Confidential Draft No. 1 as confidentially submitted to the Securities and Exchange Commission on May 8, 2020.
This draft registration statement has not been publicly filed with the Securities and Exchange Commission
and all information herein remains strictly confidential.

Registration No. 333-[●]

 

 

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

 

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

 

Sentage Holdings Inc.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   6199   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

501, Platinum Tower, 233 Taicang Rd, HuangPu,

Shanghai City

the PRC

+86-21 5386 0209

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

 

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

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

 

With a Copy to:

 

Ying Li, Esq.

Guillaume de Sampigny, Esq.

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

[Underwriter’s counsel]

 

 

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

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  Amount
to Be
Registered
   Proposed
Maximum
Offering
Price per
Share
   Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee(2)
 
Ordinary shares, par value $1.00 per share(3)                          $           $             
Underwriter Warrants(4)                    
Ordinary shares, par value $1.00 per share, underlying the Underwriter Warrants            $    $        
Total            $    $         

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”). Includes the offering price attributable to additional shares that [●] and [●] (the “Underwriters”) have the option to purchase up to [●] ordinary shares to cover over-allotments, if any.
   
(2) Calculated pursuant to Rule 457(a) under the Securities Act, based on an estimate of the proposed maximum aggregate offering price.
   
(3) In accordance with Rule 416(a), we are also registering an indeterminate number of additional ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
   
(4)

The Registrant will issue to the Underwriters warrants to purchase a number of ordinary shares equal to an aggregate of [●]% of the ordinary shares (the “Underwriter Warrants”) sold in the offering. The exercise price of the Underwriter Warrants equals to [●]% of the offering price of the ordinary shares offered hereby. The Underwriter Warrants are exercisable within [●] years commencing from the effective date of the offering at any time, and from time to time, in whole or in part. Includes warrants to purchase up to [●] ordinary shares subject to the Underwriter’s over-allotment allowance.

 

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

 

 

 

 

 

 

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

 

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS DATED [●], 2020

 

Ordinary Shares

 

 

Sentage Holdings Inc.

 

This is an initial public offering of our ordinary shares. We are offering on a firm commitment basis our ordinary shares, par value $1.00 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 $[●] to $[●] per Ordinary Share. We have reserved the symbol “[●]” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market and plan to apply to list our Ordinary Shares on the Nasdaq Capital Market. It is a condition to the closing of this offering that the Ordinary Shares qualify for listing on the Nasdaq Capital Market.

 

Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 10 to read about factors you should consider before buying our Ordinary Shares.

 

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 49 of this prospectus for more information.

 

Following the completion of this offering, our largest shareholder may beneficially own approximately [●]% of the aggregate voting power of our outstanding Ordinary Shares. As such, we may be deemed a “controlled company” under Nasdaq Marketplace Rules 5615(c). However, even if we are deemed as a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the Nasdaq Marketplace Rules. 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)  $            $              $            

  

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

 

(2) We expect our total cash expenses for this offering (including cash expenses payable to the Underwriters for their out-of-pocket expenses) to be approximately $[●], exclusive of the above discounts. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

 

 

 

 

This offering is being conducted on a firm commitment basis. The Underwriters are obligated to take and pay for all of the Ordinary Shares if any such Ordinary Shares are taken. We have granted the Underwriters an option for a period of [●] days after the closing of this offering to purchase up to [●]% of the total number of the Ordinary Shares to be offered by us pursuant to this offering (excluding Ordinary Shares subject to this option), solely for the purpose of covering over-allotments, at the public offering price less the underwriting discounts. If the Underwriters exercise the option in full, the total underwing discounts payable will be $[●] based on an assumed offering price of $[●] per Ordinary Share, and the total gross proceeds to us, before underwriting discounts and expenses, will be $[●].

 

The Underwriters expect to deliver the Ordinary Shares against payment as set forth under “Underwriting,” on or about [●], 2020.

 

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

 

 

 

[UNDERWRITER LOGO]

 

Prospectus dated [●], 2020.

 

 

 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
   
SUMMARY FINANCIAL DATA 9
   
RISK FACTORS 10
   
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 49
   
ENFORCEABILITY OF CIVIL LIABILITIES 50
   
USE OF PROCEEDS 51
   
DIVIDEND POLICY 52
   
CAPITALIZATION 53
   
DILUTION 54
   
CORORATE HISTORY AND STRUCTURE 55
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 59
   
INDUSTRY 77
   
BUSINESS 87
   
REGULATIONS 117
   
MANAGEMENT 126
   
PRINCIPAL SHAREHOLDERS 131
   
RELATED PARTY TRANSACTIONS 133
   
DESCRIPTION OF SHARE CAPITAL 134
   
SHARES ELIGIBLE FOR FUTURE SALE 149
   
MATERIAL INCOME TAX CONSIDERATION 150
   
UNDERWRITING 157
   
EXPENSES RELATING TO THIS OFFERING 161
   
LEGAL MATTERS 162
   
EXPERTS 162
   
WHERE YOU CAN FIND ADDITIONAL INFORMATION 162
   
INDEX TO FINANCIAL STATEMENTS F-1

 

i

 

 

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.

 

Conventions that Apply to this Prospectus

 

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

 

 

“Affiliated Entities” are to our subsidiaries and the Sentage Operating Companies (defined below);

     
  “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
     
  “Sentage HK” are to Sentage Hong Kong Limited, a Hong Kong corporation, which is the wholly owned subsidiary of Sentage Holdings (defined below);
     
 

“Sentage Holdings” are to Sentage Holdings Inc., an exempted company with limited liability incorporated under the laws of Cayman Islands;

     
 

“Sentage Operating Companies” or “our VIE” are to Daxin Wealth Investment Management (Shanghai) Co., Ltd. (“Daxin Wealth”), Daxin Zhuohui Financial Information Services (Shanghai) Co., Ltd. (“Daxin Zhuohui”), and Qingdao Buytop Payment Services Co., Ltd. (“Qingdao Buytop”), all of which are limited liability companies organized under the laws of the PRC, which we control via a series of contractual arrangements between Sentage WFOE and each of the Sentage Operating Companies;

     
  “Sentage WFOE” are to Shanghai Santeng Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by Sentage HK;
     
  “shares,” “Shares,” or “Ordinary Shares” are to the ordinary shares of Sentage Holdings, par value $1.00  per share;
     
  “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States;
     
  “VIE” are to variable interest entity;
     
  “we,” “us,” or the “Company” are to one or more of Sentage Holdings and its Affiliated Entities, as the case may be; and
     
  “WFOE” are to wholly foreign-owned enterprise;

 

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

 

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

 

ii

 

 

PROSPECTUS SUMMARY

 

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

 

Overview

 

We are a growing financial service provider that offers a comprehensive range of financial services across consumer loan repayment and collection management, loan recommendation, and prepaid payment network services in China. Leveraging a deep understanding of our client base, strategic partner relationships, and valuation models and technologies, we are committed to working with our clients to understand their financial needs and challenges and offering customized services to help them meet their respective objectives.

 

Consumer Loan Repayment and Collection Management

 

Relying on our industry expertise and proprietary technology, our unique approach that integrates internal and external resources under a centralized management system allows us to offer investors a cost-effective and trustworthy solution to recover consumer loans. We have devised and implemented a systematic repayment and collection management process adapted to each stage of a loan. Prior to loan delinquency, we provide investors with services such as repayment record reconciliation and payment reminder and notice. Upon delinquency, our experienced in-house team works on recovering past-due loans during the first three months of delinquency through means that do not require face-to-face interaction. If delinquency exceeds three months, we outsource loan collection services to reputable and local licensed third-party loan collection agencies, whose performance is supervised and evaluated by us under our monitoring system. Specifically, these third-party agencies collect past-due loans through various collection efforts such as professional skip-tracing (i.e. the process of locating a borrower who cannot be found at his or her place of residence or usual hangouts) and on-site visits. After the first six months of delinquency, if all the previous efforts to recover past-due loans remain unsuccessful, and after having received our investors’ express authorizations, we then engage reputable third-party law firms and initiate judicial proceedings against the delinquent borrower on behalf of our investors. As we exclusively rely on third-party resources for on-site visits, our in-house team is able to minimize potential physical confrontation with borrowers and effectively control compliance-related risks. In addition, we coordinate and manage all client engagements and collected information centrally through our Shanghai headquarters. Through our internal management system, we assign and adjust repayment and collection tasks to in-house specialists and third-party collection agencies based on a variety of factors. We believe our centralized management allows us to streamline and standardize the payment and collection management process, effectively monitor compliance level, and increase collection efficiency.

 

We believe that the expertise and service quality of collection specialists is critical to the success of our business. As a result, we place considerable focus on attracting, nurturing, and retaining of our in-house specialists by providing mentorship, continued education, and performance-based promotion track. We carefully select third-party collection agencies based on our rigorous standards and only collaborate with those whose corporate history, past business activities, and internal compliance policies and measures meet our selection criteria. As we strengthen business partnerships with qualified collection agencies and help our in-house specialists accumulate experience over time, we expect continued improvement in productivity and profitability.

 

During the 2019 and 2018 fiscal years, the total amount repaid by borrowers and collected by us and third-party agencies reached RMB18.78 million (approximately US$2.72 million) and RMB82.79 million (approximately US$12.51 million). While we offer services nationwide, we strategically focus on strengthening our presence in second-tier and third-tier Chinese cities where we have observed a strong demand for consumer loans. Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. Our current loan repayment and collection management engagements will all be completed by the middle of 2020. Those investors paid service fees for loan repayment and collection management as part of our service agreements entered at the time of loan facilitation. Such prepayments are recorded as a credit to a liability account for prepayments on our balance sheet. As we provide loan repayment and collection management services to specific investor clients, loan management and collection management fees received from investors in advance are deferred and recognized as revenue over time when designated services are performed. Since the end of 2017, we have not charged any new fees for loan repayment and collection management.

 

For the 2019 and 2018 fiscal years, revenue generated from our consumer loan repayment and collection management services was US$3,618,823 and US$6,389,528, respectively. In the future, we plan to provide our repayment and collection management services to other online consumer finance companies and major commercial banks in China. We believe our proven track record, industry reputation, integrated repayment and collection management approach, and centralized management sets solid foundation for us to develop relationships with prospective clients.

 

Loan Recommendation

 

As part of our strategy to diversify and expand our product and service offering, we started our loan recommendation business in June 2019. Leveraging our advanced credit assessment and risk management capabilities, we carefully evaluate applications and supporting materials submitted by individual borrowers and recommend those borrowers we deem qualified to funding partners, who in return directly provide funds to borrowers recommended by us. We endeavor to provide a transparent, seamless, and convenient recommendation process for both borrowers and funding partners, while safeguarding their respective interests.

 

1

 

 

We provide services including processing paperwork related to borrowers’ applications, evaluating credentials of borrower applicants, and appraising properties to be collateralized through data analysis and on-site inspection. For borrowers we acquired through business contacts, we do not directly charge them any service fee. Instead, referral partners first charge borrowers service fees for their referrals. We then charge the referral partners a commission pursuant to the service agreement between us and the referral partners. Our commission rate for the period from our business launch to December 31, 2019 was 1.5% to 2%. For the borrowers directly acquired by us, we directly charge them service fees as a percentage of the loan amount pursuant to service agreement between us and them. Our service fee rate for the period from our business launch to December 31, 2019 was 1.75% to 3%.

 

We only recommend borrowers who are able to collateralize properties that have been evaluated and approved by our team of experienced in-house appraisers. We are confident that our disciplined, asset-driven risk management approach can effectively minimize borrowers’ default risk, mitigate the impact of a default, and promote sustainable returns for our funding partners. Specifically, we require a current real estate appraisal on all properties that borrowers intend to collateralize. Leveraging our appraisal model and technologies, our experienced in-house appraisers first undertake a rigorous due diligence process involving intensive data collection, review, and analysis to ensure that we understand the state of the market and the risk-reward profile of the property. Our team then conducts a complete visual inspection of the interior and exterior of the property, through which they notice and examine conditions that might adversely affect the property’s value. After consolidating information collected through various channels, our in-house appraisers compare the property with comparable sales based on a set of factors selected to assess specific features of the property and its market conditions. As of the date of the prospectus, through our advanced risk management capabilities, mortgage loans granted to borrowers recommended by us achieved a default rate of zero percent as opposed to an industry average of approximately 3% for similar loans.

 

We continuously work on strengthening our cooperation with funding partners and organically expanding our network of funding partners. As of the date of this prospectus, the Company is working with eight funding partners. We provide our funding partners access to our high-quality borrower applicants base, as well as enhanced credit assessment and risk management capabilities. Our value proposition is further magnified by the repeat lending and cross-selling opportunities we provide to them. Once borrowers are connected to funding partners through our services, funding partners will be able to extend more loans and sell other financial products to such borrowers. As of the date of the prospectus, we deliver value in the form of delinquency rate of zero percent. We acquire our funding partners through word-of-mouth referrals and referrals made by our shareholders and management team members, many of whom have established extensive connections in the financial industry based on their respective years of professional experience. Although subject to regulations on loan recommendation services, our business model does not subject us to the relevant local regulatory requirements that are applicable to online lending platforms since we do not provide online financing intermediary services. We believe our strengthened cooperation with funding partners allows us to sustainably grow our business and mitigate the negative impact brought by the continuing challenging regulatory environment in China.

 

Borrowers are drawn to us because of the convenient access to various mortgage products offered by funding partners, a transparent, easily navigable recommendation process, and a client-centric service approach aiming to understand borrowers’ specific financial needs and match them with mortgage products suitable to their current situation. The number of borrowers who have used our recommendation services has grown rapidly over time through third-party and word-of-mouth referrals. As of December 31, 2019, a total of 26 borrowers had successfully received mortgages from our funding partners through the use of our recommendation services. As of December 31, 2019, our funding partners had approved loans to borrowers recommended by us in the aggregate amount of RMB99.83 million (approximately US$14.45 million). During the period from our business launch to December 31, 2019, we had steadily expanded the scale of our loan recommendation business and reached US$260,388 in revenue.

 

Prepaid Payment Network Services

 

We started providing prepaid payment network services in August 2019, offering seamless, convenient, and reliable payment services to merchants across different industries. Specifically, we offer prepaid cards to individual consumers, who after purchasing such prepaid cards from us, will be able to buy goods and services offed by our merchant customers with their prepaid cards and recharge such cards online. The proceeds generated from the actual sales of the prepaid card are deposited into an escrow account designated and monitored by People’s Bank of China (“PBOC”). Leveraging our partnership with NetsUnion Clearing Corporation (“NetsUnion”) (i.e. the only bank card clearing house and the largest card payment organization offering mobile and online payment services in China), our prepaid payment network services enable qualified merchants selected by us after rigorous internal review to accept prepaid-card payments using traditional payment terminals. Our growing prepaid payment service business enables us to develop a deep understanding of customers’ needs and will allow us to provide merchants with continuously improving services and technologies. During the period from our business launch to December 31, 2019, the revenue generated from our payment services, consisted of technology consulting and support fees, was US$86,052.

 

2

 

 

For merchant customers who need payment-related technical consulting and support, we charge service fees for designing tailored payment solutions, interfacing their internal systems with our prepaid card payment system, and providing their staff with relevant operation training. Depending on the estimated annual transaction amount agreed by us and the particular merchant customer, the technology consulting and support fee ranges from RMB100,000 (approximately US$14,474) to RMB300,000 (approximately US$43,423). For merchant customers who need prepaid card payment services, we charge fees for services, including, but not limited to, collecting and processing information necessary for prepaid card issuance and authorizing transaction requests after verifying transaction information. The prepaid card payment service fee is equal to either (i) 0.3% to 0.5% of each transaction amount or (ii) 0.2% of the estimated annual transaction amount.

 

Our merchant customers choose us because we are a licensed prepaid card issuer capable of offering multipurpose prepaid cards and a licensed payment service provider. In order to issue multipurpose prepaid cards, which can be used to purchase goods and services from a diverse group of merchants across industries and regions, and provide related payment services, a service provider must obtain a third-party payment license that allows such activities. As a result of the tightened control imposed by the PBOC over payment licenses, it has become much harder to obtain such licenses from relevant regulatory bodies in China. A license applicant must undergo a time-consuming application process, be able to pay expensive application fee, and satisfy stringent standards adopted by the regulatory bodies. In light of the strong entry barriers, our payment license is a unique asset that distinguishes us from competitors. Without such license, a prepaid issuer can issue only single-purpose prepaid cards, which is limited to purchasing goods and services provided by the card issuer or companies related to the card issuer.

 

Our proprietary technology systems are critical to the growth of our prepaid payment network business, allowing us to process a large volume of transactions, achieve high level of stability, promote workflow automation, and build an easily scalable business model. Supported by a set of integrated databases, our information system can efficiently process and analyze a high volume of data, securely store the data on a cloud server, and provide each of our departments with convenient access to data. Our account management system allows us to consolidate and manage all our customers’ account information and track the balances of customer accounts in an efficient manner, promoting more transparent management of funds movements. We regularly update our systems to improve their reliability, efficiency and compatibility with our services and evolving regulatory requirements. We believe that our proprietary technology systems will enable us to build a highly automated platform that is compatible with mainstream payment methods and channels across different industries. As of the date of this prospectus, our systems have not encountered any major system interruption.

  

We deliver complementary products and services connecting customers and business partners through our three business lines as illustrated below:

 

 

Through our services, we are able to grow our borrower applicants base and develop enduring relationships with these prospective borrowers by offering them convenient access to funding partners who lend mortgage loans. As most of the borrower applicants are small-to-medium size business owners with the need for payment solutions, we have introduced and plan to provide prepaid payment network services to them. As these small-to-medium size business owners become our prepaid payment network service users, we generate a vast scale of transaction volumes, which provides us with greater insights into user behavior and transaction data. Such accumulated data allows us to further strengthen our credit assessment and risk management capabilities, which attract more funding partners and broaden funding sources for our loan recommendation business. The growth of our loan recommendation business, in return, results in more mortgage loans, which increases lenders’ demand for our repayment and collection management services. Through the process of managing the repayment and collection of loans, we further identify borrowers whose properties meet our selection criteria and introduce those qualified borrowers in short of capital to pay back their existing loans to funding partners through our loan recommendation business. Such multidimensional approach enables us to build a comprehensive suite of services and solutions addressing borrowers’ and lenders’ financial needs across all stages of a loan lifecycle.

 

 

3

 

 

Competitive Strengths

 

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

 

  Scalable, sustainable business model supported by a portfolio of integrated and complementary products and services;
     
  Advanced know-how and compliance-centric business practice for our loan repayment and collection management business;
     
  Unique approach to loan repayment and collection management, supported by proprietary IT systems and infrastructure;
     
  Steadily growing our loan recommendation business with the support of our asset-driven, disciplined risk management approach and distinct funding source advantage resulting from our collaboration with funding partners;
     
 

Growing our prepaid payment network business with the support of reliable, robust technology infrastructure; and

     
 

Experienced and visionary management team and innovative workforce.

 

Growth Strategies

 

Our goal is to become a leading financial service provider that offers a comprehensive range of financial services across consumer loan repayment and collection management, loan recommendation, and prepaid payment network services in China. Specially, we plan to implement the following strategies:

 

  Continue to invest in technology, focusing on artificial intelligence and data analytics;
     
  Strategically grow our loan repayment and collection management business;
     
  Maintain the steady growth of our loan recommendation business by broadening service offering, borrower base, and funding sources; and
     
  Build a cohesive portfolio of prepaid payment network services and expand our customer base for our prepaid payment network business.

 

Our Challenges

 

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

 

 

operate in emerging and evolving industries;

 

4

 

 

 

increased regulatory risk resulting from public complaints against the consumer loan repayment and collection management industry;

 

  ensure our business operations are in compliance with developing and evolving laws and regulations governing the industries in which we are operating in China; 
     
  unexpected reactions from borrowers to our request for payment in the loan repayment and collection management process; 
     
 

obtaining sufficient consumer loans for repayment and collection management;

     
  retaining efficiency in managing the repayment and collection of consumer loans; 
     
  changes in fee arrangements with prospective clients;
     
 

retaining existing and attracting new clients and respond to changes in client preferences for our products and services and provide a satisfactory customer experience;

 

  maintain low delinquency rates among borrowers for loans originated by our intuitional funding partners; 
     
 

obtain accurate and up-to-date credit and other information regarding prospective borrowers for our loan recommendation business; 

 

 

secure adequate funding sources from funding partners at a reasonable cost;

 

 

successfully retain existing business partners including financial institution partners, third-party referral partners, third-party collection agencies, and NetsUnion, and attract new ones; 

 

  continuingly improve and upgrade our risk management guidelines and models to improve our risk management capabilities for the loan recommendation and prepaid payment network businesses; 
     
  retaining experienced employees and attracting talent;
     
 

compete effectively in all the markets in which we operate; and

 

  promote and maintain our brand and reputation.

 

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

 

Corporate Information

 

Our principal executive offices are located at 501, Platinum Tower, 233 Taicang Rd, HuangPu, Shanghai City, the PRC, and our phone number is +86-21 5386 0209. Our registered office in the Cayman Islands is located at Suite #4-210, Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman KY1-1209, Cayman Islands, and the phone number of our registered office is +1-345-814-2857. We maintain a corporate website at www.sentageholdings.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

 

Corporate Structure

 

We are a Cayman Islands exempted company incorporated on September 16, 2019. Exempted companies are Cayman Islands’ companies conducting business mainly outside the Cayman Islands and, as such, are exempted from complying with certain provisions of the Companies Law (2020 Revision).

 

5

 

 

The following diagram illustrates our corporate structure, including our subsidiaries and our VIEs, as of the date of this prospectus and upon completion of this offering based on a proposed number of [●] Ordinary Shares being offered. For more detail on our corporate history, refer to “Corporate History and Structure.”

 

 

Implications of Our Being an “Emerging Growth Company”

 

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

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A;”
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;

 

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  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 $1.07 billion in annual revenue, have more than $700 million in market value of our Ordinary Shares held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

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

 

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

 

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THE OFFERING

 

Ordinary Shares offered by us   [●] million Ordinary Shares
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be in the range of $[●] to $[●] per Ordinary Share.
     
Ordinary Shares outstanding prior to completion of this offering   [●] Ordinary Shares

  

Ordinary Shares outstanding immediately after this offering  

[●] Ordinary Shares assuming no exercise of the Underwriters’ over-allotment option and excluding [●] Ordinary Shares underlying the Underwriter Warrants

 

[●] Ordinary Shares assuming full exercise of the Underwriters’ over-allotment option and excluding [●] Ordinary Shares underlying the Underwriter Warrants

     
Listing   We will apply to have our Ordinary Shares listed on the Nasdaq Capital Market.
     
Nasdaq Capital Market symbol   “[●]”
     
Transfer Agent   [●]
     
Use of proceeds   We intend to use the proceeds from this offering for investment in service and product development, sales and marketing activities, technology infrastructure, capital expenditures, improvement of corporate facilities, and other general and administrative matters. See “Use of Proceeds” on page 51 for more information.
     
Lock-up   All of our directors and officers and our principal shareholders ([5%] or more shareholders) have agreed with the Underwriter, subject to certain exceptions, not to sell, transfer, or dispose of, directly or indirectly, any of our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of [●] months after the effective date of this registration statement. All of our other shareholders have agreed with the Underwriters, subject to certain exceptions, not to sell, transfer, or dispose of, directly or indirectly, any our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of [●] months after the effective date of this registration statement. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
     
Risk factors   The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 10 for a discussion of factors to consider before deciding to invest in our Ordinary Shares.

 

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SUMMARY FINANCIAL DATA

 

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

 

(All amounts in U.S. dollars)

 

Statements of Operations Data:

 

   For the Fiscal Year
Ended
December 31,
2019
   For the
Fiscal Year
Ended
December 31,
2018
 
Revenue  $3,965,263   $6,389,528 
Operating expenses  $1,528,043   $4,825,830 
Income from operations  $2,437,220   $1,563,698 
Provision for Income taxes  $611,362   $386,302 
Net income  $1,834,353   $1,154,512 

 

Balance Sheet Data:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Current assets  $936,093   $607,088 
Total assets  $1,832,075   $2,186,263 
Current liabilities  $1,395,310   $5,046,094 
Total liabilities  $2,605,001   $5,975,219 
Total shareholders’ deficit  $(772,926)  $(3,788,956)

 

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RISK FACTORS

 

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

 

Risks Related to Our Businesses and Industries

 

We have a limited operating history, which makes it difficult to evaluate our future prospects.

 

As we launched our consumer loan repayment and collection management business in 2015, loan recommendation business in June 2019, and prepaid payment network business in August 2019, we only have a limited operating history. Members of our management team have been working together only for a short period of time and are still in the running-in period. They may still be in the process of exploring approaches to running our company and reaching consensus among themselves, which may affect the efficiency and results of our operation.

 

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

 

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

 

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

 

The industries in which we operate, including the consumer loan repayment and collection management industry, loan recommendation industry, and the third-party payment services industry, in the PRC are still in evolving stages. The regulatory framework for these industries remains uncertain for the foreseeable future. Many market players in these industries, including us, are inexperienced in responding to changes of market situations effectively and keep the growth of business steadily when the industries enter a different stage. We may not be able to sustain our historical growth rate in the future.

