Lichen International Ltd F-1/A, filed Jul 11, 2022
Lichen International Ltd (LICN)
As filed with the U.S. Securities and Exchange Commission on July 11, 2022.
Registration No. 333-264624
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Lichen China Limited
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s Name into English)
| Cayman Islands | 8742 | Not Applicable | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
B2306, Block B
Tower 3, Jinjiang Wanda Plaza Commercial Complex
888 Century Avenue
Meiling Street, Jinjiang
Fujian Province
People’s Republic of China 362000
+86- 59585633335
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Cogency Global Inc.
122 E 42nd St., 18th Floor
New York, NY 10168
(212) 947-7200
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
| William S. Rosenstadt, Esq. | Ying Li, Esq. | |
| Mengyi “Jason” Ye, Esq. | Guillaume de Sampigny, Esq. | |
| Yarona L. Yieh, Esq. | Lisa Forcht, Esq. | |
| Ortoli Rosenstadt LLP | Hunter Taubman Fischer & Li LLC | |
| 366 Madison Avenue, 3rd Floor | 48 Wall Street, Suite 1100 | |
| New York, NY 10017 | New York, NY 10005 | |
| 212-588-0022 – telephone | 212-530-2206 - telephone |
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We will not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, DATED JULY [-], 2022 |
Lichen China Limited
6,250,000 Class A Ordinary Shares
This is an initial public offering of our Class A ordinary shares, par value $0.00004 (the “Class A Ordinary Shares”). Prior to this offering, there has been no public market for our Class A Ordinary Shares. We expect the offering price to be $4.00 per Class A Ordinary Share (the “Offering Price”). We plan to apply to list our Class A Ordinary Shares on the Nasdaq Capital Market under the symbol “LICN.” This offering is contingent upon us listing our Class A Ordinary Shares on the Nasdaq Capital Market, or Nasdaq, or another national exchange. There is no guarantee or assurance that our Class A Ordinary Shares will be approved for listing on the Nasdaq or another national exchange.
Throughout this prospectus, unless the context indicates otherwise, references to “Lichen China”, “Lichen China Limited”, “we,” “us,” the “Company,” “our company” refer to Lichen China Limited, a holding company. References to “Subsidiaries” or “PRC subsidiaries” refer to the Lichen China Limited’s subsidiaries established under the laws of the People’s Republic of China. References to “Group” are to Lichen China Limited and its consolidated subsidiaries collectively.
Lichen China Limited’s issued share capital is a dual class structure consisting of Class A Ordinary Shares and Class B Ordinary Shares. Holders of Class A Ordinary Shares and Class B Ordinary Shares shall vote together as one class on all resolutions of the shareholders and have the same rights except each Class A Ordinary Share shall entitle its holder to one (1) vote and each Class B Ordinary Share shall entitle its holder to ten (10) votes. Each Class B Ordinary Share is convertible into one (1) Class A Ordinary Share at any time at the option of the holder thereof but Class A Ordinary Shares are not convertible into Class B Ordinary Shares.
Lichen China Limited is, and will continue to be, a “controlled company” within the meaning of the Nasdaq Stock Market Rules, due to the fact Mr. Ya Li, the Chairman of our Board of Directors and our Chief Executive Officer, owns Class B Ordinary Shares representing approximately 86.96% of the total voting power of our issued and outstanding Ordinary Shares. In addition, as a “controlled company,” as defined under the Nasdaq Stock Market Rules, Lichen China Limited is permitted to elect to rely on certain exemptions from corporate governance rules. Lichen China Limited does not plan to rely on these exemptions, but may elect to do so after completing this offering.
Lichen China Limited is a Cayman Islands holding company and is not a Chinese operating company. As a holding company with no material operations of its own, it conducts all of its operations and operates its business in China through its PRC subsidiaries, in particular, Fujian Province Lichen Management and Consulting Company Limited, or Lichen Zixun, and its subsidiary, Xiamen City Legend Education Services Company Limited, or Lichen Education. Because of our corporate structure as a Cayman Islands holding company with operations conducted by our PRC subsidiaries, it involves unique risks to investors. Furthermore, Chinese regulatory authorities could change the rules and regulations regarding foreign ownership in the industry in which the company operates, which would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or become worthless. Investors in our Class A Ordinary Shares should be aware that they do not directly hold equity interests in the Chinese operating entities, but rather are purchasing equity solely in Lichen China Limited, our Cayman Islands holding company, which indirectly owns 100% equity interests in the Chinese subsidiaries. Our Class A Ordinary Shares offered in this offering are shares of our Cayman Islands holding company instead of shares of our subsidiaries in China. See “Risk Factors – Risks Related to Doing Business in China – The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, which could result in a material change in our operations and/or the value of our Ordinary Shares. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class A Ordinary Shares. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 34.
This is an offering of the Class A Ordinary Shares of the Cayman Islands holding company. You may never hold equity interests in the operating PRC subsidiaries. Further, Lichen China Limited controls and receives the economic benefits of its PRC subsidiaries’ business operation, if any, through equity ownership. We do not use a Variable Interest Entity (“VIE”) structure.
Because our operations are primarily located in the PRC through our subsidiaries, we are subject to certain legal and operational risks associated with our operations in China, including changes in the legal, political and economic policies of the Chinese government, the relations between China and the United States, or Chinese or United States regulations may materially and adversely affect our business, financial condition and results of operations. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in our operations and the value of our Class A Ordinary Shares, or could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or be worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. As confirmed by our PRC counsel, Tianyuan Law Firm, we are not subject to cybersecurity review with the Cyberspace Administration of China, or the “CAC,” after the Cybersecurity Review Measures became effective on February 15, 2022, since we currently do not have over one million users’ personal information and do not anticipate that we will be collecting over one million users’ personal information in the foreseeable future, which we understand might otherwise subject us to the Cybersecurity Review Measures; we are also not subject to network data security review by the CAC if the Draft Regulations on the Network Data Security Administration are enacted as proposed, since we currently do not have over one million users’ personal information and do not collect data that affects or may affect national security and we do not anticipate that we will be collecting over one million users’ personal information or data that affects or may affect national security in the foreseeable future, which we understand might otherwise subject us to the Network Data Security Administration Draft. See “Risk Factors – Risks Related to Doing Business in China – The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, which could result in a material change in our operations and/or the value of our Ordinary Shares. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class A Ordinary Shares. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 34. As advised by our PRC counsel, Tianyuan Law Firm, no relevant laws or regulations in the PRC explicitly require us to seek approval from the China Securities Regulatory Commission for our overseas listing plan. As of the date of this prospectus, we and our PRC subsidiaries have not received any inquiry, notice, warning, or sanctions regarding our planned overseas listing from the China Securities Regulatory Commission or any other PRC governmental authorities. However, since these statements and regulatory actions by the PRC government are newly published and official guidance and related implementation rules have not been issued, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. or other foreign exchange. The Standing Committee of the National People’s Congress, or the SCNPC, or other PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules that requires our company or any of our subsidiaries to obtain regulatory approval from Chinese authorities before offering in the U.S. In other words, although the Company is currently not required to obtain permission or approval from any of the PRC federal or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our operations could be adversely affected, directly or indirectly; our ability to offer, or continue to offer, securities to investors would be potentially hindered and the value of our securities might significantly decline or be worthless, by existing or future laws and regulations relating to its business or industry or by intervene or interruption by PRC governmental authorities, if we or our subsidiaries (i) do not receive or maintain such permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are not required, (iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, or (iv) any intervention or interruption by PRC governmental with little advance notice.
Pursuant to the Holding Foreign Companies Accountable Act, or the HFCAA, if the Public Company Accounting Oversight Board, or the PCAOB, is unable to inspect an issuer’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a U.S. stock exchange. The PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. Furthermore, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations. On June 22, 2021, United States Senate has passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would decrease the number of “non-inspection years” from three years to two years, and thus, would reduce the time before our securities may be prohibited from trading or delisted if the PCAOB determines that it cannot inspect or investigate completely our auditor. As of the date of the prospectus, our auditors, Briggs & Veselka Co. for the fiscal year ended December 31, 2020 and TPS Thayer, LLC (“TPS Thayer”) for the fiscal year ended December 31, 2021, are not subject to the determinations as to inability to inspect or investigate completely as announced by the PCAOB on December 16, 2021 as they are not on the list published by the PCAOB. The Company’s auditors are both based in the U.S. and registered with PCAOB and subject to PCAOB inspection, however, recently developments with respect to audits of China-based companies, create uncertainty about the ability of our auditors, to fully cooperate with the PCAOB’s request for audit workpapers without the approval of the Chinese authorities. In the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditors because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCAA, and ultimately result in a determination by a securities exchange to delist the Company’s securities. The delisting of our Class A Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment, even making it worthless. See “Risk Factors — Risks Related to Doing Business in China – The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering” on page 44.
We currently have not maintained any cash management policies that dictate the purpose, amount and procedure of cash transfers between the Company, our subsidiaries, or investors. Rather, the funds can be transferred in accordance with the applicable PRC laws and regulations. To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets. See “Risk Factors - Risks Related to Doing Business in China - To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets.”
Under existing PRC foreign exchange regulations, payment 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 the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulations, 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. Current PRC regulations permit our PRC subsidiaries to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of Hong Kong (including funds from Hong Kong to the PRC), except for transfer of funds involving money laundering and criminal activities. Cayman Islands law prescribes that a company may only pay dividends out of its profits. Other than that, there is no restrictions on Lichen China Limited’s ability to transfer cash to investors. See “Prospectus Summary – Transfers of Cash to and from Our Subsidiaries,” “Prospectus Summary – Summary of Risk Factors,” and “Risk Factors - Risks Related to Doing Business in China - To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets,” “Risk Factors - Risks Related to Doing Business in China - We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business,” and “Risk Factors - Risks Related to Doing Business in China - Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.”
As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries, including those based in the PRC, for our cash and financing requirements. If any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us. Lichen China Limited is permitted under the laws of the Cayman Islands to provide funding to our subsidiaries incorporated in the British Virgin Islands and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. Our subsidiaries are permitted under the respective laws of the British Virgin Islands and Hong Kong to provide funding to Lichen China Limited through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividend transfers from HK to BVI and BVI to the Cayman Islands. Current PRC regulations permit Lichen Wholly Foreign Owned Enterprise (“WFOE”) to pay dividends to the Company only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. The transfer of funds among companies are subject to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (2020 Revision, the “Provisions on Private Lending Cases”), which was implemented on August 20, 2020 to regulate the financing activities between natural persons, legal persons and unincorporated organizations. As advised by our PRC counsel, Tianyuan Law Firm, the Provisions on Private Lending Cases does not prohibit using cash generated from one subsidiary to fund another subsidiary‘s operations. We have not been notified of any other restriction which could limit our PRC subsidiaries’ ability to transfer cash between PRC subsidiaries. During the fiscal years ended December 31, 2020, Lichen Zixun made dividend payments of RMB30 million (approximately $4.3 million) to the then ultimate shareholders of Lichen Zixun, who are PRC individuals. The Company made no such dividend, distribution or transfer during the fiscal year ended December 31, 2021. As of the date of this prospectus, except for the previously mentioned dividend payments in fiscal year 2020, neither the Company nor its subsidiaries have made other transfers, dividends, or distributions to investors and no investors have made transfers, dividends, or distributions to the Company or its subsidiaries. As of the date of this prospectus, no dividends, distributions or transfers has been made between Lichen China Limited and any of its subsidiaries. We do not expect to pay any cash dividends in the foreseeable future. Also, as of the date of this prospectus, no cash generated from one subsidiary is used to fund another subsidiary’s operations and we do not anticipate any difficulties or limitations on our ability to transfer cash between subsidiaries. See “Prospectus Summary – Transfers of Cash to and from Our Subsidiaries,” on page 18, “Prospectus Summary – Summary of Financial Position and Cash Flows of Lichen China Limited” on page 22, and “Consolidated Financial Statements” starting from page F-1.
On December 15, 2021, Lichen China Limited executed a special resolution to change the par value of the ordinary shares from $0.0001 to $0.00004, a 2.5 for 1 stock split (“Stock Split”). Upon the Stock Split, every issued and outstanding ordinary share was exchanged for 2.5 new ordinary shares. Pursuant to such resolution, the authorized share capital of Lichen was US$50,000 divided into (a) 1,000,000,000 Class A Ordinary Shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 Class B Ordinary Shares with a nominal or par value of US$0.00004, each in accordance with section 13 of the Cayman Islands Companies Act. The changes were completed on December 23, 2021.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Our business is subject to many risks, and investing in our securities involves a high degree of risk. See the section titled “Risk Factors” herein, beginning on page 26.
| Per Share | Total Without Over-Allotment Option |
Total With Full Over-Allotment Option |
||||||||||
| Public offering price | $ | 4.00 | $ | 25,000,000 | $ | 28,750,000 | ||||||
| Underwriting discounts(1) | $ | 0.28 | $ | 1,750,000 | $ | 2,012,500 | ||||||
| Proceeds to us before expenses(2) | $ | 3.72 | $ | 23,250,000 | $ | 26,737,500 | ||||||
| (1) | We have agreed to give our underwriters a discount equal to seven percent (7%) of the gross proceeds from the sales of our Class A Ordinary Shares in this offering, as well as warrants equal to one percent (1%) of the Class A Ordinary Shares issued in this offering including as a result of the exercise of the underwriters’ over-allotment option (the “Underwriters Warrants”). The Underwriters Warrants will be exercisable at any time, and from time to time, in whole or in part, for a period of five years from the commencement of sales of the offering in compliance with FINRA Rule 5110(g)(8)(A). The Representative Warrants are exercisable at a per share price of $4.80, which is 120% of the Public Offering Price. See “Underwriting” beginning on page 134 of this prospectus for a description of all underwriting compensation payable in connection with this offering. |
| (2) | The total estimated expenses related to this offering are set forth in the section entitled “Expenses Relating to This Offering”. |
This offering is being conducted on a firm commitment basis. The underwriters have agreed to purchase and pay for all of the Class A Ordinary Shares offered by this prospectus if they purchase any Class A Ordinary Shares. We have granted the underwriters an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of the Class A Ordinary Shares to be offered by us pursuant to this offering (excluding Class A 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 underwriting discounts payable will be $2,012,500 based on an offering price of $4.00 per Class A Ordinary Share, and the total gross proceeds to us, before underwriting discounts and expenses, will be $28,750,000.
The underwriters expect to deliver the Class A Ordinary Shares against payment as set forth under “Underwriting.”
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Book-Running Manager
The date of this prospectus is [●], 2022.
TABLE OF CONTENTS
Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Class A Ordinary Share only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Class A Ordinary Shares. Our business, financial condition, results of operations, and prospects may have changed since that date.
i
This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Class A Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
Prospectus Conventions
Throughout this prospectus, unless the context indicates otherwise, references to “Lichen China”, “Lichen China Limited”, “we,” “us,” the “Company,” “our company” refer to Lichen China Limited, a holding company. References to “Subsidiaries” or “PRC subsidiaries” refer to the Lichen China Limited’s subsidiaries established under the laws of the People’s Republic of China. References to “Group” are to Lichen China Limited and its consolidated subsidiaries collectively. Unless otherwise indicated, in this prospectus, references to:
| ● | “China” or the “PRC” are to the People’s Republic of China; |
| ● | “Class A Ordinary Shares” are to a class of shares of Lichen China (as defined below) called the “series A ordinary shares” with par value $0.00004 per share; |
| ● | “Class B Ordinary Shares” are to a class of shares of Lichen China (as defined below) called the “series B ordinary shares” with par value $0.00004 per share; |
| ● | “HKD” are to the official currency of Hong Kong; |
| ● | “Lichen China” are to Lichen China Limited, a Cayman Islands exempted company; |
| ● | “Legend Consulting BVI” are to Legend Consulting Investments Limited, a British Virgin Islands exempted company and a wholly-owned subsidiary of Lichen China; |
| ● | “Legend Consulting HK” are to Legend Consulting Limited (HK), a Hong Kong company and a wholly-owned subsidiary of Legend Consulting BVI; |
| ● | “Lichen WFOE” or “Lichen Zixun” are to Fujian Province Lichen Management and Consulting Company Limited, a wholly foreign-owned company organized under the laws of the PRC and a wholly-owned subsidiary of Legend Consulting HK; |
| ● | “Lichen Education” are to Xiamen City Legend Education Services Company Limited, a limited liability company organized under the laws of the PRC and a wholly-owned subsidiary of Lichen WFOE; |
| ● | “RMB” are to Renminbi, or the legal currency of the PRC; |
| ● | “U.S. dollars,” “$,” and “USD” are to the legal currency of the United States; and |
| ● | “WFOE” are to wholly foreign-owned enterprise. |
This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates solely for the convenience of the reader. All reference to “U.S. dollars”, “USD”, “US$” or “$” are to United States dollars. The relevant exchange rates are listed below:
As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Period-end RMB : US$1 exchange rate | 6.3757 | 6.5249 | ||||||
| Period-end HKD : US$1 exchange rate | 7.7981 | 7.7530 | ||||||
| Period-average RMB : US$1 exchange rate | 6.4515 | 6.8976 | ||||||
| Period-average HKD : US$1 exchange rate | 7.7729 | 7.7562 | ||||||
We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth. We did not directly or indirectly sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have commissioned the industry report from Frost & Sullivan Inc. (“Frost& Sullivan”). We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus.
1
Overview
We are a leading financial and taxation service provider in China in terms of revenue, according the industry report of Frost & Sullivan. We have operated as a dedicated financial and taxation solution service specialist in China for over 17 years. We focus on providing (i) financial and taxation solution services; (ii) education support services; and (iii) software and maintenance services in the PRC under the “Lichen” brand. With over 17 years of operation history, we have gained substantial experience and established a solid reputation with our proven track record in the PRC.
Leveraging our business relationships with our Partnered Institutions (as defined below), our expertise and experience obtained in the financial and taxation solution services market, and our experience in developing financial and taxation training software and financial and taxation analysis software by our research and development (“R&D”) department, we launched a new business line of software and maintenance services in 2019 to expand our software product offerings to enterprise customers, universities, colleges and educational institutes and have started to generate revenue from provision of such services since then.
In recognition of our expertise and experience earned from over 17 years in the financial and taxation solution services industry, we have built up our reputation as a dedicated financial and taxation solution services provider in the PRC. From 2012 to 2020, we have been recognized as one of the Top 50 Providers of Management Consulting Services in China for eight consecutive years by the China Enterprise Confederation Management Advisory Committee.
According to the industry report of Frost & Sullivan, which is our source for the industry information discussed in this prospectus, we ranked first in terms of revenue among the solution service specialists, i.e. those service providers which focus on the market of financial and taxation solution service, with a market share of approximately 0.5% in the PRC financial and taxation solution services market in 2019 and tenth in terms of revenue among providers of education support services, with a market share of approximately 0.1% in the PRC education support services market in 2019. Our Partnered Institutions, located in 12 provinces or municipalities and 23 cities in the PRC, are education services providers which mainly engage in the organization of various seminars, talks and training courses to entrepreneurs, senior executives as well as financial and taxation executives. Through our business relationships with these Partnered Institutions, we are able to, on the one hand, provide our education support services to them and, on the other hand, leverage their business networks and their geographical coverage and promote our brand name and services to the participants of these seminars, talks and courses organized by them.
Our Subsidiaries currently have obtained all material permissions and approvals required for our operations in compliance with the relevant PRC laws and regulations in the PRC, including the business license and agency bookkeeping license. The business license is a permit issued by Market Supervision and Administration that allows the company to conduct specific business within the government’s geographical jurisdiction. The agency bookkeeping license is issued by the financial department to enterprises, allowing enterprises to accept entrusted bookkeeping business. The business license and agency bookkeeping license are the only two permissions and approvals that our PRC subsidiaries are required to obtain to conduct our business in China. In addition, Lichen China Limited, Legend Consulting BVI and Legend Consulting HK are not required to obtain any permissions or approvals from any Chinese authorities to operate our business as of the date of this prospectus. However, applicable laws and regulations may be tightened, and new laws or regulations may be introduced to impose additional government approval, license and permit requirements. If we or our Subsidiaries inadvertently conclude that such permissions and approvals relating to the operations of our business are not required, fail to obtain and maintain such approvals, licenses or permits required for our business, or fail to respond to changes in the applicable laws, regulations, interpretations and regulatory environment, we or our subsidiaries could be subject to liabilities, monetary penalties and even operational disruption, which may materially and adversely affect our business, operating results, financial condition and the value of our Class A Ordinary Shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless.
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As confirmed by our PRC counsel, Tianyuan Law Firm, we and our Subsidiaries are not subject to cybersecurity review with the Cyberspace Administration of China, or the “CAC,” after the Cybersecurity Review Measures became effective on February 15, 2022, since we currently do not have over one million users’ personal information and do not anticipate that we will be collecting over one million users’ personal information in the foreseeable future, which we understand might otherwise subject us to the Cybersecurity Review Measures; we are also not subject to network data security review by the CAC if the Draft Regulations on the Network Data Security Administration are enacted as proposed, since we currently do not have over one million users’ personal information and do not collect data that affects or may affect national security and we do not anticipate that we will be collecting over one million users’ personal information or data that affects or may affect national security in the foreseeable future, which we understand might otherwise subject us to the Network Data Security Administration Draft. However, the changing applicable laws, regulations or interpretations may require us to do so in the future. Accordingly, any future failure to obtain prior approval of the CSRC, CAC, or any other Chinese authorities for the listing and trading of our Class A Ordinary Shares on a foreign stock exchange could have a material adverse effect upon our business. If we or our subsidiaries inadvertently conclude that such approval or permission is not required, fail to obtain and maintain such approval or permission required, we or our subsidiaries may face sanctions by the CSRC, CAC or other PRC regulatory agencies for failure to seek CSRC, CAC approval. These sanctions may include fines and penalties on our operations in China, limitations on our operations in China, 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 subsidiaries in China, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation, prospects, the trading price of our Class A Ordinary Shares, and the ability to offer the securities being registered to foreign investors.
Our offering will be subject to compliance with the CSRC’s Draft Overseas Listing Regulations when adopted. On December 24, 2021, the CSRC, together with other relevant government authorities in China issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Administration Provisions”), and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations requires a PRC domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) to complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing includes direct and indirect issuance and listing. Where an enterprise whose principal business activities are conducted in PRC seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant PRC domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. Therefore, the proposed offering would be deemed an Indirect Overseas Issuance and Listing under the Draft Overseas Listing Regulations. As such, the Company would be required to complete the filing procedures of and submit the relevant information to CSRC after the Draft Overseas Listing Regulations become effective. The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless. However, as of the date of this prospectus, as advised by our PRC counsel, Tianyuan Law Firm, it is uncertain when the Administration Provision and the Draft Overseas Listing Regulations will take effect or if they will take effect as currently drafted, hence we are currently not required to complete the filing procedures and submit the relevant information to CSRC.
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Corporate Structure
We are a Cayman Islands exempted company limited by shares. The following diagram illustrates the corporate structure of the Company as of the date of this prospectus and upon completion of this offering:
Lichen China Limited was incorporated on April 13, 2016 under the laws of the Cayman Islands. As of the date of this prospectus, the authorized share capital of the Company is US$50,000 divided into 1,000,000,000 Class A Ordinary Shares and 250,000,000 Class B Ordinary Shares, of which 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares are issued and outstanding. The Company is a holding company and is currently not actively engaging in any business. This is an offering of the Class A Ordinary Shares of the Cayman Islands holding company. You may never hold equity interests in the operating PRC subsidiaries. Further, Lichen China Limited controls and receives the economic benefits of its PRC subsidiaries’ business operation, if any, through equity ownership. We do not use a Variable Interest Entity (“VIE”) structure.
Legend Consulting BVI was incorporated on December 20, 2013 under the laws of the British Virgin Islands with limited liability. Legend Consulting BVI is a wholly owned subsidiary of the Company. Legend Consulting BVI is a holding company and is currently not actively engaging in any business.
Legend Consulting HK was formed on January 8, 2014 under the laws of Hong Kong. Legend Consulting HK is a wholly owned subsidiary of Legend Consulting BVI. It is a holding company and is not actively engaging in any business.
Lichen Zixun was established on April 14, 2004 under the laws of the PRC. Lichen Zixun is a wholly owned subsidiary of Legend Consulting HK and is our main operating entity.
Lichen Education was established on July 30, 2014 under the laws of PRC. Lichen Education is a wholly owned subsidiary of Lichen Zixun and is our operating entity.
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Our Services
Through our PRC subsidiaries, we provide (i) financial and taxation solution services; (ii) education support services; and (iii) software and maintenance services in the PRC. The connections and synergies amongst our services are illustrated in the diagram below:
The financial and taxation solution services provided to our corporate customers mainly comprise financial and taxation related management consultation, internal control management consultation, annual or regular consultation, and internal training and general consultation.
The education support services provided to our partnered institutions (“Partnered Institutions”) mainly comprise the provision of marketing, operational and technical support and the sales of teaching and learning materials.
The software and maintenance services provided to our corporate customers mainly comprise the sales of financial and taxation analysis software and sales of financial and taxation training software.
Financial and Taxation Solution Services
We focus on our financial and taxation solution services to business companies in the PRC. We believe that every company, regardless of its size, should adopt a sound financial and taxation management system for growth and sustainable development. With such philosophy in mind as a guiding principle, our financial and taxation solution services are customized based on the specific needs and requirements of individual customers.
Education Support Services
Our education support services are provided to our Partnered Institutions. As of the date of this prospectus, we collaborate with 25 Partnered Institutions in 12 provinces or municipalities and 23 cities in the PRC. Partnered Institutions are education services providers which mainly engage in organization of various seminars, talks and training courses to entrepreneurs, senior executives as well as financial and taxation executives. From the personal and business networks of our management as well as our marketing initiatives (being our talks and seminars hosted by the Partnered Institutions), potential customers who wish to set up education institutions may approach us and initiate discussions with us, with an aim to becoming our Partnered Institutions.
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Software and Maintenance Services
Lichen Zixun has been providing financial and taxation training software and academic affairs management system to our Partnered Institutions as part of our services under the Partnership Agreements (defined below).
Leveraging our understanding of corporate needs on financial and taxation management and analysis tools in daily operation of our enterprise customers, we began to invest and develop our first financial and taxation analysis software, namely, Enterprise Financial Intelligence Analysis System V1.0, in 2017 and have commercialized it for sale to our corporate customers since 2019.
With respect to our Lichen Education Accounting Practice System V1.0, a financial and taxation training system that was developed in 2014, it is focused on students’ or users’ practice experience by resembling, illustrating and providing practices on various accounting tasks, such as bookkeeping, tax computation, filing tax returns and issuing valued-added tax invoices in actual business practices. Thereafter, we updated and developed some new training systems based on Lichen Education Accounting Practice System V1.0. Lichen Education has eight copyrights for financial and taxation training software to date.
As of the date of this prospectus, we have not experienced any product recalls, liability claims or material complaints on our software products. For details, please see “Research and Development” under the “Business” section of this prospectus.
After Sales Services
Our customers who engage us for our financial and taxation related consultation services may attend courses provided by our Partnered Institutions. Continuous training can enhance the financial and taxation concepts of our customers and ensure the continuous implementation of the financial and taxation solutions we provided to them. We also provide general customer care by responding to customer queries as they arise, in order to resolve their problems on a timely basis.
From time to time, the Partnered Institutions will also host talks and seminars, conducted by our experienced senior management personnel, internal consultants or external experts, to which our customers are invited. As for our Partnered Institutions, we provide continuous support to them, including operational and technical support in school management and operation and trainings to Partnered Institutions’ staff and employees to enhance their teaching quality. With respect to our software products, we offer software installation, training and after sales technical and maintenance services, such as telephone, instant communication and remote support services, within one year of purchase for our financial and taxation training software and financial and taxation analysis software.
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Sales and Marketing
We believe brand recognition of “Lichen” is critical to our ability to attract new customers and retain business collaboration and relationship with our existing clientele, and our promotion and marketing efforts are designed to enhance our brand awareness and reputations among them. Generally, we attract new customers with referrals from our Partnered Institutions and personal and business networks of our executives and directors.
In addition, we organize marketing activities, such as seminars, talks and consultation events with our Partnered Institutions, business federations and business associations, leveraging our accumulated resources and connections. Through the business relationships with our Partnered Institutions, we could, on the one hand, provide our education support services to them and, on the other hand, by leveraging their business networks and their geographical coverage, promote our brand name and services to the participants of these seminars, talks and courses organized by them. As of the date of this prospectus, we have deployed external experts and internal consultants to participate in and deliver more than 1,000 talks, courses and seminars organized for their target audience.
Our Competitive Strength
| ● | “Lichen” is a recognized brand in the financial and taxation solution services industry in the PRC. |
| ● | We benefit from the synergies resulting from the business relationships with our Partnered Institutions. |
| ● | Our management team possesses a broad personal and business network, which provides us with a valuable source of potential customers. |
| ● | Strong R&D capabilities to further increase our competitiveness and better cater to our customers’ needs. |
| ● | Innovative capabilities in developing a comprehensive range of services to meet evolving customer demands. |
| ● | We are able to offer high quality services to customers from a diversified range of industry sectors. |
Our Business Strategies
Our objective is to strengthen and improve our market position in the PRC. We intend to achieve our objective by implementing business strategies in the following key aspects:
| ● | Expand our business in financial and taxation solution services |
| ● | Strengthen our R&D capabilities and expand the self-developed software |
| ● | Source new customers and improve recognition of the “Lichen” brand |
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Impact of COVID-19
Following the global outbreak of COVID-19 in early 2020, our business operations and service provision to our customers in the PRC were temporarily disrupted since the Chinese New Year holiday of 2020, as a result of the temporary suspension of operation of our offices, the Partnered Institutions and our enterprise customers in response to the respective local government’s policies. We resumed full operations on February 10, 2020. We have been closely monitoring and evaluating the effect of COVID-19 on our services, especially financial and taxation solution services provided to our enterprise customers and education support services provided to our Partnered Institutions.
With the PRC government gradually relaxing lockdown measures or travel restrictions and allowing resumption of business, the reported number of new cases dropping from the height of the crisis, the decrease in revenue and gross profit of our Group has slowed down, as illustrated below, and we believe that the adverse effect of the COVID-19 pandemic is only temporary in nature.
Due to the impact of the COVID-19 pandemic, the total revenue of our Group decreased by 2.94% from approximately $31.6 million for the year ended December 31, 2019 to approximately $30.67 million for the year ended December 31, 2020. The decrease in revenue generated from financial and taxation solution services by approximately $1.68 million, offset by the increase in revenue generated from education support services and software and maintenance services by approximately $0.05 million and $0.7 million, respectively, were the primary cause of the decrease in our total revenue for the year ended December 31, 2020. For the year ended December 31, 2021, the total revenue of our Group was approximately $34.30 million, an increase of approximately $3.63 million, or 11.83%, compared to the total revenue of our Group for the year ended December 31, 2020. The increase was primary due to the resumption of our business and operations and the increase in the number of our consulting services orders.
As a whole, our business and services were subject to different degree of delays, due to temporary suspension of business operations, lockdown measures and travel restrictions. In particular, our internal consultants and external experts were not able to provide certain on-site consultation or meet face-to-face with our enterprise customers or deliver in-person seminars or talks at premises of our Partnered Institutions before February 2020. For our financial and taxation solution services, save for the postponed completion of 24 financial and taxation related management or internal control management consultation projects resulting in the delay in recognition of revenue of approximately RMB2.29 million (approximately $0.35 million) and cancellation or termination of 43 annual or regular consultation projects resulting in the loss of revenue of approximately RMB13.18 million (approximately $2.02 million), our management confirmed that the COVID-19 pandemic had not resulted in any substantial delay or difficulties in discharging our obligations under any financial and taxation solution service contracts or agreements, and we had not been subject to any late charges or damages imposed on us by our customers. The aforesaid postponed projects were completed and the relevant revenue of approximately RMB2.29 million (approximately $0.35 million) was fully recognized by June 2020.
Our Partnered Institutions temporarily suspended the provision of in-person trainings, seminars or talks with their participants, due to travel restrictions, lockdown and/or quarantine measures imposed by local governments as well as the governments’ recommendation to maintain social distancing to reduce the chance of transmission of COVID-19. To mitigate the disruption of services provided to our Partnered Institutions, we commenced offering technical support to online education courses to our Partnered Institutions. Since late May 2020, our Partnered Institutions had resumed provisions of in-person trainings, seminars and talks. None of our Partnered Institutions has terminated any scheduled training or seminar to talk of our Subsidiaries due to the COVID-19 pandemic.
For our software and maintenance services, due to temporary suspension of business operations or classes, six enterprise customers and eight universities or colleges canceled their order of software, and, accordingly, we recorded a loss of revenue of approximately RMB3.7 million (approximately $0.54 million) for fiscal year ended December 31, 2020. Given that sales of software and maintenance support services do not generally require a lot of face-to-face meetings with our customers, we have not encountered or experienced, and do not expect to encounter, any material disruption to our software and maintenance services due to the COVID-19 pandemic. There is no order cancelled during the fiscal year ended December 31, 2021 by any of our customers or universities or colleges.
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We believe that the COVID-19 pandemic caused a certain level of business disruption and had a negative impact to business results and financial performance of business enterprises in the PRC, which are our major customers for financial and taxation solution services, and, therefore business owners and entrepreneurs tended to tighten their budgets, reduced expenditures or postponed their projects in order to mitigate impact of the COVID-19 to their businesses at the initial stage of the outbreak. In addition, certain projects were referred by our Partnered Institutions. As affected by the temporary suspension of in-person trainings, seminars or talks held by our Partnered Institutions, our promotion through these in-person activities to participants of our Partnered Institutions was also disrupted.
