As filed with the U.S. Securities and Exchange Commission on September 1, 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
_______________________
Linkage Global Inc
(Exact name of registrant as specified in its charter)
_______________________
Cayman Islands | | 5961 | | Not Applicable |
(State or other jurisdiction of
incorporation or organization) | | (Primary Standard Industrial
Classification Code Number) | | (I.R.S. Employer
Identification Number) |
2-23-3 Minami-Ikebukuro, Toshima-ku
Tokyo, Japan 171-0022
+03-5927-9261
(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
(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 | | Mengyi “Jason” Ye, Esq.
Yarona Yieh, Esq.
Ortoli Rosenstadt LLP
366 Madison Avenue, 3rd Floor
New York, NY 10017
212-588-0022 |
_______________________
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, or until the registration statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine. |
Table of Contents
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 U.S. 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 SEPTEMBER 1, 2023
1,500,000 Ordinary Shares
Linkage Global Inc
This is an initial public offering on a firm commitment basis of our ordinary shares, par value $0.00025 per share (“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 $4.0 to $6.0 per Ordinary Share. The offering is being made on a “firm commitment” basis by the underwriters. See “Underwriting.” We have reserved the symbol “LGCB” for purposes of listing the Ordinary Shares on the Nasdaq Capital Market (“Nasdaq”). At this time, Nasdaq has not yet approved the application to list the Ordinary Shares. It is a condition to the closing of this offering that the Ordinary Shares qualify for listing on Nasdaq. There is no guarantee or assurance that our Ordinary Shares will be approved for listing on 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 20 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,” “Linkage Cayman,” “Linkage,” “our Company,” and the “Company” refer to Linkage Global Inc, a Cayman Islands exempted company, and when describing Linkage Cayman’s consolidated financial information for the fiscal years ended September 30, 2022 and 2021, also includes Linkage Cayman’s subsidiaries; “Linkage Holding” refers to Linkage Holding (Hong Kong) Limited, a Hong Kong corporation, which is wholly owned by Linkage Cayman; “Linkage Electronic” refers to Linkage Electronic Commerce Limited, a Hong Kong corporation and wholly owned subsidiary of Linkage Holding; “HQT NETWORK” refers to HQT NETWORK CO., LIMITED, a Hong Kong corporation and wholly owned subsidiary of Linkage Holding; “EXTEND” refers to EXTEND CO., LTD, a Japanese corporation, which is wholly owned by Linkage Cayman; “Linkage Network” refers to Linkage (Fujian) Network Technology Limited (传丞（福建）网络科技有限公司), a limited liability company organized under the laws of the People’s Republic of China (the “PRC” or “China”), which is wholly owned by Linkage Holding; “Chuancheng Digital” refers to Fujian Chuancheng Digital Technology Limited (福建传丞数字科技有限公司), a limited liability company organized under the laws of the PRC, which is wholly owned by Linkage Network; “Chuancheng Internet” refers to Fujian Chuancheng Internet Technology Limited (福建传丞互联网科技有限公司, formerly known as 福建海狮跨境教育科技有限公司 and 福建传丞跨境教育科技有限公司), a limited liability company organized under the laws of the PRC, which is wholly owned by Chuancheng Digital; the “Operating Entities” refers, collectively, to Linkage Electronic, HQT NETWORK, EXTEND, Chuancheng Digital, and Chuancheng Internet; the Hong Kong subsidiaries refers to Linkage Holding, Linkage Electronic and HQT NETWORK, collectively; the PRC subsidiaries refers to Linkage Network, Chuancheng Digital, and Chuancheng Internet, collectively; and “the Group” or “our Group” refers to Linkage Cayman, its Japanese subsidiary, the Hong Kong subsidiaries and the PRC subsidiaries, collectively.
Linkage Cayman is a holding company incorporated in the Cayman Islands with no material operations of its own. Linkage Cayman conducts its operations through its Operating Entities in Japan, Hong Kong, and mainland China. The Ordinary Shares offered in this prospectus are shares of the Cayman Islands holding company instead of shares of the Operating Entities in Japan, Hong Kong, and mainland China. Holders of our Ordinary Shares do not directly own any equity interests in our subsidiaries, including the equity interests in our principal subsidiaries based in Japan, Hong Kong, and mainland China, but will instead own shares of a Cayman Islands holding company.
The PRC subsidiaries and the Hong Kong subsidiaries are subject to certain legal and operational risks associated with the business operations in mainland China and Hong Kong. PRC laws and regulations governing the current business operations of the PRC subsidiaries are sometimes vague and uncertain, and as a result, these risks may result in material changes in the operations of the PRC subsidiaries, significant depreciation of the value of our Ordinary Shares, or a complete hindrance of our ability to offer, or continue to offer, our securities to investors. Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China with little advance notice, including cracking down
Table of Contents
on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. As of the date of this prospectus, neither we nor the PRC subsidiaries have been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice, or sanction. The Cybersecurity Review Measures became effective on February 15, 2022, which provide that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review. In the course of the PRC subsidiaries’ operations, the data collected is mainly the mailing addresses used by the Customers (which term refers to both enterprises and individual cross-border e-commerce sellers). Such data will be transmitted to an enterprise resource planning system in the PRC for use in subsequent shipments. Consequently, our PRC counsel, AllBright Law Offices (Fuzhou) (“AllBright”), has advised that such practice may be interpreted as meaning that the PRC subsidiaries use the Internet to carry out data processing activities in the PRC, and thus, the PRC subsidiaries may be subject to cybersecurity review, and during the pendency of such review, in order to prevent certain risks, including risks that activities may endanger critical information infrastructure security and national data security and disclosure of personal information, the PRC subsidiaries may be required to take technical measures and other necessary measures, such as ceasing transmission and deletion of data or information, suspension of new user registration to prevent and mitigate risks in accordance with the requirements of the cybersecurity review. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations. In addition, on July 7, 2022, the Cyberspace Administration of China (“CAC”) issued the Measures for the Security Assessment of Cross-border Transfer of Data, which stipulates that data processors who provide overseas the important data collected and generated during operations within the PRC and personal information that shall be subject to security assessment shall conduct a security assessment. As of the date of this prospectus, the PRC subsidiaries have not carried out the activities of providing personal information outside the territory of the PRC. According to our PRC legal counsel, AllBright, we and the PRC subsidiaries are compliant with the Personal Information Protection Law of the PRC (the “PIPL”) and, the PRC subsidiaries have not provided critical data and personal information outside the territory of the PRC, as of the date of this prospectus. The data collected in the course of the PRC subsidiaries’ operations is mainly the mailing addresses used by the Customers. Such data is stored within the territory of the PRC. Based on the foregoing analysis, our PRC legal counsel is of the view that we and the PRC subsidiaries are in compliance with the existing PRC laws and regulations on cybersecurity, data security and personal data protection in all material aspects, and we believe that we are in compliance with the regulations and policies that have been issued by the CAC as of the date of this prospectus. Since the Measures for the Security Assessment of Cross-border Transfer of Data is new, there remains substantial uncertainties about its interpretation and implementation, and it is unclear whether the PRC subsidiaries shall require a security assessment. If it is determined in the future that the PRC subsidiaries are required such security assessment, it is uncertain whether they can or how long it will take them to complete such security assessment or rectification. See “Risk Factors — Risks Relating to Doing Business in mainland China — Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering.”
On February 17, 2023, the China Securities Regulatory Commission (“CSRC”) promulgated the Trial Administrative Measures of the Overseas Securities Offering and Listing by Domestic Companies (the “Overseas Listing Trial Measures”) and relevant five guidelines, which became effective on March 31, 2023. According to the Overseas Listing Trial Measures, PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedures with the CSRC and report relevant information. At a press conference held for these new regulations, officials from the CSRC clarified that the domestic companies that have already been listed overseas on or before the effective date of the Overseas Listing Trial Measures (i.e. March 31, 2023) shall be deemed as existing issuers, or the Existing Issuers. Existing Issuers are not required to complete the filling procedures immediately, and they shall be required to file with the CSRC when subsequent matters such as refinancing are involved. Further, according to the officials from the CSRC, domestic companies that have obtained approval from overseas regulatory authorities or securities exchanges for their indirect overseas offering and listing prior to the effective date of the Overseas Listing Trial Measures (i.e. 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. Those who complete their overseas offering and listing within such six months are deemed as Existing Issuers. Within such six-month transition period, however, if such domestic companies need to reapply for offering and listing procedures to the overseas regulatory authority or securities exchanges, or if they fail to complete their indirect overseas issuance and listing, such domestic companies shall complete the filling procedures with the CSRC. Under the Overseas Listing Trial Measures, direct overseas offering and listing by domestic companies refers to such overseas offering and listing by a joint-stock company incorporated domestically. Indirect overseas offering and listing by domestic companies
Table of Contents
refers to such overseas offering and listing by a company in the name of an overseas incorporated entity, whereas the company’s major business operations are located domestically and such offering and listing is based on the underlying equity, assets, earnings or other similar rights of a domestic company. Any overseas offering and listing made by an issuer that meets both the following conditions will be determined as indirect (i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by domestic companies; and (ii) the main parts of the issuer’s business activities are conducted in mainland China, or its main places of business are located in mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in mainland China. If a PRC domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that we are not required to complete the filing procedures with the CSRC for the offering and listing of our Ordinary Shares, given that (i) we are not a China domestic company; and (ii) our offering and listing is not an indirect overseas offering or listing, because the operating revenue, total profit, total assets, or net assets, as documented in our audited consolidated financial statements for the most recent accounting year, accounted for by the PRC subsidiaries are all under 50%. See “Regulations — Regulations Relating to Overseas Listings” and “Risk Factors — Risks Relating to Doing Business in mainland China — The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.”
According to our PRC counsel AllBright, no relevant laws or regulations in the PRC explicitly require us to seek approval from the CSRC for our overseas listing plan, but recent statements by the Chinese government have indicated an intent to impose more oversight and control over offerings conducted overseas and/or foreign investment in China-based issuers. As of the date of this prospectus, we and the PRC subsidiaries have not received any inquiry, notice, warning, or sanctions regarding our planned overseas listing from the CSRC or any other PRC governmental authorities. Since these statements and regulatory actions are newly published, however, official guidance and related implementation rules have not been issued. 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 an U.S. exchange. The Standing Committee of the National People’s Congress (the “SCNPC”) or PRC regulatory authorities may in the future promulgate laws, regulations, or implementing rules that require us, or our subsidiaries to obtain regulatory approval from Chinese authorities before listing in the U.S. If we do not receive or maintain the 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.
The same legal and operational risks associated with operations in mainland China also apply to operations in Hong Kong. Hong Kong was established as a special administrative region of the PRC in accordance with Article 31 of the Constitution of the PRC. The Basic Law of the Hong Kong Special Administrative Region of the PRC (the “Basic Law”) was adopted and promulgated on April 4, 1990 and became effective on July 1, 1997, when the PRC resumed the exercise of sovereignty over Hong Kong. Pursuant to the Basic Law, Hong Kong is authorized by the National People’s Congress of the PRC to exercise a high degree of autonomy and enjoy executive, legislative, and independent judicial power, under the principle of “one country, two systems,” and the PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs, and other matters that are not within the scope of autonomy). However, there is no assurance that there will not be any changes in the economic, political, and legal environment in Hong Kong in the future. Due to the uncertainty of the PRC legal system and changes in laws, regulations, or policies, the Basic Law may be revised in the future, and thus, we may face the same legal and operational risks associated with operating in the PRC. If there is a significant change to current political arrangements between mainland China and Hong Kong, or if the applicable laws, regulations, or interpretations change, the Hong Kong subsidiaries may become subject to PRC laws or authorities. As a result, the Hong Kong subsidiaries could incur material costs to ensure compliance, be subject to fines, experience devaluation of securities or delisting, no longer conduct offerings to foreign investors,
Table of Contents
and no longer be permitted to continue their current business operations. See “Risk Factors — Risks Relating to Doing Business in Hong Kong — There are some political risks associated with conducting business in Hong Kong” and “Risk Factors — Risks Relating to Doing Business in Hong Kong — The enforcement of laws and rules and regulations in China can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in the Hong Kong subsidiaries’ operations and/or the value of the securities we are registering for sale.” 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 advised by our Hong Kong counsel, Winston & Strawn, as of the date of this prospectus, we and each of the Hong Kong subsidiaries 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 the Hong Kong subsidiaries to consequences, including government enforcement actions and investigations, fines, penalties, and suspension or disruption of the Hong Kong subsidiaries’ 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 the Hong Kong subsidiaries have complied with all three areas of anti-competition laws and requirements in Hong Kong. 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. See “Regulations — Overview of the Laws and Regulations Relating to the Operating Entities’ Business and Operations in Hong Kong — Regulations Related to Data Privacy” and “Risk Factors — Risks Relating to Doing Business in Hong Kong — Some of our subsidiaries are subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly, which could subject them to government enforcement actions and investigations, fines, penalties, and suspension or disruption of their operations.”
In addition, our Ordinary Shares may be prohibited from trading on a national exchange under the Holding Foreign Companies Accountable Act, or the “HFCA Act,” if the Public Company Accounting Oversight Board (United States) (the “PCAOB”) is unable to inspect our auditors for three consecutive years beginning in 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 or in Hong Kong, a Special Administration Region of the PRC, because of positions taken by PRC authorities in those jurisdictions. Our auditor, TPS Thayer, LLC (“TPS”), is headquartered in Sugar Land, Texas, and has been inspected by the PCAOB on a regular basis, with the last inspection in September 2022. The PCAOB currently has access to inspect the working papers of our auditor and our auditor is not subject to the determinations announced by the PCAOB on December 16, 2021, which determinations were vacated on December 15, 2022. 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 and trading in our Ordinary Shares could be prohibited. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), 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 AHFCAA 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 prohibition on trading. On August 26, 2022, the CSRC, the Ministry of Finance of the PRC (the “MOF”), and the PCAOB signed a Statement of Protocol (the “Protocol”) governing inspections and investigations of accounting 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 Protocol 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
Table of Contents
access in the future, the PCAOB Board will consider the need to issue a new determination. See “Risk Factors — Risks Relating to Doing Business in mainland China — 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 offerings.”
The PRC subsidiaries are subject to restrictions and limitations on their ability to distribute earnings from their businesses to us and U.S. investors. Current PRC regulations permit the PRC subsidiaries to pay dividends to Linkage Holding only out of their respective accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Additionally, each of the companies in the PRC are 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. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (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. 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 Tax Avoidance Arrangement with respect to any dividends paid by Linkage Network to its immediate holding company, Linkage Holding. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Linkage Holding intends to apply for the tax resident certificate if and when Linkage Network plans to declare and pay dividends to Linkage Holding. To the extent cash in the business is in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash. See “Prospectus Summary — Asset Transfers Between the Company and its Subsidiaries,” “Prospectus Summary — Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences,” “Risk Factors — Risks Relating to Doing Business in mainland China — To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets,” and “Risk Factors — Risks Relating to Doing Business in mainland China — There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC subsidiaries, and dividends payable by the PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
As of the date of this prospectus, no cash transfer or transfer of other assets has occurred among the Company and any of its subsidiaries. See “Prospectus Summary — Asset Transfers Between the Company and its Subsidiaries,” “Prospectus Summary — Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences,” and our audited consolidated financial statements for the years ended September 30, 2022 and 2021. As of the date of this prospectus, none of subsidiaries has made any dividends or distributions to the Company and the Company has not made any dividends or distributions to its shareholders. 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. See “Prospectus Summary — Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences.”
As a holding company, we are dependent on receipt of funds from our principal subsidiaries in Hong Kong and Japan. There are currently no restrictions on foreign exchange and our ability to transfer cash among our Cayman Islands holding company and our principal subsidiaries in Hong Kong and Japan. As a Cayman Islands holding company, the Company will be able to pay dividends and make other distributions to its shareholders, including investors of the Ordinary Shares, provided that it (i) has either sufficient profits or retained profits, when the dividend is to be declared and paid from profits, or sufficient share premium, and satisfies the solvency test as defined under the Companies Act (Revised) of the Cayman Islands, or the Companies Act, when the dividend is to be paid from share premium, and (ii) complies with the provisions in our memorandum and articles of association then in effect. However, as the PRC government imposes control over currency conversion, it has the authority to conduct exchange transfer reviews, which may impose certain limitations on our ability to transfer cash among the Company, its subsidiaries, and its investors. See “Prospectus Summary — Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences,” “Risk Factors — Risks Relating to Doing Business in mainland China — PRC regulations
Table of Contents
relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or the PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit the PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us,” “Risk Factors — Risks Relating to Doing Business in mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business,” and “Risk Factors — Risks Relating to Doing Business in mainland China — Governmental control of currency conversion may affect the value of your investment and our payment of Dividends.” Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) as long as certain procedural requirements are met. However, approval from appropriate government authorities is required if RMB is converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into, and out of Hong Kong (including funds from Hong Kong to mainland China), except for the transfer of funds involving money laundering and criminal activities. However, there is no guarantee that the Hong Kong government will not promulgate new laws or regulations that may impose such restrictions in the future. There is no assurance the PRC government will not intervene in or impose restrictions on our ability to transfer cash or assets. To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets.
For details, see “Risk Factors — Risks Relating to Doing Business in mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business” and “Risk Factors — Risks Relating to Doing Business in mainland China — To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets.”
We have established controls and procedures for cash flows within our organization based on internal cash management policies established by our finance department, discussed, considered, and reviewed by the relevant departments in the Company, and approved by the Chairman of our Board of Directors. Specifically, our finance department supervises 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 the 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. See “Prospectus Summary — Asset Transfers Between the Company and its Subsidiaries.”
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 13 of this prospectus for more information.
On February 17, 2023, our Chief Executive Officer (“CEO”) and Chairman of the Board of Directors, Mr. Zhihua Wu, as the concerted actor, entered into a concerted actor agreement (the “Concerted Actor Agreement”) with Smart Bloom Global Limited, Xiaoyu Qi, Rosy Gold Investments Limited, Ryo Fuyunishiki, Talent Best Global Limited, Zheng Jin, Glorious Global Investments Limited, Liang Chen, Horizon Century International Limited, Liangyi Li, Sharp Creation Developments Limited, and Fengjuan Su, pursuant to which, Smart Bloom Global Limited, Xiaoyu Qi, Rosy Gold Investments Limited, Ryo Fuyunishiki, Talent Best Global Limited, Zheng Jin, Glorious Global Investments Limited, Liang Chen, Horizon Century International Limited, Liangyi Li, Sharp Creation Developments Limited, and Fengjuan Su agreed to vote consistently with Zhihua Wu in the exercise of all of their rights as shareholders of the Company. See “Related Party Transactions — Concerted Actor Agreement.” Mr. Wu and the remaining parties to
Table of Contents
the Concerted Actor Agreement, as a group, collectively own voting power of 71.5% of our issued and outstanding Ordinary Shares. Following the completion of this offering, Mr. Wu and the remaining parties to the Concerted Actor Agreement as a group will beneficially own approximately 66.51% of the aggregate voting power of our issued and outstanding Ordinary Shares, assuming no exercise of the underwriters’ over-allotment option. As such, we may be deemed a “controlled company” under Nasdaq Marketplace Rules 5615(c). Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules even if we are a controlled company, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See “Risk Factors” and “Management — Controlled Company.”
| | Per Share | | Total Without
Over-Allotment
Option | | Total With
Over-Allotment
Option |
Initial public offering price | | $ | | | $ | | | $ | |
Underwriters’ discounts(1) | | $ | | | $ | | | $ | |
Proceeds to our company before expenses(2) | | $ | | | $ | | | $ | |
The underwriters expect to deliver the Ordinary Shares against payment in U.S. dollars in New York, New York on or about , 2023.
Neither the U.S. 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.
EF HUTTON
Division of Benchmark Investments, LLC
Prospectus dated , 2023
Table of Contents
i
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
Unless otherwise indicated or the context requires otherwise, references in this prospectus to:
• “authorized agent” are to an designated agent for the media, who is responsible for identifying and procuring merchants to purchase ad inventory from the media, facilitating the transaction process, and assisting ad deployment;
• “China” or the “PRC” are to the People’s Republic of China, including the special administrative regions of Hong Kong and Macau and excluding Taiwan for the purposes of this prospectus only. The same legal and operational risks associated with operations in mainland China also apply to operations in Hong Kong;
• “Chuancheng Digital” are to Fujian Chuancheng Digital Technology Limited (福建传丞数字科技有限公司), a limited liability company organized under the laws of the PRC, which is wholly owned by Linkage Network;
• “Chuancheng Internet” are to Fujian Chuancheng Internet Technology Limited (福建传丞互联网科技有限公司, formerly known as 福建海狮跨境教育科技有限公司 and 福建传丞跨境教育科技有限公司), a limited liability company organized under the laws of the PRC, which is wholly owned by Chuancheng Digital;
• “Customers” are to cross-border e-commerce sellers (both enterprises and individuals) that purchase products, e-commerce operation training and software support services;
• “EXTEND” are to EXTEND CO., LTD, a Japanese corporation, which is wholly owned by Linkage Cayman;
• “HKD” or “HK$” are to the legal currency of Hong Kong;
• “Honeybee product shelving software” are to software application owned by Chuancheng Internet that helps cross-border e-commerce sellers manage and optimize their product listings on their e-commerce websites;
• “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
• “HQT NETWORK” are to HQT NETWORK CO., LIMITED, a Hong Kong corporation and wholly owned subsidiary of Linkage Holding;
• “Internet traffic dividend” are to the rapid growth in the number of users and economic value resulting from the widespread of internet applications;
• “Japanese yen” or “JPY” are to the legal currency of Japan;
ii
Table of Contents
• “KOLs” are to individuals who have significant influence over online shoppers and their purchasing decisions;
• “Linkage Cayman” are to Linkage Global Inc, a Cayman Islands exempted company;
• “Linkage Electronic” are to Linkage Electronic Commerce Limited, a Hong Kong corporation and wholly owned subsidiary of Linkage Holding;
• “Linkage ERP System” are to the Operating Entities’ enterprise resource planning owned by Chuancheng Digital, which is committed to providing cross-border e-commerce sellers with solutions for delicacy operations and business and financial data integration, making cross-border e-commerce easier;
• “Linkage Holding” are to Linkage Holding (Hong Kong) Limited, a Hong Kong corporation, which is wholly owned by Linkage Cayman;
• “Linkage Network” or “WFOE” are to Linkage (Fujian) Network Technology Limited (传丞（福建）网络科技有限公司), a limited liability company organized under the laws of China, which is wholly owned by Linkage Holding;
• “mainland China” or “Mainland China” are to the People’s Republic of China, excluding the special administrative regions of Hong Kong and Macau, and Taiwan;
• “Merchants” are to Customers and other cross-border e-commerce sellers and suppliers;
• “Operating Entities” are to EXTEND, Linkage Electronic, HQT NETWORK, Chuancheng Digital, and Chuancheng Internet, collectively;
• “Renminbi” or “RMB” are to the legal currency of China;
• “shares,” “Shares,” or “Ordinary Shares” are to the ordinary shares of Linkage Cayman, par value $0.00025 per share;
• “SKUs” are to stock keeping units;
• “smart products” and “smart electronics” are to the combination of computer, communication and consumer electronics;
• “SMEs” are to small and medium enterprises; and
• “$,” “USD,” “US$” or “U.S. dollars” are to the legal currency of the United States.
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 Operating Entities in Japan using JPY, in Hong Kong using U.S. dollars, and in China 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 JPY or 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). With respect to amounts not recorded in our consolidated financial statements included elsewhere in this prospectus, the conversion of JPY into U.S. dollars is based on 0.0069, and RMB to U.S. dollars is based on 0.14.
iii
Table of Contents
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares discussed under “Risk Factors,” “Business,” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to invest in our Ordinary Shares. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, a third-party independent research firm. We refer to this report as the “Frost and Sullivan Report”.
Our Corporate Structure
Linkage Cayman is a holding company incorporated in the Cayman Islands with no material operations of its own. Linkage Cayman conducts its operations through the Operating Entities in Japan, Hong Kong, and mainland China. The Ordinary Shares offered in this prospectus are shares of the Cayman Islands holding company instead of shares of the Operating Entities in Japan, Hong Kong, and mainland China. Holders of our Ordinary Shares do not directly own any equity interests in the Operating Entities, but will instead own shares of a Cayman Islands holding company.
The following diagram illustrates our corporate structure as of the date of this prospectus and upon the completion of this offering, assuming no exercise of the over-allotment option. For more details on our corporate history, please refer to “Corporate History and Structure.”
The PRC subsidiaries and the Hong Kong subsidiaries are subject to certain legal and operational risks associated with the business operations in mainland China and Hong Kong. PRC laws and regulations governing the current
1
Table of Contents
business operations of the PRC subsidiaries are sometimes vague and uncertain, and as a result, these risks may result in material changes in the operations of the PRC subsidiaries, significant depreciation of the value of our Ordinary Shares, or a complete hindrance of our ability to offer, or continue to offer, our securities to investors.
Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. As of the date of this prospectus, neither we nor the PRC subsidiaries have been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice, or sanction. The Cybersecurity Review Measures became effective on February 15, 2022, which provide that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review. In the course of the PRC subsidiaries’ operations, the data collected is mainly the mailing addresses used by the Customers. Such data will be transmitted to the Linkage ERP System in the PRC for use in subsequent shipments. Consequently, our PRC counsel, AllBright, has advised that such practice may be interpreted as meaning that the PRC subsidiaries use the Internet to carry out data processing activities in the PRC, and thus, the PRC subsidiaries may be subject to cybersecurity review, and during the pendency of such review, in order to prevent certain risks, including risks that activities may endanger critical information infrastructure security and national data security and disclosure of personal information, the PRC subsidiaries may be required to take technical measures and other necessary measures, such as ceasing transmission and deletion of data or information, and suspension of new user registration, to prevent and mitigate risks in accordance with the requirements of the cybersecurity review. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations. See “Risk Factors — Risks Relating to Doing Business in mainland China — Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering.”
On February 17, 2023, the CSRC promulgated the Overseas Listing Trial Measures and relevant five guidelines, which became effective on March 31, 2023. According to the Overseas Listing Trial Measures, PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedures with the CSRC and report relevant information. At a press conference held for these new regulations, officials from the CSRC clarified that the domestic companies that have already been listed overseas on or before the effective date of the Overseas Listing Trial Measures (i.e. March 31, 2023) shall be deemed as existing issuers, or the Existing Issuers. Existing Issuers are not required to complete the filling procedures immediately, and they shall be required to file with the CSRC when subsequent matters such as refinancing are involved. Further, according to the officials from the CSRC, domestic companies that have obtained approval from overseas regulatory authorities or securities exchanges for their indirect overseas offering and listing prior to the effective date of the Overseas Listing Trial Measures (i.e. 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. Those who complete their overseas offering and listing within such six months are deemed as Existing Issuers. Within such six-month transition period, however, if such domestic companies need to reapply for offering and listing procedures to the overseas regulatory authority or securities exchanges, or if they fail to complete their indirect overseas issuance and listing, such domestic companies shall complete the filling procedures with the CSRC. Under the Overseas Listing Trial Measures, indirect overseas offering and listing by domestic companies refers to such overseas offering and listing by a company in the name of an overseas incorporated entity, whereas the company’s major business operations are located domestically and such offering and listing is based on the underlying equity, assets, earnings or other similar rights of a domestic company. Any overseas offering and listing made by an issuer that meets both the following conditions will be determined as indirect (i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by domestic companies; and (ii) the main parts of the issuer’s business activities are conducted in mainland China, or its main places of business are located in mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in mainland China. If a PRC domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that we are not required to complete filing procedures
2
Table of Contents
with the CSRC for the offering and listing of our Ordinary Shares, given that (i) we are not a China domestic company; and (ii) our offering and listing is not an indirect overseas offering or listing, because the operating revenue, total profit, total assets, or net assets, as documented in our audited consolidated financial statements for the most recent accounting year, accounted for by the PRC subsidiaries are all under 50%. See “Regulations — Regulations Relating to Overseas Listings” and “Risk Factors — Risks Relating to Doing Business in mainland China — The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.”
According to our PRC counsel, AllBright, no relevant laws or regulations in the PRC explicitly require us to seek approval from the China Securities Regulatory Commission for our overseas listing plan, but recent statements by the Chinese government have indicated an intent to impose more oversight and control over offerings conducted overseas and/or foreign investment in China-based issuers. As of the date of this prospectus, we and the PRC subsidiaries have not received any inquiry, notice, warning, or sanctions regarding our planned overseas listing from the China Securities Regulatory Commission or any other PRC governmental authorities. Since these statements and regulatory actions are newly published, however, official guidance and related implementation rules have not been issued. It is highly uncertain what the potential impact such modified or new laws and regulations will have on the daily business operations of the PRC subsidiaries, our ability to accept foreign investments, and our listing on an U.S. exchange. The SCNPC or PRC regulatory authorities may in the future promulgate laws, regulations, or implementing rules that require us, or the PRC subsidiaries to obtain regulatory approval from Chinese authorities before listing in the U.S. If we do not receive or maintain the 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.