 

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

 

  offer competitive product and services;
     
  broaden our prospective customer bases across three business lines;
     
  increase the utilization of our products and services by existing customers as well as new customers; 

 

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  maintain and enhance our relationship and business collaboration with our partners, including, but not limited to, develop cooperative relationships with new funding partners to provide borrowers with sufficient, diversified, and cost-effective funding options and maintain strategic partnerships with NetsUnion; 
     
 

navigate a complex and evolving regulatory environment in China; 

 

 

improve our operational efficiency; 

     
 

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

     
 

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

     
 

navigate economic conditions and fluctuation; and 

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

 

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

 

The success of our consumer loan repayment and collection management business depends on our ability to manage the repayment and collection of such loans efficiently. Although investors who currently use our services prepaid us fees for our services, in the future this payment structure might change. Our prospective clients could pay us a certain percentage of the total amount of consumer loans collected as commission; the commission rates will correlate strongly to our collection rates. Furthermore, we have been able to establish our industry reputation largely due to the fact that we have been able to manage the repayment and collection of these loans efficiently. Our ability to manage the repayment and collection of consumer loans may be adversely affected by, among other factors, the borrowers’ inability to repay during economic downturns, the age of the loans, or any issue with our operating portal. If we are unable to manage the repayment and collection of consumer loans efficiently in the future, our business, financial condition and results of operations could be significantly and adversely impacted.

 

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

 

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

 

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

 

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

 

If we are unable to obtain sufficient consumer loans from clients to sustain the operation of our loan repayment and collection management business, our revenue may decline and this loss of revenue could have an adverse impact on our business, results of operation, and financial condition.

 

Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. Although the service fees we have received for collecting these consumer loans currently represent a significant portion of our revenue, we do not expect this trend to continue in the future. However, for us to operate profitably, we must continuously receive a sufficient supply of consumer loans for repayment and collection management from our clients.

 

The availability of consumer loans for repayment and collection management depends on a number of factors outside of our control, including the continued growth of consumer loans in China. The growth in consumer loans may be affected by commercial banks and online consumer finance companies underwriting criteria and government regulations with respect to consumer loans. Any slowing of the consumer loan growth could result in less credit being extended. Therefore, there can be no assurance that our prospective clients will outsource their consumer loans at all, or that we will be able to offer competitive bids or services for consumer loan collection in the future.

 

If we are unable to maintain, develop and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, or if the amount of outsourced consumer loans available in the market for repayment and collection decreases, we may not be able to obtain the same amount of consumer loans from clients as we have in the past. As our current loan servicing and collection management engagements will all be completed by the middle of 2020, unless we expand our consumer loan and collection management business, this loss of revenue could have an adverse impact on our business, results of operation, and financial condition.

 

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

 

If our prospective clients, including commercial banks and online consumer finance companies, decide to develop their own loan collection solution or platform internally or rely on their in-house collection team and other service providers, our loan repayment and collection management business could be adversely affected. For example, prospective clients could require our in-house specialists to sign into their proprietary loan collection system to access borrower information, instead of allowing us to use such information in our system. Since our success partially depends on our ability to use our advanced technology system, clients resorting to such alternate system may deprive us of our competitive advantage. In addition, our clients may decide against the use of third-party service providers altogether by relying on internal and proprietary resources, which could result in the partial reduction our revenue.

 

We may not be able to diversify our operations in loan repayment and collection management successfully.

 

Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. While our business has been profitable, the lack of business diversification makes us vulnerable to market volatility within this particular market segment. We expect to expand our business beyond consumer loans by managing the collection for non-consumer loans. However, the non-consumer loan market is highly competitive. As a new market participant, we may not compete successfully with the current market participants who have substantially longer operating histories and greater financial resources. There is no assurance that the strategy and methods we developed in the collection of consumer loans will be effective in managing the collection of non-consumer loans. If we are not be able to offer competitive services, we may not be able obtain non-consumer loans from prospective clients, which could negatively affect our financial condition and results of operation.

 

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Our employees and collection specialists of third-party agencies may violate our compliance policies and government rules and regulations during the repayment and collection management process.

 

We have compliance policies to instruct and guide our employees during the repayment and collection management process to comply with government rules and regulations. We also have comprehensive compliance protocols in place to monitor the activities of collection specialists of third-party agencies with which we collaborate. However, our employees and third-party collection specialists may not comply with our compliance policies and violate laws and regulations in the repayment and collection management process. They may make verbal or written threats of physical harm, use vulgar or inappropriate language, or agree to unauthorized repayment arrangements with borrowers, among other actions, in order to increase the likelihood of collection. They may use illegal tactics such as impersonation of government officials or fabricated documents to exert influence over borrowers. They may solicit borrower’s personal information illegally and sell such information to third parties for their personal financial gains.

 

Although these are individual acts, these acts may still adversely affect our business, cause reputational damage, or result in monetary penalties or loss of business. If the violations are severe, our clients may terminate our services and cease cooperation with us in the future. In addition, the government may investigate our operations for potential violations of government rules and regulations, which may interrupt our normal operations, and we may be subject to administrative penalties such as monetary penalties or, in the most severe circumstances, suspension of our loan repayment and collection management business. As of the date of this prospectus, government agencies have not initiated any investigation against us for violations during the repayment and collection management process.

 

Borrowers may respond to our request for payment with unexpected reactions.

 

The responsibilities of our in-house collection specialists include, but not limited to, contacting borrowers by telephone and informing borrowers about the disadvantages and potential consequences of having delinquent debts. However, borrowers may not react to our requests for payments rationally.

 

In addition, borrowers have formed groups to strategize against collection service providers, including entrapment arrangements to induce collection specialists to violate compliance policies and laws and regulations. We are aware of the existence of certain online social media groups organized by borrowers to strategize against repayment and collection activities, such as inducing collection specialists to use inappropriate language during the repayment and collection management process and then recording such conversations as evidence against collection service providers in order to claim monetary damages or request reduction or cancellation of their debts.

 

Borrowers’ actions are beyond our control. If any of their threats materializes, such threats may cause significant reputational damage to our operations and/or instigate a government investigation. Our clients may be discouraged from working with us due to the negative publicity caused by borrowers’ actions, which could result in an increase in staff turnover rates, a decrease in revenue, and an adverse impact on our business, financial condition, and results of operations. Government agencies may also initiate formal investigations as result of any materialized threats. As of the date of this prospectus, government agencies have not initiated any investigation against us for violations during the repayment and collection management process.

 

If the scale and growth of our loan recommendation business are restrained by PRC laws and regulations, our business, financial condition, and prospects would be materially and adversely affected.

 

As part of our business model, we provide recommendation services to funding partners under our loan recommendation business, which allow funding partners to access borrowers who have passed our risk assessment. The funding partners make the final credit decision based on their own credit assessment and are also in charge of funding and servicing the loans. See “BusinessLoan Recommendation” for details.

 

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Under the current PRC regulatory regime, the legal definition and regulatory principles of loan recommendation services and specific regulatory requirements regarding the services have not been clarified in any relevant promulgated laws or regulations. However, in light of the evolving and developing nature of the regulatory regime regarding loan recommendation services in China, it is probable that Chinese government will adopt regulations and policies that may temporarily restrain the scale and growth of our loan recommendation services in the future. For more details, see “Regulations—Regulations on Loan Recommendation Services.”

 

Conditions that negatively impact the real estate market in China may affect the loan amount borrowers may receive from funding partners, reduce demand for our loan recommendation business, and adversely impact our business, results of operations, and financial condition.

 

We only recommend borrowers who are able to collateralize properties evaluated and approved by our dedicated team of experienced professionals. The borrowers who have used our loan recommendation services are primarily owners of residential properties in Shanghai City, China. Accordingly, the success of our business is closely tied to the conditions of the real estate market segment in which these borrowers are. Various changes in real estate conditions may impact this market segment. Any negative trends in such real estate conditions may affect the loan amount borrowers may receive from funding partners, the demand for our recommendation services, the accuracy of our property valuation and, as a result, adversely affect our results of operations. These conditions include:

 

  oversupply of, or a reduction in demand for, residential properties;
     
  zoning, rent control or stabilization laws, or other laws regulating the real estate market segment;
     
  changes in the national and local tax code related to real estate;
     
  increased operating costs, including increased real property taxes, maintenance, insurance, and utilities costs; and
     
  potential liability under environmental and other laws.

 

Any or all of these factors could negatively impact the real estate market segment and, as a result, reduce the demand for loans provided by our funding partners or the terms on which they are able to make loans and, as a result, materially and adversely affect us.

 

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

 

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

 

We rely on our risk management model in assessing the creditworthiness of borrowers, the value of collateralized property, and risks associated with loans. If our risk management approach is ineffective, or if we otherwise fail or are perceived to fail to manage the impact of default, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.

 

Our ability to attract borrowers and funding partners to, and build trust in, our loan recommendation business is significantly dependent on our ability to effectively evaluate borrowers’ credit profiles, the likelihood of default, and the value of borrowers’ collateralized properties. We have devised and implemented a systematic credit assessment model and an asset-driven, disciplined risk management approach to minimize a borrower’s default risk and mitigate the impact of default. Specifically, our assessment model and risk management capabilities not only enable us to select high-quality borrowers whose financial conditions and personal background are satisfactory to us, but also protect our funding partners against lending more than they might be able to recover in the case of default. For details on our credit assessment and risk management approach, see “BusinessLoan RecommendationCredit Assessment and Risk Management.”

 

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During the risk management process, appraisals are obtained on the collateral underlying each prospective mortgage. Although we have adopted internal measures to guide the appraisal process and conducted internal review for each appraisal opinion, the quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure to provide an appraisal in the amount necessary to enable funding partners to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the mortgage loans, which could have a material and adverse effect on our reputation, business, and results of operations.

 

There can be no assurance that our risk management measures will allow us to identify or appropriately assess whether the interest and principal payments due on a loan will be repaid when due, or at all, or whether the value of the mortgaged property will be sufficient to otherwise provide for recovery of such amounts. Our risk management measures are narrower than some other competitors because we give primary consideration to the adequacy of the property as collateral rather than focusing on the personal income of the borrower. For example, while we have adopted a multifactor selection process, there is no minimum credit score that a potential borrower must have in order to obtain a recommendation from us. Although we believe that this asset-driven approach is one of our competitive advantages, it may result in higher delinquency and default rates than those experienced by our competitors with broader risk management measures and/or those who require minimum credit scores. Furthermore, if we are unable to identify delinquency, default, and other fraud risks of the borrower through our risk management measures, although we are not legally responsible for such risks, they may still expose us to reputational harm, reduce our industry credibility, and adversely affect our business.

 

On a case by case basis, our in-house credit assessment team may determine that a prospective borrower that does not strictly qualify under our internal guidelines warrants a recommendation exception, based upon compensating factors. Compensating factors may include, but are not limited to, higher borrower net worth or liquidity, stable employment, longer length of time in business and length of time owning the property. If our funding partners lend loans to these borrowers recommended by us, it may result in a higher number of delinquencies and defaults.

 

We also rely on analytical models (both models developed by us and those supplied by third parties) and information and data (both generated by us and supplied by third parties). Models and data will be used to make projections on borrowers’ ability to repay loans and estimate value of collateralized properties. When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. Some of the analytical models we use, such as mortgage default models, are predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to volatility in results. In addition, the predictive models used by us may differ substantially from those models used by other competitors.

 

If any of the foregoing were to occur in the future, our funding partners may try to rescind their affected investments or decide not to invest in loans, or borrowers may seek to revise the terms of their loans or reduce the use of our services, and our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.

 

We rely on our risk management team to establish and execute our risk management policies. If our risk management team or key members of such team were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

We rely on our risk management team to continuously adjust our property valuation method, which is the center of our risk management policies. We rely on our risk management team to spot and fix potential errors and flaws in our property valuation method. Meanwhile, the primary mortgage market in China changes fast and we may need to adjust our risk management principles from time to time to minimize borrowers’ default rate while securing a stable increase in the number of borrowers and satisfying returns for our funding partners. We rely on our risk management team to closely monitor the change in the market and our business and update our risk management principles accordingly. If our risk management team or key members of such team were unable or unwilling to continue in their present positions, we may have to incur additional time and monetary cost to find a replacement to our risk management team that fits us, and our result of business operation and financial conditions may be adversely and severely impacted.

 

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

 

For credit assessment purposes, we obtain certain information of the prospective borrowers from prospective borrowers directly and some from third parties. For more details on our information collection measures, see “Business—Loan Recommendation—Credit Assessment and Risk Management—Information Collection, Verification, and Fraud Detection.” Such information may not be complete, accurate, or reliable. Our credit assessment may not reflect that particular borrower’s actual creditworthiness because the assessment may be based on outdated, incomplete, or inaccurate borrower information. We currently cannot accurately determine whether borrowers have outstanding loans at the time they apply for loans through the use of recommendation services even though we have adopted compliance processes. This creates the risk that a borrower may borrow money through our services in order to pay off loans they have obtained through other funding sources and vice versa. If a borrower incurs additional debt before fully repaying any loan such borrower takes out with our funding partner, the additional debt may impair the ability of that borrower to make repayments on her loan with the funding partner. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally and could result in the financial distress or insolvency of the borrower. As a result, we may incur reputational harms and lose potential or existing business opportunities with our funding partners.

 

Meanwhile, if the price of the quality data increases, we may not get access to the quality information at the same cost in the future. We may be forced to conduct credit assessment with less quality data or pay more for quality information in the future, which could adversely affect our business, financial conditions, and result of the operation.

 

If we are unable to maintain or increase the overall loan volume, if we are unable to retain existing borrowers or attract new borrowers, or if we fail to meet the financial needs of borrowers as they evolve and are therefore unable to capture their long-term growth potential, our loan recommendation business and results of operations will be adversely affected.

 

To maintain the high growth momentum of our loan recommendation business, we must continuously increase the loan volume by retaining current borrowers and attracting additional borrowers. We intend to continue to dedicate significant resources to our borrower acquisition efforts. If there are insufficient qualified loan requests, our funding partners may consider withdrawing from our collaboration, which may result in borrowers being unable to obtain capital through our recommendation services and turning to other sources for their borrowing needs.

 

The overall loan volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers relative to the market rates, the efficiency of our credit assessment process, availability of our funding partners, the macroeconomic environment, and other factors. In connection with the introduction of new services or response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of recommended borrowers, which may negatively affect the growth of loan volume.

 

If any of our current user acquisition channels become less effective, if we are unable to continue to use any of these channels or if we are not successful in using new channels, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers, and may even lose our existing borrowers to our competitors. If we are unable to attract qualified borrowers or if borrowers do not continue to use our recommendation services at the current rates, we might be unable to increase loan volume as we expect, and our business and results of operations may be adversely affected.

 

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Some borrowers may use our loan recommendation services through business contacts, which could expose us to risks associated with such third parties.

 

Some borrowers are referred to us after receiving and reviewing the information provided by a third party. We do not verify, validate or modify any information provided by third-party websites and, while we do not believe we would have liability for such information, it is possible that an unsatisfied borrower could bring claims against us based on such information. Such claims could be costly and time-consuming to defend and would distract management’s attention from the operation of our business and create negative publicity, which could harm our business and affect our reputation. In addition, if the business operation of such third parties deteriorate, the unsatisfied borrowers may associate our company with such third parties, which could harm our business and negatively affect our reputation.

 

If we fail to maintain collaboration with our funding partners, our reputation, results of operations, and financial condition may be materially and adversely affected.

 

Our funding partners typically agree to provide funding to borrowers who meet their predetermined criteria, subject to their credit approval process. While borrowers’ loan requests are usually approved if they fall within the parameters set and agreed upon by us and our funding partners, our funding partners may implement additional requirements in their approval process outside of our monitor and control. Thus, there is no assurance that our funding partners could provide reliable, sustainable and adequate funding, either because they could decline to fund borrowers recommended by us or decline to continue consider qualified borrowers recommended by us.

 

In addition, if PRC laws and regulations impose more restrictions on our collaboration with funding partners, these funding partners will become more selective in choosing business partners for recommendation services, which may drive up the competition among loan recommendation service providers. If our funding partners, which mainly consist of national and regional banks, are restricted from funding loans to borrowers recommended by us in any sense, it may adversely affect our results of operations. Furthermore, if the PRC government issues any laws and regulations that restrict or prohibit our collaboration with our funding partners, our collaboration with our funding partners may have to be terminated or suspended, which may materially and adversely affect our business, financial condition and results of operations.

 

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If our loan recommendation services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

 

To achieve market acceptance of our recommendation services, it is essential for us to maintain and enhance our ability to match and recommend suitable mortgage products for our borrowers and the effectiveness of our credit assessment and property valuation process. If we are unable to respond to changes in borrower preference and deliver satisfactory and distinguishable borrower experience, existing borrowers and prospective borrowers may prefer services provided by competitors or obtain mortgage products directly from funding providers. As a result, loan recommendation applications will decrease, and our services and solutions will be less attractive to funding partners, and our business, financial performance, and prospects will be materially and adversely affected.

 

Our loan recommendation services could fail to attain sufficient market acceptance for many reasons, including:

 

borrowers may not find the features of available mortgage loan products, such as the prices and credit limits, competitive or appealing;

 

we may fail to predict market demand accurately and recommend mortgage products that meet this demand in a timely fashion;

 

borrowers and funding partners using our services may not like, find useful, or agree with the changes we make;

 

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

 

 

there may be negative publicity about our recommendation services; 

 

 

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

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

 

If our loan recommendation services do not maintain or achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be materially and adversely affected.

 

Fluctuations in interest rates could negatively affect our loan origination volume.

 

Most of the mortgages provided by our funding partners are issued with fixed interest rates. Fluctuations in the interest rate environment may discourage funding partners to provide loans for borrowers recommended by us, which may adversely affect our business. Meanwhile, if our funding partners fail to respond to the fluctuations in interest rates in a timely manner, the available mortgage products may become less attractive to borrowers.

 

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Our success depends on the ability to develop products and services to address the rapidly evolving market for third-party payment services, which include prepaid payment network services.

 

As we offer prepaid payment network services, which is a subcategory of third-party payment services, we expect that new products, services and technologies applicable to the third-party payment services industry in which we operate will continue to emerge and evolve. Rapid and significant technological changes continue to shape such industry, including developments in ecommerce, mobile commerce, and proximity payment devices. Other potential changes, such as developments in big data analytics and artificial intelligence, are on the horizon as well. Similarly, there is rapid innovation in the products and services to facilitate business operations, including technology-enabled business services. These new products, services and technologies may be superior to, impair, or render obsolete the payment services we currently offer, or the technologies we currently use to provide them.

 

Incorporating new technologies into our payment services may require substantial expenditures and considerable time, and we may not be successful in realizing a return on these development efforts in a timely manner or at all. There can be no assurance that any new products or services we develop and offer to our customers will achieve significant commercial acceptance. Our ability to develop new products and services may be inhibited by industry-wide standards, laws and regulations, payment networks, resistance to change from customers, or third parties’ intellectual property rights. The planned timing for introduction of new products and services is subject to risks and uncertainties. We cannot assure you that any of our new payment products and services will achieve widespread market acceptance and generate incremental revenue. Moreover, actual timing may differ materially from original plans. Unexpected technical, distribution or other problems could delay or prevent the introduction of our new products and services. If we are unable to provide enhancements and new features for our prepaid payment network services or keep pace with rapid technological developments and evolving industry standards, our business, results of operations, and financial condition would be materially and adversely affected.

 

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

 

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

 

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

 

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

 

low levels of consumer and business confidence associated with recessionary environments may reduce spending of consumers;

 

financial institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder defaults; and

 

government intervention and regulation, and/or reduction in government investments in our customers, may reduce their desire to use our products and services.

 

We are subject to extensive regulations in the third-party payment services industry. Non-compliance with or changes to the regulations or licensing regimes may materially affect our business operations and financial results.

 

We are subject to extensive regulations in the third-party payment services industry. Non-compliance with or changes to the regulations or licensing regimes may materially affect our business operations and financial results.

 

As prepaid payment network services is a subcategory third-party payment services, we are subject to the regulations applicable to the third-party payment services industry, which is implemented and monitored by several regulatory authorities, such as PBOC, CSRC, SAFE, NDRC and CBIRC. There are laws and regulations that cover different aspects of the industry including entry into such businesses, scope of permitted activities, licenses and permits for various operations and pricing. Major laws and regulations that govern our prepaid payment network business include or may in the future include those relating to payment services, such as payment processing and settlement, money transfer, foreign exchange, anti-money laundering and financial consumer protection, insurance and financial services. See “Regulations—Regulations on Prepaid Payment Network Services.”

 

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As the third-party payment services industry in China is emerging and evolving, the applicable laws, rules, and regulations are continually developing and evolving. Any changes in the relevant rules and regulations may result in an increase in our cost of compliance or might restrict our business activities. If we fail to continuously comply with the applicable rules, regulations, we may face fines or restrictions on our business activities, or even a suspension or revocation of some or all of our licenses that allow us to carry on our business activities. Furthermore, the PRC government may institute new licensing regimes covering our current and future services offerings. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

 

Our efforts to expand our payment service offerings may not succeed and may reduce our revenue growth.

 

While we intend to continue to broaden the scope of our payment services, we may not be successful in deriving any significant revenue from them. Failure to do so may inhibit the growth of our business, as well as increase the vulnerability of our core payments business to competitors who offer a full suite of products and services. Furthermore, we may have limited or no experience in our newly expanded markets. We cannot assure you that any of our new payment services will be widely used. These offerings may present new technology, operational, and other challenges. If we experience service disruptions, failures, or other issues, our business may be materially and adversely affected. Our newly expanded business operations may not recoup our investments in a timely manner or at all. If any of these were to occur, it could damage our reputation, limit our growth, and materially and adversely affect our business, results of operations and financial condition.

 

If we are unable to provide customers with satisfactory experience, or otherwise fail to maintain or enlarge our customer base, the volume of transaction processed via our prepaid payment network services may decline and our results of operations may be adversely affected.

 

We believe that customer base is the core building block of our prepaid payment network business, and our ability to provide customers with satisfactory experience is critical to our success and continuous growth in revenue and customer base. If we fail to deliver satisfactory and distinct user experience, we may lose our customers and business partners, resulting in a decrease in the volume of transaction processed via our payment services, and our results of operations may be adversely affected. Our ability to provide customers with satisfactory experience is subject to a number of factors, including our ability to provide effective services, our ability to continuously innovate and improve our services to meet customer needs, and our access to and cooperation with our business partners. We may lose customers and revenue, and our results of operations could be materially and adversely affected if we fail to provide satisfactory experience to our customers.

 

We are dependent on NetsUnion, and any changes to its rules or practices could harm our prepaid payment network business.

 

According to the PBOC, after June 30, 2018, third-party payment service providers, which include prepaid payment network service providers, are required to channel internet payments via NetsUnion, rather than banks’ payment gateways. As a result, we rely on NetsUnion to process transactions on our behalf. However, NetsUnion may fail or refuse to process transactions adequately, may breach its agreement with us, or may refuse to renew the agreement on commercially reasonable terms. It may also take actions that downgrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including that of its own. If we are unsuccessful in establishing or maintaining mutually beneficial relationship with NetsUnion, our business may be harmed.

 

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NetsUnion requires us to comply with its network operating rules, including special operating rules that apply to us as a provider of payment services to customers. These rules are set by NetsUnion, who have the discretion to its interpretation and alteration. If there is any interpretation of, or alteration to the network rules that are inconsistent with the way we currently operate, we may be required to make changes to our business operation. This could be costly or difficult to implement. If we fail to make such changes or otherwise resolve the issue with NetsUnion, we could be fined or prohibited from processing prepaid cards. In addition, violations of the network rules or failure to maintain good relationships with NetsUnion could increase our costs or otherwise harm our prepaid payment network business.

 

Our current risk management system and internal control policies and procedures may not be able to exhaustively address or mitigate all risks to which we are exposed through our prepaid payment network business.

 

We are subject to various kinds of risks, including business risks, operational risks and financial risks. Currently, we rely on our data driven risk management system, and internal control policies and procedures to address and mitigate these risks. See “BusinessPrepaid Payment Network ServicesRisk Management and Internal Control.” Our limited experience in providing prepaid payment network services may render risk management less effective in addressing some of the risks, exacerbating our risk exposure. Additionally, our data-driven risk management system and internal control policies and procedures may not be able to exhaustively mitigate our exposure to these risks. We cannot assure you that our assessment and monitoring of risks will always be sufficient. Any insufficiency in our risk management system and internal control policies and procedures may have a material adverse effect on our business, results of operations, and financial condition.

 

Fraudulent and fictitious transactions, and misconducts committed by our employees, customers, and other third parties may pose challenges to our risk management capabilities, and failure to manage the related risks may adversely affect our business, financial condition, and results of operations.

 

As our prepaid payment network business grows and we diversify our service offerings, we may be subject to liability for fraudulent payment transactions by customers, in particular, fraudulent chargeback and use of counterfeit cards. Fraud or other misconduct committed by our employees, customers, or other third parties may be difficult to detect or prevent. Such fraud or misconduct could subject us to financial losses and regulatory sanctions as well as seriously damage our reputation. We cannot assure you that all of our employees and customers and other third parties will fully comply with our risk management policies, measurements and procedures for preventing fraud and other misconduct. We cannot assure that we will always be able to identify and prevent all fraud and other misconduct by our employees and customers and other third parties. Future fraud or other misconduct by our employees and customers and other third parties could damage our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. Fraudulent activities have become increasingly sophisticated. Incidents of frauds could increase in the future. Our measures to detect and reduce the risk of fraud need to be continually improved to effectively guard against new and evolving forms of fraud, or frauds in connection with our new products and services. Substantial costs may be incurred in improving such security measures. Failure to effectively identify and address these risks could lead to losses, regulatory penalties, or even regulatory restrictions to our business operations, which will adversely affect our business, financial condition, and results of operations. See “BusinessPrepaid Payment Network Services—Risk Management and Internal ControlFraud.”