Following the resumption of in-person trainings, seminars or talks by our Partnered Institutions in late May 2020, our promotion to participants of our Partnered Institutions or referrals from Partnered Institutions gradually resumed. Since the reported number of new COVID-19 cases have dropped from the height of the crisis and business enterprises have resumed their business under the guidance of the PRC government, we believe that the demand in our financial and taxation solution services should continue to resume to pre-pandemic levels.
Any further impact of the COVID-19 pandemic will depend on its subsequent development, and there remains a possibility of further outbreaks of COVID-19 variants forcing a complete or partial suspension of our business operations in the PRC. The impact of such an event is out of our control and beyond our estimation and assessment.
Summary of Risk Factors
Investing in our Ordinary Shares involves significant risks. Our corporate structure as a Cayman Islands holding company with operations conducted by our PRC subsidiaries involves unique risks to investors. You should carefully consider all of the information in this prospectus before making an investment in our Ordinary Shares. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk Factor”, beginning on page 26.
Risks Relating to Our Business and Operations
Risks and uncertainties relating to our business and operations, beginning on page 26 of this prospectus, include but are not limited to the following:
| ● | Our business, financial condition and results of operations may be affected due to the COVID-19 pandemic and other diseases or epidemic. See “Risk Factors – Risks Relating to Our Business and Operations – Our business, financial condition and results of operations may be affected due to the COVID-19 pandemic and other diseases or epidemic” on page 26. |
| ● | We may incur impairment losses for intangible assets, which may adversely affect our results of operations. See “Risk Factors – Risks Relating to Our Business and Operations – We may incur impairment losses for intangible assets, which may adversely affect our results of operations” on page 26. |
| ● | Our results of operations may be adversely affected by credit risk associated with our financial assets through profit and loss. See “Risk Factors – Risks Relating to Our Business and Operations – Our results of operations may be adversely affected by credit risk associated with our financial assets through profit and loss” on page 26. |
| ● | Our business depends on the market recognition of our “Lichen” brand name. See “Risk Factors – Risks Relating to Our Business and Operations – Our business depends on the market recognition of our “Lichen” brand name” on page 27. |
| ● | Our revenue was mainly derived from financial and taxation solution services projects, which are not recurring in nature and there is no assurance that our customers will provide us with new business. See “Risk Factors – Risks Relating to Our Business and Operations – Our revenue was mainly derived from financial and taxation solution services projects, which are not recurring in nature and there is no assurance that our customers will provide us with new business” on page 27. |
| ● | Failure to maintain our relationship with our external experts could materially and adversely affect our business, financial condition and results of operations. See “Risk Factors – Risks Relating to Our Business and Operations – Failure to maintain our relationship with our external experts could materially and adversely affect our business, financial condition and results of operations” on page 28. |
| ● | Our financial and taxation solution services may attract liability. See “Risk Factors – Risks Relating to Our Business and Operations – Our financial and taxation solution services may attract liability” on page 30. |
| ● | We may not be able to successfully implement our strategies, or achieve our business objectives and our business, operating results and financial position may be materially and adversely affected. See page “Risk Factors – Risks Relating to Our Business and Operations – We may not be able to successfully implement our strategies, or achieve our business objectives and our business, operating results and financial position may be materially and adversely affected” on 30. |
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| ● | We have limited insurance coverage to protect us against all risks associated with our business operations. See “Risk Factors – Risks Relating to Our Business and Operations – We have limited insurance coverage to protect us against all risks associated with our business operations” on page 31. |
| ● | Protection of intellectual property rights may not prevent third parties and/or our competitors’ infringement on our teaching and learning materials or self-developed software, which could weaken our competitive position and harm our business and results of operations. See “Risk Factors – Risks Relating to Our Business and Operations – Protection of intellectual property rights may not prevent third parties and/or our competitors’ infringement on our teaching and learning materials or self-developed software, which could weaken our competitive position and harm our business and results of operations” on page 31. |
Risks Relating to Our Industry
Risks and uncertainties related to our industry, beginning on page 32 of this prospectus, include but not limited to the following:
| ● | The financial and taxation solution service, education support service and software and maintenance service industries rely on manpower and the increase in our staff costs may materially and adversely affect our operations, profitability and financial condition. See “Risk Factors – Risks Relating to Our Industry – The financial and taxation solution service, education support service and software and maintenance service industries rely on manpower and the increase in our staff costs may materially and adversely affect our operations, profitability and financial condition” on page 32. |
| ● | Our customer base is primarily concentrated on business enterprises and Partnered Institutions in the PRC. Any slowdown of the enterprises’ growth and development in the PRC or demands for financial and taxation solution services, education support services or software and maintenance services could have a material adverse effect on our business, financial condition and results of operations. See “Risk Factors – Risks Relating to Our Industry – Our customer base is primarily concentrated on business enterprises and Partnered Institutions in the PRC. Any slowdown of the enterprises’ growth and development in the PRC or demands for financial and taxation solution services, education support services or software and maintenance services could have a material adverse effect on our business, financial condition and results of operations” on page 32. |
| ● | We face significant competition in various geographical locations where we offer our financial and taxation solution services, and if we fail to compete effectively, we may lose market share and our profitability could be adversely affected. See “Risk Factors – Risks Relating to Our Industry – We face significant competition in various geographical locations where we offer our financial and taxation solution services, and if we fail to compete effectively, we may lose market share and our profitability could be adversely affected” on page 32. |
Risks Relating to Doing Business in China
Risks and uncertainties related to doing business in China in general, beginning on page 33 of this prospectus, include but not limited to the following:
| ● | Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations. See “Risk Factors – Risks Relating to Doing Business in China – Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations” on page 33. | |
| ● | PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business. See “Risk Factors – Risks Relating to Doing Business in China – PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business” on page 34. |
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| ● | Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in laws and regulations in China with little advance notice could adversely affect us and limit the legal protections available to you and us. See “Risk Factors – Risks Relating to Doing Business in China – Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in laws and regulations in China with little advance notice could adversely affect us and limit the legal protections available to you and us” on page 33. | |
| ● |
Chinese regulatory authorities could change the rules and regulations regarding foreign ownership in the industry in which the company operates, which would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or become worthless. See “Risk Factors – Risks Relating to Doing Business in China – The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, which could result in a material change in our operations and/or the value of our Ordinary Shares. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class A Ordinary Shares. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 34. | |
| ● | The Chinese government may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of the securities we are registering for sale. See “Risk Factors – Risks Relating to Doing Business in China – The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, which could result in a material change in our operations and/or the value of our Ordinary Shares. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class A Ordinary Shares. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 34. |
| ● | We are not currently required to obtain any approval from the CSRC. However, the approval from the CSRC may be required in connection with this offering in the future, and, if required, we cannot predict whether we will be able to obtain such approval. See “Risk Factors – Risks Relating to Doing Business in China – We are not currently required to obtain any approval from the CSRC. However, the approval from the CSRC may be required in connection with this offering in the future, and, if required, we cannot predict whether we will be able to obtain such approval” on page 37. |
| ● | Uncertainties exist with respect to the interpretation and implementation of the enacted Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations. See “Risk Factors – Risks Relating to Doing Business in China – Uncertainties exist with respect to the interpretation and implementation of the enacted Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations” on page 38. |
| ● | We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business. See “Risk Factors – Risks Relating to Doing Business in China – We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business” on page 38. |
| ● | To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets. See “Risk Factors – Risks Relating to Doing Business in China – To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets” on page 39. |
| ● | Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our Class A Ordinary Shares. See “Risk Factors – Risks Relating to Doing Business in China – Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our Class A Ordinary Shares” on page 39. |
| ● | Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment. See “Risk Factors – Risks Relating to Doing Business in China – Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment” on page 40. |
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| ● | We must remit the offering proceeds to PRC before they may be used to benefit our business in the PRC, and this process may take a number of months. See “Risk Factors – Risks Relating to Doing Business in China – We must remit the offering proceeds to PRC before they may be used to benefit our business in the PRC, and this process may take a number of months” on page 41. | |
| ● | Our Class A Ordinary Shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Class A Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment, even making it worthless. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On December 16, 2021, the PCAOB issued its determination that the PCAOB is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions, and the PCAOB included in the report of its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong. This list does not include our auditors, TPS Thayer, LLC and Briggs & Veselka Co. While our auditor are based in the U.S. and registered with PCAOB and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause our securities to be delisted from the stock exchange. See “Risk Factors — Risks Related to Doing Business in China — The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering” on page 44. |
Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares
Risks and uncertainties related to our public offering and ownership of our Class A Ordinary Shares, beginning on page 46 of this prospectus, include but are not limited to the following:
| ● | We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Ordinary Shares less attractive to investors. See “Risk Factors – Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares – We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Ordinary Shares less attractive to investors” on page 47. |
| ● | 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. See “Risk Factors – Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares – 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” on page 48. |
| ● | The market price of our Class A 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 public offering price. See “Risk Factors – Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares – The market price of our Class A 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 public offering price” on page 50. |
See “Risk Factors” section, beginning on page 26, and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.
We are currently not required to obtain approval from Chinese authorities to list on U.S. exchanges, however, if our subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on a U.S. exchange, which would materially affect the interest of the investors. It is uncertain when and whether the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and when such permission is obtained, whether it will be rescinded. Although the Company is currently not required to obtain permission from any of the PRC federal or local government to list on U.S. exchanges and has not received any denial to list on a U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry. For more detailed information, see “Risk Factors – Risks Relating to Doing Business in China – We are not currently required to obtain any approval from the CSRC. However, the approval from the CSRC may be required in connection with this offering in the future, and, if required, we cannot predict whether we will be able to obtain such approval. See page 37.”
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Holding Foreign Company Accountable Act
U.S. laws and regulations, including the Holding Foreign Companies Accountable Act, or HFCAA, may restrict or eliminate our ability to complete a business combination with certain companies, particularly those acquisition candidates with substantial operations in China.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. An identified issuer will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years instead of three years. If our auditor cannot be inspected by the Public Company Accounting Oversight Board, or the PCAOB, for two consecutive years, the trading of our securities on any U.S. national securities exchanges, as well as any over-the-counter trading in the U.S., will be prohibited. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions.
As of the date of the prospectus, our auditors, Briggs & Veselka Co. for the fiscal year ended December 31, 2020 and TPS Thayer, LLC (“TPS Thayer”) for the fiscal year ended December 31, 2021, are not subject to the determinations as to inability to inspect or investigate completely as announced by the PCAOB on December 16, 2021 as they are not on the list published by the PCAOB. As of the date of the prospectus, TPS Thayer, headquartered in Sugar Land, Texas, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. TPS Thayer’s registration with the PCAOB took effect in September 2020 and it is currently subject to PCAOB inspections. As of the date of the prospectus, Briggs & Veselka Co., headquartered in Houston, Texas, is subject to inspection by the PCAOB on a regular basis, with the last inspection in 2019, and is not subject to the determinations as to inability by the PCAOB to inspect or investigate registered firms completely announced by the PCAOB on December 16, 2021.
However, recent developments with respect to audits of China-based companies create uncertainty about the ability of TPS Thayer to fully cooperate with the PCAOB’s request for audit workpapers without the approval of the Chinese authorities. We cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. In the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCAA ultimately result in a determination by a securities exchange to delist the Company’s securities. The delisting of our Class A Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment, even making it worthless. In addition, under the HFCAA, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, which could be reduced to two consecutive years if the Accelerating Holding Foreign Companies Accountable Act is signed into law, and this ultimately could result in our ordinary shares being delisted by and exchange. See “Risk Factors — Risks Related to Doing Business in China – The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering” on page 44 and “Trading in our securities may be prohibited under the HFCAA and as a result an exchange may determine to delist our securities if it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction” on page 45.
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Regulatory Permissions
On August 8, 2006, six PRC regulatory agencies jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules requires that an offshore special purpose vehicle formed for overseas listing purposes and controlled directly or indirectly by PRC citizens shall obtain the approval of the China Securities Regulatory Commission, or CSRC, prior to overseas listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. Based on our understanding of the Chinese laws and regulations in effect at the time of this prospectus and the advice of our PRC legal counsel, we will not be required to submit an application to the CSRC for its approval of this offering and the listing and trading of ordinary shares on the Nasdaq under the M&A Rules, 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. However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented, and our understanding summarized above is 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 Chinese government agencies, including the CSRC, would reach the same conclusion.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Strictly Cracking Down on Illegal Securities Activities, which were made available to the public on July 6, 2021. The Opinions on Strictly Cracking Down on Illegal Securities Activities emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Pursuant to the Opinions, Chinese regulators are required to accelerate rulemaking related to the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border data flow, and management of confidential information. Numerous regulations, guidelines and other measures are expected to be adopted under the umbrella of or in addition to the Cybersecurity Law and Data Security Law. As of the date of this prospectus, no official guidance or related implementation rules have been issued. As a result, the Opinions on Strictly Cracking Down on Illegal Securities Activities remain unclear on how they will be interpreted, amended and implemented by the relevant PRC governmental authorities.
On December 24, 2021, the CSRC, together with other relevant government authorities in China issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Administration Provisions”), and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations require a PRC domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) to complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing includes direct and indirect issuance and listing. Where an enterprise which principal business activities are conducted in the PRC seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant PRC domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. Therefore, the proposed offering would be deemed an Indirect Overseas Issuance and Listing under the Draft Overseas Listing Regulations. As such, the Company would be required to complete the filing procedures of and submit the relevant information to CSRC after the Draft Overseas Listing Regulations become effective.
The Draft Rules Regarding Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials for an initial public offering and listing should include at least the following: record-filing report and related undertakings; regulatory opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
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In addition, an overseas offering and listing is prohibited under any of the following circumstances: (1) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (2) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Draft Administration Provisions defines the legal liabilities of breaches such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel order to suspend relevant business or halt operation for rectification, revoke relevant business permits or operational license.
The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless. However, as of the date of this prospectus, as advised by our PRC counsel, Tianyuan Law Firm, it is uncertain when the Administration Provision and the Draft Overseas Listing Regulations will take effect or if they will take effect as currently drafted, hence we are currently not required to complete the filing procedures and submit the relevant information to CSRC.
On December 28, 2021, the Cyberspace Administration of China jointly with the relevant authorities formally published Measures for Cybersecurity Review (2021) which took effect on February 15, 2022 and replaced the former Measures for Cybersecurity Review (2020). Measures for Cybersecurity Review (2021) stipulate that operators of critical information infrastructure purchasing network products and services, and online platform operator (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security, shall conduct a cybersecurity review, and any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country. Given that: (i) we do not possess personal information on more than one million users in our business operations; and (ii) data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the authorities, we would not be required to apply for a cybersecurity review under the Measures for Cybersecurity Review (2021).
If the CSRC, CAC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering and any follow-on offering, we may be unable to obtain such approvals and we may face sanctions by the CSRC, CAC or other PRC regulatory agencies for failure to seek their approval which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors and the securities currently being offered may substantially decline in value and be worthless. For more details, see “Risk Factors – Risks Related to Doing Business in China”.
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Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include, but are not limited to:
| ● | the ability to include only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations disclosure; |
| ● | an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002. |
| ● | reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and |
| ● | a delay in adopting new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. |
We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Class A Ordinary Shares held by non-affiliates or issue more than $1 billion of non-convertible debt over a three-year period.
Implication of Being a Foreign Private Issuer
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; |
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| ● | 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. |
We have taken advantage of certain reduced reporting and other requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold equity securities.
We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (1) the majority of our executive officers or directors are U.S. citizens or residents, (2) more than 50% of our assets are located in the United States or (3) our business is administered principally in the United States.
Implication of Being a Controlled Company
We are and will continue, following this offering, to be a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We are, and will remain, a “controlled company” as defined under the Nasdaq Stock Market Rules, as our Chief Executive Officer and Chairman of the Board, Mr. Ya Li, owns more than 50% of the voting right represented by our issued and outstanding Class B Ordinary Shares. For so long as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:
| ● | an exemption from the rule that a majority of our Board of Directors must be independent directors; |
| ● | an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and |
| ● | An exemption from the rule that our director nominees must be selected or recommended solely by independent directors. |
As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
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Although we do not intend to rely on the “controlled company” exemption under the Nasdaq listing rules, we could elect to rely on this exemption after we complete this offering. If we elected to rely on the “controlled company” exemption, a majority of the members of our Board of Directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors after we complete this offering. (See “Risk Factors – Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares – As a “controlled company” under the rules of the Nasdaq Capital Market, we may choose to exempt our Company from certain corporate governance requirements that could have an adverse effect on our public shareholders.”)
Additionally, pursuant to Nasdaq’s phase-in rules for newly listed companies, we have one year from the date on which we are first listed on Nasdaq to comply fully with the Nasdaq listing standards. We do not plan to rely on the phase-in rules for newly listed companies and will comply fully with the Nasdaq listing standards at the time of listing.
Transfers of Cash to and from Our Subsidiaries
We currently have not maintained any cash management policies that dictate the purpose, amount and procedure of cash transfers between the Company, our subsidiaries, or investors. Rather, the funds can be transferred in accordance with the applicable PRC laws and regulations. To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets.
Under existing PRC foreign exchange regulations, payment 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 the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulations, 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. Current PRC regulations permit our PRC subsidiaries to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of Hong Kong (including funds from Hong Kong to the PRC), except for transfer of funds involving money laundering and criminal activities. Cayman Islands law prescribes that a company may only pay dividends out of its profits. Other than that, there is no restrictions on Lichen China Limited’s ability to transfer cash to investors. See “Risk Factors - Risks Related to Doing Business in China - To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets,” “Risk Factors - Risks Related to Doing Business in China - We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business,” and “Risk Factors - Risks Related to Doing Business in China - Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.”
As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries, including those based in the PRC, for our cash and financing requirements. If any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us. Lichen China Limited is permitted under the laws of the Cayman Islands to provide funding to our subsidiaries incorporated in the British Virgin Islands and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. Our subsidiaries are permitted under the respective laws of the British Virgin Islands and Hong Kong to provide funding to Lichen China Limited through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividends transfers from HK to BVI and BVI to the Cayman Islands. Current PRC regulations permit our WFOE to pay dividends to the Company only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations.
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The PRC has currency and capital transfer regulations that require us to comply with certain requirements for the movement of capital. The Company is able to transfer cash (US Dollars) to its PRC subsidiaries through an investment (by increasing the Company’s registered capital in a PRC subsidiary). The Company’s subsidiaries within China can transfer funds to each other when necessary through the way of current lending. The transfer of funds among companies are subject to the Provisions on Private Lending Cases, which was implemented on August 20, 2020 to regulate the financing activities between natural persons, legal persons and unincorporated organizations. As advised by our PRC counsel, Tianyuan Law Firm, the Provisions on Private Lending Cases does not prohibit using cash generated from one subsidiary to fund another subsidiary‘s operations. We have not been notified of any other restriction which could limit our PRC subsidiaries’ ability to transfer cash between PRC subsidiaries. The Company’s subsidiaries in the PRC have not transferred any earnings or cash to the Company to date. As of the date of this prospectus, there has not been any assets or cash transfer between the holding company and its subsidiaries. As of the date of this prospectus, there has not been any dividends or distributions made to US investors. The Company’s business is primarily conducted through its subsidiaries. The Company is a holding company and its material assets consist solely of the ownership interests held in its PRC subsidiaries. The Company relies on dividends paid by its subsidiaries for its working capital and cash needs, including the funds necessary: (i) to pay dividends or cash distributions to its shareholders, (ii) to service any debt obligations and (iii) to pay operating expenses. As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, the Company’s PRC subsidiaries are restricted in that respect, as well as in others respects noted below, in their ability to transfer a portion of their net assets to the Company as a dividend.
With respect to transferring cash from the Company to its subsidiaries, increasing the Company’s registered capital in a PRC subsidiary requires the filing of the local commerce department, while a shareholder loan requires a filing with the State Administration of Foreign Exchange or its local bureau. Aside from the declaration to the State Administration of Foreign Exchange, there is no restriction or limitations on such cash transfer or earnings distribution.
With respect to the payment of dividends, we note the following:
| 1. | PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations (an in-depth description of the PRC regulations is set forth below); |
| 2. | Our PRC subsidiaries are required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; |
| 3. | Such reserves may not be distributed as cash dividends; |
| 4. | Our PRC subsidiaries may also allocate a portion of their after-tax profits to fund their staff welfare and bonus funds; except in the event of a liquidation, these funds may also not be distributed to shareholders; the Company does not participate in a Common Welfare Fund; and |
| 5. | The incurrence of debt, specifically the instruments governing such debt, may restrict a subsidiary’s ability to pay stockholder dividends or make other cash distributions. |
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If, for the reasons noted above, our subsidiaries are unable to pay shareholder dividends and/or make other cash payments to the Company when needed, the Company’s ability to conduct operations, make investments, engage in acquisitions, or undertake other activities requiring working capital may be materially and adversely affected. However, our operations and business, including investment and/or acquisitions by our subsidiaries within China, will not be affected as long as the capital is not transferred in or out of the PRC.
During the fiscal years ended December 31, 2020, Lichen Zixun made dividend payments of RMB30 million (approximately $4.3 million) to the then eventual shareholders of Lichen Zixun, who are PRC individuals. The Company made no such dividend, distribution or transfer during the fiscal year ended December 31, 2021. As of the date of this prospectus, the Company or its subsidiaries have made no other transfers, dividends, or distributions to investors and no investors have made transfers, dividends, or distributions to the Company or its subsidiaries.
As of the date of this prospectus, no dividends, distributions or transfers has been made between Lichen China Limited and any of its subsidiaries. For the foreseeable future, the Company intends to use the earnings for research and development, to develop new products and to expand its production capacity. As a result, we do not expect to pay any cash dividends in the foreseeable future. Also, as of the date of this prospectus, no cash generated from one subsidiary is used to fund another subsidiary’s operations and we do not anticipate any difficulties or limitations on our ability to transfer cash between subsidiaries.
PRC Regulations
In accordance with PRC regulations, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide statutory reserves, which are appropriated from net profit, as reported in the FIE’s PRC statutory accounts. A FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital (based on the FIE’s PRC statutory accounts). The aforementioned reserves may only be used for specific purposes and may not be distributed as cash dividends. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its shareholders, unless approved by the State Administration of Foreign Exchange. After satisfaction of this requirement, the remaining funds may be appropriated at the discretion of the FIE’s Board of Directors. Our subsidiary, Shanghai TCH, qualifies as a FIE and is therefore subject to the above-mandated regulations on distributable profits.
Additionally, in accordance with PRC corporate law, a domestic company is required to maintain a surplus reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and may not be distributed as cash dividends. Lichen Zixun and Lichen Education were established as domestic companies; therefore, each is subject to the above-mentioned restrictions on distributable profits.
As a result of PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends, in a general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend or otherwise.
Corporate Information
Our principal executive office is located B2306, Block B Tower 3, Jinjiang Wanda Plaza Commercial Complex 888 Century Avenue Meiling Street, Jinjiang City Fujian, PRC. The telephone number of our principal executive offices is +86-595-85633335. Our registered office provider in Cayman Islands is Ocorian Trust (Cayman) Limited. Our registered office in Cayman Islands is at Windward 3, Regatta Office Park, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands. Our registered agent in the United States is Cogency Global Inc., 122 E 42nd St 18th Fl, New York, NY 10168. We maintain a corporate website at http://www.lichenzx.com. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.
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The Offering
| Shares Offered: | 6,250,000 Class A Ordinary Shares, excluding exercise of the over-allotment discussed below | |
| 7,187,500 Class A Ordinary Shares, assuming full exercise of the over-allotment | ||
| Shares Issued and Outstanding Prior to the Offering: | 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares | |
|
Ordinary shares |
Lichen China Limited will issue 6,250,000 Class A Ordinary Shares in this offering. Our issued and outstanding share capital consists of Class A Ordinary Shares and Class B Ordinary Shares. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. Each Class A Ordinary Share is entitled to one vote, and each Class B Ordinary Share is entitled to ten votes and is convertible into one Class A Ordinary Share. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. | |
| Shares Issued and Outstanding after the Offering: | 19,750,000 Class A Ordinary Shares (or 20,687,500 Class A Ordinary Shares if the underwriters exercise the over-allotment option in full) and 9,000,000 Class B Ordinary Shares. | |
| Over-Allotment: | Lichen China Limited has granted to the underwriters the option, exercisable for 45 days from the date of this prospectus, to purchase up to 937,500 additional Class A Ordinary Shares. | |
| Underwriters Warrants | Lichen China Limited will issue to the Underwriters Warrants to purchase a number of Class A Ordinary Shares equal to an aggregate of one percent (1%) of the Class A Ordinary Shares sold in the offering, including as a result of the exercise of the underwriters’ over-allotment option. The exercise price of the Representative Warrants is equal to 120% of the offering price of the Class A Ordinary Shares offered hereby. | |
| Assumed Offering Price per Class A Ordinary Share: | $4.00 per Class A Ordinary Shares | |
| Gross Proceeds: | Approximately $25,000,000, excluding proceeds from the exercise of the Underwriters’ over-allotment option | |
| Lock-up | We, our directors, officers, and 5% or greater shareholders have agreed with the underwriter, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ordinary shares for a period of 12 months from the date of this prospectus. See “Underwriting” for more information. |
| Proposed trading market and symbol: | We intend to apply for the listing of our Class A Ordinary Shares on the Nasdaq Capital Market under the symbol “LICN.” |
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| Transfer Agent: | Vstock Transfer, LLC | |||
| Risk Factors: | Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our Class A Ordinary Shares. | |||
| Use of Proceeds: | We intend to use the proceeds from this offering for research and development, working capital and general corporate purposes. See “Use of Proceeds” for more information. |
21
SUMMARY OF FINANCIAL POSITION AND CASH FLOWS OF LICHEN LIMITED AND SUBSIDIARIES
The consolidated financial statements included in this Prospectus reflect financial position and cash flows of the registrant and Cayman Islands incorporated parent company, Lichen China Limited, together with those of its China-based subsidiaries, on a consolidated basis. The tables below are condensed consolidating schedules summarizing separately the financial position and cash flows of the registrant and Cayman Islands incorporated parent company, Lichen China Limited. (“Parent Company” in the tables below), and its China-based subsidiaries (“Subsidiaries” in the tables below), together with eliminating adjustments:
| As of December 31, 2021 | ||||||||||||||||||||
| Parent Company | Subsidiaries | Subtotal | Elimination | Consolidation | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash | - | 16,845 | 16,845 | - | 16,845 | |||||||||||||||
| Accounts receivable | - | 3,942 | 3,942 | - | 3,942 | |||||||||||||||
| Other receivables – related party | 1,568 | 14,190 | 15,758 | (15,339 | ) | 419 | ||||||||||||||
| Inventories | - | 150 | 150 | - | 150 | |||||||||||||||
| Prepayments and other current assets | - | 2,532 | 2,532 | - | 2,532 | |||||||||||||||
| Total current assets | 1,568 | 37,659 | 39,227 | (15,339 | ) | 23,888 | ||||||||||||||
| Property and equipment, net | - | 14,937 | 14,937 | - | 14,937 | |||||||||||||||
| Intangible assets, net | - | 3,868 | 3,868 | - | 3,868 | |||||||||||||||
| Other assets | - | 250 | 250 | - | 250 | |||||||||||||||
| Total assets | 1,568 | 56,714 | 58,282 | (15,339 | ) | 42,943 | ||||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | - | 123 | 123 | - | 123 | |||||||||||||||
| Accrued expenses and other current liabilities | - | 3,061 | 3,061 | - | 3,061 | |||||||||||||||
| Unearned revenues | - | 1,273 | 1,273 | - | 1,273 | |||||||||||||||
| Taxes payable | - | 1,203 | 1,203 | - | 1,203 | |||||||||||||||
| Due to a related party | - | 15,408 | 15,408 | (15,302 | ) | 106 | ||||||||||||||
| Short-term bank loan | - | 345 | 345 | - | 345 | |||||||||||||||
| Total current liabilities | - | 21,413 | 21,413 | (15,302 | ) | 6,111 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Shareholders’ equity: | ||||||||||||||||||||
| Class A Ordinary Share, $0.00004 par value, 1,000,000,000 shares authorized; 13,500,000 shares issued and outstanding | 1 | - | 1 | - | 1 | |||||||||||||||
| Class B Ordinary Share, $0.00004 par value, 250,000,000 shares authorized; 9,000,000 shares issued and outstanding | - | - | - | - | - | |||||||||||||||
| Additional paid-in capital | 1,487 | - | 1,487 | - | 1,487 | |||||||||||||||
| Statutory surplus reserves | - | 789 | 789 | - | 789 | |||||||||||||||
| Retained earnings | 80 | 32,934 | 33,014 | - | 33,014 | |||||||||||||||
| Accumulated other comprehensive income (loss) | - | 1,578 | 1,578 | (37 | ) | 1,541 | ||||||||||||||
| Total shareholders’ equity | 1,568 | 35,301 | 36,869 | (37 | ) | 36,832 | ||||||||||||||
| Total liabilities and shareholders’ equity | 1,568 | 56,714 | 58,282 | (15,339 | ) | 42,943 | ||||||||||||||
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| As of December 31, 2020 | ||||||||||||||||||||
| Parent Company | Subsidiaries | Subtotal | Elimination | Consolidation | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash | - | 8,665 | 8,665 | - | 8,665 | |||||||||||||||
| Accounts receivable | - | 2,417 | 2,417 | - | 2,417 | |||||||||||||||
| Other receivables – related party | 1,533 | 262 | 1,795 | (1,379 | ) | 416 | ||||||||||||||
| Inventories | - | 23 | 23 | - | 23 | |||||||||||||||
| Prepayments and other current assets | - | 130 | 130 | - | 130 | |||||||||||||||
| Total current assets | 1,533 | 11,497 | 13,030 | (1,379 | ) | 11,651 | ||||||||||||||
| Property and equipment, net | - | 15,771 | 15,771 | - | 15,771 | |||||||||||||||
| Intangible assets, net | - | 5,589 | 5,589 | - | 5,589 | |||||||||||||||
| Other assets | - | 337 | 337 | - | 337 | |||||||||||||||
| Total assets | 1,533 | 33,194 | 34,727 | (1,379 | ) | 33,348 | ||||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | - | 95 | 95 | - | 95 | |||||||||||||||
| Accrued expenses and other current liabilities | - | 3,018 | 3,018 | - | 3,018 | |||||||||||||||
| Unearned revenues | - | 1,103 | 1,103 | - | 1,103 | |||||||||||||||
| Taxes payable | - | 1,049 | 1,049 | - | 1,049 | |||||||||||||||
| Due to a related party | - | 1,498 | 1,498 | (1,395 | ) | 103 | ||||||||||||||
| Short-term bank loan | - | 337 | 337 | - | 337 | |||||||||||||||
| Total current liabilities | - | 7,100 | 7,100 | (1,395 | ) | 5,705 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Shareholders’ equity: | ||||||||||||||||||||
| Class A Ordinary Share, $0.00004 par value, 1,000,000,000 shares authorized; 13,500,000 shares issued and outstanding | 1 | - | 1 | - | 1 | |||||||||||||||
| Class B Ordinary Share, $0.00004 par value, 250,000,000 shares authorized; 9,000,000 shares issued and outstanding | - | - | - | - | - | |||||||||||||||
| Additional paid-in capital | 1,487 | - | 1,487 | - | 1,487 | |||||||||||||||
| Statutory surplus reserves | - | 789 | 789 | - | 789 | |||||||||||||||
| Retained earnings | 45 | 24,507 | 24,552 | - | 24,552 | |||||||||||||||
| Accumulated other comprehensive income (loss) | - | 798 | 798 | 16 | 814 | |||||||||||||||
| Total shareholders’ equity | 1,533 | 26,094 | 27,627 | 16 | 27,643 | |||||||||||||||
| Total liabilities and shareholders’ equity | 1,533 | 33,194 | 34,727 | (1,379 | ) | 33,348 | ||||||||||||||
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| For the year ended December 31, 2021 | ||||||||||||
| Parent Company | Subsidiaries | Consolidation | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | 35 | 8,427 | 8,462 | |||||||||
| Adjustments to reconcile net income to net cash provided by activities: | ||||||||||||
| Depreciation of property and equipment | - | 660 | 660 | |||||||||
| Amortization of intangible assets | - | 1,786 | 1,786 | |||||||||
| Amortization of other assets | - | 93 | 93 | |||||||||
| Loss on disposal of property and equipment | - | (30 | ) | (30 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | - | (1,451 | ) | (1,451 | ) | |||||||
| Prepayments and other current assets | - | (2,370 | ) | (2,370 | ) | |||||||
| Other receivables – related party | - | 7 | 7 | |||||||||
| Other assets | - | - | - | |||||||||
| Accounts payable | - | 25 | 25 | |||||||||
| Unearned revenues | - | 142 | 142 | |||||||||
| Accrued expenses and other current liabilities | - | (26 | ) | (26 | ) | |||||||
| Due to a related party | - | 1 | 1 | |||||||||
| Tax payables | - | 131 | 131 | |||||||||
| Inventories | - | (126 | ) | (126 | ) | |||||||
| Net cash provided by operating activities | 35 | 7,269 | 7,304 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of intangible assets | - | - | - | |||||||||
| Purchases of property and equipment | - | (28 | ) | (28 | ) | |||||||
| Disposal of property and equipment | - | 589 | 589 | |||||||||
| Net cash used in investing activities | - | 561 | 561 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from short-term bank loans | - | - | - | |||||||||
| Repayments on short-term bank loans | - | - | - | |||||||||
| Dividend paid | - | - | - | |||||||||
| Net cash used in financing activities | - | - | - | |||||||||
| Effects of foreign currency exchange rate changes on cash | (35 | ) | 350 | 315 | ||||||||
| Net increase (decrease) in cash | - | 8,180 | 8,180 | |||||||||
| Cash, beginning of year | - | 8,665 | 8,665 | |||||||||
| Cash, end of year | - | 16,845 | 16,845 | |||||||||
| Supplemental disclosure of cash flows information: | ||||||||||||
| Cash paid for income taxes | - | 2,976 | 2,976 | |||||||||
| Cash paid for interest | - | 15 | 15 | |||||||||
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| For the year ended December 31, 2020 | ||||||||||||
| Parent Company | Subsidiaries | Consolidation | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | - | 6,407 | 6,407 | |||||||||
| Adjustments to reconcile net income to net cash provided by activities: | - | |||||||||||
| Depreciation of property and equipment | - | 806 | 806 | |||||||||
| Amortization of intangible assets | - | 1,441 | 1,441 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | - | (465 | ) | (465 | ) | |||||||
| Prepayments and other current assets | - | (6 | ) | (6 | ) | |||||||
| Other receivables – related party | - | (1,007 | ) | (1,007 | ) | |||||||
| Other assets | - | - | - | |||||||||
| Accounts payable | - | 4 | 4 | |||||||||
| Unearned revenues | - | (145 | ) | (145 | ) | |||||||
| Accrued expenses and other current liabilities | - | 71 | 71 | |||||||||
| Due to a related party | - | 886 | 886 | |||||||||
| Tax payables | - | 347 | 347 | |||||||||
| Inventories | - | 11 | 11 | |||||||||
| Net cash provided by operating activities | - | 8,350 | 8,350 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of intangible assets | - | (1,160 | ) | (1,160 | ) | |||||||
| Purchases of property and equipment | - | - | - | |||||||||
| Net cash used in investing activities | - | (1,160 | ) | (1,160 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from short-term bank loans | - | - | - | |||||||||
| Repayments on short-term bank loans | - | - | - | |||||||||
| Dividend paid | - | (4,348 | ) | (4,348 | ) | |||||||
| Net cash used in financing activities | - | (4,348 | ) | (4,348 | ) | |||||||
| Effects of foreign currency exchange rate changes on cash | - | 433 | 433 | |||||||||
| Net increase (decrease) in cash | - | 3,275 | 3,275 | |||||||||
| Cash, beginning of year | - | 5,390 | 5,390 | |||||||||
| Cash, end of year | - | 8,665 | 8,665 | |||||||||
| Supplemental disclosure of cash flows information: | ||||||||||||
| Cash paid for income taxes | - | 2,310 | 2,310 | |||||||||
| Cash paid for interest | - | 15 | 15 | |||||||||
25
Before you decide to purchase our Class A Ordinary Shares, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our Class A Ordinary Shares could decline, perhaps significantly.