The same legal and operational risks associated with operations in China also apply to operations in Hong Kong. Hong Kong was established as a special administrative region of the PRC in accordance with Article 31 of the Constitution of the PRC. The Basic Law was adopted and promulgated on April 4, 1990 and became effective on July 1, 1997, when the PRC resumed the exercise of sovereignty over Hong Kong. Pursuant to the Basic Law, Hong Kong is authorized by the National People’s Congress of the PRC to exercise a high degree of autonomy and enjoy executive, legislative, and independent judicial power, under the principle of “one country, two systems,” and the PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs, and other matters that are not within the scope of autonomy). However, there is no assurance that there will not be any changes in the economic, political, and legal environment in Hong Kong in the future. Due to the uncertainty of the PRC legal system and changes in laws, regulations, or policies, the Basic Law may be revised in the future and thus we may face the same legal and operational risks associated with operating in the PRC. If there is a significant change to current political arrangements between mainland China and Hong Kong, or if the applicable laws, regulations, or interpretations change, the Hong Kong subsidiaries may become subject to PRC laws or authorities. As a result, the Hong Kong subsidiaries could incur material costs to ensure compliance, be subject to fines, experience devaluation of securities or delisting, no longer conduct offerings to foreign investors, and no longer be permitted to continue their current business operations. See “Risk Factors — Risks Relating to Doing Business in Hong Kong — There are some political risks associated with conducting business in Hong Kong” and “Risk Factors — Risks Relating to Doing Business in Hong Kong — The enforcement of laws and rules and regulations in China can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in the Hong Kong subsidiaries’ operations and/or the value of the securities we are registering for sale.” 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. As advised by our Hong Kong counsel, Winston & Strawn, as of the date of this prospectus, we and each of the Hong Kong subsidiaries 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 the Hong Kong subsidiaries to consequences, including government enforcement actions and investigations, fines, penalties, and suspension or disruption of the Hong Kong subsidiaries’ operations. In addition, the Competition Ordinance (Cap. 619 of the Laws
3
Table of Contents
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 the Hong Kong subsidiaries have complied with all three areas of anti-competition laws and requirements in Hong Kong. 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. See “Regulations — Overview of the Laws and Regulations Relating to the Operating Entities’ Business and Operations in Hong Kong — Regulations Related to Data Privacy” and “Risk Factors — Risks Relating to Doing Business in Hong Kong — Some of our subsidiaries are subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly, which could subject them to government enforcement actions and investigations, fines, penalties, and suspension or disruption of their operations.”
In addition, our Ordinary Shares may be prohibited from trading on a national exchange under the HFCA Act if the PCAOB is unable to inspect our auditors for three consecutive years beginning in 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 or in Hong Kong, a Special Administration Region of the PRC, because of positions taken by PRC authorities in those jurisdictions. Our auditor, TPS, has been inspected by the PCAOB on a regular basis, with the last inspection in September 2022. The PCAOB currently has access to inspect the working papers of our auditor and our auditor is not subject to the determinations announced by the PCAOB on December 16, 2021, which determinations were vacated on December 15, 2022. 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 and trading in our Ordinary Shares could be prohibited. On December 29, 2022, the Consolidated Appropriations Act was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to AHFCAA, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to two, thus reducing the time period for triggering the prohibition on trading. On August 26, 2022, the CSRC, the MOF, and the PCAOB signed the Protocol governing inspections and investigations of accounting 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 Protocol disclosed by 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. See “Risk Factors — Risks Relating to Doing Business in mainland China — 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 continued listing or future offerings of our securities in the U.S.”
Business Overview
We are a holding company incorporated in the Cayman Islands with no material operations of its own. Linkage Cayman conducts its operations through the Operating Entities in Japan, Hong Kong, and mainland China. As a cross-border e-commerce integrated services provider headquartered in Japan, through the Operating Entities, we have developed a comprehensive service system comprised of two lines of business complementary to each other, including (i) cross-border sales and (ii) integrated e-commerce services.
Cross-border Sales
Cross-border sales operations were initially launched in 2011 in Japan through our subsidiary, EXTEND. Products are sourced from Japanese and Chinese manufacturers and brands, together with our private label smart products, and are included as the Operating Entities’ internal “recommended” or “strictly selected” product collections for Customers to select and purchase. Since our inception, the Operating Entities have selected approximately 10,000 suppliers and 100,000 featured products. Customers are mainly comprised of sellers on various e-commerce platforms, such as Amazon, Lazada, Shopee, Wish, Coupang, Yahoo, WOWMA, Rakuten, Tmall, Taobao, JD, and TikTok, and independent website operators.
4
Table of Contents
The Operating Entities use a multi-channel marketing strategy. Online, the Operating Entities approach Customers through (i) advertising promotion on their own official websites (www.jp-extend.com and www.whale.xin), major e-commerce platforms, social media, search engines, and independent websites, (ii) sending email marketing to potential customers, (iii) and referrals from existing Customers. Offline, the Operating Entities approach Customers mainly through attending exhibitions. See “Business — Business Model — Marketing.” The Customers place orders directly with the Operating Entities through email. Following receipt of orders, the Operating Entities either place orders with suppliers who ship the products directly to the Customers, or deliver the orders from their own warehouses in Japan to the Customers via third-party delivery companies. For the six months ended March 31, 2023 and the fiscal years ended September 30, 2022 and 2021, revenue derived from cross-border sales operating was $6.39 million, $17.91 million, and $12.42 million, accounting for approximately 70.80%, 81.29%, and 80.28% of our total revenue for the respective periods.
A majority of the Operating Entities’ cross-border sales operations have historically been conducted in Japan, and since 2011, the Operating Entities have been expanding their operations to Hong Kong and mainland China markets. Cross-border sales operation is the foundation of the comprehensive service system we are building. Over the years of experience the Operating Entities have encountered with e-commerce sellers in cross-border sales operation, they identified a large gap between the demands for placing advertisements, and limited resources and channels to advertise, especially on social media platforms, and have identified significant growth potential in China’s rapidly developing e-commerce market. Therefore, in 2016, HQT NETWORK was established in Hong Kong, for the provision of digital marketing services; and in 2021, we established Chuancheng Digital and Chuancheng Internet in China, offering cross-border sales and Integrated e-commerce training services, respectively.
For the fiscal year ended September 30, 2021, among our revenues derived from cross-border sales operations, 99.48%, 0.52%, and 0% were derived from Japan, mainland China and Hong Kong, respectively. For the fiscal year ended September 30, 2022, among our revenues derived from cross-border sales operations, 92.23%, 5.46%, and 2.31% were derived from Japan, mainland China and Hong Kong, respectively. For the six months ended March 31, 2023, among our revenues derived from cross-border sales operations, 85.65%, 8.95%, and 5.40% were derived from Japan, mainland China and Hong Kong, respectively.
Integrated E-commerce Services
Digital Marketing
Through the subsidiary, HQT NETWORK, in Hong Kong, the Operating Entities connect Customers and other cross-border e-commerce sellers and suppliers (collectively, the “Merchants”) with social media platforms to provide digital marketing services to Merchants. HQT NETWORK has cooperated with Google Asia Pacific Pte., Ltd. (“Google”) since 2017 and became an authorized agent of Google in 2018, through making use of the vast suppliers’ and Customers’ data that the Operating Entities have collected from their cross-border sales operation by conducting market research and analysis by digital marketing team to identify trends and preferences in different regions and consumer segments, HQT NETWORK helps the Merchants create multilingual websites, optimize product keyword rankings, and distribute advertisements on Google and its own channels, such as Google search engine, Google display, Gmail, and YouTube. HQT NETWORK aims to provide comprehensive digital marketing solutions equipped with technology and data that meet the digital marketing needs of the Merchants, and help the Merchants engage, cultivate, retain and expand their regional customer base. Since the launch of this business line, HQT NETWORK has served more than 200 Merchants. Starting from 2023, HQT NETWORK has also partnered with Huntmobi Holdings Limited, an online advertising agency based in China, for ad deployment, to gain access to a wider array of online media. For the six months ended March 31, 2023, and the fiscal years ended September 30, 2022 and 2021, revenue derived from digital marketing was $2.26 million, $3.95 million, and $3.05 million, accounting for approximately 25.04%, 17.91%, and 19.70% of our total revenue for the respective periods.
E-commerce Operation Training and Software Support Services
To diversify our revenue sources, in 2021, the Operating Entities started offering services, including e-commerce operation training and software support services. The recorded e-commerce operation training courses teach Customers skills and information needed to successfully operate and grow their online shops. The Operating Entities also offer proprietary software tools that facilitate Customers with their day-to-day e-commerce operations, including product shelving, supply chain management, and operational management.
5
Table of Contents
For the six months ended March 31, 2023, and the fiscal years ended September 30, 2022, and 2021, our revenue from e-commerce operation training and software services was $0.35 million, $175,543, and $3,264, accounting for approximately 3.39%, 0.80%, and 0.02% of our total revenue for the respective periods.
Competitive Strengths
We believe the following competitive strengths are essential for our success and differentiate us from our competitors:
• comprehensive service system comprising cross-border sales and integrated e-commerce services;
• diversified internal “recommended” or “strictly selected” product collections;
• capability of providing targeted digital marketing services by leveraging our business data analysis technology; and
• experienced management team.
Growth Strategies
We intend to develop our business and strengthen brand loyalty by implementing the following strategies:
• grow and diversify Customer and Merchant bases, and seek more authorized agency qualifications of other media;
• actively layout social e-commerce channels;
• develop a wider selection of products;
• venture into Southeast Asian market;
• expand our manpower and talent pool to support our pursuit of business growth; and
• further strengthen our supply chain integration.
Corporate Information
Our principal executive offices are located at 2-23-3 Minami-Ikebukuro, Toshima-ku, Tokyo, Japan and our phone number is +03-5927-9261. Our registered office in the Cayman Islands is located at the offices of Vistra (Cayman) Limited, P. O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1 – 1205, Cayman Islands, and the phone number of our registered office is+1-(345)769-9372. We maintain a corporate website at www.linkagecc.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. at 122 East 42nd Street, 18th Floor, New York, NY 10168.
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.”
Risks Relating to Our Business and Industry (for a more detailed discussion, see “Risk Factors — Risks Relating to Our Business and Industry” from pages 20 to 32.)
Risks and uncertainties related to our business include, but are not limited to, the following:
• the Operating Entities operate in a highly-competitive market and their failure to compete effectively could adversely affect their results of operations (see page 20 of this prospectus);
• our historical growth rates and performance may not be sustainable or indicative of our future growth and financial results. We cannot guarantee that we will be able to maintain the growth rate we have experienced to date (see page 20 of this prospectus);
6
Table of Contents
• system interruptions that impair access to the Operating Entities’ software, or other performance failures in its technology infrastructure, could damage their reputation and results of operations (see page 21 of this prospectus);
• cybersecurity risks and cyber incidents may adversely affect the Operating Entities business by causing a disruption to their operations, a compromise or corruption of their confidential information, misappropriation of assets and/or damage to their business relationships, all of which could negatively impact their business and results of operations (see page 29 of this prospectus);
• we have engaged in substantial transactions with related parties, and such transactions present possible conflicts of interest that could have a material and adverse effect on our business, financial conditions and results of operations (see page 30 of this prospectus); and
• the Operating Entities’ business, results of operations and financial condition have been and may continue to be affected by the COVID-19 pandemic (see page 30 of this prospectus).
Risks Relating to this Offering and the Trading Market (for a more detailed discussion, see “Risk Factors — Risks Relating to this Offering and the Trading Market” from pages 32 to 39.)
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 32 of this prospectus);
• Mr. Zhihua Wu, our CEO and Chairman of our Board of Directors, and certain shareholders have entered into a concerted actor agreement to vote in concert, which provides control over majority of our Ordinary Shares and increases our influence on shareholder decisions (see page 32 of this prospectus);
• since we are a “controlled company” within the meaning of the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholder (see page 32 of this prospectus);
• you will experience immediate and substantial dilution in the net tangible book value of Ordinary Shares purchased (see page 33 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 33 of this prospectus); and
• 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 35 of this prospectus).
Risks Relating to Doing Business in Hong Kong (for a more detailed discussion, see “Risk Factors — Risks Relating to Doing Business in Hong Kong” from pages 39 to 42.)
The same legal and operational risks associated with operations in mainland China also apply to operations in Hong Kong.
• the enactment of Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact the Hong Kong subsidiaries (see “Risk Factors — Risks Relating to Doing Business in Hong Kong — The enactment of Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact the Hong Kong subsidiaries” on page 39 of this prospectus);
7
Table of Contents
• the enforcement of laws and rules and regulations in China can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in the Hong Kong subsidiaries’ operations and/or the value of the securities we are registering for sale (see “Risk Factors — Risks Relating to Doing Business in Hong Kong — The enforcement of laws and rules and regulations in China can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in the Hong Kong subsidiaries’ operations and/or the value of the securities we are registering for sale” on page 40 of this prospectus);
• there are some political risks associated with conducting business in Hong Kong (see “Risk Factors — Risks Relating to Doing Business in Hong Kong — There are some political risks associated with conducting business in Hong Kong” on page 40 of this prospectus); and
• some of our subsidiaries are subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly, which could subject them to government enforcement actions and investigations, fines, penalties, and suspension or disruption of their operations (see “Risk Factors — Risks Relating to Doing Business in Hong Kong — Some of our subsidiaries are subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly, which could subject them to government enforcement actions and investigations, fines, penalties, and suspension or disruption of their operations on page 41 of this prospectus).
Risks Relating to Doing Business in mainland China (for a more detailed discussion, see “Risk Factors — Risks Relating to Doing Business in mainland China” from pages 42 to 58.)
Some of our business is conducted in mainland China through the Operating Entities, and therefore, we face risks and uncertainties relating to doing business in mainland China in general, including, but not limited to, the following:
• changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on the PRC subsidiaries’ business and operations (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on the PRC subsidiaries’ business and operations” on page 42 of this prospectus);
• uncertainties in the interpretation and enforcement of PRC laws and regulations and changes in policies, rules, and regulations in China, which may be quick with little advance notice, could limit the legal protection available to you and us (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Uncertainties in the interpretation and enforcement of PRC laws and regulations and changes in policies, rules, and regulations in China, which may be quick with little advance notice, could limit the legal protection available to you and us” on page 42 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 this prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China (see “Risk Factors — Risks Relating to Doing Business in Mainland China — 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 this prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China on page 43 of this prospectus);
• given the Chinese government’s significant oversight and discretion over the conduct of the PRC subsidiaries’ business, the Chinese government may intervene or influence their operations at any time, which could result in a material change in the PRC subsidiaries’ operations and/or the value of our Ordinary Shares (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Given the Chinese government’s significant oversight and discretion over the conduct of the PRC subsidiaries’ business,
8
Table of Contents
the Chinese government may intervene or influence their operations at any time, which could result in a material change in the PRC subsidiaries’ operations and/or the value of our Ordinary Shares” on page 44 of this prospectus);
• any actions by the Chinese government, including any decision to intervene or influence the operations of the PRC subsidiaries or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the PRC subsidiaries, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Any actions by the Chinese government, including any decision to intervene or influence the operations of the PRC subsidiaries or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the PRC subsidiaries, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless” on page 44 of this prospectus);
• recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering” on page 44 of this prospectus);
• the Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future (see “Risk Factors — Risks Relating to Doing Business in Mainland China — The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future” on page 46 of this prospectus);
• recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offerings (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offerings” on page 47 of this prospectus);
• to the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets (see “Risk Factors — Risks Relating to Doing Business in Mainland China — To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets” on page 48 of this prospectus);
• the approval of and the filing with the CSRC or other PRC government authorities may be required in connection with this offering, 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 the CSRC approval for this offering (see “Risk Factors — Risks Relating to Doing Business in Mainland China — The approval of and the filing with the CSRC or other PRC government authorities may be required in connection with this offering, 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 the CSRC approval for this offering” on page 55 of this prospectus);
9
Table of Contents
• the M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China (see “Risk Factors — Risks Relating to Doing Business in Mainland China — The M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China” on page 56 of this prospectus); and
• Chinese regulatory authorities could disallow our holding company structure, which may 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 (see “Risk Factors — Risks Relating to Doing Business in Mainland China — Chinese regulatory authorities could disallow our holding company structure, which may 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” on page 57 of this prospectus).
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has spread throughout the world, including Japan and China. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic — the first pandemic caused by a coronavirus. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Both the Japanese and Chinese governments have ordered quarantines, travel restrictions, and the temporary closure of stores and facilities. In 2022, there was been a resurgence of COVID-19 cases in certain parts of China due to the Delta and Omicron variants, which caused local governments to tighten COVID-19-related restrictions, including measures such as banning social and work gatherings, imposing mandatory quarantine requirements and suspending public transportation in certain cities. In December 2022, the COVID-19 restriction policies in China were lifted, both locally and nationally. Beginning in January 2023, among other changes, China no longer conducted nucleic acid tests and centralized quarantines for all inbound travelers, and measures to control the number of international passenger flights were lifted.
With regard to the Operating Entities’ cross-border sales, COVID-19 related lockdowns and other control measures imposed in other countries, which form part of the overseas market for our products, had, and may continue to have, an impact on our international exports and import. For instance, the Chinese market will not be able to receive delivery of the Operating Entities’ products during the period of lockdown. In addition, as the price of sea freight has increased as compared with that before the pandemic, this has led to higher overall costs for our Customers. The reduction in shipping frequency and longer shipping period have also affected the shipment and delivery of the Operating Entities’ products to a certain extent. Nevertheless, save for delivery delay of some of the Operating Entities’ products which in turn caused delay in recording of account receivables, the supply chain disruptions do not have any material impact on the cross-border sales operation since the Operating Entities’ supply chain integration capability, and their product suppliers are mainly located outside China. The Operating Entities recorded improvements in the revenue of cross-border sales in fiscal year 2022 compared to fiscal year 2021.
With regard to the Operating Entities’ digital marketing, e-commerce training and software support services, they are mainly completed online and not limited by time or space. To counter the impact of the COVID-19 pandemic, compared with the practice prior to the outbreak of COVID-19, the Operating Entities have changed their traditional office mode to a “work-from home” model and built an online office platform. Despite the fact that the pandemic and lockdown measures resulted in instability in personnel and a high turnover rate in other industries, they also prompted more unemployed people to join the cross-border e-commerce industry and more people to shop online, which in turn accelerated the growth of the entire cross-border e-commerce industry. Looking ahead, our management team expects that the needs from e-commerce start-ups for integrated e-commerce services will further expand for the next decades. Compared with fiscal year 2021, the number of Merchants using digital marketing service and the number of Customers of e-commerce training and software support services increase 14.02% and 140 %, respectively.
For the six months ended March 31, 2023 and the fiscal years ended September 30, 2022 and 2021, the COVID-19 pandemic did not have a material impact on the Operating Entities’ financial positions and operating results. Our revenue reached approximately $9.03 million for the six months ended March 31, 2023, representing an increase of approximately $0.61 million or 7.26% from approximately $8.42 million for the six months ended March 31, 2022.
10
Table of Contents
Our revenue reached approximately $21.88 million for the fiscal year ended September 30, 2022, representing an increase of approximately $6.41 million or 41.44% from approximately $15.47 million for the fiscal year ended September 30, 2021.
The circumstances that have driven the Operating Entities’ business growth during the COVID-19 pandemic may not persist in the future. In addition, the COVID-19 could impact economies and financial markets, resulting in an economic downturn that could impact our ability to raise capital or slow down potential business opportunities. There are still uncertainties of COVID-19’s future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; and the macroeconomic impact of government measures to contain the spread of COVID-19 and related government stimulus measures. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. See “Risk Factors — Risks Relating to Our Business and Industry — The Operating Entities’ business, results of operations and financial condition have been and may continue to be affected by the COVID-19 pandemic.”
Asset Transfers Between the Company and its Subsidiaries
As of the date of this prospectus, no cash transfer or transfer of other assets has occurred among the Company and any of its subsidiaries.
We have established controls and procedures for cash flows within our organization based on internal cash management policies established by our finance department, discussed, considered, and reviewed by the relevant departments in the Company, and approved by the Chairman of our Board of Directors. Specifically, our finance department supervises 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 the 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 a holding company, we are dependent on receipt of funds from our principal subsidiaries in Hong Kong and Japan. There are currently no restrictions on foreign exchange and our ability to transfer cash among our Cayman Islands holding company and our principal subsidiaries in Hong Kong and Japan. As a Cayman Islands holding company, the Company will be able to pay dividends and make other distributions to its shareholders, including investors of the Ordinary Shares, provided that it (i) has either sufficient profits or retained profits, when the dividend is to be declared and paid from profits, or sufficient share premium, and satisfies the solvency test as defined under the Companies Act, when the dividend is to be paid from share premium, and (ii) complies with the provisions in our memorandum and articles of association then in effect. However, as the PRC government imposes control over currency conversion, it has the authority to conduct exchange transfer reviews, which may impose certain limitations on our ability to transfer cash among the Company, its subsidiaries, and its investors. See “Prospectus Summary — Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences,” “Risk Factors — Risks Relating to Doing Business in mainland China — PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or the PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit the PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us,” “Risk Factors — Risks Relating to Doing Business in mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business,” and “Risk Factors — Risks Relating to Doing Business in mainland China — Governmental control of currency conversion may affect the value of your investment and our payment of Dividends.” Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) as long as certain procedural requirements are met. However, approval from appropriate government authorities is required if RMB is converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into, and out of Hong Kong (including funds from Hong Kong to mainland China), except for the transfer of funds involving money laundering and criminal activities. However, there is no guarantee that the Hong Kong
11
Table of Contents
government will not promulgate new laws or regulations that may impose such restrictions in the future. There is no assurance the PRC government will not intervene in or impose restrictions on our ability to transfer cash or assets. To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets. For details, see “Risk Factors — Risks Relating to Doing Business in mainland China — Risk Factors — Risks Relating to Doing Business in mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business” and “Risk Factors — Risks Relating to Doing Business in mainland China — To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets.”
Dividends or Distributions Made to the Company and U.S. Investors and Tax Consequences
As of the date of this prospectus, none of subsidiaries has made any dividends or distributions to the Company and the Company has not made any dividends or distributions to its shareholders. 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. Subject to the passive foreign investment company (“PFIC”) rules, the gross amount of distributions we make to investors with respect to our Ordinary Shares (including the amount of any taxes withheld therefrom) will be taxable as a dividend, to the extent that the distribution is paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Under the laws of the Cayman Islands, a Cayman Islands company may pay a dividend on its shares out of either profit or the share premium account, provided that in no circumstances may a dividend be paid if following such payment the company would be unable to pay its debts as they fall 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 are dependent on receipt of funds from our principal subsidiaries in Hong Kong and Japan. There are currently no restrictions on foreign exchange and our ability to transfer cash among our Cayman Islands holding company and our principal subsidiaries in Hong Kong and Japan. As a Cayman Islands holding company, the Company will be able to pay dividends and make other distributions to its shareholders, including investors of the Ordinary Shares, provided that it (i) has either sufficient profits or retained profits, when the dividend is to be declared and paid from profits, or sufficient share premium, and satisfies the solvency test as defined under the Companies Act, when the dividend is to be paid from share premium, and (ii) complies with the provisions in our memorandum and articles of association then in effect. However, as the PRC government imposes control over currency conversion, it has the authority to conduct exchange transfer reviews, which may impose certain limitations on our ability to transfer cash among the Company, its subsidiaries, and its investors, primarily reflected in the following aspects: (i) we are restricted from injecting capital or providing loans to the PRC subsidiaries, which may adversely affect the operations of the PRC subsidiaries; (ii) the PRC subsidiaries may be restricted from paying dividends to us; and (iii) if we are unable to obtain dividends from the PRC subsidiaries, it may adversely impact our dividends distribution to investors. See “Summary of Risk Factors,” “Risk Factors — Risks Relating to Doing Business in mainland China — PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or the PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit the PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us,” “Risk Factors — Risks Relating to Doing Business in mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business,” and “Risk Factors — Risks Relating to Doing Business in mainland China — Governmental control of currency conversion may affect the value of your investment and our payment of Dividends.”
The PRC subsidiaries are subject to restrictions and limitations on their ability to distribute earnings from their businesses to us and U.S. investors. Current PRC regulations permit the PRC subsidiaries to pay dividends to Linkage Holding only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and
12
Table of Contents
regulations. 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 principle of genuine transaction. Furthermore, if the 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 the PRC subsidiaries are unable to receive all of the revenue from their operations, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. Linkage Holding may be considered a non-resident enterprise for tax purposes, so that any dividends the PRC subsidiaries pay to Linkage Holding 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 — People’s Republic of China Enterprise Taxation in Mainland China.”
As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries, including those based in mainland China, for our cash and financing requirements. If any of the RC subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to us.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (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 Tax Avoidance Arrangement with respect to any dividends paid by Linkage Network to its immediate holding company, Linkage Holding. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Linkage Holding intends to apply for the tax resident certificate if and when Linkage Network plans to declare and pay dividends to Linkage Holding. To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets. See “Risk Factors — Risks Relating to Doing Business in mainland China — There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC subsidiaries, and dividends payable by the PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.” and “Risk Factors — Risks Relating to Doing Business in mainland China — To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets.”
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;
• 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”;
13
Table of Contents
• 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’s 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.
Controlled Company
Our CEO and Chairman of the Board of Directors, Mr. Zhihua Wu, as the concerted actor and the remaining parties to the Concerted Actor Agreement as a group, collectively own voting power of 71.5% of our issued and outstanding Ordinary Shares. See “Related Party Transactions — Concerted Actor Agreement.” Upon completion of this offering, Mr. Wu and the remaining parties to the Concerted Actor Agreement as a group, will beneficially own approximately 66.51% of the aggregate voting power of our issued and outstanding Ordinary Shares, assuming no exercise of the
14
Table of Contents
underwriters’ over-allotment option. As a result, we will be deemed a “controlled company” for the purpose of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including the requirements that:
• a majority of our board of directors consist of independent directors;
• our director nominees be selected or recommended solely by independent directors; and
• we have a nominating committee and a remuneration committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees.
Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules even if we are a controlled company, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
Permissions or Approval Required from the PRC Authorities for the PRC Subsidiaries
Our PRC legal counsel, AllBright, has advised us that, as of the date of this prospectus, in order to operate our business activities as currently conducted in China, the PRC subsidiaries are required to obtain business licenses from the State Administration for Market Regulation (“SAMR”). As of the date of this prospectus, as confirmed by AllBright, our PRC legal counsel, each of the PRC subsidiaries has obtained a valid business license from the SAMR and no application for any such license has been denied.
We cannot assure you that the PRC subsidiaries will always be able to successfully update or renew the Governmental Permits required for the relevant business in a timely manner or that these licenses or permits are sufficient to conduct all of the PRC subsidiaries’ present or future business. The PRC subsidiaries’ operations could be adversely affected, directly or indirectly; our ability to offer, or continue to offer, securities to investors would be potentially hindered; and the value of our securities might significantly decline or be worthless, by existing or future laws and regulations relating to the business of the subsidiaries and the PRC subsidiaries or our industry, or by intervention or interruption by PRC governmental authorities, if the PRC subsidiaries (1) do not receive or maintain such Governmental Permits, (2) inadvertently conclude that such Governmental Permits are not required, (3) applicable laws, regulations, or interpretations change and the PRC subsidiaries are required to obtain such Governmental Permits in the future.
To operate business activities in Hong Kong, every person carrying on any business must make an application to the Commissioner of Inland Revenue for the registration of that 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 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, each of the Hong Kong subsidiaries has obtained a valid business registration certificate.
Permissions or Approval Required from the PRC Authorities for Overseas Listing
As of the date of this prospectus, our PRC counsel, AllBright, has advised us that (1) neither we nor any of the PRC subsidiaries are required to obtain permission from any of the PRC authorities to operate and issue our Ordinary Shares to foreign investors, (2) we may be required to obtain permission or approval relating to our Ordinary Shares from the CAC pursuant to the Cybersecurity Review Measures (2021 version), and (3) we are not required to complete the filing procedures with the CSRC for the offering and listing of our Ordinary Shares.
Recently, however, 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.
15
Table of Contents
The Cybersecurity Review Measures, which became effective on February 15, 2022, provide 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 require 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, we have not received any notice from any authorities identifying any of the PRC subsidiaries as a CIIO or requiring us to go through cybersecurity review or network data security review by the CAC. In the course of the PRC subsidiaries’ operations, the data collected is mainly the mailing addresses used by the Customers. Such data will be transmitted to the Linkage ERP System in the PRC for use in subsequent shipments. Consequently, our PRC counsel, AllBright, has advised that such practice may be interpreted as meaning that the PRC subsidiaries use the Internet to carry out data processing activities in the PRC, and thus, the PRC subsidiaries may be subject to cybersecurity review, in order to prevent certain risks, including risks that activities may endanger critical information infrastructure security and national data security and disclosure of personal information, the PRC subsidiaries may be required to take technical measures and other necessary measures, such as ceasing transmission and deletion of data or information, and suspension of new user registration to prevent and mitigate risks in accordance with the requirements of the cybersecurity review. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations. See “Risk Factors — Risks Relating to Doing Business in mainland China — Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering.”
On February 17, 2023, the CSRC issued the Overseas Listing Trial Measures, which became effective on March 31, 2023. On the same date of the issuance of the Overseas Listing Trial Measures, the CSRC circulated No. 1 to No. 5 Supporting Guidance Rules, the Notes on the Overseas Listing Trial Measures, the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and the relevant CSRC Answers to Reporter Questions on the official website of the CSRC, or collectively, the Guidance Rules and Notice. The Overseas Listing Trial Measures, together with the Guidance Rules and Notice, reiterate the basic supervision principles as reflected in the draft rules by providing substantially the same requirements for filings of overseas offering and listing by domestic companies, yet made the following updates compared to the draft rules: (a) further clarification of the circumstances prohibiting overseas issuance and listing; (b) further clarification of the standard of indirect overseas listing under the principle of substance over form, and (c) adding more details of filing procedures and requirements by setting different filing requirements for different types of overseas offering and listing. Under the Overseas Listing Trial Measures and the Guidance Rules and Notice, domestic companies conducting overseas securities offering and listing activities, either in direct or indirect form, shall complete filing procedures with the CSRC pursuant to the requirements of the Overseas Listing Trial Measures within three working days following its submission of initial public offerings or listing application. The companies that have already been listed on overseas stock exchanges or have obtained the approval from overseas supervision administrations or stock exchanges for its offering and listing and will complete their overseas offering and listing prior to September 30, 2023 are not required to make immediate filings for its listing yet need to make filings for subsequent offerings in accordance with the Overseas Listing Trial Measures. The companies that have already submitted an application for an initial public offering to overseas supervision administrations prior to the effective date of the Overseas Listing Trial Measures but have not yet obtained the approval from overseas supervision administrations or stock exchanges for the offering and listing may arrange for the filing within a reasonable time period and should complete the filing procedure before such companies’ overseas issuance and listing. Under the Overseas Listing Trial Measures and the Guidance Rules and Notice, where a domestic company seeks to directly or indirectly offer and list securities in overseas markets, the issuer shall file with the CSRC. Direct overseas offering and listing by domestic companies refers to such overseas offering and listing by a joint-stock company incorporated domestically. Indirect overseas offering and listing by domestic companies refers to such overseas offering and listing by a company in the name of an overseas incorporated entity, whereas the company’s major business operations are located domestically and such offering and listing is based on the underlying equity, assets, earnings or other similar rights of a domestic company. Any overseas offering and listing made by an issuer that meets both the following conditions will be determined as indirect (i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent
16
Table of Contents
accounting year is accounted for by domestic companies; and (ii) the main parts of the issuer’s business activities are conducted in mainland China, or its main places of business are located in mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in mainland China. If a PRC domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that we are not required to complete filing procedures with the CSRC for the offering and listing of our Ordinary Shares, given that (i) we are not a China domestic company; and (ii) our offering and listing is not an indirect overseas offering or listing, because the operating revenue, total profit, total assets, or net assets, as documented in our audited consolidated financial statements for the most recent accounting year, accounted for by the PRC subsidiaries are all under 50%. See “Regulations — Regulations Relating to Overseas Listings” and “Risk Factors — Risks Relating to Doing Business in mainland China — The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.”