 

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

 

The industries in which we are operating are competitive and evolving. With respect to loan repayment and collection management and loan recommendation, we compete with market players such as traditional financial institutions, small loan companies, e-commerce driven installment platforms, and other consumer finance platforms. For repayment and collection management, our major competitors include China Data Group (Suzhou) Limited, M&Y Global Services, and Promisechina (Shanghai) Investment Co., Ltd. For loan recommendation, we primarily compete with institutions such as Shanghai Qingpu Real Estate Investment Property Co., Ltd, Shanghai Hongkou Real Estate Service Co., Ltd. and Shanghai Yangpu Public Housing Asset Management Co., Ltd. With respect to prepaid payment network services, we primarily compete with other third-party payment service providers in China, including Shandong Chenglian Card Payment Co., Ltd., Qingdao Baisentong Payment Co., Ltd. and Shandong Feiyin Intelligent Technology Co., Ltd.

 

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

 

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

 

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

 

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

 

 

maintain the quality and reliability of our products and services; 

     
 

provide our customers with a satisfactory and distinguished customer experience; 

     
 

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

     
  effectively manage and resolve customer complaints; and 
     
 

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

 

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

 

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

 

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

 

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

 

Furthermore, we rely on certain third-party service providers, such as borrower acquisition partners, data providers, and third-party collection agencies, to conduct our business. If these service providers failed to function properly, we cannot assure you that we would be able to find an alternative in a timely and cost-efficient manner or at all. We enter into collaboration contracts with fixed terms with such service providers. However, we cannot assure you that we can renew such collaboration agreements once they expire, or we can renew such agreements with the term we desire. Such service providers may also be demanded by their investors not to work with us, or form alliance to seek better terms dealing with us. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers, inability to attract borrowers, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition, and results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our business is materially dependent on our proprietary operating portal and IT systems. Development and maintenance of our proprietary operating portal and IT systems are time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our operating portal and IT systems from functioning properly and consequently adversely affect our information infrastructure and our business. If our IT systems cease to work, become unavailable, or experience significant interruption, we may be prevented from operating business normally.

 

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

 

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

 

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

 

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

 

Our success depends in a large part on our technology and IT infrastructure. We use these systems to identify, locate and contact borrowers and record the results of our collection efforts, manage merchant accounts and behavior and transaction data, and store and analyze borrower information to establish a comprehensive borrower profile for prospective borrowers who submitted their loan recommendation applications. If we are not able to respond to advances in telecommunications and computer technologies in a timely manner, we may not be able to remain competitive. We have made significant investments in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Although we will continue to devote significant resources to enhance and develop our technologies, we cannot assure you that we will have the capital resources available to invest in new technologies, and we may not be able to implement technology updates on a timely basis, or at all. In addition, new technologies may not succeed or integrate well with our existing systems and infrastructure, and even if integrated, may not function as expected. As telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, we may not be successful in anticipating new technology trends or adopt technological changes on a timely basis. If any of the foregoing were to occur in the future, our business and results of operation could be materially adversely affected.

 

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

 

We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. See “Business— Intellectual Property.” However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated or circumvented, or such intellectual property will be sufficient for providing us with competitive advantages. In addition, other parties may misappropriate our intellectual property rights, which would cause us to suffer economic or reputational damages. Because of the rapid pace of technological change, nor can we assure you that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

the failure to successfully further develop the acquired technology; 

 

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

 

 

potential disruptions to our ongoing businesses; and 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our business may be adversely affected by instability, disruption or destruction in a geographic region of China in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, flood, fire, earthquake, storm or pandemic events and spread of disease, including the recent outbreak of the new coronavirus commonly referred to as “COVID-19”. The COVID-19 outbreak, first found in mainland China, then in Asia, and eventually throughout the world, may significantly affected business, results of operation, and financial conditions. The COVID-19 outbreak may cause an increase in borrowers’ default and delinquency risks. Specifically, the COVID-19 outbreak may give rise to economic downturn and other significant changes in regional and global economic conditions. As a result, borrowers’ default and delinquency risks might increase as they experience unemployment or generate less income. Subsequently, higher default and delinquency risks may require us to dedicate more resources to maintain our current collection rate for the loan repayment and collection management business and pose risk-management challenges for our loan recommendation business, increasing our operating costs. In addition, depends on the duration and spread of the outbreak, the COVID-19 outbreak may have an adverse impact on the real estate market in the Shanghai area and other first-tier cities we target, subsequently decreasing the total loan amount borrowers are able to obtain through our services, bringing down our service fee, which is based on specific loan amount, and adversely impacting our revenue from the loan recommendation business. As the majority of our merchant customers are retailers whose businesses have been adversely affected by the COVID-19 outbreak, the outbreak may also cause our merchant customers to stop or delay using our prepaid payment network services, adversely impacting our revenue from the prepaid payment network business.

 

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

 

Our business has been adversely impacted by the COVID-19 outbreak. In the beginning of February 2020, we had to temporarily suspend our prepaid payment network services due to government restrictions. Throughout the COVID-19 outbreak, we managed to promptly implement a series of response measures, including full work force resume remotely by the end of February. We fully resumed our operation on March 10, 2020.

 

Due to the continuous and rapid development of the COVID-19 outbreak, the full impact of the COVID-19 outbreak on our business is currently unknown. 

 

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

 

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

 

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

 

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

 

We have not independently verified the data and information contained in such third-party publications and reports. Data and information contained in such third-party publications and reports may be collected using third-party methodologies. In addition, these industry publications and reports generally indicate that the information contained therein was believed to be reliable, but do not guarantee the accuracy and completeness of such information.

 

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

 

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

 

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

 

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

 

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, we may be unable to insure against certain types of losses or claims, or the cost of such insurance may be prohibitive. Uninsured losses or claims, if they occur, could have a material adverse effect on our reputation, business, results of operations, financial condition, or prospects.

 

Risks Relating to Our Corporate Structure

 

Our corporate structure, in particular our VIE arrangements (the “VIE Arrangements”) with the Sentage Operating Companies and all the shareholders of the Sentage Operating Companies (the “Sentage Operating Companies Shareholders”), are subject to significant risks, as set forth in the following risk factors.

 

Our VIE Arrangements with the Sentage Operating Companies and the Sentage Operating Companies Shareholders may not be effective in providing control over the Sentage Operating Companies.

 

A substantial part of our current revenue and net income is derived from the Sentage Operating Companies. We do not have an entity ownership interest in the Sentage Operating Companies but rely on VIE Arrangements with them to control and operate their business. However, the VIE Arrangements may not be as effective in providing us with the necessary control over the Sentage Operating Companies and their operations. Any deficiency in these VIE Arrangements may result in our loss of control over the management and operations of the Sentage Operating Companies, which will result in a significant loss in the value of an investment in our company. We rely on contractual rights through our VIE Arrangements to effect control over and management of the Sentage Operating Companies, which exposes us to the risk of potential breach of contract by the Sentage Operating Companies Shareholders.

 

Our VIE Arrangements with the Sentage Operating Companies are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these VIE Arrangements.

 

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

 

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We may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial condition.

 

A substantial part of our business is conducted through the Sentage Operating Companies, which currently are considered for accounting purposes as VIEs, and we are considered the primary beneficiary, enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we hold as a VIE would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for PRC purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s financial results in our consolidated financial statements for PRC purposes. If such entity’s financial results were negative, this could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting principles, practices, and methods used in preparing financial statements for PRC purposes from the principles, practices, and methods generally accepted in the United States and in the SEC accounting regulations must be discussed, quantified, and reconciled in financial statements for the United States and SEC purposes.

 

The VIE Arrangements between Sentage WFOE and each of the Sentage Operating Companies may result in adverse tax consequences.

 

PRC laws and regulations emphasize the requirement of an arm’s length basis for transfer pricing arrangements between related parties. The laws and regulations also require enterprises with related party transactions to prepare transfer pricing documentation to demonstrate the basis for determining pricing, the computation methodology, and detailed explanations. Related party arrangements and transactions may be subject to challenge or tax inspection by the PRC tax authorizes.

 

Under a tax inspection, if our transfer pricing arrangements between Sentage WFOE and each of the Sentage Operating Companies are judged as tax avoidance, or related documentation does not meet the requirements, Sentage WFOE and each of the Sentage Operating Companies may be subject to material adverse tax consequences, such as transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purpose, of adjustments recorded by Sentage WFOE, which could adversely affect us by (i) increasing Sentage Operating Companies’ tax liabilities without reducing our subsidiaries’ tax liabilities, which could further result in interest being levied to us for unpaid taxes; or (ii) limiting the ability of our PRC companies to maintain preferential tax treatment and other financial incentives.

 

Our controlling shareholder has potential conflicts of interest with our company which may adversely affect our business.

 

Ms. Qiaoling Lu is our controlling shareholder and chief executive officer. Given her significant interest in our company, there is a risk that when conflicts of interest arise, Ms. Lu will not act completely in the best interests of our shareholders (as opposed to her personal interest) or that conflicts of interests will be resolved in our favor. For example, she may determine that it is in the Sentage Operating Companies’ interests to sever the VIE Arrangements with us, irrespective of the effect such action may have on us. In addition, she could violate her fiduciary duties by diverting business opportunities from us to others, thereby affecting the amount of payment the Sentage Operating Companies are obligated to remit to us under the VIE Arrangements.

 

Our board of directors is comprised of a majority of independent directors. These independent directors may be in a position to deter and counteract the actions of our officers or non-independent directors (including, potentially, Ms. Lu) that are against our interests. We cannot, however, give any assurance as to how the independent directors will act in any given circumstance. Further, if we or the independent directors cannot resolve any conflicts of interest between us and those of our officers and directors who are management members of our affiliated companies in the PRC, we would have to rely on legal proceedings, which could result in the disruption of our business.

 

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In the event that you believe that your rights have been infringed under the securities laws or otherwise as a result of any one of the circumstances described above, it may be difficult or impossible for you to bring an action against us or our officers or directors whom reside within in the PRC. Even if you are successful in bringing an action, the PRC laws may render you unable to enforce a judgment against our assets and management, all of which are located in the PRC.

 

The Sentage Operating Companies Shareholders have potential conflicts of interest with us, which may adversely affect our business and financial condition.

 

The Sentage Operating Companies Shareholders may have potential conflicts of interest with us. These shareholders may not act in the best interest of Sentage Holdings or may breach, or cause Sentage Operating Companies to breach the existing VIE Arrangements we have with them and the Sentage Operating Companies, which would have a material and adverse effect on our ability to effectively control the Sentage Operating Companies and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with the Sentage Operating Companies to be performed in a manner adverse to us by, among other things, failing to remit payments due under the VIE Arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of us or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and us, except that we could exercise our purchase option under the exclusive purchase option agreements with these shareholders to request them to transfer all of their equity interests in the Sentage Operating Companies to a PRC entity or individual designated by us, to the extent permitted by PRC law. If we cannot resolve any conflicts of interest or disputes between us and those individuals, we would have to rely on legal proceedings, which may materially disrupt our business. There is also substantial uncertainty as to the outcome of any such legal proceeding.

 

We rely on the approval certificates and business license held by the Sentage Operating Companies and any deterioration of the relationship between Sentage WFOE and any of the Sentage Operating Companies could materially and adversely affect our overall business operations.

 

Pursuant to the VIE Arrangements, a substantial part of our business in the PRC will be undertaken on the basis of the approvals, certificates, business licenses, and other requisite licenses held by each of the Sentage Operating Companies. There is no assurance that all the Sentage Operating Companies will be able to renew their licenses or certificates when their terms expire with substantially similar terms as the ones they currently hold.

 

Further, our relationship with each of the Sentage Operating Companies is governed by the VIE Arrangements, which are intended to provide us, through our indirect ownership of Sentage WFOE, with effective control over the business operations of each of the Sentage Operating Companies. However, the VIE Arrangements may not be effective in providing control over the applications for and maintenance of the licenses required for our business operations. Each of the Sentage Operating Companies could violate the VIE Arrangements, go bankrupt, suffer from difficulties in its business, or otherwise become unable to perform its obligations under the VIE Arrangements and, as a result, our operations, reputation, business, and stock price could be severely harmed.

 

The exercise of our option to purchase part or all of the equity interests in each of the Sentage Operating Companies under the exclusive purchase option agreement might be subject to approval by the PRC government. Our failure to obtain this approval may impair our ability to substantially control all the Sentage Operating Companies and could result in actions by Sentage Operating Companies that conflict with our interests.

 

Our exclusive purchase option agreement with each of the Sentage Operating Companies gives Sentage WFOE the option to purchase all or part of the equity interests in each of the Sentage Operating Companies. However, the option may not be exercised if the exercise would violate any applicable laws and regulations in the PRC or cause any license or permit necessary for the operation of each of the Sentage Operating Companies to be cancelled or invalidated. Under the PRC laws, if a foreign entity, through a foreign investment company that it invests in, acquires a domestic related company, China’s regulations regarding mergers and acquisitions would technically apply to the transaction. Application of these regulations requires an examination and approval of the transaction by Ministry of Commerce of the PRC (the “MOFCOM”), or its local counterparts. Also, an appraisal of the equity or assets to be acquired is mandatory. We cannot guarantee you that we can pass such examination and get the approval to acquire each of the Sentage Operating Companies. If we are not able to purchase the equity of each of the Sentage Operating Companies, then we will lose a substantial portion of our ability to control Sentage Operating Companies and our ability to ensure that Sentage Operating Companies will act in our interests.

 

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Because we rely on the exclusive business cooperation agreement with each of the Sentage Operating Companies for our revenue, the termination of this agreement will severely and detrimentally affect our continuing business viability under our current corporate structure.

 

We are a holding company and a substantial part of our business operations are conducted through the VIE Arrangements between each of the Sentage Operating Companies and Sentage WFOE. As a result, we currently rely for our revenue on dividends payments from Sentage WFOE after it receives payments from each of the Sentage Operating Companies pursuant to the exclusive business cooperation agreement. The term of the exclusive business cooperation agreement remains effective unless the agreement is explicitly terminated by Sentage WFOE through written form or other means specified therein. None of the Sentage Operating Companies has the right to terminate that agreement unilaterally. Because neither we nor our subsidiaries own equity interests of the Sentage Operating Companies, the termination of the exclusive business cooperation agreement would sever our ability to continue receiving payments from the Sentage Operating Companies under our current holding company structure. While we are currently not aware of any event or reason that may cause the business cooperation agreement to terminate, we cannot assure you that such an event or reason will not occur in the future. In the event that the exclusive business cooperation agreement is terminated, this may have a severe and detrimental effect on our continuing business viability under our current corporate structure, which, in turn, may affect the value of your investment.

 

Risks Relating to Doing Business in the PRC

 

There are uncertainties under the Foreign Investment Law relating to the status of businesses in China controlled by foreign invested projects primarily through contractual arrangements, such as our business.

 

The Administrative Measures of People’s Bank of China on Payment Services Provided by Non-financial Institutions (Order of the People’s Bank of China (2010) No. 2, “Order No.2”) (中国人民银行令[2010]第2号《非金融机构支付服务管理办法》) was promulgated by the PBOC on June 14, 2010. According to the Order No. 2, the business scope of a foreign-invested payment institutions, the qualification conditions, and the allowed ratio of contribution of the payment institution’s foreign investors shall be stipulated by the PBOC and submitted to the State Council for approval. According to “Announcement No. 7 of the People’s Bank of China (2018) (《中國人民銀行公告(2018)第7號》”) (the “No. 7 Announcement”), which was issued by the PBOC and became effective on March 19, 2018, upon approval by the State Council, pursuant to the Law of the People’s Republic of China on the People’s Bank of China and the Order No. 2, foreign-invested payment institutions should satisfy regulatory requirements relevant to foreign-invested payment institutions. According to the Order No.2 and the No.7 Announcement, our VIE, Qingdao Buytop, is considered a payment institution as it provides prepaid payment network services. To comply with PRC laws and regulations on foreign ownership and investment in companies that engage in certain businesses including third-party payment services, we rely on VIE Arrangements with our VIEs to operate such business in China.

  

The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015, or the “2015 FIL Draft,” which expanded the definition of foreign investment and introduced the principle of  “actual control” in determining whether a company is considered an foreign-invested enterprise. Under the 2015 FIL Draft, VIEs that are controlled via contractual arrangement would also be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC, which came into effect on January 1, 2020, repealing simultaneously the Law of the PRC on Sino-foreign Equity Joint Ventures, the Law of the PRC on Wholly Foreign-owned Enterprises, and the Law of the PRC on Sino-foreign Cooperative Joint Ventures, together with their implementation rules and ancillary regulations. Pursuant to the Foreign Investment Law, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises, or other organizations, including investment in new construction project, establishment of foreign funded enterprise or increase of investment, merger and acquisition, and investment in any other way stipulated under laws, administrative regulations, or provisions of the State Council of the PRC (the “State Council”). Although the Foreign Investment Law has deleted the particular reference to the concept of “actual control” and contractual arrangements in the 2015 FIL Draft, there is still uncertainty regarding whether our VIEs would be identified as a foreign-invested enterprise in the future. As a result, we cannot assure you that the Foreign Investment Law, when it becomes effective, will not have a material and adverse effect on our ability to conduct our business through our VIE Arrangements.

 

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If we are deemed to have a non-PRC entity as a controlling shareholder, the provisions regarding control through contractual arrangements could reach our VIE arrangements, and as a result Sentage Operating Companies could become subject to restrictions on foreign investment, which may materially impact the viability of our current and future operations. Specifically, we may be required to modify our corporate structure, change our current scope of operations, obtain approvals, or face penalties or other additional requirements, compared to entities which do have PRC controlling shareholders. Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance, and business operations.

 

It is uncertain whether we would be considered as ultimately controlled by Chinese parties. Ms. Qiaoling Lu, our chief executive officer and a PRC citizen, beneficially and indirectly owns 78.7% of our outstanding voting securities. It is uncertain, however, if these factors would be sufficient to give them control over us under the Foreign Investment Law. If future revisions or implementation rules of the Foreign Investment Law mandate further actions, such as the MOFCOM market entry clearance or certain restructuring of our corporate structure and operations, there may be substantial uncertainties as to whether we can complete these actions in a timely manner, if at all, and our business and financial condition may be materially and adversely affected.

 

Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations.

 

Substantially all of our assets and operations are currently located in China. Accordingly, our 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 our business and operating results, reduce demand for our products, and weaken our 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 us. For example, our 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 our business and operating results.

 

Uncertainties in the interpretation and enforcement of PRC laws and regulations 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. Our PRC Affiliated Entities 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

On July 4, 2014, State Administration of Foreign Exchange (“SAFE”) issued the Circular on Issues Concerning Foreign Exchange Control over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or “SAFE Circular 37.” According to SAFE Circular 37, prior registration with the local SAFE branch is required for PRC residents, (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose), in connection with their direct or indirect contribution of domestic assets or interests to offshore special purpose vehicles, or “SPVs.” SAFE Circular 37 further requires amendments to the SAFE registrations in the event of any changes with respect to the basic information of the offshore SPV, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore SPV, such as an increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or “SAFE Notice 13,” effective in June 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of 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 Notice 13, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions, the failure of which may subject such PRC individual to warnings, fines, or other liabilities.

 

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Our current shareholders, Qiaoling Lu, Yiheng Guo, Hua Wang and Jianxiu Li, who are subject to the SAFE Circular 37 and Individual Foreign Exchange Rules, have completed the initial registrations with the qualified banks as required by the regulations. We may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, however, and we have no control over any of our future beneficial owners. Thus, we cannot provide any assurance that our current or future PRC resident beneficial owners will comply with our request to make or obtain any applicable registrations or continuously comply with all registration procedures set forth in these SAFE regulations. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject us or our PRC resident beneficial owners to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiary’s ability to distribute dividends to or obtain foreign-exchange-dominated loans from us, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

 

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

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration, statutory limitations on amount, and approval requirements. The amount of capital contributions that we may make to Sentage WFOE is approximately $100,000, without obtaining approvals from SAFE or other government authorities. Additionally, Sentage WFOE may increase its registered capital to receive additional capital contributions from us and currently there is no statutory limit to increasing its registered capital, subject to satisfaction of applicable government and filing requirements. For any amount of loans that we may extend to Sentage WFOE, such loans must be registered with the local counterpart of SAFE. For more details, see “Regulations—Regulations on Foreign Exchange.” These PRC laws and regulations may significantly limit our ability to use the RMB converted from the net proceeds of this offering to fund the establishment of new entities in China by our PRC subsidiary or to invest in or acquire any other PRC companies through our PRC subsidiary. Moreover, we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our business, including our liquidity and our ability to fund and expand our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

If the PRC tax authorities determine that the actual management organ of Sentage Holdings is within the territory of China, Sentage Holdings 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, Sentage Holdings has not been notified or informed by the PRC tax authorities that it has been deemed to be a resident enterprise for the purpose of the EIT Law, we cannot assure you that it will not be deemed to be a resident enterprise in the future.

 

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

 

In February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or “SAT Circular 7.” SAT Circular 7 provides comprehensive guidelines relating to indirect transfers of PRC taxable assets (including equity interests and real properties of a PRC resident enterprise) by a non-resident enterprise. In addition, in October 2017, SAT issued an Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or “SAT Circular 37,” effective in December 2017 and amended in June 2018, which, among 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.

 

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

 

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

 

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, our PRC subsidiary may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expend valuable resources to comply with the SAT circulars or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

Our PRC subsidiary is 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 our PRC subsidiary to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its respective accumulated profits each year, if any, to fund certain statutory reserves until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiary may also allocate a portion of its respective after-tax profits based on PRC accounting standards to employee welfare and bonus funds at its discretion. These reserves are not distributable as cash dividends. These limitation on the ability of our PRC subsidiary 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The approval of the China Securities Regulatory Commission, or the “CSRC,” may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval, in which case we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek 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 has advised us based on their understanding of the current PRC law, rules, and regulations that the CSRC’s approval is not required for the listing and trading of our shares on the Nasdaq Capital Market in the context of this offering, given that:

 

  the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and
     
  we currently control our PRC subsidiary by virtue of Sentage HK acquiring 100% of the equity interest of Sentage WFOE, which is not regulated by the M&A Rules. Sentage WFOE was established by means of direct investment rather than by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules. The CSRC approval only applies to overseas listings of SPVs that have used their existing or newly issued equity interest to acquire existing or newly issued equity interest in PRC domestic companies, and we do not constitute an SPV that requires a CSRS approval for this offering.

 

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

 

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

 

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

 

Risks Relating to this Offering and the Trading Market

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements as of and for the years ended December 31, 2019 and 2018, we and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, or “PCAOB,” and other control deficiencies. The material weaknesses identified included (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; (iii) a lack of independent directors and an audit committee; and (iv) a lack of an effective review process by the accounting manager which led to material audit adjustments to the financial statements.

 

Following the identification of the material weaknesses and control deficiencies, we plan to take remedial measures including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) setting up an internal audit function as well as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors, 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.

 

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Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may be unable to complete our evaluation testing and any required remediation in a timely manner.

 

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

 

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

 

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

 

We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior December 31, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

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

 

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

 

Since our chief executive officer, Ms. Qiaoling Lu, will own more than [●] % of our Ordinary Shares assuming no exercise of the over-allotment option and [●] % of our Ordinary Shares assuming the full exercise of the over-allotment option following this offering, she will have the ability to elect directors and approve matters requiring shareholder approval by way of ordinary resolution or special resolution.

 

Ms. Qiaoling Lu, our chief executive officer, currently owns (prior to completion of this offering) 78.7% of the issued Ordinary Shares of the Company. Following this offering, she will own more than [●] % of our Ordinary Shares with assuming no exercise of the over-allotment option and [●] % of our Ordinary Shares assuming the full exercise of the over-allotment option. As each Ordinary Share entitles the holder thereof the right to exercise one vote per Ordinary Share at a general meeting of the Company, Ms. Lu will have the right to vote [●]% of the Company’s voting share capital in issue after this offering. As result, Ms. Lu will be able to exert significant voting influence over fundamental and significant corporate matters and transactions. Depending on the percentage, she may have the power to elect all directors and approve all matters requiring shareholder approval without the votes of any other shareholder. She will have significant influence over a decision to enter into any corporate transaction and will have the ability to prevent any transaction that requires the approval of shareholders, regardless of whether or not our other shareholders believe that such transaction is in our best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which could, in turn, have an adverse effect on the market price of our Ordinary Shares or prevent our shareholders from realizing a premium over the then-prevailing market price for their Ordinary Shares.

 

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If we are deemed 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.

 

Following this offering, our largest shareholder may continue to own more than a majority of the voting power of our outstanding Ordinary Shares. Under the Nasdaq listing 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.

 

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 [●] Ordinary Shares is outstanding before the consummation of this offering. An aggregate of [●] Ordinary Shares will be outstanding immediately after the consummation of this offering assuming no exercise of the over-allotment and [●] Ordinary Shares will be outstanding immediately after the consummation of this offering assuming the full exercise of the over-allotment option. Sales of these shares into the market could cause the market price of our Ordinary Shares to decline.

 

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

 

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

 

If securities or industry analysts do not publish research or reports about our business, or if the 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  a limited availability for market quotations for our securities;
     
  reduced liquidity with respect to our securities;
     
  a determination that our Ordinary 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.

 

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

 

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

 

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

 

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

 

For as long as we remain an “emerging growth company,” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile. See “Implications of Our Being an Emerging Growth Company.

 

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, by the Companies Law (2020 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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 Law 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.”

 

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

 

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

 

Newly enacted Economic Substance Legislation in the Cayman Islands may have an impact on the Company.