We believe that an investment in our Class A Ordinary Shares involves certain risks, some of which are beyond our control. These risks can be categorized into (i) risks relating to our business and operations; (ii) risks relating to our industry; (iii) risks relating to doing business in China; and (iv) risks relating to our public offering and the ownership of our Class A Ordinary Shares. Prospective investors in our Shares should consider carefully all the information set forth in this prospectus.
Risks Relating to Our Business and Operations
Our business, financial condition and results of operations may be affected due to the COVID-19 pandemic and other diseases or epidemic
Any occurrence of disease or epidemic may cause material disruptions to our business operations. In particular, during the occurrence of a disease or epidemic, we may not be able to deliver our services as efficiently and effectively as before such occurrence. In such event, we may not be able to conduct physical meetings with our customers or our customers may be less inclined to meet with us, and the Partnered Institutions may temporarily close their education premises or postpone or cancel scheduled talks and seminars, or our external experts may encounter difficulties hosting seminars or talks at the Partnered Institutions’ premises due to travel restrictions. As a result, we may experience disruption in our on-site expert support services provided to the Partnered Institutions. The outbreak of COVID-19 in early 2020 had temporarily disrupted our business operations, which temporarily suspended our business operations after the Chinese New Year. We resumed full operation as of February 10, 2020. Our Partnered Institutions also temporarily suspended provision of in-person trainings, seminars or talks and gradually resumed these trainings, seminars and talks in late May 2020. The overall confidence and interest of the customers or investors in the general economy in China was affected due to COVID-19, which in turn directly affected the growth and development of business companies in the market and the demand for financial and taxation solution services. Since the outbreak of COVID-19, the impact to our business was mainly on the on-site consultation services. Due to travel restrictions, our external experts could not provide on-site consultation services to our customers, we therefore modified our business model by providing remote services first and postponed or reduced part of our on-site procedures. The areas where our Partnered Institutions located were not greatly affected by the pandemic and the total number of Partnered Institutions remained stable. Our business of software and maintenance services accounts approximately for 10% of our total sales, and the impact on suppliers such as textbook and software service providers is negligible. After taking corresponding measures, most of our customers’ business and operations have returned to pre-pandemic level since the second quarter of 2020. Our total revenue for the year ended December 31, 2021 has increased by 11.83% to approximately $34.30 million compared to the total revenue of $30.67 million for the year ended December 31, 2020. We do not believe that the pandemic had overall material adverse effect on our business, financial condition and results of operations. However, there is no assurance that there will be no recurrence of any outbreak of diseases such as COVID-19, Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome Coronavirus (MERS-CoV) or any other contagious disease or epidemic in major cities or provinces in China in which we conduct business. Any occurrence of disease or epidemic in the future could have a material and adverse effect on our business, financial condition and results of operations.
We may incur impairment losses for intangible assets, which may adversely affect our results of operations
As reported in our consolidated financial statements for the years ended December 31, 2021 and 2020, our intangible assets amounted to approximately $3.87 million and $5.59 million as of December 31, 2021 and 2020, respectively. Intangible assets are tested for impairment whenever there is indication that their carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of our intangible assets exceeds their recoverable amount. The process of assessment is uncertain and complex and requires judgments in relation to such events or changes in circumstances. If our intangible assets are determined to be impaired in the future, we would be required to write down the carrying value by recognized impairment loss for our intangible assets in our consolidated financial statements during the period in which the relevant intangible assets are determined to be impaired, which may in turn adversely affect our results of operations.
Our results of operations may be adversely affected by credit risk associated with our financial assets through profit and loss
Our financial assets primarily consist of trade and other receivables and bank balances and cash. Our Group recognizes loss allowances for expected credit allowances (“ECL”) on financial assets measured at amortized costs. Our Group measures loss allowances at an amount equal to lifetime ECL. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECL, our Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on our Group’s historical experience and informed credit assessment and including forward-looking information. Any decrease in value of a financial asset is recorded as other losses, and therefore will directly affect our results of operations.
26
Our business depends on the market recognition of our “Lichen” brand name
We believe that the market awareness and reputation of our “Lichen” brand name has contributed significantly to the success and growth of our business. We also believe that maintaining and enhancing the “Lichen” brand name is critical to maintaining our competitive advantage. Our ability to maintain our brand reputation depends on a number of factors, some of which are beyond our control. As we continue to grow in size, expand our services and extend our geographical coverage through our own growth and expansion, and through our education support services provided to the Partnered Institutions, it may become difficult to maintain quality and consistency in the services we provide, which may lead to diminishing confidence in our “Lichen” brand name as well as our financial and taxation solution services, education support services and software and maintenance services. Numerous factors can potentially impact the reputation of our “Lichen” brand name, including but not limited to customers’ satisfaction with our financial and taxation solution services, education support services and software and maintenance services, performance of the external experts, negative press, and unaffiliated parties using our brand name. If our brand is tarnished, customers’ interest in us may decrease and our business could be materially and adversely affected. If we are unable to maintain or sustain our brand reputation and recognition, we may also be unable to maintain or increase customers’ patronage, which may cause material adverse effects on our business, financial condition and results of operations.
Our revenue was mainly derived from financial and taxation solution services projects, which are not recurring in nature and there is no assurance that our customers will provide us with new business
Our revenue was mainly derived from financial and taxation solution services projects which are non-recurring in nature. For the years ended December 31, 2021 and 2020, revenue generated from our financial and taxation solution services amounted to approximately $26.49 million and $23.34 million, representing approximately 77.24 % and 76.10% of our total revenue, respectively. Our customers are not obliged to renew such agreements with us should their business no longer requires our services. Further, the fees for our financial and taxation solution services are primarily based on, amongst others, the nature and estimated scope of services. However, there can be no assurance that we will be able to maintain or raise the level of our fees we charge our customers in the future, or even if we are able to maintain or raise such fees, we cannot assure you that we will be able to attract prospective customers to engage us for the relevant financial and taxation solution services at such increased fee rates. There is no guarantee that with our continued efforts, we will be able to secure new businesses from recurring customers effectively or at all at the same level of fees we charged. Accordingly, the number and scale of agreements and the amount of revenue we are able to secure may vary significantly from year to year, and it may be difficult to accurately forecast the volume and size and scale of future business.
In the event that we are unable to maintain our business with our recurring customers or to expand and diversify our customer base by sourcing new customers at desired levels or at all, or to develop and expand our service diversity, or to meet the requirements of our customers regarding service quality and delivery or any other requirements of our customers at reasonable or affordable costs, our relationship with our customers, our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to sufficiently guarantee the legal compliance and service quality standards of the Partnered Institutions under the Partnership Agreements and failure of the Partnered Institutions to meet requisite standard of service quality and compliance could materially and adversely affect our reputation, business, financial condition and results of operations
Our customers, being the Partnered Institutions under the partnership agreements (the “Partnership Agreements,” each a “Partnership Agreement”), are required to meet basic standards of service quality and compliance as stipulated in the Partnership Agreements when operating their business under our “Lichen” brand name. However, there is no assurance that Partnered Institutions will be able to continuously maintain such basic standards and our brand name will suffer as a result of their non-fulfillment by delivering subpar services. There is also no assurance that the Partnered Institutions will be in continuous compliance with the relevant PRC laws and regulations in obtaining the necessary approvals, licenses and permits and making all necessary registrations and filings for their education business in the PRC. As a consequence, our reputation and our “Lichen” brand name may be tarnished. Lichen Zixun has terminated two Partnership Agreements with two Partnered Institutions which did not or could not obtain relevant licenses or permits for conducting education and training activities. In the event any of the Partnered Institutions fail to be in compliance with the PRC laws and regulations resulting in penalty or closure orders from the relevant authorities in the PRC, our reputation and marketing activities may be hampered and our reputation and business, financial condition and results of operations may be materially and adversely affected.
27
Failure to maintain our relationship with our external experts could materially and adversely affect our business, financial condition and results of operations
As of the date of this prospectus, we had a team of 47 external experts. These external experts primarily conduct courses for the Partnered Institutions, participate in our promotional activities and events and occasionally provide financial and taxation solution services to our customers on an “as needed” basis. The external experts are one of the key components of our education support services and financial and taxation solution services, which we believe distinguishes us from our competitors. We believe that the knowledge and know-how of the external experts, enables us to stay at the forefront as a service provider in financial and taxation solution and education support services in the PRC and to continue to develop financial and taxation related course contents and innovative solutions. However, our current and future competitors may compete with us for the external experts. There is no assurance that the external experts will continue to partner and cooperate with us or will not cooperate with our competitors after the expiry of the terms under the Expert Cooperation Agreements (defined below). If we are unable to maintain our relationship with the external experts, our business and results of operations could be materially and adversely affected.
We may not be successful in developing and enhancing our teaching and learning materials provided to the Partnered Institutions or our self-developed software to keep abreast with the latest developments in the relevant laws and regulations in the PRC and technological changes
The laws and regulations in relation to the financial and taxation sectors are constantly evolving in the PRC. For example, since January 2012, China has begun the pilot program to replace the business tax with value-added tax in several provinces and the reform was officially implemented nationwide in May 2016. In 2016, the new tax management system of “Golden Tax System Phase III” was established in China. In 2018, the National People’s Congress and Chinese People’s Political Consultative Conference launch the institutional reform of the state council, which points out that the reform of the tax collection and management system, and the combination of provincial and provincial level and local taxation institutions. In addition, with the issuance of the Accounting Standard for Small Enterprises in 2011 and the Opinions of the State Council on Supporting the Sound Development of Micro and Small Enterprises in 2014, the PRC government established a standard to regulate the accounting measurement and now encourages micro and small enterprises to seek professional financial and taxation solution advice and services. We currently rely on our R&D department to improve our teaching and learning materials provided to the Partnered Institutions. We are responsible for conducting studies into the trending topics in relation to the financial and taxation solution sector. With respect to our self-developed software, the introduction of new technology and emergence of new industry standards may render our self-developed software obsolete and uncompetitive. For the years ended December 31, 2021 and 2020, we incurred R&D expenses of approximately $1.08 million and $1.0 million, respectively. We expect to continue to invest in our human and capital resources to ensure our teaching and learning materials, as well as our self-developed software, reflect the latest developments and changing customer needs. If we fail to develop and enhance our teaching and learning materials provided to the Partnered Institutions so as to keep up with and reflect the latest financial and taxation developments in the PRC, or to introduce updated versions of our existing self-developed software or introduce new software, our brand reputation and relationship among our customers and with the Partnered Institutions may be materially affected, thus our results of operations, financial condition and prospects may be materially and adversely affected.
Our Group may not be able to enforce the restrictive covenants of the employment contracts against our employees, confidentiality and non-compete agreements against our senior management, and Expert Cooperation Agreements against the external experts, to prevent them from directly competing with our Group within the restraint period
Generally, our employees and our senior management enter into employment contracts and separate confidentiality and non-compete agreements with us, respectively. The external experts enter into expert cooperation agreements with us (the “Expert Cooperation Agreements,” each an “Expert Cooperation Agreement”). All of the aforesaid contracts and agreements are subject to restrictive covenants governed by PRC law.
If any dispute arises between our employees, senior management or external experts and our Group, we may not necessarily be able to enforce these employment contracts or confidentiality and non-compete agreements against our employees or senior management or Expert Cooperation Agreements against the external experts, and the enforceability of restrictive covenants may only be determined by the courts on a case-by-case basis. It is thus difficult to predict the outcome of the proceedings or gauge the level of legal protection that such proceedings may provide. If our Group cannot enforce the restrictive covenants of the employment contracts, confidentiality and non-compete agreements or Expert Cooperation Agreements, the relevant person may leave our Group upon or before the expiry of their engagement and join a competitor or form a competing company immediately after leaving our Group, which may disrupt our business and materially and adversely affect our financial condition and results of operations.
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We may not be able to retain members of our management team and other key personnel
We depend on the continued efforts of our senior management team and other key employees for our success. Our executive officers have an average of 20 years of experience in the PRC’s financial and taxation industry, of which an average of 13 years has been spent with us. They possess in-depth understanding of our target industries, our customers and competitors and the laws regulating our business. In addition, our executive officers also deliver talks and participate in seminars hosted by our Partnered Institutions. Therefore, they play an important role in formulating and implementing appropriate strategies for achieving business success. However, we may not be able to retain the services of our key management. The loss of service of any of our key management, in particular our executive officers, could impair our ability to operate and make it difficult to implement our business and growth strategies. We may not be able to replace such persons within a reasonable period of time or with another person of equivalent expertise and experience in a timely manner, or at all, which may severely disrupt our business operations.
Further, our R&D team is responsible for maintaining high-quality teaching and learning materials provided to the Partnered Institutions and our software technicians are responsible for designing and developing our self-developed software. However, we cannot assure you that any of the core R&D team or software technicians will continue his/her employment with us or won’t leave their position due to other reasons beyond our control. The loss of service of any member of our core R&D team or software technicians could impair our ability to or delay the development of our teaching and learning materials and self-developed software which contributes an important part of our education support services and software and maintenance services. As a result, our business, financial condition and results of operations may be materially and adversely affected.
Our business, financial condition and results of operations may be affected if our customers do not pay the progress payments in full or on schedule or if we fail to bill
Under our financial and taxation solution services, we normally receive progress payments from our customers at various stages of our services rendered, as stipulated in the agreements.
For the years ended December 31, 2021 and 2020, our average trade receivables turnover days were approximately 33 days and 24 days, respectively, which were largely in line with our general credit period of 30 days. There can be no assurance that progress payments will be timely paid to us and in full in accordance with the progress payment schedules. Should we fail to receive progress payments from our customers for our work performed under the financial and taxation solution projects, our business, financial condition and results of operations may be materially and adversely affected.
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Our financial and taxation solution services may attract liability
Our financial and taxation solution services normally involve providing advice to our customers. A customer who relies on our advice may suffer loss if we are negligent in providing such advice and the customer may have legal cause to claim compensation against us. In this regard, our Group is exposed to possible claims or lawsuits arising from such complaints. Should we experience any incident, such as claims or lawsuits, our “Lichen” brand name and our financial position may be adversely affected.
Our self-developed software products are exposed to product liability risk
Our financial and taxation training software and financial and taxation analysis software are designed to be used by our customers for learning and teaching purposes and practical business purposes, respectively, and may be critical to our customers’ business operations. Any bugs, defects or errors in our software may cause damage to our customers’ system and hardware, and adversely affect the performance of such software or our customers’ operations. There is no assurance that we have discovered and corrected all bugs, defects or errors in our self-developed software in our testing process. As such, we may incur additional costs in rectifying the defects or defending any potential claims or lawsuits against us. We do not maintain any product liability insurance for our self-developed software at present. If any of our customers initiates a claim or lawsuit with regard to our self-developed software against us, we may be liable to monetary damages or other liabilities and our reputation, business, financial condition and results of operations may be adversely affected.
We are exposed to software source code storage risk
Our source codes and master copies of self-developed software are stored at our premises. We have implemented various measures, such as a restrictive access system, to safeguard these source codes and master copies of software. We also back up the source codes of our self-developed software from time to time. Nevertheless, there is no guarantee that such measures are sufficient or effective for the protection of the source codes and master copies of our self-developed software. Any damage to or loss of our source codes and master copies of self-developed software could adversely affect our business, financial condition and results of operations.
Any loss or deterioration of our relationship with external software developers may affect our business, financial condition and results of operations
We engage external software developers to design and develop our software prototype. Any failure on our part to properly optimize, operate, safeguard the intellectual properties including the source code of the software prototype, or perform our contractual obligations under agreements with them may cause substantial harm to our business relationship with software developers. Our external software developers may fail to provide satisfactory software prototype or perform their obligations under the relevant agreements. They may also terminate agreements with us or demand commercial terms that are less favorable to us than under our existing agreements in the future. They may choose to partner with our competitors, allowing our competitors to enhance their software products and better compete against us. Any loss or deterioration of our relationship with external software developers may affect our business, financial condition and results of operations.
We may not be able to successfully implement our strategies, or achieve our business objectives and our business, operating results and financial position may be materially and adversely affected
Our business strategies are intended to be accomplished by implementing various future business plans. Our Group intends to allocate our net proceeds from this offering to establish representative offices in Beijing City and Chengdu City, recruit additional staff to support our business expansion, acquire other companies engaging in provision of financial and taxation solution services in the PRC, strengthen our R&D capabilities and expand the self-developed software offered by our Subsidiaries, and further improve our “Lichen” brand recognition through multi-channel marketing. There is no assurance that our business plans will materialize in accordance with the plan as set out in “Use of Proceeds” in this prospectus, or at all, or that our business strategies will be fully or partially accomplished. In the event that we fail to accomplish our business plans or to do so in a timely manner, we may not be able to achieve our planned future business growth and our results of operations may be materially and adversely affected.
In addition, our future business plans may result in significant capital expenditures, selling expenses, and administrative and other operating costs incurred by us, which may or may not be recoverable, or may or may not bring in a positive result to our revenue. There is no assurance that we will successfully implement our strategies or that our strategies, even if implemented, will result in us achieving our objectives. Our business, financial condition and results of operations may be materially and adversely affected if our business objectives are not achieved.
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Protection of intellectual property rights may not prevent third parties and/or our competitors’ infringement on our teaching and learning materials or self-developed software, which could weaken our competitive position and harm our business and results of operations
Our success depends upon, among other things, the protection of copyrights of our teaching and learning materials or self-developed software and other intellectual property rights. We rely on a combination of copyrights, trademarks, contractual restrictions and other software security technologies to protect, and restrict unauthorized access to, our intellectual property rights in teaching and learning materials or self-developed software. As of the date of the prospectus, Lichen Zixun has registered four trademarks in Hong Kong and the PRC and Lichen Education has registered eight copyrights for our financial and taxation training software and financial and taxation analysis software in the PRC.
For our software developed by external software developers, we also own all the rights with respect to the software and are entitled to request the software developers to provide all source codes of the software pursuant to the agreements for software upgrade or development between our Subsidiaries and the software developers. The efforts that we take to protect our intellectual property rights may not always be sufficient or effective. Protecting our intellectual property rights can become costly and time consuming and may not always be successful. Our customers, being the Partnered Institutions under the Partnership Agreements, may disseminate our teaching and learning materials through the internet or other media without our consent. In addition, our self-developed software products are subject to the risks of piracy, such as reverse engineering, secondary development, unauthorized copying or other misappropriation by our customers or other third parties. If we fail to prevent the infringement of our intellectual property rights, the rights could be diminished and our competitive position could suffer, which could harm our business and results of operations.
The validity, enforceability and scope of protection available under the relevant intellectual property laws in China are uncertain and still evolving. Implementation and enforcement of Chinese intellectual property-related laws have historically been deficient and ineffective. Accordingly, intellectual property and confidentiality legal regimes in China may not afford protection to the same extent as in the United States or other countries. The experience and capabilities of Chinese courts in handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require a significant expenditure of cash and may divert management’s attention from our operations, which could harm our business, financial condition and results of operations. An adverse determination in any such litigation could materially impair our intellectual property rights and may harm our business, prospects and reputation.
We may face disputes from time to time relating to the intellectual property rights of third parties. We cannot assure you that our teaching and learning materials supplied to the Partnered Institutions under the Partnership Agreements or our self-developed software do not or will not infringe intellectual property rights of third parties
We have and may continue to be involved in legal and other disputes in the ordinary course of our business, including allegations against us for potential infringement of third-party copyrights or other intellectual property rights. Participation in such litigation and legal proceedings may also cause us to incur substantial expenses and divert the time and attention of our management. We may be required to pay damages or incur settlement expenses. Any similar claim against us, even without any merit, could also hurt our reputation and brand image. Any such event could have a material and adverse effect on our business, financial condition and results of operations.
We have limited insurance coverage to protect us against all risks associated with our business operations
Currently, we only maintain motor vehicle insurance policies and social insurance policies for our employees in the PRC. We believe our insurance coverage is consistent with the industry practice in the PRC and we have not experienced any material insurance claims in relation to our business as of the date of the prospectus. We do not maintain insurance to cover all our assets or properties or any business interruption insurance. Any damage to our assets or properties due to natural disasters or accidents and any business disruption could result in our incurring substantial costs and diversion of resources, which would have an adverse effect on our business and results of operations.
Our office premises in Shanghai had not completed change of ownership registration
As of the date of the prospectus, our operating subsidiary in PRC, Lichen Zixun, has paid approximately RMB26.6 million ($3.82 million) to the seller for the office premises in Shanghai (described more particularly under “Management’s Discussion and Analysis of Financial Condition – Business – Description of Property”) and the seller has delivered the property to Lichen Zixun for use. Lichen Zixun has moved in and occupied the office, but has not officially completed the change of ownership registration. Pursuant to the terms of the Property Sale and Purchase Agreement and the Amendment of Property Sale and Purchase Agreement, the seller agreed to transfer the ownership registration of the property to Lichen Zixun on or before December 31, 2021, and Lichen Zixun agreed to pay the remaining consideration of approximately RMB11.4 million (approximately $ 1.63 million) within five business days after receiving notification of the change of building ownership certificate from the seller. We expected to complete the change of ownership registration by the end of 2021. However, due to the Covid-19 pandemic, the seller is not able to travel to China and the change of ownership registration date under the Amendment has been postponed to December 2022. Other than the change of ownership registration date, the Amendment remains the same. As such, Lichen Zixun does not have legal title to the property as of the date hereof.
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If the seller fails or breaches its obligation under the Property Sale and Purchase Agreement and its Amendment to complete change of building ownership registration and deliver the building ownership certificate, or otherwise requests us to vacate the offices premises in Shanghai, we may be forced to relocate from the office premises in Shanghai and may be subject to lawsuits with the seller. If we fail to locate suitable replacement properties on terms acceptable to us or have to incur legal costs with respect to potential lawsuits with the seller, our operation, financial condition and results of operations may be adversely affected.
Risks Relating to Our Industry
The financial and taxation solution service, education support service and software and maintenance service industries rely on manpower and the increase in our staff costs may materially and adversely affect our operations, profitability and financial condition
The operations of our Subsidiaries are labor-intensive and our Subsidiaries relies on a stable supply of financial and taxation personnel and practitioners and R&D personnel in the PRC, in particular, our internal consultants and software R&D staff. As of the date of this prospectus, our Group has not experienced any shortage of staff in the PRC. For the years ended December 31, 2021 and 2020, the staff costs under cost of revenues were approximately $10.76 million and $9.1 million, respectively. The average annual wage of employees in the financial and software industry in the PRC has been increasing in recent years and may continue to increase in future. If we are unable to identify and employ other appropriate means to reduce our staff costs, or pass such increase in our staff costs to our customers, the results of our operations, profitability and financial condition may be adversely affected.
Our customer base is primarily concentrated on business enterprises and Partnered Institutions in the PRC. Any slowdown of the enterprises’ growth and development in the PRC or demands for financial and taxation solution services, education support services or software and maintenance services could have a material adverse effect on our business, financial condition and results of operations
All of our revenue during the years ended December 31, 2021 and 2020 was generated in the PRC. According to Frost & Sullivan, the growing number of enterprises and rapid development of small and medium-sized enterprises in the PRC lead to the demand for quality financial and taxation solution services. In addition, amongst other factors, the increased awareness of business enterprises in the PRC to compliance requirements with respect to financial and taxation laws and accounting standards, the inclination to improve their financial taxation or internal control systems to improve their cost efficiency, financial management model and productivity in an increasingly competitive business environment, the increasingly common use of artificial intelligence and big data to devise efficient financial and taxation management models and solutions, and the difficulties for small and medium-sized enterprises to attract or recruit experienced financial and taxation personnel, as such enterprises may not be able to offer competitive remuneration package, have also driven demands for financial and taxation solution services.
With respect to education support services, according to Frost & Sullivan, high-end comprehensive accountants are highly welcomed by modern enterprises, which in turn creates demand and opportunities for education support services. In addition, the continuous development of internet technologies and increasingly complex financial and taxation system have also driven business enterprises to adopt financial and taxation software in their operation processes to improve their efficiency. However, we cannot assure you that there will be continuous development of business enterprises in the PRC or growth in demand of our services or products in the future. If there is any slowdown of business growth or development in the PRC or demand for our services or products due to policy changes or change in business practices or operating environment, our business, financial condition and results of our operations will be materially and adversely affected.
We face significant competition in various geographical locations where we offer our financial and taxation solution services, and if we fail to compete effectively, we may lose market share and our profitability could be adversely affected
According to Frost & Sullivan, the financial and taxation solution services market in the PRC is rapidly evolving, highly fragmented and competitive. There is no enterprise that currently dominates this industry or that occupies the leading position in this industry. According to Frost & Sullivan, the top 10 “Solution Service Specialists” in the PRC, defined as service providers that focus on the market of financial and taxation solution service, only accounted for approximately 2.6% of the total market share in terms of revenue in 2019. Competition is expected to persist and intensify in the near future. We, in particular, face intense competition in our financial and taxation solution services in the geographical locations where we offer such services from many different smaller sized organizations that focus on providing similar services. As a result of such intense competition, the number of our customers may decrease. We may be required to reduce our financial and taxation solution services fees in response to competition in order to retain or attract customers. As a result, our revenue and profitability may be adversely affected. We cannot assure you that we will be able to compete successfully against current or potential competitors. If we are unable to maintain our competitive position or otherwise respond to market competition effectively, we may lose our market share and our profitability could be adversely affected.
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Risks Relating to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations
Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole. The Chinese economy differs from the economies of most developed countries in many respects, including the amount 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, and has reduced state ownership of productive assets, 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 through 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. 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 increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.
Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in laws and regulations in China with little advance notice could adversely affect us and limit the legal protections available to you and us
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement could be unpredictable, with little advance notice. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our current understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations related to foreign investment in China could affect the business environment and our ability to operate our business in China.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.
The financial and taxation solution services industry in China is subject to extensive regulation. Related laws and regulations are relatively new and evolving. The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the financial and taxation solution services industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, financial and taxation solution services businesses in China, including our business. We cannot assure you that we will be able to maintain our existing licenses or obtain new ones. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
The PRC government has significant oversight and discretion over the conduct of our business and may intervene or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that significantly affected certain industries, such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless.
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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business
We are an offshore holding company conducting our operations in China through our PRC subsidiaries. We may decide to finance our PRC subsidiaries by means of loans or capital contributions.
Any loans to Lichen WFOE, which is treated as a Foreign Investment Enterprise, or FIE, under PRC law, is subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to Lichen WFOE to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the SAFE, or filed with SAFE in its information system. According to the Notice of the People’s Bank of China (“PBOC”) and the State Administration of Foreign Exchange on Adjustments to Comprehensive Macro-prudential Regulation Parameters for Cross-border Financing issued by the People’s Bank of China and the State Administration of Foreign Exchange in January 2021, the limit for the total amount of foreign debt is 2 times of their respective net assets. Moreover, any medium or long-term loan to be provided by us to our PRC subsidiaries must also be filed and registered with the National Development and Reform Commission, or the NDRC. We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be reported to the Ministry of Commerce, or MOFCOM, or its local counterpart.
We believe the offering proceeds would be available for investments in our PRC operation after completing the registration. For example, if we decide to make loans to our PRC subsidiaries, the loan can be in an amount of up to 2 times of the net assets in the consolidated financial statement. However, we cannot assure you that we will be able to obtain relevant government registrations or approvals on a timely basis, or at all.
These capital contributions must be approved by the Ministry of Commerce (“MOC”) or its local counterpart. On March 30, 2015, the State Administration of Foreign Exchange (“SAFE”) promulgated Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capital of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. On June 9, 2016, SAFE promulgated Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, to further expand and strengthen such reform. Under Circular 19 and Circular 16, foreign-invested enterprises in the PRC are allowed to use their foreign exchange funds under capital accounts and RMB funds from exchange settlement for expenditure under current accounts within their business scope or expenditure under capital accounts permitted by laws and regulations, except that such funds shall not be used for (i) expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations; (ii) investments in securities or other investments than principal-secured products issued by banks; (iii) granting loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) construction or purchase of real estate for purposes other than self-use (except for real estate enterprises). In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the cash provided by our offshore financing activities to fund the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries.
In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our initial public offering to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities, which could result in a material change in our operations and/or the value of our Ordinary Shares. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class A Ordinary Shares. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless
Lichen China Limited is a Cayman Islands holding company and is not a Chinese operating company. As a holding company with no material operations of its own, it conducts all of its operations and operates its business in China through its PRC subsidiaries, in particular, Lichen Zixun, and its subsidiary, Lichen Education. Because of our corporate structure as a Cayman Islands holding company with operations conducted by our PRC subsidiaries, it involves unique risks to investors. Furthermore, Chinese regulatory authorities could change the rules and regulations regarding foreign ownership in the industry in which the company operates, which would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or become worthless.
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The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or become worthless.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal Securities Activities According to Law, or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be taken to deal with the risks and incidents of China-concept overseas listed companies. As of the date of this prospectus, we have not received any inquiry, notice, warning, or sanctions from PRC government authorities in connection with the Opinions.
On June 10, 2021, the Standing Committee of the National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
In early July 2021, regulatory authorities in China launched cybersecurity investigations with regard to several China-based companies that are listed in the United States. The Chinese cybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s app be removed from smartphone app stores. On July 5, 2021, the Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers and acquisitions, franchise development, and variable interest entities are banned from this sector.
On August 17, 2021, the State Council promulgated the Regulations on the Protection of the Security of Critical Information Infrastructure, or the Regulations, which took effect on September 1, 2021. The Regulations supplement and specify the provisions on the security of critical information infrastructure as stated in the Cybersecurity Review Measures. The Regulations provide, among others, that protection department of certain industry or sector shall notify the operator of the critical information infrastructure in time after the identification of certain critical information infrastructure.
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court.
As such, the Company’s business segments may be subject to various government and regulatory interference in the provinces in which they operate. The Company could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The Company may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
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Furthermore, it is uncertain when and whether the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. Although the Company is currently not required to obtain permission from any of the PRC federal or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.
On December 24, 2021, the CSRC, together with other relevant government authorities in China issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Administration Provisions”), and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations requires a PRC domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) to complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing includes direct and indirect issuance and listing. Where an enterprise whose principal business activities are conducted in PRC seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant PRC domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. Therefore, the proposed offering would be deemed an Indirect Overseas Issuance and Listing under the Draft Overseas Listing Regulations. As such, the Company would be required to complete the filing procedures of and submit the relevant information to CSRC after the Draft Overseas Listing Regulations become effective.
The Draft Rules Regarding Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials for an initial public offering and listing should include at least the following: record-filing report and related undertakings; regulatory opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
In addition, an overseas offering and listing is prohibited under any of the following circumstances: (1) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (2) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Draft Administration Provisions defines the legal liabilities of breaches such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel order to suspend relevant business or halt operation for rectification, revoke relevant business permits or operational license.
The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless. However, as of the date of this prospectus, as advised by our PRC counsel, Tianyuan Law Firm, it is uncertain when the Administration Provision and the Draft Overseas Listing Regulations will take effect or if they will take effect as currently drafted, hence we are currently not required to complete the filing procedures and submit the relevant information to CSRC.