To conduct business activities in Hong Kong, every person carrying on any business must make an application to the Commissioner of Inland Revenue for the registration of that 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 commencement of such 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, each of the Hong Kong subsidiaries has obtained a valid business registration certificate. There is no statutory or mandatory permission or regulatory approval required for the provision of customized servers and ancillary software and services in Hong Kong. As advised by our Hong Kong counsel, Winston & Strawn, as of the date of this prospectus, neither we nor the Hong Kong subsidiaries are required to obtain any permission or approval from the Hong Kong authorities to offer the securities being registered to foreign investors outside Hong Kong. However, it is uncertain whether we or the Hong Kong subsidiaries will be required to obtain additional permissions or approval from Hong Kong authorities to operate 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 approvals if required in the future because applicable laws, regulations, or interpretations change, or inadvertently conclude that such permissions or approvals are not required, then the value of our Ordinary Shares may depreciate significantly or become worthless.
17
Table of Contents
THE OFFERING
Ordinary Shares offered by us | | 1,500,000 Ordinary Shares |
Price per Ordinary Share | | We currently estimate that the initial public offering price will be in the range of $4.0 to $6.0 per Ordinary Share. |
Ordinary Shares issued and outstanding prior to completion of this offering | |
20,000,000 Ordinary Shares
|
Ordinary Shares issued and outstanding immediately after this offering | |
21,500,000 Ordinary Shares assuming no exercise of the underwriters’ over-allotment option and excluding up to 51,750 Ordinary Shares underlying the Representative’s Warrants
21,725,000 Ordinary Shares assuming full exercise of the underwriters’ over-allotment option and excluding 51,750 Ordinary Shares underlying the Representative’s Warrants |
Listing | | We intend to apply to have our Ordinary Shares listed on the Nasdaq Stock 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 on Nasdaq. |
Proposed ticker symbol | | “LGCB” |
Transfer Agent | | Transhare Corporation |
Over-allotment Option | | We have granted to the underwriters an option, exercisable within 45 days from the date of this prospectus, to purchase up to 15% of the aggregate number of Ordinary Shares sold in the offering. |
Use of proceeds | | We intend to use the proceeds from this offering (i) for technology research and development, (ii) to further strengthen supply chain integration, (iii) to expand our manpower and talent pool, (iv) to venture into the Southeast Asian market, and (v) for working capital and other general corporate purposes. See “Use of Proceeds” on page 62 for more information. |
Lock-up | | We have agreed that, without the prior written consent of the Representative, we will not, during the engagement period of the Representative and additionally for a period of 180 days from the date of this prospectus, (i) 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 of our Ordinary Shares or any securities that are convertible into or exercisable or exchangeable for our Ordinary Shares, (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any Ordinary Shares or any securities convertible into or exercisable or exchangeable for Ordinary Shares, or (iii) complete any offering of our debt securities, other than entering into a line of credit with a traditional bank, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital shares, whether any such transaction described in clause (i), (ii), (iii), or (iv) above is to be settled by delivery of shares of our Company or such other securities, in cash or otherwise. Furthermore, all of our directors and officers and our principal shareholders (5% or more shareholders) |
18
Table of Contents
| | have agreed with the underwriters, subject to certain exceptions, 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 of our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of 180 days after the effective date of this prospectus. In addition, without the prior consent of the Representative, each holder of less than 5% outstanding Ordinary Shares of the Company as of the effective date of the Registration Statement, for a period of 90 days from the date of this prospectus, may not 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 shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company, subject to customary exceptions. See “Underwriting — Lock-Up Agreements” for more information. |
Risk factors | | The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 20 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 3% of the total number of Ordinary Shares sold in this offering, excluding 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 three and a half years after six months from the effective date of this offering at a per share exercise price of $6.0 (120% of the public offering price of the Ordinary Shares, based on an assumed offering price of $5.0 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 — The Representative’s Warrants” for a description of these warrants. |
19
Table of Contents
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 Our Business and Industry
The Operating Entities operate in a highly-competitive market and their failure to compete effectively could adversely affect their results of operations.
The cross-border e-commerce service provider industry in Japan and China is highly-competitive and rapidly evolving, with many new companies joining the competition in recent years and few leading companies. The Operating Entities primarily compete against offline and online supply chain provider, retailers, and wholesalers, but also increasingly face competition from advertising providers, software support service providers, and other cross-border e-commerce service provider. See “Business — Competition.” The Operating Entities’ current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources than they do. Competitors may leverage their brand recognition, experience, and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products. Some of the Operating Entities’ competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to their website and platform development than the Operating Entities. In addition, new and enhanced technologies may increase the competition in the cross-border e-commerce service provider market. Increased competition may reduce the Operating Entities’ profitability, market share, customer base, and brand recognition. There can be no assurance that the Operating Entities will be able to compete successfully against current or future competitors, and such competitive pressures could have a material adverse effect on their business, financial condition, and results of operations.
Our historical growth rates and performance may not be sustainable or indicative of our future growth and financial results. We cannot guarantee that we will be able to maintain the growth rate we have experienced to date.
We have grown rapidly over the last few years. Our revenues increased from $15.47 million in the fiscal year ended September 30, 2021 to $22.03 million in the fiscal year ended September 30, 2022, and from $8.42 million in the six months ended March 31, 2022 to $9.03 million in the six months ended March 31, 2023. However, our historical performance may not be indicative of our future growth or financial results. We cannot assure you that we will be able to grow at the same rate as we did in the past, or avoid any decline in the future. Our growth may slow down or become negative, and revenues may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending, increasing competition, declining growth of our overall market or industry, the emergence of alternative business models and changes in rules, regulations, government policies or general economic conditions. In addition, the Linkage ERP System, from which we generated 0.80% of our revenues in the fiscal year ended September 30, 2022 and 3.93% of our revenues in the six months ended March 31, 2023, is a relatively new initiative and may not grow as quickly as we have anticipated. Our growth rate may also be slower than the previous years due to inflationary pressure and changes in the global economic conditions. It is difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in rapidly evolving markets may be exposed. If our growth rate declines, our business, financial condition and results of operations may be materially and adversely affected.
20
Table of Contents
System interruptions that impair access to the Operating Entities’ software, or other performance failures in their technology infrastructure, could damage their reputation and results of operations.
The satisfactory performance, reliability and availability of the Operating Entities’ marketplace, software (Linkage ERP System and Honeybee product shelving software), and other technology infrastructures are critical to its reputation and ability to acquire and retain Customers, as well as maintain adequate Customer service levels. For example, if the Linkage ERP System fails or suffers an interruption or degradation of services, the Operating Entities could lose customer data, which could harm their business. The Operating Entities’ systems and operations, including their ability to fulfill Customer orders through our logistics network, are also vulnerable to damage, breakdown, breach or interruption from inclement weather, fire, flood, power loss, telecommunications failure, terrorist attacks, labor disputes, employee error or malfeasance, theft or misuse, cyber-attacks, denial-of-service attacks, computer viruses, ransomware or other malware, data loss, acts of war, break-ins, earthquake and similar events. In the event of a software failure, the failure to maintain back-up resources could take substantial time, during which time the Operating Entities’ sites could be completely shut down. Further, the Operating Entities’ back-up services may not effectively process spikes in demand, may process customers’ requirement more slowly and may not support all of their sites’ functionality.
The Operating Entities may experience periodic system interruptions from time to time. In addition, to remain competitive, the Operating Entities continue to enhance and improve the responsiveness, functionality and features of their marketplace, which is particularly challenging, given the rapid rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the e-commerce industry. Accordingly, the Operating Entities redesign and enhance various functions in their marketplace on a regular basis, and they may experience instability and performance issues as a result of these changes. Any slowdown, interruption or performance failure of the Operating Entities’ marketplace and the underlying technology could harm their business, reputation and their ability to acquire, retain and serve Customers, which could materially adversely affect the Operating Entities’ results of operations.
The Operating Entities’ international operations are subject to a variety of legal, regulatory, political and economic risks.
We conduct a substantial majority of our operations through the Operating Entities established in mainland China, Hong Kong, and Japan and we operate one warehouse in Japan. We also plan to venture into the Southeast Asian market. See “Business — Growth Strategies — Grow and Diversify Customer and Merchant Bases, and Seek More Authorized Agency Qualifications of Other Media.” In certain international market segments, the Operating Entities have relatively little operating experience and may not benefit from any first-to-market advantages. It is costly to establish, develop, and maintain international operations, and promote our brand internationally. The Operating Entities’ international operations may not become profitable on a sustained basis.
In addition, the Operating Entities’ international sales and operations are subject to a number of risks, mainly including (i) local economic, inflation and political conditions; (ii) government regulation (such as regulation of our product and service offerings and of competition); restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs); nationalization; and restrictions on foreign ownership; (iii) restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedents, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights; (iv) business licensing or certification requirements; (v) limitations on the repatriation and investment of funds and foreign currency exchange restrictions; (vi) limited fulfillment and technology infrastructure; (vii) potential impact of the COVID-19 pandemic on the Operating Entities’ business operations and the global economy; (viii) shorter payable and longer inventory and receivable cycles and the resultant negative impact on cash flow; (ix) laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, advertising, and restrictions on pricing or discounts; (x) lower levels of use of the Internet; (xi) lower levels of consumer spending and fewer opportunities for growth compared to the China, Japan or other Asian nations; (xii) different employee/employer relationships and the existence of works councils and labor unions; (xiii) laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and (xiv) geopolitical events, including pandemics, war and terrorism.
21
Table of Contents
As international physical, e-commerce, and omni-channel retail and other services grow, competition will intensify, including through adoption of evolving business models. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. The inability to hire, train, retain, and manage sufficient required personnel may limit the Operating Entities’ international growth.
If the Operating Entities fail to maintain and expand our relationships with suppliers, their revenues and results of operations will be harmed.
The Operating Entities have no long-term supply agreements arrangements with major suppliers and, therefore, the Operating Entities’ success depends on maintaining good relationships with their major suppliers. The Operating Entities’ business depends to a significant extent on the willingness and ability of their suppliers to supply them with a sufficient selection and volume of products to stock product collection. Some of their suppliers that have many other clients may not have the capacity to supply the Operating Entities with sufficient merchandise to keep pace with their growth plans. Any of the Operating Entities’ suppliers could in the future decide to scale back or end its relationship with the Operating Entities and strengthen its relationship with the Operating Entities’ competitors, which could negatively impact the revenue we earn from the sale of products from such supplier. If the Operating Entities fail to maintain strong relationships with their existing suppliers, or fail to continue acquiring and strengthening relationships with additional suppliers, the Operating Entities’ ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on their competitive position.
During the six months ended March 31, 2023, two suppliers accounted for approximately 19.39% and 15.63% of the Operating Entities’ total purchases, respectively. During the six months ended March 31, 2022, one supplier accounted for approximately 24.33% of the Operating Entities’ total purchases. During the fiscal year ended September 30, 2022, two suppliers accounted for approximately 20.59% and 15.97% of the Operating Entities’ total purchases, respectively. During the fiscal year ended September 30, 2021, one supplier accounted for approximately 20.81% of the Operating Entities’ purchases. The loss of or a reduction in the amount of merchandise made available to the Operating Entities by any one of these key suppliers, or by any of their other suppliers, could have an adverse effect on the Operating Entities’ business.
If HQT NETWORK fails to maintain the relationship with Google, its digital marketing services could be materially affected, which in turn could adversely affect our financial condition and results of operations.
For the six months ended March 31, 2023, and the fiscal years ended September 30, 2022 and 2021, all the revenue in digital marketing services came from the commissions of Google was $2.26 million, $3.95 million, and $3.05 million, accounting for approximately 25.04%, 17.91% and 19.70% of our total revenue for the respective periods.
HQT NETWORK typically enters into agency agreement with Google with a term of one year, and its currently effective agency agreement with Google expires on January 1, 2024. Pursuant to the agency agreement currently in effect, HQT NETWORK is responsible for identifying and procuring Merchants who then purchase ad inventory from the Google platforms, facilitating the transaction process, and assisting with advertisement deployment in Mainland China and Hong Kong. As Google’s authorized agency, HQT NETWORK’s relationship with Google is mainly governed by the agency agreement which provides for, among other things, credit periods and the commission polices offered to HQT NETWORK. Either party to the agency agreement may terminate the agreement upon a 30-day advance written notice, and Google may unilaterally terminate the agreement if HQT NETWROK fails to perform certain obligations specified therein. Any failure to enter into a new agency agreement with Google upon expiration of the current term or any termination of the agreement with Google may have a material adverse impact on the results of HQT NETWORK’s digital marketing services, which in turn could adversely affect our financial condition and results of operations. For a detailed description of the material terms of our agency agreement with Google and the commissions offered by Google, see “Business — Digital Marketing — Agency agreement with Google.”
There are a number of factors, including HQT NETWORK’s performance, which could cause the loss of, or decrease in the volume of digital marketing business from. Even though we believe HQT NETWORK has a strong record of performance in digital marketing services, we cannot assure you that HQT NETWORK will continue to maintain the business cooperation with Google at the same level, or at all. The loss of business from Google, or any downward adjustment of the rates of commissions paid by Google, could materially and adversely affect HQT NETWORK’s
22
Table of Contents
digital marketing services, which in turn could adversely affect our financial condition and results of operations. Furthermore, if Google terminates its relationship with HQT NETWORK, we cannot assure you that HQT NETWORK will be able to secure an alternative arrangement with comparable media in a timely manner, or at all.
The Operating Entities rely on third-party manufacturers to produce their private label smart products and problems with, or loss of, these manufacturers could harm the Operating Entities’ business and operating results.
The Operating Entities entrust third parties to manufacture their private label smart products which the Operating Entities sell to Customers. The Operating Entities offer approximately 190 SKUs of private label smart electronics from qualified third-party manufacturers in a timely and efficient manner. For the six months ended March 31, 2023 and the fiscal years ended September 30, 2022 and 2021, we were materially dependent upon three third-party manufacturers for the production of private label smart products; namely, Shenzhen Luoxi Technology Co., Ltd. (“Shenzhen Luoxi”), Shenzhen Huajue Communication Co., Ltd. (“Shenzhen Huajue”), and Shenzhen Weiermei Intelligent Technology Co., Ltd. (“Shenzhen Weiermei”), each contributing to more than 5% of our total manufacturing fees paid during each of the reporting periods. Political and economic instability, global or regional adverse conditions, such as pandemics or other disease outbreaks or natural disasters, the financial stability of third-party manufacturers, third-party manufacturers’ ability to meet the Operating Entities’ standards, labor problems experienced by third-party manufacturers, the availability or cost of raw materials, merchandise quality issues, currency exchange rates, trade tariff developments, transport availability and cost, including import-related taxes, transport security, inflation, and other factors relating to the Operating Entities’ third-party manufacturers are beyond their control. As an example, the COVID-19 pandemic could adversely impact third-party manufacturers facilities and operations due to extended holidays, factory closures and risks of labor shortages, among other things, which may materially and adversely affect the Operating Entities’ business, financial condition and results of operations.
Under certain circumstances, the agreements entered into with such third-party manufacturers may lapse, in the event the third-party manufacturers determine not to renew such agreements. For example, our agreements with the major third-party manufacturers identified above, namely Shenzhen Huajue, Shenzhen Luoxi and Shenzhen Weiermei, will be automatically renewed for additional one-year terms, unless a party has provided a three-month advance written notice to the other party prior to the expiration of the term. See “Business — Business Model — Product Selection — Product Offerings — Our Private Label Smart Electronics” on page 104 for detailed descriptions of the material terms of our agreements with major third-party manufacturers. In the event that any of such third parties determines to not to renew by providing such advance written notice, there can be no assurance that the Operating Entities will be able to obtain a replacement in a timely manner, or at all, which may affect our business, financial condition, and results of operations. The Operating Entities’ ability to develop and maintain relationships with reputable third-party manufacturers and offer high quality merchandise to Customers is critical to the Operating Entities’ success. If the Operating Entities are unable to develop and maintain relationships with third-party manufacturers that would allow them to offer a sufficient amount and variety of quality merchandise on acceptable commercial terms, the Operating Entities’ ability to satisfy Customers’ needs, and therefore the Operating Entities’ long-term growth prospects, may be materially adversely affected.
We also are unable to predict whether any of the countries in which the Operating Entities’ products are currently manufactured or may be manufactured in the future will be subject to new, different, or additional trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of exports from products, including the imposition of additional export restrictions, restrictions on the transfer of funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available to Customers and materially adversely affect the Operating Entities’ financial performance as well as their reputation and brand.
If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.
As we continue to expand, our continued growth could strain our existing resources, and we could experience ongoing challenges, including (i) managing our operational, administrative and financial capabilities and other resources; (ii) managing our brand portfolio, including further expanding our private label offerings, products and services; (iii) expanding marketing channels and deepening end customer outreaches; (iv) staying abreast of the evolving industry demands and market developments and catering to consumers’ changing tastes; (v) developing and applying
23
Table of Contents
technologies necessary to support our expanded operations; (vi) responding to changes in the regulatory environment; (vii) exploring new market opportunities such as new monetization channels; and (viii) addressing other challenges resulting from our expansion.
All efforts to address the potential challenges on our way to expansion require significant managerial, financial and human resources. We cannot assure you that we will be able to effectively or timely address operating difficulties and challenges to keep up with our growth. If we are unable to successfully address these difficulties, risks and uncertainties, our business, financial conditions and results of operations could be materially and adversely affected.
We may be unsuccessful in expanding and operating our business internationally, which could adversely affect our results of operations.
We plan to selectively launch our integrated e-commerce related services in other countries in Southeast Asia during the next two years, starting from markets such as the Thailand, Malaysia, and Indonesia. For details, see “— Liquidity and Capital Resources” The entry and operation of our business in these markets could cause us to be subject to unexpected, uncontrollable, and rapidly changing events and circumstances outside Japan and China. As we grow our international operations in the future, we may need to recruit and hire new product development, sales, marketing, and support personnel in the countries in which we will launch our services or otherwise have a significant presence. Entry into new international markets typically requires the establishment of new marketing channels. Our ability to continue to expand into international markets involves various risks, including the possibility that our expectations regarding the level of returns we will achieve on such expansion will not be achieved in the near future, or ever, and that competing in markets with which we are unfamiliar may be more difficult than anticipated. If we are less successful than we expect in a new market, we may not be able to realize an adequate return on our initial investment and our operating results could suffer.
Our international operations may also fail due to other risks inherent in foreign operations, including:
• varied, unfamiliar, unclear, and changing legal and regulatory restrictions, including different legal and regulatory standards applicable to cross-border e-commerce market;
• compliance with multiple and potentially conflicting regulations in other countries in Southeast Asia;
• difficulties in staffing and managing foreign operations;
• longer collection cycles;
• different intellectual property laws that may not provide consistent and/or sufficient protections for our intellectual property;
• proper compliance with local tax laws, which can be complex and may result in unintended adverse tax consequences;
• localized spread of infection resulting from the COVID-19 pandemic, including any economic downturns and other adverse impacts;
• difficulties in enforcing agreements through foreign legal systems;
• fluctuations in currency exchange rates that may affect service demand and may adversely affect the profitability in U.S. dollars, RMB, or JPY of services provided by us in foreign markets where payment for our services is made in the local currency;
• changes in general economic, health, and political conditions in countries where our services are provided;
• disruptions caused by acts of war;
• potential labor strike, lockouts, work slowdowns, and work stoppages; and
• different consumer preferences and requirements in specific international markets.
Our current and any future international expansion plans will require management attention and resources and may be unsuccessful. We may find it impossible or prohibitively expensive to continue expanding internationally or we may be unsuccessful in our attempt to do so, and our results of operations could be adversely impacted.
24
Table of Contents
If the Operating Entities cannot retain, attract, and motivate key personnel, the Operating Entities may be unable to effectively implement their business plan.
The Operating Entities’ success depends in large part upon their ability to retain, attract, and motivate highly skilled management, research and development, marketing, and sales personnel. The loss of and failure to replace key technical management and personnel could adversely affect multiple development efforts. Recruitment and retention of senior management and skilled technical, sales and other personnel is very competitive, and we may not be successful in either attracting or retaining such personnel. The Operating Entities may lose key personnel to other high technology companies, and many larger companies with significantly greater resources than us may aggressively recruit, key personnel. In addition, due to the intense competition for qualified employees, the Operating Entities may be required to, and have had to, increase the level of compensation paid to existing and new employees, which could materially increase the Operating Entities’ operating expenses.
The Operating Entities may not be successful in optimizing their warehouse and fulfillment network.
As of March 31, 2023, the Operating Entities had one warehouse in Japan. Failures to adequately predict Customers demand or otherwise optimize and operate the Operating Entities’ fulfillment network successfully from time to time result in excess or insufficient fulfillment capacity, increased costs and impairment charges, any of which could materially harm the Operating Entities’ business. As the Operating Entities continue to add warehouses and fulfillment capability, their fulfillment and logistics networks become increasingly complex and operating them becomes more challenging. There can be no assurance that the Operating Entities will be able to operate their networks effectively.
In addition, failure to optimize inventory in the Operating Entities’ fulfillment network increases their net shipping costs by requiring long-zone or partial shipments. The Operating Entities may be unable to adequately staff their warehousing network and customer service centers. As the Operating Entities maintain the inventory of other companies, the complexity of tracking inventory and operating their fulfillment network has further increased. The Operating Entities’ failure to properly handle such inventory or the inability of the other businesses on whose behalf the Operating Entities’ perform inventory fulfillment services to accurately forecast product demand may result in the Operating Entities being unable to secure sufficient storage space or to optimize their warehouses and fulfillment network or cause other unexpected costs and other harm to the Operating Entities’ business and reputation.
Damage to the Operating Entities’ brand image could have a material adverse effect on their growth strategy and their business, financial condition, results of operations and prospects.
Maintaining and enhancing the Operating Entities’ brand is critical to expanding the Operating Entities’ base of Customers and Merchants, including attracting more Customers and Merchants to use the Operating Entities’ services. The ability to maintain and enhance the Operating Entities’ brand depends largely on the Operating Entities’ ability to maintain Customer and Merchant confidence in product and service offerings, including by offering good quality products for Customers to sell on third-party e-commerce platforms and providing high qualified comprehensive cross-border e-commerce services to them, or delivering satisfactory digital marketing service for the Merchants. If third-party e-commerce platforms, Customers, or Merchants do not have a satisfactory experience with the Operating Entities’ products or services, such third-party e-commerce platforms, Customers or Merchants may seek out alternatives from the Operating Entities’ competitors and may not return to the Operating Entities in the future, or at all.
In addition, unfavorable publicity regarding, for example, the Operating Entities’ practices relating to privacy and data protection, product quality, delivery problems, competitive pressures, litigation or regulatory activity, could seriously harm the Operating Entities’ reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of Customer and Merchant bases and result in decreased total revenues, which could adversely affect the Operating Entities’ business, financial condition and results of operations. A significant portion of Customers’ brand experience also depends on third parties outside of the Operating Entities’ control, including third-party e-commerce platforms, carrier and freight service providers and other third-party delivery agents. If these third parties do not meet the Operating Entities’ or Customers’ expectations, the Operating Entities’ brands may suffer irreparable damage.
25
Table of Contents
Customers and/or Merchants complaints or negative publicity about the Operating Entities’ marketplace, products, services, delivery times, company practices, employees, customer data handling and security practices or customer support, especially on social media websites and in the Operating Entities’ marketplace, could rapidly and severely diminish Customers, Merchants, and third-party e-commerce platforms confidence in the Operating Entities and result in harm to their brands.
The Operating Entities’ efforts to launch new products or services may not be successful.
The Operating Entities’ business success depends to some extent on their ability to launch new products and services and expand existing offerings into new geographies. For example, the Operating Entities expanded into Japan for our warehouse services in 2020, and launched Linkage ERP System in 2022. Launching new products and services or expanding internationally requires significant upfront investments, including investments in marketing, information technology, and additional personnel. Expanding the Operating Entities’ service offerings internationally is particularly challenging because it requires the Operating Entities to gain country-specific knowledge about consumers, regional competitors and local laws, and customize portions of our technology for local markets. The Operating Entities may not be able to generate satisfactory revenues from these efforts to offset these costs. Any lack of market acceptance of the Operating Entities’ efforts to launch new services or to expand their existing offerings could have a material adverse effect on the Operating Entities’ business, financial condition and results of operations. Further, as the Operating Entities continue to expand their fulfillment capability or add new businesses with different requirements, the Operating Entities’ warehouse networks become increasingly complex and operating them becomes more challenging. There can be no assurance that the Operating Entities will be able to operate their networks effectively.
The Operating Entities have also entered and may continue to enter into new markets in which the Operating Entities have limited or no experience, which may not be successful or appealing to Customers. These activities may present new and difficult technological and logistical challenges, and resulting service disruptions, failures or other quality issues may cause Customers’ dissatisfaction and harm the Operating Entities’ reputation and brand. Further, the Operating Entities’ current and potential competitors in new market segments may have greater brand recognition, financial resources, longer operating histories and larger customer bases than the Operating Entities do in these areas. As a result, the Operating Entities may not be successful enough in these newer areas to recoup our investments in them. If this occurs, the Operating Entities’ business, financial condition and results of operations may be materially adversely affected.
Real or perceived errors, failures or bugs in the Operating Entities’ services, software or technology could adversely affect their business, financial condition and results of operations.
Undetected real or perceived errors, failures, bugs or defects may be present or occur in the future in the Operating Entities’ solutions, software or technology or the technology or software the Operating Entities license from third parties, including open-source software. Despite testing by the Operating Entities, real or perceived errors, failures, bugs or defects may not be found until Customers use the Operating Entities’ services. Real or perceived errors, failures, bugs or defects in the Operating Entities’ solutions could result in negative publicity, loss of or delay in market acceptance of the Operating Entities’ services and harm to the Operating Entities’ brand, weakening of their competitive position, claims by Customers for losses sustained by them or failure to meet the stated service level commitments in Customer agreements. In such an event, the Operating Entities may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help solve the problem. Any real or perceived errors, failures, bugs or defects in the Operating Entities’ services could also impair their ability to attract new Customers, retain existing Customers or expand their use of the Operating Entities’ services, which could adversely affect the Operating Entities’ business, financial condition and results of operations.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
We may require additional cash capital resources in order to fund future growth and the development of our businesses, including expansion of our e-commerce platform, our third-party logistics services and any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, share price performance, liquidity of international capital and lending markets, governmental regulations over
26
Table of Contents
foreign investment and the e-commerce and logistics services industries. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and financing covenants that would restrict our operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. Any failure to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations. Moreover, any issuance of equity or equity-linked securities could result in significant dilution to our existing shareholders.
The Operating Entities’ business may be affected by increases in rental expenses or the termination of leases of their warehouse and offices.
The Operating Entities’ lease properties to operate all of warehouse and offices. The Operating Entities may also not be able to successfully extend or renew such leases prior to expiration, on commercially reasonable terms or at all, and may be forced to relocate the affected operations. Such relocation may disrupt the Operating Entities’ operations and result in significant relocation expenses, which could adversely affect the Operating Entities’ business, financial condition and results of operations. The Operating Entities may not be able to locate desirable alternative sites for their facilities as their business continues to grow and failure in relocating their operations when required could adversely affect their business and operations. In addition, the Operating Entities compete with other businesses for premises at certain locations or of desirable sizes. Even if the Operating Entities are able to extend or renew the respective leases, rental payments may significantly increase as a result of the high demand for the leased properties.
If the Operating Entities cannot successfully protect their intellectual property and exclusive rights, the Operating Entities’ brand and business would suffer.
The Operating Entities rely on a combination of trademark, copyright, domain name and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect their intellectual property rights and other exclusive rights. The Operating Entities also enter into agreements containing confidentiality obligations with their employees and any third parties who may access the Operating Entities’ proprietary technology and information, and the Operating Entities rigorously control access to their proprietary technology and information.
Nevertheless, we cannot guarantee that we can successfully protect the Operating Entities’ intellectual property and exclusive rights from unauthorized usage by third parties or breach of confidentiality obligations by our counterparties. For example, there could be other online stores imitating or copying the Operating Entities’ self-designed products without their prior consent, which may harm the Operating Entities’ reputation and operations. Furthermore, a third-party may take advantage of the “first-to-file” trademark registration system in China to register the Operating Entities’ brands in bad faith, which will cause the Operating Entities to incur additional costs for legal actions. Moreover, confidentiality obligations may be breached by counterparties, and there may not be adequate remedies available to the Operating Entities for any such breach. Accordingly, the Operating Entities may not be able to effectively protect our intellectual property rights and exclusive rights or to enforce our contractual rights in China or elsewhere.
In addition, policing any unauthorized use of the Operating Entities’ intellectual property and exclusive rights is difficult, time-consuming and costly. The precaution steps the Operating Entities have taken for protecting their rights may be inadequate. In the event that the Operating Entities resort to litigation to enforce their intellectual property rights and exclusive rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that the Operating Entities will prevail in such litigation or that the Operating Entities would be able to halt any unauthorized use of their intellectual property and exclusive rights. In addition, the Operating Entities’ trade secrets may be leaked to, or be independently discovered by, their competitors. Any failure in protecting or enforcing the Operating Entities’ intellectual property rights could have a material adverse effect on the Operating Entities’ business, financial condition and results of operations.