 

The Cayman Islands, together with several other non-European Union jurisdictions, have recently introduced legislation aimed at addressing concerns raised by the Council of the European Union as to offshore structures engaged in certain activities which attract profits without real economic activity. The International Tax Co-operation (Economic Substance) Law (2020 Revision) (the “Substance Law”) contains certain economic substance requirements for in-scope Cayman Islands entities which are engaged in certain “relevant activities,” which in the case of exempted companies incorporated before January 1, 2019 will apply in respect of financial years commencing July 1, 2019 onwards. However, it is anticipated that the Company itself may remain out of scope of the legislation or else be subject to more limited substance requirements. Although it is presently anticipated that the Substance Law will have little material impact on the Company or its operations, as the legislation is new and remains subject to further clarification and interpretation it is not currently possible to ascertain the precise impact of these legislative changes on the Company.

 

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

 

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

 

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

 

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

 

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

 

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

 

For 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 Consideration—United States Federal Income Taxation—Passive Foreign Investment Company.

 

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

 

Our pre-IPO shareholders may be able to sell their Ordinary Shares under Rule 144 after the completion of this offering. See “Shares Eligible for Future Sale” below. Because these shareholders have paid a lower price per Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the Ordinary Shares following the completion of the offering, to the detriment of participants in this offering. In September 2019 and March 2020, we issued a total of 9,999 Ordinary Shares that, together with the original subscription share, brought the total of issued and outstanding Ordinary Shares to 10,000. These 10,000 Ordinary Shares are indirectly held by our pre-IPO shareholders. Under Rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period. We do not expect any of the Ordinary Shares to be sold pursuant to Rule 144 during the pendency of this offering.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

  assumptions about our future financial and operating results, including revenue, income, expenditures, cash balances, and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  our ability to attract clients and further enhance our brand recognition;
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in the consumer loan repayment and collection management, loan recommendation, and third-party payment services industries; 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 consumer loan repayment and collection management, loan recommendation, and third-party payment services industries in China. These industry data include projections that are based on a number of assumptions which have been derived from industry and government sources which we believe to be reasonable. The consumer loan repayment and collection management, loan recommendation, and third-party payment services industries may not grow at the rate projected by industry data, or at all. The failure of these industries to grow as anticipated is likely to have a material adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly changing nature of the consumer loan repayment and collection management, loan recommendation, and third-party payment services industries subjects any projections or estimates relating to the growth prospects or future condition of our industries to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the industry data turns out to be incorrect, actual results may, and are likely to, differ from the projections based on these assumptions.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

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

 

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

 

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

 

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

 

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

 

Grandall 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. Grandall 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.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $[●] per Ordinary Share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts and the estimated offering expenses payable by us, of approximately $[●] if the Underwriters do not exercise their over-allotment option, and $[●] if the Underwriters exercise their over-allotment option in full.

 

We plan to use the net proceeds we receive from this offering primarily for general corporate purposes, which may include investment in service and product development, sales and marketing activities, technology infrastructure, capital expenditures, improvement of corporate facilities, and other general and administrative matters. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our businesses, although we do not have any present commitments or agreements to enter into any acquisitions or investments.

 

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.

 

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DIVIDEND POLICY

 

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

 

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

 

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

 

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

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in complying with the administrative requirements necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our Affiliated Entities in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our PRC subsidiary is 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. Sentage HK may be considered a non-resident enterprise for tax purposes, so that any dividends Sentage WFOE pays to Sentage HK may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10%. See “Material Income Tax Consideration—People’s Republic of China Enterprise Taxation.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from the Sentage Operating Companies to Sentage WFOE, pursuant to VIE Arrangements between them, and the distribution of such payments to Sentage HK as dividends from Sentage WFOE. Certain payments from the Sentage Operating Companies to Sentage WFOE are subject to PRC taxes, including business taxes and value-added taxes. In addition, if any of the Sentage Operating Companies incurs debt on their own behalves in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

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

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2019:

 

  on an actual basis; and
     
  on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed initial public offering price of $[●] 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, [non-accountable expense allowance], and the estimated offering expenses payable by us.

 

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

 

   December 31, 2019 
   Actual   As adjusted (Over-allotment option not exercised)   As adjusted (Over-allotment option exercised in full) 
   $   $   $ 
Cash and cash equivalents  $227,387                     
Shareholders’ Deficit:               
Ordinary shares, $1.00 par value, 50,000 Ordinary Shares authorized, 10,000 Ordinary Shares issued and outstanding as of December 31, 2019; [●] Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised, and [●] Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is exercised in full  $10,000           
Additional paid-in capital(1)  $38,419,832           
Accumulated deficit  $(39,226,760)          
Accumulated other comprehensive income  $24,002           
Total Shareholders’ Deficit  $(772,926)          
Total Capitalization  $(545,539)          

 

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

 

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

 

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DILUTION

 

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

 

Our net tangible book value as of December 31, 2019, was $[●], or $[●] 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 discounts to the Underwriters, [non-accountable expense allowance], and the estimated offering expenses payable by us.

 

After giving effect to our sale of [●] Ordinary Shares offered in this offering based on the initial public offering price of $[●] per Ordinary Share after deduction of the estimated discounts to the Underwriters, [non-accountable expense allowance], and the estimated offering expenses payable by us, our as adjusted net tangible book value as of December 31, 2019, would have been $[●], or $[●] per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $[●] per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $[●] per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

 

The following table illustrates such dilution:

 

   Post-
Offering(1)
   Full
Exercise of
Over-
Allotment
Option
 
Assumed Initial public offering price per Ordinary Share  $             $           
Net tangible book value per Ordinary Share as of December 31, 2019  $    $       
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $    $  
Pro forma net tangible book value per Ordinary Share immediately after this offering  $    $  
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $          $  

 

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

 

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

 

The following tables summarize, on a pro forma as adjusted basis as of December 31, 2019, 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 discounts to the Underwriters, [non-accountable expense allowance], and the estimated offering expenses payable by us.

 

   Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option not exercised  Number   Percent   Amount   Percent   Share 
   ($ in thousands) 
Existing shareholders                   %  $                     %  $         
New investors          %  $         %  $     
Total             %  $         %  $         

 

   Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option exercised in full  Number   Percent   Amount   Percent   Share 
   ($ in thousands) 
Existing shareholders                         %  $                      %  $                  
New investors         %  $      %  $  
Total         %  $         %  $  

 

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

 

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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate History

 

We incorporated Sentage Holdings Inc. (“Sentage Holdings”) on September 16, 2019, under the laws of the Cayman Islands. Sentage Hongkong Limited (“Sentage HK”) was incorporated on September 25, 2019 in Hong Kong as a wholly owned subsidiary of Sentage Holdings.

 

On December 17, 2019, Shanghai Santeng Technology Co., Ltd. (“Sentage WFOE”) was incorporated pursuant to PRC laws as a wholly foreign owned enterprise. Sentage HK holds 100% of the equity interests in Sentage WFOE. Due to PRC laws and regulations on foreign ownership and investment in companies that engage in certain businesses including third-party payment services, we conduct our businesses in China through a VIE structure.

 

We currently operate three lines of business in loan repayment and collection management, loan recommendation, and prepaid payment network through Daxin Wealth Investment Management (Shanghai) Co., Ltd. (“Daxin Wealth”), Daxin Zhuohui Financial Information Services (Shanghai) Co., Ltd. (“Daxin Zhuohui”), and Qingdao Buytop Payment Services Co., Ltd. (“Qingdao Buytop,” together with Daxin Wealth and Daxin Zhuohui, the “Sentage Operating Companies”), pursuant to a series of contractual arrangements, also known as VIE Arrangements, between Sentage WFOE and each of the Sentage Operating Companies. All the Sentage Operating Companies were incorporated as limited companies pursuant to PRC laws. Specifically, Daxin Wealth and Daxin Zhuohui are engaged in the loan repayment and collection management business, Daxin Zhuohui provides loan recommendation services, and Qingdao Buytop provides prepaid payment network services.

 

Our Corporate Structure

 

The following diagram illustrates our corporate structure, including our subsidiaries and our VIEs, as of the date of this prospectus and upon completion of this offering based on a proposed number of [●] Ordinary Shares being offered.

 

 

 

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

 

Our VIE Arrangements

 

Neither we nor our subsidiaries own any equity interest in any of the Sentage Operating Companies. Instead, we control and receive the economic benefits of each of the Sentage Operating Companies’ business operation through a series of VIE Arrangements. Sentage WFOE, each of the Sentage Operating Companies, and the shareholders of the Sentage Operating Companies entered into the VIE Arrangements on March 9, 2020. The VIE Arrangements are designed to provide Sentage WFOE with the power, rights, and obligations equivalent in all material respects to those it would possess as the sole equity holder of each of the Sentage Operating Companies, including absolute control rights and the rights to the assets, property, and revenue of each of the Sentage Operating Companies.

 

As a result of our direct ownership in Sentage WFOE and the VIE Arrangements, we are regarded as the primary beneficiary of our VIEs, and we treat our VIEs as our consolidated entities under U.S. GAAP. We have consolidated the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

 

Each of the VIE Arrangements is described in detail below:

 

Exclusive Business Cooperation Agreement

 

Pursuant to the Exclusive Business Cooperation Agreement between the Sentage Operating Companies and Sentage WFOE, Sentage WFOE provides the Sentage Operating Companies with technical support, intellectual services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. For services rendered to the Sentage Operating Companies by Sentage WFOE under the Exclusive Business Cooperation Agreement, Sentage WFOE is entitled to collect a service fee equal to the remaining amount of the Sentage Operating Companies’ profit before tax after deducting relevant costs and reasonable expenses.

 

The term of the Exclusive Business Cooperation Agreement remains effective unless the agreement is explicitly terminated by Sentage WFOE through written form or other means specified therein. The Sentage Operating Companies do not have the right to terminate that agreement unilaterally.

 

Sentage WFOE has absolutely authority relating to the management of the Sentage Operating Companies, including but not limited to decisions with regard to expense, salary raises and bonuses, hiring, firing, and other operational functions. The Exclusive Business Cooperation Agreement does not prohibit related party transactions. Upon the establishment of the audit committee at the consummation of this offering, the Company’s audit committee will be required to review and approve in advance any related party transactions, including transactions involving Sentage WFOE or the Sentage Operating Companies.

 

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Equity Pledge Agreement

 

Under the Equity Pledge Agreement between Sentage WFOE and all the shareholders of Sentage Operating Companies (the “Sentage Operating Company Shareholders”), the Sentage Operating Company Shareholders pledged all of their equity interests in the Sentage Operating Companies to Sentage WFOE to guarantee the performance of the Sentage Operating Companies’ obligations under the Exclusive Business Cooperation Agreement, Exclusive Purchase Option Agreement, and Loan Contracts (collectively, the “Transaction Agreements”). Under the terms of the Equity Pledge Agreement, in the event that the Sentage Operating Companies or the Sentage Operating Companies Shareholders breach their respective contractual obligations under the Transaction Agreements, Sentage WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The Sentage Operating Companies Shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Pledge Agreement, Sentage WFOE is entitled to dispose of the pledged equity interests in accordance with applicable PRC laws. The Sentage Operating Companies Shareholders further agreed not to dispose of the pledged equity interests or take any action that would prejudice Sentage WFOE’s interest.

 

The Equity Pledge Agreement is effective until the latest date of the following: (1) the secured debt in the scope of pledge is cleared off; (2) pledgees exercise their pledge rights pursuant to provisions and conditions of the Equity Pledge Agreement; and (3) pledgors transfer all the pledged equity interests to Pledgees according to the Exclusive Purchase Option Agreement, or other entity or individual designated by it.

 

The purpose of the Equity Pledge Agreement are to (1) guarantee the performance of the Sentage Operating Companies’ obligations under the Transaction Agreements, (2) make sure the Sentage Operating Companies Shareholders do not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice Sentage WFOE’s interests without Sentage WFOE’s prior written consent, and (3) provide Sentage WFOE control over the Sentage Operating Companies. In the event the Sentage Operating Companies breach their contractual obligations under the Transaction Agreements, Sentage WFOE will be entitled to foreclose on the Sentage Operating Companies Shareholders’ equity interests in the Sentage Operating Companies and may (1) exercise its option to purchase or designate third parties to purchase part or all of their equity interests in the Sentage Operating Companies and in this situation, Sentage WFOE may terminate the Equity Pledge Agreement and the other VIE Arrangements after acquisition of all equity interests in the Sentage Operating Companies or form a new VIE structure with the third parties designated by Sentage WFOE, or (2) dispose of the pledged equity interests and be paid in priority out of proceeds from the disposal in which the case the existing VIE structure will be terminated.

 

On March 9, 2020, the Sentage Operating Companies Shareholders pledged all of their equity interests in the Sentage Operating Companies to Sentage WFOE. As of the date of the prospectus, the pledge registration is in process.

 

Exclusive Purchase Option Agreement

 

Under the Exclusive Purchase Option Agreement, the Sentage Operating Companies Shareholders irrevocably granted Sentage WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in the Sentage Operating Companies or the assets of the Sentage Operating Companies. The option price is the minimum amount to the extent permitted under PRC law.

 

Under the Exclusive Purchase Agreement, Sentage WFOE may at any time under any circumstances, purchase or have its designee purchase, at its discretion, to the extent permitted under PRC law, all or part of the Sentage Operating Companies Shareholders’ equity interests in the Sentage Operating Companies or the assets of the Sentage Operating Companies. The Exclusive Purchase Agreement, together with the Equity Pledge Agreement, the Exclusive Business Cooperation Agreement, Powers of Attorney, and Loan Contracts, enable Sentage WFOE to exercise effective control over the Sentage Operating Companies.

 

The Exclusive Purchase Agreement remains effective until all the equity or assets of the Sentage Operating Companies is legally transferred under the name of Sentage WFOE and/or other entity or individual designated by it.

 

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Shareholders’ Powers of Attorney

 

Under each of the Powers of Attorney, the Sentage Operating Companies Shareholders authorized Sentage WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholders’ rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer, and other senior management members of the Sentage Operating Companies.

 

The term of each of the Powers of Attorney is the same as the term of the Exclusive Purchase Option Agreement. The Powers of Attorney is irrevocable and continuously valid from the date of execution of the Powers of Attorney, so long as the Sentage Operating Companies Shareholders are shareholders of the Sentage Operating Companies.

 

Loan Contracts

 

Each shareholder of our VIEs has entered into a loan contract with  Sentage WFOE, with each contract taking effect from March 9, 2020. Under these loan contracts, Sentage WFOE provided each shareholder of our VIEs with a loan, free of interest, provided that if any of the shareholders of our VIEs fails to pay any sum pursuant to the schedule specified thereunder, a default interest shall be calculated at a daily rate of 0.1% until the shareholder fully repays such sum (including the default interest). The proceeds from the loans were used for purposes consented by Sentage WFOE. The loans can be repaid by transferring each shareholder’s respective equity interest in the VIEs pursuant to the Exclusive Purchase Option Agreements. Each of the loan contracts shall remain in effect until the day when Sentage WFOE exercises its exclusive option in accordance with the applicable Exclusive Purchase Option Agreement, unless otherwise terminated by Sentage WFOE when any shareholder of VIEs materially breaches the terms of such loan contracts.

 

Spousal Consent

 

The spouse of each of the Sentage Operating Companies Shareholders agreed, via a spousal consent, to the execution of the “Transaction Documents” including: (a) Exclusive Purchase Option Agreement entered into with Sentage WFOE and the Sentage Operating Companies; (b) Equity Pledge Agreement entered into with Sentage WFOE; (c) Powers of Attorney executed by the Sentage Operating Companies Shareholder, and (d) Loan Contracts entered into with Sentage WFOE, and the disposal of the equity interests of Sentage Operating Companies held by the Sentage Operating Companies Shareholder and registered in his or her name.

 

The spouse of each of the Sentage Operating Companies Shareholders further undertakes not to make any assertions in connection with the equity interests of Sentage Operating Companies, which are held by the Sentage Operating Companies Shareholder. The spouse of the Sentage Operating Companies Shareholder confirms that the Sentage Operating Companies Shareholder can perform, amend, or terminate the Transaction Documents without his or her authorization or consent. He or she undertakes to execute all necessary documents and take all necessary actions to ensure appropriate performance of the agreements.

 

The spouse of each of the Sentage Operating Companies Shareholders also undertakes that if he or she obtains any equity interest of Sentage Operating Companies which are held by the Sentage Operating Companies Shareholder for any reasons, he or she shall be bound by the Transaction Documents and the Exclusive Business Cooperation Agreement entered into between Sentage WFOE and the Sentage Operating Companies (as amended time to time) and comply with the obligations thereunder as a shareholder of the Sentage Operating Companies. For this purpose, upon Sentage WFOE’s request, he or she shall sign a series of written documents in substantially the same format and content as the Transaction Documents and Exclusive Business Cooperation Agreement (as amended from time to time).

 

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

 

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

 

Overview

 

We are a growing financial service provider that offers a comprehensive range of financial services across consumer loan repayment and collection management services, loan recommendation services, and prepaid payment network services in the PRC. Leveraging a deep understanding of our client base, strategic partner relationships, and centralized information system, we are committed to working with our clients to understand their financial needs and challenges and offering customized services to help them meet their respective needs. 

 

We currently report our operating revenue from three main revenue streams, namely, (i) consumer loan repayment and collection management service fees, (ii) loan recommendation service fees, and (iii) prepaid payment network service fees.

 

Consumer Loan Repayment And Collection Management Services

 

Loans facilitated through us were consumer loan products ranging from 30,000 RMB (approximately $4,342) to 80,000 RMB (approximately US$11,579). Loan term ranges from one year to four years. All our clients are individual investors who entered into service agreements with us. All these loans were facilitated through our offline loan recommendation services before November 2017. Since November 2017, we have not provided any intermediary services for any new investors due to changes in related governing regulations in China, and we have been focusing on providing services related to consumer loan repayment and collection management to our investor clients. These consumer loan repayment and collection management services are a part of the service obligations in our existing service agreements with investor. Our loan repayment services primarily include reconciling borrower repayment record and sending payment reminder and notice, while our collection management services involve using our experienced in-house team and/or collaborating with third-party collection agents and law firms to recover delinquent loans.

 

Pursuant to service agreements entered with individual investors, investors authorized us to monitor and manage the repayment and collection process of outstanding loans for a fixed service fee, which was paid upfront by investors. We are required to monitor loans within the loan term to ensure timely repayment of loans when they become due. Once a specific loan is repaid on time, our service obligation related to such loan is satisfied. If a loan becomes delinquent, we are then required to assist in collection efforts for an extended service period of additional 12 months. If all or a part of the loan is still not repaid after all collection management efforts are exhausted within such required service period, our service obligation related to such loan is satisfied and we are not responsible for any loss from an uncollectible loan.

 

Our current consumer loan repayment and collection management services will all be completed by the middle of 2020. We plan to provide our loan repayment and collection management services to other online consumer finance companies and major commercial banks in China. We believe our proven track record, industry reputation, integrated repayment and collection management approach, and centralized management set a solid foundation to expand such services.

 

Loan Recommendation Services

 

In order to diversify and expand our services, we started to provide recommendation services where we recommend prospective borrowers to funding partners since June 2019. Our services include making loan product recommendations to borrower applicants based on their specific needs, processing paperwork related to borrowers’ applications, evaluating credentials of borrower applicants, appraising borrowers’ properties to be collateralized through data analysis and on-site inspection, and recommending qualified borrowers to various funding partners for loan approval. We receive a service fee from a borrower if he or she is approved for a loan and such loan is then funded by one of funding partners. We recognize revenue at the point when our recommendation services are performed and the loan proceeds are disbursed to a specific borrower.

 

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We acquire borrower applicants through cooperating with third-party referral partners and our own marketing efforts. Leveraging our advanced credit assessment and risk management capabilities, we carefully evaluate applications and supporting materials submitted by borrowers and refer those borrowers we deem qualified to third party funding partners. We only recommend borrowers who are able to collateralize properties that have been evaluated and approved by our team of experienced in-house appraisers.

 

Prepaid Payment Network Services

 

In 2012, our VIE, Qingdao Buytop, was granted a third-party payment service license by the relevant regulatory authority in China. We started to provide prepaid payment network services to merchant customers since August 2019. We are licensed to issue generic and branded prepaid gift and debit cards and provide related services to various merchants, such as supermarkets and department stores. In connection with prepaid payment network services, we expect to generate revenue from : (1) technology consulting and support services fees related to payment solution planning, design, and management; (2) prepaid card payment services fees related to issuance and use of prepaid cards.

 

Leveraging our strong partnership with NetsUnion, our prepaid payment network services enable qualified merchants selected by us to accept prepaid-card payments using traditional payment terminals. Our prepaid payment network service business enables us to develop a deep understanding of customers’ needs and will allow us to provide merchants with continuously improving products, services, and technologies.

 

As we recently launched this new business, we only recognized a small amount of revenue from prepaid payment network consulting services upon performance of the services for the year ended December 31, 2019. We have not issued any prepaid cards for our potential customers yet.

 

Our Organization

 

Sentage Holdings was incorporated as an exempted company with limited liability under the laws of the Cayman Islands on September 16, 2019.

 

Sentage Holdings owns 100% of the equity interests of Sentage Hongkong Limited (“Sentage HK”), a limited liability company formed under the laws of Hong Kong on September 25, 2019.

 

On December 17, 2019, Shanghai Santeng Technology Co., Ltd. (“Sentage WFOE”) was incorporated pursuant to PRC laws as a wholly foreign owned enterprise of Sentage HK.

 

Sentage Holdings, Sentage HK, and Sentage WFOE are currently not engaging in any active business operations and merely acting as holding companies.

 

Prior to the reorganization described below, Ms. Qiaoling Lu, the chairperson of the board of directors and the chief executive officer of the Company, and her close family members, were the controlling shareholders of the following entities: (1) Daxin Wealth Investment Management (Shanghai) Co., Ltd. (“Daxin Wealth”), formed in Shanghai City, China on August 13, 2014; (2) Daxin Zhuohui Financial Information Services (Shanghai) Co., Ltd. (“Daxin Zhuohui”), formed in Shanghai City, China on January 9, 2015; and (3) Qingdao Buytop Payment Services Co., Ltd. (“Qingdao Buytop”), formed in Qingdao City, Shandong Province, China on August 4, 2009. Daxin Wealth, Daxin Zhuohui, and Qingdao Buytop were all formed as limited companies pursuant to PRC laws. Daxin Wealth and Daxin Zhuohui are primarily engaged in providing consumer loan repayment and collection management services. Daxin Zhuohui also provides loan recommendation services. Qingdao Buytop is primarily engaged in providing customers with prepaid payment network services. Daxin Wealth, Daxin Zhuohui, and Qingdao Buytop are collectively referred to as the “Sentage Operating Companies” below.

 

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Reorganization

 

A reorganization of our legal structure (“Reorganization”) was completed on March 9, 2020. The Reorganization involved the formation of Sentage Holdings, Sentage HK and Sentage WFOE, and entering into certain contractual arrangements Sentage WFOE, the shareholders of the Sentage Operating Companies and the Sentage Operating Companies. Consequently, the Company became the ultimate holding company of Sentage HK, Sentage WFOE, Daxin Wealth, Daxin Zhuohui, and Qingdao Buytop.

 

On March 9, 2020, Sentage WFOE entered into a series of contractual arrangements with the shareholders of the Sentage Operating Companies. These agreements include Exclusive Purchase Agreements, an Exclusive Business Cooperation Agreement, Equity Pledge Agreements, Powers of Attorney, Loan Agreements intended to guarantee the exercise of the Exclusive Purchase Agreements and Spouse Consents (collectively the “VIE Agreements”). Pursuant to the VIE Agreements, Sentage WFOE has the exclusive right to provide to the Sentage Operating Companies consulting services related to business operations including technical and management consulting services. The VIE Agreements are designed to provide Sentage WFOE with the power, rights, and obligations equivalent in all material respects to those it would possess as the sole equity holder of each of the Sentage Operating Companies, including absolute control rights and the rights to the assets, property, and revenue of each of the Sentage Operating Companies. As a result of our direct ownership in Sentage WFOE and the VIE Agreements, we believe that the Sentage Operating Companies should be treated as Variable Interest Entities (“VIEs”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 Consolidation and we are regarded as the primary beneficiary of our VIEs. We treat our VIEs as our consolidated entities under U.S. GAAP.

 

Sentage Holdings, together with its wholly owned subsidiaries and VIEs are effectively controlled by the same shareholders before and after the Reorganization. Therefore, the Reorganization is considered as an acquisition of entities under common control. The accounts of Sentage Holdings, its wholly owned subsidiaries and VIEs have been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

Key Factors That Affect Our Results of Operations

 

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

 

Effectiveness of Risk Management

 

The success of our loan recommendation business relies heavily on our ability to effectively evaluate borrowers’ credit profiles, the likelihood of default, and the value of borrowers’ collateralized properties. We have devised and implemented a systematic credit assessment model and an asset-driven, disciplined risk management approach to minimize a borrower’s default risk and mitigate the impact of default. Specifically, our assessment model and risk management capabilities not only enable us to select high-quality borrowers whose financial conditions and personal background meet our selection criteria, but also protect our funding partners against lending more than they might be able to recover in the case of default. There can be no assurance that our risk management measures will allow us to identify or appropriately assess whether interest and principal payments due on a loan will be repaid when due, or at all, or whether the value of the mortgaged property will be sufficient to otherwise provide for recovery of such amounts. If our risk management approach is ineffective, or if we otherwise fail or are perceived to fail to manage the impact of default, our reputation and market share could be materially and adversely affected, which would severely impact our business and results of operations.

 

Our Ability to Provide Consumer Loan Repayment and Collection Management Services Efficiently

 

The success of our consumer loan repayment and collection management business depends on our ability to manage the loan repayment and collection process efficiently. Prior to November 2017, the loans we facilitated were consumer loans ranging from 30,000 RMB (approximately $4,342) to 80,000 RMB (approximately US$11,579), with a term ranging from one year to four years. All our clients are individual investors who entered into services agreements with us. All these loans were facilitated through our offline loan recommendation services before November 2017. Since November 2017, we have not provided any intermediary services for any new investors due to changes of related governing regulations in China, and we have been focusing on providing services related to consumer loan repayment and collection management to investors who entered into the service agreements with us.