In addition, on December 28, 2021, the CAC, the National Development and Reform Commission (“NDRC”), and several other administrations jointly issued the revised Measures for Cybersecurity Review, or the Revised Review Measures, which became effective and has replaced the existing Measures for Cybersecurity Review on February 15, 2022. According to the Revised Review Measures, if an “online platform operator” that is in possession of personal data of more than one million users intends to list in a foreign country, it must apply for a cybersecurity review. Based on a set of Q&A published on the official website of the State Cipher Code Administration in connection with the issuance of the Revised Review Measures, an official of the said administration indicated that an online platform operator should apply for a cybersecurity review prior to the submission of its listing application with non-PRC securities regulators. Given the recency of the issuance of the Revised Review Measures and their pending effectiveness, there is a general lack of guidance and substantial uncertainties exist with respect to their interpretation and implementation. For example, it is unclear whether the requirement of cybersecurity review applies to follow-on offerings by an “online platform operator” that is in possession of personal data of more than one million users where the offshore holding company of such operator is already listed overseas. Furthermore, the CAC released the draft of the Regulations on Network Data Security Management in November 2021 for public consultation, which among other things, stipulates that a data processor listed overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. If the draft Regulations on Network Data Security Management are enacted in the current form, we, as an overseas listed company, will be required to carry out an annual data security review and comply with the relevant reporting obligations.
We have been closely monitoring the development in the regulatory landscape in China, particularly regarding the requirement of approvals, including on a retrospective basis, from the CSRC, the CAC or other PRC authorities with respect to this offering, as well as regarding any annual data security review or other procedures that may be imposed on us. If any approval, review or other procedure is in fact required, we are not able to guarantee that we will obtain such approval or complete such review or other procedure timely or at all. For any approval that we may be able to obtain, it could nevertheless be revoked and the terms of its issuance may impose restrictions on our operations and offerings relating to our securities.
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We are not currently required to obtain any approval from the CSRC. However, the approval from the CSRC may be required in connection with this offering in the future, and, if required, we cannot predict whether we will be able to obtain such approval
The M&A Rules requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission (“CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, Tianyuan Law Firm, that the CSRC approval is not required for the listing and trading of our Ordinary Shares on the Nasdaq Global 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 the acquisitions of the 100% equity interests in Lichen Zixun by Legend Consulting HK is not subject to the M&A Rules. However, our PRC legal counsel 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, regulations and rules or detailed implementations and interpretations in any form relating to the M&A Rules. If CSRC approval is required in the future, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. There remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and the above summary is subject to any new laws, regulations, and rules or detailed implementations and interpretations in any form relating to the M&A Rules.
The Draft Rules Regarding Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials for an initial public offering and listing should include at least the following: record-filing report and related undertakings; regulatory opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
In addition, an overseas offering and listing is prohibited under any of the following circumstances: (1) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (2) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Draft Administration Provisions defines the legal liabilities of breaches such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel order to suspend relevant business or halt operation for rectification, revoke relevant business permits or operational license.
The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless.
We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to obtain or delay in obtaining CSRC approval for this offering. These sanctions may include fines and penalties on our operations in China, limitations on our operating privileges in China, 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 subsidiaries in China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver.
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Uncertainties exist with respect to the interpretation and implementation of the enacted Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations
On March 15, 2019, the PRC National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020 and replaces the trio of existing laws regulating foreign investment in the PRC, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, together with their implementation rules and ancillary regulations and become the legal foundation for foreign investment in the PRC. Meanwhile, the Implementation Regulation of the Foreign Investment Law and the Measures for Reporting of Information on Foreign Investment came into effect as of January 1, 2020, which clarified and elaborated the relevant provisions of the Foreign Investment Law.
The Foreign Investment Law sets out the basic regulatory framework for foreign investments and proposes to implement a system of pre-entry national treatment with a negative list for foreign investments, pursuant to which (i) foreign entities and individuals are prohibited from investing in the areas that are not open to foreign investments, (ii) foreign investments in the restricted industries must satisfy certain requirements under the law, and (iii) foreign investments in business sectors outside of the negative list will be treated equally with domestic investments. The Foreign Investment Law also sets forth necessary mechanisms to facilitate, protect and manage foreign investments and proposes to establish a foreign investment information reporting system, through which foreign investors or foreign-invested enterprises are required to submit initial report, report of changes, report of deregistration and annual report relating to their investments to the Ministry of Commerce, or MOFCOM, or its local branches.
We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business
We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiaries to adjust its taxable income, in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.
Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
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In response to the persistent capital outflow and the Renminbi’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China (“PBOC”) and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
To the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets
The transfer of funds and assets among Lichen China Limited, its Hong Kong and PRC subsidiaries is subject to restrictions. The PRC government imposes controls on the conversion of the RMB into foreign currencies and the remittance of currencies out of the PRC. See “Risk Factors – Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.” In addition, the PRC Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises, unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident. See “Risk Factors - Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.”
As of the date of this prospectus, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of Hong Kong (including funds from Hong Kong to the PRC), except for the transfer of funds involving money laundering and criminal activities. However, there is no guarantee that the Hong Kong government will not promulgate new laws or regulations that may impose such restrictions in the future.
As a result of the above, to the extent cash or assets in the business is in the PRC or Hong Kong or a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of us or our subsidiaries by the PRC government to transfer cash or assets.
Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business
We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of their respective after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. These limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments, or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our Class A Ordinary Shares
Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets and the proceeds from our initial public offering. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiaries is RMB. Gains and losses from the re-measurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The re-measurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our consolidated financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our Class A Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.
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The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. 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. However, the PBOC regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our Class A Ordinary Shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our Class A Ordinary Shares.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. As of the date of this prospectus, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on the price of our Class A Ordinary Shares.
Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment
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 net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from, or registration with, appropriate government authorities is required where 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.
In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting processes have been put in place by SAFE to regulate cross-border transactions falling under the capital account. 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 demands, we may not be able to pay dividends in foreign currencies to our shareholders.
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We must remit the offering proceeds to PRC before they may be used to benefit our business in the PRC, and this process may take a number of months
The proceeds of this offering must be sent back to the PRC, and the process for sending such proceeds back to the PRC may take several months after the closing of this offering. We may be unable to use these proceeds to grow our business until we receive such proceeds in the PRC. In order to remit the offering proceeds to the PRC, we will have to take the following actions: First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to SAFE certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments by domestic residents, and foreign exchange registration certificate of the invested company. Second, we will remit the offering proceeds into this special foreign exchange account. Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a tax certificate.
The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary materially. Ordinarily, the process takes several months to complete but is required by law to be accomplished within 180 days of application. The proceeds of this offering will be maintained in an interest-bearing account maintained by us in the United States, until the abovementioned approvals have been provided.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties
We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China, given the different levels of economic development in different locations. If the local governments deem our contribution to be not sufficient, we may be subject to late contribution fees or fines in relation to any underpaid employee benefits, our financial condition and results of operations may be adversely affected.
Currently, we are making contributions to the plans based on the minimum standards, although the PRC laws required such contributions to be based on the actual employee salaries up to a maximum amount specified by the local government. If we are required to make increased contributions or are subject to late contribution fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
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 Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, and some other 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, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC 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 MOC, 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 MOC or its local counterparts, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law
SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014, which requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37, requiring PRC residents or entities to register with qualified banks, rather than SAFE or its local branch, in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
All of our shareholders who directly or indirectly hold shares in Lichen China Limited and who are known to us as being PRC residents have completed the foreign exchange registrations required in connection with our recent corporate restructuring. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
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We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares – People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that Lichen China Limited or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then Lichen China Limited or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our Class A Ordinary Shares may be subject to PRC 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 imposed may reduce the returns on the investment in our Class A Ordinary Shares.
We may not be able to obtain certain benefits under relevant tax treaties on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary
We are an exempted company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. 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, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file the relevant report and materials with the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate, according to other relevant tax rules and regulations. As of the date of the prospectus, we did not record any withholding tax on the retained earnings of our subsidiaries in the PRC, as we intended to re-invest all earnings generated from our PRC subsidiaries for the operation and expansion of our business in China, and we intend to continue this practice in the foreseeable future. Should our tax policy change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax. We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax authority or if we will be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to HK Beach, our Hong Kong subsidiary.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future
The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (Circular 59) and Announcement No. 7 [2015] of the State Administration of Taxation—Announcement on Several Issues concerning the Enterprise Income Tax on Income from the Indirect Transfer of Assets by Non-Resident Enterprises (Circular 7) which became effective in February 2015. Under Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. Circular 7 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
Circular 7 extends its tax jurisdiction to not only indirect transfers but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clear criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax.
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According to the “Enterprise Income Tax Law of the People’s Republic of China” (adopted on March 16, 2007, first amended on February 24, 2017, and further amended on December 29, 2018), if the business dealings between an enterprise and its affiliated parties do not conform to the principle of independent transactions and thus reduce the taxable income or income of the enterprise or its affiliated parties, the tax authorities have the right to adjust in accordance with reasonable methods. The cost incurred by an enterprise and its related parties in developing and accepting intangible assets or providing and receiving labor services together shall be apportioned according to the principle of independent transaction when calculating taxable income.
Where enterprises that are controlled by resident enterprises or resident enterprises and Chinese residents in the country (region) where the actual tax burden is obviously lower than the tax rate level of China’s enterprise income tax, and profits are not distributed or are distributed at a reduced rate due to reasons other than reasonable business needs, the portion of the above profits attributable to such resident enterprises shall be included in the income of such resident enterprises for the reported period. Interest expenses incurred when the ratio of creditor’s rights investment to equity investment accepted by an enterprise from its affiliated parties exceeds the prescribed standard shall not be deducted in the calculation of taxable income. If an enterprise reduces its taxable income or income by implementing other arrangements without reasonable commercial purposes, tax authorities have the right to adjust them in accordance with reasonable methods.
We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 and Circular 7, and may be required to expend valuable resources to comply with Circular 59 and Circular 7 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Circular 59 and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under Circular 59 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering
On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market”, (ii) adopt a new requirement relating to the qualification of management or board of directors for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.
On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act (“HFCAA”), requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national securities exchange or in the over-the-counter trading market in the U.S. On December 2, 2020, the U.S. House of Representatives approved the HFCAA. On December 18, 2020, the HFCAA was signed into law.
On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the HFCAA. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.
On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years instead of three years.
On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions.
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The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could result in a lack of assurance that our financial statements and disclosures are adequate and accurate.
Our auditor, TPS Thayer, the independent registered public accounting firm that issues the audit report for the fiscal year ended December 31, 2021 that was included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. The firm is headquartered in Sugar Land, Texas, and its registration with the PCAOB took effect in September 2020 and it is currently subject to PCAOB inspections.
Our auditor, Briggs & Veselka Co., the independent registered public accounting firm that issues the audit report for the fiscal year ended December 31, 2020 that was included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. The firm is headquartered in Houston, Texas, and is subject to inspection by the PCAOB on a regular basis, with the last inspection in 2019.
However, recent developments with respect to audits of China-based companies create uncertainty about the ability of our auditors to fully cooperate with the PCAOB’s request for audit workpapers without the approval of the Chinese authorities. We cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. In the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCAA ultimately result in a determination by a securities exchange to delist the Company’s securities. The delisting of our Class A Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment, even making it worthless. It remains unclear what the SEC’s implementation process related to the above rules and amendments will entail or what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange. In addition, the above rules and amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ordinary shares could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.
Trading in our securities may be prohibited under the HFCAA and as a result an exchange may determine to delist our securities if it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction
The HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over-the-counter trading market in the U.S.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above.
On June 22, 2021, United States Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would decrease the number of “non-inspection years” from three years to two years, and thus, would reduce the time before our securities may be prohibited from trading or delisted if the PCAOB determines that it cannot inspect or investigate completely our auditor.
Despite that we have a U.S.-based auditor that is registered with the PCAOB and subject to PCAOB inspection, there are still risks to the company and investors if it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction. Such risks include, but are not limited to that trading in our securities may be prohibited under the HFCAA and as a result an exchange may determine to delist our securities.
We are not currently required to obtain any approval from the CAC. However, it is unclear whether we will be subject to the oversight of the CAC and how such oversight may impact us. Our business could be interrupted or we could be subject to liabilities which may materially and adversely affect the results of our operation and the value of your investment
Pursuant to the PRC Cybersecurity Law and the Measures for Cybersecurity Censorship (the “Cybersecurity Review Measures”) promulgated on April 13, 2020, if a critical information infrastructure operator purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. Any internet product or service that affect or may affect national security as deemed by the cybersecurity review authorities may be subject to cybersecurity review. According to the Cybersecurity Review Measures, a critical information infrastructure operator refers to any operator identified by an authority for the protection of critical information infrastructures. As of the date hereof, we have not received any notice from such authorities identifying us as a critical information infrastructure operator or requiring us to going through cybersecurity review by the CAC.
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On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the “new Cybersecurity Review Measures”) which took effect on February 15, 2022, and replaced the original Cybersecurity Review Measures. Pursuant to the new Cybersecurity Review Measures, if critical information infrastructure operators purchase network products and services, or network platform operators conduct data processing activities that affect or may affect national security, they will be subject to cybersecurity review. A network platform operator holding more than one million users/users’ individual information also shall be subject to cybersecurity review before listing abroad. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments and risk of network data security after going public overseas.
As the new Cybersecurity Review Measures took effect on February 15, 2022, we believe we are not subject to the cybersecurity review by the CAC for this offering, given that: (i) we are not a network platform operator holding more than one million users’ individual information; and (ii) data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the authorities and we will not be required to obtain any permission from the CAC. However, there remains uncertainty as to how the new Cybersecurity Review Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the new Cybersecurity Review Measures. If any such new laws, regulations, rules, or implementation and interpretation comes into effect, we expect to take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us.
We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we can fully or timely comply with such laws. In the event that we are subject to any mandatory cybersecurity review and other specific actions required by the CAC, we face uncertainty as to whether any clearance or other required actions can be timely completed, or at all. Given such uncertainty, we may be further required to suspend our relevant business, shut down our website, or face other penalties, which could materially and adversely affect our business, financial condition, and results of operations.
Risks Relating to Our Public Offering and Ownership of Our Class A Ordinary Shares
Our CEO has control over key decision making as a result of his control of a majority of our voting shares
Our authorized and issued ordinary shares are divided into Class A Ordinary Shares and Class B Ordinary Shares. Holders of Class A Ordinary Shares are entitled to one vote per share, while holders of Class B Ordinary Shares are entitled to ten votes per share. Lichen China Limited will issue Class A Ordinary Shares in this offering. Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holders thereof, while Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.
Our Founder, CEO, and our Chairman of the Board of Directors of the Company, or the Board, Mr. Ya Li, has voting rights with respect to an aggregate of 9,000,000 Class B Ordinary Shares, representing 86.96% of the voting power of our issued and outstanding Ordinary Shares as of the date of this prospectus. As a result, Mr. Li has the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Li has the ability to control the management and affairs of our Company, as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Li controls our Company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Li owes a fiduciary duty to our Company and must act in good faith in a manner he reasonably believes to be in the best interests of our Company. As a beneficial shareholder, even a controlling beneficial shareholder, Mr. Li is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our shareholders generally.
Future issuances of our Class B Ordinary Shares may be dilutive to the voting power of our Class A Ordinary Shareholders
Future issuances of our Class B Ordinary Shares, which can be approved by our Board of Directors, could result in dilution to existing holders of our Class A Ordinary Shares. Such issuances, or the perception that such issuances may occur, could depress the market price of the Class A Ordinary Shares.
In addition, there might be impact of the conversion of Class B Ordinary Shares on holders of Class A Ordinary Shares, including dilution and the reduction in aggregate voting power, as well as the potential increase in the relative voting power if any Class B holder retains their shares.
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The dual-class structure of our ordinary shares may adversely affect the trading market for the Class A Ordinary Shares
Certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of the Class A Ordinary Shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A Ordinary Shares. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of the Class A Ordinary Shares.
As a “controlled company” under the rules of the Nasdaq Capital Market, we may choose to exempt our Company from certain corporate governance requirements that could have an adverse effect on our public shareholders
Our directors and officers beneficially own a majority of the voting power of our issued and outstanding Ordinary Shares. Under the Rule 4350(c) of the Nasdaq Capital Market, 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 may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the Nasdaq Capital Market Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under the Nasdaq listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our Board of Directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying on the exemption 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 Nasdaq Capital Market corporate governance requirements. Our status as a controlled company could cause our Class A Ordinary Share to look less attractive to certain investors or otherwise harm our trading price.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Ordinary Shares less attractive to investors
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our Class A Ordinary Shares held by non-affiliates exceeds $700 million before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our Class A Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Class A Ordinary Shares less attractive as a result, there may be a less active trading market for our Class A Ordinary Shares and our stock price may be more volatile.
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Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to accounting standards that are available to emerging growth companies.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects
Lichen China Limited is a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
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 Rule requires 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, the 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. The 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. However, we may 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.
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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act (as revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law may not be as clearly established, as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Certain judgments obtained against us by our shareholders may not be enforceable
We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. In addition, a majority of our current directors and officers are nationals and/or residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Enforceability of Civil Liabilities.”
Shareholder claims, including securities law class actions and fraud claims, are common in the United States and are generally difficult to pursue as a matter of law or practicability in China. For example, in China, there are significant legal and other barriers to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the United States have not been efficient in the absence of a mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators or other relevant authorities, no entity or individual may provide any documents and materials relating to securities business activities to foreign entities or government agencies.
Nasdaq may apply additional and more stringent criteria for our initial and continued listing because we plan to have a small public offering and insiders will hold a large portion of the company’s listed securities
Nasdaq Listing Rule 5101 provides Nasdaq with broad discretionary authority over the initial and continued listing of securities in Nasdaq and Nasdaq may use such discretion to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued listing on Nasdaq. In addition, Nasdaq has used its discretion to deny initial or continued listing or to apply additional and more stringent criteria in the instances, including but not limited to: (i) where the company engaged an auditor that has not been subject to an inspection by the PCAOB, an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources, geographic reach, or experience to adequately perform the company’s audit; (ii) where the company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities. Nasdaq was concerned that the offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company; and (iii) where the company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations, or members of the Board of Directors or management. Our public offering will be relatively small and the insiders of our Company will hold a large portion of the company’s listed securities. Nasdaq might apply the additional and more stringent criteria for our initial and continued listing, which might cause delay or even denial of our listing application.
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If we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of Nasdaq Capital Market, although we exempt from certain corporate governance standards applicable to US issuers as a Foreign Private Issuer, 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 Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price and certain corporate governance 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 Class A Ordinary Share is a “penny stock,” which will require brokers trading in our Class A Ordinary Share to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Class A Ordinary Share; |
| ● | limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The market price of our Class A 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 public offering price
The public offering price for our Class A Ordinary Shares will be determined through negotiations between the underwriters and us and may vary from the market price of our Class A Ordinary Shares following our public offering. If you purchase our Class A Ordinary Shares in our public offering, you may not be able to resell those shares at or above the public offering price. We cannot assure you that the public offering price of our Class A Ordinary Shares, or the market price following our public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our public offering. The market price of our Class A 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; |
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| ● | announcements by us or our competitors of significant services 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.
We have broad discretion in the use of the net proceeds from our public offering and may not use them effectively
To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our public offering in a manner that does not produce income or that loses value.
If we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired
Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. We will be in a continuing process of developing, establishing, and maintaining internal controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act of 2002. Although our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the date we are no longer an emerging growth company, our management will be required to report on our internal controls over financial reporting under Section 404.
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As of December 31, 2021, our management assessed the effectiveness of our internal control over financial reporting. The material weaknesses relate to that the Company does not have in-house accounting personnel with sufficient knowledge of US GAAP and SEC reporting experiences. Management concluded that as of December 31, 2021, our internal control over financial reporting was ineffective.
In order to address and resolve the foregoing material weakness, we have implemented measures designed to improve our internal control over financial reporting to remediate this material weakness, including hiring consultants who have requisite training and experience in the preparation of financial statements in compliance with applicable SEC requirements. In addition to hiring outside consultant, we also 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.
The implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct theses material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on our internal control over financial 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 timely complete our evaluation testing and any required remediation.
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 Class A Ordinary Shares if the market price of our Class A Ordinary Shares increases.
There may not be an active, liquid trading market for our Class A Ordinary Shares
Prior to this offering, there has been no public market for our Class A Ordinary Shares. An active trading market for our Class A Ordinary Shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The public offering price was determined by negotiations between us and the underwriters based upon a number of factors. The public offering price may not be indicative of prices that will prevail in the trading market.
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Shares eligible for future sale may adversely affect the market price of our Class A Ordinary Shares, as the future sale of a substantial amount of issued and outstanding Class A Ordinary Shares in the public marketplace could reduce the price of our Class A Ordinary Shares
The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Class A Ordinary Shares. 6,250,000 shares will be issued and outstanding immediately after this offering, if the firm commitment is completed and the underwriters do not exercise their over-allotment option and 7,187,500 shares if exercised in full. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act of 1933 (the “Securities Act”). The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”
You will experience immediate and substantial dilution
The public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Class A Ordinary Shares. Assuming the completion of the firm commitment offering and no exercise of the over-allotment option by the underwriters, if you purchase shares in this offering, you will incur immediate dilution of approximately $2.10 or approximately 52.6% in the pro forma net tangible book value per share from the price per Class A Ordinary Share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”
We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity
Upon completion of this offering, we will become a public company in the United States. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations implemented by the SEC and the Nasdaq Capital Market require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly. We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Class A Ordinary Shares could decline.
The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies
Upon completion of this offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file annual reports with the Securities and Exchange Commission. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, we undertake no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
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After deducting the underwriting discount and estimated offering expenses payable by us, we expect to receive net proceeds of approximately 21,559,242 from this offering, assuming the over-allotment option is not exercised.
| Offering | ||||
| Gross proceeds | $ | 25,000,000 | ||
| Underwriting discounts (7% of gross proceeds) | $ | 1,750,000 | ||
| Underwriter’s non-accountable expense allowance (1% of gross proceeds) | $ | 250,000 | ||
| Other offering expenses (including Underwriter’s accountable expenses) | $ | 1,440,758 | ||
| Net proceeds | $ | 21,559,242 | ||
The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. We intend to use the net proceeds of this offering as follows after we complete the remittance process, and we have ordered the specific uses of proceeds in order of priority.
| Description of Use | % | |||
| Expand financial and taxation solution services | 30 | % | ||
| Strengthen R&D capabilities and expand self-developed software | 20 | % | ||
| Improve brand recognition through multi-channel marketing | 20 | % | ||
| Working capital and general corporate matters | 30 | % | ||
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We do not have any plan to declare or pay any cash dividends on our Class A or Class B Ordinary Shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the Board of Directors may deem relevant.
If we determine to pay dividends on any of our Class A or Class B Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries. Dividend distributions from our PRC subsidiaries to us are subject to PRC taxes, such as withholding tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “PRC Regulation—Regulations on Foreign Currency Exchange” and “PRC Regulation—Regulations on Dividend Distribution.”
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The following table sets forth our capitalization as of December 31, 2021 on a pro forma as adjusted basis giving effect to the completion of the firm commitment offering at an assumed public offering price of $4.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting discounts, non-accountable expense allowance and estimated offering expenses (including accountable expenses) payable by us. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Ordinary Shares.”
As of December 31, 2021
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
| Actual | Pro Forma As Adjusted (1) | Pro Forma As Adjusted with Full Exercise of Over-Allotment Shares | ||||||||||
| US$ | US$ | US$ | ||||||||||
| Shareholders’ Equity | ||||||||||||
| Class A Ordinary Share, $0.00004 par value, 1,000,000,000 shares authorized; 13,500,000 shares issued and outstanding (2) | 1 | 1 | 1 | |||||||||
| Class B Ordinary Share, $0.00004 par value, 250,000,000 shares authorized; 9,000,000 shares issued and outstanding (2) | - | - | - | |||||||||
| Additional paid-in capital | 1,487 | 23,046 | 26,493 | |||||||||
| Retained earnings | 33,014 | 33,014 | 33,014 | |||||||||
| Statutory surplus reserves | 789 | 789 | 789 | |||||||||
| Accumulated other comprehensive income | 1,541 | 1,541 | 1,541 | |||||||||
| Total shareholders’ equity | 36,832 | 58,391 | 61,838 | |||||||||
| Total capitalization | 36,832 | 58,391 | 61,838 | |||||||||
| (1) | Reflects the sale of Class A Ordinary Shares in this offering (excluding any over-allotment shares that may be sold pursuant to the over-allotment option) at an assumed initial public offering price of $4.00 per share, and after deducting the estimated underwriting discounts, non-accountable expense allowance, and other estimated offering expenses (including accountable 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 other estimated offering expenses (including accountable expenses) payable by us. We estimate that such net proceeds will be approximately $21,559,242. |
| (2) | The number of our Ordinary Shares had been adjusted retrospectively to reflect the increasing of share capital. See “Description of Ordinary Shares” for more details. |
Assuming the over-allotment option is not exercised, each $1.00 increase (decrease) in the assumed initial public offering price of $4.00 per Class A Ordinary Share would increase (decrease) the pro forma as adjusted amount of total capitalization by $5,750,000, assuming that the number of Class A Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts, non-accountable expense allowance and estimated offering expenses (including accountable expenses) payable by us. An increase (decrease) of 1 million in the number of Class A Ordinary Shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of total capitalization by $3,680,000, assuming no change in the assumed initial public offering price per Class A Ordinary Share as set forth on the cover page of this prospectus.
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If you invest in our Class A Ordinary Shares, your interest will be diluted to the extent of the difference between the initial public offering price per Class A Ordinary Shares and the pro forma net tangible book value per Class A Ordinary Share after the offering. Dilution results from the fact that the offering price per Class A Ordinary Share is substantially in excess of the book value per Class A Ordinary Share attributable to the existing shareholders for our presently outstanding Class A Ordinary Shares. Our net tangible book value attributable to shareholders on December 31, 2021 was approximately $1.47 per Ordinary Share (both Class A and Class B Ordinary Share). Net tangible book value per Ordinary Share as of December 31, 2021 represents the amount of total assets less intangible assets and total liabilities, divided by the number of total Ordinary Shares outstanding.
We will have 19,750,000 Class A Ordinary Shares issued and outstanding upon completion of the offering or 20,687,500 Class A Ordinary Shares assuming the full exercise of over-allotment option. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after December 31, 2021, will be approximately $1.90 per Ordinary Share. This would result in dilution to investors in this offering of approximately $2.10 per Class A Ordinary Share or approximately 52.6% from the assumed offering price of $4.00 per Class A Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $0.43 per share attributable to the purchase of the Class A Ordinary Shares by investors in this offering.
The following table sets forth the estimated net tangible book value per Class A Ordinary Share after the offering and the dilution to persons purchasing Class A Ordinary Shares based on the foregoing firm commitment offering assumptions. The number of our Ordinary Shares had been adjusted retrospectively to reflect the increasing of share capital. See “Description of Ordinary Shares” for more details.
Offering Without Over- Allotment | Offering With Over- Allotment | |||||||
| Assumed offering price per Class A Ordinary Share | $ | 4.00 | $ | 4.00 | ||||
| Net tangible book value per Ordinary Share before the offering | $ | 1.47 | $ | 1.47 | ||||
| Increase per Ordinary Share attributable to payments by new investors | $ | 0.43 | $ | 0.48 | ||||
| Pro forma net tangible book value per Ordinary Share after the offering | $ | 1.90 | $ | 1.95 | ||||
| Dilution per Class A Ordinary Share to new investors | $ | 2.10 | $ | 2.05 | ||||
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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 consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the “Risk Factors” section of this prospectus. All amounts included herein with respect to the fiscal years ended December 31, 2021 and 2020 are derived from our audited consolidated financial statements (“Annual Financial Statements”) included elsewhere in this prospectus. These Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP.
Overview
We are a leading financial and taxation service provider in China, in terms of revenue, according the industry report of Frost & Sullivan. We have operated as a dedicated financial and taxation solution service specialist of professional and high-quality services in China for over 17 years. We focus on providing (i) financial and taxation solution services; (ii) education support services; and (iii) software and maintenance services in the PRC under our “Lichen” brand. With over 17 years of operation history, we have gained substantial experience and established a solid reputation with our proven track record in the PRC.
In recognition of our expertise and experience earned from over 17 years in the financial and taxation solution services industry, we have built up our reputation as a dedicated financial and taxation solution services provider of professional and high-quality services in the PRC. From 2012 to 2020, we had been recognized as one of the Top 50 Providers of Management Consulting Services in China for eight consecutive years by the China Enterprise Confederation Management Advisory Committee.
In order to curtail the COVID-19 pandemic, the Chinese government has established a series of restrictions, including some lockdown rules, and during this period, we provided our consulting services to our clients online and postponed or reduced part of the on-site procedures. As of December 31, 2021, most of our customers’ business and operations have returned to pre-pandemic level since the second quarter of 2020. We saw a 11.83% increase in revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020. At the same time, our cost of revenues increased by 16.81% due to our raised labor costs mainly due to an increase in orders we received from our clients, and our net income increased to approximately $8.46 million for the year ended December 2021, from approximately 6.41 million for the year ended December 2020, an increase of 32.07%. Although, the effects of our financial results caused by the COVID-19 were limited, we expect to continue our new business model that combines remote and on-site consultation services after the COVID-19 pandemic subsides.
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Key Factors Affecting Our Operating Results
Our operating results are primarily affected by the following factors:
| ● | Growth of the Chinese Economy
We operate our business within China and the growth or decline of the Chinese economy in general affects our business. |
| ● | Industry Demand
Since China is still a developing country, the financial and taxation solution industry has barely reached its full capacity and the current and potential demand for financial and taxation solutions is still expected to remain at a relatively high level. |
| ● | Contract Pricing and Terms
To provide our clients with high-quality financial and taxation solution services, a fair price and reasonable terms are essential for us to operate successfully in the industry in the long term. |
| ● | Competition
The financial and taxation solution consulting market is highly dispersed and competitive with a large number of participants. To maintain the goodwill and reputation under the brand “Lichen” is essential for the Company to grow. |
| ● | Strategic Acquisitions and Investments
Strategic acquisitions could significantly reinforce our market position with larger scale of operation, consolidation of resources, expanding customer base and more market share. Specifically, by merging with providers of various operational sizes and/or with different industry specialty, establishing representative offices in more cities, recruiting additional staff to support our business expansion plans, would firmly expand our business and strengthen our market position; and the ability to access capital is also very important to execute our acquisition strategy. We do not have acquisition targets now and the proceeds from this offering will not be used for acquisitions. |
| ● | Changes to Government Policies
China has highly complicated taxation regulations and the fast-changing business environment we operate in is constantly adapting to these policy changes. |
| ● | Our Ability to Broaden Service Offerings and Diversify Our Customer Base
Service offerings dictate our added value to our customers and the profitability of the Company; and the diversification of our customer base in turn dictates the range of services we offer. |
Trend Information
Other than the impact of COVID-19 disclosed below, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 and 2020 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.
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Impact of COVID-19
Following the global outbreak of COVID-19 in early 2020, our business operations and service provision to our customers in the PRC were temporarily disrupted since the Chinese New Year holidays of 2020, due to temporary suspension of operation of our offices, the Partnered Institutions and our enterprise customers in response to the respective local government’s policies. We have resumed operation in full since February 10, 2020. We had been closely monitoring and evaluating the effect of the COVID-19 pandemic on our services, especially financial and taxation solution services provided to our enterprise customers and education support services provided to our Partnered Institutions.
Meanwhile, considering that the PRC government has gradually relaxed the lockdown measures or travel restrictions and allowed resumption of business, the reported number of new cases had dropped from the height of the crisis and the slowdown in the decrease in revenue and gross profit of our Lichen Group as illustrated below, we believe that the adverse effect on, and business interruption to, us as a result of the of COVID-19 pandemic is only temporary in nature.
Due to the impact of the COVID-19 pandemic, as compared to the year ended December 31, 2019, the total revenue of our Group for the year ended December 31, 2020 decreased by approximately $0.93 million, which was attributable to the decrease in revenue generated from financial and taxation solution services by approximately $1.68 million, but offset by the increase in revenue generated from education support services and software and maintenance services by approximately $0.05 million and $0.70 million, respectively. There is no further impact for the year ended December 31, 2021 as the total revenue of our Group for the year ended December 31, 2021 increased by approximately $3.63 million to approximately $34.30 million from approximately $30.67 million for the year ended December 31, 2020. The increase was primary due to the resumption of our business and operations and the increase in the number of our consulting services orders.
As a whole, our business and services were subject to different degree of delays, due to temporary suspension of business operations, lockdown measures and travel restrictions. In particular, our internal consultants and external experts have not been able to provide certain on-site consultation or meet face-to-face with our enterprise customers or deliver in-person seminars or talks at premises of our Partnered Institutions. For our financial and taxation solution services, save for the postponed completion of 24 financial and taxation related management or internal control management consultation projects resulting in expected delay in recognition of revenue of approximately RMB2.29 million (approximately $0.35 million) and cancellation or termination of 43 annual or regular consultation projects resulting in expected loss of revenue of approximately RMB13.18 million (approximately $2.02 million), our management confirmed that the COVID-19 pandemic had not resulted in any substantial delay or difficulties in discharging our obligations under any financial and taxation solution service contracts or agreements, and we had not been subject to any late charges or damages imposed on us by our customers. The aforesaid postponed projects were completed and the relevant revenue of approximately RMB2.29 million (approximately $0.35 million) was fully recognized by June 2020.
Our Partnered Institutions had temporarily suspended the provision of in-person trainings, seminars or talks to their participants, owing to travel restrictions, lockdown and/or quarantine measures imposed by local governments as well as the governments’ recommendation to maintain social distancing to reduce the chance of transmission of COVID-19. To mitigate the disruption of our services provided to our Partnered Institutions, we commenced offering technical support to online education courses to our Partnered Institutions. Since late May 2020, our Partnered Institutions resumed provision of in-person trainings, seminars and talks. As of the date of this prospectus, none of our Partnered Institutions has terminated our services or requested compensation from our Group due to disruptions attributed to the COVID-19 pandemic.