The Operating Entities may be accused of infringing, misappropriating or otherwise violating the intellectual property rights of third parties.
We cannot assure you that the Operating Entities’ product design, offerings, or technologies do not or will not infringe upon copyrights or other intellectual property rights (including, but not limited to, trademarks, patents and know-how) held by third parties. For example, the design of third-party products and the Operating Entities’ products may be similar and result in intellectual property disputes. Nor can we assure you that the Operating Entities’ use of software
27
Table of Contents
or any other intellectual properties in business and operation will not be alleged by any third party as infringement resulting from lack of licenses. If any third-party infringement claims are brought against the Operating Entities, they may be forced to divert management’s time and other resources from their business and operations to defend against these claims. The Operating Entities may also be prohibited from using such intellectual property or relevant content. As a result, the Operating Entities may incur licensing or usage fees, develop alternatives of our own, or even need to pay damages, legal fees and other costs. Even if such assertions against the Operating Entities are unsuccessful, they may cause the Operating Entities to lose existing and future business and incur reputational harm and substantial legal fees. As a result, the Operating Entities’ reputation may be harmed and their business and financial performance may be materially and adversely affected.
The Operating Entities are subject to legal and regulatory proceedings from time to time in the ordinary course of their business.
The Operating Entities have not been subject to any material allegations or complaints in the past, but they may be involved in legal and other disputes in the ordinary courses of their business, including allegations against the Operating Entities for potential infringement of third-party copyrights or other intellectual property rights, as well as Customers’ complaints in relation to the Operating Entities’ refund policy, the quality of their services, data security and other dissatisfaction. The Operating Entities might also be involved in governmental investigations for advertisements or content posted on the Operating Entities’ websites or Linkage ERP System or accounts or other aspect of the Operating Entities’ business operation in the future. Any claims against the Operating Entities, with or without merit, could be time-consuming and costly to defend or litigate, divert the Operating Entities’ management’s attention and resources or harm their brand equity. If a lawsuit or governmental proceeding against the Operating Entities is successful, they may be required to pay substantial damages or fines. The Operating Entities may also lose, or be limited in, the rights to offer some of the Operating Entities’ products and services or be required to make changes to the Operating Entities’ product and service offerings or business model. As a result, the scope of the Operating Entities’ product and service offerings could be reduced, which could adversely affect the Operating Entities ability to attract new Customers and Merchants, harm the Operating Entities’ reputation and have a material adverse effect on the Operating Entities’ business, financial condition and results of operations.
Moreover, becoming a public company will raise our public profile, which may result in increased litigation as well as increased public awareness of any such litigation. There is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we or the Operating Entities are subject, which increases the risk that we or the Operating Entities will be subject to claims alleging violations of those laws and regulations. In the future, the Operating Entities may also be accused of having, or be found to have, infringed, misappropriated or otherwise violated third-party intellectual property rights.
The Operating Entities’ insurance coverage may not be sufficient to cover all the risks which their operations are exposed to and therefore the Operating Entities are susceptible to significant liabilities.
The Operating Entities have purchased property insurance covering their warehouse in Japan and to insure the authenticity and quality of products and maintain a few other insurances to manage unexpected risks during their operations. See “Business — Insurance.” However, we cannot assure you that the Operating Entities’ insurance coverage is sufficient to prevent the Operating Entities from any losses or that the Operating Entities will be able to successfully claim for losses under the Operating Entities’ current insurance policies on a timely basis, or at all. In addition, the Operating Entities do not maintain business interruption insurance, product liability insurance, general third-party liability insurance or key man insurance. Any uninsured risks may result in substantial costs and the diversion of resources, which could adversely affect the Operating Entities’ results of operations and financial condition.
The PRC subsidiaries have not made adequate social insurance and housing provident fund contributions for all employees, as required by PRC regulations, which may subject them to penalties.
According to the PRC Social Insurance Law and the Administrative Regulations on the Housing Funds, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance (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, see “Regulations — Regulations Related to Labor and Social Welfare — Social Insurance and Housing Provident Funds.” The requirements to make contributions with respect to the social insurance and housing
28
Table of Contents
provident funds have not been implemented consistently by the local governments in China, given the different levels of economic development in different locations. The PRC subsidiaries have been making social insurance payments for employee benefits of at least the minimum wage level for all eligible employees; however, the applicable PRC laws and regulations regarding employee benefits stipulate that employers shall be responsible for making payments based on the actual wages paid to employees. With respect to the underpaid employee benefits, the PRC subsidiaries 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 they fail to make up for any shortfall within the prescribed time limit, the relevant administrative authorities will impose a fine of one to three times the outstanding amount upon the PRC subsidiaries. With respect to housing fund plans, the PRC subsidiaries may be required to pay and deposit housing provident funds in full and on time within the prescribed time limit. If the PRC subsidiaries fail to do so, the relevant authorities could file applications to competent courts for compulsory enforcement of payment and deposit.
As of the date of this prospectus, the PRC subsidiaries have not received any notices from local authorities or any requests from the employees in this regard. However, if the relevant PRC authorities determine that the PRC subsidiaries in China shall be required to make supplemental social insurance and housing fund contributions or that the PRC subsidiaries in China are subject to fines and legal sanctions in relation to their failure to make social insurance and housing fund contributions in full for their employees, their business, financial condition, and results of operations may be adversely affected.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
We intend to facilitate the overseas business development. The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Practices in the local business communities of many countries outside the United States have a level of government corruption that is greater than that found in the developed world. Our policies mandate compliance with these anti-bribery laws and we have established policies and procedures designed to monitor compliance with these anti-bribery law requirements; however, we cannot assure you that our policies and procedures will protect us from all potential reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations, we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.
Cybersecurity risks and cyber incidents may adversely affect the Operating Entities business by causing a disruption to their operations, a compromise or corruption of their confidential information, misappropriation of assets and/or damage to their business relationships, all of which could negatively impact their business and results of operations.
Cyber incidents may result in disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs and litigation and damage to the Customers and the Merchants. As the Operating Entities’ reliance on technology has increased, so have the risks posed to their information systems, both internal and those the Operating Entities have outsourced. Any processes, procedures and internal controls that the Operating Entities implement, as well as their increased awareness of the nature and extent of a risk of a cyber-incident, do not guarantee that the Operating Entities’ financial results, operations, business relationships, confidential information or price of the common stock will not be negatively impacted by such an incident.
Insider or employee cyber and security threats are increasingly a concern for all companies, including the Operating Entities. In addition, social engineering and phishing are a particular concern for companies with employees. The Operating Entities are continuously working to deploy information technology systems and to provide employee awareness training around phishing, malware and other cyber risks to ensure that the Operating Entities are protected against cyber risks and security breaches. Such technology and training, however, may not be sufficient to protect the Operating Entities and the Customers and the Merchants from all risks.
Currently, the Customers and the Merchants use third-party vendors to assist them with their network and information technology requirements. While the Customers and the Merchants carefully select these third-party vendors, we cannot control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor could adversely affect the Operating Entities business and results of operations.
29
Table of Contents
Our board of directors have adopted certain measures to address any cybersecurity threats and mitigate any cybersecurity risks, including, among other things, setting up internal cybersecurity risks control protocols, monitoring industry-wide cybersecurity incidents, evaluating the qualifications of third-party business partners and any cybersecurity risks we bear that may result directly or indirectly from such third-party partners, and holding regular internal training sessions to increase cybersecurity awareness. See “Management — Board Oversight of Cybersecurity Risks.” Notwithstanding the foregoing, we cannot assure you that these measures will be effective in addressing any cybersecurity threats or mitigating any cybersecurity risks we face. In the event that the Operating Entities are unable to adequately address the cybersecurity risks, their operations might suffer, and our results of operations and financial condition may be materially and adversely affected.
We have engaged in substantial transactions with related parties, and such transactions present possible conflicts of interest that could have a material and adverse effect on our business, financial conditions and results of operations.
We have entered into a substantial number of transactions with certain related parties, including Ms. Xiaoyu Qi, the spouse of Zhihua Wu, our chief executive officer and director, Mr. Fuyunishiki Ryo, our director, Mr. Zhihua Wu, our chief executive officer and director, Shunyu Wu, head of our digital marketing sales department, and Ishiyama Real Estate Co. Ltd., an investee of our company. As of March 31, 2023 and September 30, 2022 and 2021, (i) the amounts due to related parties were $444,303, $1,273,832, and $466,442, respectively, consisting of expenses paid by certain related parties on our behalf; and (ii) the amounts due from related parties were nil, $34,552, and nil, respectively, consisting of expenses paid by us on behalf of Ishiyama Real Estate Co. Ltd. For the six months ended March 31, 2023 and the fiscal years ended September 30, 2022 and 2021, expenses paid on behalf of the Company by related parties were $350,758, $1,424,460, and $451,602, respectively, and expenses paid by the Company on half of related parties were nil, $34,552 and nil, respectively. For details, see “Related Party Transactions.” We may in the future enter into additional transactions with entities in which members of our management, board of directors and other related parties hold ownership interests.
Transactions with these related parties present potential for conflicts of interest, as the interests of related parties may not align with the interests of our shareholders. Conflicts of interest may also arise in connection with the exercise of contractual remedies under these transactions, such as the treatment of events of default.
Our board of directors intends to authorize the audit committee, upon its formation, to review and approve all material related party transactions. We rely on the laws of the Cayman Islands, which provides that directors owe a duty of care and a duty of loyalty to our Company. Under the laws of the Cayman Islands, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonable prudent person would exercise in comparable circumstances. See “Description of Share Capital — Differences in Corporate Law” for additional information. Nevertheless, we may have achieved more favorable terms if such transactions had not been entered into with related parties and these transactions, individually or in the aggregate, may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.
The Operating Entities’ business, results of operations and financial condition have been and may continue to be affected by the COVID-19 pandemic.
The COVID-19 pandemic has spread throughout the world, including Japan and China. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic — the first pandemic caused by a coronavirus. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Both the Japanese and Chinese governments have ordered quarantines, travel restrictions, and the temporary closure of stores and facilities. In 2022, there has been a resurgence of COVID-19 cases in certain parts of China due to the Delta and Omicron variants, which has caused local governments to tighten COVID-19-related restrictions, including measures such as banning social and work gatherings, imposing mandatory quarantine requirements and suspending public transportation was suspended in certain cities. In December 2022, the COVID-19 restriction policies in China were lifted, both locally and nationally. Beginning in January 2023, among other changes, China no longer conducted nucleic acid tests and centralized quarantines for all inbound travelers, and measures to control the number of international passenger flights were lifted.
With regard to the Operating Entities’ cross-border sales, COVID-19 related lockdowns and other control measures imposed in other countries, which form part of the overseas market for our products, had and may continue to have an impact on our international exports and import. For instance, the Chinese market will not be able to receive delivery
30
Table of Contents
of our products during the period of lockdown. In addition, as the price of sea freight has increased as compared with that before the pandemic, this has led to higher overall costs for our Customers. The reduction in shipping frequency and longer shipping period have also affected the shipment and delivery of the Operating Entities’ products to a certain extent. Nevertheless, save for delivery delay of some of the Operating Entities’ products, which in turn caused delay in recording of account receivables, the supply chain disruptions do not have any material impact on the cross-border sales operation since the Operating Entities’ strong supply chain integration capability, and the Operating Entities’ product suppliers are mainly located outside China. The Operating Entities’ recorded improvements in the revenue of cross-border sales in fiscal year 2022 compared to fiscal year 2021, and in the six months ended March 31, 2023 compared to the six months ended March 31, 2022.
With regard to the Operating Entities’ digital marketing, e-commerce training, and other operation solutions services, they are mainly completed online and not limited by time or space. To counter the impact of the COVID-19 pandemic, compared with the practice prior to the outbreak of COVID-19, the Operating Entities have changed their traditional office mode to a “work-from-home” model and built an online office platform. Despite the fact that the pandemic and lockdown measures resulted in instability in personnel and a high turnover rate in other industries, they also prompted more unemployed people to join the cross-border e-commerce industry and more people to shop online, which in turn accelerated the growth of the entire cross-border e-commerce industry. Looking ahead, our management team expects that the needs from e-commerce start-ups for integrated e-commerce services will further expanded for the next decades. Compared with fiscal year 2021, the number of Merchants using our digital marketing service and the number of Customers of e-commerce training, e-commerce training, software support, and other operation solutions services in the fiscal year 2022 increased by 14.02% and 140%, respectively. Compared with the six months ended March 31, 2022, these two numbers in the six months ended March 31, 2023 increased by 20.21% and 63.64%, respectively.
For the six months ended March 31, 2023, and the fiscal years ended September 30, 2022 and 2021, the COVID-19 pandemic did not have a material impact on the Operating Entities’ financial positions and operating results. Our revenue reached approximately $9.03 million for the six months ended March 31, 2023, representing an increase of approximately $0.61 million, or 7.26%, from approximately $8.42 million for the six months ended March 31, 2022. Our revenue reached approximately $22.03 million for the fiscal year ended September 30, 2022, representing an increase of approximately $6.56 million, or 42.42%, from approximately $15.47 million for the fiscal year ended September 30, 2021.
The circumstances that have driven the Operating Entities’ business growth during the COVID-19 pandemic may not persist in the future. In addition, the COVID-19 could impact economies and financial markets, resulting in an economic downturn that could impact our ability to raise capital or slow down potential business opportunities. There are still uncertainties of COVID-19’s future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; and the macroeconomic impact of government measures to contain the spread of COVID-19 and related government stimulus measures. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Fluctuation of the value of the Japanese yen against certain foreign currencies may have a material adverse effect on the results of our operations.
Some of our foreign operations’ functional currencies are not the JPY, and the financial statements of such foreign operations prepared initially using their functional currencies are translated into JPY. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. During the six months ended March 31, 2023 and the fiscal years ended September 30, 2022 and 2021, 39.17%, 25.03% and 20.13%, respectively, of our revenue was derived from markets outside of Japan. We expect that an increasing portion of our revenue and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business.
Failure to obtain and maintain required licenses and permits or to comply with regulations regarding liquor, pharmaceuticals, medical devices, secondhand goods, or other regulations could lead to the loss of the Operating Entities’ liquor, pharmaceutical, and other licenses and, thereby, harm the Operating Entities’ business, financial condition, or results of operations.
The sale of liquor, pharmaceuticals, medical devices, and secondhand products are subject to various government regulations in the markets in which the Operating Entities’ products are sold. In addition, such regulations are subject to change from time to time. See “Regulations.” The failure to obtain and maintain licenses, permits, and approvals
31
Table of Contents
relating to such regulations could adversely affect the Operating Entities’ business, financial condition, or results of operations. Licenses may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that the Operating Entities’ conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits, and approvals could adversely affect the Operating Entities, which could adversely affect the Operating Entities’ business, financial condition, or results of operations.
The Operating Entities may be subject to product liability claims if Customers are harmed by the products sold through the Operating Entities’ distribution channels.
The Operating Entities sell products manufactured by third parties, some of which may be defectively designed or manufactured. Sales and distributions of products to Customers could expose the Operating Entities to product liability claims relating to quality and may require product recalls or other actions. Third parties that suffered such injury may bring claims or legal proceedings against the Operating Entities as the seller of the products. See “Regulations — Regulations on Consumer Protection.” Although the Operating Entities would have legal recourse against the manufacturers or suppliers of such products under Japanese law, attempting to enforce our rights against the manufacturers or suppliers may be expensive, time-consuming, and ultimately futile. Defective, inferior, or counterfeit products or negative publicity as to personal injury caused by products the Operating Entities sell may adversely affect consumer perceptions of our Company or the Operating Entities’ products, which could harm our reputation and brand image. In addition, the Operating Entities do not currently maintain any third-party liability insurance or product liability insurance with respect to the products they sell. As a result, any material product liability claim or litigation could have a material adverse effect on the Operating Entities’ business, financial condition, and results of operations. Even unsuccessful claims could result in the expenditure of funds and management time and effort in defending them and could have a negative impact on the Operating Entities’ reputation and results of operations.
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 Stock 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.
Mr. Zhihua Wu, Our CEO and Chairman of our Board of Directors, and certain shareholders have entered into a concerted actor agreement to vote in concert, which provides control over majority of our Ordinary Shares and increases our influence on shareholder decisions.
Our CEO and Chairman of our Board of Directors, Mr. Zhihua Wu, as the concerted actor, has entered into the Concerted Actor Agreement with Smart Bloom Global Limited, Xiaoyu Qi, Rosy Gold Investments Limited, Ryo Fuyunishiki, Talent Best Global Limited, Zheng Jin, Glorious Global Investments Limited, Liang Chen, Horizon Century International Limited, Liangyi Li, Sharp Creation Developments Limited, and Fengjuan Su, pursuant to which Smart Bloom Global Limited, Xiaoyu Qi, Rosy Gold Investments Limited, Ryo Fuyunishiki, Talent Best Global Limited, Zheng Jin, Glorious Global Investments Limited, Liang Chen, Horizon Century International Limited, Liangyi Li, Sharp Creation Developments Limited, and Fengjuan Su agreed to vote consistently with Zhihua Wu in the exercise of all of their rights as shareholders of the Company. See “Related Party Transactions — Concerted Actor Agreement.” As a result, Mr. Zhihua Wu and the remaining parties to the Concerted Actor Agreement as a group possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our Ordinary Shares.
Since we are a “controlled company” within the meaning of the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders.
Our CEO and Chairman of our Board of Directors, Mr. Zhihua Wu, and the remaining parties to the Concerted Actor Agreement as a group owns and will continue to own at least 50% of the voting power of our Company after the closing of this offering, assuming no exercise of the underwriters’ over-allotment option. Under the Nasdaq listing
32
Table of Contents
rules, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and is permitted to phase in its compliance with the independent committee requirements. Although we do not intend to rely on the “controlled company” exemptions under the Nasdaq listing rules even if we are deemed a “controlled company,” we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
You will experience immediate and substantial dilution in the net tangible book value of Ordinary Shares purchased.
The initial public offering (“IPO”) 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 $4.57 per share, assuming an initial public offering price of $5.0 per Ordinary Share, the midpoint of the estimated price range set forth on the cover page of this prospectus. 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. The material weakness identified relates to (i) the lack of formal internal control policies and internal independent supervision functions to establish formal risk assessment process and internal control framework; (ii) the lack of accounting staff and resources with appropriate knowledge of generally accepted U.S. GAAP and SEC reporting and compliance requirements to design and implement formal period-end financial reporting policies and procedures to address complex U.S. GAAP technical accounting issue in accordance with U.S. GAAP and the SEC requirements.
Following the identification of the material weaknesses and control deficiencies, we have taken the following remedial measures: (i) hiring additional qualified accounting and financial personnel with appropriate knowledge and experience in U.S. GAAP accounting and SEC reporting; and (ii) organizing regular training for our accounting staffs, especially training related to U.S. GAAP and SEC reporting requirements. We also plan to adopt additional measures to improve our internal control over financial reporting, including, among others, creating U.S. GAAP accounting policies and procedures manual, which will be maintained, reviewed and updated, on a regular basis, to the latest US GAAP accounting standards, and establishing an audit committee and strengthening corporate governance.
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.
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 second annual report after becoming a public company. 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
33
Table of Contents
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 year end, 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 are issued and outstanding before the consummation of this offering. An aggregate of 21,500,000 Ordinary Shares will be issued and outstanding immediately after the consummation of this offering, assuming no 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.
34
Table of Contents
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. Share 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. 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.
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.
35
Table of Contents
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 shares of 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 to technology research and development, supply chain integration, venture into Southeast Asian market, expand our manpower and talent pool, and for working capital and other general 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.
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. If we cease to qualify as a foreign private issuer in the future, we would incur significant additional expenses that could have a material adverse effect on our results of operations.
Because we are a foreign private issuer and intend to take advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.
Our status as a foreign private issuer exempts us from compliance with certain Nasdaq corporate governance requirements if we instead choose to comply with the statutory requirements applicable to a Cayman Islands exempted company. 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 our 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 that our home country’s rules do not. Following Cayman Islands governance practices, as opposed to the requirements applicable to a U.S. company listed on Nasdaq, may provide less protection to you than would otherwise be the case.
If we cannot continue to satisfy the listing requirements and other rules of the Nasdaq Stock Market, our securities may be delisted, which could negatively impact the price of our securities and your ability to sell them.
We plan to apply to have our Ordinary Shares listed on the Nasdaq Stock Market. 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 Stock Market, we will be required to comply with certain rules of the Nasdaq Stock Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value
36
Table of Contents
of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq Stock Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq Stock Market criteria for maintaining our listing, our securities could be subject to delisting.
If the Nasdaq Stock 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 memorandum and articles of association may discourage, delay, or prevent a change in control.
Some provisions of our memorandum and articles of association, which will become effective on or before the completion of this offering, may discourage, delay, or prevent a change in control of our Company or management that shareholders may consider favorable, including, among other things, the following:
• provisions that authorize our board of directors to issue shares with preferred, deferred, or other special rights or restrictions without any further vote or action by our shareholders; and
• provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.
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 of 2002, 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 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 (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
37
Table of Contents
in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British Overseas Territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of 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 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 does not provide shareholders with any right to requisition a general meeting or put any proposal before a general meeting. These rights, however, may be provided in a company’s articles of association. Our articles of association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least seven clear days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of the total issued shares carrying the right to vote at a general meeting of our Company. For these purposes, “clear days” means that period excluding (a) the day when the notice is given or deemed to be given and (b) the day for which it is given or on which it is to take effect.
If we are classified as a PFIC, 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 PFIC, which is known as a PFIC, for any taxable year if, for such year, either
• At least 75% of our gross income for the year is passive income; or
• The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%.
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
38
Table of Contents
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 2022 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 U.S. federal income tax consequences for U.S. 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 — Material United States Federal Income Tax Consequences — 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 and the provisions under the Lock-Up Agreements.
20,000,000 of our Ordinary Shares are issued and outstanding as of the date of this prospectus. 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.” 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.
The shareholders, who own 5% or more of our Ordinary Shares, have agreed not to sell any of their Ordinary Shares for a period of 180 days from the date of this prospectus. In addition, without the prior consent of the Representative, each holder of less than 5% outstanding Ordinary Shares of the Company may not sell any of their Ordinary Shares for a period of 90 days from the date of this prospectus. See “Underwriting — Lock-Up Agreements” for more information.
Risks Relating to Doing Business in Hong Kong
The enactment of Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact the Hong Kong subsidiaries.
On June 30, 2020, the Standing Committee of the PRC National People’s Congress adopted the Hong Kong National Security Law. This law defines the duties and government bodies of the Hong Kong National Security Law for safeguarding national security and four categories of offences — secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security — and their corresponding penalties. On July 14, 2020, the former U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. On August 7, 2020, the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including the HKSAR chief executive Carrie Lam. On October 14, 2020, the U.S. State Department submitted to relevant committees of Congress the report required under HKAA, identifying persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law.” The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions may directly affect the foreign financial institutions as well as any third parties or customers dealing with any foreign financial institution that is targeted. It is difficult to predict the full impact of the Hong Kong National Security Law and HKAA on Hong Kong and companies located in Hong Kong. If the Hong Kong subsidiaries are determined to be in violation of the Hong Kong National Security Law or the HKAA by competent authorities, the Hong Kong subsidiaries’ business operations, financial position and results of operations could be materially and adversely affected.
39
Table of Contents
The enforcement of laws and rules and regulations in China can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in the Hong Kong subsidiaries’ operations and/or the value of the securities we are registering for sale.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China accepted conditions such as Hong Kong’s Basic Law. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people’s rights and freedom for fifty years from 1997. This agreement has given Hong Kong the freedom to function with a high degree of autonomy. The Special Administrative Region of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
However, if the PRC attempts to alter its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of the Hong Kong subsidiaries’ contractual rights. This could, in turn, materially and adversely affect the Hong Kong subsidiaries’ business and operations. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including the ability to enforce agreements with Customers and/or Merchants.
There are some political risks associated with conducting business in Hong Kong.
We have two Operating Entities based in Hong Kong. Accordingly, these two Operating Entities’ business operations and financial conditions will be affected by the political and legal developments in Hong Kong. During the period covered by the financial information incorporated by reference into and included in this prospectus, we derive a portion of our revenue from operations in Hong Kong and, specifically, from Linkage Electronic and HQT NETWORK. Any adverse economic, social and/or political conditions, material social unrest, strike, riot, civil disturbance or disobedience, as well as significant natural disasters, may affect the market and may adversely affect the business operations of Linkage Electronic and HQT NETWORK. Hong Kong is a special administrative region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law, namely, Hong Kong’s constitutional document, which provides Hong Kong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under the principle of “one country, two systems”. However, there is no assurance that there will not be any changes in the economic, political and legal environment in Hong Kong in the future. Since Linkage Electronic’s and HQT NETWORK’s operations are based in Hong Kong, any change of such political arrangements may pose an immediate threat to the stability of the economy in Hong Kong, thereby directly and adversely affecting their results of operations and financial positions.
The Hong Kong protests that began in 2019 were triggered by the introduction of the Fugitive Offenders amendment bill by the Hong Kong government. If enacted, the bill would have allowed the extradition of criminal fugitives who are wanted in territories with which Hong Kong does not currently have extradition agreements, including mainland China. This led to concerns that the bill would subject Hong Kong residents and visitors to the jurisdiction and legal system of mainland China, thereby undermining the region’s autonomy and people’s civil liberties.
Under the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, Hong Kong is exclusively in charge of its internal affairs and external relations, while the government of the PRC is responsible for its foreign affairs and defense. As a separate customs territory, Hong Kong maintains and develops relations with foreign states and regions. Based on certain recent developments, including the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region issued by the Standing Committee of the PRC National People’s Congress in June 2020, the U.S. State Department has indicated that the United States no longer considers Hong Kong to have significant autonomy from China, and President Trump signed an executive order and the Hong Kong Autonomy Act, or HKAA, to remove Hong Kong’s preferential trade status and to authorize the U.S. administration to impose blocking sanctions against individuals and entities who are determined
40
Table of Contents
to have materially contributed to the erosion of Hong Kong’s autonomy. The United States may impose the same tariffs and other trade restrictions on exports from Hong Kong that it places on goods from mainland China. These and other recent actions may represent an escalation in political and trade tensions involving the U.S, China and Hong Kong, which could potentially harm our business.
The Hong Kong subsidiaries’ revenue is susceptible to the ongoing incidents or factors which affect the stability of the social, economic and political conditions in Hong Kong. Any drastic events may adversely affect the Hong Kong subsidiaries’ business operations. Such adverse events may include changes in economic conditions and regulatory environment, social and/or political conditions, civil disturbance or disobedience, as well as significant natural disasters. Given the relatively small geographical size of Hong Kong, any of such incidents may have a widespread effect on the Hong Kong subsidiaries’ business operations, which could in turn adversely and materially affect our business, results of operations and financial condition. It is difficult to predict the full impact of the HKAA on Hong Kong and companies with operations in Hong Kong such as the Hong Kong subsidiaries. Furthermore, legislative or administrative actions in respect of China-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our Ordinary Shares could be adversely affected.
Some of our subsidiaries are subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly, which could subject them to government enforcement actions and investigations, fines, penalties, and suspension or disruption of their operations.
The Hong Kong subsidiaries, including Linkage Holding, Linkage Electronic and HQT NETWORK, operate in Hong Kong and are 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 and the Hong Kong subsidiaries have complied with the laws and requirements in respect of data security in Hong Kong. Our directors confirm that: (i) none of our directors nor any of the Hong Kong subsidiaries has been involved in any litigation or regulatory action relating to 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 the Hong Kong subsidiaries. Since the 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 the Hong Kong subsidiaries to consequences including but not limited to government enforcement actions and investigations, fines, penalties, and suspension or disruption of the Hong Kong subsidiaries’ 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 advised by our Hong Kong counsel, Winston & Strawn, as of the date of this prospectus, we and the Hong Kong subsidiaries have complied with all three areas of anti-competition laws and requirements in Hong Kong to the extent they are applicable to the Hong Kong subsidiaries. The Hong Kong subsidiaries have 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 subsidiaries possess 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 nor to the Hong Kong subsidiaries since neither we nor the Hong Kong subsidiaries hold any carrier licenses issued under the Telecommunications Ordinance.
41
Table of Contents
Accordingly, the data security or antimonopoly laws and regulations in Hong Kong currently in effect do not restrict our ability to accept foreign investment or impose limitations on our ability to list on any U.S. stock exchange. However, in the event that the data security or antimonopoly laws and regulations in Hong Kong change or evolve in the future, and we and/or our subsidiaries become subject to or impacted by such newly enacted laws and regulations, our business operations, financial condition and results of operations may be negatively and adversely affected.
Risks Relating to Doing Business in Mainland China
Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on the PRC subsidiaries’ business and operations.
The PRC subsidiaries’ assets and operations are currently located in China. Accordingly, their business, financial condition, results of operations, and prospects may be influenced to a significant degree by political, economic, and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, including the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government, or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect the PRC subsidiaries’ business and operating results, reduce demand for their products, and weaken their competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on the PRC subsidiaries. For example, the PRC subsidiaries’ financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustments, to control the pace of economic growth. These measures may cause decreased economic activities in China, which may adversely affect the PRC subsidiaries’ business and operating results.
Furthermore, the Company, the PRC subsidiaries, and our investors may face uncertainty about future actions by the government of China that could significantly affect the PRC subsidiaries’ financial performance and operations. As of the date of this prospectus, neither the Company nor the PRC subsidiaries have received or were denied permission from Chinese authorities to list on U.S. exchanges. However, there is no guarantee that the Company or the PRC subsidiaries will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future.
Uncertainties in the interpretation and enforcement of PRC laws and regulations and changes in policies, rules, and regulations in China, which may be quick with little advance notice, could limit the legal protection available to you and us.
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. The PRC subsidiaries are 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.
42
Table of Contents
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, internal rules, and regulations (some of which are not published in a timely manner or at all) that may have retroactive effect and may change quickly with little advance notice. 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.
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 this prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China.