 

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Our current consumer loan repayment and collection management services will all be completed by the middle of 2020. We plan to provide loan repayment and collection management services to other online consumer finance companies and major commercial banks in China.

 

As of the date of the prospectus, although we are in active conversation with a number of prospective clients, we have not secured a new source of revenue to replace the loss of our current engagements. If we are unable to maintain, develop, and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, or if we are unable to acquire a sufficient number of customers who need our services, we may not be able to generate the same amount of revenue and/or profits to sustain the operation of our consumer loan repayment and collection management business. As a result, our business and results of operations may be adversely affected.

 

Our Ability to Acquire Prospective Borrowers Effectively And Increase Overall Loan Volume

 

We started our loan recommendation services since June 2019. Our revenue growth in this business largely depends on our ability to acquire prospective borrowers effectively and increase the overall loan volume funded by our funding partners. We intend to continue to dedicate significant resources to our borrower acquisition efforts. If there are insufficient qualified loan requests, our funding partners may not want to collaborate with us further, which may result in borrowers being unable to obtain capital through our loan recommendation services and turning to other sources for their borrowing needs. In addition to the size of the prospective borrower base, the overall loan volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers relative to the market rates, the efficiency of our credit assessment process, the availability of our funding partners, the macroeconomic environment, and other factors. In connection with the introduction of new services or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of recommended borrowers, which may negatively affect loan volume. If we are unable to attract qualified borrowers or if borrowers do not continue to use our loan recommendation services at the current rates and/or we are unable to increase the overall loan volume as we expect, our business and results of operations may be adversely affected.

 

Our Ability to Expand Our Prepaid Payment Network Services

 

We started to generate revenue from our prepaid payment network services since August 2019. Our revenue growth in this business largely depends on our ability to develop and expand our client network. We believe that customer base is the core building block of our prepaid payment network service business, and our ability to provide customers with satisfactory experience is critical to our success and continuous growth in our customer base. Our ability to provide customers with satisfactory experience is subject to a number of factors, including our ability to provide effective services, our ability to continuously innovate and improve our services to meet customer needs, and our access to and cooperation with our business partners. If we experience service disruptions, failures, or other issues, or, if we fail to deliver satisfactory and distinct customer experience, we may lose our customers and business partners, which could further lead to a decrease in the volume of transaction processed via our prepaid payment network services. As a result, our business, results of operations, and financial condition may be adversely affected.

 

Our Ability to Improve Our Operating Efficiency

 

Our business growth is dependent on our ability to improve our operating efficiency, which is determined by our abilities to monitor and adjust costs and expenses. Specifically, we consider our ability to monitor and adjust staffing costs (including payroll and employee benefit expense), administrative expenses, and third-party cost as essential to the success of our business.

 

As our client base expands and we enter into more service agreements with clients, which typically results in expanded work volume, our staffing costs are likely to rise. In contrast, other expenses, particularly those relating to administrative functions, are relatively fixed. For our consumer loan repayment and collection management services and loan recommendation services, we outsource certain tasks to third-party loan collection agencies or law firms and we collaborate with funding partners. As a result, our cost of third-party business partnership is likely to rise as we grow our business and expand our partnership network. If our staffing costs, administrative expenses, and third-party costs exceed our estimated budget and we are unable to increase our revenue as expected, our operational efficiency might decrease, having an adverse impact on our business, results of operation, and financial condition.

 

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If we Are Unable to Compete Successfully, Our Financial Condition And Results of Operations May be Harmed

 

The industries we are in are highly competitive and evolving in China. With respect to consumer loan repayment and collection management services and loan recommendation services, we compete with market players such as traditional financial institutions, small loan companies, e-commerce driven installment platforms, and other consumer finance platforms. With respect to prepaid payment network services, we primarily compete with other third-party payment service providers in China. Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do, and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have longer operating histories, more extensive borrowers, larger amounts of data, greater brand recognition and loyalty, and broader partner relationships than we do. Our customers and clients make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. If we do not compete effectively, our operating results could be harmed.

 

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

 

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

 

COVID-19

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses across the globe. The extent to which the COVID-19 outbreak may adversely impact our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on customers’ demand for our services and our service fees, all of which are uncertain and cannot be predicted. The outbreak has significantly impacted our prepaid payment network business. Although the outbreak has not significantly impacted our consumer loan repayment and collection management business and loan recommendation business as of the date of this prospectus, the COVID-19 outbreak may exert a negative impact on our financial condition and results of operations, and its total impact on us is unknown at this time.

 

Key Financial Performance Indicators

 

Our key financial performance indicators consist of the number of fixed-price customer service agreements for our services, the service fees we charge our customers and our ability to collect the service fees on a timely manner, and our ability to improve our operating efficiency over time, all of which significantly impact our revenue and operating expenses as discussed in greater detail under “Results of Operations” below.

 

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We derived our operating revenue from our three business lines, which are presented as percentages of our total net revenue from operations as follows for the fiscal years ended December 31, 2019 and 2018:

 

   For the Fiscal Years Ended December 31, 
   2019   2018 
   % of total revenue   % of total revenue 
         
Revenue from consumer loan repayment and collection management services   91.3%   100.0%
Revenue from loan recommendation services   6.6%   0.0%
Revenue from prepaid payment network services   2.1%   0.0%
Total operating revenue   100.0%   100.0%
           
Number of service agreements under our consumer loan repayment and collection management business   12,133    17,549 
Number of borrowers who had obtained loans from funding partners through our loan recommendation business   26    - 
Number of customers for our prepaid payment network business   2    - 

 

Operating Revenue

 

Revenue from our consumer loan repayment and collection management business accounted for 91.3% and 100.0% of our total revenue for the fiscal years ended December 31, 2019 and 2018, respectively. Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. These loans were consumer loan products ranging from 30,000 RMB (approximately $4,342) to 80,000 RMB (approximately US$11,579), with a term ranging from one year to four years. All our clients are individual investors who entered into service agreements with us. All these loans were facilitated through our offline loan recommendation services before November 2017. All these loans were facilitated before November 2017 Since November 2017, we have not provided any intermediary services for any new investors due to changes in related governing regulations in China, and we have been focusing on providing services related to consumer loan repayment and collection management to investors who entered into the service agreements with us. Pursuant to the service agreements entered with individual investors, investors authorized us to monitor and manage the repayment and collection process of outstanding loans for a fixed service fee, which was paid upfront to us by investors. We are required to monitor loans within loan term to ensure timely repayment of loans when they become due. Once a specific loan is repaid on time, our service obligation related to such loan is satisfied. When a loan becomes delinquent, we are then required to assist in collection efforts for an extended service period of additional 12 months starting with the day when such loan becomes delinquent. If all or a part of the loan is still not repaid after all collection management efforts are exhausted within such required service period, our service obligation related to such loan is satisfied and we are not responsible for any loss from uncollectible loan.

 

At the beginning of the 2018 fiscal year, we had a total of 17,549 outstanding service agreements from investors to whom we had provided loan facilitation services through our offline loan recommendation business until November 2017. Since November 2017, we have not provided any intermediary services to any new consumer loans due to changes of related governing regulations in China. Our consumer loan repayment and collection management service fees derive solely from those existing consumer service agreements we entered into with investors before November 2017. As some of the service agreements were completed as a result of loan repayment and some of the service agreement expired because of their respective service terms, the total number of outstanding service agreements under our consumer loan repayment and collection management business decreased by 5,416 from 17,549 cases at the beginning of the 2018 fiscal year to 12,133 cases at the beginning of the 2019 fiscal year. During the fiscal year ended December 31, 2019, we completed another 6,904 outstanding service agreements based on our contract terms, which brought the total number of outstanding service agreements as of December 31, 2019 to 5,229. The decrease in outstanding service agreements led to a decrease of $2.8 million, or 43.3%, in our revenue associated with consumer loan repayment and collection management services from the 2018 fiscal year to the 2019 fiscal year. Our current loan repayment and collection management engagements will all be completed by the middle of 2020 and unless we expand our consumer loan repayment and collection management business, this loss of revenue will have an adverse impact on our business, results of operation, and financial condition.

 

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Our revenue from consumer loan repayment and collection management business was not significantly impacted by COVID-19 because investors to which we provide consumer loan repayment and collection management services prepaid us service fees upfront at the time they entered into service agreements with us. Despite the COVID-19 outbreak, our revenue from the consumer loan repayment and collection management business is expected to only slightly decrease in the first quarter of the 2020 fiscal year as compared to our revenue for the first quarter of the 2019 fiscal year.

 

Revenue from our loan recommendation business only accounted for 6.6% of our total revenue for the fiscal year ended December 31, 2019. There was no such revenue in 2018 as we started this new business in June 2019. During the 2019 fiscal year, we successfully recommended 26 borrowers to our funding partners. To the extent we are able to acquire borrowers effectively and maintain stable partnerships with our funding partners, we expect a steady increase in revenue from this business in the future.

 

The COVID-19 outbreak has not significantly impacted our revenue from the loan recommendation business. We have been able to provide loan recommendation services and generate the amount of revenue as we expected. However, depending on the duration and spread of the outbreak, the COVID-19 outbreak may have an adverse impact on the real estate market in the Shanghai area and other first-tier cities we target, subsequently decreasing the total loan amount borrowers are able to obtain through our services, bringing down our service fee, which is based on specific loan amount, and adversely impacting our revenue from the loan recommendation business.

 

Revenue from our prepaid payment network service business accounted for 2.1% of our total revenue for the fiscal year ended December 31, 2019. We started this new service since August 2019 and have only provided prepaid payment network consulting services to two customers in the 2019 fiscal year. Due to the growing market demand for prepaid payment network services and the relatively high market entry resulting from license requirements, to the extent we are able to expand our client network in the future, we expect a steady revenue growth from this business in the future.

 

The COVID-19 outbreak has significantly impacted our revenue from the prepaid payment network services business. The outbreak has caused our merchant customers to delay using our prepaid payment network services, as our merchant customers are retailers whose businesses have been adversely affected by the COVID-19 outbreak. However, as lockdowns and travel restrictions in China are being gradually lifted in China and our merchant customers started resuming their business operation, we expect that the negative impact of the COVID-19 outbreak on our revenue from the prepaid payment network services business will diminish over time.

 

Operating expenses 

 

Our operating expenses primarily consist of selling and marketing expenses and general and administrative expenses. Our selling expense primarily include expenses incurred for business travel, meals, outsourced collection agent fees and other expenses related to our sales and marketing activities. Our general and administrative expenses primarily include employee salaries, welfare, and insurance expenses, business consulting expenses, travel and transportation expenses for our management team, meals and entertainment expenses, office rental expense, depreciation expenses, and office supply and utility expenses.

 

Our selling, general and administrative expenses accounted for 38.5% and 75.5% of our total revenue for the fiscal years ended December 31, 2019 and 2018, respectively. The decrease in our selling and general and administrative expenses from the 2018 fiscal year to the 2019 fiscal year was largely due to the decreased work volume related to our consumer loan repayment and collection management services. As some of the service agreements were completed as a result of loan repayment and some of the service agreement expired at the end of their respective service terms, the total number of outstanding service agreements under our consumer loan repayment and collection management business decreased, which resulted in less expenses incurred to us. In addition, in order to improve operational efficiency, we have developed and utilized a centralized information system to support the core processing and analytics functions of our consumer loan repayment and collection management business under a set of integrated databases. The system allows us to streamline and standardize the loan repayment and collection management process and monitor the compliance level in a cost-effective manner. As a result, we closed all our local branch offices and cut down the number of employees to save costs. These collective efforts led to the decrease in our total selling, general and administrative expenses. As we implement our newly adopted cost-control policy and leverage our advanced technologies, we do not expect our overall selling and general and administrative expenses to increase in the foreseeable future.

 

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Results of Operations

 

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

 

The following table summarizes our operating results as reflected in our statements of income during the fiscal years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   For the Fiscal Years Ended December 31, 
   2019   2018   Variance 
   Amount   % of
revenue
   Amount   % of
revenue
   Amount   % 
                         
Operating Revenue                        
Consumer loan repayment and collection management fees  $3,618,823    91.3%  $6,389,528    100.0%  $(2,770,705)   (43.4)%
Loan recommendation service fees   260,388    6.6%   -    0.0%   260,388    100.0%
Prepaid payment network service fees   86,052    2.1%   -    0/0%   86,052    100.0%
Total operating revenue   3,965,263    100.0%   6,389,528    100.0%   (2,424,265)   (37.9)%
                               
Operating expenses                              
Selling, general and administrative expenses   1,528,043    38.5%   4,825,830    75.5%   (3,297,787)   (68.3)%
Total operating expenses   1,528,043    38.5%   4,825,830    75.5%   (3,297,787)   68.3)%
                               
Income from operations   2,437,220    61.5%   1,563,698    24.5%   873,522    55.9%
                               
Other income (expenses)   8,495    0.2%   (22,884)   (0.4)%   31,379    (137.1)%
                               
Income before income tax provision   2,445,715    61.7%   1,540,814    24.1%   904,901    58.7%
                               
Provision for income taxes   611,362    15.4%   386,302    6.0%   225,060    58.3%
                               
Net income  $1,834,353    46.3%  $1,154,512    18.1%  $679,841    58.9%

 

Operating Revenue. Total operating revenue decreased by $2,424,265, or 37.9%, to $3,965,263 for the fiscal year ended December 31, 2019 from $6,389,528 for the fiscal year ended December 31, 2018. The decrease in our revenue was mainly due to the decreased number of outstanding service agreements under our consumer loan repayment and collection management business during the fiscal year ended December 31, 2019 as compared to the fiscal year ended December 31, 2018, compensated by increased revenue from our newly launched loan recommendation business and prepaid payment network services business.

 

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Our operating revenue by service type is as follows:

 

   For the Fiscal Years Ended December 31, 
   2019   2018   Variance 
   Amount   % of
revenue
   Amount   % of
revenue
   Amount   % 
                         
Operating Revenue                        
Revenue from consumer loan repayment and collection management services  $3,618,823    91.3%  $6,389,528    100.0%  $(2,770,705)   (43.4)%
Revenue from loan recommendation services   260,388    6.6%   -    0.0%   260,388    100.0%
Revenue from prepaid payment network services   86,052    2.1%   -    0/0%   86,052    100.0%
Total operating revenue  $3,965,263    100.0%  $6,389,528    100.0%  $(2,424,265)   (37.9)%

 

Revenue from our consumer loan repayment and collection management business decreased by $2,770,705, or 43.4%, from $6,389,528 in the fiscal year ended December 31, 2018 to $3,618,823 in the fiscal year ended December 31, 2019. As some of the service agreements were completed as a result of loan repayment and some of the service agreements expired at the end of their respective service terms, the total number of the outstanding service agreements under our loan repayment and collection management business decreased from 17,549 at the beginning of the 2018 fiscal year to 12,133 at the beginning of the 2019 fiscal year. As of December 31, 2019 and 2018, the total outstanding service agreements were 5,229 and 12,133, respectively, as some of the 6,904 and 5,416 service agreements had been completed as a result of repayment and the remaining agreements expired at the end of their respective service terms during the 2019 and 2018 fiscal years, respectively. The decrease in the outstanding service agreements led to a decrease of $2,770,705 or 43.4%, in our revenue associated with the consumer loan repayment and collection management services from the 2018 fiscal year to the 2019 fiscal year. We expect our revenue associated with consumer loan repayment and collection management services will continue to decrease in the 2020 fiscal year as all of the remaining outstanding service agreements under our consumer loan repayment and collection management business are expected to be completed or expire by the middle of 2020. Unless we expand our consumer loan repayment and collection management business, this loss of revenue will have an adverse impact on our business, results of operation, and financial condition. However, this does not mean that we expect to cease this business line. We plan to provide our loan repayment and collection management services to other online consumer finance companies and major commercial banks in China. We believe our proven track record, industry reputation, integrated repayment and collection management approach, and centralized management set a solid foundation for us to expand such services to new clients.

 

Revenue from our consumer loan repayment and collection management business was not significantly impacted by COVID-19 because investors to which we provide consumer loan repayment and collection management services prepaid us service fees upfront at the time they entered into service agreements with us. Despite the COVID-19 outbreak, our revenue from the consumer loan repayment and collection management business is expected to only slightly decrease in the first quarter of fiscal year 2020 as compared to the revenue in the first quarter of the 2019 fiscal year.

 

Revenue derived from our loan recommendation services for the 2019 fiscal year was $260,388 while there was no such revenue for the 2018 fiscal year. We only started this new business since June 2019 and have successfully recommended 26 borrowers to our funding partners during the 2019 fiscal year. All the 26 borrowers were located in the Shanghai area, where we are currently conducting our loan recommendation business. However, as we plan to expand our operations to other first-tier cities in China through cooperation with our funding partners, we expect to acquire more qualified borrowers in these areas of China. To the extent we are able to engage potential borrowers effectively and maintain stable partnerships with our funding partners, we anticipate a steady increase in revenue from this business in the near future.

  

The COVID-19 outbreak has not significantly impacted our revenue from the loan recommendation business. We have been able to provide loan recommendation services that connect borrowers with funding partners and generate the amount of revenue as we expected. However, depending on the duration and spread of the outbreak, the COVID-19 outbreak may have an adverse impact on the real estate market in the Shanghai area and other first-tier cities we target, subsequently decreasing the total loan amount borrowers are able to obtain through our services, bringing down our service fee, which is based on specific loan amount, and adversely impacting our revenue from the loan recommendation business.

 

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Revenue generated from our prepaid payment network services business were $86,052 for the fiscal year ended December 31, 2019. We only started this new business since August 2019 and have successfully provided services to 2 customers in the 2019 fiscal year. Due to the growing market demand for prepaid payment business and the relatively high market entry resulted from license requirements, and to the extent we are able to expand our client network, we expect a steady revenue growth in revenue from this business in the future.

 

The COVID-19 outbreak has significantly impacted our revenue from the prepaid payment network services business. The outbreak has caused some of our merchant customers to delay using our prepaid payment network services, as the majority of our merchant customers are retailers whose businesses have been adversely affected by the COVID-19 outbreak. However, as lockdowns and travel restrictions in China are being gradually lifted in China and our merchant customers started resuming their business operation, we expect that the negative impact of the COVID-19 outbreak on our revenue from the prepaid payment network services business will diminish over time.

 

Operating expenses

 

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

 

   For the years ended December 31, 
   2019   2018   Change 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses  $842,282    55.1%  $2,988,193    61.9%  $(2,145,911)   (71.8)%
Office rental and decoration  expenses   128,824    8.4%   824,403    17.1%   (695,579)   (84.4)%
Outsourcing service expenses   159,500    10.4%   340,073    7.0%   (180,573)   (53.1)%
Consulting and professional service fee   232,191    15.2%   163,365    3.4%   68,826    42.1%
Utility and office supply expenses   92,100    6.0%   191,645    4.0%   (99,545)   (51.9)%
Depreciation and amortization   57,022    3.7%   174,144    3.6%   (117,122)   (67.3)%
Travel, meals and marketing expenses   16,124    1.1%   144,007    3.0%   (127,883)   (88.8)%
Total selling, general and administrative expenses  $1,528,043    100.0%  $4,825,830    100.0%  $(3,297,787)   (68.3)%

 

Our selling, general and administrative expenses decreased by $3,297,787 or 68.3%, from $4,825,830 in the 2018 fiscal year to $1,528,043 in the 2019 fiscal year. The decrease was due to following reasons:

 

(1) Our salary and employee benefit expenses decreased by $2,145,911 or 71.8%, from $2,988,193 in the 2018 fiscal year to $842,282 in the 2019 fiscal year, primarily due to the decreased number of employees. From 2016 to 2017, we established 21 local branch offices in different geographic areas across China for our offline loan recommendation business, which we operated until the end of 2017. We had 219 employees in the 2018 fiscal year, which led to a higher amount of salary and employee benefit expense in the 2018 fiscal year as compared to the 2019 fiscal year. As a result of the reduced amount of outstanding service agreements under our consumer loan repayment and collection management business, we closed 21 local branch offices in late 2018 and dismissed 191 employees. We consolidated resources and centralized the operation of our consumer loan repayment and collection management business to the headquarter office in Shanghai City, China. In the 2019 fiscal year, we only kept 28 employees to operate our business. We have developed and utilized a centralized information system to support the core processing and analytics functions of our consumer loan repayment and collection management business under a set of integrated databases. The system allows us to streamline and standardize the repayment and collection management process and monitor the compliance level in a cost-effective manner;

 

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(2) Our office rental and decoration expenses decreased by $695,579 or 84.4 %, from $824,403 in the 2018 fiscal year to $128,824 in the 2019 fiscal year. Our utility and office supply expenses also decreased by $99,545 or 51.9% from $191,645 in the 2018 fiscal year to $92,100 in the 2019 fiscal year, primarily due to the closure of the 21 local branch offices in late 2018 as discussed above. In addition, in the 2018 fiscal year, our VIEs, Daxin Wealth and Daxin Zhuohui, leased separate office spaces in Shanghai for the operation of our consumer loan repayment and collection management business. As a result of the reduced amount of outstanding service agreements under our consumer loan repayment and collection management business and the reduced number of employees, we terminated the office lease agreement for Daxin Wealth upon lease expiration and did not further renew the lease agreement with the landlord. We then consolidated two office spaces into one;

 

(3) Our outsourcing service expenses decreased by $180,573, or 53.1%, from $340,073 in the 2018 fiscal year to $159,500 in the 2019 fiscal year. In order to conduct the loan repayment and collection management in an effective and compliant way, we outsourced certain collection efforts to third-party collection agencies and also paid service fees to third-party law firms to initiate judicial proceedings against borrowers for loan delinquency. As the number of outstanding service agreements under our consumer loan repayment and collection management business decreased from 12,133 as of December 31, 2018 to 5,299 as of December 31, 2019, related outsourcing service expenses decreased in the 2019 fiscal year;

 

(4) Our travel, meals and marketing expenses related to our consumer loan repayment and collection management services as well as new business development efforts decreased by $127,883, or 88.8%, primarily due to decreased business travel frequency and meals expense as we reduced the number of marketing employees to improve our work efficiency and we decided to adopt loan repayment and collection tactics that do not involve physical confrontation, such as phone calls, WeChat messages, and emails;

 

(5) Our depreciation and amortization expense decreased by $117,122, or 67.3%, from $174,144 in the 2018 fiscal year to $57,022 in the 2019 fiscal year, because we closed 21 local branch offices in the 2018 fiscal year and disposed of furniture and other fixed assets at these offices; (6) our consulting and professional expenses increased by $68,826, or 42.1%, in the 2019 fiscal year as compared to the 2018 fiscal year. In order to diversify our business types and revenue sources, in 2019, we started our loan recommendation business and our prepaid payment network services business. In order to successfully grow our new businesses, we paid third-party professionals for business strategy and planning, which led to our increased consulting expenses for the 2019 fiscal year.

 

Other income (expenses)

 

Our other income (expenses) primarily include bank charges, penalty, gain or loss from disposal of fixed assets, etc. We reported net other income of $8,495 for the 2019 fiscal year, including $9,174 gain on disposal of fixed assets, offset by bank charge and penalty. In the 2018 fiscal year, we reported net other expense of $22,884, including loss of employee cash advances of $19,653 for the closure of 21 branch offices in 2018 and $6,530 of bank charges and penalty charges.

 

Provision for Income Taxes

 

Our provision for income taxes was $611,362 in fiscal year ended December 31, 2019, an increase of $225,060, or 58.3%, from $386,302 in fiscal year ended December 31, 2018 due to our increased taxable income. Our deferred tax assets primarily derived from deferred revenue and net operating losses from our VIEs, Daxin Wealth, Daxin Zhuohui, and Qingdao Buytop. As of December 31, 2017, deferred tax assets amounted to $2,903,374 which may be carried forward for 5 years to reduce future taxable income. As we ended our offline loan recommendation business in the end of 2017, management concluded that the chances for our VIEs Daxin Wealth and Daxin Zhuohui to utilize part of their net operating loss (“NOL”) carry forwards were remote. Accordingly, a valuation allowance of approximately $1.1 million has been applied against the deferred tax assets balance associated with the NOL carryforwards that occurred prior to December 31, 2016. For the years ended December 31, 2019 and 2018, $611,362 and $386,302 deferred income tax expenses, respectively, have been applied against the deferred tax assets balance because we generated taxable income for the years then ended. As of December 31, 2019, we had deferred tax assets balance of $669,125. In connection with the newly added loan recommendation services and prepaid payment network services, we believe that we will continue to generate sufficient taxable income in 2020 fiscal year. Therefore, we believe that we can utilize the remaining deferred tax asset to offset future taxable income.

 

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Net Income

 

As a result of the foregoing, we reported a net income of $1,834,353 for the fiscal year ended December 31, 2019, representing a $679,841 increase from the net income of $1,154,512 for the fiscal year ended December 31, 2018.

 

Our business has been negatively impacted due to the COVID-19 coronavirus outbreak. In the beginning of February 2020, we had to temporarily suspend our prepaid payment network services due to government restrictions. Throughout the COVID-19 outbreak, we managed to promptly implement a series of response measures, including full work force resume remotely by the end of February. On March 10, 2020, we fully resumed our operation. In light of the current circumstances, based on available information, for the period from January to April 2020, our total revenue decreased by approximately 13% from the originally expected amount of approximately $0.87 million to the actual result of approximately $0.76 million. As a result, our net income for this period has also been reported as lower than expected by approximately $0.2 million. Nevertheless, we expect the negative impact of the COVID-19 outbreak on our business and revenue to be temporary.