For our software and maintenance services, due to temporary suspension of business operations or classes, six enterprise customers and eight universities or colleges cancelled their order of software, and accordingly we recorded loss of revenue of approximately RMB3.7 million (approximately $0.54 million) for the year ended December 31, 2020. Given that sales of software and maintenance support services do not generally require a lot of face-to-face meetings with our customers on a day-to-day basis, we have not encountered or experienced, and do not expect to encounter, any material disruption to our software and maintenance services due to the COVID-19 pandemic. There is no order cancelled during the fiscal year ended December 31, 2021 by any of our customers or universities or colleges.
We believe that the COVID-19 pandemic caused a certain level of business disruption and had a negative impact to business results and financial performance of business enterprises in the PRC, which are our major customers for financial and taxation solution services As a consequence, business owners and entrepreneurs tended to tighten their budgets, reduced expenditures or postponed their projects in order to mitigate the impact of COVID-19 to their businesses at the initial stage of the outbreak. In addition, certain projects were referred by our Partnered Institutions. Due to the temporary suspension of in-person trainings, seminars or talks held by our Partnered Institutions, our promotion through these in-person activities to participants of our Partnered Institutions was also disrupted.
Following the resumption of in-person trainings, seminars or talks by our Partnered Institutions in late May 2020, our promotion to participants of our Partnered Institutions or referrals from Partnered Institutions gradually resumed. Since the reported number of new COVID-19 cases has dropped from the height of the crisis and business has resumed under the guidance of the PRC government, we believe that the demand in our financial and taxation solution services should continue to pre-pandemic levels.
Transfers of Cash to and from Our Subsidiaries
Lichen China Limited is permitted under the laws of the Cayman Islands to provide funding to our subsidiaries incorporated in the British Virgin Islands and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. Our subsidiaries are permitted under the respective laws of the British Virgin Islands and Hong Kong to provide funding to Lichen China Limited through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividends transfers from HK to BVI and BVI to the Cayman Islands.
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The PRC has currency and capital transfer regulations that require us to comply with certain requirements for the movement of capital. The Company is able to transfer cash (US Dollars) to its PRC subsidiaries through an investment (by increasing the Company’s registered capital in a PRC subsidiary). The Company’s subsidiaries within China can transfer funds to each other when necessary through the way of current lending. The transfer of funds among companies are subject to the Provisions on Private Lending Cases, which was implemented on August 20, 2020 to regulate the financing activities between natural persons, legal persons and unincorporated organizations. As advised by our PRC counsel, Tianyuan Law Firm, the Provisions on Private Lending Cases does not prohibit using cash generated from one subsidiary to fund another subsidiary‘s operations. We have not been notified of any other restriction which could limit our PRC subsidiaries’ ability to transfer cash between subsidiaries. The Company’s subsidiaries in the PRC have not transferred any earnings or cash to the Company to date. As of the date of this prospectus, there has not been any assets or cash transfer between the holding company and its subsidiaries. As of the date of this prospectus, there has not been any dividends or distributions made to US investors. The Company’s business is primarily conducted through its subsidiaries. The Company is a holding company and its material assets consist solely of the ownership interests held in its PRC subsidiaries. The Company relies on dividends paid by its subsidiaries for its working capital and cash needs, including the funds necessary: (i) to pay dividends or cash distributions to its shareholders, (ii) to service any debt obligations and (iii) to pay operating expenses. As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, the Company’s PRC subsidiaries are restricted in that respect, as well as in others respects noted below, in their ability to transfer a portion of their net assets to the Company as a dividend.
With respect to transferring cash from the Company to its subsidiaries, increasing the Company’s registered capital in a PRC subsidiary requires the filing of the local commerce department, while a shareholder loan requires a filing with the State Administration of Foreign Exchange or its local bureau. Aside from the declaration to the State Administration of Foreign Exchange, there is no restriction or limitations on such cash transfer or earnings distribution.
With respect to the payment of dividends, we note the following:
| 1. | PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations (an in-depth description of the PRC regulations is set forth below); |
| 2. | Our PRC subsidiaries are required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; |
| 3. | Such reserves may not be distributed as cash dividends; |
| 4. | Our PRC subsidiaries may also allocate a portion of their after-tax profits to fund their staff welfare and bonus funds; except in the event of a liquidation, these funds may also not be distributed to shareholders; the Company does not participate in a Common Welfare Fund; and |
| 5. | The incurrence of debt, specifically the instruments governing such debt, may restrict a subsidiary’s ability to pay stockholder dividends or make other cash distributions. |
If, for the reasons noted above, our subsidiaries are unable to pay shareholder dividends and/or make other cash payments to the Company when needed, the Company’s ability to conduct operations, make investments, engage in acquisitions, or undertake other activities requiring working capital may be materially and adversely affected. However, our operations and business, including investment and/or acquisitions by our subsidiaries within China, will not be affected as long as the capital is not transferred in or out of the PRC.
During the fiscal years ended December 31, 2020, Lichen Zixun made dividend payments of RMB30 million (approximately $4.3 million) to the then ultimate shareholders of Lichen Zixun, who are PRC individuals. The Company made no such dividend, distribution or transfer during the fiscal year ended December 31, 2021. As of the date of this prospectus, except for the previously mentioned dividend payments in fiscal year 2020, the Company or its subsidiaries have made no other transfers, dividends, or distributions to investors and no investors have made transfers, dividends, or distributions to the Company or its subsidiaries.
As of the date of this prospectus, no dividends, distributions or transfers has been made between Lichen China Limited and any of its subsidiaries. For the foreseeable future, the Company intends to use the earnings for research and development, to develop new products and to expand its production capacity. As a result, we do not expect to pay any cash dividends in the foreseeable future. Also, as of the date of this prospectus, no cash generated from one subsidiary is used to fund another subsidiary’s operations and we do not anticipate any difficulties or limitations on our ability to transfer cash between subsidiaries. We have not installed any cash management policies that dictate the amount of such funding.
PRC Regulations
In accordance with PRC regulations, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide statutory reserves, which are appropriated from net profit, as reported in the FIE’s PRC statutory accounts. A FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital (based on the FIE’s PRC statutory accounts). The aforementioned reserves may only be used for specific purposes and may not be distributed as cash dividends. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its shareholders, unless approved by the State Administration of Foreign Exchange. After satisfaction of this requirement, the remaining funds may be appropriated at the discretion of the FIE’s Board of Directors. Our subsidiary, Shanghai TCH, qualifies as a FIE and is therefore subject to the above-mandated regulations on distributable profits.
Additionally, in accordance with PRC corporate law, a domestic company is required to maintain a surplus reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and may not be distributed as cash dividends. Lichen Zixun and Lichen Education were established as domestic companies; therefore, each is subject to the above-mentioned restrictions on distributable profits.
As a result of PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends, in a general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend or otherwise.
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Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
The following table summarizes the consolidated results of our operations for the years ended December 31, 2021 and 2020, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
(All amounts, other than percentages, in thousands of U.S. dollars)
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Statement of Operations Data: | Amount | As % of Revenues | Amount | As % of Revenues | Amount Increase (Decrease) | Percentage Increase (Decrease) | ||||||||||||||||||
| Revenue | $ | 34,295 | 100.00 | % | $ | 30,667 | 100.00 | % | $ | 3,628 | 11.83 | % | ||||||||||||
| Cost of revenues | (13,820 | ) | (40.30 | )% | (11,831 | ) | (38.58 | )% | (1,989 | ) | 16.81 | % | ||||||||||||
| Gross profit | 20,475 | 59.70 | % | 18,836 | 61.42 | % | 1,639 | 8.70 | % | |||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling and marketing | (2,009 | ) | (5.86 | )% | (1,590 | ) | (5.18 | )% | (419 | ) | 26.35 | % | ||||||||||||
| General and administrative | (7,168 | ) | (20.90 | )% | (8,459 | ) | (27.58 | )% | 1,291 | (15.26 | )% | |||||||||||||
| Total operating expenses | (9,177 | ) | (26.76 | )% | (10,049 | ) | (32.77 | )% | 872 | (8.68 | )% | |||||||||||||
| Income from operations | 11,298 | 32.94 | % | 8,787 | 28.65 | % | 2,511 | 28.58 | % | |||||||||||||||
| Other income (expenses) | ||||||||||||||||||||||||
| Interest income (expense) | 28 | 0.08 | % | 103 | 0.34 | % | (75 | ) | (72.82 | )% | ||||||||||||||
| Other income, net | 188 | 0.55 | % | 106 | 0.35 | % | 82 | 77.36 | % | |||||||||||||||
| Income before income taxes | 11,514 | 33.57 | % | 8,996 | 29.33 | % | 2,518 | 27.99 | % | |||||||||||||||
| Provision for income taxes | (3,052 | ) | (8.90 | )% | (2,589 | ) | (8.44 | )% | (463 | ) | 17.88 | % | ||||||||||||
| Net income | $ | 8,462 | 24.67 | % | $ | 6,407 | 20.89 | % | $ | 2,055 | 32.07 | % | ||||||||||||
Revenues
We generate revenue from the provision of financial and taxation solution services, education support services and software and maintenance services. Our total revenue was approximately $34.30 million for the year ended December 31, 2021, compared to approximately $30.67 million for the year ended December 31, 2020, an increase of approximately $3.63 million, or 11.83%. Such increase was due to an approximately $3.15 million increase in revenue from financial and taxation solution services, an approximately $0.08 million increase in revenue from our education support services, and an approximately $0.40 million increase in revenue from our software and maintenance services, which we began providing in the year ended December 31, 2019.
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Revenue from financial and taxation solution services amounted to approximately $26.49 million, or 77.24% of total revenue, for the year ended December 31, 2021, increased by $3.15 million, or 13.51%, from approximately $23.34 million for the year ended December 31, 2020. Such increase was primarily due to the branding and business expanding that brought the company more clients and orders.
Revenue from education support services increased by $0.08 million, or 1.69%, from approximately $4.56 million or 14.86% of total revenue, for the year ended December 31, 2020, to approximately $4.64 million, or 13.52 % of total revenue for the year ended December 31, 2021.
Our operations for software and maintenance services began in March 2019. Revenue from this business amounted to approximately $3.17 million, or 9.24% of total revenue, for the year ended December 31, 2021, increased by $0.40 million, or 14.36%, from approximately $2.77 million for the year ended December 31, 2020. The main reason is due to the market expanding and impact of the COVID-19 pandemic.
Cost of revenue
Our cost of revenue includes employee salaries, registration fees paid to our Partner Institutions and amortization of software in software sales. Our cost of revenue increased by $1.99 million, or 16.81%, to approximately $13.82 million for the year ended December 31, 2021, from approximately $11.83 million for the year ended December 31, 2020. Such decrease was in line with our increased revenue.
Selling and marketing expenses
Our selling and marketing expenses consist primarily of online and offline promotion, video broadcast promotion and self-media promotion. Our selling and marketing expenses increased by $0.42 million, or 26.35%, to approximately $2.01 million for the year ended December 31, 2021, from approximately $1.59 million for the year ended December 31, 2020. Such increase was primarily due to the strengthened online promotion of the company. As a percentage of revenue, selling and marketing expenses increased to 5.86% for the year ended December 31, 2021, from 5.18% for the year ended December 31, 2020.
General and administrative expenses
Our general and administrative expenses consist primarily of compensation for management, social security payment, depreciation of property and equipment, amortization of intangible assets and IPO related expense. Our general and administrative expenses decreased by $1.29 million, or 15.26%, to approximately $7.17 million for the year ended December 31, 2021, from approximately $8.46 million for the year ended December 31, 2020. As a percentage of revenue, general and administrative expenses decreased to 20.90% for the year ended December 31, 2021, from 27.58% for the year ended December 31, 2020.
Income from operations
As a result of the foregoing, we recorded income from operations of approximately $11.30 million for year ended December 31, 2021, compared $8.79 million for the year ended December 31, 2020.
Total other income (expense)
We had approximately $0.22 million in total other income (expense) for the year ended December 31, 2021, as compared to approximately $0.21 million in total other income for the year ended December 31, 2020. Total other income (expenses) for the year ended December 31, 2021 consisted of other income, net, in the amount of approximately $0.19 million and interest income in the amount of approximately $0.03 million. Total other income (expenses) for the year ended December 31, 2020 consisted of other income, net, in the amount of approximately $0.11 million and interest income in the amount of approximately $0.10 million.
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Provision for income tax
We recorded income tax expenses of approximately $3.05 million for the year ended December 31, 2021, as compared to approximately $2.59 million for the year ended December 31, 2020; an increase of approximately $0.46 million, or17.88%. The increase in the income tax expense mainly resulted from the increase in our revenue.
Net income
As a result of the cumulative effect of the factors described above, our net income increased by approximately $2.06 million, or 32.07%, to approximately $8.46 million for the year ended December 31, 2021, from approximately $6.41 million for the year ended December 31, 2020.
Liquidity and Capital Resources
As of December 31, 2021, we had cash of approximately $16.85 million. To date, we have financed our operations primarily through net cash flow from operations. We expect to finance our operations and working capital needs in the near future from part of our net proceeds of the initial public offering and cash generated through operations.
We believe that our current levels of cash, combined with the net proceeds from this offering, will be sufficient to meet our anticipated cash needs for our operations and expansion plans for at least the next 12 months. We may, however, in the future require additional cash resources, due to changing business conditions, implementation of our strategy to expand our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
In utilizing the proceeds that we expect to receive from this offering, we may make capital contributions to our PRC subsidiaries, acquire or establish new subsidiaries, or give loans to our subsidiaries. However, uses of the proceeds by our PRC subsidiaries are subject to PRC regulations. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business”.
Our operations are primarily based in China. A significant portion of our transactions are settled in Renminbi and our financial statements are presented in U.S. dollars. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign currencies for current account items, including profit distributions, interest payments and trade- and service-related foreign exchange transactions, without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi 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 at its discretion restrict access to foreign currencies for current account transactions in the future. The ability of our PRC subsidiaries to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. See “Risk Factors—Risks Relating to Doing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.” and “Risk Factors—Risks Relating to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
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Cash Flow Summary
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 7,304 | $ | 8,350 | ||||
| Net cash provided(used) in investing activities | 561 | (1,160 | ) | |||||
| Net cash used in financing activities | - | (4,348 | ) | |||||
| Effects of foreign currency exchange rate changes on cash | 315 | 433 | ||||||
| Net increase (decrease) in cash | 8,180 | 3,275 | ||||||
| Cash, beginning of period | 8,665 | 5,390 | ||||||
| Cash, end of period | $ | 16,845 | $ | 8,665 | ||||
Operating Activities:
Net cash provided by operating activities was approximately $7.30 million for the year ended December 31, 2021, as compared to approximately $8.35 million for the year ended December 31, 2020. For the year ended December 31, 2021, net cash provided by operating activities was mainly resulted from the net income of $8.46 million, the unearned revenues in the amount of approximately $0.14 million, and the depreciation of property and equipment and the amortization of intangible and other assets in the amount of approximately $2.54 million, the accounts receivable in the amount of approximately $1.45 million and the prepayments and other current assets in the amount of approximately $2.37 million. For the year ended December 31, 2020, net cash provided by operating activities was mainly resulted from the net income of $6.41 million, and the depreciation of property and equipment and the amortization of intangible and other assets in the amount of approximately $2.25 million, the accounts receivable in the amount of approximately $0.47 million, the other receivables-related party in the amount of approximately $1.01 million, and the unearned revenues in the amount of approximately $0.15 million.
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Investing Activities:
Net cash provided in investing activities was approximately $0.56 million for the year ended December 31, 2021, as compared to approximately $1.16 million in net cash used in investing activities for the year ended December 2020. Net cash provided in investing activities for the year ended December 31, 2021 was mainly resulted from the purchases of property and equipment in the amount of approximately $0.03 million and disposal of property and equipment in the amount of approximately $0.59 million, while net cash used in investing activities for the year ended December 31, 2020 consisted entirely of purchases of intangible assets in the amount of approximately $1.16 million.
Financing Activities:
The company has no net cash used in financing activities for the year ended December 31, 2021.
Net cash used in financing activities was approximately $4.35 million for the year ended December 31, 2020 consisted entirely of dividends paid in the amount of approximately $4.35 million with respect to our Class B Ordinary Shares.
Accounts Receivable
Accounts receivable represents our right to consideration in exchange for goods and services that we have transferred to the customers before payment is due. Accounts receivable is stated at the historical carrying amount, net of an estimated allowance for uncollectible accounts. We review on a periodic basis for doubtful accounts for the outstanding trade receivable balances based on historical collection trends, aging of receivables and other information available. Additionally, we evaluate individual customer’s financial condition, credit history, and the current economic conditions to make specific bad debt provisions when it is considered necessary, based on (i) our specific assessment of the collectability of all significant accounts; and (ii) any specific knowledge we have acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require us to use substantial judgment in assessing its collectability. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Our management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. There was no allowance for accounts receivable set up by us as of December 31, 2021 and 2020, respectively.
The aging of all accounts receivable balance is within one year as of December 31, 2021.
Capital Expenditures
We made capital expenditures of approximately $0.28 million and approximately $1.2 million for the years ended December 31, 2021 and 2020, respectively. In these periods, our capital expenditures were mainly used for purchasing the office located in Shanghai for our operation and the development for our software. We plan to continue to make capital expenditures to meet the needs that result from the expected growth of our business.
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Off-balance Sheet Commitments and Arrangements
We did not have any off-balance sheet commitments or arrangements as of December 31, 2021.
Impact of Inflation
To date, inflation in the PRC has not materially impacted our results of operations. However, we can provide no assurance that we will not be affected in the future by higher rates of inflation in the PRC. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and short-term investments, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.
Impact of COVID-19
Following the global outbreak of COVID-19 in early 2020, our business operations and service provision to our customers in the PRC were temporarily disrupted since the Chinese New Year holidays of 2020, due to temporary suspension of operation of our offices, the Partnered Institutions and our enterprise customers in response to the respective local government’s policies. We have resumed operation in full since February 10, 2020. We had been closely monitoring and evaluating the effect of the COVID-19 pandemic on our services, especially financial and taxation solution services provided to our enterprise customers and education support services provided to our Partnered Institutions.
Meanwhile, considering that the PRC government had gradually relaxed the lockdown measures or travel restrictions and allowed resumption of business, the reported number of new cases had dropped from the height of the crisis and the slowdown in decrease in revenue and gross profit of our Group as illustrated below, we believe that the adverse effect on, and business interruption to, us as a result of the of COVID-19 pandemic is only temporary in nature.
Due to the impact of the COVID-19 pandemic, as compared to the year ended December 31, 2019, the total revenue of our Group for the year ended December 31, 2020 decreased by approximately $0.93 million, which was attributable to the decrease in revenue generated from financial and taxation solution services by approximately $1.68 million, but offset by the increase in revenue generated from education support services and software and maintenance services by approximately $0.05 million and $0.70 million, respectively. There is no further impact for the year ended December 31, 2021 as the total revenue of our Group for the year ended December 31, 2021 increased by approximately $3.63 million to approximately $34.30 million from approximately $30.67 million for the year ended December 31, 2020.
As a whole, our business and services were subject to different degree of delays, due to temporary suspension of business operations, lockdown measures and travel restrictions. In particular, our internal consultants and external experts have not been able to provide certain on-site consultation or meet face-to-face with our enterprise customers or deliver in-person seminars or talks at premises of our Partnered Institutions. For our financial and taxation solution services, save for the postponed completion of 24 financial and taxation related management or internal control management consultation projects resulting in expected delay in recognition of revenue of approximately RMB2.29 million (approximately $0.35 million) and cancellation or termination of 43 annual or regular consultation projects resulting in expected loss of revenue of approximately RMB13.18 million (approximately $2.02 million), our management confirmed that the COVID-19 pandemic had not resulted in any substantial delay or difficulties in discharging our obligations under any financial and taxation solution service contracts or agreements, and we had not been subject to any late charges or damages imposed on us by our customers. The aforesaid postponed projects were completed and the relevant revenue of approximately RMB2.29 million (approximately $0.35 million) was fully recognized by June 2020.
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Our Partnered Institutions had temporarily suspended the provision of in-person trainings, seminars or talks to their participants, owing to travel restrictions, lockdown and/or quarantine measures imposed by local governments as well as the governments’ recommendation to maintain social distancing to reduce the chance of transmission of COVID-19. To mitigate the disruption of our services provided to our Partnered Institutions, we commenced offering technical support to online education courses to our Partnered Institutions. Since late May 2020, our Partnered Institutions resumed provision of in-person trainings, seminars and talks. None of our Partnered Institutions has terminated or requested compensation from our Group due to the COVID-19 pandemic.
For our software and maintenance services, due to temporary suspension of business operations or classes, six enterprise customers and eight universities or colleges cancelled their order of software, and accordingly we recorded loss of revenue of approximately RMB3.7 million (approximately $0.54 million) for year ended December 31, 2020. Given that sales of software and maintenance support services do not generally require a lot of face-to-face meetings with our customers on a day-to-day basis, we have not encountered or experienced and do not expect to encounter any material disruption to our software and maintenance services due to the COVID-19 pandemic. There is no order cancelled during the fiscal year ended December 31, 2021 by any of our customers or universities or colleges.
We believe that the COVID-19 pandemic caused a certain level of business disruption and had a negative impact to business results and financial performance of business enterprises in the PRC, which are our major customers for financial and taxation solution services, and, therefore business owners and entrepreneurs tended to tighten their budgets, reduced expenditures or postponed their projects in order to mitigate the impact of COVID-19 to their businesses at the initial stage of the outbreak. In addition, certain projects were referred by our Partnered Institutions. Due to the temporary suspension of in-person trainings, seminars or talks held by our Partnered Institutions, our promotion through these in-person activities to participants of our Partnered Institutions was also disrupted.
Following the resumption of in-person trainings, seminars or talks by our Partnered Institutions in late May 2020, our promotion to participants of our Partnered Institutions or referrals from Partnered Institutions gradually resumed. Since the reported number of new COVID-19 cases has dropped from the height of the crisis and business has resumed under the guidance of the PRC government, we believe that the demand in our financial and taxation solution services should continue to resume to pre-pandemic levels.
Critical Accounting Policies
We prepare consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. We periodically evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form 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 the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
We are an “emerging growth company” as defined under the federal securities laws and, as such, will be subject to reduced public company reporting requirements. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards and acknowledged such election is irrevocable pursuant to Section 107 of the JOBS Act. As a result of our election, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
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Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived assets, allowance for doubtful accounts, allowance for deferred tax assets, uncertain tax position, and inventory allowance. Actual results could differ from these estimates.
Revenue recognition
Financial and taxation solution services
We derive our service revenue by providing financial and taxation solution service to our customers. Revenue is recognized over time based on the contract costs incurred to date through the service period. The service price is predetermined according to the nature and scope of services. There are no other obligations in our contracts, such as return, refund or warranties. Revenue and the cost of revenue are therefore both reported on a gross basis.
Education support services - sales of teaching and learning materials
Revenues from the sales of teaching and learning materials for which control of assets is transferred at a point in time is recognized when the goods are delivered to customers. The Company does not provide any sales-related warranties. There is no right of return by customers under the Company’s standard contract terms.
Education support services - Provision of marketing, operation and technical support services
Revenues from provision of marketing, operation and technical support services from the partnered institutions is recognized on a straight-line basis over the term of the partnership agreement. The transaction price inclusive of value added tax is recognized as a contract liability at the time of the initial transaction and is released on a straight-line basis over the period of service (usually one year).
Software and maintenance services
Standard software is a right to use license with no limited useful life. The Company recognizes revenues for such licenses at a point in time when the customer has received licenses and thus has control over the software. In case there is an update of the standard software, end customers or distributors are required to pay additional consideration to buy upgraded version.
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Quantitative and Qualitative Disclosures about Market Risks
Foreign Exchange Risk
All of our revenues and substantially all of our expenses are denominated in RMB. In our consolidated financial statements, our financial information that uses RMB as the functional currency has been translated into U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar, though there have been periods when the RMB has depreciated against the U.S. dollar. In particular, on August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. dollar. It is difficult to predict how long the current situation may last and when and how the relationship between the RMB and the U.S. dollar may change again.
To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our interest rate risk arises primarily from short-term borrowings. Borrowings issued at variable rates and fixed rates expose us to cash flow interest rate risk and fair value interest rate risk respectively.
Inflation Risk
We are also exposed to inflation risk. Inflationary factors, such as increases in labor costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses.
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All the information and data presented in this section have been derived from Frost & Sullivan’s industry report. The following discussion contains projections for future growth, which may not occur at the rates that are projected or at all.
Key Assumptions to the data projection
Frost & Sullivan’s industry report was compiled based on the below assumptions:
| 1) | China’s economy is likely to maintain steady growth in the next decade; |
| 2) | China’s social, economic, and political environment is likely to remain stable in the forecast period; |
| 3) | The COVID-19 pandemic will be under effective control in the PRC along with government’s strict quarantine and prevention measures and will not affect the long-term economy development of the PRC. |
For determining the projections of the industry, Frost & Sullivan performed the following steps:
| 1) | Reviewed the website and publicly disclosed data of the National Bureau of Statistics of China and International Monetary Fund for the macro economy trend of China. |
| 2) | Conducted detailed primary research which involve discussing the status, market size, future trends with (1) industry experts; and (2) leading players to understand the market size and potential growth rate of the markets. |
| 3) | Processed the data from the above-mentioned sources to come out the overall market size and forecast data of the industries in which the Company operates. |
China’s financial and taxation solution services market
Financial and taxation solution services refer to a broad range of services that deal with financial goods or tax, such as business solutions, planning, tax analysis, evaluation, accountants and tax filling services, global payment services, etc. Major modules include the following five sectors:
| ● | Financial risk management: the practice of economic value in a firm by using financial instruments to manage exposure to risk. |
| ● | Internal control management consultation: to assure the operational effectiveness and efficiency of internal control management system, internal audit and accounting system, reliable financial reporting, and compliance with laws, regulations and policies. |
| ● | Tax planning: the analysis of a financial situation or plan to ensure tax efficiency. |
| ● | Construction and optimization of accounting and financial information system: to establish or optimize the system that helps clients to collect, store, manage, process, retrieve and report their financial and accounting data. |
| ● | Cost management: the process of planning, allocating and controlling the budget of a business. |
Other service providers refer to service providers that provide a comprehensive range of financial and taxation services including mergers and acquisitions, new listing, etc., with financial and taxation solution services as only one of services provided. Examples of other service providers include security traders such as investment banks, financial advisory firms, and large-scaled accounting firms.
According to the International Monetary Fund (“IMF”), the macro economy of China is expected to grow at a Compound Annual Growth Rate (“CAGR”) of around 8% in the next five years.
According to the National Bureau of Statistics of China, the number of enterprises in China increased at a CAGR of approximately 18% from 2014 to 2019. Based on the historical growth rate and the promising macro economy of China, the number of enterprises in China is forecast to grow at a CAGR of over 10% in the next five years.
With the developing economy in China and the growing number of enterprises, the market size of China’s financial and taxation solution services market is forecast to grow at a CAGR of approximately 12.5% from 2020 to 2024, since enterprises are the major clients in this market.
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Revenue of financial and taxation solution services market (the PRC), classified by providers, 2014-2024E: (RMB in Billions)
(Source: Frost & Sullivan)
According to Frost & Sullivan, the financial and taxation solution services market increased from approximately RMB35.3 billion (approximately $5.15 billion) in 2014 to approximately RMB70.1 billion (approximately $10.16 billion) in 2019, representing a compound annual growth rate, or CAGR, of approximately 14.7%. The market is forecast to reach approximately RMB119.1 billion (approximately $17.27 billion) in 2024, with a CAGR of approximately 12.5% from 2020 to 2024.
Comparing with other service providers, the businesses of solution service specialists is more concentrated. By 2019, revenue generated by solution service specialists accounted for 52.9% in the financial and taxation solution services industry in China, according to Frost & Sullivan, and the business line grew from approximately RMB17.8 billion (approximately $2.58 billion) in 2014 to approximately RMB37.1 billion (approximately $5.38 billion) in 2019, with a CAGR of approximately 15.8%. The business line is mainly driven by the professionalism and growing brand recognition and reputation of solution service specialists.
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Since the outbreak of COVID-19 in late 2019, 31 provincial-level regions in the PRC have activated first-level emergency response to contain the spread of the COVID-19 pandemic. The large-scale postponement of work resumption adversely affected the economy in the PRC in 2020, resulting in a slower growth in revenue in the financial and taxation solution services market in 2020. However, the COVID-19 pandemic is expected to bring limited adverse impact to the financial and taxation solution services market in the long run, as the pandemic declines in China. Following the outbreak of COVID-19 in China, it became increasingly common for financial and taxation service providers to market and introduce their services and capabilities to potential customers based in different regions in the PRC through producing and broadcasting financial and taxation videos and programs through television and internet, so as to overcome the inconveniences imposed by different local governments from time to time to deter the spread and future development of COVID-19.
Since the reform program to replace the business tax with a value-added tax and the China Taxation Administration Information System was implemented nationwide in the PRC, the supervision by the relevant tax authority on the compliance of tax payment has become stricter. It is likely that enterprises, especially small ones, would seek financial and taxation solution service specialists rather than establish a system by themselves, since service providers are presumed to be more professional and cost effective.
With the development of big data and artificial intelligence, an increasing number of financial and taxation solution service specialists would strengthen their research and development specialists by using new technologies and integrating their comprehensive services into one intelligent system in order to enhance efficiency. Service providers with stronger brand recognition and reputation are more likely to gain market share. Hence, leading service providers may strengthen their market position through merger and acquisition so as to benefit from larger scale of operation, consolidation of resources, expanding customer base and capturing more market share. There has been a recent market trend for mergers by acquisitions, where financial and taxation solution services providers of different operational sizes and/or with different industry specialty were merged among themselves by acquisitions so as to benefit from a larger scale of operation, consolidation of resources, expanding customer base and capturing more market shares.
China’s education support services market
Education support services refer to the education and related services like sales of teaching and learning materials. Education market includes skill-oriented training and test-oriented training. Skill-oriented financial and taxation education support service is the training service mainly paid by employers to enhance employee’s financial and taxation skills. Accountants nowadays are not only required to master the traditional skills of storing, calculating and summarizing, but also need to acquire skills of advanced accounting such as value management, mergers and acquisitions, and accounting information. Along with the further development of accountancy in China, the demand for high-end talents in this area has increased in recent years. For those who are searching for senior positions or job mobility across business, financial and taxation education support service is useful and essential. Test-oriented training have a history of around 20 years in China. Participants of the financial and taxation tests prefer to take part in test trainings since the tests are difficult and the passing rates are relatively low. In recent years, an increasing number of participants are taking trainings as the consumption power increases.
Based on the data disclosed by the Chinese Institute of Certified Public Accountants, the China Certified Tax Agents Association, the Ministry of Finance and other official associations and departments, the number of candidates taking part in finance and tax certificates increased at a CAGR of over 30% from 2014 to 2019.
With the growing number of candidates, the market size of China’s education support services market is forecast to grow at a CAGR of approximately 27.9% from 2020 to 2024.
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Related support service includes sales of teaching and learning materials and processing academic education applications.
Revenue of education support services market (the PRC), 2014-2024E: (RMB in Billions)
Source: Frost & Sullivan
Number of participants of education support services (in PRC), 2014-2024E: (Million)
Source: Frost & Sullivan
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The education support services market has witnessed a rapid growth during the past several years. According to Frost & Sullivan Analysis, the market size increased from approximately RMB9.6 billion (approximately $1.39 billion) in 2014 to approximately RMB40.0 billion (approximately $5.8 billion) in 2019, representing a CAGR of approximately 33.0%. In 2017, the public examination for Certification of Accounting Profession was cancelled, resulting in a larger number of candidates taking part in the Accounting Professional and Technical Qualification examination This strongly drove the market, since the Accounting Professional and Technical Qualification examination is harder than the examination of Certification of Accounting Profession, and a larger percentage of Accounting Professional and Technical Qualification candidates would choose to take professional training in order to pass the examination.
The market is expected to keep growing as the companies are paying increasing attention to financial and taxation training. The market is forecast to increase from approximately RMB47.5 billion (approximately $6.89 billion) in 2020 to approximately RMB127.3 billion (approximately $18.46 billion) in 2024 with a CAGR of approximately 27.9%, based on Frost & Sullivan Analysis.
The online education support services market is still at an early stage, the total revenue increased from RMB1.1 billion (approximately $0.16 billion) in 2014 to RMB5.9 billion (approximately $0.86 billion) in 2019, representing a CAGR of approximately 39.9%, based on Frost & Sullivan Analysis. The market is expected to increase to RMB23.0 billion (approximately $3.33 billion) in 2024 with a CAGR of approximately 34.2% from 2020 to 2024. Individual participants accounted for 78.6% of the total participants online. Enterprise users still tend to use offline channels to participate in the trainings. However, as a consequence of the COVID-19 pandemic, it is expected that the practice of enterprises might gradually change and the development of online support services may expand in the coming future.
The offline education support services market increased from RMB8.5 billion (approximately $1.23 billion) in 2014 to RMB34.1 billion (approximately $4.94 billion) in 2019, representing a CAGR of approximately 32.0%, according to Frost & Sullivan Analysis. Going forward, Frost & Sullivan also forecasts that the market will keep the growing trend with a CAGR of approximately 26.8% from 2020 to 2024, reaching RMB104.3 billion (approximately $15.12 billion) in 2024. Individual participants accounted for 68.4% of the total participants online. Enterprise participants increased from 0.8 million in 2014 to 2.9 million in 2019.
There are three major drivers for education support services market in China:
| ● | Growing Demands for High Level Talents |
There is growing demand for high level accountants with comprehensive capability. Enterprises in the PRC nowadays would like to choose talents with certifications. As high-level talents are highly valued by enterprises, individuals, including new graduates and those who are looking for career developments, are having stronger willingness to afford great cost on financial and taxation certification training, and in turn promote the development of the education support services market.
| ● | Online Education Revolution |
With the increasing penetration rate of the internet and the development of online platforms, the online education market has witnessed strong growth and has provided new development opportunities to the education support services market. Proper online training courses, such as live classes, are more flexible and convenient for candidates, especially those who work full time, to arrange their study time. In addition, new technologies, such as big data and artificial intelligence, have provided innovation of learning platforms with more accuracy and interactivity. Due to these circumstances, the revolution of online education is considered as a significant driver for the great development of the education support services market.