As a company incorporated under the laws of the Cayman Islands, we conduct a portion of operations through our subsidiaries in China. Aside from EXTEND’s assets, which are located in Japan, the rest of the Operating Entities’ assets are located in China. In addition, except for one director and executive officer, Mr. Ryo Fuyunishiki, who is a resident of Japan, the rest of directors and executive officers are residents of China and a substantial majority of their assets are located outside the United States. As a result, it may be difficult for you to effect service of process upon those persons inside 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 who do not currently reside in the U.S. or have substantial assets in the U.S. Even if you obtain a judgment against us, our directors or executive officers in a U.S. court or other court outside the PRC, you may not be able to enforce such judgment against us or them in the PRC. 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.
It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation mechanism with counterparts of another country or region to monitor and oversee cross border securities activities, such regulatory cooperation with the securities regulatory authorities in the United States may not be efficient in the absence of a practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the territory of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed to provide documents or materials related to securities business activities to foreign agencies without prior consent from the securities regulatory authority of the State Council and the competent departments of the State Council. While detailed interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
43
Table of Contents
Given the Chinese government’s significant oversight and discretion over the conduct of the PRC subsidiaries’ business, the Chinese government may intervene or influence their operations at any time, which could result in a material change in the PRC subsidiaries’ operations and/or the value of our Ordinary Shares.
The Chinese government has significant oversight and discretion over the conduct of the PRC subsidiaries’ business and may intervene or influence their operations at any time as the government deems appropriate to further regulatory, political, and societal goals, which could result in a material change in the PRC subsidiaries’ operations and/or the value of our Ordinary Shares.
The Chinese government has recently published new policies that significantly affected certain industries, such as internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding the e-commerce and cross-border trade industry that could adversely affect the PRC subsidiaries’ business, financial condition, and results of operations. Furthermore, if China adopts more stringent standards with respect to certain areas such as corporate social responsibilities, the PRC subsidiaries may incur increased compliance costs or become subject to additional restrictions in their operations. Certain areas of the law, including intellectual property rights and confidentiality protections, in China may also not be as effective as in the United States or other countries. In addition, the PRC subsidiaries cannot predict the effects of future developments in the PRC legal system on their business operations, including the promulgation of new laws, or changes to existing laws or the interpretation or enforcement thereof. These uncertainties could limit the legal protections available to us and our investors, including you.
Any actions by the Chinese government, including any decision to intervene or influence the operations of the PRC subsidiaries or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the PRC subsidiaries, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. The ability of our subsidiaries to operate in China may be impaired by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, foreign investment limitations, and other matters. The central or local governments of China may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts for the PRC subsidiaries to ensure their compliance with such regulations or interpretations. As such, the PRC subsidiaries may be subject to various government and regulatory interference in the provinces in which they operate in China. They could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. They may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether we will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be later denied or rescinded. Although we believe the Company and the PRC subsidiaries are currently not required to obtain permission from any Chinese authorities and have not received any notice of denial of permission to list on the U.S. exchange as of the date of this prospectus, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry, particularly in the event permission to list on U.S. exchanges may be later required, or withheld or rescinded once given.
Accordingly, government actions in the future, including any decision to intervene or influence the operations of the PRC subsidiaries at any time or to exert control over an offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the PRC subsidiaries, may limit or completely hinder our ability to offer or continue to offer securities to investors, and/or may cause the value of such securities to significantly decline or be worthless.
Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact the PRC subsidiaries’ business and our offering.
On December 28, 2021, 13 governmental departments of the PRC, including the CAC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provide that, in addition to CIIO that intend to purchase Internet products and services, net platform operators engaging
44
Table of Contents
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 require that an online platform operator which possesses the personal information of at least one million users must apply for a cybersecurity review by the CAC if it intends to be listed in foreign countries.
On November 14, 2021, the CAC published the Regulations for the Security Administration Draft. The Security Administration Draft provides that data processors shall apply for a cybersecurity review under certain circumstances, such as mergers, restructurings, and divisions of Internet platform operators that hold large amount of data relating to national security, economic development, or public interest which affects or may affect the national security, overseas listings of data processors that process personal data for more than one million individuals, Hong Kong listings of data processors that affect or may affect national security, and other data processing activities that affect or may affect the national security. The deadline for public comments on the Security Administration Draft was December 13, 2021.
As of the date of this prospectus, we have not received any notice from any authorities identifying the PRC subsidiaries as CIIOs or requiring us to go through cybersecurity review or network data security review by the CAC. In the course of the PRC subsidiaries’ operations, the data collected is mainly the mailing addresses used by the Customers. Such data will be transmitted to the Linkage System in the PRC for use in subsequent shipments. Consequently, our PRC counsel, AllBright has advised that such practice may be interpreted as meaning that the PRC subsidiaries use the Internet to carry out data processing activities in the PRC, and thus, the PRC subsidiaries may be subject to cybersecurity review, and during the pendency of such review, in order to prevent certain risks, including the risks that activities may endanger critical information infrastructure security and national data security and disclosure of personal information, the PRC subsidiaries may be required to take technical measures and other necessary measures, such as ceasing transmission and deletion of data or information, and suspension of new user registration to prevent and mitigate risks in accordance with the requirements of the cybersecurity review. As of the date of this prospectus, we and the PRC subsidiaries have not been involved in any investigations on cybersecurity review initiated by CAC, and we and the PRC subsidiaries have not received any warning, sanction or penalty in such respect. However, the Cybersecurity Review Measures (2021 version) were recently adopted and the Measures on Network Data Security Management (draft for public comments) are in the process of being formulated and the Opinions remain unclear on how it will be interpreted, amended and implemented by the relevant PRC governmental authorities. There remains uncertainty, however, as to how the Cybersecurity Review Measures and the Security Administration Draft 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 and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we expect to take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no guaranty that we can fully or timely comply with such laws should they be deemed to be applicable to the PRC subsidiaries’ operations. There is no certainty as to how such review or prescribed actions would impact the PRC subsidiaries’ operations and we cannot guarantee that any clearance can be obtained, or maintained, if approved, or any actions that may be required can be taken in a timely manner, or at all.
In addition, on July 7, 2022, the CAC issued the Measures for the Security Assessment of Cross-border Transfer of Data, which stipulates that data processors who provide overseas the important data collected and generated during operations within the PRC and personal information that shall be subject to security assessment shall conduct a security assessment. Furthermore, if the data processor provides data overseas and meets one of the following circumstances, it shall require the security assessment: (i) where a data processor provides critical data abroad; (ii) where a key information infrastructure operator or a data processor processing the personal information of more than one million people provides personal information abroad; (iii) where a data processor has provided personal information of 100,000 people or sensitive personal information of 10,000 people in total abroad since January 1 of the previous year; and (iv) other circumstances prescribed by the CAC for which requirement for security assessment for outbound data transfers is required. Prior to declaring security assessment for cross-border transfer of data, the data processor shall conduct self-assessment on the risks of the outbound data transfer. For outbound data transfers that have been carried out before the effectiveness of the Outbound Data Transfer Security Assessment Measures, if it is not in compliance with these measures, rectification shall be completed within six months starting from September 1, 2022.
45
Table of Contents
As of the date of this prospectus, the PRC subsidiaries have not carried out the activities of providing personal information outside the territory of the PRC. According to our PRC legal counsel, AllBright, we and the PRC subsidiaries are compliant with the PIPL. As of the date of this prospectus, the PRC subsidiaries have not provided critical data and personal information outside the territory of the PRC. The data collected in the course of the PRC subsidiaries’ operations is mainly the mailing addresses used by the Customers. Such data is stored within the territory of the PRC. Based on the foregoing analysis, our PRC legal counsel is of the view that we and the PRC subsidiaries are in compliance with the existing PRC laws and regulations on cybersecurity, data security and personal data protection in all material aspects, and we believe that we are in compliance with the regulations and policies that have been issued by the CAC as of the date of this prospectus. Since the Measures for the Security Assessment of Cross-border Transfer of Data is new, there remain substantial uncertainties about its interpretation and implementation, and it is unclear whether the PRC subsidiaries shall declare a security assessment. If it is determined in the future that the PRC subsidiaries are required such security assessment, it is uncertain whether the PRC subsidiaries can or how long it will take them to complete such security assessment or rectification.
The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.
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, 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 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 December 24, 2021, the CSRC published draft rules for the regulation of overseas offering and listing by Chinese companies for public consultation. The draft rules included two pieces of rules: the Management Regulations on Overseas Offering and Listing by Domestic Enterprises of the State Council, which provided for a general filing regulatory framework, and the Management Rules for the Filing Work of Overseas Offering and Listing by Domestic Enterprises of the CSRC, which set out more detailed terms and procedures of the filing requirements.
On February 17, 2023, the CSRC issued the Overseas Listing Trial Measures, which became effective on March 31, 2023. On the same date of the issuance of the Overseas Listing Trial Measures, the CSRC circulated the Guidance Rules and Notice. See “Regulations — Regulations Relating to Overseas Listings.” The Overseas Listing Trial Measures, together with the Guidance Rules and Notice, reiterate the basic supervision principles as reflected in the draft rules by providing substantially the same requirements for filings of overseas offering and listing by domestic companies, yet made the following updates compared to the draft rules: (a) further clarification of the circumstances prohibiting overseas issuance and listing; (b) further clarification of the standard of indirect overseas listing under the principle of substance over form, and (c) adding more details of filing procedures and requirements by setting different filing requirements for different types of overseas offering and listing. Under the Overseas Listing Trial Measures and the Guidance Rules and Notice, where a domestic company seeks to directly or indirectly offer and list securities in overseas markets, the issuer shall file with the CSRC. Direct overseas offering and listing by domestic companies refers to such overseas offering and listing by a joint-stock company incorporated domestically. Indirect overseas offering and listing by domestic companies refers to such overseas offering and listing by a company in the name of an overseas incorporated entity, whereas the company’s major business operations are located domestically and such offering and listing is based on the underlying equity, assets, earnings or other similar rights of a domestic company. Any overseas offering and listing made by an issuer that meets both the following conditions will be determined as indirect (i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by domestic companies; and (ii) the main parts of the issuer’s business activities are conducted in mainland China, or its main places of business are located in mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in mainland China.
Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that we are not required to complete filing procedures with the CSRC for the offering and listing of our Ordinary Shares, given that (i) we are not a China domestic company; and (ii) our offering and listing is not an indirect overseas offering or listing, because the operating revenue, total profit, total assets, or net assets, as documented in our audited consolidated financial statements for the most recent accounting year, accounted for by the PRC subsidiaries are all under 50%.
46
Table of Contents
Recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offerings.
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 controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed into law.
On March 24, 2021, the SEC announced the adoption of interim final amendments to implement the submission and disclosure requirements of the HFCA Act. In the announcement, the SEC clarifies that before any issuer will have to comply with the interim final amendments, the SEC must implement a process for identifying covered issuers. The announcement also states that the SEC staff is actively assessing how best to implement the other requirements of the HFCA Act, including the identification process and the trading prohibition requirements.
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 board of directors of a company 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 adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable 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 the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. For example, 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.
On December 16, 2021, the PCAOB issued a report on its determinations that the Board 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. The Board made these determinations pursuant to PCAOB Rule 6100, which provides a framework for how the PCAOB fulfills its responsibilities under the HFCA Act.
Our auditor, TPS, 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, TPS, is headquartered in Sugar Land, Texas, and has been inspected by the PCAOB on a regular basis, with the last inspection in September 2022. The PCAOB currently has access to inspect the working papers of our auditor and our auditor is not subject to the determinations announced by the PCAOB on December 16, 2021, which determinations were vacated on December 15, 2022. However, the recent developments would add uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditors’ audit procedures and quality control procedures, adequacy of personnel
47
Table of Contents
and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit. In addition, the HFCA Act, as amended by the Consolidated Appropriations Act, which requires that the PCAOB be permitted to inspect an issuer’s public accounting firm within two years, may result in the delisting of our Company or prohibition of trading in our Ordinary Shares in the future if the PCAOB is unable to inspect our accounting firm at such future time.
On June 22, 2021, the U.S. Senate passed the AHFCAA, and on December 29, 2022, legislation entitled the “Consolidated Appropriations Act” was signed into law by President Biden, which contained, among other things, an identical provision to the AHFCAA 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 prohibition on trading.
On August 26, 2022, the CSRC, the MOF, and the PCAOB signed the Protocol governing inspections and investigations of accounting 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 Protocol disclosed by 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.
To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the PRC government to transfer cash or assets.
As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries, including those based in mainland China, for our cash and financing requirements. The ability of our PRC subsidiaries to distribute dividends is based upon their distributable earnings.
Current relevant PRC laws and regulations permit the companies in the PRC to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, each of the companies in the PRC are 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. The companies in the PRC are also required to further set aside a portion of their after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at their discretion. These reserves are not distributable as cash dividends. Furthermore, in order for us to pay dividends to our shareholders, we will rely on receipt of funds from the Hong Kong subsidiaries. Linkage Holding will rely on payments made from Linkage Electronic, HQT NETWORK, and Linkage Network. Linkage Network relies on payments made from Chuancheng Digital and its subsidiary. If Chuancheng Digital and its subsidiary, Chuancheng Internet, incurs 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.
Our cash dividends, if any, will be paid in U.S. dollars. If we are considered a tax resident enterprise of the PRC for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax. See “— Risks Relating to Doing Business in the mainland China — 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.”
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The majority of the PRC subsidiaries’ income is received in RMB and shortages in foreign currencies may restrict our ability to pay dividends or other payments, or otherwise satisfy our foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) as long as certain procedural requirements are met. Approval from appropriate government authorities is required if
48
Table of Contents
RMB is converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders.
As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into, and out of Hong Kong (including funds from Hong Kong to mainland China), except for the transfer of funds involving money laundering and criminal activities. However, there is no guarantee that the Hong Kong government will not promulgate new laws or regulations that may impose such restrictions in the future. There is no assurance the PRC government will not intervene in or impose restrictions on our ability to transfer cash or assets.
As a result of the above, to the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, such funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong, due to interventions in or the imposition of restrictions and limitations on the ability of our Company or our subsidiaries by the competent government to the transfer of cash or assets.
Increases in labor costs in the PRC may adversely affect the PRC Subsidiaries’ business and 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 the PRC subsidiaries’ employees has also increased in recent years. We expect that their labor costs, including wages and employee benefits, will continue to increase. Unless the PRC subsidiaries are able to pass on these increased labor costs to their customers by increasing prices for their products or services, their profitability and results of operations may be materially and adversely affected.
In addition, the PRC subsidiaries have been subject to stricter regulatory requirements in terms of entering into labor contracts with their 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 their 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 the PRC subsidiaries decide to terminate some of their employees or otherwise change their employment or labor practices, the Labor Contract Law and its implementation rules may limit their ability to effect those changes in a desirable or cost-effective manner, which could adversely affect their business and results of operations.
As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that the PRC subsidiaries’ employment practices do not and will not violate labor-related laws and regulations in China, which may subject the PRC subsidiaries to labor disputes or government investigations. If the PRC subsidiaries are deemed to have violated relevant labor laws and regulations, they could be required to provide additional compensation to their employees and their business, and, in such case, our financial condition, and results of operations could be materially and adversely affected.
PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or the PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit the PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
On July 4, 2014, SAFE issued the Circular on Issues Concerning Foreign Exchange Control over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or “SAFE Circular 37.” 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 to be 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 a change of a PRC individual shareholder, SPV name, and operation term, or any significant changes
49
Table of Contents
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 Circular on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or “SAFE Circular 13,” effective in June 2015. Under SAFE Circular 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.
In addition to SAFE Circular 37 and SAFE Circular 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 who are subject to SAFE Circular 37 or SAFE Circular 13 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 interests 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 the PRC subsidiaries’ ability to distribute dividends to or obtain foreign-exchange-denominated 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business.
We are an offshore holding company conducting our operations in China through the PRC subsidiaries, to which we can make loans and make additional capital contributions. Most of these loans or contributions are subject to PRC regulations and approvals or registration. For example, any loans to the PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. Furthermore, loans made by us to the PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE, or filed with SAFE in its information system. Pursuant to relevant PRC regulations, we may provide loans to the PRC subsidiaries up to the larger amount of (i) the balance between the registered total investment amount and registered capital of these entities, or (ii) twice the amount of the net assets of these entities 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 the PRC subsidiaries, or other domestic PRC entities must also be filed and registered with the National Development and Reform Commission (the “NDRC”). We may also decide to finance the PRC subsidiaries by means of capital contributions. These capital contributions are subject to registration with the SAMR or its local branch, reporting of foreign investment information with the Ministry of Commerce of the PRC (the “MOFCOM”), or registration with other governmental authorities in China.
On March 30, 2015, SAFE issued the Notice 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, and was amended on December 30, 2019. 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
50
Table of Contents
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, 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 SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-affiliated enterprises. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our offshore offerings, to the PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China. On October 23, 2019, SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, or “SAFE Circular 28,” which, among other things, expanded the use of foreign exchange capital to 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 to prevailing Special Administrative Measures for Access of Foreign Investments (Edition 2021), or the “Negative List,” and the authenticity and compliance with the regulations of domestic investment projects. However, since SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry it out in practice.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, 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 or capital contributions to the PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to the PRC subsidiaries when needed. 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 the PRC subsidiaries’ business, including their liquidity and their ability to fund and expand their 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.
Some of our business is conducted in the PRC through Chuancheng Digital and Chuancheng Internet, and their books and records are maintained in RMB. 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 their assets and results of 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 in the U.S. are offered in U.S. dollars, we need to convert the net proceeds we receive into RMB in order to use the funds for the PRC subsidiaries’ 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 the PRC subsidiaries’ 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 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.
51
Table of Contents
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 (the “EIT Law”), which 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 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 April 2009, the State Administration of Taxation (the “SAT”) issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance with the Actual Standards of Organizational Management, or “SAT Circular 82,” which was amended in December 2017. SAT Circular 82 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. In addition to SAT Circular 82, the SAT issued the Measures for the Administration of Enterprise Income Tax of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises (for Trial Implementation), or “SAT Bulletin 45,” which took effect in September 2011 and was amended in April 2015, 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.
If the PRC tax authorities determine that the actual management organ of Linkage Cayman is within the territory of China, Linkage 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 world-wide 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 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 shares. Although up to the date of this prospectus, Linkage Cayman has not been notified or informed by the PRC tax authorities that it has been deemed to be a resident enterprise for purposes of the EIT Law, 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, which, among others, amended certain provisions in SAT Circular 7 and further clarify the tax payable declaration obligation by non-resident enterprise. Indirect transfer of 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.
52
Table of Contents
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; and (iii) the percentages in bullet points (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. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
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.
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 of being 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, the PRC subsidiaries 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.
The PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, 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 the 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 the 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 the 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, the 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. The 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. These limitation on the ability of the 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.
53
Table of Contents
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 a small portion of our revenues in RMB. Under our current corporate structure, Linkage Cayman may rely on dividend payments from the PRC subsidiaries 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, the PRC subsidiaries are 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 the PRC subsidiaries, and dividends payable by the PRC subsidiaries 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 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. Linkage Network is wholly owned by Linkage Holding. 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 Linkage Network to our Hong Kong subsidiary, Linkage Holding, in which case, we would be subject to the higher withdrawing tax rate of 10% on dividends received.
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, share price, and reputation.
U.S. public companies that have substantially most 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
54
Table of Contents
cases, have 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 could 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 the 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.
The approval of and the filing with the CSRC or other PRC government authorities may be required in connection with this offering, 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 the 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 the CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.
Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that the CSRC’s approval is not required under the M&A Rules for the listing and trading of our Ordinary Shares on the Nasdaq Stock Market in the context of this offering, given that (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings under this prospectus are subject to the M&A Rule; and (ii) we did not acquire any equity interests or assets of a “PRC domestic company” as such terms are defined under the M&A Rules. 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.
On February 17, 2023, the CSRC issued the Overseas Listing Trial Measures, which became effective on March 31, 2023. On the same date of the issuance of the Overseas Listing Trial Measures, the CSRC circulated No. 1 to No. 5 Supporting Guidance Rules, the Notes on the Overseas Listing Trial Measures, the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and the relevant CSRC Answers to Reporter Questions on the official website of the CSRC, or collectively, the Guidance Rules and Notice. The Overseas Listing Trial Measures, together with the Guidance Rules and Notice, reiterate the basic supervision principles as reflected in the draft rules by providing substantially the same requirements for filings of overseas offering and listing by domestic companies, yet made the following updates compared to the draft rules: (a) further clarification of the circumstances prohibiting overseas issuance and listing; (b) further clarification of the standard of indirect overseas listing under the principle of substance over form, and (c) adding more details of filing procedures and requirements by setting different filing requirements for different types of overseas offering and listing. Under the Overseas Listing Trial Measures and the Guidance Rules and Notice, domestic companies conducting overseas securities offering and listing activities, either in direct or indirect form, shall complete filing procedures with the CSRC pursuant to the requirements of the Overseas Listing Trial Measures within three working days following its submission of initial
55
Table of Contents
public offerings or listing application. The companies that have already been listed on overseas stock exchanges or have obtained the approval from overseas supervision administrations or stock exchanges for its offering and listing and will complete their overseas offering and listing prior to September 30, 2023 are not required to make immediate filings for its listing yet need to make filings for subsequent offerings in accordance with the Overseas Listing Trial Measures. The companies that have already submitted an application for an initial public offering to overseas supervision administrations prior to the effective date of the Overseas Listing Trial Measures but have not yet obtained the approval from overseas supervision administrations or stock exchanges for the offering and listing may arrange for the filing within a reasonable time period and should complete the filing procedure before such companies’ overseas issuance and listing. Under the Overseas Listing Trial Measures and the Guidance Rules and Notice, where a domestic company seeks to directly or indirectly offer and list securities in overseas markets, the issuer shall file with the CSRC. Direct overseas offering and listing by domestic companies refers to such overseas offering and listing by a joint-stock company incorporated domestically. Indirect overseas offering and listing by domestic companies refers to such overseas offering and listing by a company in the name of an overseas incorporated entity, whereas the company’s major business operations are located domestically and such offering and listing is based on the underlying equity, assets, earnings or other similar rights of a domestic company. Any overseas offering and listing made by an issuer that meets both the following conditions will be determined as indirect (i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by domestic companies; and (ii) the main parts of the issuer’s business activities are conducted in mainland China, or its main places of business are located in mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in mainland China. If a PRC domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
Our PRC legal counsel, AllBright, has advised us, based on its understanding of the current PRC law, rules, and regulations, that we are not required to complete filing procedures with the CSRC for the offering and listing of our Ordinary Shares, given that (i) we are not a China domestic company; and (ii) our offering and listing is not an indirect overseas offering or listing, because the operating revenue, total profit, total assets, or net assets, as documented in our audited consolidated financial statements for the most recent accounting year, accounted for by the PRC subsidiaries are all under 50%. See “Regulations — Regulations Relating to Overseas Listings” and “Risk Factors — Risks Relating to Doing Business in mainland China — The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.”
We cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we have. If it is determined that the CSRC approval is required for our offerings in the U.S., we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek the CSRC approval for our offerings in the U.S. 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 our offerings in the U.S. into the PRC, restrictions on or prohibition of the payments or remittance of dividends by the PRC subsidiaries, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation, and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt our offerings in the U.S. before the settlement and delivery of the Ordinary Shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the 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 certain 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 and recently adopted PRC regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise,
56
Table of Contents
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 MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the “Prior Notification Rules,” issued by the State Council in August 2008 is triggered. In addition, the Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Security Review Rules”) issued by MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by MOFCOM, and the Security Review 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 MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. It is clear that the PRC subsidiaries’ business would not be deemed to be in an industry that raises “national defense and security” or “national security” concerns. MOFCOM or other government agencies, however, may publish explanations in the future determining that the PRC subsidiaries’ 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. The PRC subsidiaries’ ability to expand their business or maintain or expand their market share through future acquisitions would as such be materially and adversely affected.
Chinese regulatory authorities could disallow our holding company structure, which may 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.
We indirectly hold the equity of the PRC subsidiaries through Linkage Holding, and thus the PRC subsidiaries are directly or indirectly foreign-invested enterprises. Although the PRC government has increasingly open attitude towards absorbing foreign investment in general, it still implements the Negative List, which restricts or prohibits overseas enterprises from holding the equity of Chinese companies whose operations are included in the Negative List. As the boundaries stipulated in the Negative List are relatively vague, they are subject to further determination and clarification by the Chinese government. As of the date of this prospectus, the business operated by the PRC subsidiaries has not been included in the Negative List, but we cannot fully guarantee that the Chinese government will not make a different interpretation, so as to disallow our holding corporate structure. Moreover, the Chinese government revises the Negative List from time to time; although the scope of the Negative List is narrowing as a whole, it remains uncertain whether our existing business or future business will be included in future revisions. If the business of the PRC subsidiaries is deemed as a restricted or prohibited business based on the Negative List, our existing corporate structure may be considered illegal and required to be restructured by the Chinese government, which may adversely affect our operations and the value of the securities we are registering for sale.
On July 4, 2014, SAFE issued the SAFE Circular 37, which requires PRC residents, including PRC individuals and institutions, to register with SAFE or its local branches in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents must update their foreign exchange registrations with SAFE or its local branches when the offshore special purpose vehicles in which such residents directly hold equity interests undergo material events relating to any changes of basic information (including changes of such PRC individual shareholders, names, and operation terms), increases or decreases in investment amount, share transfers or exchanges, or mergers or divisions. As of the date of this prospectus, our current shareholders who are subject to the SAFE Circular 37 have completed the initial registrations with the qualified banks as required by the regulations. However, we may not be fully informed of the identities of all our shareholders or beneficial owners who are PRC residents, and therefore, we may not be able to identify all our shareholders or beneficial owners who are PRC residents to ensure their compliance with the SAFE Circular 37 or other related rules. In addition, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain, or update any applicable registrations or comply
57
Table of Contents
with other requirements required by the SAFE Circular 37 or other related rules in a timely manner. Even if our shareholders and beneficial owners who are PRC residents comply with such request, we cannot provide any assurance that they will successfully obtain or update any registration required by the SAFE Circular 37 or other related rules in a timely manner. If any of our shareholders who is a PRC resident as determined by SAFE Circular 37 fails to fulfill the required foreign exchange registration, it will be deemed to be illegal for such shareholders to directly or indirectly hold our equity under the PRC laws. Furthermore, if PRC authorities disallow such shareholders to own our equity, the PRC subsidiaries may be prohibited from distributing dividends to us or from carrying out other subsequent cross-border foreign exchange activities, and we may be restricted in our ability to contribute additional capital to the PRC subsidiaries, which may adversely affect our operations and our values of the securities we are registering for sale.
Furthermore, if future laws, administrative regulations, or provisions mandate further actions to be taken by us or the PRC subsidiaries with respect to our existing corporate structure, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, resulting in a material change in our operations and/or a material change in the value of our Ordinary Shares, including that it could cause the value of our Ordinary Shares to significantly decline or become worthless.
58
Table of Contents
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;
• the COVID-19 pandemic;
• trends and competition in the cross-border e-commerce industry; and
• other assumptions described in this prospectus underlying or relating to any forward-looking statements.
We describe certain material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.
Industry Data and Forecasts
This prospectus contains data related to the cross-border e-commerce industry in Japan, China, and Regional Comprehensive Economic Partnership (“RCEP”) that we obtained from various government and private entity publications, including the industry report of Frost & Sullivan Limited (“Frost & Sullivan”) which we commissioned. This industry data includes 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 cross-border e-commerce industry may not grow at the rate projected by industry data, or at all. The failure of the industry to grow as anticipated is likely to have a material adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly changing nature of the cross-border e-commerce industry subjects any projections or estimates relating to the growth prospects or future condition of our industry 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.
59
Table of Contents
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated under the laws of the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. The Cayman Islands, however, has a less developed body of securities laws as compared to the United States and provides significantly less protection for investors than the United States. Additionally, Cayman Islands companies may not have standing to sue in the Federal courts of the United States.
Substantially all of our assets are located in Japan, Hong Kong, and mainland China. In addition, except for one director and executive officer, Mr. Ryo Fuyunishiki, who is a resident of Japan, the rest of directors and executive officers are residents of China and a substantial majority 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.
Cayman Islands
Ogier (Cayman) LLP (“Ogier”), our counsel with respect to the laws of the Cayman Islands, and AllBright, our counsel with respect to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Ogier has further advised us that there is currently no statutory enforcement or treaty between the United States and the Cayman Islands providing for enforcement of judgments. A judgment obtained in the United States, however, may be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination on the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment: (i) is given by a foreign court of competent jurisdiction; (ii) is final; (iii) is not in respect of taxes, a fine or a penalty; and (iv) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy of the Cayman Islands. Furthermore, it is uncertain that Cayman Islands courts would enforce: (1) judgments of U.S. courts obtained in actions against us or other persons that are predicated upon the civil liability provisions of the U.S. federal securities laws; or (2) original actions brought against us or other persons predicated upon the Securities Act. Ogier has informed us that there is uncertainty with regard to Cayman Islands law relating to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature.
Japan
City-Yuwa Partners (“City-Yuwa”), our Japanese counsel with respect to the laws of Japan, has advised us that there is uncertainty as to whether the courts of Japan 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 Japan against us or our directors or officers predicated upon the securities laws of the United States. The Civil Execution Act of Japan and the Code of Civil Procedure require Japanese courts to deny requests for the enforcement of judgments of foreign courts if foreign judgments fail to satisfy the requirements prescribed by the Civil Execution Act and the Code of Civil Procedure, including that: (a) the jurisdiction of the foreign court be recognized under laws, regulations, treaties, or conventions; (b) proper service of process be made on relevant defendants, or relevant defendants be given appropriate protection if such service is not received; (c) the judgment and proceedings of the foreign court must not be repugnant to public policy as applied in Japan; and (d) there exists reciprocity as to the recognition by a court of the relevant foreign jurisdiction of a final judgment of a Japanese court.