 

Liquidity and Capital Resources

 

As of December 31, 2019, we had $251,031 in cash and restricted cash on hand as compared to $165,368 as of December 31, 2018. We also had $236,582 in accounts receivable as of December 31, 2019, which we have fully collected by the end of March 2020.

 

As of December 31, 2019, we had deferred revenue of $1,190,106, which represents payments of service fee we had received in advance prior to fully satisfying our service obligation in connection with our consumer loan repayment and collection management business. Such amount is expected to be fully recognized as revenue in the 2020 fiscal year. We also had a related-party loan balance of $1,209,691 as of December 31, 2019, representing cash advances that are lent by our controlling shareholder and used to support our working capital need. We believe that our controlling shareholder will not seek for repayment of this loan anytime soon.

 

As reflected in our consolidated financial statements, our revenue decreased by approximately $2.4 million from approximately $6.4 million in the 2018 fiscal year to approximately $4.0 million in the 2019 fiscal year. Net cash used in operating activities amounted to approximately $1.4 million for the fiscal year ended December 31, 2019. As of December 31, 2019, we had negative working capital of approximately $0.5 million.

 

In assessing our liquidity, our management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. As of December 31, 2019, we had cash and restricted cash of approximately $0.3 million. Accounts receivable of $0.2 million associated with services rendered for our prepaid payment network business and loan recommendation business has been billed to our customers but has not been collected as of the balance sheet dates. We fully collected the December 31, 2019 accounts receivable as of the date of this prospectus and such cash collection can be used to support our working capital need. As of December 31, 2019, we had approximately $1.2 million deferred revenue representing our unsatisfied performance obligations as of the balance sheet date. Such deferred revenue will be recognized as revenue within one year. We also borrowed approximately $1.2 million, which was provided by our controlling shareholder, Ms. Qiaoling Lu, to support our working capital need. Ms. Qiaoling Lu will not seek repayment of her related party balance of 1.2 million until at least 12 months from the issuance of the financial statements. In addition, she also made pledges to provide continuous financial support to us for at least next 12 months from the date of this prospectus.

  

In order to diversify our business types and revenue sources, we started our loan recommendation services in June 2019 and prepaid payment network services in August 2019. Revenue from our loan recommendation and prepaid payment network services in 2019 fiscal year amounted to $260,388 and $86,052, respectively. From January to April 2020, our loan recommendation services had successfully enabled 16 borrowers to obtain loans from our funding partners, and we had provided technology consulting and support services under our prepaid payment network business to one customers. We have generated approximately $0.8 million in revenue from these two new lines of business during the period from January to April 2020 despite the impact of COVID-19. Based on the current trend and our management’s planned business strategies, we expect revenue from our loan recommendation and prepaid payment network businesses to grow during the remaining months of 2020 fiscal year. We expect to recommend more qualified borrowers to funding partners and assist those borrows to obtain loans collateralized by properties. We further expect to provide prepaid payment network services to more customers and anticipate to facilitate increased sales of prepaid gift and debit cards in 2020. We believe that our loan recommendation and prepaid payment network services business will contribute to our revenue growth and improve our operating cash flow.

 

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Currently, we improve our liquidity and capital sources primarily through cash flows from operation and financial support from our principal shareholders. In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain funds as needed. At the present time, however, we do not have commitments of funds from any third party.

 

We believe that our current cash and cash flows provided by operating activities and borrowings from our principal shareholders will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued.

 

In light of the effects of the COVID-19 outbreak as discussed above, if we are required to operate in a challenging economic environment in China, if we incur unanticipated capital expenditures, or if we decide to accelerate our growth, we may need additional financing. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders. 

 

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

 

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

 

   For the Fiscal Years Ended December 31, 
   2019   2018 
Net cash used in operating activities  $(1,375,258)  $(4,630,273)
Net cash provided by (used in) investing activities   10,747    (13,302)
Net cash provided by financing activities   1,443,234    4,440,584 
Effect of exchange rate change on cash and restricted cash   6,940    162,347 
Net increase (decrease) in cash and restricted cash   85,663    (40,644)
Cash and restricted cash, beginning of year   165,368    206,012 
Cash and restricted cash, end of year  $251,031   $165,368 

 

Operating Activities

 

Net cash used in operating activities was $1,375,258 for the fiscal year ended December 31, 2019, which primarily consisted of the following:

 

  Net income of $1,834,353 for the fiscal year.

 

  An increase in accounts receivable of $238,609. The increase was due to our provision of loan recommendation services in June 2019 and prepaid payment network services in August 2019 and, in connection with the two business lines, our performance obligation under our service agreements with clients had been fully satisfied. We had fully collected our accounts receivable in March 2020. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
     
  A decrease in deferred revenue of $3,618,822. The decrease was due to the recognition of such amount as revenue when our performance obligation associated with our consumer loan repayment and collection management services had been satisfied during the 2019 fiscal year.

 

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Net cash used in operating activities was $4,630,273 in the fiscal year ended December 31, 2018, which primarily consisted of:

 

  Net income of $1,154,512 for the fiscal year.

 

  An increase in prepaid expenses and other current assets of $429,283. The increase was due to the fact that we had 21 local branch offices and hired a large number of employees in different areas for the operation of our consumer loan repayment and collection management business in the  2018 fiscal year. We provided cash to local employees for business purposes and prepaid a considerable amount of office rental deposit to landlords.
     
  A decrease in deferred revenue of $6,390,171. The decrease in deferred revenue was due to the recognition of such amount as revenue when our performance obligation associated with our consumer loan repayment and collection management services had been satisfied during the 2018 fiscal year.

 

  A decrease in accrued expenses and other current liabilities of $378,479. The decrease was primarily due to reduced payroll payable when we reduced the number of employees during the process of closing our 21 local branch offices.

 

Investing Activities

 

Net cash provided by investing activities amounted to $10,747 for the fiscal year ended December 31, 2019, primarily consisting of proceeds from disposal of equipment.

 

Net cash used in investing activities amounted to $13,302 for the fiscal year ended December 31, 2018, primarily consisting of purchasing fixed assets.

 

Financing Activities

 

Net cash used in financing activities amounted to $1,443,234 and $4,440,584 for the fiscal years ended December 31, 2019 and 2018, respectively, primarily consisting of proceeds provided by related parties as working capital.

 

Contractual obligations

 

Lease commitment

 

We entered into operating lease agreements with the landlords to lease office space in Shanghai City and Qingdao City, China. For the years ended December 31, 2019 and 2018, total operating lease expense amounted to $126,176 and $164,016, respectively, among which, office lease expense of $78,716 and $82,197, respectively, was paid to the landlord through loans from our CEO and controlling shareholder, Ms. Qiaoling Lu.

 

As of December 31, 2019, future minimum lease payments under the non-cancelable operating lease agreement are as follows:

 

Year ending December 31,  Lease expense 
2020  $64,143 
Total  $64,143 

 

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Trend Information

 

Other than as disclosed elsewhere in this prospectus, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenue, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of December 31, 2019 and 2018.

 

Inflation

 

Inflation does not materially affect our business or the results of our operations.

 

Seasonality

 

Seasonality does not materially affect our business or the results of our operations.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, useful lives of property and equipment, the realization of deferred tax assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Uses of estimates

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, useful lives of property and equipment, the recoverability of long-lived assets, realization of deferred tax assets, and provision necessary for contingent liabilities and revenue recognition. Actual results could differ from those estimates. 

 

Accounts receivable, net

 

Accounts receivable include service fees generated through our loan recommendation and prepaid payment network services to customers.

 

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We reduce accounts receivables by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid consideration to us. We determine the adequacy of allowance for doubtful accounts based on individual account analysis, historical collection trend and best estimate of specific losses on individual exposures. We establish a provision for doubtful receivable when there is objective evidence that we may not be able to collect amounts due. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of December 31, 2019 and 2018, there was no allowance recorded as we consider all of the accounts receivable fully collectible.

 

Revenue recognition

 

We early adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with customers”, using the modified retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services. It is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

 

We have assessed the impact of the new guidance by reviewing our existing customer contracts and current accounting policies and practices and identifying differences that will result from applying the new requirements, including the evaluation of our performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, we concluded that there was no change to the timing and pattern of revenue recognition for our current revenue streams in scope of Topic 606. Therefore, there was no material changes to our consolidated financial statements upon adoption of ASC 606.

 

We currently generate our revenue from the following main sources:

 

Revenue from consumer loan repayment and collection management services

 

Loans facilitated through us were consumer loan products ranging from 30,000 RMB (approximately $4,342) to 80,000 RMB (approximately US$11,579). Loan term ranges from one year to four years. All our clients are individual investors who entered into service agreements with us. All these loans were facilitated through our offline loan recommendation services before November 2017. Since November 2017, we have not provided any intermediary services for any new investors due to changes in related governing regulations in China, and we have been focusing on providing services related to consumer loan repayment and collection management to our investor clients. These consumer loan repayment and collection management services are a part of the service obligations in our service agreements with our investor clients. Pursuant to services agreements entered with individual investors, investors authorized us to monitor and manage the repayment and collection process of outstanding loans for a fixed service fee, which was paid upfront by investors. We are required to monitor loans within the loan term to ensure timely repayment of loans when they become due. Once a specific loan is repaid on time, our service obligation related to such loan is satisfied. If a loan becomes delinquent, we are then required to assist in collection efforts for an extended service period of additional 12 months starting with the day when such loan becomes delinquent. If all or a part of the loan is still not repaid after all collection management efforts are exhausted within such required service period, our service obligation related to such loan is satisfied and we are not responsible for any loss from an uncollectible.

 

Our loan repayment services primarily include reconciling borrower repayment record and sending payment reminder and notice, while our collection management services involves using our experienced in-house team and/or collaborating with third-party collection agents and law firms to recover delinquent loans. Loan repayment management fee is recognized when a specific borrower repays the principal and interests to the investor within the loan term. Collection management fee is recognized at earlier of either successful recovery of full or a part of a delinquent loan or after 12 months from the time when such loan becomes delinquent.

 

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Loan management and collection management fees received from investors in advance are deferred and recognized as revenue over time when designated services are performed.

 

Revenue from services provided to borrower for loan recommendation

 

We started to provide recommendation services by recommending certain borrowers to funding partners consisted of various financial institutions since June 2019 started to provide borrower recommendation services where we recommend prospective borrowers to funding partners since June 2019. Our services include making loan product recommendations to borrower applicants based on their specific needs, processing paperwork related to borrowers’ applications, evaluating credentials of borrower applicants, appraising borrowers’ properties to be collateralized through data analysis and on-site inspection, and recommending qualified borrowers to various funding partners for loan approval. We receive a service fee from a borrower if he or she is approved for a loan and such loan is then funded by one of our funding partners. We recognize revenue at the point when our recommendation services are performed and the loan proceeds are disbursed to a specific borrower. For the year ended December 31, 2019, we earned $260,388 recommendation service revenue.

 

Revenue from prepaid payment network services

 

In 2012, one of our VIE subsidiaries, Qingdao Buytop, was granted a third-party payment service license by the relevant authority in China. We started to provide prepaid payment network services to merchant customers since August 2019. We are licensed to issue generic and branded prepaid gift and debit cards and provide related services to various merchants, such as supermarket and department stores, etc. In connection with repaid payment network services, we expect to generate revenue from : (1) technology consulting and support services fees related to payment solution planning, design, and management; (2) prepaid card payment services fees related to issuance and use of prepaid cards. We recognize revenue from the prepaid card payment services fees when we perform the services. Since this is a relatively new line of business, we only generated a small amount of revenue related to technology consulting and support services during the year ended December 31, 2019.

 

Contract Assets and Liabilities

 

We did not have contract assets as of December 31, 2019 and 2018.

 

Contract liabilities are recognized for contracts where payment has been received in advance of delivery. Our contract liabilities, which are reflected in its consolidated balance sheets as deferred revenue of $1,190,106 and $4,840,988 as of December 31, 2019 and 2018, respectively, consist primarily of our unsatisfied performance obligations as of the balance sheet dates.

 

Disaggregation of revenue

 

Revenue disaggregated by service types was as follows for the fiscal years ended December 31, 2019 and 2018:

 

  

For the Fiscal Years Ended
December 31,

 
   2019   2018 
Revenue from consumer loan repayment and collection management services  $3,618,823   $6,389,528 
Revenue from loan recommendation services   260,388    - 
Revenue from prepaid payment network services   86,052    - 
Total revenue  $3,965,263   $6,389,528 

 

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Income Tax

 

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the fiscal years ended December 31, 2019 and 2018. We do not believe that there was any uncertain tax provision as of December 31, 2019 and 2018. Our PRC subsidiary and VIEs are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal years ended December 31, 2019 and 2018. As of December 31, 2019, all the tax returns of our PRC subsidiary and VIEs remain available for statutory examination by PRC tax authorities.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components. In November 2019, FASB released ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which modified the implementation date of the standard. For public entities, the guidance will be effective for fiscal year beginning after December 15, 2018 and interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. As an emerging growth company, we will adopt this guidance effective January 1, 2021. The Company does not expect the cumulative effect resulting from the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We do not expect this guidance to have a material impact on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, we plan to adopt this guidance effective on January 1, 2023. We are currently evaluating the impact of our pending adoption of ASU No. 2016-13 on our consolidated financial statements.

 

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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 March, 2020 entitled “The Consumer Loan Repayment and Collection, Loan Recommendation, and Third-Party Payment Market Study in China,” which is filed as exhibit 99.4 to this registration statement (the “Frost & Sullivan 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.

 

Overview of Consumer Loan Repayment and Collection Management Market in China

 

Market Definition and Segmentation

 

Loan repayment and collection management services include, but are not limited to, repayment records reconciliation and sending payment reminder and notice, which are services provided to assist borrowers with paying loans on time prior to delinquency. Upon delinquency, loan repayment and collection management services include using in-house resources to collect delinquencies, supervising collection services outsourced to third-party collection agencies, and, depending on circumstances, engaging third-party law firms and initiate judicial proceedings against delinquent borrowers on behalf of investors after receiving investors’ express authorization.

 

Market Overview

 

The consumer credit market in China has recorded a substantial growth in recent years due the rapid economic growth and development of Internet finance and e-commerce. The outstanding balance of consumer loans in China increased from RMB15.4 trillion (approximately US$2.17 trillion) in 2014 to RMB47.2 trillion (approximately US$6.65 trillion) in 2019, at a CAGR of 25.1%.

 

As people’s standards of living have improved in China, China’s disposal income per capita has increased year-on-year from 2014 to 2019. This increase in Chinese consumers’ disposable income, coupled with a high level of consumer confidence, indicates a strong appetite to spend. As a result, the consumption structure has shifted from staple and necessity goods to premium products and services. There is an increasing consumption demand for luxury goods, travel, cosmetic medicine, education and home renovation and a desire to enhance personal well-being. The increasing consumption demand for a diversified portfolio of goods and services gives rise to a parallel increase of small, convenient, consumer loan products. It is forecasted that the outstanding balance of consumer loans in China would reach RMB 109.3 trillion (approximately US$15.4 trillion) by 2024, at a CAGR of 18.3% from 2019 to 2024.

 

 

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Source: Frost & Sullivan

 

The growth of the consumer credit market has contributed to the rise of a market for delinquent consumer loans recovery services in China. The delinquent consumer loans recovery market in China is in its early stage of development, compared to more mature markets such as that of the United States. It has experienced a high rate of growth since 2013 and is one of the important factors affecting the market size of loan repayment and collection management services in China. The size of the consumer loan repayment and collection management market in China increased from RM7.8 billion (approximately US$1.10 billion) in 2014 to RMB38.8 billion in 2019 (approximately US$5.47 billion), at a CAGR of 37.8%.

 

Technological advancements related to online financing contribute to the rising demand for consumer loan repayment and collection management services in China. Specifically, big data and borrower-acquisition related technological advancements have enabled many online financing platforms to acquire borrowers in a cost-effective manner. As a large number of consumer loans are originated through online financing platforms in a relatively short period of time, delinquency rate of these loans increases as well, hence increasing the demand for consumer loan repayment and collection management services in China. The size of the consumer loan repayment and collection management market is expected to grow at a CAGR of 19.0% from 2019 to 2024.

 

 

Source: Frost & Sullivan

 

Growth Drivers

 

The primary drivers behind the growth of the consumer loan repayment and collection management market include:

 

Government policies in promoting consumer finance – The Chinese government has supported the development of the consumer finance market by promulgating and implementing policies that promote domestic consumption. In 2016, the Report on the Work of the Government, released by the State Council of the People’s Republic of China, heightened the importance of developing consumer finance services to serve people with low to medium incomes and enable their spending potential to achieve economic growth. In December 2016, the China Banking Regulatory Commission (“CBRC”) held a press conference, at which CBRC recognized the critical role of consumer-finance service providers in boosting consumption and improving people’s standard of living.

 

Shifting of economy towards a consumption-driven model – The per capita annual disposable income of urban household increased from RMB28.8 thousand (approximately US$4.06 thousand) in 2014 to RMB39.3 thousand (approximately US$5.54 thousand) in 2018, representing a CAGR of approximately 8.1%. In light of the rising disposable income, China is shifting its economy towards a consumption-driven model, with the total value of consumption increasing from RMB27.2 billion (approximately US$3.83 billion) in 2014 to RMB41.2 billion (approximately US$5.81 billion) in 2019, at a CAGR of 8.7%. Along with growing consumption power, the consumption-driver model will continue to increase the demand for financial services in the personal consumption space in China, including the demand for consumer loan repayment and collection management services.

 

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Proliferation of online consumer loans – With an ever-faster pace of data generation and comprehensive data gathering through e-commerce, social networks, and other use cases of mobile Internet, financial institutions have invested heavily in data collection, data analytics, and related technologies. Over the past few years, by leveraging their strengthened technology capabilities, financial institutions have facilitated various technological advancements in the consumer finance market, such as workflow automation and borrower/investor profiling based on big data. As a result of these technological advancements, a large number of consumer loans have been originated through online financing platforms in a relatively short period of time, which then resulted in an increased demand for consumer loan repayment and collection management services in China.

 

High growth rate of consumer loans – The total volume of consumer loans over the past few years has achieved a high growth rate and is expected to continue to grow rapidly in the foreseeable future. The outstanding balance of consumer loan in China increased from RMB15.4 trillion (approximately US$2.17 billion) in 2014 to RMB47.2 trillion (approximately US$6.65 billion) in 2019, at a CAGR of 25.1%, It is expected to increase at a CAGR of 18.3% from 2019 to 2024. The steady growth of consumer loans is primarily driven by the rising consumption demand of consumers with diverse financial backgrounds, which brings challenges for consumer finance service providers, including commercial banks, E-commerce platform and merchants affiliated finance companies, specialized consumer finance companies, P2P lenders, and payday loan lenders, to accurately evaluate these consumers’ credit profiles in a cost-efficient way. As more loan requests of borrowers with different loan repayment abilities are being approved, more difficulties and uncertainties associated with loan repayment and collection arise, which in return increases the demand for consumer loan repayment and collection management services.

 

Development of insurance sector – CBIRC issued The Guideline On High-quality Development of Banking – Insurance Sectors in 2020, which aims to diversify the financial structure of the banking and insurance system and broaden the coverage of the system. The guidance encourages the development of foreign banking and insurance institutions. As a result of the supportive government policy, the insurance financing market is expected to grow in the near future. Specifically, insurance financing service providers will be able to issue more consumer loans, which as a result may lead to an increase in the demand for affiliated loan repayment and collection management services in China.

 

Competition Overview

 

The consumer loan repayment and collection management market is highly competitive and fragmented, with competition focusing on industry reputation and expertise in the collection of consumer loans, technology and IT infrastructure, relationships with clients, quality of collection specialists’ services, and compliance with applicable laws. As estimated, there are approximately 9,000 market players in the consumer loan repayment and collection management market in China and the number of market players in Shanghai is approximately 500. Key entry barriers of consumer loan repayment and collection management market in China include the following:

 

Compliance of the repayment and collection management process – Commercial banks and online consumer finance companies have adopted stringent requirements for consumer loan repayment and collection management service providers regarding their technology, facility, compliance, and business scale. These requirements are implemented to ensure the regulatory compliance of the loan repayment and collection management process, since any violation of industry-standard practices and regulations could taint commercial banks and online consumer finance companies’ reputation and increase their regulatory risks.

 

Industry expertise and market know-how – Consumer loan repayment and collection management companies are required to have a solid market know-how to understand industry trends and provide value-added services for clients. In particular, the existing market players typically are equipped with experienced in-house teams to collect past-due loans through means of reminder, negotiation, collaboration with third-party collection agencies, and engagement of third-party law firms.

 

  Long established relationships with banks and other financial institutions – Long-established business relationships with banks and other financial institutions constitutes a critical competitive advantage that distinguishes some consumer loan repayment and collection management service providers from their competitors in China. These business relationships enable these service providers to source more deals related to consumer loans while exploring specific market trends and client needs. Specifically, the long-established business relationships allow consumer loan repayment and collection management service providers to save time and cost in deal negotiation and facilitate more effective communication with business partners during day-to-day operation.

 

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Major Competitors

 

Key market participants in the consumer loan repayment and collection management market in China include China Data Group (Suzhou) Limited, M&Y Global Services, Promisechina (Shanghai) Investment Co., Ltd and Gold Partners Management Consultancy Company Limited.

 

China Data Group (Suzhou) Limited. (“华道数据处理(苏州)有限公司”) is a private company based in Suzhou, specializing in loan repayment and collection management, digital marketing, and data management.

 

M&Y Global Services (“北京华拓金融服务外包有限公司”) is a private company based in Beijing and principally engaged in loan repayment and collection management services, user experience management, and digital marketing.

 

Promisechina (Shanghai) Investment Co., Ltd. (“上海一诺银华服务外包有限公司”) is a private company based in Shanghai, with focus on loan repayment and collection management services and related financial consultancy services.

 

Gold Partners Management Consultancy Company Limited (“高柏(中国)企业管理咨询有限公司”) is a private company based in Shanghai, specializing in loan repayment and collection management services, IPO consultancy, and wealth management.

 

Overview of Loan recommendation Market in China

 

Market Definition and Segmentation

 

To satisfy borrowers’ financing needs, service providers acting as intermediary agents recommend qualified prospective borrowers to funding partners, who in return may directly fund such borrowers. In addition to recommendation, loan recommendation agents provide other loan-related services, such as loan product consultation, loan application and relevant materials preparation and procession, credit assessment, and real estate appraisal. After loan recommendation agents recommended qualified prospective borrowers to funding partners, these funding partners independently conduct their own due diligence to review and assess the credential of the recommended prospective borrowers before making a final decision. Throughout the transaction process, funding partners assume full credit risks for issuing loans to borrowers. Loan recommendation agents do not bear any credit risk or provide any guarantee for loans directly issued by the funding partners.

 

Loan Recommendation Business Model

 

As part of the Company’s strategy to diversify and expand product and service offerings, the Company started providing loan recommendation services in June 2019. Leveraging its advanced credit assessment and risk management capabilities, the Company carefully evaluate applications and supporting materials submitted by individual borrowers and recommend those borrowers it deem qualified to funding partners, who in return directly provide funds to borrowers recommended by the Company. For details on the transaction process of the Company’s loan recommendation business, see “Business—Loan Recommendation—Our Business Model and Recommendation Process.”

 

In the future, the Company plans to collaborate with seasoned asset management corporations (AMCs) specializing in distressed debt acquisition and management. With AMCs’ commitment to purchasing funding partners’ rights in defaulted loans, the Company believes its collaboration with AMCs will effectively mitigate the impact of a default and expand the scale of loan origination, which in return can better serve borrowers’ financing needs and increase the borrower base for the Company’s loan recommendation business.

 

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The Company has the following competitive strengths in the loan recommendation market:

 

The Company’s collaboration with its funding partners, many of which are leading national and regional banks in China, leads to a distinct, sustainable funding advantage. As of the date of this prospectus, the Company is working with eight funding partners, who are drawn to the Company because of convenient access to a high-quality borrower applicants base, effective credit assessment and risk management support, and risk-adjusted returns. As of the date of the prospectus, the Company delivers value in the form of delinquency rate of zero percent.

 

Credit assessment and risk management is a major competitive advantage of the Company. The Company has devised and implemented a systematic credit assessment model and an asset-driven, disciplined risk management approach to minimize a borrower’s default risk and mitigate the impact of default. The core value of the Company’s risk management approach lies in its real estate appraisal. The Company requires a current real estate appraisal on all the properties borrowers intend to collateralize. The valuation process is led by in-house appraisers who factor different risks associated with the properties into the appraisal process. Such process enables borrowers to obtain the loan amount that accurately corresponds to the value of their properties and properly reflects the local market liquidity. It also protects funding partners against lending more than they might be able to recover in the case of default. For details, see “Business—Loan Recommendation—Credit Assessment and Risk Management.”

 

Market Overview

 

Supported by the PRC government’s continuous fixed asset investment, completed investment in real estate in China had reached a CAGR of approximately 7.3% from 2014 to 2019, reaching RMB9.1 trillion (approximately US$1.3 trillion) by the end of 2019. Stimulated by the rapid urbanization and demand for residential flats, the real estate market in China is forecasted to grow at a steady rate in the near future.