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| ● | Favorable Government Policy |
In relation to the Opinions on Implementing the System of Lifelong Vocational Skills Training promulgated in 2018, it has been suggested that enterprises should establish lifelong vocation skills training system by diversifying the types of training and carrying out large-scale training regularly, vigorously developing private vocational skills training, encouraging enterprises to set up vocational training institutions, and promoting market-oriented trainings. Meanwhile, according to the Outline of the 13th Five-Year Plan for Accounting Reform and Development, continuing education system for accountants is encouraged, to constantly improve professional competence. Favorable government policies have promoted the vigorous development of the education support services market in the PRC.
In line with the development of businesses, high-end comprehensive accountants are highly welcomed by modern enterprises. The demand of high-level talents provides an opportunity for the education support services market. The training institutions nowadays are providing a wider range of service portfolio including in-depth professional knowledge of tax planning, internal control, prediction, decision-making and other fields related to accounting. As the policy changes in recent years, the demand for service providers with R&D capabilities to develop and update learning and training materials and software products for training and courses delivered by the educational institutions are also likely to increase in the future.
The revenue stream of online certification training services market shows great potential in recent years in line with the development of online platforms. An increasing number of trainees are showing interests towards online training as it’s more convenient compared with traditional offline training, and the electronic videos and files are easier to be stored and reviewed. The online business is expected to witness a growth in the coming future.
Education support services providers who also provide solution services may gain larger market share, since these providers generally have well-established customer bases, practical experience and industry know-how.
China’s software and maintenance services market
Software and maintenance services refers to the software and technical support service that helps companies to deal with financial and taxation related businesses. As the taxation policies have changed a lot and the awareness of the importance of management has increases in China in recent years, it is likely that an increasing number of enterprises would choose to use software and maintenance services.
Key segments of software and maintenance services include the following areas: 1) e-filing: by using the software provided by service providers, billings such as declaration forms could be filed electronically and automatically. Electronic invoicing is one of the major segments of e-filing in China. 2) Intelligent bookkeeping: Intelligent bookkeeping could help the enterprises to collect, store, sort, retrieve and summarize the data and bills for the users. 3) Customer Management: Intelligent Customer management allows the enterprises to store and sort the information of all customers online. The information could be checked and maintained anywhere anytime. 4) Financial and taxation training software: Financial and taxation training software is for teaching and learning related use. It ensures that users are prepared with the financial and taxation tools and skills needed for business and study. 5) Data Analysis; 6) Financial Training Support Services; 7) Other services, including financial and taxation technical support service for financial and taxation staff, etc.
According to the Ministry Industry and Information Technology of the PRC, China’s software services industry is expected to grow fast and maintain a growth rate of over 10% in the next few years.
Along with a growing software services industry and support from the central government in China, revenue of service providers in the software and maintenance services market in China is likely to continue to increase and reach RMB112.3 billion in 2024, representing a CAGR of 22.6% from 2020 to 2024.
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Revenue of software and maintenance services market (China), 2014-2024E: (RMB in Billion)
Source: National Bureau of Statistics of China; Frost & Sullivan
Number of clients of software and maintenance services market (China), 2014-2024E: (Million)
Source: National Bureau of Statistics of China; Frost & Sullivan
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Along with growing penetration rate of software and maintenance services and rising number of enterprises in China, according to Frost & Sullivan, number of clients of software and maintenance services market has increased from 2.3 million in 2014 to 8.0 million in 2019 with a CAGR of 28.3%. Meanwhile, revenue of software and maintenance services market has kept a rapid growth from RMB8.4 billion (approximately $1.22 billion) in 2014 to RMB38.4 billion (approximately $5.57 billion) in 2019 with a CAGR of 35.5%.
In the future, it is expected that increasing number of enterprises will adopt software and maintenance services. Hence, based on Frost & Sullivan’s analysis, number of clients of software and maintenance services market is expected to reach 16.8 million in 2024 with a CAGR of 15.3%. Also, revenue of software and maintenance services market in China is likely to continue to increase and reach RMB112.3 billion (approximately $16.28 billion) in 2024, representing a CAGR of 22.6% from 2020 to 2024.
There three major drivers for the software and maintenance services market in China:
| ● | Development of Internet Technologies |
The development of internet technologies has changed various industries in China. Internet technologies provide enterprises technological base for the modernization of tax collection and help the enterprises to improve the management capability through big data and cloud computing. With the application and innovation of internet technologies, the tax collection has developed from face-to-face event into online event. Software and maintenance services could help tax bureaus with the online tax collection to reduce costs. The development of internet technologies is likely to drive the adoption of software and maintenance services in the future.
| ● | Higher Penetration Rate of Software and Maintenance Services |
As the financial and taxation system has become increasingly complex in recent years, a growing number of enterprises prefer to outsourcing the sector to third parties or using software and technical support services. Software and maintenance services could collect and classify bills and invoices and help filling the tax receipts automatically and thus strongly improve the efficiency of the enterprises. It is likely that the penetration rate of software and maintenance services would increase in the future, as more companies may choose software and maintenance services to adapt to the changing and complex tax system.
| ● | Integration of Tax Systems |
In recent years, central government of China has issued several policies in the field of tax, such as replacing business tax with value-added tax, promoting electronic invoicing, integrating certificates into one, etc. These policies have changed the traditional tax system and provided opportunities to software and maintenance services providers. At the meantime, the merging of national and local taxation departments and the establishment of China Taxation Administration Information System (CTAIS) have broken the regional barriers of financial and taxation services, providing a potential market for service providers to offer trans-regional services in the future.
The software and maintenance services of each business line have been generally separately provided by different service providers in recent years. However, in line with the development of technology and establishment of CTAIS, integrated service, including e-filling, intelligent bookkeeping and customer management, is likely to be highly welcomed by enterprises. The big data analytics technology has kept developing in recent years and has strongly affected a wide range of businesses, including software and maintenance services. Big data analytics transform data into practical information in order to help enterprises to improve business visibility and provide insights of their businesses. The demand for software and maintenance services with big data analytics is expected to augment the prospects of growth of this sector in the market.
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Overview
We are a leading financial and taxation service provider in China, in terms of revenue, as cited in the industry report of Frost & Sullivan. We have operated as a dedicated financial and taxation solution service specialist of professional services in China for over 17 years. We focus on providing (i) financial and taxation solution services; (ii) education support services; and (iii) software and maintenance services in the PRC under our “Lichen” brand. With over 17 years of operation history, we have gained substantial experience and established a solid reputation with our proven track record in the PRC.
Leveraging our business relationships with our Partnered Institutions, our expertise and experience obtained in the financial and taxation solution services market, and our experience in developing financial and taxation training software and financial and taxation analysis software by our R&D department, we launched a new business line of software and maintenance services in 2019 to expand our software product offerings to enterprise customers, universities, colleges and educational institutes and have started to generate revenue from provision of such services since then.
In recognition of our expertise and experience earned from over 17 years in the financial and taxation solution services industry, we have built up our reputation as a financial and taxation solution services provider of professional services in the PRC. From 2012 to 2020, we were recognized as one of the Top 50 Providers of Management Consulting Services in China for eight consecutive years by the China Enterprise Confederation Management Advisory Committee.
According to the industry report of Frost & Sullivan, which is our source of our industry information, we ranked first in terms of revenue among the solution service specialists with a market share of approximately 0.5% in the PRC financial and taxation solution services market in 2019, and tenth in terms of revenue with a market share of approximately 0.1% in the PRC education support services market in 2019. Our Partnered Institutions, located in 12 provinces or municipalities and 23 cities in the PRC, are education services providers which mainly engage in the organization of various seminars, talks and training courses to entrepreneurs, senior executives, as well as financial and taxation executives. Through our business relationships with these Partnered Institutions, we are able to, on the one hand, provide our education support services to them and, on the other hand, by leveraging their business networks and their geographical coverage, promote our brand name and services to the participants of these seminars, talks and courses organized by them.
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Our Services
We primarily provide (i) financial and taxation solution services; (ii) education support services; and (iii) software and maintenance services in the PRC. The connections and synergies amongst our services are illustrated in the diagram below:
The financial and taxation solution services provided to our enterprise customers mainly comprise financial and taxation related management consultation, internal control management consultation, annual or regular consultation, and internal training and general consultation.
The education support services provided to our Partnered Institutions mainly comprise the provision of marketing, operational and technical support and the sales of teaching and learning materials.
The software and maintenance services provided to our enterprise customers mainly comprise the sales of financial and taxation analysis software and sales of financial and taxation training software.
Financial and Taxation Services
We focus on our financial and taxation solution services to business enterprises in the PRC. We believe that every enterprise, regardless of its size, should adopt a sound financial and taxation management system for growth and sustainable development. Our financial and taxation solution services are customized based on the specific needs and requirements of our customers.
When we accept an engagement for financial or taxation solution services, we will first assess the customer’s needs and background so that we can have a general picture of the problem they face and the potential solution suitable for the case. Thus, we can quote a service fee based on our preliminary analysis on the total hours and experts to be used on this case according to its nature and the scope of service. The service fee is calculated on a case-by-case basis. We negotiate and fix the fee before the engagement start and collected in each phase of the engagement.
Our team consists of internal consultants and external experts with extensive experience and knowledge in the financial and taxation solution services industry. As of the date of this prospectus, our team is comprised of 47 external experts and 253 internal consultants of our company that are responsible for providing financial and taxation solutions to our customers. In particular, all of our internal consultants possess professional qualifications in accounting and the majority of our project managers or directors were intermediate accountants, senior accountants or certified public accountants, as of December 31, 2021. In addition, as of December, 2021, over 80.0% of our external experts were registered certified public accountants or registered certified tax agents, and over 85.0% of our external experts possessed a master’s degree or doctoral degree, with a number of them recognized as leading individuals in the financial and taxation field, who have served as lecturers in major universities in the PRC, published teaching materials, books and case studies on a wide range of taxation, risk management and corporate governance related subjects and have been granted awards or subsidies from the governmental bodies, including the State Council of the PRC.
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We have established and implemented stringent policy for selection of our external experts and recruitment of our internal consultants. When selecting a suitable candidate, we will take into account a number of factors, including their academic background, professional qualifications, working experience, reputation and influence in the financial and taxation industry. With our consultants and experts under the supervision and guidance of our management team, we believe that we are capable of providing customized and practical solutions to cater to our customers’ diversified financial and taxation needs in an effective manner. The experience and expertise of our team is designed to also help enhance the quality and standard, and ensure consistency, of our services.
We generally enter into Expert Cooperation Agreements with the external experts. Set out below is a summary of the principal terms of the Expert Cooperation Agreement:
| Validity period | Fixed term of five years from the date of the Expert Cooperation Agreement. |
| Payment terms | We typically apportion 50% of the amount received under the financial and taxation solution projects to the external expert by way of progress payment if we require their assistance in these projects. |
| Intellectual property rights | Any intellectual property rights arising from the implementation of the Expert Cooperation Agreement belong to our Subsidiaries. |
| Confidentiality | Any technology secrets and trade secrets are to be kept confidential by the external expert and this obligation survives the expiration of the Expert Cooperation Agreement for a period of five years. |
| Exclusivity | The external expert will not provide results of the collaborations with our Subsidiaries on education courses and financial and taxation solution projects or related services to any third parties during the term of the Expert Cooperation Agreement. |
| Restrictive covenant | The external experts are prohibited from dealing with our customers directly during the term of the Expert Cooperation Agreement and three years after its expiration. |
| Termination | The Expert Cooperation Agreement may be terminated by mutual agreement reached by both parties. |
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Workflow of our financial and taxation solution projects
Once customers inform us of their needs, we undertake a preliminary assessment and proposal to analyze the feasibility of the customer projects and to set out the timeline of the projects. We then enter into agreements with customers. Thereafter, we conduct an on-site inspection and on-site training, provide diagnosis reports, and have ongoing discussions with customers until they are satisfied with our recommendations.
We endeavor to utilize stringent quality control over the services we provide to our customers, with the goal of providing customized solutions based on the actual business and financial condition of each customer. We have devised a number of tools and measures to ensure that consistent, professional and high-quality services can be rendered by our consultants and experts to our customers. Further, we keep abreast of the relevant financial and taxation laws and regulations in the PRC and economic development, such that our advice to our customers corresponds with the latest trends and development in the financial and taxation regulations and policies of the PRC and is practical to our customers in light of the then existing business environment.
With the experience of our internal consultants, we are able to tailor solutions to our customers’ needs. Our internal consultants, apart from possessing professional qualifications in accounting, are also experienced personnel in the financial and/or taxation sectors, as our internal recruitment policies require our internal consultants and project managers to possess at least three and seven years of relevant working and/or consultancy experience, respectively. As such, we believe that our internal consultants have ample experience in the financial and/or taxation sectors to execute our financial and taxation solution projects.
Our work cycle typically spans a period of 10 to 16 weeks, with approximately two to four weeks allocated to planning and designing the diagnosis report, seven to nine weeks allocated to implementing the consultation plan and providing guidance to our customers and one to three weeks allocated to assessment. We typically assign three internal consultants to form a working team. Our internal consultants are also required to provide their services on an as-requested basis for our annual and regular consultation services.
Our internal consultants will, depending on the complexity of the project, work on-site from time to time. During on-site inspections, our internal consultants will strive to understand the business operations and goals of our customers by:
| (i) | conducting interviews with directors, senior management and employees of the enterprise; |
| (ii) | reviewing corporate and financial documents, including those relating to history and corporate structure, organization structure, human resources management, internal control measures and sales invoice; |
| (iii) | reviewing business plans of the enterprise; and |
| (iv) | observing the day-to-day operations of the enterprise, etc. |
Such on-site inspections can assist our internal consultants in devising the project diagnosis report. The project diagnosis report aims to point out the shortcoming, if any, of the current system of the enterprise and enables the enterprise to achieve its goals. The diagnosis report is then submitted to our quality control department for its approval before we submit the final version to our customers to implement. The implementation of the approved diagnosis report relies on our internal consultants to provide training to the employees of the customers and on-site guidance, to ensure the implementation process can adhere to the actual needs and problems of the enterprise, and to provide timely advice to the enterprise whenever the enterprise encounters any issues or difficulties during implementation.
By implementing the recommended measures set out in the project diagnosis report, we believe our customers are empowered to mitigate or lower their operational and financial risks, strengthen their management capabilities and increase their financial, taxation and/or internal control awareness, thereby improving their results of operations and maintaining their sustainability.
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Scope of our financial and taxation solution services
1. Financial and taxation related management consultation
We provide financial and taxation related management consultation services covering four aspects, namely, (a) cost management; (b) financial risk management; (c) computerized financial information systems; and (d) financial management system optimization. We identify weaknesses in our customers’ financial and taxation related management and provide advice and internal trainings to enhance the enterprise’s overall financial and taxation related management capabilities.
The areas, contents and intended benefits of our financial and taxation related management consultation services are set out below:
| Area of Services | Contents of Services | Intended benefits for customers | ||
| Cost management | ● Formulation of:
— Procurement policy (including procurement procedures, suppliers management and contract management) — Payment policy (including credit assessment and credit policy) — Inventory management policy (including inventory accounting and optimal inventory management) — Production management (including control on raw materials, direct labor cost management and manufacturing expense management) |
Assist our customers in improving workflow and systems to provide practical cost control solutions to achieve cost savings and improve profits | ||
| Financial risks management | ● Formulation of financial risk management procedures (including risk identification, risk measurement and risk control) ● Assist customers in setting out a financial budget and formulating a capital plan ● Setting up financial risk warning system and crisis management system |
Assist our customers in identifying financial risks involved in business operation, provide practical solutions to rationalize customers’ financial conditions to analyze current financial risks and avoid future financial risks | ||
| Computerized financial information system | ● Selection of financial management software and servers ● Design of integration of business and financial processes ● Formulation of system standardization and financial accounting standardization ● Initial design of computerization works ● Operational tracking and improvement of computerization |
Assist our customers in transforming their manual financial information management system to a computerized system, to reduce human resource costs, increase data timeliness and accuracy and improve financial management efficiency and effectiveness | ||
Financial management system optimization
|
● Formulation of cash budgets and plans ● Establishment of comprehensive budget management ● Improvement of internal control system ● Development of finance team ● Formulation of financial analysis and financial evaluation system |
Assist clients in strengthening financial management concepts and financial management methods, developing financial analysis tools and evaluation systems to standardize financial management objectives, thereby improving corporate management efficiency and supporting corporate development strategies |
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2. Internal control management consultation
We provide internal control management consultation services covering three aspects, namely, establishment of an (a) internal control management system; (b) internal audit system; and (c) accounting system to enhance internal control and accounting capabilities. We identify weaknesses in our customers’ internal control, internal audit and accounting systems and recommend remedial measures to enhance the enterprise’s overall internal control and accounting capabilities.
The areas, contents and intended benefits of our internal control management consultation services are set forth below:
| Area of Services | Contents of Services | Intended benefits for customers | ||
| Establishment of an internal control management system | ● Improvement of internal control environment ● Establishment of internal control system and process ● Optimization and improvement of control procedures ● Formulation of internal control manual |
Assist our customers in establishing or enhancing internal control management systems to monitor procedures, improve business efficiency, increase financial reliability and integrity and ensure compliance with relevant rules and regulations | ||
| Establishment of an internal audit system | ● Adjustment of the organizational structure and enhancement of the authority of the internal audit unit ● Improvement of the independence of internal audit unit and internal auditors ● Building up of the internal audit unit and team ● Improvement of internal audit system through information technology tools ● Establishment of internal audit system |
Assist our customers in establishing or enhancing an internal audit system to identify and rectify operational or financial weaknesses and improve overall business efficiency and performance, in order to achieve effective control of risks through internal audit | ||
| Establishment of accounting system | ● Establishment of organizational structure and division of work responsibilities ● Standardization of business process ● Standardization of accounting process |
Assist our customers in establishing or enhancing the accounting systems to sort out and systemize accounting policies and procedures, strengthening the effectiveness and accuracy of accounting and practicality of financial reports and analysis |
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3. Annual or regular consultation
We provide annual or regular consultation services in (a) finance; (b) taxation; and (c) post financial and management or internal control project implementation. Our annual consultation services are generally provided immediately after our financial and taxation related management consultation projects or internal control management consultation projects, to ensure the continuous implementation of our suggestions under the respective projects, and to provide continuous advice and guidance on day-to-day internal operation matters for our customers. In particular, our annual consultation services include (i) tracking and enhancing the implementation of our recommendations provided under our financial and taxation related management consultation projects or internal control management consultation projects; and (ii) providing new suggestions and guidance where new circumstances arise in our customers’ day-to-day operations which render our previous recommendations invalid or inapplicable.
We also provide regular consultation services on financial and taxation matters to our customers on a stand-alone basis. Our regular financial consultation services include (i) financial consultation, which refers to providing guidance on accounting, auditing, financial analysis and financial risk management and control, establishment of financial management systems and daily financial consultations; (ii) compliance consultation, which refers to providing our customers with information about the latest laws and regulations on financial management and assisting them to correctly understand and adopt appropriate financial tools; and (iii) professional training, which refers to providing training on latest financial and taxation policies of the PRC, financial management, disclosure requirements of financial reports and any other specific areas for which our customers require training. Our regular taxation consultation services include (i) taxation consultation, which refers to assisting our customers to identify the relevant types of taxes and preferential tax treatments applicable to them; (ii) professional training, which refers to providing training on latest taxation policies of the PRC and their implementation; and (iii) tax inspection assistance, which refers to assisting our customers to prepare for tax inspection conducted by the relevant tax authorities.
As part of our annual or regular consultation services, our internal consultants, at the request of our customers, will also meet at our customers’ premises once a month to provide on-site consultation services.
4. Internal training and general consultation
Apart from financial and taxation related management consultation, internal control management consultation and annual or regular consultation services, we have commenced providing on-site internal training services to our customers, as of January 2019.
In addition, we also provide general consultation to our customers on an ad-hoc basis at customers’ requests on relatively simple matters, as compared to our other types of consultation services which generally involve more complicated, tailor-made and in-depth analysis and practical solution proposals.
Education Support Services
Our education support services are mainly provided to our Partnered Institutions. As of the date of this prospectus, we collaborate with 25 Partnered Institutions in 12 provinces or municipalities and 23 cities in the PRC. The Partnered Institutions are education services providers which mainly engage in organization of various seminars, talks and training courses to entrepreneurs, senior executives, and financial and taxation executives, etc. From the personal and business networks of our management, as well as our marketing initiatives (being our talks, seminars hosted by the Partnered Institutions and the website shared by the Partnered Institutions), potential customers who wish to set up education institutions may approach us and initiate discussions with us, with an aim to becoming our Partnered Institutions.
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Scope of our education support services
1. Marketing, operational and technical support
Lichen Zixun enters into Partnership Agreements with the Partnered Institutions to provide marketing, operational, technical and other support as part of our educational support business for the Partnered Institutions. We allow the Partnered Institutions to use our “Lichen” brand name to operate their education business and we provide our internal consultants to conduct high-end courses aimed at financial and taxation practitioners, other support services such as marketing and operational support and information technology services to the Partnered Institutions.
2. Sales of teaching and learning materials
We also generate revenue from the sales of teaching and learning materials to the Partnered Institutions. The financial and taxation related teaching and learning materials are sold to the Partnered Institutions for their education business. We developed courses in relation to (i) accounting licensing, (ii) accounting practice, (iii) financial management, (iv) financial tools, (v) non-financial management and (vi) taxation practice courses.
Cooperation with our Partnered Institutions
We believe that by leveraging the business relationships with our Partnered Institutions in the past six years, as well as the expertise and experience that we have established in the financial and taxation solution services market over the years, we have built a unique business model and have generated synergies amongst the services that we provide as evidenced by the growth of our business.
For the years ended December 31, 2021 and 2020, the total revenue from our education support services was approximately $4.64 million and $4.56 million, representing approximately 13.52% and 14.86%, respectively, of our total revenues for the same periods.
It is a key and crucial element of our Subsidiaries ’s business model and marketing strategy to cooperate with the Partnered Institutions, which has created an important source of referrals for our Subsidiaries ’s financial and taxation solution services. For the years ended December 31, 2021 and 2020, 155 and 176 financial and taxation solution projects, respectively, were obtained from the referrals made by our Partnered Institutions, representing approximately 38.60% and 41.22%, respectively, of the total number of financial and taxation solution projects and approximately 48.60% and 58.41%, respectively, of the revenue of financial and taxation solution services during the same periods.
As to collaboration with these education institution operators, we carry out internal assessments to evaluate the potential and capability of such customers. Our internal assessments take into account the economic status, personal and business connections and the business belief of the intended education institution operators. They are typically required to have good standing and strong financial backgrounds, and their intended business location is expected to be in line with our Subsidiaries ’s strategic development plan, such that they may assist our Subsidiaries to tap into those areas as we have planned. Should they reach our internal assessment standards, we require them to have an assessment interview with our personnel. Our operations department will also conduct a feasibility study and consult with the institution in order to choose a strategic location for the Partnered Institution. Upon passing the assessment interview, we will enter into a Partnership Agreement with the intended education institution operator, after the terms of the agreement are agreed upon. Upon expiration of the Partnership Agreement, we will conduct another internal assessment of the performance and future prospects of the Partnered Institution, to determine whether the Partnership Agreement should be renewed.
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As of the date of this prospectus, we have agreements with 25 Partnered Institutions, including Jinjiang Xingminqi Accounting Vocational Training School and Quanzhou City Lichen Accounting Vocational Training School, which are controlled by Ya Li, our CEO, and the rest of them are unrelating third-party. Set out below are the principal terms of the Partnership Agreement:
| Validity period | Fixed term of five years from the date of the Partnership Agreement. |
| Payment terms | A fixed fee is payable annually by way of bank transfer and no progress payments are resulted from the Partnership Agreement. The annual fees payable under the first year are to be settled within seven days after signing the Partnership Agreement, and the annual fees for the remaining years are to be paid in a specified month as agreed between our Subsidiaries and the Partnered Institution. For details relating to the pricing of the annual fees we charge Partnered Institutions, please refer to “Pricing” in this section. As for online courses, we charge a fixed fee ranging from RMB200 to RMB500 for each audience recruited by the Partnered Institution depending on the topics of the online courses. |
| Exclusivity | Our Partnered Institution is prohibited from dealing with any third parties where the scope of cooperation is similar to the Partnership Agreement, failing which, we have the right to terminate the Partnership Agreement and request our Partnered Institution to pay damages.
We will not enter into similar partnership agreements with third parties who intend to conduct business in the Specified District without the consent of our Partnered Institution.
|
| Termination | Our Subsidiaries may elect to terminate the Partnership Agreement if:
(i) our Partnered Institution breaches the terms and conditions of the Partnership Agreement; or (ii) the shareholding of our Partnered Institution has undergone changes without our prior written consent.
Our Partnered Institution may elect to terminate the Partnership Agreement if our Subsidiaries is unable to deliver our services under the Partnership Agreement within a reasonable time after being urged by our Partnered Institution.
|
| Remedial measures | Where our Partnered Institution is in breach of the terms and conditions of the Partnership Agreement, our Subsidiaries will not return any fees already paid by the Partnered Institution and the Partnered Institution has to pay us a sum equivalent to two years of service fees as a penalty.
Where our Subsidiaries is in breach of the terms and conditions of the Partnership Agreement, our Subsidiaries will return the remaining portion of the fees paid which is proportionate to the remaining contract period under the Partnership Agreement to the Partnered Institutions.
|
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Software and Maintenance Services
Lichen Zixun has been providing a financial and taxation training software and academic affairs management system to our Partnered Institutions as part of our services under the Partnership Agreements. Leveraging our understanding of corporate needs on financial and taxation management and analysis tools in daily operation of our enterprise customers, we began in 2017 to invest and develop our first financial and taxation analysis software, namely, Enterprise Financial Intelligence Analysis System V1.0, and have commercialized it for sale to our enterprise customers since 2019.
With respect to our Lichen Education Accounting Practice System V1.0, a financial and taxation training system that was developed in 2014, it is focused on students’ or users’ practice experience by resembling, illustrating and providing practices on various accounting tasks, such as bookkeeping, tax computation, filing tax returns and issuing valued-added tax invoices in actual business practices. Thereafter, we updated and developed some new training systems based on Lichen Education Accounting Practice System V1.0.
Lichen Education has eight copyrights for financial and taxation training software, to date. As of the date of this prospectus, we have not experienced any product recalls, liability claims or material complaints on our software products. For details, please see “Research and Development” under the “Business” section.
After Sales Services
Our customers who engage us for our financial and taxation related or internal control related management consultation services may attend courses provided by the Partnered Institutions. Continuous trainings can enhance the financial and taxation concepts of our customers and ensure the continuous implementation of the financial and taxation solutions we provided to them. We also provide general customer care by responding to customer queries from time to time, in order to timely resolve their problems.
From time to time, the Partnered Institutions will also host talks and seminars conducted by our experienced senior management personnel, internal consultants or external experts and invite our customers to attend. As for our Partnered Institutions, we provide continuous support to them, including operational and technical support in school management and operation and trainings to Partnered Institutions’ staff and employees. With respect to our software products, we offer software installation, training and after sales technical and maintenance, such as telephone, instant communication and remote support services within one year of purchase for our financial and taxation training software and financial and taxation analysis software.
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Corporate Structure
We are a Cayman Islands exempted company limited by shares. The following diagram illustrates the corporate structure of the Company as of the date of this prospectus and upon completion of this offering:
Lichen China Limited was incorporated on April 13, 2016 under the laws of the Cayman Islands. As of the date of this prospectus, the authorized share capital of the Company is US$50,000 divided into 1,000,000,000 Class A Ordinary Shares and 250,000,000 Class B Ordinary Shares, of which 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares are issued and outstanding. The Company is a holding company and is currently not actively engaging in any business. The Company’s registered office provider in the Cayman Islands is Ocorian Trust (Cayman) Limited and the Company’s registered office is at Windward 3, Regatta Office Park, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands.
Legend Consulting BVI was incorporated on December 20, 2013 under the laws of the British Virgin Islands with limited liability. Legend Consulting BVI is a wholly owned subsidiary of the Company. Legend Consulting BVI is a holding company and is currently not actively engaging in any business.
Legend Consulting HK was incorporated on January 8, 2014 under the laws of Hong Kong. Legend Consulting HK is a wholly owned subsidiary of Legend Consulting BVI. It is a holding company and is not actively engaging in any business.
Lichen Zixun was incorporated on April 14, 2004 under the laws of the PRC. Lichen Zixun is a wholly owned subsidiary of Legend Consulting HK and is our main operating entity.
Lichen Education was established on July 30, 2014 under the laws of PRC. Lichen Education is a wholly owned subsidiary of Lichen Zixun and is our operating entity.
Sales and Marketing
We believe brand recognition to “Lichen” is critical to our ability to attract new customers and retain business collaboration and maintain our relationships with our existing clientele, and our promotion and marketing efforts are designed to enhance our brand awareness and reputations among them. Generally, we attract new customers with referrals from our Partnered Institutions and personal and business networks of our executives and directors.
In addition, we organize marketing activities, such as seminars, talks and consultation events with our Partnered Institutions, business federations and business associations, leveraging our accumulated resources and connections. Through the business relationships with our Partnered Institutions, we strive to provide our education support services to them, and by leveraging their business networks and their geographical coverage, we endeavor to promote our brand name and services to the participants of these seminars, talks and courses organized by them. We have deployed external experts and internal consultants to participate in and deliver more than 1,000 talks, courses and seminars organized for their target audience.
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To highlight our efforts, we have co-hosted the 2018 China Management Consulting Innovation Forum with the China Enterprise Confederation Management Advisory Committee and hosted the 2019 Excellent Financial Manager Summit Forum in Xiamen, both of which were well attended by business leaders, senior government officials, university professors and financial and taxation executives.
We also promote our brand to a wide audience nationwide by multi-marketing strategies, which comprise (i) production and broadcasting of financial and taxation videos and programs, (ii) internet and conventional advertisement placing, and (iii) organizing and sponsoring marketing events and activities.
(i) Production and broadcasting of financial and taxation videos and programs
We believe that broadcasting our financial and taxation videos and programs on television and the internet can promote the professionality of our brand image to a wider group of targeted audiences, by matching the content of the programs with the relevant television programs and/or internet websites and domains. Our external experts, internal consultants and senior management have participated in our promotional activities, such as appearing on television broadcasts and popular online video websites that feature our practical financial and taxation videos and programs. The television programs, which include the participation of our external experts, have been broadcasted on various selected television channels, while our videos, featuring our external experts, internal consultants and senior management, have been shown on popular and selected third-party online video platforms, such as iQIYI, Tencent Video, TouTiao, Sohu Video, Bilibili, etc.
(ii) Internet and conventional advertisement placing
We plan to place advertisements on the internet and through social media platforms, all of which could be conveniently accessed by our targeted customers. We also intend to publish advertisements in selected financial magazines and newspapers. In addition, we plan to lease billboard advertising space and light box displays situated on highways and floor spaces, pillars and ceiling spaces in airports and metro stations, as well as the interiors and exteriors of trains, in order to attract potential new customers. According to Frost & Sullivan, it is a common advertising method for financial and taxation solution service providers to promote their services and brand awareness through placing advertisements on billboard and/or light box displays as well as other internet and conventional advertisement placing. We believe that strategic locations and high visibility of our billboards may give us an opportunity to engage in high-profile brand building. We will mainly place our advertisements in Beijing, Shanghai, Xiamen and Chengdu. We will also enhance the advertising spaces by integrating newer technologies, applications and techniques. We plan to include QR codes printed on our advertisements providing convenient access to the website of our Company and our online financial and taxation videos and programs.
(iii) Organizing and sponsoring marketing events and activities
We plan to further promote our brand by organizing national financial competitions and sponsoring different types of events and activities tailored for participation by high-end entrepreneurs. We encourage our Partnered Institutions and enterprise customers to participate in the national financial competitions. We also plan to sponsor high-end entrepreneurs’ events and activities, such as golf tournaments, to expand and strengthen our client base. We have already organized and sponsored four golf tournaments. After each golf tournament, our players are invited to attend awards ceremonies and banquets, which provide them with opportunities to exchange business contacts and allow our sales and marketing personnel to approach our targeted and potential customers.
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Awards and Recognition
As a result of our efforts to provide quality financial and taxation solution service, and develop brand recognition, trust and confidence from our customers, we have received the following awards and recognitions:
| Award/Recognition | Year | Awarding/Admission Organization/Authority | ||
| Top 50 Providers of Management Consulting Services in China | 2012-2020 | China Enterprise Confederation Management Advisory Committee | ||
| Trustworthy Providers of Management Consulting Services in China | 2018 | Corporate Management Magazine | ||
| First Batch Recommended List of National Providers of Management Consulting Services in China | 2017 | Ministry of Industry and Information Technology of the PRC |
Customers
Our customers primarily consist of business enterprises in respect of our financial and taxation solution services, Partnered Institutions in respect of our education support services, and business enterprises and universities, colleges or other educational institutes for our software and maintenance services.
We have a diverse customer base consisting of listed companies, state-owned enterprises, government authorities and other business enterprises, especially small and medium-sized enterprises, in the PRC, spanning across more than 20 industries, such as manufacturing, wholesale or retail, food processing, information technology, software and related technical services, construction, property development, commercial and financial services, agriculture and fishery, catering, hotel and accommodation, transportation, postal services and warehousing, telecommunication, broadcasting and media services, research and development, oil refinery, gas or electricity supply, environment management, public facilities management, culture, sports and entertainment, water supply, repairs and public administration. Besides spreading across different industry sectors, we also enjoy a customer base with broad geographical locations in the PRC.