60
Table of Contents
No treaties exist between the U.S. and Japan that would generally allow any U.S. judgments to be recognized or enforced in Japan. In addition, reciprocity is judged by a Japanese court on a case-by-case basis as to whether a court of the jurisdiction in question (i.e., a court of the state or country that has rendered the judgment in question) would recognize or enforce a final judgment of the same type or kind rendered by a Japanese court, based on effectively the same process as applied in Japan (i.e., without re-examining the merit of the case, subject to public policy). Japanese courts have admitted reciprocity in relation to judgments rendered by a federal court in Hawaii, and state courts in Washington DC, New York, California, Texas, Nevada, Minnesota, Oregon, and Illinoi, respectively (mainly relating to monetary claims), but there is no guarantee that reciprocity will be admitted with respect to U.S. judgments rendered in any other state or of any kind or type. Therefore, judgments of U.S. courts of civil liabilities predicated solely upon the federal and state securities laws of the United States may not satisfy these requirements.
Hong Kong
As advised by our Hong Kong counsel, Winston & Strawn, judgments of U.S. courts will not be directly enforced in Hong Kong. There are currently no treaties or other arrangements providing for reciprocal enforcement of foreign judgments between Hong Kong and the U.S. However, the common law permits an action to be brought upon a foreign judgment. That is to say, a foreign judgment itself may form the basis of a cause of action since the judgment may be regarded as creating a debt between the parties to it. In a common law action for enforcement of a foreign judgment in Hong Kong, the enforcement is subject to various conditions, including but not limited to, that the foreign judgment is a final judgment conclusive upon the merits of the claim, the judgment is for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which the judgment was obtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of Hong Kong. Such a judgment must be for a fixed sum and must also come from a “competent” court as determined by the private international law rules applied by the Hong Kong courts. The defenses that are 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.
Mainland China
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.
61
Table of Contents
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 1,500,000 Ordinary Shares in this offering will be approximately $5,481,170, after deducting the underwriting discounts (assuming that all of the investors in this offering are introduced by the underwriters), and estimated offering expenses payable by us, based on the assumed initial public offering price of $5.0 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 $6,527,420, after deducting the underwriting discounts and estimated offering expenses payable by us.
A US$1.0 increase (decrease) in the assumed initial public offering price of US$5.0 per Ordinary Share would increase (decrease) the net proceeds to us from this offering by US$1.40 million, or by US$1.60 million if the underwriters exercise their over-allotment option in full, assuming the number of Ordinary Shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us.
We plan to use the net proceeds we receive from this offering for the following purposes:
• approximately 25%, or approximately US$1,370,293, for technology research and development;
• approximately 30%, or approximately US$1,644,351, to further strengthen supply chain integration, including (i) adding labels and performing analysis for each category of products, (ii) expanding to a variety of product categories and markets, and (iii) deepen our relationships with suppliers and work to establish partnerships with logistics companies;
• approximately 15%, or approximately US$822,176, to expand our manpower and talent pool;
• approximately 20%, or approximately US$1,096,234, to venture into Southeast Asian market; and
• approximately 10%, or approximately US$548,117, 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 using the proceeds of this offering, we are permitted under PRC laws and regulations to utilize the proceeds from this offering to fund the 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 mainland China — 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 offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
62
Table of Contents
DIVIDEND POLICY
As of the date of this prospectus, neither of our PRC and Japanese subsidiaries have made any dividends or distributions to our Company and our Company has not made any dividends or distributions to our shareholders. 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. Subject to the PFIC rules, the gross amount of distributions we make to investors with respect to our Ordinary Shares (including the amount of any taxes withheld therefrom) will be taxable as a dividend, to the extent that the distribution is paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Under the laws of the Cayman Islands, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium account, provided that in no circumstances may a dividend be paid, if following such payment, the company would be unable to pay its debts as they fall 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 are dependent on receipt of funds our Hong Kong and Japanese subsidiaries, Linkage Holding and EXTEND. Linkage Holding will rely on payments made from Linkage Electronic, HQT NETWORK, and Linkage Network. Linkage Network will rely on payments made from Chuancheng Digital and Chuancheng Internet. Dividends distributed by our subsidiaries in certain jurisdictions, such as in China and Japan, are subject to local taxes. PRC regulations may restrict the ability of the PRC subsidiaries to pay dividends to us.
Our Japanese subsidiary is permitted to distribute dividends only to the extent of the “distributable amount” stipulated in the Companies Act of Japan, or Japan Companies Act. See “Regulation — Regulatory Overview of Japan.”
Current PRC regulations permit Linkage Network, to pay dividends to Linkage Holding only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, Linkage Network 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.
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, 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 principle of genuine transaction. Furthermore, if the 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 the PRC subsidiaries are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. Linkage Holding may be considered a non-resident enterprise for tax purposes, so that any dividends Linkage Network pays to Linkage Holding 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 from our Hong Kong and Japanese subsidiaries, Linkage Holding and EXTEND. Linkage Holding will rely on payments made from Linkage Electronic, HQT NETWORK, and Linkage Network. Linkage Network relies on payments made from Chuancheng Digital and Chuancheng Internet. If the 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.
Pursuant to 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
63
Table of Contents
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 Tax Avoidance Arrangement with respect to any dividends paid by Linkage Network to its immediate holding company, Linkage Holding. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Linkage Holding intends to apply for the tax resident certificate if and when Linkage Network plans to declare and pay dividends to Linkage Holding. See “Risk Factors — Risks Relating to Doing Business in mainland China — There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC subsidiaries, and dividends payable by the PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
64
Table of Contents
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2023:
• on an actual basis;
• on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed initial public offering price of $5.0 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 underwriters (assuming that all of the investors in this offering are introduced by the underwriters) and the estimated offering expenses payable by us and assuming no exercise of the underwriters of their over-allotment option; and
• on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed initial public offering price of $5.0 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 underwriters (assuming that all of the investors in this offering are introduced by the underwriters) and the estimated offering expenses payable by us and assuming the underwriters exercise their over-allotment option in full.
We currently have 20,000,000 Ordinary Shares issued and outstanding with a par value of $0.00025 each. As of the date of this prospectus, there are 20,000,000 Ordinary Shares issued and outstanding.
You should read this capitalization table in conjunction with “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.
| | March 31, 2023 |
Actual | | As adjusted
(Over-allotment
option not
exercised) | | As adjusted
(Over-allotment
option
exercised
in full) |
| | | $ | | $ | | $ |
Shareholders’ Equity: | | | | | | | | | |
Ordinary shares, $0.00025 par value, 200,000,000 Ordinary Shares authorized, 20,000,000 Ordinary Shares issued and outstanding as of March 31, 2023) | | 5,000 | | | 5,375 | | | 5,431 | |
Additional paid-in capital(1) | | 1,575,414 | | | 7,056,209 | | | 8,102,403 | |
Retained Earnings | | 3,271,456 | | | 3,271,456 | | | 3,271,456 | |
Accumulated other comprehensive loss | | (90,026 | ) | | (90,026 | ) | | (90,026 | ) |
Total Shareholders’ Equity | | 4,761,844 | | | 10,243,014 | | | 11,289,264 | |
Total Capitalization | | 4,761,844 | | | 10,243,014 | | | 11,289,264 | |
A $1.00 increase (decrease) in the assumed initial public offering price of $5.0 per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $1,395,000, 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 estimated expenses payable by us.
65
Table of Contents
DILUTION
If you invest in our Ordinary Shares, your ownership interest will be diluted 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 March 31, 2023, was $4,761,844, or $0.24 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 underwriting discounts and the estimated offering expenses payable by us.
After giving effect to our sale of 1,500,000 Ordinary Shares offered in this offering based on the initial public offering price of $5.0 per Ordinary Share, the midpoint of the estimated price range set forth on the cover page of this prospectus and after deduction of the estimated underwriting discounts and the estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2023, would have been $8,413,684, or $0.39 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $0.15 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $4.61 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:
| | No Exercise of
Over-Allotment
Option | | 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 March 31, 2023 | | $ | 0.24 | | $ | 0.24 |
Increase in net tangible book value per Ordinary Share attributable to payments by new investors | | $ | 0.15 | | $ | 0.19 |
Pro forma net tangible book value per Ordinary Share immediately after this offering | | $ | 0.39 | | $ | 0.43 |
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering | | $ | 4.61 | | $ | 4.57 |
The pro forma as adjusted net tangible book value per Ordinary Share after the offering would be $0.39, the increase in net tangible book value per Ordinary Share to existing shareholders would be $0.15, and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $4.61.
The following tables summarize, on a pro forma as adjusted basis as of March 31, 2023, 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 underwriting discounts and the estimated offering expenses payable by us.
Over-allotment option not exercised | |
Ordinary Shares
purchased
| |
Total
consideration
| | Average
price per
Ordinary
Share |
Number | | Percent | | Amount | | Percent | |
Existing shareholders | | 20,000,000 | | 93.02 | % | | $ | 1,580,414 | | 17.40 | % | | $ | 0.08 |
New investors | | 1,500,000 | | 6.98 | % | | $ | 7,500,000 | | 82.60 | % | | $ | 5.00 |
Total | | 21,500,000 | | 100.00 | % | | $ | 9,080,414 | | 100.00 | % | | $ | 0.42 |
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.
66
Table of Contents
CORPORATE HISTORY AND STRUCTURE
Our Corporate History
Linkage Cayman was incorporated on March 24, 2022, as an exempted company with limited liability in the Cayman Islands. On April 13, 2022, Linkage Holding was incorporated in Hong Kong with limited liability, which is a wholly owned subsidiary of Linkage Cayman. On November 24, 2022, we incorporated Linkage Network, a limited liability company organized under the laws of the PRC, which is a wholly owned subsidiary of Linkage Holding.
EXTEND was established on June 13, 2011 as a limited liability company organized under the laws of Japan. HQT NETWORK was established on December 8, 2016 as a limited liability company organized under the laws of Hong Kong. Linkage Electronic was established on March 11, 2022 as a limited liability company organized under the laws of Hong Kong.
Chuancheng Internet was established on March 2, 2021 as a limited liability company organized under the laws of the PRC. Chuancheng Digital was established on June 1, 2021 as a limited liability company organized under the laws of the PRC.
In connection with this offering, we have undertaken a reorganization of our corporate structure (the “Reorganization”) in the following steps:
• On April 30, 2022, Linkage Cayman acquired 100% of the equity interests in EXTEND from its original shareholder;
• On October 31, 2022, Linkage Holding acquired 100% of the equity interests in HQT NETWORK from its original shareholders;
• On September 28, 2022, Linkage Holding acquired 100% of the equity interests in Linkage Electronic from its original shareholder;
• On June 2, 2022, Chuancheng Digital acquired 100% of the equity interests in Chuancheng Internet from its original shareholders; and
• On February 17, 2023, Linkage Network acquired 100% of the equity interests in Chuancheng Digital from its original shareholders.
Consequently, Linkage 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.
As a holding company, Linkage Cayman has no material operations of its own and conducts its operations through the Operating Entities, including Linkage Electronic, HQT NETWORK, EXTEND, Chuancheng Digital, and Chuancheng Internet.
67
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 1,500,000 Ordinary Shares being offered and assuming no exercise of the over-allotment option.
For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principal Shareholders.”
Our Subsidiaries
Branching from our corporate structure above, our subsidiaries as of the date of this prospectus are set forth in the table below.
Name | | Background | | Ownership | | Principal Activities |
Linkage Holding (Hong Kong) Limited | | A Hong Kong company incorporated on April 13, 2022 | | 100% owned by our Company | | Investment holding |
EXTEND CO., LTD | | A Japanese company incorporated on June 13, 2011 | | 100% owned by our Company | | Operation of Cross-border Sales |
HQT NETWORK CO., LIMITED | | A Hong Kong company incorporated on December 8, 2016 | | 100% owned by Linkage Holding (Hong Kong) Limited | | Digital Marketing Services |
Linkage Electronic Commerce Limited | | A Hong Kong company incorporated on March 11, 2022 | | 100% owned by Linkage Holding (Hong Kong) Limited | | Operation of Cross-border Sales |
Linkage (Fujian) Network Technology Limited | | A PRC company incorporated on November 24, 2022 | | 100% owned by Linkage Holding (Hong Kong) Limited | | Investment holding |
Fujian Chuancheng Digital Technology Limited | | A PRC company incorporated on June 1, 2021 | | 100% owned by Linkage (Fujian) Network Technology Limited | | Cross-border Sales and Software Support Services |
Fujian Chuancheng Internet Technology Limited | | A PRC company incorporated on March 2, 2021 | | 100% owned by P Fujian Chuancheng Digital Technology Limited | | E-commerce Operation Training and Software Support Services |
68
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our combined financial statements and consolidated financial statements and the related notes included in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. For purposes of this section only, the term “Customers” shall mean (i) cross-border e-commerce sellers (both enterprises and individuals) that purchase products, e-commerce operation training, and software support services, and (ii) media that pay the Operating Entities commissions.
OVERVIEW
We, together with the Operating Entities in Japan, Hong Kong and mainland China, are a cross-border e-commerce integrated services provider based in Japan. There are two lines of businesses complementary to each other, including (i) cross-border sales and (ii) integrated e-commerce services. Our mission is to make cross-border transactions easier.
Key Factors that Affect Operating Results
We believe the key factors affecting our financial condition and results of operations include the following:
Changes in global and local economic conditions
Factors that could affect consumers’ willingness to make discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. Events leading to uncertainty of global and local economic conditions, such as the COVID-19 pandemic, trade wars and occasional regional armed conflicts, could adversely impact consumer purchases of discretionary items such as beauty and health products. In the event of an economic downturn, consumer spending habits could be adversely affected and we could experience lower than expected net sales, which could force us to delay or slow down the implementation of our growth strategy and have a material adverse effect on our business, financial condition, profitability, and cash flows.
Our ability to maintain our major Customers
Approximately 49.74% and 69.94% of our total revenues were generated by our five largest Customers for the six months ended March 31, 2023 and 2022, respectively. For the six months ended March 31, 2023, two Customers accounted for approximately 14.88% and 10.76%, of which are greater than 10% of our total revenues in terms of monetary value, respectively. For the six months ended March 31, 2022, three Customers accounted for approximately 23.20%, 16.50% and 11.25%, of which are greater than 10% of our revenues in terms of monetary value, respectively. Approximately 59.66% and 51.35% of our total revenues were generated by our five largest Customers for the years ended September 30, 2022 and 2021, respectively. For the fiscal year ended September 30, 2022, three Customers accounted for approximately 18.03%, 17.53%, and 10.53%, of which are greater than 10% of our total revenues in terms of monetary value, respectively. For the fiscal year ended September 30, 2021, two Customers accounted for approximately 19.70% and 13.02%, of which are greater than 10% of our revenues in terms of monetary value, respectively. While certain sales contracts and service contracts contain options of renewal, there is no assurance that our major Customers will continue their business relationships with us, or the revenue generated from transactions with them will be maintained or increased in the future. If we are unable to enter into new sales contracts or service contracts with our Customers upon the expiry of the current contracts, or there is a reduction or cessation of demands from these Customers for whatever reasons and we are unable to enter into sales contracts or service contracts of comparable size and terms in substitution, our business, financial conditions and results of operation may be materially and adversely affected.
69
Table of Contents
Our ability to compete successfully
Over the years, we have been devoted to developing the integrated ERP system (“Linkage ERP System”) for e-commerce sellers, and exploiting our advantages in supply chain services and networks. Through continuously upgrading, Linkage ERP System enables us to meet the ever-changing needs of e-commerce markets for various functions across sectors. At the platform level, the Company is equipped with digital capabilities, and takes both horizontal integration across different industries and vertical integration for various functions from the very beginning of opening an online store to the very end of analyzing the best-selling products. On the sales side, we are building a matrix based on a cross-regional and cross-ecommerce platform sales network. On the supply side, we rely on a large and high-quality supplier ecosystem, global warehousing and logistics network, and empower production through the self-developed private label smart electronics supply-chain system, to build efficient supply capabilities.
Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources than we do. Competitors may leverage their brand recognition, experience, and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, and adopt more aggressive pricing or inventory policies. In addition, new and enhanced technologies may increase the competition in the online retail market. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures may have a material adverse effect on our business, financial condition, and results of operations.
Regulatory Environment
The Operating Entities’ business is subject to complex and evolving laws and regulations in Japan, Hong Kong and mainland China. Our ability to anticipate and respond to potential changes in government policies and regulations will have a significant impact on our business operations in such countries and our overall results of operations may likewise be impacted. Many of these laws and regulations are relatively new and subject to changes and uncertain interpretation, and could result in claims, changes to the Operating Entities’ business practices, monetary penalties, increased cost of operations, declines in user growth or engagement, or other harm to their businesses. Although we have not experienced significant losses from potential changes in government policies and regulations and the Operating Entities are in compliance with existing laws and regulations, such experience may not be indicative of future results.
Key Components of Our Results of Operations
Revenues
We generate revenues from cross-border product sales and integrated e-commerce services.
Our breakdown of revenues by revenue streams for the six months ended March 31, 2023 and 2022 is summarized below:
| | For the six months ended March 31, | | Variances |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Cross-border Sales | | 6,414,977 | | 6,435,360 | | (20,383 | ) | | (0.32 | )% |
Integrated E-commerce Services | | 2,616,350 | | 1,984,690 | | 631,660 | | | 31.83 | % |
(i) Digital Marketing Services | | 2,261,811 | | 1,953,513 | | 308,298 | | | 15.78 | % |
(ii) Others | | 354,539 | | 31,177 | | 323,362 | | | 1,037.18 | % |
Total revenues | | 9,031,327 | | 8,420,050 | | 611,277 | | | 7.26 | % |
70
Table of Contents
Our breakdown of revenues by geographic areas for the six months ended March 31, 2023 and 2022 is summarized below:
| | For the six months ended March 31, | | Variances |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Japan | | 5,494,129 | | 6,394,096 | | (899,967 | ) | | (14.07 | )% |
Mainland China | | 928,668 | | 72,441 | | 856,227 | | | 1,181.97 | % |
Others | | 2,608,530 | | 1,953,513 | | 655,017 | | | 33.53 | % |
Total revenues | | 9,031,327 | | 8,420,050 | | 611,277 | | | 7.26 | % |
Our breakdown of revenues by revenue streams for the years ended September 30, 2022 and 2021 is summarized below:
| | For the Years Ended
September 30, | | Variances |
| | | 2022 | | 2021 | | Amount | | % |
| | | USD | | USD | | USD | | |
Cross-border Sales | | 17,907,407 | | 12,417,033 | | 5,490,374 | | 44.22 | % |
Integrated E-commerce Services | | 4,120,896 | | 3,049,829 | | 1,071,067 | | 35.12 | % |
(i) Digital Marketing Services | | 3,945,353 | | 3,046,565 | | 898,788 | | 29.50 | % |
(ii) Others | | 175,543 | | 3,264 | | 172,279 | | 5278.16 | % |
Total revenues | | 22,028,303 | | 15,466,862 | | 6,561,441 | | 42.42 | % |
Our breakdown of revenues by geographic areas for the years ended September 30, 2022 and 2021 is summarized below:
| | For the Years Ended
September 30, | | Variances |
| | | 2022 | | 2021 | | Amount | | % |
| | | USD | | USD | | USD | | |
Japan | | 16,515,393 | | 12,352,979 | | 4,162,414 | | 33.70 | % |
Mainland China | | 1,153,985 | | 67,318 | | 1,086,667 | | 1614.23 | % |
Others | | 4,358,925 | | 3,046,565 | | 1,312,360 | | 43.08 | % |
Total revenues | | 22,028,303 | | 15,466,862 | | 6,561,441 | | 42.42 | % |
Cost of Revenues
Cost of revenues represents costs and expenses incurred in order to generate revenue. Our cost of revenues primarily consists of (i) cost of goods, (ii) commissions, and (iii) labor costs.
Our breakdown of cost of revenues for the six months ended March 31, 2023 and 2022 is summarized below:
| | For the Six Months Ended
March 31, | | Variances |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Cross-border Sales | | 5,713,156 | | 5,601,263 | | 111,893 | | 2.00 | % |
Integrated E-commerce Services | | 1,372,072 | | 1,074,731 | | 297,341 | | 27.67 | % |
(i) Digital Marketing Services | | 1,358,841 | | 1,067,195 | | 291,646 | | 27.33 | % |
(ii) Others | | 13,231 | | 7,536 | | 5,695 | | 75.57 | % |
Total cost of revenues | | 7,085,228 | | 6,675,994 | | 409,234 | | 6.13 | % |
71
Table of Contents
Our breakdown of cost of revenues for the years ended September 30, 2022 and 2021 is summarized below:
| | For the Years Ended
September 30, | | Variances |
| | | 2022 | | 2021 | | Amount | | % |
| | | USD | | USD | | USD | | |
Cross-border Sales | | 16,416,758 | | 11,231,219 | | 5,185,539 | | 46.17 | % |
Integrated E-commerce Services | | 1,907,044 | | 1,698,361 | | 208,683 | | 12.29 | % |
(i) Digital Marketing Services | | 1,892,318 | | 1,693,443 | | 198,875 | | 11.74 | % |
(ii) Others | | 14,726 | | 4,918 | | 9,808 | | 199.43 | % |
Total cost of revenues | | 18,323,802 | | 12,929,580 | | 5,394,222 | | 41.72 | % |
Gross Profit
Our gross profit equals our revenue less our cost of revenues. Our gross profit is primarily affected by our ability to generate revenue and the fluctuation of our cost.
Our breakdown of gross profit by revenue stream for the six months ended March 31, 2023 and 2022 is set forth below:
| | For the six months ended
March 31, | | |
| | | 2023 | | 2022 | | Variance |
| | | USD | | USD | | USD or % |
Cross-border Sales | | | | | | | | | |
Gross profit | | 701,821 | | | 834,097 | | | (132,276 | ) |
Gross margin | | 10.94 | % | | 12.96 | % | | (2.02 | )% |
Integrated E-commerce Services | | | | | | | | | |
Gross profit | | 1,244,278 | | | 909,959 | | | 334,319 | |
Gross margin | | 47.56 | % | | 45.85 | % | | 1.71 | % |
Total | | | | | | | | | |
Gross profit | | 1,946,099 | | | 1,744,056 | | | 202,043 | |
Gross margin | | 21.55 | % | | 20.71 | % | | 0.84 | % |
Our breakdown of gross profit by revenue stream for the years ended September 30, 2022 and 2021 is set forth below:
| | For the years ended
September 30, | | |
| | | 2022 | | 2021 | | Variance |
| | | USD | | USD | | USD or % |
Cross-border Sales | | | | | | | | | |
Gross profit | | 1,490,649 | | | 1,185,814 | | | 304,835 | |
Gross margin | | 8.32 | % | | 9.55 | % | | (1.23 | )% |
Integrated E-commerce Services | | | | | | | | | |
Gross profit | | 2,213,852 | | | 1,351,468 | | | 862,384 | |
Gross margin | | 53.72 | % | | 44.31 | % | | 9.41 | % |
Total | | | | | | | | | |
Gross profit | | 3,704,501 | | | 2,537,282 | | | 1,167,219 | |
Gross margin | | 16.82 | % | | 16.40 | % | | 0.41 | % |
Operating expenses
Operating expenses include general and administrative expenses, selling expenses, and research and development expenses. General and administrative expenses mainly consist of (i) salary and social welfare expenses, (ii) rental cost for offices; and (iii) depreciation expenses. Our selling expenses mainly consist of (i) salary and social welfare expenses, (ii) freight costs and (iii) advertising costs and market promotion expenses. Research and development expenses mainly consist of (i) payroll and related expenses for research and development professionals, and (ii) technology services fees.
72
Table of Contents
The following table sets forth our operating expenses, both in absolute amounts and as a percentage of the total operating expenses, for the six months ended March 31, 2023 and 2022:
| | For the six months ended March 31, |
| | | 2023 | | 2022 |
| | | USD | | % | | USD | | % |
General and administrative expenses | | 694,449 | | | 64.29 | % | | 521,064 | | | 53.25 | % |
Selling expenses | | 294,240 | | | 27.24 | % | | 399,417 | | | 40.82 | % |
Research and development expenses | | 287,971 | | | 26.66 | % | | 226,936 | | | 23.19 | % |
Disposal gain from property and equipment | | (196,503 | ) | | (18.19 | )% | | (168,867 | ) | | (17.26 | )% |
Total operating expenses | | 1,080,157 | | | 100.00 | % | | 978,550 | | | 100.00 | % |
The following table sets forth our operating expenses, both in absolute amounts and as a percentage of the total operating expenses, for the years ended September 30, 2022 and 2021:
| | For the years ended September 30, |
| | | 2022 | | 2021 |
| | | USD | | % | | USD | | % |
General and administrative expenses | | 1,047,552 | | | 45.65 | % | | 625,014 | | 37.74 | % |
Selling expenses | | 812,062 | | | 35.39 | % | | 928,385 | | 56.05 | % |
Research and development expenses | | 628,350 | | | 27.38 | % | | 102,880 | | 6.21 | % |
Disposal gain from property and equipment | | (193,191 | ) | | (8.42 | )% | | — | | — | |
Total operating expenses | | 2,294,773 | | | 100.00 | % | | 1,656,279 | | 100.00 | % |
In anticipation of becoming a listed company, we anticipate that our operating expenses will continue to increase as we hire additional personnel and incur additional costs in connection with the expansion of our business operations.
Other income/(expense), net
Other income/(expense), net mainly consists of (i) rental income, (ii) tax subsidies and deductions, (iii) interest expenses and (iv) investment income.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
Six months ended March 31, 2023 Compared to Six months ended March 31, 2022
| | For the six months ended March 31, | | Variance |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Revenues | | 9,031,327 | | | 8,420,050 | | | 611,277 | | | 7.26 | % |
Cost of revenues | | (7,085,228 | ) | | (6,675,994 | ) | | (409,234 | ) | | 6.13 | % |
Gross profit | | 1,946,099 | | | 1,744,056 | | | 202,043 | | | 11.58 | % |
Operating expenses: | | | | | | | | | | | | |
General and administrative expenses | | (694,449 | ) | | (521,064 | ) | | (173,385 | ) | | 33.28 | % |
Selling expenses | | (294,240 | ) | | (399,417 | ) | | 105,177 | | | (26.33 | )% |
Research and development expenses | | (287,971 | ) | | (226,936 | ) | | (61,035 | ) | | 26.90 | % |
Disposal gain from property and
equipment | | 196,503 | | | 168,867 | | | 27,636 | | | 16.37 | % |
Total operating expenses | | (1,080,157 | ) | | (978,550 | ) | | (101,607 | ) | | 10.38 | % |
Operating profit | | 865,942 | | | 765,506 | | | 100,436 | | | 13.12 | % |
73
Table of Contents
| | For the six months ended March 31, | | Variance |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Other income/(expenses), net: | | | | | | | | | | | | |
Investment loss | | (4,857 | ) | | (832 | ) | | (4,025 | ) | | 483.77 | % |
Interest income/(expenses), net | | (83,252 | ) | | (47,208 | ) | | (36,044 | ) | | 76.35 | % |
Others, net | | 28,036 | | | 87,787 | | | (59,751 | ) | | (68.06 | )% |
Total other (expenses)/income, net | | (60,073 | ) | | 39,747 | | | (99,820 | ) | | (251.14 | )% |
Income before income tax expense | | 805,869 | | | 805,253 | | | 616 | | | 0.08 | % |
Income tax expenses | | (251,042 | ) | | (225,676 | ) | | (25,366 | ) | | 11.24 | % |
Net income | | 554,827 | | | 579,577 | | | (24,750 | ) | | (4.27 | )% |
Revenues
Total revenues increased by approximately USD0.61 million, or 7.26%, from approximately USD8.42 million for the six months ended March 31, 2022 to approximately USD9.03 million for the six months ended March 31, 2023, primarily attributable to the growth of digital marketing services.
Revenues from cross-border sales slightly decreased by approximately USD0.03 million, or 0.32%, from approximately USD6.44 million for the six months ended March 31, 2022 to approximately USD6.41 million for the six months ended March 31, 2023. The slight decrease in cross-border sales was mainly due to several severe COVID outbreaks in Japan during the first quarter of 2023, causing a decrease of cross-border sales generated from Japan by USD0.90 million in the absolute amount and 15.10% as the percentage of total revenue. For the six months ended March 31, 2023, food, health and daily necessities products accounted for 50.91%, 11.45% and 6.33% of total cross-border sales from EXTEND, respectively. For the six months ended March 31, 2022, food, health and beauty products accounted for 72.71%, 20.47%, and 4.95% of total cross-border sales from EXTEND, respectively.
Revenues from integrated e-commerce services increased by approximately USD0.64 million, or 31.83%, from approximately USD1.98 million for the six months ended March 31, 2022 to approximately USD2.62 million for the six months ended March 31, 2023, as we continued to grow both in digital marketing services and other integrated e-commerce services. With a relatively stable incentive policy from the media platform for the six months ended March 31, 2022 and 2023, the increase in digital marketing services revenue was driven by the increase in total qualifying spend from Merchants. Our relationship with media platforms and our customized and one-stop marketing services enabled us to achieve a 20.21% growth in the number of Merchants served from the six months ended March 31, 2022 to the six months ended March 31, 2023. The revenue from the remaining integrated e-commerce services increased by approximately USD0.31 million, or 1,037.18%, from approximately USD0.04 million for the six months ended March 31, 2022 to approximately USD0.35 million for the six months ended March 31, 2023, which mainly contributed to revenues generated from e-commerce related training and consulting services from Chuancheng Internet since July 2022.
Cost of Revenues
Our cost of revenues increased by 6.13% from approximately USD6.68 million for the six months ended March 31, 2022 to approximately USD7.09 million for the six months ended March 31, 2023.
Our cost of revenues for cross-border sales increased by approximately USD0.11 million, or 2.00%, from approximately USD5.60 million for the six months ended March 31, 2022 to approximately USD5.71 million for the six months ended March 31, 2023. The increase was primarily attributable to the increase of cost of goods sold.
Our cost of revenues for integrated e-commerce services increased by approximately USD0.30 million, or 27.67%, from approximately USD1.07 million for the six months ended March 31, 2022 to approximately USD1.37 million for the six months ended March 31, 2023. Cost of revenues for integrated e-commerce services were essentially the commissions paid to third-party agents for introducing new Merchants, which was in line with the increase of the number of Merchants.
74
Table of Contents
Gross Profit
Our gross profit increased by approximately USD0.21 million, or 0.84%, from USD1.74 million for the six months ended March 31, 2022 to USD1.95 million for the six months ended March 31, 2023. The increase was primarily attributable to the business growth of integrated e-commerce services. For the six months ended March 31, 2023 and 2022, our overall gross profit margin was 21.55% and 20.71%, respectively.