 

 

Source: Frost & Sullivan

 

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Growth Drivers

 

The primary drivers behind the growth of the loan recommendation market in China include:

 

Supportive governmental policies – The real estate market in China has been supported by various governmental policies over the past years. The “13th Five-Year Plan for Development of Construction Industry” (《建築業發展 “十三五” 規劃》) layouts the targeted growth rate of the construction industry in China, which is approximately 7% from 2016 to 2020. The Plan for the Development of Regional Integration in the Yangtze River Delta (長三角一體化發展), adopted by the State Council of the People’s Republic of China in 2019, promotes the integration of areas of Shanghai, southern Jiangsu province and northern Zhejiang province, particularly focusing on construction and related business activities. As a result, such policies would contribute to the growth of the regional real estate market and increase the demand for real-estate related financial services, such as loan recommendation services for mortgages.

 

Steady Growth of the real estate market – The growing amount of real estate investment has been a major factor underpinning the rapid development of the real estate market in China. According to the National Bureau of Statistic of China, completed real-estate investment transactions in China reached a CAGR of approximately 7.4% from 2014 to 2018 and achieved RMB8.5 trillion by the end of 2018 and it is forecasted to grow at a CAGR of 5.8% from 2019 to 2024. In addition to contributing to the development of the real estate market in China, the growing amount of real estate investment will further increase the demand for real estate related financial services, such as loan recommendation services for mortgages.

 

Enhanced credit assessment and risk management capabilities – The social credit system is a national credit system developed by the Chinese government. Its trial period started in 2009. In 2014, the credit system was first used by eight credit scoring firms in China. In 2018, the People’s Bank of China became the agency in charge of managing the credit system. The credit system is designed and implemented to standardize the assessment process of citizens’ and businesses’ economic and social credits. Credit data in the Social Credit System will be accessible to the eight credit scoring firms, which, in return, may provide the public with the data. This mechanism constitutes an efficient, convenient, and accurate method to verify citizens’ and businesses’ data in China. Loan recommendation service providers may conduct preliminary screening on borrowers by accessing data in the Social Credit System through the credit scoring firms. Access to such system strengthens loan recommendation service providers’ credit assessment and risk management capabilities, reduces their operational cost, and improves their operational efficiency.

 

Competition Overview

 

The loan recommendation market in China is highly competitive. It contains a large number of market players. Companies compete on credit assessment and risk management capabilities, reputation, and source of funding partners. As estimated, there are approximately 15,000 market players in the mortgage sector of the loan recommendation market in China and the number of market players is estimated to be around 1,000 in Shanghai City. Key entry barriers of the loan recommendation market in China include the following:

 

Risk management and credit evaluation system – Companies entering the loan recommendation market must possess strong credit assessment and risk management capabilities and establish a systematic and effective risk management and credit evaluation system to screen prospective borrowers. Loan recommendation service providers with sound credit assessment and risk management capabilities are more likely to achieve higher recommendation success rates as compared to those who do not possess the capabilities on the same level.

 

Brand reputation – Loan recommendation service providers usually rely on existing clients’ word of mouth to acquire potential clients and establish market presence. As a result of word of mouth, potential clients are more inclined to choose renowned institutions who have already established successful track record in the loan recommendation market. Such feature poses challenges for new market entrants to grow their businesses and build industry credibility.

 

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Major Competitors

 

Key market participants in the loan recommendation market in Shanghai include Shanghai Qingpu Real Estate Investment Property Co., Ltd, Shanghai Hongkou Real Estate Service Co., Ltd. and Shanghai Yangpu Public Housing Asset Management Co., Ltd.

 

Shanghai Qingpu Real Estate Investment Property Co., Ltd. (“上海青浦区房地产投资置业有限责任公司”) is a private company based in Shanghai and provides loan recommendation services, property development, financing and loan guarantee services.

 

Shanghai Hongkou Real Estate Service Co., Ltd. (“上海虹口置业服务有限公司”) is a private company based in Shanghai and specializes in providing loan recommendation services and property agency services.

 

Shanghai Yangpu Public Housing Asset Management Co., Ltd. (“上海杨浦公房资产经营有限公司”) is a private company based in Shanghai and is principally engaged in providing loan recommendation services, property development and loan guarantee services.

 

Overview of Third-party Payment Services Market in China

 

Market Definition and Segmentation

 

Third-party payment service providers act as an intermediary for payment processing and settlement between consumers and merchants. In general, third-party payment services are provided by a non-bank corporation. Third-party payment services are classified as four main types: (i) Point-of-sales (POS); (ii) Internet payment; (iii) Mobile-related payment (including mobile POS and mobile payment); and (iv) cross-border payment services. Prepaid payment network services fall under the categories of POS and Internet payment.

 

Introduction of Prepaid Payment Network Services

 

Prepaid card issuance and related payment processing is a subcategory of third-party payment services, which are highly regulated by relevant governmental authorities in China. In order to provide services related to prepaid card issuance and payment processing, a service provider must obtain two separate licenses, namely, prepaid card issuance license and prepaid card payment acceptance license. Alternatively, a service provider must obtain a third-party payment license that allows prepaid card related payment activities.

 

Prepaid cards can be widely used in various commercial settings. They may serve as shopping vouchers and rechargeable consumption cards. Generally, there are two types of prepaid cards, namely, single-purpose prepaid cards (i.e. prepaid cards that can be only used to purchase goods and services provided by the card issuer or companies related to the card issuer) and multipurpose prepaid cards (i.e. prepaid cards that can be used to purchase goods and services provided by a diverse group of companies across regions and industries). Issuing single-purpose prepaid cards and processing related payment transactions does not require a service provider to obtain any third-party payment license. In comparison, issuing multipurpose prepaid cards and processing related payment transactions require a service provider to obtain relevant third-party payment licenses.

 

Market Overview

 

The size of the third-party payment services market in China has rapidly grown over the years, which is mainly attributable to the general economic growth and the booming of e-commerce market in China. In particular, the mobile POS and mobile payment segment has experienced the greatest growth among the other two third-party payment services market segments. POS services and Internet payment had increased with CAGRs of 36.4% and 35.1%, respectively, during the same period.

 

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Due to the outbreak of COVID-19, China’s economy is expected to slow down in 2020. The closure of a large amount of retail stores will adversely impact the demand for POS services and mobile-related payment services. Meanwhile, the demand for Internet payment services will remain strong as the e-commerce market in China is not expected to be much affected by the outbreak of COVID-19. From 2020 onward, the third-party payment services market is expected to rebound and restore its steady growth. The market size is expected to reach RMB420.2 trillion by 2024, with a CAGR of 9.6% from 2019 to 2024.

 

 

Source: Frost & Sullivan

 

Growth Drivers

 

The primary drivers behind the growth of the third-party payment services market include:

 

Consumers’ changing consumption habits – The rapid development of e-commerce in China has completely changed consuming behaviors in China, as well as consumers’ payment preferences. According to the Ministry of Commerce of the PRC, the total e-commerce transaction volume in 2018 reached RMB31.6 trillion, representing a CAGR of 17.8% from 2014 to 2018. As a result, the demand for mobile and digital payment solutions has been rising, which has expanded the third-party payment services market in China. In addition, Chinese citizens’ improved standard of living has contributed to the growth of the retail industry in China, which subsequently creates more demands for third-party payment services.

 

Increased popularity of prepaid cards – Increased popularity of prepaid cards has been one of the critical factors driving the growth of third-party payment services market in China. Prepaid cards are widely used across various industry verticals such as corporate institutions, retailers, governments and financial institutions and commonly used to pay for a variety of goods and services. As a result of the rising number of internet users and the booming e-commerce industry in China, prepaid cards have become an increasingly popular payment method among consumers. Demand for prepaid cards is expected to continue to grow in China as payment service providers update their technologies and provide cardholders with enhanced user experience. As prepaid cards’ popularity and market acceptance continuously increase, the third-party payment services market in China is simultaneously expected to expand.

 

Regulatory development – The PRC government and the PBOC have introduced specific policies focusing on improving the regulatory framework of the third-party payment services market in China. The Regulations on Inspection and Verification of Non-financial Institutions Payment Service Business System (《非金融机构支付服务业务系统检测认证管理规定》) was promulgated by the PBOC on June 16, 2011. The regulations specified, among other requirements, safety and management requirements for third-party payment institution business system and communication system. The Measures for the Deposit of Customer Provisions of Payment Institutions (《支付机构客户备付金存管办法》) ( [2013] No. 6 of the People’s Bank of China), which was released by the PBOC on June 7, 2013, requires that the customer provisions received by payment institutions must be fully deposited into an escrow account at an designated provision bank. In 2017, the PBOC announced plans to regulate risks related to QR code payment. Specifically, third-party payment service providers must apply for permits in order to offer barcode-based payment services. With the introduction of more policies and regulations, the regulatory framework for third-party payment services market in China will become more comprehensive and transparent, promoting a stable commercial environment for service providers to develop their businesses.

 

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Demand underpinned by the rising number of micro and small merchants – The rising number of micro and small merchants in China translates into growth opportunities for the third-party payment services market. Due to these merchants’ small business sizes and limited resources, third-party payment solutions that are convenient, efficient and affordable meet merchants’ increasing payment processing needs. In addition, as mobile payments become universally acceptable among consumers in China, there are more micro and small merchants who need payment solutions that enable them to accept bank cards and other digital payment methods, such as QR code payment, in a cost-effective way.

 

Competition Overview

 

The third-party payment services market is highly regulated in China. In 2019, the total number of licensed third-party payment service providers amounts to 240 in China. Third-party payment service providers primarily compete on the basis of the scope of service offerings and service fees. Key entry barriers to the third-party payment services market in China include the following:

 

Licensed market – In order to regulate access to the third-party payment services market and tighten regulations over the market, the PBOC has only issued 271 Payment Business Permits since 2011. With 31 retracted licenses, the total number of licensed third-party payment service providers amounts to 240 in China in 2019. New market entrants must meet the stringent financial and compliance requirements determined by the PBOC and other relevant regulatory bodies in order to acquire a Payment Business Permit, whose market price is approximately RMB 25 million (approximately US$3.54 million).

 

Established business relationship – Existing market players, particularly the leading players, have already established stable relationships with different stakeholders in the third-party payment services market, including, but not limited to channels partners, including commercial banks and SaaS providers, NetsUnion, UnionPay, and relevant regulatory authorities. To reduce their operational risks and cost, merchants as potential clients are more inclined to use services provided by payment solution service providers who have established stable business relationships with various stakeholders. Therefore, if new market entrants cannot establish and maintain such connections with these stakeholders in a cost-effective manner, they may not be able to grow their businesses and survive in the market.

 

Major Competitors

 

Key market participants in the third-party payment services market in Shandong Province include Shandong Chenglian Card Payment Co., Ltd., Qingdao Baisentong Payment Co., Ltd. and Shandong Feiyin Intelligent Technology Co., Ltd.

 

Shandong Chenglian Card Payment Co., Ltd. (“山东城联一卡通支付有限责任公司”) is a private company based in Shandong Province specializing in prepaid card issuance and acceptance in Shandong province.

 

Qingdao Baisentong Payment Co., Ltd. (“青岛百森通支付有限公司”) is a private company based in Shandong Province, focusing on prepaid card issuance and acceptance and wholesale business in Qingdao City.

 

Shandong Feiyin Intelligent Technology Co., Ltd. (“山东飞银智能科技有限公司”) is a private company based in Shandong Province and is principally engaged in prepaid card issuance and acceptance in Shandong Province.

 

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Our Strengths

 

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

 

Local Market leading position – Through its wholly-owned subsidiary, Qingdao Buytop Payment Services, Co., Ltd., the Company is a leading third-party payment service provider in Qingdao City*, Shandong Province, China. It owns the largest market share in the multipurpose prepaid cards segment with a focus on large shopping malls.

 

Reliable, Robust Technology Infrastructure – With the support of reliable, robust technology infrastructure, the Company has been able to organically scale its prepaid payment network services business. Leveraging such technology infrastructure, the Company has developed technology systems that allow it to process a large volume of transactions, achieve high level of stability, promote workflow automation, and build an easily scalable business model.

 

Forefront at the industry – The Company is one of the 237 third-party payment service providers authorized by CSRC to offer payment and settlement services as of April 2020. In particular, the Company is one of the third-party payment service providers authorized to offer payment services specifically related to prepaid card issuance and acceptance.

 

Experienced management team – The Company’s management team has demonstrated extensive expertise and track record in both technology and financial services industries, which are critical to the Company’s growth in the third-party payment services market.

 

Note: * According to the National Statistics Bureau of China, Qingdao City is the eleventh largest city in terms of GDP in the PRC in 2018 with the population of over 9 million. In terms of GDP, the comparable cities in the U.S. include St. Louis and Portland.

 

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BUSINESS

 

We are a growing financial service provider that offers a comprehensive range of financial services across consumer loan repayment and collection management, loan recommendation, and prepaid payment network services in China. Leveraging a deep understanding of our client base, strategic partner relationships, and valuation models and technologies, we are committed to working with our clients to understand their financial needs and challenges and offering customized services to help them meet their respective objectives.

 

 

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Consumer Loan Repayment and Collection Management

 

Relying on our industry expertise and proprietary technology, our unique approach that integrates internal and external resources under a centralized management system allows us to offer investors a cost-effective and trustworthy solution to recover consumer loans. We have devised and implemented a systematic repayment and collection management process adapted to each stage of a loan. Prior to loan delinquency, we provide investors with services such as repayment record reconciliation and payment reminder and notice. Upon delinquency, our experienced in-house team works on recovering past-due loans during the first three months of delinquency through means that do not require face-to-face interaction. If delinquency exceeds three months, we outsource loan collection services to reputable and local licensed third-party loan collection agencies, whose performance is supervised and evaluated by us under our monitoring system. Specifically, these third-party agencies collect past-due loans through various collection efforts such as professional skip-tracing (i.e. the process of locating a borrower who cannot be found at his or her place of residence or usual hangouts) and on-site visits. After the first six months of delinquency, if all the previous efforts to recover past-due loans remain unsuccessful, and after having received our investors’ express authorizations, we then engage reputable third-party law firms and initiate judicial proceedings against the delinquent borrower on behalf of our investors. As we exclusively rely on third-party resources for on-site visits, our in-house team is able to minimize potential physical confrontation with borrowers and effectively control compliance-related risks. In addition, we coordinate and manage all client engagements and collected information centrally through our Shanghai headquarters. Through our internal management system, we assign and adjust repayment and collection tasks to in-house specialists and third-party collection agencies based on a variety of factors. We believe our centralized management allows us to streamline and standardize the payment and collection management process, effectively monitor compliance level, and increase collection efficiency.

 

We believe that the expertise and service quality of collection specialists is critical to the success of our business. As a result, we place considerable focus on attracting, nurturing, and retaining of our in-house specialists by providing mentorship, continued education, and performance-based promotion track. We carefully select third-party collection agencies based on our rigorous standards and only collaborate with those whose corporate history, past business activities, and internal compliance policies and measures meet our selection criteria. As we strengthen business partnerships with qualified collection agencies and help our in-house specialists accumulate experience over time, we expect continued improvement in productivity and profitability.

 

During the 2019 and 2018 fiscal years, the total amount repaid by borrowers and collected by us and third-party agencies reached RMB18.78 million (approximately US$2.72 million) and RMB82.79 million (approximately US$12.51 million). While we offer services nationwide, we strategically focus on strengthening our presence in second-tier and third-tier Chinese cities where we have observed a strong demand for consumer loans. Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. Our current loan repayment and collection management engagements will all be completed by the middle of 2020. Those investors paid service fees for loan repayment and collection management as part of our service agreements entered at the time of loan facilitation. Such prepayments are recorded as a credit to a liability account for prepayments on our balance sheet. As we provide loan repayment and collection management services to specific investor clients, loan management and collection management fees received from investors in advance are deferred and recognized as revenue over time when designated services are performed. Since the end of 2017, we have not charged any new fees for loan repayment and collection management.

 

For the 2019 and 2018 fiscal years, revenue generated from our consumer loan repayment and collection management services was US$3,618,823 and US$6,389,528, respectively. In the future, we plan to provide our repayment and collection management services to other online consumer finance companies and major commercial banks in China. We believe our proven track record, industry reputation, integrated repayment and collection management approach, and centralized management sets solid foundation for us to develop relationships with prospective clients.

 

Loan Recommendation

 

As part of our strategy to diversify and expand our product and service offering, we started our loan recommendation business in June 2019. Leveraging our advanced credit assessment and risk management capabilities, we carefully evaluate applications and supporting materials submitted by individual borrowers and recommend those borrowers we deem qualified to funding partners, who in return directly provide funds to borrowers recommended by us. We endeavor to provide a transparent, seamless, and convenient recommendation process for both borrowers and funding partners, while safeguarding their respective interests.

 

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We provide services including processing paperwork related to borrowers’ applications, evaluating credentials of borrower applicants, and appraising properties to be collateralized through data analysis and on-site inspection. For borrowers we acquired through business contacts, we do not directly charge them any service fee. Instead, referral partners first charge borrowers service fees for their referrals. We then charge the referral partners a commission pursuant to the service agreement between us and the referral partners. Our commission rate for the period from our business launch to December 31, 2019 was 1.5% to 2%. For the borrowers directly acquired by us, we directly charge them service fees as a percentage of the loan amount pursuant to service agreement between us and them. Our service fee rate for the period from our business launch to December 31, 2019 was 1.75% to 3%.

 

We only recommend borrowers who are able to collateralize properties that have been evaluated and approved by our team of experienced in-house appraisers. We are confident that our disciplined, asset-driven risk management approach can effectively minimize borrowers’ default risk, mitigate the impact of a default, and promote sustainable returns for our funding partners. Specifically, we require a current real estate appraisal on all properties that borrowers intend to collateralize. Leveraging our appraisal model and technologies, our experienced in-house appraisers first undertake a rigorous due diligence process involving intensive data collection, review, and analysis to ensure that we understand the state of the market and the risk-reward profile of the property. Our team then conducts a complete visual inspection of the interior and exterior of the property, through which they notice and examine conditions that might adversely affect the property’s value. After consolidating information collected through various channels, our in-house appraisers compare the property with comparable sales based on a set of factors selected to assess specific features of the property and its market conditions. As of the date of the prospectus, through our advanced risk management capabilities, mortgage loans granted to borrowers recommended by us achieved a default rate of zero percent as opposed to an industry average of approximately 3% for similar loans.

 

We continuously work on strengthening our cooperation with funding partners and organically expanding our network of funding partners. As of the date of this prospectus, the Company is working with eight funding partners. We provide our funding partners access to our high-quality borrower applicants base, as well as enhanced credit assessment and risk management capabilities. Our value proposition is further magnified by the repeat lending and cross-selling opportunities we provide to them. Once borrowers are connected to funding partners through our services, funding partners will be able to extend more loans and sell other financial products to such borrowers. As of the date of the prospectus, we deliver value in the form of delinquency rate of zero percent. We acquire our funding partners through word-of-mouth referrals and referrals made by our shareholders and management team members, many of whom have established extensive connections in the financial industry based on their respective years of professional experience. Although subject to regulations on loan recommendation services, our business model does not subject us to the relevant local regulatory requirements that are applicable to online lending platforms since we do not provide online financing intermediary services. We believe our strengthened cooperation with funding partners allows us to sustainably grow our business and mitigate the negative impact brought by the continuing challenging regulatory environment in China.

 

Borrowers are drawn to us because of the convenient access to various mortgage products offered by funding partners, a transparent, easily navigable recommendation process, and a client-centric service approach aiming to understand borrowers’ specific financial needs and match them with mortgage products suitable to their current situation. The number of borrowers who have used our recommendation services has grown rapidly over time through third-party and word-of-mouth referrals. As of December 31, 2019, a total of 26 borrowers had successfully received mortgages from our funding partners through the use of our recommendation services. As of December 31, 2019, our funding partners had approved loans to borrowers recommended by us in the aggregate amount of RMB99.83 million (approximately US$14.45 million). During the period from our business launch to December 31, 2019, we had steadily expanded the scale of our loan recommendation business and reached US$260,388 in revenue.

 

Prepaid Payment Network Services

 

We started providing prepaid payment network services in August 2019, offering seamless, convenient, and reliable payment services to merchants across different industries. Specifically, we offer prepaid cards to individual consumers, who after purchasing such prepaid cards from us, will be able to buy goods and services offed by our merchant customers with their prepaid cards and recharge such cards online. The proceeds generated from the actual sales of the prepaid card are deposited into an escrow account designated and monitored by the PBOC. Leveraging our partnership with NetsUnion Clearing Corporation (“NetsUnion”) (i.e. the only bank card clearing house and the largest card payment organization offering mobile and online payment services in China), our prepaid payment network services enable qualified merchants selected by us after rigorous internal review to accept prepaid-card payments using traditional payment terminals. Our growing prepaid payment service business enables us to develop a deep understanding of customers’ needs and will allow us to provide merchants with continuously improving services and technologies. During the period from our business launch to December 31, 2019, the revenue generated from our payment services was US$86,052.

 

For merchant customers who need payment-related technical consulting and support, we charge service fees for designing tailored payment solutions, interfacing their internal systems with our prepaid card payment system, and providing their staff with relevant operation training. Depending on the estimated annual transaction amount agreed by us and the particular merchant customer, the technology consulting and support fee ranges from RMB100,000 (approximately US$14,474) to RMB300,000 (approximately US$43,423). For merchant customers who need prepaid card payment services, we charge fees for services, including, but not limited to, collecting and processing information necessary for prepaid card issuance and authorizing transaction requests after verifying transaction information. The prepaid card payment service fee is equal to either (i) 0.3% to 0.5% of each transaction amount or (ii) 0.2% of the estimated annual transaction amount.

 

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Our merchant customers choose us because we are a licensed prepaid card issuer capable of offering multipurpose prepaid cards and a licensed payment service provider. In order to issue multipurpose prepaid cards, which can be used to purchase goods and services from a diverse group of merchants across industries and regions, and provide related payment services, a service provider must obtain a third-party payment license that allows such activities. As a result of the tightened control imposed by the People’s Bank of China (“PBOC”) over payment licenses, it has become much harder to obtain such licenses from relevant regulatory bodies in China. A license applicant must undergo a time-consuming application process, be able to pay expensive application fee, and satisfy stringent standards adopted by the regulatory bodies. In light of the strong entry barriers, our payment license is a unique asset that distinguishes us from competitors. Without such license, a prepaid issuer can issue only single-purpose prepaid cards, which is limited to purchasing goods and services provided by the card issuer or companies related to the card issuer.

 

Our proprietary technology systems are critical to the growth of our prepaid payment network business, allowing us to process a large volume of transactions, achieve high level of stability, promote workflow automation, and build an easily scalable business model. Supported by a set of integrated databases, our information system can efficiently process and analyze a high volume of data, securely store the data on a cloud server, and provide each of our departments with convenient access to data. Our account management system allows us to consolidate and manage all our customers’ account information and track the balances of customer accounts in an efficient manner, promoting more transparent management of funds movements. We regularly update our systems to improve their reliability, efficiency and compatibility with our services and evolving regulatory requirements. We believe that our proprietary technology systems will enable us to build a highly automated platform that is compatible with mainstream payment methods and channels across different industries. As of the date of this prospectus, our systems have not encountered any major system interruption.

 

We deliver complementary products and services connecting customers and business partners through our three business lines as illustrated below:

 

 

 

Through our services, we are able to grow our borrower applicants base and develop enduring relationships with these prospective borrowers by offering them convenient access to funding partners who lend mortgage loans. As most of the borrower applicants are small-to-medium size business owners with the need for payment solutions, we have introduced and plan to provide prepaid payment network services to them. As these small-to-medium size business owners become our prepaid payment network service users, we generate a vast scale of transaction volumes, which provides us with greater insights into user behavior and transaction data. Such accumulated data allows us to further strengthen our credit assessment and risk management capabilities, which attract more funding partners and broaden funding sources for our loan recommendation business. The growth of our loan recommendation business, in return, results in more mortgage loans, which increases lenders’ demand for our repayment and collection management services. Through the process of managing the repayment and collection of loans, we further identify borrowers whose properties meet our selection criteria and introduce those qualified borrowers in short of capital to pay back their existing loans to funding partners through our loan recommendation business. Such multidimensional approach enables us to build a comprehensive suite of services and solutions addressing borrowers’ and lenders’ financial needs across all stages of a loan lifecycle.

 

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Competitive Advantages

 

Scalable, Sustainable Business Model Supported by a Portfolio of Integrated, Complementary Products And Services

 

We deliver complementary products and services connecting customers and business partners through our three business lines as illustrated below:

 

By offering borrowers convenient access to mortgage loans, a transparent recommendation process, and quality customized services, we are able to maintain our existing borrower applicants base while also attracting new borrowers via word-of-mouth and business contacts;

 

As most of the borrowers are small-to-medium size business owners with the need for payment solutions, we have introduced and plan to provide prepaid payment network services to them, which allow us to develop enduring relationships with these borrowers;

 

As these small-to-medium size business owners become our prepaid payment network service users and, in return, the user base of our prepaid payment network services expands, we generate a vast scale of transaction volumes, which provides us with greater insights into user behavior and lays a solid foundation for us to test and refine our credit assessment procedures and risk management measures on a continuing basis;

 

With strengthened credit assessment and risk management capabilities, more funding partners are willing to fund loans, broadening our funding sources;

 

The growth of our loan recommendation business, in return, results in more mortgage loans, which increases the demand for our repayment and collection management service; and

 

Through the process of managing the repayment and collection of loans, we further identify borrowers whose properties we consider as acceptable collaterals and introduce those qualified borrowers in short of capital to pay back their existing loans to funding partners through our loan recommendation business, further expanding the borrower applicants base.

 

Through these various products and services, we bring together all of our clients across three business lines, enabling them to contribute to and benefit from the connectivity we provide. Leveraging our collaboration with a broad network of strategic partners, we are dedicated to expanding our client base, enhancing client experience, and strengthening network effects, which, in return, enables us to build a sustainable, scalable business model.