For the years ended December 31, 2021 and 2020, sales to our five largest customers amounted to approximately $2.03 million and $1.3 million, representing approximately 5.90% and 4.22%, respectively, of our total revenue. As of the date of this prospectus, we have no customer that accounts for more than 10% of our revenue.
Suppliers
Our suppliers primarily consist of the external experts, education and office materials providers, including education materials and textbooks, software developers and technology vendors, and a media company in the PRC. For the years ended December 31, 2021 and 2020, purchases from our five largest suppliers amounted to approximately $2.07 million and $1.84 million, which accounted for approximately 84.30% and 68.39%, respectively, of our total purchases. For the year ended December 31, 2021, Guangzhou Xingjinhui Trade Co., Ltd, Beijing Duoying Times Culture Media Co., Ltd and Jimei University contributed approximately 29.1%, 26.3% and 17.2% of total purchases of the Company, respectively. For the year ended December 2020, Guangzhou Xingjinhui Trade Co., Ltd, Beijing Duoying Times Culture Media Co., Ltd, and Jimei University contributed approximately 21.3%, 19.7%, and 12.1% of total purchases of the Company.
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Our Competitive Strength
We have a recognized “Lichen” brand in the financial and taxation solution services industry in the PRC
From 2012 to 2020, we were recognized as one of the Top 50 Providers of Management Consulting Services in China for eight consecutive years by the China Enterprise Confederation Management Advisory Committee, which has enabled us to build the “Lichen” brand reputation for comprehensive and customized financial and taxation solution services in the PRC. Our revenue slightly decreased in 2020, due to the impact of COVID-19. The increasing demand for financial and taxation solution services and favorable government policies have brought us increasing opportunities in the financial and taxation solution services industry.
The tax system in China is complex because it applies 18 different types of taxes, along with accounting standards including 1 basic standard, 41 specific standards and 13 explanation standards. Therefore, a professional financial and taxation solution become a critical internal control method for enterprises. The PRC government has issued a series of policies that emphasize on the standardization of Chinese enterprises’ accounting procedures, especially for small and micro enterprises. In 1999, the State council amended the Accounting Law of the PRC to require organizations and enterprises without accounting departments to commission a professional third-party service provider to provide bookkeeping. The Accounting Standard for Small Enterprises issued by Ministry of Finance in 2011 and the Opinions of the State Council on Supporting the Sound Development of Micro and Small Enterprises issued in 2014, the government sets a standard to regulate the accounting measurement and encourages micro and small enterprises to seek for professional financial and taxation solution advice and services. These policies could effectively facilitate and enhance the stable development of the financial and taxation solution services market.
In recent years, the PRC government has issued policies for the benefit of micro and small sized enterprises in China. However, it can be a challenge for the micro and small sized enterprises usually need to learn and apply the new policies. For instance, in June 2020, as a relief in response to the COVID-19 pandemic, the Chinese State Administration of Taxation published the “Announcement of the Administration of Taxation on delaying the payment of income tax in 2020 by small and low profit enterprises and individual industrial and commercial households”. In July 2021, the Chinese State Administration of Taxation published the “Guidelines for preferential tax policies for micro and small enterprises and individual industrial and commercial households”. Additionally, the Chinese State Administration of Taxation announced a new version of the governmental management system Golden Tax System, which was expected to be effective by the end of 2021. Specifically, compared to Golden Tax System Phase III, the upcoming Golden Tax System Phase IV is going to require disclosure of not only the enterprises’ tax-related activities in China but also other non-tax events, including the companies’ daily operation, the information sharing between different banks, human resource, tax payment, completion of registration and so on. The new standards require a higher transparency and structured management of the enterprise and provide increasing opportunities in the financial and taxation solutions services market. We provide services to micro and small enterprises by researching and understanding the new policies, help them navigate the complex and evolving regulatory system in China, and provide financial and taxation solutions that are most profitable and suitable for them in a more efficient way.
We believe that our established market position, proven operating track record and trusted “Lichen” brand will enable us to seize these opportunities and further strengthen and consolidate our established position in the fast-developing PRC financial and taxation solution services industry.
We enjoy the synergies from the business relationships with our Partnered Institutions
Pursuant to the Partnership Agreements entered into with our Partnered Institutions, Partnered Institutions operate their education institutions under our brand name “Lichen”. Through the various seminars, talks and courses organized by our Partnered Institutions under our brand name, we endeavor to reach a larger target audience and therefore expand our customer reach to their participants who are entrepreneurs, senior executives, as well as financial and taxation executives, etc. from 11 provinces or municipalities and 21 cities in the PRC. For the years ended December 31, 2021 and 2020, 155 and 176 financial and taxation solution projects, respectively, were obtained from the referrals made by our Partnered Institutions through our engagement, representing approximately 38.60% and 41.22%, respectively, of the total number of financial and taxation solution projects and approximately 48.60% and 58.41%, respectively, of the revenue of financial and taxation services during the same periods. We believe that this synergistic effect is mutually beneficial to both our Company and our Partnered Institutions and thus will promote and showcase our capabilities and technical expertise to our potential enterprise and individual customers.
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Our management team possesses a wide personal and business network, which provides us a valuable source of potential customers
Our management team has been selected based on values emphasizing the importance of standardized operations, teamwork, cohesiveness, continuous learning and performance excellence and places stringent quality control on our services. They strive to keep abreast of the financial and taxation related laws and regulations in the PRC. In addition to the management of our Group, Mr. Li and Mr. Fang have also participated in seminars, talks and lectures organized by our Partnered Institutions or made online videos to deliver keynote speeches, and have presented and shared with the participants, together with our internal consultants and external experts, their professional knowledge and views on the trending topics in the PRC so as to promote our “Lichen” brand.
Our R&D capabilities can further increase our competitiveness and better cater to our customers’ needs
Our management believe that our Subsidiaries’ R&D capabilities represent one of our core competencies and key competitive advantages in the financial and taxation solution services industry. With our dedicated efforts and investments in various R&D initiatives and projects, we have developed 16 sets of teaching and learning materials covering various financial and taxation related topics, eight financial and taxation training software, and one financial and taxation analysis software to support and complement various types of services offered by our Subsidiaries. In addition, Lichen Education has registered eight copyrights for software developed by our Subsidiaries as to the date of this prospectus.
We develop a comprehensive range of services designed to meet the evolving demands of our customers
We incorporate our self-developed products and services in the projects carried out by our team, in order to enhance and expand our product offerings to meet the evolving demands from the customers and to capture different market opportunities. For example, we regularly conduct research and studies on the trending topics and commonly raised customer enquiries in the financial and taxation sectors, including but not limited to questions concerning the issuance of new financial and taxation related laws and regulations by the PRC government, in order to provide timely updates to our customers.
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We are able to offer services to customers from a diversified range of industry sectors
By keeping abreast of the relevant PRC laws and regulations as well as economic development of the PRC, we are able to assist our customers to react and adapt to the changes through our financial and taxation solution projects. In addition, in the course of providing services to our customers, we attempt to gain insights as to the actual needs and difficulties that our customers are facing, which would in turn provide us with first-hand experience in our financial and taxation solution services. We believe that our ability to keep up with the fast-changing business environment in the PRC and our efforts to offer updated and timely advice to our customers may provide us with a competitive advantage in capturing growth opportunities in our financial and taxation solution business.
Our Business Strategies
Our objective is to strengthen and improve our market position in the PRC. We intend to achieve our objective by implementing business strategies in the following key aspects.
Expand our business in financial and taxation solution services
We will continue to expand our business in financial and taxation solution services by establishing representative offices in more cities, recruitment of additional staff to support our business expansion plans, and strengthening our market position through acquisition of other companies engaging in the provision of financial and taxation solution services in the PRC. We do not have acquisition targets now and the proceeds from this offering will not be used for acquisitions.
Strengthen our R&D capabilities and expand the self-developed software
We believe that possession of up-to-date market intelligence and technical knowledge of the latest development of financial and taxation related policies, regulations and practice is one of the key factors leading to the success of a financial and taxation solution services provider. Thus, we intend to continue to strengthen our R&D capabilities by focusing on developing and upgrading our financial and taxation analysis software for business and commercial use and financial and taxation training software for teaching and learning-related use, both of which are required to be continuously updated and/or upgraded in order for the relevant functions and content to keep abreast of the latest financial and taxation development.
Source for new customers and improve our “Lichen” brand
We continue to search for educational institutions to sign as our Partnered Institutions and opportunities to strengthen our cooperation with industry associations, chambers of commerce and corporate organizations to promote our services in the PRC. In addition, we hope to further improve our “Lichen” brand recognition through multi-channel marketing methods, including production and broadcasting of financial and taxation videos and programs, internet and conventional advertisement placing, and organizing and sponsoring marketing events and activities.
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Intellectual Property
Our “Lichen” brand is an important element of our business. The registered trademarks and copyrights in the PRC, and the domains are as follows:
Trademarks
| Registrant | Trademark | Application Code | Category | Application Area | ||||
| Lichen Zixun |  |
14288203 | 35 | Advertisement, business operations, business management, office management | ||||
| Lichen Zixun | |
14288204 | 36 | Financial evaluation, real estate evaluation, capital investment | ||||
| Lichen Zixun | |
14288205 | 41 | School, boarding school, training, coaching | ||||
| Lichen Zixun |  |
24220583 | 41 | School, boarding school, training, coaching |
Copyrights
| Registrant | Copyright | Registration No. | Registration Date | |||
| Lichen Education | Enterprise Financial Intelligence Analysis System V1.0 | 2020SR0515804 | May 26, 2020 | |||
| Lichen Education | Lichen Education Land Tax Declaration Simulation System V1.0 | 2015SR250983 | December 9, 2015 | |||
| Lichen Education | Lichen Education Government Tax Declaration Simulation System V1.0 | 2015SR251364 | December 9, 2015 | |||
| Lichen Education | Lichen Education Value-added Tax Billing Simulation System V1.0 | 2015SR250218 | December 8, 2015 | |||
| Lichen Education | Lichen Education Examination Simulation System V1.0 | 2015SR250978 | December 9, 2015 | |||
| Lichen Education | Lichen Education Accounting Practice System V1.0 | 2015SR252772 | December 10, 2015 | |||
| Lichen Education | Lichen Education Internet School System V1.0 | 2015SR250018 | December 8, 2015 | |||
| Lichen Education | Lichen Education Academic Affairs Management System V1.0 | 2016SR086921 | April 26, 2016 |
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Domains
| Registrant | Domain name | Expiration Date | ||
| Lichen Education | xmqcw.com.cn | May 16, 2022 | ||
| Lichen Education | lichenjy.com | October 18, 2021 | ||
| Lichen Education | lichenkj.com | January 14, 2022 | ||
| Lichen Education | lichenzx.com | October 24, 2021 | ||
| Lichen Education | lichenjyfz.com | January 4, 2022 | ||
| Lichen Education | kj2008.com | September 7, 2021 |
The software copyrights we owned have the effective protection period of 50 years from the registration date for each registered copyright according to the Copyright Law in China. It is not renewable or extendable. We plan to continue upgrading our software and register copyright of the updated software. We believe the expiration of the copyrights will not have material impact on our business.
As of the date of this prospectus, our Group has not (i) received any intellectual property infringement-related complaints or claims against us; (ii) been notified of any infringement of any intellectual property of any third party by us or of any of our intellectual property being infringed by any third party; and (iii) been involved in any litigation in relation to claims of infringement of intellectual property.
Research and Development
We place strong emphasis on the R&D of our services. In order to maintain our market position and to further expand market share in our services, it is paramount to continuously keep ourselves up-to-date with the latest market demand and trends and develop services, in our efforts to surpass the services offered by our competitors in terms of quality and practicality. For the years ended December 31, 2021 and 2020, we incurred R&D expenses of approximately $1.08 million and $1.0 million, respectively. Our R&D department is responsible for the development of teaching and learning materials on new topics for our Partnered Institutions, financial and taxation training software, and financial and taxation analysis software. As of the date of this prospectus, all of the staff of our R&D department possess a tertiary education diploma or undergraduate degree.
Our R&D department is responsible for developing, updating and improving our software products for educational purposes and business and commercial use. As of the date of this prospectus, we had 15 software technicians, with an average working experience of more than 14 years. All of them possessed a bachelor’s degree or master’s degree. The software R&D team identifies the needs of the market by obtaining feedback from our Partnered Institutions, receiving first-hand information on market needs, industry trends and practical experiences from our internal consultants and external experts through their interaction and exchanges with enterprise clients during their provision of financial and taxation solution services, observing offerings by our competitors and through internal discussion. Once a market need is identified, the software R&D team will conduct feasibility studies to assess the market demand and design detailed specifications on functions and performance.
Our financial and taxation analysis software, namely, Enterprise Financial Intelligence Analysis System V1.0, is designed for our enterprise customers in the industrial and manufacturing industries to conduct business management analysis on the CRM system, inventory sharing, product lifecycle management and supply chain management, which enables them to improve their operation and financial process and business efficacy. Our financial and taxation training software, mainly including virtual accounting practice software designed to simulate different tasks of an accountant such as preparation of general ledgers, cost management, taxation and budgeting etc. in real daily practice, assists our Partnered Institutions to illustrate the actual roles and work of an accountant in business practices to their participants.
With our dedicated efforts and investments in various R&D initiatives and projects, we have developed (i) 16 sets of teaching and learning materials covering various financial and taxation related topics, (ii) eight financial and taxation training software, and (iii) one financial and taxation analysis software to support and complement various types of services offered by our Subsidiaries. In addition, Lichen Education has registered eight copyrights for software developed by our Subsidiaries, as of the date of this prospectus.
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Employees
As of December 31, 2021, we have 390 employees. All of our employees are located in the PRC.
The following table sets out the number of our employees, excluding external experts, categorized by functions as of the date of this prospectus:
| Function | Number of Employees as of December 31, 2021 | Number of Employees as of December 31, 2020 | ||||
| Management | 10 | 9 | ||||
| Finance | 8 | 8 | ||||
| Research and Development | 43 | 44 | ||||
| Human Resource Administration | 7 | 7 | ||||
| Operating Center | 55 | 52 | ||||
| Quality Control Center | 14 | 14 | ||||
| Consultation Service Center | 253 | 253 | ||||
| Total | 390 | 387 |
We strive to maintain a high-quality work force with specialized financial and taxation industry expertise. As a general recruitment policy, we typically require our internal consultants and project managers to possess at least three and seven years of related working experience, respectively.
Our internal consultants carry out their services for financial and taxation solution projects under the supervision of our project managers. Annual performance evaluations are conducted on our internal consultants and project managers, so that our team of internal consultants and project managers may comprise a balanced mix of professional and experienced members, in an effort to provide quality services to our customers. In accordance with applicable PRC laws and regulations, we have made contributions to social security insurance funds (including pension, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance plans) and housing provident funds for our employees. None of our employees are represented by a labor organization. As of the date of this prospectus, we did not experience any strikes or significant labor disputes which materially affected our operations, and we believe we have maintained good relationship with our employees.
Description of Property
Real property
There is no private land and property ownership in China. The right to possess the property is held by the government and the right to use the property has been transferred to our operating subsidiaries in PRC.
| Location | Description and tenure | Use of property | Approximate Gross Floor Area (sq.m.) | |||||
| Office Premises in Xiamen and Six Carparking Spaces in the Basement (Units 13A, 13B, 13C, Level 13, No. 10 Hubin Bei Road, Siming District, Xiamen City, Fujian Province, PRC) | The property is subject to a right to use the land for a term until December 1, 2044 for office purposes. | Office | 1,715.87 | |||||
| Office Premises in Jinjiang (Unit B2306, Block B, Tower 3, Jinjiang Wanda Plaza Commercial Complex, 888 Century Avenue, Meiling Street, Jinjiang City, Fujian Province, PRC) | N/A | Office | 344.5 | |||||
| Office Premises in Shanghai (Level 28 of Zhongyi Building No. 1040 Caoyang Road Putuo District Shanghai City, PRC) | The property is subject to a right to use the land for a maximum term of 50 years for composite purpose. | Office | 1,156.29 | |||||
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Leased property
Lichen Zixun leased the following property in the PRC:
| Location | Term | Use of property | Rent | Termination | ||||
| Broadcasting studio in Beijing (LG1, Left Bank Community, 68 North Fourth Ring West Road, Haidian District, Beijing City, PRC) | April 1, 2022 to March 31, 2025 | Broadcasting studio | RMB $650,000 per year | Either party may terminate this Agreement with thirty days prior written notice to the other party. Lichen Zixun may renew the lease with two-month’s written notice prior to the end of the lease. We intend to renew as of the date of this prospectus. |
Legal Proceedings
Lichen Education, our operating subsidiary in the PRC, have involved in legal and other disputes in the ordinary course of our business, including but not limited to allegations against us for potential infringement of third-party copyrights or other intellectual property rights. However, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business or financial condition.
Seasonality
Our services historically have not been subject to seasonal variations.
Insurance
We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See “Risk Factors – We have limited insurance coverage to protect us against all risks associated with our business operations.”
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Our operation in China is subject to a number of PRC laws and regulations. This section summarizes the most significant PRC laws and regulations relevant to our business and operations in China and the key provisions of such regulations.
Regulations on Foreign Investment
The Foreign Investment Law of the PRC was adopted by the 2nd session of the thirteenth National People’s Congress on March 15, 2019 and became effective on January 1, 2020. The Foreign Investment Law sets out the basic regulatory framework for foreign investments and proposes to implement a system of pre-entry national treatment with a negative list for foreign investments, pursuant to which (i) foreign natural persons, enterprises or other organizations, collectively the foreign investors, shall not invest in any sector forbidden by the negative list for access of foreign investment, (ii) for any sector restricted by the negative list, foreign investors shall conform to the investment conditions provided in the negative list, and (iii) sectors not included in the negative list shall be managed under the principle that domestic investment and foreign investment shall be treated equally. The Foreign Investment Law also sets forth necessary mechanisms to facilitate, protect and manage foreign investments and proposes to establish a foreign investment information report system in which foreign investors or foreign-funded enterprises shall submit the investment information to competent departments of commerce through the enterprise registration system and the enterprise credit information publicity system.
On December 30, 2019, the Ministry of Commerce and the State Administration for Market Regulation issued the Measures for the Reporting of Foreign Investment Information, which came into effect on January 1, 2020 and replaced Interim Administrative Measures. Since January 1, 2020, for foreign investors carrying out investment activities directly or indirectly in China, the foreign investors or foreign-invested enterprises shall submit investment information to the commerce authorities pursuant to these measures.
Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version)
The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version), or the Negative List, which was promulgated jointly by the Ministry of Commerce and the National Development and Reform Commission on June 23, 2020 and became effective on July 23, 2020, replaced and abolished the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) regulating the access of foreign investors to China. Pursuant to the Negative List, foreign investors should refrain from investing in any of prohibited sectors specified in the Negative List, and foreign investors are required to obtain the permit for access to other sectors that are listed in the Negative List but not classified as “prohibited”. The Negative List covers 12 industries. Fields not covered in the Negative List shall be administrated under the principle of equal treatment to domestic and foreign investments.
We are a Cayman Islands company and our businesses by nature in China are mainly financial and taxation solution services, education support services and software and maintenance services, which are not restricted or prohibited for foreign investors by the Negative List.
Regulations on Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is 10 years, 15 years or 20 years from the date of application, depending on the type of patent right.
Copyright. Copyrights in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Names. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
We have adopted necessary mechanisms to register, maintain and enforce intellectual property rights in the PRC. However, we cannot assure you that we can prevent our intellectual property from all the unauthorized use by any third party, neither can we promise that none of our intellectual property rights would be challenged any third party.
Regulations on Internet Information Services
According to the Administrative Measures on Internet Information Services promulgated by the State Council on September 25, 2000, and amended on January 8, 2011, internet information services are classified into two categories: (1) profitable internet information services; and (2) non-profitable internet information services. Profitable internet information services refer to the provision, via the internet, of information or webpage development etc. for payment to internet users. Non-profitable internet information services refer to the provision, via the internet, of open or sharable information for free to internet users. PRC applies the license system to profitable internet information services and applies the record-filing system to non-profitable internet information services. We have completed the registration required by the measures for the website we operate.
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Regulations Relating to Taxation
Regulations on Dividend Withholding Tax
Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 20%. 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, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations.
According to the Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties, which was issued on February 3, 2018 by the SAT, effective as of April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of its income in twelve months to residents in any third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
On October 14, 2019, the State Administration of Taxation issued the Notice on the Administrative Measures for Non-resident Enterprises to Enjoy Contractual Benefits (Circular No. 35 of the State Administration of Taxation in 2019, Circular 35), which was implemented from January 1, 2020. According to Circular 35, non-resident enterprises may enjoy the benefits by the way of “self-judgment, declaration and enjoyment, and retention of relevant information for future reference”. If a non-resident enterprise judges that it meets the conditions for enjoying the contractual benefits, it may enjoy the contractual benefits at the time of tax declaration or through the withholding agent. At the same time, it shall collect and retain relevant information for reference in accordance with Circular 35, and accept the follow-up management of the tax authorities.
Regulations on Enterprise Income Tax
According to the Enterprise Income Tax Law which was issued by the National People’s Congress on March 16, 2007 and last revised and came into effect on December 29, 2018, and the Implementation Rules to the Enterprise Income Tax Law issued by the State Council on December 6, 2007 and effective on January 1, 2008 and was revised on April 23, 2019, both domestic and foreign-invested enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located in the PRC are considered resident enterprises, and will generally be subject to EIT at the rate of 25% of their global income. Under the Implementing Rules of the Enterprise Income Tax 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. A circular issued by the State Administration of Taxation of the PRC in April 2009 and amended in 2017, regarding the standards used to classify certain Chinese invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprise”, which also clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to shareholders outside of the PRC. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities. We believe that Lichen China Limited or any of our subsidiaries outside of China is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management bodies”.
Regulations on Value-Added Tax
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax. On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and General Administration of Customs issued Announcement on Policies for Deepening the VAT Reform jointly, under which the VAT rates under the basic mechanism is 13% for the sectors such as operating and financial leases of equipment, 9% for sectors such as transportation, postal, basic telecommunication, and construction services as well as sales and leases of real property and real property rights, 0% for exported services and 6% for all remaining services, including financial services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided. Furthermore, according to Announcement of the State Taxation Administration on Matters relating to Expanding the Scope of the Pilot Scheme for Issuance of Special VAT Invoices by Small-Scale Taxpayers issued by State Administration on February 3, 2019, the basic mechanism may not apply to small-scale taxpayers who may pay the VAT taxes at the levy rates of 3% and 5% on the basis of their sales amount. As of the date of this prospectus, our PRC subsidiaries are generally subject to VAT rates of 6%.
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Regulations Relating to Foreign Exchange
Regulations on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments 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. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.
On March 30, 2015, SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. On June 9, 2016, SAFE promulgated Circular 16 to further expand and strengthen such reform. Under Circular 19 and Circular 16, foreign-invested enterprises in the PRC are allowed to use their foreign exchange funds under capital accounts and RMB funds from exchange settlement for expenditure under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations, except that such funds shall not be used for (i) expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations; (ii) investments in securities or other investments than banks’ principal-secured products; (iii) granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) construction or purchase of real estate for purposes other than self-use (except for real estate enterprises).
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Further, according to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.
Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37, requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
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PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.
Our PRC resident beneficial owners subject to these registration requirements have registered with the Jinjiang SAFE branch and/or qualified banks to reflect the recent changes to our corporate structure.
Regulations on Dividend Distribution
Under our current corporate structure, the Company may rely on dividend payments from Lichen Education and Lichen Zixun, which are wholly foreign-owned enterprises incorporated in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested enterprises include Foreign Investment Law of the People’s Republic of China and Company Law of the People’s Republic of China. Under these laws, wholly foreign-owned enterprises in China may freely make remittance inward and outward in RMB or foreign exchange of capital contribution, profits, capital yield, income from asset disposal, intellectual property licensing fees, indemnity obtained according to law or income from compensation and liquidation. In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year as a statutory reserve fund, if any, to fund the reserve fund until the statutory reserves fund has reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to optional reserve funds. After making up the losses and allocating reserve funds, the remaining after-tax profits of wholly foreign-owned enterprises may be distributed to the shareholders. As of December 31, 2021, the statutory reserves fund of Lichen Zixun has reached 50% of the registered capital of the enterprise. As of December 31, 2021, the statutory reserves fund of Lichen Education is nil as it has not made any profit after tax.
Regulations Relating to Employment
The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit plans may be subject to fines and other administrative sanctions.
Currently, we are making contributions to the plans based on the minimum standards, although the PRC laws required such contributions to be based on the actual employee salaries up to a maximum amount specified by the local government. Therefore, in our consolidated financial statements, we have made an estimate and accrued a provision in relation to the potential make-up of our contributions for these plans as well as to pay late contribution fees and fines. If we are subject to late contribution fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. See “Risk Factors — Risks Relating to Doing Business in the People’s Republic of China — Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
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Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of the date of this prospectus:
| Name | Age | Position(s) | ||||
| Ya Li | 43 | Chief Executive Officer, Chairman of the Board | ||||
| Zhixiang Fang | 50 | Chief Financial Officer | ||||
| Yi Deng | 41 | Director | ||||
| Zhihuang Deng *(1)(2)(3) | 53 | Independent Director Nominee | ||||
| Lourdes Felix *(1)(2)(3) | 55 | Independent Director Nominee | ||||
| Kipton Cariaga *(1)(2)(3) | 35 | Independent Director Nominee | ||||
| (1) | Member of the Audit Committee |
| (2) | Member of the Compensation Committee |
| (3) | Member of the Nominating Committee |
| * | The individual shall be appointed and consents to be in such position effective upon the effectiveness of the registration statement of which this prospectus forms a part. |
The business address of each of the officers and directors is B2306, Block B Tower 3, Jinjiang Wanda Plaza Commercial Complex, 888 Century Avenue, Meiling Street, Jinjiang City, Fujian Province, People’s Republic of China.
Ya Li, Chief Executive Officer, Chairman of the Board and Director
Mr. Li has served as our Chairman since January 4, 2017 and Chief Executive Officer since January 19, 2018. Mr. Li has over 21 years of experience in accounting, education and finance. From September 2013 to September 2014, Mr. Li was the chairman and a member of the supervisory board of Peixin International Group N.V., a listed company on the Warsaw Stock Exchange in Poland (WSE stock code: PEX) and a member of the audit committee and remuneration committee of the said supervisory board. Mr. Li was the general manager of Jinjiang Xingminqi Financial Consulting Co., Ltd from January 2006 to September 2013. From April 2003 to December 2005, Mr. Li became the principal of Jinjiang Xingminqi Accounting Vocational Training School (“Jinjiang School”). Prior to establishing our Group in April 2004, Mr. Li was an assistant lecturer at Anhui University of Finance and Economics from February 1999 to June 2000. Mr. Li joined Jinjiang Jiu Shen Company Limited from July 2000 to December 2002 as the chief financial officer in charge of the development of financial strategies and maintaining of financial reports. Mr. Li obtained his bachelor’s degree of management, majoring in accountancy from a program jointly organized by China Central Radio and TV University (currently known as The Open University of China) and Beijing Technology and Business University in April 2010.
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Zhixiang Fang, Chief Financial Officer
Mr. Fang has over 24 years of experience in accounting and has served as our Chief Financial Officer since July 2018. From April 2021 to February 2022, Mr. Fang is the independent director of Mobile Internet (China) Holdings Limited. Prior to that, Mr. Fang has served as the deputy general manager of Lichen Zixun since 2013. Prior to joining our Group, Mr. Fang was the director of audit at Fujian Tianlun Group Company Limited from December 2008 to January 2011. Mr. Fang was a lecturer in the teaching division of Chizhou University from July 1995 to December 2008. Mr. Fang obtained his diploma in accounting from Anhui University of Technology (previously known as Anhui Commercial College), in June 1995. He later completed a part-time top-up course in accountancy at Hefei University of Technology in January 2008. In December 2009, Mr. Fang became a member of the Chinese Institute of Certified Public Accountants. In May 1999, Mr. Fang was qualified as a Medium Level Accountant in the PRC.
Yi Deng, Director
Mr. Deng has been a member of our Group for over 15 years. He was appointed as a director on April 15, 2018. Since December 2013, Mr. Deng became a deputy general manager of Lichen Zixun. He is primarily responsible for overseeing the overall operations of our Group.
In September 2018, Mr. Deng was employed by Huaqiao University as an instructor of postgraduate students (for a term of three years). In July 2017, Mr. Deng was awarded the Small and Medium Enterprises Management Consultancy Services Expert and Database Expert in the PRC. Mr. Deng also has abundant exposure to entrepreneurship training. In July 2009 and August 2014, Mr. Deng joined two entrepreneurship training courses organized by China Employment Training Technical Instruction Center and subsequently obtained relevant qualifications as an entrepreneurship instructor. Mr. Deng was also employed by Quanzhou Ocean Institute as a guest professor for two years in October 2013.
In June 2016, Mr. Deng obtained a master’s degree in business management from Huaqiao University. He graduated from Anhui University Law School in 2009. Mr. Deng obtained his Junior College Education in law from Anhui Sanlian Career Technical College (currently known as Anhui Sanlian University) in 2003.
Zhihuang Deng, Independent Director Nominee and Chair of Compensation Committee
Mr. Deng has over 25 years of experience in legal practice in the PRC. He will serve as our independent director starting immediately upon the effectiveness of the registration statement of which this prospectus forms a part. Since June 2020, he has been appointed as the independent director and serving as the chairman of the remuneration committee and a member of each of the audit committee and nomination committee of Yik Wo International Holdings Ltd., a company listed on GEM of the Stock Exchange (stock code: 8659). He is responsible for, among other things, evaluating the performance of directors and senior management, monitoring the integrity of the company’s financial statements and annual reports and accounts, reviewing the company’s financial controls and risk management and internal control systems and making recommendations on any proposed changes to the board of directors to complement the company’s corporate strategy. In July 2019, Mr. Deng became a senior partner at Beijing Yingke (Fuzhou) Law Firm. Mr. Deng was a senior partner at Fujian Zhixinheng Law Firm from October 2005 to June 2019. Mr. Deng became a lawyer at Fujian Huawei Law Firm from April 2005 to October 2005. From April 1995 to March 2005, Mr. Deng was a prosecutor of Fujian Province Fuzhou City People’s Procuratorate.
Mr. Deng obtained his bachelor’s degree in law from Fujian Normal University in June 1992. After graduation, Mr. Deng became a lecturer at Fujian Mechanical and Electrical School (currently known as Fujian University of Technology) from August 1992 to April 1995.
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Lourdes Felix, Independent Director Nominee and Chair of Audit Committee
Ms. Felix is a female Hispanic entrepreneur and corporate finance executive with 30 years of combined experience in capital markets, public accounting and in the private sector. She presently serves as Chief Executive Officer, Chief Financial Officer and Director of BioCorRx Inc. (OTCQB: BICX), a leader in addiction treatment solutions and related disorders. She has been with BioCorRx since October 2012. Ms. Felix is one of the founders of BioCorRx Pharmaceuticals Inc., a majority owned subsidiary of BioCorRx Inc. She has been instrumental in capital procurement, completing multi-million dollars equity financing and accomplished in structuring and negotiating transactions and favorable terms with investment banks. Along with other executives of the company, Ms. Felix rebranded the company, restructured and expanded the business model to position it for long term growth in the addiction treatment space and drug development. Prior to joining BioCorRx, she had experience in several private sectors, public accounting including audit and public company experience. She has expertise in finance, accounting, budgeting and internal control principals including GAAP, SEC, and SOX Compliance. Ms. Felix has thorough knowledge of federal and state regulations and has successfully managed and produced SEC regulatory filings. She has extensive experience in developing and managing financial operations. Ms. Felix obtained a Bachelor of Science degree in Accounting from University of Phoenix in 2005.
Kipton Cariaga, Independent Director Nominee and Chair of Nominating Committee
Mr. Cariaga has over 10 years of experience in the financial industry. His expertise is in sales, marketing, education, equity and derivative markets, and strategic planning. He will serve as our independent director starting immediately upon the effectiveness of the registration statement of which this prospectus forms a part. In May 2020, Mr. Cariaga founded Citrus Capital Consulting which offers business consulting services to startup companies looking to expand into international markets. Since August 2021, Mr. Cariaga is a General Partner in Citrus Grove Capital Management, a market-neutral hedge fund that helps wealthy individuals diversify their holdings. Since July 2020, Mr. Cariaga serves as a General Partner in Shanghai Fengyu Investment Management Co. LTD, an international fund based in Shanghai. From 2014 to present, he has been an options trader and business development specialist working in the family office of Orange Grove Trading Company. Mr. Cariaga studied finance at California State University from 2006 to 2011 and in 2009, during his college days he worked for JPMorgan Chase and became a licensed investment professional holding a FINRA Series 6, and 63 license as well as a California Life-Only insurance license from 2010 to 2014.
Family Relationship
There is no family relationship among any of our directors or executive officers.
Election of Officers
Our executive officers are appointed by, and serve at the discretion of, our Board of Directors.
Board of Directors
We expect that our Board of Directors will consist of five (5) directors, a majority of whom are independent as such term is defined by the Nasdaq Capital Market. We expect that all independent director nominees will begin their service upon the effectiveness of the registration statement of which this prospectus forms a part.
A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. Provided that proper disclosure has been given to the directors as mentioned above, a director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.
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Corporate Governance
The business and affairs of the company are managed under the direction of our Board. Each of our directors has attended all meetings either in person, via telephone conference, or through written consent for special meetings. Shareholders will be given specific information on how they can direct communications to the officers and directors of the Company at our annual shareholders’ meetings. All communications from shareholders are relayed to the members of the Board.