Gross profit margin of cross-border sales decreased from 12.96% for the six months ended March 31, 2022 to 10.94% for the six months ended March 31, 2023. The decrease was mainly due to the slight increase in cost of goods sold.
Gross profit margin of integrated e-commerce related services increased from 45.85% for the six months ended March 31, 2022 to 47.56% for the six months ended March 31, 2023.
Operating Expenses, net
Our operating expenses, net increased from USD0.98 million for the six months ended March 31, 2022 to USD1.08 million for the six months ended March 31, 2023, representing an increase of 10.38%. This increase was primarily attributable to the increases in our research and development expenses and general and administrative expenses, offsetting the decrease in selling and marketing expenses.
Research and development expenses
Research and development expenses consist primarily of (i) payroll and related expenses for research and development professionals, and (ii) technology services fees. Research and development expenses are expensed as incurred.
Research and development expenses increased by 26.90% from USD0.23 million for the six months ended March 31, 2022 to USD0.29 million for the six months ended March 31, 2023.
General and administrative expenses
General and administrative expenses mainly consist of (i) salary and social welfare expenses, (ii) rental costs for offices; and (iii) depreciation expenses.
Our general and administrative expenses increased by 33.28% from USD0.52 million for the six months ended March 31, 2022 to USD0.69 million for the six months ended March 31, 2023, which was primarily attributable to an increase in professional fees as the result of preparation for listing.
Selling and marketing expenses
Selling and marketing expenses mainly consist of (i) salary and social welfare expenses, (ii) freight, and (iii) advertising costs and marketing and promotion expenses.
Our selling expenses decreased by 26.33% from USD0.40 million for the six months ended March 31, 2022 to USD0.29 million for the six months ended March 31, 2023.
Other income/(expenses), net
Other income/(expenses), net decreased by 251.14% from USD0.04 million income for the six months ended March 31, 2022 to USD0.06 million expenses for the six months ended March 31, 2023. Other non-operating income mainly consists of (i) rental income, (ii) tax subsidies and deductions, (iii) interest expenses, (iv) investment loss and (v) exchange gains or losses. Financial expenses increased by USD0.04 million, or by 76.35%, from the six months ended March 31, 2022 to the six months ended March 31, 2023, due to the increase in borrowing of higher interest rate. Other income decreased by USD0.06 million from gain of USD0.09 million for the six months ended March 31, 2022 to the gain of USD0.03 million the six months ended March 31, 2023, mainly attributed to the floatation of foreign exchange rate.
75
Table of Contents
Income taxes
Our income tax expense increased by USD0.02 million, or 11.24%, from USD0.23 million for the six months ended March 31, 2022 to USD0.25 million for the six months ended March 31, 2023.
Net income
As a result of the foregoing, our net income decreased by 4.27%, from USD0.58 million for the six months ended March 31, 2022 to USD0.55 million for the six months ended March 31, 2023.
Year Ended September 30, 2022 Compared to Year Ended September 30, 2021
| | For the years ended
September 30, | | Variance |
| | | 2022 | | 2021 | | Amount | | % |
| | | USD | | USD | | USD | | |
Revenues | | 22,028,303 | | | 15,466,862 | | | 6,561,441 | | | 42.42 | % |
Cost of revenues | | (18,323,802 | ) | | (12,929,580 | ) | | (5,394,222 | ) | | 41.72 | % |
Gross profit | | 3,704,501 | | | 2,537,282 | | | 1,167,219 | | | 46.00 | % |
Operating expenses: | | | | | | | | | | | | |
General and administrative expenses | | (1,047,552 | ) | | (625,014 | ) | | (422,538 | ) | | 67.60 | % |
Selling expenses | | (812,062 | ) | | (928,385 | ) | | 116,323 | | | (12.53 | )% |
Research and development expenses | | (628,350 | ) | | (102,880 | ) | | (525,470 | ) | | 510.76 | % |
Disposal gain from property and equipment | | 193,191 | | | — | | | 193,191 | | | 100.00 | % |
Total operating expenses | | (2,294,773 | ) | | (1,656,279 | ) | | (638,494 | ) | | 38.55 | % |
Operating profit | | 1,409,728 | | | 881,003 | | | 528,725 | | | 60.01 | % |
| | | | | | | | | | | | | |
Other income/(expenses), net: | | | | | | | | | | | | |
Investment income | | 8,402 | | | — | | | 8,402 | | | 100.00 | % |
Interest income/(expenses), net | | (79,455 | ) | | (81,877 | ) | | 2,422 | | | (2.96 | )% |
Others, net | | 113,658 | | | 54,080 | | | 59,578 | | | 110.17 | % |
Total other income/(expenses), net | | 42,605 | | | (27,797 | ) | | 70,402 | | | (253.27 | )% |
Income before income tax expense | | 1,452,333 | | | 853,206 | | | 599,127 | | | 70.22 | % |
Income tax expenses | | (385,958 | ) | | (101,540 | ) | | (284,418 | ) | | 280.10 | % |
Net income | | 1,066,375 | | | 751,666 | | | 314,709 | | | 41.87 | % |
Revenues
Total revenues increased by approximately USD6.56 million, or 42.42%, from approximately USD15.47 million for the year ended September 30, 2021 to approximately USD22.03 million for the year ended September 30, 2022, primarily attributable to the growth of cross-border sales.
Revenues from cross-border sales increased by approximately USD5.49 million, or 44.22%, from approximately USD12.42 million for the year ended September 30, 2021 to approximately USD17.91 million for the year ended September 30, 2022. EXTEND, one of our subsidiaries in Japan, contributed approximately USD4.16 million, or 33.70%, increase for the year ended September 30, 2022 compared to the 2021. With twelve years experiences in Japan’s e-commerce markets, EXTEND has been committed to providing popular brands and products. Entering into the post-pandemic period, the consumption level has been in an upward trend, due to the ease and popularity of the e-commerce business and related technology for the past two years. To follow the trend of improving individual quality of life, EXTEND has been focused on consumer products (such as food, beauty products, health products, etc.) for the last decade. For the year ended September 30, 2022, food, health and beauty products accounted for 58.09%, 9.82%, and 5.14% of total cross-border sales from EXTEND, respectively. For the year ended September 30, 2021, food, beauty and health products accounted for 66.11%, 15.64% and 11.11% of total cross-border sales from EXTEND, respectively. The rest of approximately USD1.33 million revenue growth derived from Chuancheng Digital and Linkage Electronic, which were subsequently set up in June 2021 and March 2022, respectively.
76
Table of Contents
Revenues from integrated e-commerce services increased by approximately USD1.07 million, or 35.12%, from approximately USD3.05 million for the year ended September 30, 2021 to approximately USD4.12 million for the year ended September 30, 2022, which was mainly due to the growth in digital marketing services. To satisfy the increasing needs for advertising from e-commerce enterprises, especially in Asian markets, our comprehensive digital marketing solutions equipped with technology and data are tailored to meet the digital marketing needs of the Merchants, and help our media partners engage, cultivate, retain and expand regional Merchant base as well. We provide customized marketing solution in areas including strategic advertising proposition, offline activities, as well as technology and account support. With relatively stable incentive policy from the media platform for the years ended September 30, 2022 and 2021, the increase in digital marketing services revenue was driven by the increase in total qualifying spend from the Merchants. Our relationship with media platforms and our customized and one-stop marketing services enabled us continue to maintain a 29.25% growth in the number of Merchants and a 47.63% of increase in qualifying spend per Merchant on platforms from the year ended September 30, 2021 to the year ended September 30, 2022. The rest of integrated e-commerce services increased by approximately USD0.17 million, or 5,278.16%, from approximately USD0.003 million for the year ended September 30, 2021 to approximately USD0.18 million for the year ended September 30, 2022, which mainly contributes to revenues generated from e-commerce related training and consulting services from Chuancheng Internet.
Cost of Revenues
Our cost of revenues increased by 41.72% from approximately USD12.93 million for the year ended September 30, 2021 to approximately USD18.32 million for the year ended September 30, 2022.
Our cost of revenues for cross-border sales increased by approximately USD5.19 million, or 46.17%, from approximately USD11.23 million for the year ended September 30, 2021 to approximately USD16.42 million for the year ended September 30, 2022. The increase was primarily attributable to the increase of cost of goods sold, which is in line with the business growth of sales.
Our cost of revenues for integrated e-commerce services increased by approximately USD0.21 million, or 12.29%, from approximately USD1.70 million for the year ended September 30, 2021 to approximately USD1.91 million for the year ended September 30, 2022. Cost of revenues for integrated e-commerce services were essentially the commissions paid to third-party agents for introducing new Merchants. The increase in commissions is not necessarily in proportion to the increase in digital marketing services from 2021 to 2022, as the increase in qualifying spend per Merchant outgrew the increase in the number of Merchants and became the main driver for the increase in digital marketing services.
Gross Profit
Our gross profit increased by approximately USD1.17 million, or 0.41%, from USD2.54 million for the year ended September 30, 2021 to USD3.70 million for the year ended September 30, 2022. The increase was primarily attributable to the business growth of integrated e-commerce services. For the years ended September 30, 2022 and 2021, our overall gross profit margin was 16.82% and 16.40%, respectively.
Gross profit margin of cross-border sales decreased from 9.55% for the year ended September 30, 2021 to 8.32% for the year ended September 30, 2022. The decrease was mainly due to the slight increase in cost of goods sold.
Gross profit margin of integrated e-commerce related services increased from 44.31% for the year ended September 30, 2021 to 53.72% for the year ended September 30, 2022. The decrease was primarily contributing to the increase in qualifying spend per Merchant with the support of our customized and one-stop marketing services.
Operating Expenses, net
Our operating expenses, net increased from USD1.66 million for the year ended September 30, 2021 to USD2.29 million for the year ended September 30, 2022, representing a year-on-year increase of 38.55%. This increase was primarily attributable to the increases in our research and development expenses and general and administrative expenses, offsetting the decrease in selling and marketing expenses. We anticipate that our operating expenses will continue to increase as we hire additional personnel and incur additional costs in connection with the expansion of our business operations and in anticipation for becoming a listed company.
77
Table of Contents
Research and development expenses
Research and development expenses consist primarily of (i) payroll and related expenses for research and development professionals, and (ii) technology services fees. Research and development expenses are expensed as incurred.
Research and development expenses increased by 510.76% from USD0.10 million for the year ended September 30, 2021 to USD0.63 million for the year ended September 30, 2022. Our research project was mainly related to the development of a one-stop e-commerce platform and we continuously improved the functions and efficiency of the platform.
General and administrative expenses
General and administrative expenses mainly consist of (i) salary and social welfare expenses, (ii) rental costs for offices; and (iii) depreciation expenses.
Our general and administrative expenses increased by 67.60% from USD0.63 million for the year ended September 30, 2021 to USD1.05 million for the year ended September 30, 2022, which was primarily attributable to (i) an increase of USD0.39 million in salary and social welfare expenses and outsourcing team costs, due to our business growth and establishment of new subsidiaries (Chuancheng Internet and Chuancheng Digital); and (ii) an increase of USD0.06 million in leasing expenses to satisfy the need for offices and warehousing.
Selling and marketing expenses
Selling and marketing expenses mainly consist of (i) salary and social welfare expenses, (ii) freight, and (iii) advertising costs and marketing and promotion expenses. Our selling expenses decreased by 12.53% from USD0.93 million for the year ended September 30, 2021 to USD0.81 million for the year ended September 30, 2022, which was primarily attributable to a decrease of USD0.18 million in sales commission as EXTEND paid extra sales commissions in order to increased promotion and advertising activities through various channels to attract more Customers.
Other income/(expenses), net
Other non-operating income increased by 110.17% from USD0.05 million for the year ended September 30, 2021 to USD0.11 million for the year ended September 30, 2022. Other non-operating income mainly consists of (i) rental income, (ii) tax subsidies and deductions, (iii) interest expenses and (iv) investment income. Investment income increased by 100.00% from nil for the year ended September 30, 2021 to USD0.01 million for the year ended September 30, 2022, representing the increase of investment income from long-term investment in the year of 2022. Financial expenses, net slightly decreased by 2.96% from the year ended September 30, 2021 to the year ended September 30, 2022, due to the decrease in long-term borrowings.
Income taxes
Our income tax expense increased by USD0.28 million, or 280.10%, from USD0.10 million for the year ended September 30, 2021 to USD0.39 million for the year ended September 30, 2022. This increase was primarily attributable to the growth of net income for the year ended September 30, 2022 and was offset by the utilization of tax credit accumulated from net operating losses in previous years.
Net income
As a result of the foregoing, our net income increased by USD0.31 million, or 41.87%, from USD0.75 million for the year ended September 30, 2021 to USD1.07 million for the year ended September 30, 2022.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. To date, we have financed our working capital requirements from cash flow from operations, debt and equity financings and capital contributions from our existing shareholders.
As of March 31, 2023, we had cash of USD3.50 million on hand. Our working capital was approximately USD5.64 million as of March 31, 2023.
78
Table of Contents
We expect to invest approximately 20% of the net proceeds of this offering in venturing into Southeast Asian Market. We intend to selectively launch our integrated e-commerce related services in Southeast Asia for the following two years, starting from markets such as the Thailand, Malaysia, and Indonesia. We expect to first expand to Malaysia from August 2023 to December 2023, and following Thailand, Indonesia and Philippines from in 2024. We believe that we can expand into these new markets by leveraging our existing business data analysis technology and expect to (i) establish representative offices or appoint local partners; (ii) hire key marketing and support employees who are familiar with local languages and cultures to manage our business in these countries; and (iii) promote our brands in these countries by investing in marketing activities. We estimate the total related capital investment and expenditures to be approximately $5 million.
Currently, we plan to use our own cash to support our short-term business growth goal. We believe our current working capital is sufficient to support our operations for the next twelve months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Current foreign exchange and other regulations in the PRC may restrict the PRC subsidiaries in their ability to transfer their net assets to us and the subsidiaries in Hong Kong. However, as of the date of this prospectus, these restrictions have no impact on the ability of these PRC entities to transfer funds to us, as we do not anticipate declaring or paying any dividends in the foreseeable future, and plan to retain our retained earnings to continue to grow our business. In addition, these restrictions have no impact on the ability for us to meet our cash obligations.
There are no foreign exchange or other regulations in Japan or Hong Kong that restrict EXTEND and the Hong Kong subsidiaries in their ability to transfer their net assets to us.
Cash Flows
Cash Flows for the six months ended March 31, 2023, compared to the six months ended March 31, 2022
The table below sets forth our cash flows for the six months ended March 31, 2022 and 2023.
| | For the six months ended March 31, | | Change |
| | | 2023 | | 2022 | | Amount | | % |
| | | USD | | USD | | USD | | |
Net cash used in operating activities | | (1,810,240 | ) | | (134,437 | ) | | (1,675,803 | ) | | 1,246.53 | % |
Net cash provided by investing activities | | 1,951,041 | | | 806,973 | | | 1,144,068 | | | 141.77 | % |
Net cash used in financing activities | | (155,627 | ) | | (787,222 | ) | | 631,595 | | | (80.23 | )% |
Effects of exchange rate changes on cash | | (170,542 | ) | | (39,183 | ) | | (131,359 | ) | | 335.24 | % |
Net decrease in cash | | (185,368 | ) | | (153,869 | ) | | (31,499 | ) | | 20.47 | % |
Cash at the beginning of the periods presented | | 3,686,391 | | | 1,779,057 | | | 1,907,334 | | | 107.21 | % |
Cash at the end of the periods presented | | 3,501,023 | | | 1,625,188 | | | 1,875,835 | | | 115.42 | % |
Operating activities
For the six months ended March 31, 2023, our net cash used in operating activities was USD1.81 million, primarily attributable to net income of USD0.55 million, non-cash items of disposal gain from property and equipment of USD0.20 million, and changes in operating assets and liabilities which primarily consisted of: (a) an increase of USD2.11 million in prepaid expenses and other current asset, net and an increase of USD0.21 million in accounts receivables due the expansion of business, (b) an increase of USD0.32 million in accounts payable, and offsetting (i) a decrease of USD0.34 million in inventory, as the third quarter is not the peak season of the year and we did not increase inventories at the end of the second quarter, and (ii) an decrease of USD0.88 million in amounts due to related parties due to the repayment to shareholders who previously paid for operating expenses on behalf of the subsidiaries.
For the six months ended March 31, 2022, our net cash used in operating activities was USD0.13 million, primarily attributable to net income of USD0.58 million, as adjusted by non-cash and non-operating items, which primarily comprised effect of (1) disposal gain from property and equipment of USD0.17 million, (2) allowance of inventory
79
Table of Contents
write-down of USD0.15 million, and (3) changes in operating assets and liabilities which primarily consisted of: (a) an increase of USD1.70 million in prepaid expenses and other current asset, net and an increase of USD0.13 million in accounts receivables due the expansion of business, (b) an increase of amounts due to related parties of USD0.77 million, as shareholders paid for operating expenses on behalf of our subsidiaries which have not yet generated operating income on their own; (c) an increase of USD0.19 in tax payable resulting from more profit achieved, offset by (i) a decrease of inventories of USD0.19 million, as the third quarter is not the peak season of the year and there is no need to stock inventories at the end of the second quarter.
Investing activities
For the six months ended March 31, 2023, our net cash provided by investing activities was approximately USD1.95 million, which was primarily due to the proceeds from the disposal of properties of approximately USD1.96 million, offsetting the payments for equipment, intangible assets of approximately USD0.012 million.
For the six months ended March 31, 2022, our net cash provided by investing activities was approximately USD0.81 million, which was primarily due to the proceeds from the disposal of properties of approximately USD1.30 million, offsetting the payments for equipment, intangible assets of approximately USD0.49 million.
Financing activities
For the six months ended March 31, 2023, our net cash used in financing activities was approximately USD0.16 million, which was primarily due to (i) repayments of long-term debt of approximately USD1.39 million, (ii) payments of IPO expenses of approximately USD0.34 million, offset by capital contributions from shareholders of approximately USD1.46 million.
For the six months ended March 31, 2022, our net cash used in financing activities was approximately USD0.79 million, which was primarily due to repayments of long-term debt of approximately USD0.79 million.
As of March 31, 2023 and September 30, 2022, short-term debt consists of the following:
Bank | | Annual
Interest
Rate | | Maturity | | As of
March 31,
2023 | | As of
September 30,
2022 |
| | | | | | | | | USD | | USD |
Gunma Bank | | 1.50 | % | | 27/06/2022 | | 25/06/2023 | | 37,642 | | 103,649 |
| | | | | | | | | | 37,642 | | 103,649 |
As of March 31, 2023 and September 30, 2022, long-term debts consist of the following:
| | | | | | | | As of
March 31, 2023 | | As of
September 30, 2022 | | |
Bank and other financial institution | | Annual Interest Rate | | Start | | End | | Long-term | | Long-term (current portions) | | Long-term | | Long-term (current portions) | | Pledge |
| | | | | | | | | USD | | USD | | |
Shinhan Bank Japan | | 1.90 | % | | 16/04/2021 | | 16/04/2024 | | — | | — | | 989,428 | | 48,095 | | |
The Shoko Chukin Bank | | 1.50 | % | | 09/05/2019 | | 25/04/2024 | | 7,533 | | 45,198 | | 27,641 | | 41,462 | | |
The Shoko Chukin Bank | | 1.11 | % | | 26/05/2020 | | 25/04/2030 | | 138,667 | | 22,780 | | 137,655 | | 20,897 | | |
The Shoko Chukin Bank | | 1.50 | % | | 04/02/2022 | | 27/01/2025 | | 61,469 | | 75,932 | | 91,217 | | 69,657 | | |
Mizuho Bank | | 0.83 | % | | 25/03/2020 | | 25/03/2025 | | 14,945 | | 15,096 | | 20,634 | | 13,848 | | |
Mizuho Bank | | 2.00 | % | | 01/06/2021 | | 01/06/2031 | | 163,842 | | 22,599 | | 160,666 | | 20,731 | | |
Kiraboshi Bank | | 0.50 | % | | 03/04/2020 | | 31/03/2030 | | 271,186 | | 45,198 | | 269,505 | | 41,462 | | |
Japan Finance Corporation | | 1.11 | % | | 16/07/2020 | | 30/06/2030 | | 237,439 | | 37,966 | | 235,229 | | 34,828 | | |
Musashino Bank | | 1.50 | % | | 31/05/2022 | | 02/06/2025 | | 87,774 | | 75,390 | | 120,862 | | 63,396 | | |
Japan Finance Corporation | | 0.46 | % | | 09/06/2020 | | 20/04/2030 | | 140,776 | | 23,141 | | 139,755 | | 21,229 | | |
Japan Finance Corporation | | 0.38 | % | | 23/04/2021 | | 20/03/2031 | | 53,785 | | 7,684 | | 52,864 | | 7,050 | | |
Zhongli International Financial Leasing Co. LTD | | 14.56 | % | | 11/08/2022 | | 15/08/2025 | | 206,283 | | 145,611 | | 269,441 | | 140,578 | | |
Zhongli International Financial Leasing Co. LTD | | 13.63 | % | | 26/07/2022 | | 26/07/2025 | | 108,086 | | 69,164 | | 138,867 | | 62,397 | | Vehicle |
Caizhi Linghang (Xiamen) Investment Management Co., Ltd | | 3.75 | % | | 01/11/2022 | | 31/10/2027 | | 276,661 | | — | | — | | — | | |
| | | | | | | | | | 1,768,446 | | 585,759 | | 2,653,764 | | 585,630 | | |
80
Table of Contents
Cash Flows for the year ended September 30, 2022, compared to the year ended September 30, 2021
The table below sets forth our cash flows for the years ended September 30, 2022 and 2021.
| | For the Years Ended September 30, | | Change |
| | | 2022 | | 2021 | | Amount | | % |
| | | USD | | USD | | USD | | |
Net cash provided by operating activities | | 1,168,927 | | | 1,218,197 | | | (49,270 | ) | | -4.04 | % |
Net cash provided by/(used in) investing activities | | 743,728 | | | (3,206,566 | ) | | 3,950,294 | | | (123.19 | )% |
Net cash provided by financing activities | | 45,745 | | | 2,022,231 | | | (1,976,486 | ) | | (97.74 | )% |
Effects of exchange rate changes on cash | | (51,066 | ) | | (8,604 | ) | | -42,462 | | | 493.51 | % |
Net increase in cash | | 1,907,334 | | | 25,258 | | | 1,882,076 | | | 7,451.41 | % |
Cash at the beginning of the periods presented | | 1,779,057 | | | 1,753,799 | | | 25,258 | | | 1.44 | % |
Cash at the end of the periods
presented | | 3,686,391 | | | 1,779,057 | | | 1,907,334 | | | 107.21 | % |
Operating activities
For the year ended September 30, 2022, our net cash provided by operating activities was USD1.17 million, which was primarily attributable to (i) net income of USD1.07 million; (ii) an increase of amounts due to related parties of USD0.95 million, as shareholders paid for operating expenses on behalf of the subsidiaries which have not yet generated operating income on their own; (iii) an increase of contract liability of USD0.37 million, due to the development of training and consulting services of e-commerce. This type of revenue stream collects service fees in advance and amortizes afterwards, which as a result leads to the increase in the balance of contract liability; and (iv) an increase of USD0.27 million in tax payable resulting from more profit achieved, offset by (i) an increase of accounts receivable of USD0.91 million for overall increase in revenue, especially in the last quarter for the year ended September 30, 2022; and (ii) an increase of prepaid expenses and other current assets, net of USD0.52 million, due to the increase in the balance of export tax refund.
For the year ended September 30, 2021, our net cash provided by operating activities was USD1.22 million, which was primarily attributable to (i) net income of USD0.75 million; (ii) a decrease of USD0.44 million in accounts receivable, net due to the decrease of sales resulting from the outbreak of COVID-19 in Japan in the last quarter for the year ended September 30, 2021; (iii) a decrease of USD0.23 million in inventories due to the decrease of procurement in line with the decrease in sales; and (iv) an increase of USD0.19 million in tax payable resulting from more profit achieved, offset by (i) a decrease of USD0.22 million in contract liability due to the decrease in sales; and (ii) an increase of prepaid expenses and other current assets, net of USD0.15 million due to the slight increase in the balance of export tax refund.
Investing activities
For the year ended September 30, 2022, our net cash provided by investing activities was approximately USD0.74 million, which was primarily due to the proceeds from the disposal of properties of approximately USD1.27 million, offsetting the payments for equipment, intangible assets and long-term investments of approximately USD0.52 million.
For the year ended September 30, 2021, our net cash used in investing activities was approximately USD3.21 million, which was due to payments for purchase of properties and equipment of approximately USD3.07 million.
Financing activities
For the year ended September 30, 2022, our net cash provided by financing activities was approximately USD0.05 million, which was primarily due to proceeds from long-term debts of approximately USD1.17 million and proceeds from short-term debts of approximately USD0.16 million, offsetting repayments of long-term debt of approximately USD1.00 million and repayments of short-term debt of approximately USD0.28 million.
81
Table of Contents
For the year ended September 30, 2021, our net cash provided by financing activities was approximately USD2.02 million, which was primarily due to the proceeds from long-term debt of approximately USD2.59 million, offsetting the repayments of long-term debt of approximately USD0.85 million.
As of September 30, 2022 and 2021, short-term debts consist of the following:
Bank | | Annual
Interest
Rate | | Maturity | | As of
September 30,
2022 | | As of
September 30,
2021 |
| | | | | | | | | USD | | USD |
The Shoko Chukin Bank | | 1.50 | % | | 05/02/2021 | | 04/02/2022 | | — | | 269,058 |
Gunma Bank | | 1.50 | % | | 27/06/2022 | | 25/06/2023 | | 103,649 | | — |
| | | | | | | | | | 103,649 | | 269,058 |
As of September 30, 2022 and 2021, long-term debts consist of the following:
| | | | | | | | As of
September 30,
2022 | | As of
September 30,
2021 | | |
Bank and other financial institution | | Annual
Interest
Rate | | Start | | End | | Long-term | | | | Long-term
(current
portions) | | Long-term | | | | Long-term
(current
portions) | | Pledge |
| | | | | | | | | | | USD | | | | | | USD | | | | |
Shinhan Bank Japan | | 1.90% | | 16/04/2021 | | 16/04/2024 | | | | | 989,428 | | 48,095 | | | | 1,346,548 | | 62,421 | | |
The Shoko Chukin Bank | | 1.05% | | 31/03/2017 | | 25/02/2022 | | | | | — | | — | | | | — | | 7,354 | | |
The Shoko Chukin Bank | | 1.50% | | 09/05/2019 | | 25/04/2024 | | | | | 27,641 | | 41,462 | | | | 89,686 | | 53,812 | | |
The Shoko Chukin Bank | | 1.11% | | 26/05/2020 | | 25/04/2030 | | | | | 137,655 | | 20,897 | | | | 205,776 | | 27,121 | | |
The Shoko Chukin Bank | | 1.50% | | 04/02/2022 | | 27/01/2025 | | | | | 91,217 | | 69,657 | | | | — | | — | | |
Mizuho Bank | | TIBOR*+0.75% | | 28/03/2019 | | 25/03/2022 | | | | | — | | — | | | | — | | 15,157 | | |
Mizuho Bank | | 0.83% | | 25/03/2020 | | 25/03/2025 | | | | | 20,634 | | 13,848 | | | | 44,753 | | 17,973 | | |
Mizuho Bank | | 2.00% | | 01/06/2021 | | 01/06/2031 | | | | | 160,666 | | 20,731 | | | | 235,426 | | 26,906 | | |
Kiraboshi Bank | | 0.50% | | 03/04/2020 | | 31/03/2030 | | | | | 269,505 | | 41,462 | | | | 403,587 | | 53,812 | | |
The Higa Shi-nippon Bank | | 1.05% | | 31/10/2019 | | 25/10/2022 | ** | | | | — | | — | | | | — | | 3,668 | | |
Japan Finance Corporation | | 1.11% | | 16/07/2020 | | 30/06/2030 | | | | | 235,229 | | 34,828 | | | | 350,493 | | 45,202 | | |
Musashino Bank | | 1.50% | | 31/05/2022 | | 02/06/2025 | | | | | 120,862 | | 63,396 | | | | — | | — | | |
Japan Finance Corporation | | 0.46% | | 09/06/2020 | | 20/04/2030 | | | | | 139,755 | | 21,229 | | | | 208,933 | | 27,552 | | |
Japan Finance Corporation | | 0.38% | | 23/04/2021 | | 20/03/2031 | | | | | 52,864 | | 7,050 | | | | 77,758 | | 9,148 | | |
Asuka Shinkumi Bank | | 2.20% | | 09/10/2020 | | 25/05/2022 | | | | | — | | — | | | | — | | 215,190 | | |
Shinsei Investment Bank | | 3.08% | | 09/10/2020 | | 15/12/2045 | | | | | — | | — | | | | 426,160 | | 12,831 | | |
Zhongli International Financial Leasing Co. LTD | | 14.56% | | 11/08/2022 | | 15/08/2025 | | | | | 269,441 | | 140,578 | | | | — | | — | | |
Zhongli International Financial Leasing Co. LTD | | 13.63% | | 26/07/2022 | | 26/07/2025 | | | | | 138,867 | | 62,397 | | | | — | | — | | Vehicle |
| | | | | | | | | | | | 2,653,764 | | 585,630 | | | | 3,389,120 | | 578,147 | | |
Contingencies
From time to time, we may become involved in litigation relating to claims arising in the ordinary course of the business. There are no claims or actions pending or threatened against us that, if adversely determined, would in our judgment have a material adverse effect on us.
Off-balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
82
Table of Contents
Contractual Obligations
The total future minimum lease payments under the non-cancellable short-term operating lease which are not included in operating lease right-of-use assets and lease liabilities, with respect to the office and the warehouse as of March 31, 2023 are payable as follows:
| | Lease Commitment |
Within 1 year | | $ | 42,371 |
See “Business — Properties” in this prospectus for commitments under long-term operating lease for more information. Other than that, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of March 31, 2023.
Inflation
Inflation in Japan and the PRC does not materially affect our results of operations.