 

Advanced Know-How And Compliance-Centric Business Practice For Our Loan Repayment and Collection Management Business

 

To grow our presence in the loan repayment and collection market in China, we have consistently dedicated resources to help our employees acquire specific know-hows in skip tracing and negotiation skills, which are essential to maintaining and enhancing our service quality and reputation. Specifically, we provide multi-stage training and mentorship programs for our newly recruited employees and continuing education programs for experienced employees. We also employ a performance monitoring system to monitor our in-house specialists’ and third-party collection agencies’ activities and set minimum performance standards for them. This system assigns a performance score to each specialist and agency based on a set of key performance indicators, or KPIs, which we use to evaluate service quality, collection efficiency, and compliance with relevant laws, regulations and internal procedures. We believe that this system helps us identify employees and third-party agencies with poor performance, reward those with consistent high performance, and ultimately achieve our goal of enhancing operational efficiency with quality repayment and collection management services. This monitoring system is also linked to our compensation structure, which provides our employees and third-party agencies with an open and transparent compensation system that, in addition to base salary, rewards them based on their performance.

 

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We have also been operating in compliance with relevant laws and regulations and our clients’ compliance policies. We developed an Employee Code of Conduct and a Quality Assurance Management Plan, and we require all our employees to strictly comply with internal compliance policies and relevant laws and regulations. In addition, we established separate departments for quality inspection, supervision, security, and legal compliance to control all phases of the repayment and collection management process. As of the date of this prospectus, we have not been involved in any material litigation regarding our repayment and collection management practice.

 

Unique Approach to Loan Repayment And Collection Management, Supported by Proprietary IT Systems And Infrastructure

 

Our unique approach that integrates internal and external resources under a centralized management system allows us to offer creditors a cost-effective and trustworthy solution to recover consumer loans. We have devised and implemented a systematic repayment and collection management process adapted to each stage of a loan. Prior to loan delinquency, we provide investors with services such as repayment record reconciliation and payment reminder and notice. Upon delinquency, our experienced in-house team works on recovering past-due loans during the first three months of delinquency through means that do not require face-to-face interaction. If delinquency exceeds three months, we outsource loan collection services to reputable and local licensed third-party loan collection agencies, whose performance is supervised and evaluated by us under our monitoring system. Specifically, these third-party agencies collect past-due loans through various collection efforts such as professional skip-tracing and on-site visits. After the first six months of delinquency, if all the previous efforts to recover past-due loans remain unsuccessful, and after having received our investors’ express authorizations, we then engage reputable third-party law firms and initiate judicial proceedings against the delinquent borrower on behalf of our investors. As we exclusively rely on third-party resources for on-site visits, our in-house team is able to minimize potential physical confrontation with borrowers and effectively control compliance-related risks. In addition, we coordinate and manage all client engagements and collected information centrally through our Shanghai headquarters. Through our internal management system, we assign and adjust repayment and collection tasks to in-house specialists and third-party collection agencies based on a variety of factors. We believe our centralized management allows us to streamline and standardize the repayment and collection management process, effectively monitor compliance level, and increase collection efficiency.

 

We also devote significant effort to develop our proprietary IT system and infrastructure in order to standardize and improve our repayment and collection management process, as well as optimize collection results. Our operating portal is designed to meet our investors’ security and safety requirements, process large volumes of borrower and loan information, and ensure compliance and information security. The portal is also designed to be scalable to support the expansion of our business operations. Specifically, we applied different statistical models and algorithms in our operating portal to streamline our repayment and collection management process and facilitate an efficient and compliant operation.

 

Steadily Growing Our Loan Recommendation Business With The Support of Our Asset-Driven, Disciplined Risk Management Approach And Distinct Funding Source Advantage Resulting from Our Collaboration With Funding Partners

 

As part of our strategy to diversify and expand our product and service offerings, we started our loan recommendation business line in June 2019. Leveraging our advanced credit assessment and risk management capabilities, we carefully evaluate applications and supporting materials submitted by individual borrowers and recommend those borrowers we deem qualified to funding partners, who in return directly provide funds to borrowers recommended by us. During the period from our business launch to December 31, 2019, we steadily expanded the scale of our loan recommendation business and reached US$260,388 in revenue. As of December 31, 2019, our funding partners had approved loans to borrowers recommended by us in the aggregate amount of RMB99.83 million (approximately US$14.45 million).

 

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Our asset-driven, disciplined risk management approach is the key to our growth. We are confident that our approach can effectively minimize borrowers’ default risk, mitigate the impact of a default, and promote sustainable returns for our funding partners. Specifically, we require a current real estate appraisal on all properties that borrowers intend to collateralize. The appraisal process is led by our in-house appraisers who have received rigorous training and have years of experience evaluating a wide range of commercial and residential properties in Shanghai, China. Leveraging their appraisal expertise and extensive knowledge of the local market, we are able to factor different risks and conditions associated with the collateralized properties into our analysis through a rigorous due diligence process involving intensive data collection, review, and analysis and a complete visual inspection of the interior and exterior of the property. To ensure the reliability of our appraisal result, we also consult property values estimated by licensed and reputable third-party real estate appraisers. We currently maintain long-term partnerships with several third-party appraisers, which are recognized as AAA (i.e. the highest level) appraisal institutions by China Appraisal Society, a well-known self-disciplinary organization of the appraisal profession in China.

 

Our collaboration with our funding partners, many of which are leading national and regional banks in China, leads to what we view as a distinct, sustainable funding advantage. As of the date of this prospectus, we have established long-term partnerships with eight funding partners, who are drawn to us because of convenient access to a high-quality borrower applicants base, effective credit assessment and risk management support, and risk-adjusted returns. As of the date of the prospectus, we deliver value in the form of delinquency rate of zero percent. Although subject to regulations on loan recommendation services, our business model does not subject us to the relevant local regulatory requirements that are applicable to online lending platforms since we do not provide online financing intermediary services. We believe that our strengthened cooperation with funding partners allows us to sustainably grow our business and mitigate the negative impact brought by the continuing challenging regulatory environment in China.

 

Growing Our Prepaid payment network Business With The Support of Reliable, Robust Technology Infrastructure

 

We are led by a team of experienced technology professionals with extensive payment and technology background in China. Our research and development staff and product and operation team members have expertise in system, infrastructure, large-scale distributed application technology, and big data computing technology. They represent approximately 28% and of the total number of employees in our prepaid payment network business line.

 

Leveraging our robust technology infrastructure, we have developed technology systems that allow us to process a large volume of transactions, achieve high level of stability, promote workflow automation, and build an easily scalable business model. Supported by a set of integrated databases, our proprietary information system can efficiently process and analyze a high volume of data, securely store the data on a cloud server, and provide each of our departments with convenient access to data. Our proprietary account management system allows us to consolidate and manage all our customers’ account information and track the balances of customer accounts in an efficient manner, promoting more transparent management of funds movements. We regularly update our systems to improve their reliability, efficiency and compatibility with our services and evolving regulatory requirements. We believe that our proprietary technology systems will enable us to build a highly automated platform that is compatible with mainstream payment methods and channels across different industries. As of the date of this prospectus, our systems have not encountered any major system interruption.

 

Our sophisticated data insights and data analytics capabilities have also contributed to the growth of our prepaid payment network business line. Through comprehensive merchant profiling, we are able to quickly and accurately identify risks associated with customers, captures fraud signals from a massive amount of data regarding user behaviors, analyze them in real time, and intercepts abnormal transactions at an early stage. Theses abilities are crucial in reducing our transaction loss rate and gaining valuable insights into our customers’ businesses.

 

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Experienced and Visionary Management Team And Innovative Workforce

 

Our management team’s vision, extensive and diverse financial industry experience and rich technological expertise are critical to our success.

 

Diverse Background. Our management and key employees have a strong combination of management, technology, finance, risk management and compliance expertise. Ms. Qiaoling Lu, our chief executive officer, is a visionary leader with a decade of management experience in various global companies. Mr. Kangtai Jin, our chief operation officer, brings his industry knowledge and unique insights from his experience at leading financial institutions in China, such as Shanghai Pudong Development Bank Co., Ltd. and China Everbright Bank Co., Ltd., and his experience dealing with various regulatory authorities such as the CSRC and the CBRC. Mr. Jianhua Chen, our chief financial officer, has more than 20 years of varied experience in financial management, business leadership and corporate strategy.

 

Track Record. The members of our senior management team average more than ten years of experience in their respective business functions. Their experience, along with profound insights into industry trends, has enabled us to identify growing markets, develop strategies, and capture business opportunities that promote sustainable growth and fit into our long-term visions.

 

Innovative Workforce. Our senior management team has nurtured a strong corporate culture focused on innovation and performance, paving the way for our continued success. Our workforce, as a result, is professionally trained and innovative. As of December 31, 2019, 25% of our employees had prior experience in financial services and over 20% in the technology industry. In addition, we have a number of talent and retention programs to ensure a strong and sustainable workforce, which is essential to our long-term growth.

 

Our Strategies

 

Continue to Invest in Technology, Focusing on Artificial Intelligence And Data Analytics

 

We plan to continue to make significant investments in developing technologies:

 

Artificial Intelligence. We expect to continue to strengthen our data analytics capability and upgrade our IT system for AI compatibility and functionality. We believe that artificial intelligence will allow us to optimize client profiling, customize financial service and product recommendations, and further automate various components of our businesses. Specifically, we aim to automate the service process of our loan repayment and collection management business and loan recommendation business, which enables us to better integrate our two business lines, improve efficiency and operating leverages, and achieve greater client satisfaction.

 

We aim to extract greater use of industry data, client data, and transaction data by upgrading and fine-tuning our models and algorithms based on big data technologies. For our prepaid payment network services business, we plan to use artificial intelligence capabilities to gain more valuable insights from various payment scenarios and massive transaction data, which allows us to acquire a deep understanding of our clients’ needs and further update our risk management system. To improve the quality of our loan repayment and collection management services, we are also developing a skip tracing application, which can continuously gather and process publicly available information to feed into our borrower-profiling database.

 

Risk Management and Security. We plan to enhance our risk management capability by continuing to invest in advanced technologies around credit assessment, fraud detection, and real estate appraisal. Importantly, this will allow us to continue to scale our loan recommendation and prepaid payment network businesses, allowing us to be capable of managing increased transaction volumes and complexity in a secure, compliant, and effective manner. While we are not aware of any severe data breach or security incident throughout our years of operations, we will seek to enhance our information security measures to safeguard our servers from malicious attacks.

 

Emerging New Technologies.  We will continue to explore the commercialization and application of emerging new technologies to our products and services. 

 

Mobile App. We plan to develop our mobile app and continue rolling out frequent updates related to our products and services on our WeChat social media account to enhance user experience.

 

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Strategically Grow Our Loan Repayment And Collection Management Business

 

Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. As of the date of the prospectus, although we are in active conversation with a number of prospective clients, we have not secured a new source of revenue to replace the loss of our current engagements.

 

In the future, we plan to offer our repayment and collection management services to other online consumer finance companies. The consumer loans recovery market in China has expanded rapidly in the past few years, which we believe presents a business opportunity for us to leverage our expertise and experience. We also expect to continue to deepen our business collaboration and diversify our operation by (i) offering services to major commercial banks in China to collect delinquent credit card receivables and (ii) launching an external interface, which enables our clients to upload portfolio information and review collection reports prepared by us. The interface will simplify the overall repayment and collection management process with lowered costs and improved efficiency. We also expect to expand our business beyond consumer loans by managing the repayment and collection of non-consumer loans. With our expertise and proven track record in consumer loan repayment and collection management, we believe that we are likely to succeed in other areas of the loans recovery market. Our goal is to be a comprehensive recovery solution provider for loans across different stages.

 

Maintain The Steady Growth of Our Loan Recommendation Business by Broadening Service Offering, Borrower Applicants Base, And Funding Sources

 

Through our strategic collaboration with funding partners, we intend to build a more diversified product portfolio to meet the different financial needs of borrowers. For example, we are planning on introducing a variety of investment products offered by funding partners to borrowers. We also aim to continuously upgrade our real estate appraisal model in order to deliver more accurate appraisal results, which enable borrowers to receive the loan amount that accurately corresponds to the value of their properties and properly reflects the local market liquidity. In the future, we plan to collaborate with seasoned asset management corporations (AMCs) specializing in distressed debt acquisition and management. With AMCs’ commitment to purchasing funding partners’ rights in defaulted loans, we believe our collaboration with AMCs will expand the scale of loan origination, which in return can better serve borrowers’ financing needs, creating a win-win situation for all parties. As of the date of this prospectus, we have a signed memorandum of understanding with Jiangxi Finance Limited Group Co. Ltd., a reputable state-owned AMC in China.

 

Borrower applicants base and funding source are critical to the growth of our loan recommendation business. We plan to continue focusing on attracting individual business owners who are able to collateralize qualified properties. We will also continue leveraging our partnerships with our referral partners to broaden the borrower applicants base in a more focused and cost-efficient way. We will endeavor to increase borrower loyalty through our marketing efforts, such as organizing periodic offline meetups for borrowers. We strive to diversify our funding sources by seeking opportunities to collaborate with other kinds of institutions and organizations, including pawnshops, micro-lending companies, etc. We plan to continue to enhance our brand awareness by strengthening our relationship with existing funding partners and effectively leveraging our management team members’ industry connections. By effectively merging our resources across different business lines and providing our funding partners with an array of comprehensive services covering the entire loan lifecycle, we are confident that we will able to organically expand our funding sources.

 

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Build A Cohesive Portfolio of Prepaid Payment Network Services and Expand the Customer Base For Our Prepaid Payment Network Business

 

There is an increasing demand among companies and institutions of various types and sizes for prepaid payment solutions, which would simplify the transaction process, increase operational efficiency, and generate revenue growth. In order to satisfy such market demand, we aim to build a cohesive portfolio of prepaid payment network services tailored to customers’ specific needs for prepaid payment solutions. As an important step to accomplish this goal, in addition to providing consulting and support services for customers who need tailored payment solutions, staff training, and other prepaid-payment related technical support, we plan to continue to focus on providing prepaid card payment services, which include issuing prepaid cards and authorizing prepaid-card payment transactions.

 

To organically scale our prepaid payment network business, we plan on diversifying our marketing and sale strategies and building an extensive distribution network consisting of third-party sales agents and sales partners. Through these distribution channels, we believe we will be able to expand our customer base nationwide in a cost-effective manner. As our business is currently concentrated in Qingdao City, Shandong Province in China, we aim to expand our presence into second-tier and third-tier cities in China, where we have observed growing needs for prepaid payment network solutions among merchants.

 

Loan Repayment and Collection Management

 

Our Repayment and Collection Management Services

 

We provide an extensive array of consumer loan repayment and collection management services to investors by leveraging our in-house team’s years of industry knowledge, strategic partnerships with third parties, standard and streamlined repayment and collection management process, centralized management, and proprietary IT infrastructure. Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. Our current loan repayment and collection management engagements will all be completed by the middle of 2020. For the 2019 and 2018 fiscal years, revenue generated from our consumer loan repayment and collection management services was US$3,618,823 and US$6,389,528, respectively.

 

Repayment and Collection Management Process

 

In general, when a borrower does not make a payment as scheduled, we consider the loan as being delinquent.

 

Prior to loan delinquency, we provide investors with services such as repayment record reconciliation and payment reminder and notice. Specifically, we assist borrowers to fulfill their loan obligations according to an agreed-upon schedule through daily management and monitoring of loan repayments and provides investors with after-lending services to receive investment returns throughout the life of loan. We also send repayment reminders through SMSs by our service representatives before the due date for each loan repayment schedule. Borrowers may elect to make full prepayments prior to the date for scheduled repayment. Repayments are made directly to investors. We are not involved in the process of prepayment.

 

Upon delinquency, we integrate internal and external resources to implement a systematic repayment and collection management process adapted to each stage of a loan. When a loan becomes delinquent, our service representatives may contact the borrower on the same day to request an immediate payment or negotiate a repayment date. We utilize the following strategies to collect loans based on the severity of the delinquency:

 

Within one to seven days past due, we will contact the defaulting borrower by phone to understand reasons for the nonpayment and inform them of consequences of past-due repayments.

 

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If the delinquency exceeds seven days, the borrower cannot be located, has maliciously refused to make repayment, or otherwise failed to cooperate with us, the delinquent loan will be sent to our in-house team for loan collection.

 

During the first three months of delinquency, we utilize our in-house team to recover the delinquent loan using professional skip tracing, phone calls, voice messages, text messages, e-mails, etc.

 

After the first three months of delinquency, we engage professional, licensed third-party reputable collection agencies who will be responsible for collecting the delinquent loan. In addition to the methods utilized by our in-house team, they also pay on-site visits to borrowers.

 

After the first six months of delinquency, we engage reputable third-party law firms and initiate judicial proceedings against the borrower on behalf of the investor after obtaining his or her authorization. We provide a holistic range of services across all phases of a judicial proceeding to assist the investor with navigating the process, such as serving as an intermediary between the investor and the legal team and explaining legal documents to the investor in a clear and concise manner.

 

During any stage as described above, borrowers directly make repayments to investors. We are not involved in the process of repayment.

 

Our proprietary management system assists with tracking the performance of each loan under our loan portfolio and reminding our in-house team to undertake specific collection measures. Depending on circumstances, we also propose certain payment plans, such as installment plans, partial debt waiver and other arrangements, suitable for the borrower as approved by investors. 

 

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

 

   Year Ended December 31, 
   2019   2019   2018   2018 
   RMB   US$   RMB   US$ 
Total amount to be repaid and collected   514,060,000   $74,405,554    450,000,000   $68,013,845 
Total amount repaid and collected   18,780,000   $2,718,272    82,790,000   $12,513,036 
Yearly average repayment and collection rate   3.65%        18.40%     

 

To maintain our market position and competitive advantage, we monitor our performance during certain periods of time using several operational data, including the total amount to be repaid and collected, the total amount repaid and collected, and yearly average repayment and collection rate.

 

The total amount to be repaid and collected during the assigned period represents the total value of loans borrowers are obligated to repay investors.

 

The total amount repaid and collected during the assigned period represents the total value of loans borrowers have repaid plus our in-house specialists and third-party agencies have collected during the set period of time.

 

The yearly average repayment and collection rate represents our average repayment and collection rate during a particular fiscal year.

 

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Yearly average repayment and collection rate is calculated pursuant to the following formula:

 

Yearly average repayment and collection rate = C/A

 

  C = the total amount repaid by borrowers and collected by us and third-party agencies within a particular fiscal year.
 
A

=

the total value of loans for repayment and collection management.

 

Currently, we are only managing the repayment and collection of loans that borrowers had obtained from individual investors through our offline loan recommendation business, which we had operated until the end of 2017. Our current loan servicing and collection management engagements will all be completed by the middle of 2020. As a result, our total amount repaid and collected and yearly average repayment and collection rate for the 2019 fiscal year decreased as compared to the same period in 2018.

 

Quality Assurance

 

We believe that quality assurance is critical to the success of our business. To ensure our in-house specialists and third-party agencies consistently provide quality services that meet our standards, we have designed and adopted the following set of policies and procedures to incentive them, help them improve based on their past performance, and efficiently manage their workload based on their experience and expertise.

 

Daily inspection. The department leaders of each team perform daily spot checks on several collection cases for potential compliance violations. Our operating portal records all telephone conversations between our in-house specialists and borrowers, and our system transcribes some of these recordings into text for our quality assurance team to internally review in accordance with our quality assurance protocol. Our operating portal also conducts daily keyword searches against all the work logs generated that day for potential violations. If a violation is identified, we issue a disciplinary action against the specialist. Our disciplinary actions vary from warning to termination, which are issued depending on the seriousness of the violation. Furthermore, we analyze work logs and telephone recordings collected from daily inspections for performance trend and non-compliant activities and train our specialists based on these findings in order to improve their performance. 

 

Performance Evaluation and Review. We have employed a monitoring system that monitors our in-house specialists and third-party agencies’ performances at different stages of the loan repayment and collection management process and evaluates them based on a set of key performance indicators, or KPIs. We use KPIs to assess in-house specialists and third-party agencies’ service quality, collection efficiency, and compliance with relevant laws, regulations and internal procedures. Our quality assurance team continuously monitors the performance and compliance of our in-house specialists and third-party agencies to ensure that they employ appropriate collection methods to achieve better collection performance through KPI tracking, phone call recording assessment, complaint call feedback, and internal training and examination.

 

Performance-based compensation structure. We require our in-house specialists and third-party agencies to meet the minimum performance standards predetermined by our management team and tie their performance to compensation structures.

 

Case assignment. Our performance monitoring system analyzes the past performance of each in-house specialist to aid the case assignment process. For example, potentially contentious cases that are likely to cause complaints are assigned to more experienced specialists, instead of those with less experience or have a record of compliance violations, as a way for us to manage and reduce the noncompliant risk. 

 

We require all our employees to strictly comply with our compliance policies and laws and regulations. For example, our in-house specialists are not allowed to contact a borrower for more than five times a day; no contact shall be made before 8 a.m. or after 10 p.m.; and unless authorized by the investors, our in-house specialists are not allowed to make proposal to reduce the loan value as a compromise. If our employee violates such requirements, we will issue certain penalties that range from warnings to termination of employment.

 

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Furthermore, we require our in-house specialists to contact borrowers only through the means allowed under our standard procedures. Our in-house specialists are not allowed to have face-to-face contact with any borrower. When we contact borrowers over phone, our in-house specialists are required to make such calls only from our operating center landline or encrypted mobile phones issued by us, which record all of the telephone conversations and are subject to our system’s real-time automatic monitoring.

 

We carefully select third-party agencies by performing thorough due diligence through which we review their corporate history, past business activities, professional licenses necessary for their operation, and internal compliance policies and measures, etc. In addition to constantly monitor and evaluate third-party agencies’ activities through means described in “Performance Evaluation and Review,” we establish guidelines and limitations on their collection actions and take measures to enforce those guidelines and limitations. Specifically, we regularly pay on-site visits to ensure that the collection actions of third-party agencies are compliant and our investors’ information is properly stored and managed. Furthermore, each third-party law firm with whom we collaborate is selected from an accredited industry law firm list, has compatible information technology systems, and meet certain other specific criteria.

 

Compliance

 

We believe our core competence lies in our ability to provide quality customer service and compliance with applicable laws and regulations. We have undertaken the following measures to ensure compliance.

 

Our Compliance Policies

 

We have adopted the following compliance policies:

 

Employee Code of Conduct. Our efforts to maintain compliant operations starts with the training and continuing education of our employees. The Employee Code of Conduct sets forth the basic code of ethics, proper business conduct and obligations to investors and borrowers. In particular, the code emphasizes the importance of keeping proprietary information confidential and maintaining a high level of professionalism in the performance of work functions, and have strict guidelines that prohibit certain actions such as selling borrower information, impersonating government officials, threat of violence, and use of vulgar or inappropriate language. In addition, the code specifies the reward and disciplinary actions for employees abiding by or violating this Employee Code of Conduct and other company regulations. 

 

Quality Assurance Management Plan. The goal of implementing the Quality Assurance Management Plan is to standardize the repayment and collection management operations, minimize risks related to repayment and collection management services, and ensure compliance with government and internal regulations. The plan sets forth definitions of violating conduct, including improper management of private and personal information, procedural violations, and fraudulent conducts and violations specific to loan repayment and collection management. The plan also includes corresponding penalties for employee violations and subsequent remediation plans to minimize the damage and prevent future incidents of similar violations. The plan consists of (i) Telephone Record Inspection Regulation; (ii) Compliance Management Regulation; (iii) Information Security Regulation; (iv) Work Log Inspection Regulation; and (v) Trade Secret Protection Regulation.

 

Compliance Structure

 

In addition to implementing our compliance policies to regulate employee conduct, we also established an internal committee to monitor employee conduct, investigate possible violations, and ensure policy adherence. The committee is responsible for monitoring employee activities daily to observe and detect possible violations and investigating possible violations after the violations have been reported to the management team of the company. The committee is also in charge of communicating with borrowers who raise disputes or complaints in person, if necessary, in order to explain and appease the situation. We engage third-party legal counsels, who assist us with regulation and policy interpretation.

 

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Compliance Management

 

If borrowers find our repayment and collection methods and the conducts of our in-house specialists unacceptable and believe that such methods and conducts infringe their rights, they may initiate lawsuits against us alleging improper conducts and violations of law. As of the date of the prospectus, we have not been involved in any lawsuit initiated by a borrower or an investor.

 

If an investor determines that we failed to comply with our quality assurance obligations under the contract between us and such investor, such investor may penalize us monetarily or rescind the contract if the breach is severe. As of the date of the prospectus, none of the investors to whom we have provided services has penalized us monetarily or rescind contracts with us.

 

We take allegations seriously and have developed a systematic approach to avoid potential allegations. If an in-house specialist believes that a borrower is likely to initiate a lawsuit based on his/her interaction with the borrower, he/she is required to report the case to the respective quality assurance team. The quality assurance personnel then contact the borrower directly and seeks to address the borrower’s concern in order to reduce the likelihood of a lawsuit. Once notified of the potential lawsuit, our management team will immediately conduct a preliminary investigation to verify the allegations. If the allegations are not substantiated and our investor is notified of the findings, the investor may attempt to communicate with the borrower directly. If the allegations are substantiated, we and our investor will both attempt to communicate with the borrower. Based on the information we receive from the borrower, we may undertake certain actions to rectify the problem, including to compensate the borrower after negotiation with the investors, and/or to demote or terminate the responsible in-house specialist in accordance with our compliance policies.

 

In an effort to avoid potential allegations, we carefully assign cases to our in-house specialists, monitor our employees’ conducts according to our compliance policies during the repayment and collection management process, and implement proper training to continuously educate our employees about our compliance policies and government rules an