Taxation
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to income or capital gains taxes. In addition, dividend payments are not subject to withholdings tax in the Cayman Islands.
Hong Kong
According to Tax (Amendment) (No. 3) Ordinance 2018 published by Hong Kong government, from April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first HKD2 million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for qualified corporations, and assessable profits above HK$2,000,000 will be taxed at 16.5%. The assessable profits of corporations which is not qualifying for the two-tiered profits tax rates regime, will continue to be taxed at a flat rate of 16.5%.
PRC
Under the Enterprise Income Tax Laws of the PRC, or the EIT Laws, domestic enterprises and Foreign Investment Enterprises, or the FIEs, are usually subject to a unified 25% enterprise income tax rate, while preferential tax rates, tax holidays and tax exemption may be granted on case-by-case basis.
Japan
Japan corporate income tax has been calculated on the estimated assessable profit for the six months ended March 31, 2023 and 2022 at the rates of taxation prevailing in Japan in which we operate. EXTEND is subject to national corporate income tax, inhabitant tax, and enterprise tax in Japan, which in aggregate, resulted in effective statutory income tax rates of approximately 34.40% and 34.10% for the six months ended March 31, 2022 and 2023, respectively.
Japan corporate income tax has been calculated on the estimated assessable profit for the years ended September 30, 2022 and 2021 at the rates of taxations prevailing in Japan in which we operate. We are subject to national corporate income tax, inhabitant tax, and enterprise tax in Japan, which in aggregate, resulted in effective statutory income tax rates of approximately 34.1% and 36.8% for the years ended September 30, 2022 and 2021, respectively.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and revenues and expenses during the reporting periods. Significant accounting estimates include, but not limited to allowance for doubtful accounts, useful lives and impairment of long-lived assets, accounting for deferred income taxes and valuation allowance for deferred tax assets. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.
83
Table of Contents
We believe the following critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Accounts receivable, net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The credit terms are generally between 30 to 60 days. Provision for doubtful accounts is recognized when reasonable and supportable forecasts affect the expected collectability. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. We consider many factors in assessing the collectability such as the age of the amounts due, consideration of historical loss experience, adjusted for current conditions, forward-looking indicators, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. We established standards and policies for reviewing major account exposures and concentrations of risk.
Revenue Recognition
Our revenues are mainly generated from 1) cross-border sales, 2) integrated e-commerce services.
We recognize revenue pursuant to ASC 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, revenues from contracts with customers are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services, reduced by estimates for return allowances, promotional discounts, commissions and business tax and Value Added Tax (“VAT”). To achieve the core principle of this standard, we applied the following five steps:
1. Identification of the contract, or contracts, with the Customer;
2. Identification of the performance obligations in the contract;
3. Determination of the transaction price;
4. Allocation of the transaction price to the performance obligations in the contract; and
5. Recognition of the revenue when, or as, a performance obligation is satisfied.
Each of our significant performance obligations and our application of ASC 606 to our revenue arrangements are discussed in further detail below.
Cross-border sales
We engage in the sale of food, beauty and personal care products, health products, private label smart electronics and other consumer products in Asia, by exploiting our advantages in global supply chain services and networks. We fulfil our performance obligations by transferring products to the designated location. In accordance with the customary business practices, for international sales, the delivery term is “Cost and Freight” (“CFR”, formerly known as “C&F”, which the seller bears the freight costs) and “Free on Board” (“FOB”, which the buyer bears the freight costs) shipping point. The majority of transactions were based on FOB. Under both delivery terms, once the products are loaded on board, control of products has transferred. Since shipping activities are performed after customers obtain control of the products, we elect to account for shipping as activities to fulfill the promise to transfer the good, in accordance with ASC 606-10-25-18B. Therefore, freight costs are accrued when products are delivered to the designated location, before shipping activities occur. For the remaining domestic sales, the control of products has transferred upon the time when the products are delivered to the place designated by customers. Shipping activities are performed before customers obtain control of the good, and hence, should not be considered a separate performance obligation. As a result, both cost of goods and freight costs are recognized at the same time when products are delivered to the designated location, after shipping activities are completed. Revenue generated from cross-border sales is recognized based on the product value specified in the contract at a point in time when the control of products has transferred for both international sales and domestic sales.
84
Table of Contents
For products shipped directly from suppliers to customers, pursuant to ASC 606-10-55-37A(a), we obtain control the of the products as we are primarily responsible for the contract and have pricing discretion. We are primarily responsible for the contract, as we have the supplier discretion when executing orders and we are the only party that has a contractual relationship with customers. We establish and obtain substantially all of the benefits from transactions, i.e. consideration paid by customers. Therefore, we consider ourselves to be the principal in the transactions on the basis that we are primarily responsible to fulfill the promise and have the price discretion, pursuant to ASC 606-10-55-39.
For products shipped from us to customers, we consider ourselves the principal because we are in control of establishing the transaction price, arranging the whole process of transactions and bearing inventory risk. Therefore, such revenues are reported on a gross basis.
Integrated e-commerce services
We partner with premium social media platforms and provides digital marketing services to meet the needs of the Merchants.
For digital marketing services, we act as an authorized agent persuading Merchants to display ads on social media platforms. In return, we receive commissions from social media platforms. We receive commissions from social media platforms when Merchants place ads on such platforms over the periods when we maintain contractual relationship with them. Revenue from digital marketing services is recognized over the contractual period for actual qualifying ads placed calculated by social media platforms. We have adopted “right to invoice” practical expedient and recognize revenues based on quarterly billing reports received from social media platforms. We consider ourselves the agent because we are not primarily responsible for fulfilling the promise to render digital marketing services. Therefore, such revenues are reported on a net basis. During the reporting periods, all revenue of the digital marketing services was generated from us acting as an authorized agent on behalf of the social media platforms.
For other integrated e-commerce services, revenue is generated from e-commerce related training/consulting services. We fulfil our performance obligation by providing e-commerce related training/consulting services, and revenue is recognized over the service period.
Income taxes
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.
We account for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases (“Temporary differences”).
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those Temporary differences are expected to be recovered or settled. Deferred tax is calculated at the tax rates that are expected to apply in the periods in which the asset or liability will be settled, based on rates enacted or substantively enacted at the end of the reporting period. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely- than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. We believe there were no uncertain tax positions as of March 31, 2023 and September 30, 2022, respectively.
Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining provision for income taxes. We did not recognize any significant interest and penalties associated with uncertain tax positions for the six months ended March 31, 2023
85
Table of Contents
and 2022. As of March 31, 2023 and September 30, 2022, we did not have any significant unrecognized uncertain tax positions. We do not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.
Internal Control Over Financial Reporting
Prior to this offering, we have been a private company with limited accounting personnel and other resources to address our internal controls and procedures. Our independent registered public accounting firm had not conducted an audit of our internal control over financial reporting. However, in connection with the reviews of our condensed consolidated financial statements for the six months ended March 31, 2023 and 2022, and the audits of our consolidated financial statements for the years ended September 30, 2022 and 2021, we and our independent registered public accounting firm identified the following “material weaknesses” in our internal control over financial reporting, as defined in the standards established by the PCAOB, and other control deficiencies. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The two material weaknesses that have been identified related to:
• Our lack of formal internal control policies and internal independent supervision functions to establish formal risk assessment process and internal control framework; and
• Our lack of accounting staff and resources with appropriate knowledge of generally accepted U.S. GAAP and SEC reporting and compliance requirements to design and implement formal period-end financial reporting policies and procedures to address complex U.S. GAAP technical accounting issue in accordance with U.S. GAAP and the SEC requirements.
In response to the material weaknesses identified prior to this offering, we are in the process of implementing a number of measures, which will include:
• the hiring of additional qualified accounting and financial personnel with appropriate knowledge and experience in U.S. GAAP accounting and SEC reporting, and
• the organization of regular training for our accounting staffs, especially training related to U.S. GAAP and SEC reporting requirements.
We plan to adopt additional measures to improve our internal control over financial reporting, including, among others, creating U.S. GAAP accounting policies and procedures manual, which will be maintained, reviewed and updated, on a regular basis, to the latest US GAAP accounting standards, and establishing an audit committee and strengthening corporate governance.
However, we cannot assure you that we will remediate our material weaknesses in a timely manner. See “Risk Factors — Risks Relating to Our Business and Industry — 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.”
As a company with less than US$1.235 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act (“JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting.
86
Table of Contents
Quantitative and Qualitative Disclosure of Market Risk
Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of accounts receivable. We conduct credit evaluations of our customers, and generally do not require collateral or other security from them. We evaluate our collection experience and long outstanding balances to determine the need for an allowance for doubtful accounts. We conduct periodic reviews of the financial condition and payment practices of our customers to minimize collection risk on accounts receivable.
Foreign Exchange Risk
Our business is mainly conducted in Japan, and our books and records are maintained in JPY. The PRC subsidiaries apply RMB as their functional currency. The reporting currency of consolidated 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 JPY and the U.S. dollar, and RMB and the U.S. dollar, affect the value of our assets and results of operations, when presented in U.S. dollars.
The value of the JPY against the U.S. dollar, the RMB against the U.S. and other currencies may fluctuate and is affected by, among other things, changes in the Japanese political and economic conditions and perceived changes in the economy of Japan, the PRC and the United States. Any significant revaluation of the JPY and RMB may materially and adversely affect our cash flows, revenue, and financial condition. Further, since the shares offered in the U.S. are offered in U.S. dollars, we need to convert the net proceeds we receive into JPY and RMB in order to use the funds for our business. Changes in the conversion rate among the U.S. dollar and the JPY and the U.S. dollar and the RMB will affect the amount of proceeds we will have available for our business.
We do not believe that it currently has any significant direct foreign exchange risk and has not used derivative financial instruments to hedge exposure to such 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. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Inflation Risk
In recent years, inflation has not had a material impact on our results of operations. According to the Statistics Bureau of Japan, the inflation rate in Japan is expected to be/was approximately 2.0% and 2.3% in 2023 and 2022, respectively. According to the Statistics Bureau of the PRC, the inflation rate in the PRC is expected to be/was approximately 3% and 2% in 2023 and 2022, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in Japan. If inflation rises, it may materially and adversely affect our business.
87
Table of Contents
INDUSTRY
All the information and data presented in this section have been derived from the industry report of Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. (“Frost & Sullivan”) commissioned by us in July 2023, entitled “Cross-border E-commerce Market Study in RCEP” (the “Frost & Sullivan Report” or “F&S Report”), unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion contains projections for future growth, which may not occur at the rates that are projected or at all.
Cross-border Trade Overview
Traditional cross-border trade refers to foreign trade transactions, mainly the import and export trade of goods. Domestic or foreign manufacturers directly dock with distributors, reach business cooperation through telephone, mail, exhibition marketing, etc., pay for goods in the form of international bank certificates or wire transfers, and finally complete delivery and transportation through sea containers.
Under the multilateral trading system of the World Trade Organization (WTO), the majority of member nations actively participate and collaborate in the formulation of free trade agreements to promote trade flows. The WTO provides the organizational and legal foundation for the trading system among its members, handles trade disputes, and administers various international trade agreements, including the North American Free Trade Agreement (NAFTA), OPEC (Organization of the Petroleum Exporting Countries), and RCEP (Regional Comprehensive Economic Partnership).
The RCEP, the largest free trade area in the world, was signed during the Association of South Asian Nations (ASEAN) Summit on November 15, 2020. It included the 10 ASEAN member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam), together with China, Japan, South Korea, Australia, and New Zealand. By merging existing accords, the RCEP is expected to bring Asian nations closer together, allowing mutually beneficial commercial exchanges, and boosting North East and South East Asian economic integration.
Japan’s Cross-border Trade Overview
Market Size of Japan’s Cross-border Trade Industry
The following chart sets forth the historical and estimated market size for import and export in Japan’s cross-border trade industry measured in USD billion:
Japan Cross-border Trade Market Size and Forecast (2018-2027E)
Source: UN Comtrade Database, Frost & Sullivan
According to UN Comtrade Database and Frost & Sullivan, the market size of cross-border trade in Japan in terms of Gross Merchandised Value (GMV) increased at a CAGR of 2.6%, from USD1486.6 billion in 2018 to USD1646.6 billion in 2022, and is expected to grow further to USD2253.5 billion in 2027 at a CAGR of 6.5%.
The market size of cross-border trade in Japan in terms of GMV for imports is expected to grow to USD1275.1 billion in 2027 at a CAGR of 7.2%. The market size of cross-border trade in Japan in terms of GMV for exports is expected to grow further to USD978.4 billion in 2027 at a CAGR of 5.5%.
88
Table of Contents
China’s Cross-border Trade Overview
Market Size of China’s Cross-border Trade Industry
The following chart sets forth the historical and estimated market size for imports and exports in China’s cross-border trade industry measured in trillion USD:
China Cross-border Trade Market Size and Forecast (2018-2027E)
Source: Frost & Sullivan, General Administration of Customs of PRC
According to General Administration of Customs of PRC and Frost & Sullivan, the market size of cross-border trade in China in terms of Gross Merchandised Value (GMV) grew at a CAGR of 7.9%, from 4.6 trillion USD in 2018 to 6.3trillion USD in 2022 and is expected to grow further to 9.9 trillion USD in 2027 at a CAGR of 9.6%.
The market size of cross-border trade in China in terms of GMV for import grew at a CAGR of 5.9% from 2.1 trillion USD in 2018 to 2.7 trillion USD in 2022 and is expected to grow further to 4.4 trillion USD in 2027 at a CAGR of 10.4%. The market size of cross-border trade in China in terms of GMV for exports grew at a CAGR of 9.4% from 2.5 trillion USD in 2018 to 3.6 trillion USD in 2022 and is expected to grow further to 5.4 trillion USD in 2027 at a CAGR of 8.9%.
Cross-border E-commerce Overview
In recent years, the digitalization of foreign trade has been driven by the development of Internet infrastructure, giving rise to the cross-border e-commerce model. This refers to a series of business activities between trading entities in different national territories that rely on e-commerce platforms to reach deals, complete online ordering, payment, settlement, and delivery through cross-border logistics, customs clearing, and finally complete the transaction. This transformation has weakened the limitations of traditional cross-border trade which is highly dependent on sellers and buyers that has had a long procurement chain and low-profit margin. Today, an increasing number of players are entering the cross-border e-commerce market and may be further bolstered by the RCEP.
RCEP is the first foreign trade agreement (FTA) among Japan and China in Northeast Asia. As part of the world’s top economies, China and Japan are expanding e-commerce cooperation significantly, with Japan ranking first and second, in terms of export and import value in 2022, in addition to ASEAN. With the core basis of assisting the development of ASEAN, RCEP further upgraded in the China-ASEAN FTA “Protocol” fully effected in 2019, in terms of the e-commerce chapter, and encouraged member countries to establish a unified regional economic and trade framework. Late in 2022, China also signed MOUs (memoranda of understanding) for e-commerce cooperation with Singapore, Thailand, Laos, and the Philippines, etc. ASEAN is currently China’s largest commercial partner, with bilateral commerce reaching 6.52 trillion yuan in 2022, a growth of 15.0%, accounting for 50.3% of the total trade volume of RCEP countries.
89
Table of Contents
As the cross-border e-commerce industry expands, there are more segmented divisions:
• Based on the type of transaction, cross-border e-commerce is mainly divided into business-to-business (B2B), and business-to-consumer (B2C). B2B e-commerce refers to transactions between companies and is suitable for domestic suppliers who expect to expand their market through e-commerce because of the large volume of purchases and the types of products involved. B2C e-commerce refers to the sale of products and services by a company directly to the end users of its products or services process.
• In terms of the type of trading platform, it can be divided into platform type and self-operated type. Platform type is a third-party brand or merchant stationed on the online platform to conduct sales activities. The self-operated type is a website where the seller’s sales activities are operated through their website. A hybrid “platform + self-operated” model has been developed.
• According to the cargo flow, it can be divided into exports and imports. Import refers to any goods or services brought from one country to another, while export refers to goods and services produced at home and sold to foreign markets.
Overview of Japan’s Cross-border E-commerce Industry
As the world’s third-largest economy and the world’s fourth-largest e-commerce market, Japan’s growing market size, high level of digitalization, and advanced infrastructure facilities provide a favorable environment for the development of the e-commerce industry. In addition, Japan’s foreign trade accounted for nearly 40% of its total GDP in 2022, and China is a major supplier to Japan and its second-largest buyer. The close trade relationship between the two countries also provides opportunities for the entry of Chinese cross-border e-commerce. With the further spread of e-commerce and the increasing reliance of a new generation of young consumers on online shopping, the strong level of purchasing power of Japanese nationals and the demand for high-quality products can further contribute to the booming development of e-commerce.
The following chart sets forth the historical and estimated market size of Japan’s cross-border B2C e-commerce as measured by GMV in USD billion:
Japan Cross-border B2C E-commerce Market Size and Forecast (2018-2027E)
Source: Frost & Sullivan
According to Frost & Sullivan, the market size of B2C cross-border e-commerce in Japan in terms of GMV grew at a CAGR of 15.0% from USD84.0 billion in 2018 to USD147.0 billion in 2022 and is expected to grow further to USD259.6 billion in 2027 at a CAGR of 12.0%. Among these merchandised goods sold through online platforms, according to Frost & Sullivan, around 63% were originally imported from China in 2022.
Key Growth Drivers to the Japan Cross-border E-commerce
Japan has advanced Internet infrastructure and mature logistics facilities. Japan has a well-developed Internet infrastructure and fast network speed. Its Internet technology is advanced and has a high penetration rate. According to We Are Social, a global social media company, nearly 93% of citizens had access to the Internet in 2021 in Japan. The developed level of information technology in Japan provides a strong foundation for the development of e-commerce. Japan’s well-developed digital economy base is due to the early establishment of a series of strategies,
90
Table of Contents
such as IT nation-building, the construction of domestic information technology infrastructure and the digital economy development process has been effectively promoted. In addition, Japan has efficient management of cross-border logistics, with good logistics infrastructure, supply routes and efficient delivery services, which provide strong support for cross-border e-trade, according to expert interviews conducted by Frost & Sullivan.
Japanese consumers have developed mature online shopping habits. The digitalization of Japan’s new generation of consumers is equally significant for China’s cross-border e-commerce outbound. According to Frost & Sullivan, in September 2022, Japan’s Internet penetration rate was about 94%, covering around 120 million people; 78% of Japanese people had bought products online, compared with 57% in 2017; more than 80% of Japanese people had searched for products or services to buy online, and visited an online retail website or store, both compared with 69% in 2017. This reflects the recognition of Japanese consumers for e-commerce is increasing year by year, along with the higher digitalization of the population and the increasing frequency of online shopping.
More diversified Chinese branding and product to meet Japanese consumer needs. Japan has a well-developed economy, high per capita spending power, and willingness to pay, for example, according to Frost & Sullivan, nearly 90% of Japanese consumers expressed that they are willing to pay higher prices for products with long service life. And with the trend of branding and product diversification in China, Japanese consumers’ demand for product quality and branding can be satisfied, thus helping Chinese brands in the Japanese market entry.
Entry Barriers for Cross-border E-commerce Market in Japan
Comprehensive after-sales service. The offline retail business in Japan began in the 1960s, and after decades of growth, its supply chain has well-developed supporting facilities, and its brick-and-mortar stores have professional service people capabilities and a high service awareness. Given Japan’s small geographical area, dense population, and narrow divide between rich and poor, high-density offline brick-and-mortar retailers may achieve high population coverage, which can improve the efficiency and flexibility of products circulation. As a result, e-commerce development must generate distinct competitiveness, such as delivering a better shopping experience, after-sales support, and convenience.
Premium accounts with local logistics companies. Premium accounts with logistics company discounts are crucial for suppliers looking to cut expenses. While three courier companies controlled more than 80% of the Japanese courier market in 2022, according to Frost & Sullivan, logistics costs have risen, due to rising labor costs, and local head e-commerce companies have begun to build their own logistics systems. For example, Amazon has achieved same-day delivery and free shipping in Japan through its inbound logistics service, and Rakuten has partnered with three major courier service providers, but strategically partnered with Japan Post to build its own logistics system. However, because small and medium-sized cross-border e-commerce businesses lack the skills and cash to construct their own logistics and have less negotiating power, they must establish good collaborative relationships with local logistics providers to ensure a smooth fulfillment experience.
High importance for brand and localization. Japanese consumers tend to buy high-quality, highly rated products and are highly loyal to brands, especially brands with local IPs. In 2022, according to Frost & Sullivan, over 75% of Japanese consumers stated that they can remain loyal to a brand even if they do not have its application. Therefore, for new entrants, local sales selection and branding in Japan is crucial, even though Chinese products are gradually becoming high quality and branded, they are still in the early stages. Therefore, cross-border e-commerce companies need to recruit local talents to help them select products accurately and specify local marketing solutions, such as incorporating localized IPs.
Overview of China’s Cross-border E-commerce Industry
Due to the development of cross-border services, overseas logistics, payment solutions and the facilitation of the regulatory environment, China’s cross-border e-commerce market has seen tremendous growth in market size. In terms of GMV, the overall cross-border e-commerce market in China has been dominated by the cross-border e-commerce export market in the past few years, mainly due to the improved supply chain in China and relatively low labor costs and manufacturing costs. In addition, driven by technological disruption, China’s export product categories are expected to expand from low-end products to high-end products, further driving Chinese brands to foreign countries. Meanwhile, the COVID-19 pandemic has driven online consumption in recent years, further stimulating cross-border e-commerce market growth.
91
Table of Contents
The following chart sets forth the historical and estimated market size for China cross-border e-commerce measured by GMV in trillion USD:
China Cross-border E-commerce Market Size and Forecast (2018-2027E)
Source: Frost & Sullivan
According to Frost & Sullivan, the market size of cross-border e-commerce in China in terms of GMV grew at a CAGR of 17.9% from USD1,209.9 billion in 2018 to USD2,336.0 billion in 2022 and is expected to grow further to USD4,431.0 billion in 2027 at a CAGR of 13.7%.
The market size of cross-border e-commerce in China in terms of GMV for import grew at a CAGR of 18.4% from USD257.1 billion in 2018 to USD505.9 billion in 2022 and is expected to grow further to USD1,021.0 billion in 2027 at a CAGR of 15.1%, according to Frost & Sullivan. The market size of cross-border e-commerce in China in terms of GMV for export grew at a CAGR of 17.7% from USD952.8 billion in 2018 to USD1,830.1 billion in 2022 and is expected to grow further to USD3,410.0 billion in 2027 at a CAGR of 13.3%.
Key Growth Drivers of China’s Cross-border E-commerce
Domestic policies continue to favor the development of cross-border e-commerce. Since 2015, the Chinese State Council has set up 132 cross-border e-commerce pilot zones in six batches, covering more than 30 provinces across the country, to promote smooth logistics and facilitate export customs clearance for cross-border e-commerce. In addition, support policies for small and medium enterprises (SMEs), in terms of credit and other measures, are also provided to promote trade facilitation, which largely promotes innovation in cross-border e-commerce and stimulates the industry’s development. Moreover, China’s Regional Comprehensive Economic Partnership Agreement (RCEP) showed economic merits reflected through closer trade between member countries, i.e., the total value of China’s imports and exports to other RCEP member countries in the first quarter of 2022 increased by 6.9% year-on-year, according to Frost & Sullivan. Meanwhile, the agreement came into effect also reduced tariff costs, more than 90% of the region’s trade in goods is expected to gradually achieve zero tariffs, which may be beneficial for exports.
By shortening the procurement cycle and reducing costs, both buyers and sellers may benefit from higher profits and lower prices. In the traditional offline channel, the transaction includes inquiry, quotation, order, production, transportation, chartering and booking, customs clearance and product inspection, foreign exchange collection, settlement, and write-off. And the whole process is completed by different trading companies which not only involves a wide range of cumbersome procedures but also increases the financial costs of enterprises. And the sales process is often monopolized by importers and distributors of goods, further weakening the bargaining power of manufacturers and reducing profits. But the cross-border e-commerce platform expands the traditional offline transaction channels, SMEs can directly face retailers and consumers, turnaround time and circulation layers are reduced, thereby reducing the cost of goods, the savings in intermediate costs may allow consumers to get more benefits, and enterprises may be used for product development and marketing purpose. Both sellers and consumers may benefit from cost savings and affordable prices, and this model can attract more participants.
Efficient, convenient, and transparent transaction methods can continuously optimize the fulfillment experience and provide additional value to businesses. According to Frost & Sullivan, the development of cross-border e-commerce platforms tends to diversify sales channels, including retailers’ offline to online sales, social media and mobile applications to increase sales channels. With the continuous progress of Internet technology, cross-border
92
Table of Contents
e-commerce platforms continue to optimize the user experience in addition to achieving transparency in the transaction process, allowing buyers to check logistics, customs clearance, and other important information anytime, anywhere, and increasingly perfect after-sales service can also protect consumer rights. In addition, enterprise manufacturers can realize a series of market research purposes, such as consumer insight through transaction data, which can be used to optimize overseas marketing strategy and further brand development for merchants. The convenience, efficiency and added value of online shopping may continue to drive the growth of cross-border e-commerce.
Trends of the Cross-border E-commerce Market
Innovative social e-commerce models were accelerated by the COVID-19 era. According to Frost & Sullivan, due to COVID-19, consumers have become more mature in their online shopping habits, and since the implementation of RCEP, trade exchanges between member countries have increased significantly, especially in ASEAN, with China’s cross-border e-commerce exports to ASEAN countries increasing by 98.5% in the first half of 2022. In addition, as internet penetration continues to increase with over 40 million new internet users in Southeast Asia since 2021, the internet penetration rate rose to 75% in all countries in Southeast Asia, except for Laos, Myanmar, and Timor-Leste. The increase in social media user traffic and traditional placement costs has spurred the development of social commerce to a certain extent, especially under the combination of short video and e-commerce models. The social media platforms provide sellers with more precise user targeting and burst content dissemination mechanisms, assisting sellers with high-quality content in lowering exposure costs. Meanwhile, sellers make full use of KOL (key opinion leader) marketing to generate consumer needs and achieve conversion, which is expected to continue to be mainstream in overseas marketing, while social e-commerce is anticipated to be a broad incremental market in Southeast Asia.
Surging needs for digital marketing due to the rise of direct-to-consumer (“DTC”) model. According to the Ministry of Commerce, it was estimated that the number of DTC platforms had reached approximately 200,000 in 2021. Moreover, over 50% of Chinese foreign retail brands are constructing or operating DTC websites, and 80% of listed Chinese cross-border e-commerce enterprises have their own DTC websites, according to Frost & Sullivan. Through streamlining the distribution process, the sellers can establish stronger bonds with consumers, therefore developing private domain traffic. The key to establishing brand awareness throughout the process is the ability of the sellers to utilize first-hand data from the self-operated platforms to perform in-depth and thorough market research and consumer behavior studies, and subsequently keep pace with market movement and direction, provide precise marketing, as well as iterations of products and services. Specifically, in popular categories, such as apparel, shoes, digital 3C, beauty and personal care, etc., consumers are heavily influenced by social media and celebrities. Thus, to better improve overseas consumer satisfaction and loyalty, social media marketing, including content and KOL marketing, will be compulsory elements for cross-border e-commerce sellers.
Cross-border e-commerce moving towards branding and digitalization. The cross-border e-commerce market tends to be saturated, with over 620,000 B2C vendors as of the third quarter of 2022, according to Frost & Sullivan. Most of the demand can be met by identical products, specifically, the promotion of zero tariffs under RCEP has further improved the price competitiveness of Chinese exporters. For sellers to break through the homogenous competition, two directions will require more efforts; namely, innovation and branding. According to Frost & Sullivan, while product or technology development and innovation require time and capital, most sellers choose to increase competitiveness by leveraging existing advertising and refining operations to realize branding and tighten the relationships with consumers more rapidly. However, more than 90% of existing vendors are in the first stages of branding operations, still employing click farming, pricing wars, etc., and lack significant brand awareness and experience, according to Frost & Sullivan. In this case, the huge market needs signify additional opportunities for the growth of marketing service providers with seasoned expertise and a comprehensive grasp of the local market.
Increasing demand for cross-border e-commerce support service providers. According to Frost & Sullivan, the cross-border e-commerce industry has considerable space for development, enjoying substantial profit margin and a low entry threshold. It attracts many enterprises to participate. To cope with the demand, homogeneous competition and rapidly developing market environment, merchants need to diversify the layout and refine the operation in the whole transaction process, including brand building, product exposure, customer acquisition and conversion, and after-sales service, etc., that involve several digital technology services based on big data, cloud computing, blockchain, such as logistics, cross-border payment, digital marketing, etc. These are offered by professional cross-border e-commerce service providers and have become indispensable. The stable development of cross-border e-commerce would simultaneously drive the growth of demand for related service providers and continuously enrich the ecology of the cross-border e-commerce industry.
93
Table of Contents
The breadth and depth of service requirements vary according to different sellers. Large businesses that have adequate capital and resources to build internal teams and facilities for all facets of e-commerce transactions, may provide support for market entry, scale, and branding to establish market status. The majority of SMEs, however, lack appropriate market knowledge due to a lack of funding and resources. According to Frost & Sullivan, the number of applications from cross-border e-commerce SMEs to open stores on overseas platforms increased by more than 700% year-over-year in the first half of 2022, and the average number of overseas markets per SME operating in 2021 doubled by 2022. Therefore, for SMEs to quickly enter and sustain the market, they are demanding empowerment from mature technology and the experience of e-commerce service providers in all aspects.
Market Overview of Comprehensive Service Provider for Cross-border E-commerce
Comprehensive cross-border e-commerce service providers mostly exist in the form of agency partners, generally by service providers to provide enterprises with all or part of the online store e-commerce outsourcing operation services, including store establishment and operation, product management, consumer management, marketing and promotion, customer service, warehousing, and logistics, IT and consulting services. In addition to the operating business, some service providers will also become the distributors of enterprises, selling products directly to consumers through exclusive agents, or distributing to B2C platforms. Overall, service providers optimize sales performance and improve operational efficiency for merchants through a full range of assistance. This market overview will focus on the following categories:
Cross-border E-Commerce Digital Supply Chain Management: Cross-border e-commerce supply chain involves a series of integration and management of commodities, orders, promotions, warehousing, logistics, and after-sales. Effective supply c