Board Committees
We will establish three committees under the Board of Directors: an audit committee, a compensation committee and a nominating committee, and adopt a charter for each of the three committees, effective upon the effectiveness of the registration statement of which this prospectus forms a part. Copies of our committee charters will be posted on our corporate investor relations website prior to the effectiveness of the registration statement. Each committee’s members and functions are described below.
Audit Committee. Upon the effectiveness of the registration statement of which this prospectus forms a part, our Audit Committee will consist of Mr. Zhihuang Deng, Ms. Lourdes Felix, and Mr. Kipton Cariaga. Ms. Lourdes Felix will serve as the chair of our audit committee. We have determined that these three individuals satisfy the “independence” requirements of Nasdaq Rule 5605 and Rule 10A-3 under the Securities Exchange Act of 1934. Our Board of Directors has determined that Ms. Lourdes Felix qualifies as an audit committee financial expert and has the accounting or financial management expertise as required under Item 407(d)(5)(ii) and (iii) of Regulation S-K of the SEC. The primary duties of the Audit Committee are, among other things:
| ● | Make recommendations to the Board in relation to the appointment; |
| ● | Re-appoint and remove of the external auditor; |
| ● | Monitor the reporting of our Company’s financial statements, annual reports, accounts and half-year reports; and |
| ● | Review and supervise our financial controls, internal control and risk management systems. |
Compensation Committee. Upon the effectiveness of the registration statement of which this prospectus forms a part, our compensation committee will consist of Mr. Zhihuang Deng, Ms. Lourdes Felix, and Mr. Kipton Cariaga. Mr. Zhihuang Deng will serve as the chairperson of our compensation committee. The primary duties of the compensation committee are, among other things:
| ● | Make recommendations to the Board in relation to our policy and structure for all Directors’ and senior management’s compensation; |
| ● | Make recommendations to the Board on the compensation packages of individual directors and senior management personnel; and |
| ● | Review performance-based compensation and to ensure that none of the Directors determine their own compensation. |
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Nominating Committee. Upon the effectiveness of the registration statement of which this prospectus forms a part, our nominating committee will consist of Mr. Zhihuang Deng, Ms. Lourdes Felix, and Mr. Kipton Cariaga. Mr. Kipton Cariaga will be the chairperson of our nominating committee. The primary duties of the Nominating Committee are, among other things:
| ● | Review the structure, size and composition of the Board on a regular basis |
| ● | Identify individuals suitably qualified to become Board members |
| ● | Assess the independence of independent directors; and |
| ● | Make recommendations to the Board in relation to the appointment or re-appointment of Directors. |
Duties of Directors
Under Cayman Islands law our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. See “Description of Ordinary Shares—Differences in Corporate Law” for additional information on our directors’ fiduciary duties under Cayman Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A shareholder may in certain circumstances have rights to damages if a duty owed by the directors is breached.
Our Board of Directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our Board of Directors include, among others:
| ● | convening general meetings and reporting its work to shareholders at such meetings; |
| ● | declaring dividends and distributions; |
| ● | appointing officers and determining the term of office of the officers; |
| ● | exercising the borrowing powers of our company and mortgaging the property of our company; and |
| ● | approving the transfer of shares in our company, including the registration of such shares in our share register. |
Controlled Company
We expect to continue to be a controlled company within the meaning of the Nasdaq Stock Market Rules, and as a result, we qualify for and intend to continue to rely on exemptions from certain corporate governance requirements.
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Public Companies that qualify as a “Controlled Company” with securities listed on the Nasdaq Stock Market (Nasdaq), must comply with the exchange’s continued listing standards to maintain their listings. Nasdaq has adopted qualitative listing standards. Companies that do not comply with these corporate governance requirements may lose their listing status. Under the Nasdaq rules, a “controlled company” is a company with more than 50% of its voting power held by a single person, entity or group. Under Nasdaq rules, a controlled company is exempt from certain corporate governance requirements, including:
| ● | the requirement that a majority of the Board of Directors consist of independent directors; |
| ● | the requirement that a listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; |
| ● | the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and |
| ● | the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee. |
Controlled companies must still comply with the exchange’s other corporate governance standards. These include having an audit committee and the special meetings of independent or non-management directors.
Upon the completion of this offering, our Controlling Shareholder will beneficially own 31.30% of our total issued and outstanding ordinary shares, representing 82.00% of the total voting power, assuming that the underwriters do not exercise their over-allotment option, or 30.32% of our total issued and outstanding ordinary shares, representing 81.31% of the total voting power, assuming that the over-allotment option is exercised in full. As a result, we will be a “controlled company” as defined under Nasdaq Listing Rule 5615(c), because our Controlling Shareholder will hold more than 50% of the voting power for the election of directors. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements. We do not plan to rely on these exemptions, but we may elect to do so after we complete this offering.
Remuneration
The directors may receive such remuneration as our Board of Directors may determine from time to time. The directors shall also be entitled to be paid their travelling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the directors, or any committee of the directors, or general meetings of the Company, or otherwise in connection with the business of the Company, or to receive a fixed allowance in respect thereof as may be determined by the directors from time to time, or a combination partly of one such method and partly the other. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our Board of Directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.
Qualification
There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.
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Director Compensation
All directors hold office until their successors have been duly elected and qualified. Employee directors may receive compensation for their services. Non-employee directors are entitled to receive an as-yet undetermined cash fee for serving as directors and may receive stock grants from our company. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Code of Business Conduct and Ethics
We currently do not have a code of business conduct and ethics applicable to our directors, officers and employees; however, we intend to adopt one in the near future in connection with our application to list on The Nasdaq Capital Market.
We currently do not have a compensation committee approving our salary and benefit policies. We will have a compensation committee upon the effectiveness of the registration statement. Our Board of Directors has determined the compensation to be paid to our executive officers and employee directors based on our financial and operating performance and prospects, and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the Board of Directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our Board of Directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers and employee directors. The Board of Directors will make an independent evaluation of appropriate compensation to key employees, with input from management. The Board of Directors has oversight of executive compensation plans, policies and programs.
Compensation
For the fiscal year ended December 31, 2021, we paid an aggregate of RMB2,787,291 (approximately US$432,312), which is the total amount of base salary plus bonus, in cash to our executive officers and employee directors. For the fiscal year ended December 31, 2020, we paid an aggregate of RMB1,814,400 (approximately US$263,000), which is the total amount of base salary, in cash to our executive officers and employee directors. Due to the impact of the COVID-19 pandemic, the total revenue in 2020 has decreased, and thus we did not pay bonus to our executive officers and employee directors for the fiscal year ended December 31, 2020. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors.
Employment Agreements
We have entered into an employment agreement with each of our executive officers and employee directors. Each of them is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer. We may also terminate an executive officer’s employment without cause upon advance written notice. The executive officer and employee director may resign at any time with an advance written notice.
On January 19, 2018, Lichen Zixun entered into an employment agreement with our Chief Executive Officer, Mr. Ya Li, for a term of five years. Mr. Li is entitled to an annual base salary of RMB720,000 (or approximately USD103,200).
On July 18, 2018, Lichen Zixun entered into an employment agreement with our Chief Financial Officer, Mr. Zhixiang Fang, for a term of five years. Mr. Fang is entitled to an annual base salary of RMB504,000 (or approximately USD72,245)
On January 19, 2019, Lichen Zixun entered into an employment agreement with our director, Mr. Yi Deng, for a term of five years. Mr. Deng is entitled to an annual base salary of RMB590,400 (or approximately USD84,630) The termination of this agreement is subject to PRC Labor Law and PRC Labor Contract Law.
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Employment Agreements
See “Management—Employment Agreements”
Other Transactions with Related Parties
The table below sets forth the major related parties and their relationships with the Company as of December 31, 2021, 2020 and 2019:
| Name of related parties | Relationship with the Company | |
| Jinjiang Xingminqi Accounting Vocational Training School (“Jinjiang School”) | A company controlled by the Company’s controlling shareholder | |
| Quanzhou City Lichen Accounting Vocational Training School (“Quanzhou School”) | A company controlled by the Company’s controlling shareholder |
Significant transactions with related parties were as follows: (All amounts in thousands of USD)
Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||
| Provision of marketing, operation, and technical support services to Jinjiang School | $ | 70 | $ | 70 | $ | 70 | ||||||
| Provision of marketing, operation, and technical support services to Quanzhou School | 132 | 130 | 130 | |||||||||
| Processing of academic education applications to Jinjiang School | 90 | 176 | 132 | |||||||||
| Processing of academic education applications to Quanzhou School | 113 | 229 | 182 | |||||||||
| Sales of teaching and learning materials to Jinjiang School | 70 | 80 | 77 | |||||||||
| Sales of teaching and learning materials to Quanzhou School | 66 | 77 | 76 | |||||||||
| Online training to Jinjiang School | 24 | 7 | - | |||||||||
| Online training to Quanzhou School | 23 | 7 | - | |||||||||
| Total revenue – related parities | $ | 588 | $ | 776 | $ | 667 | ||||||
Significant balances with related parties were as follows:
As of December 31, 2021 | As of December 31, 2020 | As of December 31, 2019 | ||||||||||
| Other receivables – related party | ||||||||||||
| Ya Li | $ | 419 | $ | 416 | $ | 81 | ||||||
| Due to a related party | ||||||||||||
| Quanzhou School | $ | 105 | $ | 103 | $ | 97 | ||||||
| Jinjiang School | 1 | - | - | |||||||||
| Total | 106 | 103 | 97 | |||||||||
Balances due from Ya Li and due to Quanzhou school and Jinjiang School are the result of the normal business transactions stated above.
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The following table sets forth information with respect to beneficial ownership of our Class A Ordinary Shares and Class B Ordinary Shares as of the date of this prospectus by:
| ● | Each person who is known by us to beneficially own more than 5% of our outstanding Class A Ordinary Shares and Class B Ordinary Shares; |
| ● | Each of our director, director nominees and named executive officers; and |
| ● | All directors and named executive officers as a group. |
The number and percentage of Class A Ordinary Shares and Class B Ordinary Shares beneficially owned before the offering are based on 13,500,000 Class A Ordinary Shares with a par value of $0.00004 per share, and 9,000,000 Class B Ordinary Shares with a par value of $0.00004 per share issued and outstanding as of the date of this prospectus. Holders of Class A Ordinary Shares will be entitled to one (1) vote per share. Holders of Class B Ordinary Shares will be entitled to ten (10) votes per share. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of either Class A Ordinary Shares or Class B Ordinary Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of Class A Ordinary Shares and Class B Ordinary Shares beneficially owned by a person listed below and the percentage ownership of such person, Class A Ordinary Shares and Class B Ordinary Shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of the date of this prospectus are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to the following table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all Class A Ordinary Shares and Class B Ordinary Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company at B2306, Block B Tower 3, Jinjiang Wanda Plaza Commercial Complex 888 Century Avenue Meiling Street, Jinjiang City Fujian Province People’s Republic of China. As of the date hereof, we have 15 shareholders of record.
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| Executive Officers and Directors | Amount of Beneficial Ownership of Class A Ordinary Shares(1) | Pre- Offering Percentage Ownership of Class A Ordinary Shares(2) | Post- Offering Percentage Ownership of Class A Ordinary Shares(2)(3) | Amount of Beneficial Ownership of Class B Ordinary Shares Pre- and Post- Offering | Percentage Ownership of Class B Ordinary Shares |
Pre-Offering Combined Voting Power of Class A and Class B Ordinary Shares(2) | Post- Offering Combined Voting Power of Class A and Class B Ordinary Shares(2)(3) | |||||||||||||||||||||
| Directors and Named Executive Officers: | ||||||||||||||||||||||||||||
| Ya Li (4) | - | - | - | 9,000,000 | 100 | % | 86.96 | % | 82.00 | % | ||||||||||||||||||
| Zhixiang Fang | - | - | - | - | - | - | - | |||||||||||||||||||||
| Yi Deng | - | - | - | - | - | - | - | |||||||||||||||||||||
| Zhihuang Deng | - | - | - | - | - | - | - | |||||||||||||||||||||
| Lourdes Felix | - | - | - | - | - | - | - | |||||||||||||||||||||
| Kipton Cariaga | - | - | - | - | - | - | - | |||||||||||||||||||||
| All executive officers and directors as a group (6 persons) | - | - | - | 9,000,000 | 100 | % | 86.96 | % | 82.00 | % | ||||||||||||||||||
| 5% or Greater Stockholders | ||||||||||||||||||||||||||||
| Silver Sky Investment Limited (4) | - | - | - | 9,000,000 | 100 | % | 86.96 | % | 82.00 | % | ||||||||||||||||||
| Sensation Investment Limited (5) | 2,250,000 | 16.67 | % | 11.4 | % | - | - | - | 2.05 | % | ||||||||||||||||||
| China EC Investment (Hong Kong) Limited (6) | 1,125,000 | 8.33 | % | 5.70 | % | - | - | - | 1.03 | % | ||||||||||||||||||
| Dong Chang Ventures Limited (7) | 1,125,000 | 8.33 | % | 5.70 | % | - | - | - | 1.03 | % | ||||||||||||||||||
| Suqin Deng | 1,012,500 | 7.50 | % | 5.13 | % | - | - | - | * | |||||||||||||||||||
| Chunyan Wei | 1,012,500 | 7.50 | % | 5.13 | % | - | - | - | * | |||||||||||||||||||
| Shengbi Chen | 900,000 | 6.67 | % | 4.56 | % | - | - | - | * | |||||||||||||||||||
| Meizhen Li | 900,000 | 6.67 | % | 4.56 | % | - | - | - | * | |||||||||||||||||||
| Hongyu Wang | 900,000 | 6.67 | % | 4.56 | % | - | - | - | * | |||||||||||||||||||
| Zhen Wang | 900,000 | 6.67 | % | 4.56 | % | - | - | - | * | |||||||||||||||||||
| Shishan Wu | 900,000 | 6.67 | % | 4.56 | % | - | - | - | * | |||||||||||||||||||
| Peng Ye | 675,000 | 5.00 | % | 3.42 | % | - | - | - | * | |||||||||||||||||||
| * | < 1% |
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the Class A Ordinary Shares and Class B Ordinary Shares. All shares represent only Class A Ordinary Shares and Class B Ordinary Shares held by shareholders as no options are issued or outstanding. |
| (2) | Calculation based on 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares issued and outstanding as of the date of this prospectus. Holders of Class A Ordinary Share are entitled to one (1) vote per share. Holders of Class B Ordinary Shares are entitled to ten (10) votes per share. |
| (3) | Assuming 6,250,000 Class A Ordinary Shares are issued in this offering, not including 937,500 Class A Ordinary Shares underlying the Underwriter’s Over-Allotment Option and 71,875 Class A Ordinary Shares underlying the Underwriter Warrants. |
| (4) | Ya Li is deemed to beneficially own 9,000,000 Class B Ordinary Shares through Silver Sky Investment Limited, a British Virgin Islands company holding 9,000,000 shares of our Class B Ordinary Shares. Ya Li has the sole voting and dispositive power of all the shares held by Silver Sky Investment Limited. |
| (5) | Wenjuan Chen is deemed to beneficially own 2,250,000 Class A Ordinary Shares through Sensation Investment Limited, a Hong Kong company holding 2,250,000 shares of our Class A Ordinary Shares. Wenjuan Chen has the sole voting and dispositive power of all the shares held by Sensation Investment Limited. |
| (6) | Yinong Wu is deemed to beneficially own 1,125,000 Class A Ordinary Shares through China EC Investment (Hong Kong) Limited, a Hong Kong company holding 1,125,000 shares of our Class A Ordinary Shares. Yinong Wu has the sole voting and dispositive power of all the shares held by China EC Investment (Hong Kong) Limited. |
| (7) | Weinan Shi is deemed to beneficially own 1,125,000 Class A Ordinary Shares through Dong Chang Ventures Limited, a British Virgin Islands company holding 1,125,000 shares of our Class A Ordinary Shares. Weinan Shi has the sole voting and dispositive power of all the shares held by Dong Chang Ventures Limited. |
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DESCRIPTION OF ORDINARY SHARES
Lichen China Limited was incorporated on April 13, 2016 under the Companies Act (as revised) of the Cayman Islands and our affairs are governed by our amended and restated memorandum and articles of association and the Companies Act (as revised) of the Cayman Islands which we refer to as the “Cayman Islands Companies Act” below, and the common law of the Cayman Islands. Pursuant to our amended and restated memorandum and amended and restated articles of association, the authorized share capital of our company is US$50,000, divided into 1,000,000,000 Class A Ordinary Shares of a par value of US$0.00004 each, and 250,000,000 Class B Ordinary Shares of a par value of US$0.00004 each. As of the date of this prospectus, 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares are issued and outstanding.
On April 28, 2021, Lichen China Limited passed a resolution to increase the share capital. Pursuant to such resolution, the authorized share capital of Lichen China Limited was increased from HK$50,000 divided into 5,000,000 shares with a nominal or par value of HK$0.01 each (“HKD Shares”) to the aggregate of (i) HK$50,000 divided into 5,000,000 HKD Shares and (ii) US$50,000 divided into (a) 400,000,000 Class A Ordinary Shares with a nominal or par value of US$0.0001 each and (b) 100,000,000 Class B Ordinary Shares with a nominal or par value of US$0.0001 each. 5,400,000 Class A Ordinary Shares and 3,600,000 Class B Ordinary Shares (collectively, the “USD Shares”) were issued at the consideration of US$0.0001 per share. Upon the completion of the share issuance, all HKD Shares issued were repurchased by Lichen at the consideration HK$0.01 per share and cancelled immediately upon repurchase. Upon completion of the repurchase, the 5,000,000 unissued HKD Shares of the Company were cancelled resulting in the reduction of the authorized share capital of the Company to US$50,000 divided into (a) 400,000,000 Class A Ordinary Shares with a nominal or par value of US$0.0001 each and (b) 100,000,000 Class B Ordinary Shares with a nominal or par value of US$0.0001, each in accordance with section 13 of the Cayman Islands Companies Act.
On December 15, 2021, Lichen China Limited executed a special resolution to change the par value of the ordinary shares from $0.0001 to $0.00004, a 2.5 for 1 stock split (“Stock Split”). Upon the Stock Split, every issued and outstanding ordinary share was exchanged for 2.5 new ordinary shares. Pursuant to such resolution, the authorized share capital of Lichen was US$50,000 divided into (a) 1,000,000,000 Class A Ordinary Shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 Class B Ordinary Shares with a nominal or par value of US$0.00004, each in accordance with section 13 of the Cayman Islands Companies Act. The changes were completed on December 23, 2021.
Our Memorandum and Articles
Copies of our amended and restated memorandum of association and amended and restated articles of association are filed as exhibits to the registration statement of which this prospectus is a part. As a convenience to potential investors, we provide the below summary of the material provisions of our amended and restated memorandum and articles of association and the Cayman Islands Companies Act, insofar as they relate to the material terms of our Class A Ordinary Shares and Class B Ordinary Shares, together with a comparison to similar features under Delaware law.
Objects of Our Company
Under our amended and restated memorandum of association, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Ordinary Shares
General
Upon the completion of this offering, our authorized share capital will be US$50,000 divided into 1,000,000,000 Class A Ordinary Shares with a par value of $0.00004 each, and 250,000,000 Class B Ordinary Shares, with a par value of $0.00004 each. Holders of Class A Ordinary Shares and Class B Ordinary Shares will have the same rights except for voting and conversion rights.
All of our issued Class A Ordinary Shares and Class B Ordinary Shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form.
As of the date of this prospectus, there are 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares issued and outstanding.
Lichen China Limited is selling Class A Ordinary Shares in this offering. At the completion of this offering, there will be 19,750,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary Shares issued and outstanding, assuming the Underwriter does not exercise the Over-Allotment Option and excluding the Class A Ordinary Shares issuable upon the exercise of the Underwriter Warrants.
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Listing
We plan to list our Class A Ordinary Shares on the Nasdaq Capital Market under the symbol “LICN.” We cannot guarantee that we will be successful in listing on Nasdaq; however, we will not complete this offering unless we receive approval letter for our listing.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A Ordinary Shares is Vstock Transfer, LLC.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our Board of Directors subject to the Cayman Islands Companies Act. The Directors may from time to time declare dividends (including interim dividends) and distributions on the issued and outstanding shares of the Company and authorize payment of the same out of the funds of the Company lawfully available therefor. Dividends may also be declared or paid out of share premium account or otherwise permitted by the Cayman Islands Companies Act, provided that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
Voting rights
At each general meeting of our company, on a poll or a show of hands, each shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one (1) vote for each Class A Ordinary Share and ten (10) votes for each Class B Ordinary Share which such shareholder holds. The holders of Class A Ordinary Shares and Class B Ordinary Shares shall at all times vote together as one class on all resolutions of the shareholders. At any general meeting the chairman is responsible for deciding in such manner as he considers appropriate whether any resolution proposed has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting. At any general meeting, a resolution put to the vote at the meeting shall be decided on a poll unless a show of hand is, before or on the declaration of the result of the poll, demanded by the chairman of such meeting or by one or more shareholders present in person or by proxy.
Election of directors
Directors may be appointed by an ordinary resolution of our shareholders. Directors may also be appointed by a resolution of the directors of the Company, provided that the total number of directors (exclusive of alternate directors) shall not at any time exceed the number fixed in accordance with the amended and restated articles of association.
Meetings of shareholders
Any of our directors may convene general meetings of shareholders at such times and in such manner and places within or outside the Cayman Islands as the director considers necessary or desirable. The director convening a general meeting shall give at least five days’ notice of the general meeting to those shareholders whose names on the date the notice is given appear as members in the register of members of the Company and are entitled to vote at the meeting, and each of the Company’s directors. Our Board of Directors must convene a general meeting upon the written request of one or more shareholders holding no less than 10% of the Company’s paid-up capital as at the date of the deposit of the requisition carries the right of voting at general meetings of the Company.
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No business may be transacted at any general meeting unless a quorum is present at the time the meeting proceeds to business. Two shareholders present in person or by proxy shall be a quorum. For so long as any shares are listed on the Nasdaq Capital Market (and any other stock exchange on which the Company’s shares are listed for trading), one or more shareholders holding shares that represent not less than one-third of the outstanding issued shares carrying the right to vote at such general meeting. If, within half an hour from the time appointed for the meeting, a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved. In any other case, it shall stand adjourned to the same day in the next week at the same time and place or to such other time or such other place as the directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may transact the business for which the meeting was called. The chairman, if any, of our Board of Directors shall preside as chairman at every general meeting of the Company, or if there is no such chairman, or if he shall not be present within fifteen minutes after the time appointed for the holding of the general meeting, or is unwilling to act, the directors present shall elect one of their number to be chairman of the general meeting.
Meetings of directors
Subject to the Cayman Islands Companies Act and the amended and restated articles of association of our company, the management of our company is entrusted to our Board of Directors, who will make decisions by voting on resolutions of directors. At any meeting of directors, a quorum will be present if two directors are present, unless otherwise fixed by the directors. If there is a sole director, that director shall be a quorum. A director and his appointed alternate director shall be considered as only one person for the purpose of calculating quorum. An alternate director or proxy appointed by a director shall be counted in a quorum at a meeting at which the director appointing him is not present. An action that may be taken by the directors at a meeting may also be taken by a resolution of directors consented to in writing by all of the directors.
Pre-emptive rights
There are no pre-emptive rights applicable to the issue by us of Class A Ordinary Shares under either Cayman Islands law or our amended and restated memorandum and articles of association.
Conversion
Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time at the option of the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.
Transfer of Ordinary Shares
Subject to the restrictions in our amended and restated memorandum and articles of association and applicable securities laws, any of our shareholders may transfer all or any of his or her Class A Ordinary Shares or Class B Ordinary Shares by written instrument of transfer signed by the transferor and containing the name and address of the transferee. Our Board of Directors may resolve by resolution to refuse or delay the registration of the transfer of any Class A Ordinary Shares or Class B Ordinary Shares without giving any reason.
Winding Up
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of our shares in proportion to the capital paid up. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the capital paid up.
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Calls on Ordinary Shares and forfeiture of Ordinary Shares
Our Board of Directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment provided that no call shall be payable at less than one month from the date fixed for the payment of the last preceding call. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture if the call remains unpaid after a second notice by the directors in accordance with the amended and restated articles of association.
Repurchase of Shares
The Cayman Islands Companies Act and our amended and restated memorandum and articles of association permit us to purchase our own shares, subject to certain restrictions and requirements. Our directors may only exercise this power on our behalf, subject to the Cayman Islands Companies Act, our amended and restated memorandum and articles of association and to any applicable requirements imposed from time to time by the Nasdaq, the Securities and Exchange Commission, or by any other recognized stock exchange on which our securities are listed.
Provided the necessary shareholders and board approval have been obtained, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner, provided the requirements under the Cayman Islands Companies Act have been satisfied. Under the Cayman Islands Companies Act, the repurchase of any share may be paid out of our company’s profits, out of the share premium account or out of the proceeds of a fresh issue of shares made for the purpose of such repurchase, or out of capital. If the repurchase proceeds are paid out of our Company’s capital, our Company must, immediately following the date of such payment, be able to pay its debts as they fall due in the ordinary course of business. In addition, under the Cayman Islands Companies Act, no such share may be repurchased (1) unless it is fully paid up, (2) if such repurchase would result in there being no shares outstanding, and (3) unless the manner of purchase (if not so authorized under the amended and restated memorandum and articles of association) has first been authorized by a resolution of our shareholders. In addition, under the Cayman Islands Companies Act, our Company may accept the surrender of any fully paid share for no consideration unless, as a result of the surrender, the surrender would result in there being no shares outstanding (other than shares held as treasury shares).
Variation of Rights of Shares
The rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not our company is being wound-up, may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or series or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class or series. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
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Changes in the number of shares we are authorized to issue and those in issue
We may from time to time by resolution of shareholders in the requisite majorities:
| ● | amend our amended and restated memorandum of association to increase the authorized share capital of our Company or cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person; |
| ● | subdivide our authorized and issued shares into a larger number of shares; and |
| ● | consolidate our authorized and issued shares into a smaller number of shares. |
Inspection of books and records
Holders of our Ordinary Shares will have no general right under Cayman Islands law to inspect or obtain copies of our register of members or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Where You Can Find Additional Information.”
Rights of non-resident or foreign shareholders
There are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Issuance of additional Ordinary Shares
Our amended and restated memorandum and articles of association authorizes our Board of Directors to issue additional ordinary shares from time to time as our Board of Directors shall determine, to the extent that there are sufficient authorized but unissued shares.
Exempted Company
We are an exempted company with limited liability under the Cayman Islands Companies Act. The Cayman Islands Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. An exempted company shall not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the exempted company carried on outside the Cayman Islands:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; |
| ● | is not required to open its register of members for inspection; |
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| ● | does not have to hold an annual general meeting; |
| ● | is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities if it is not listed on the Cayman Islands Stock Exchange; |
| ● | may issue bearer shares or shares with no par value; |
| ● | may obtain an undertaking against the imposition of any future taxation (for a period of up to 30 years); |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| ● | may register as an exempted limited duration company; and |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
Differences in Corporate Law
The Cayman Islands Companies Act is modeled after that of English law but does not follow recent English statutory enactments. In addition, the Cayman Islands Companies Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Cayman Islands Companies Act applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements
The Cayman Islands Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, a “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company, and a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company.
In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by a special resolution of the shareholders of each constituent company, and such other authorization, if any, as may be specified in such constituent company’s articles of association.
The plan of merger or consolidation must be filed with the Registrar of Companies of the Cayman Islands together with the requisite declarations and undertakings required under the Cayman Islands Companies Act, including a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares if they follow the required procedures, under the Cayman Islands Companies Act subject to certain exceptions. The fair value of the shares will be determined by the Cayman Islands court if it cannot be agreed among the parties. Court approval is not required for a merger or consolidation effected in compliance with these statutory procedures.
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In addition, there are statutory provisions that facilitate the reconstruction of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands.
The Cayman Islands Companies Act provides that shareholders of companies incorporated in Cayman Islands have rights of dissent and appraisal and are entitled to be paid the fair value of their shares upon dissenting to a merger or consolidation.
A company that has received any notice of dissent must, within specified time periods, make a written offer to each dissenting shareholder to purchase its shares at a price that the company determines to be the fair value, and if agreed by the shareholder, monies must be paid to the dissenting shareholder within thirty days of the offer being made. If no price is agreed upon, the company must file a petition with the Grand Court of the Cayman Islands for a determination of the fair value of the shares of all dissenting shareholders and any dissenting shareholders is permitted to be involved in those proceedings.
If the arrangement and reconstruction is thus sanctioned by the Grand Court of the Cayman Islands, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
The Cayman Islands Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholders upon a tender offer. When a tender offer is made and accepted by holders of not less than 90% of the shares which are subject to the offer within four months, the offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands.
Shareholders’ Suits and Protection of Minority Shareholders
In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Grand Court can be expected to apply and follow the common law principles (namely the rule derived from the seminal English case of Foss v. Harbottle, and the exceptions thereto, which limits the circumstances in which a shareholder may bring a derivative action on behalf of the company or a personal action to claim loss which is reflective of loss suffered by the company) which permit a minority shareholder to commence a class action against, or derivative actions in the name of the company to challenge the following acts in the following circumstances:
| ● | a company acts or proposes to act illegally or ultra vires; |
| ● | an irregularity in the passing of a resolution which requires a special majority; and |
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| ● | an act which constitutes a fraud on the minority where the wrongdoers are themselves in control of the company, so that they will not cause the company to bring an action. |
In the case of a company (not being a bank) having its share capital divided into shares, the Grand Court may, on the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine the affairs of the company and to report thereon in such manner as the Grand Court shall direct.
Indemnification of Directors and Executive Officers and Limitation of Liability
The Cayman Islands Companies Act does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such indemnification may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages shall incur or sustain by or through their own wilful neglect or default respectively. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he or she owes the following duties to the company — a duty to act in good faith in the best interests of the company, a duty not to make a personal profit based on his or her position as director (unless the company permits him or her to do so), a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party and a duty to exercise powers for the purpose for which such powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
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Shareholder Action by Written Consent
Under the Delaware corporate law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Our articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals
Under the Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the Board of Directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. The Cayman Islands Companies Act does not provide shareholders of a Cayman exempted company with any rights to requisition a general meeting nor any right to put any proposal before a general meeting. However, these rights may be provided in articles of association. Our articles of association allow our shareholders holding 10% or more of the paid up capital of the Company to requisition a general meeting. Other than this right to requisition a general meeting, our articles of association do not provide our shareholders other right to put a proposal before a meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings unless expressly provided under the articles of association.
Cumulative Voting
Under the Delaware corporate law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a Board of Directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the Cayman Islands Companies Act but our articles of association do not provide for cumulative voting.
Removal of Directors
Under the Delaware corporate law, a director of a corporation may be removed with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our articles of association, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
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Transactions with Interested Shareholders
The Delaware corporate law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the Board of Directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s Board of Directors. The Cayman Islands Companies Act has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, as mentioned above the directors have certain fiduciary duties including a duty to act bona fide in the best interests of the company. Our articles of association require directors to disclose the nature of their interest in any contract or transaction at or prior to the Board of Directors’ consideration of such contract or transaction and any vote thereon.
Dissolution; Winding up
Under the Delaware corporate law, unless the Board of Directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the Board of Directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the Cayman Islands Companies Act, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its shareholders. The court has authority to order winding up in a number of specified circumstances, including where it is, in the opinion of the court, just and equitable to do so. Under the Cayman Islands Companies Act and our articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class.
Amendment of Governing Documents
Under the Delaware corporate law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by the Cayman Islands Companies Act, our memorandum and articles of association may only be amended with a special resolution of our shareholders.
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SHARES ELIGIBLE FOR FUTURE SALE
Before our initial public offering, there has not been a public market for our Ordinary Shares, including our Class A Ordinary Shares. Future sales of substantial amounts of Class A Ordinary Shares in the public market after our initial public offering, or the possibility of these sales occurring, could cause the prevailing market price for our Class A Ordinary Shares to fall or impair our ability to raise equity capital in the future.
Upon completion of this offering and assuming the issuance of 6,250,000 Class A Ordinary Shares offered hereby and exclusion of the exercise of underwriter’s over-allotment options, we will have an aggregate of 19,750,000 Class A Ordinary Shares outstanding. The Class A Ordinary Shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act.
All of our Class A Ordinary Shares and Class B Ordinary Shares that will be outstanding upon the completion of this offering, other than those Class A Ordinary Shares sold in this offering are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
| ● | 1% of the number of Ordinary Shares then outstanding, which will equal 197,500 Class A Ordinary Shares immediately after our initial public offering, or |
| ● | the average weekly trading volume of the Ordinary Shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase our Class A Ordinary Shares and Class B Ordinary Shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of our initial public offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.
Regulation S
Regulation S provides generally that sales made in offshore transactions are not subject to the registration or prospectus-delivery requirements of the Securities Act.
Lock-up Agreements
Our directors, executive officers and other holders of 5% or more of our Class A Ordinary Shares and Class B Ordinary Shares have agreed, subject to limited exceptions, not to offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise dispose of, directly or indirectly, or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our ordinary shares or such other securities for a period of 12 months after the date of this prospectus, without the prior written consent of the Representative. See “Underwriting.”
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MATERIAL TAX CONSEQUENCES APPLICABLE TO U.S. HOLDERS OF OUR ORDINARY SHARES
The following sets forth the material Cayman Islands, Chinese and U.S. federal income tax consequences related to an investment in our Class A Ordinary Shares. It is directed to U.S. Holders (as defined below) of our Class A Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our Class A Ordinary Shares, such as the tax consequences under state, local and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold Class A Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this prospectus and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this prospectus, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. Unless otherwise noted in the following discussion, this section is the opinion of Ortoli Rosenstadt LLP, our U.S. counsel, insofar as it relates to legal conclusions with respect to matters of U.S. federal income tax law, and of Tianyuan Law Firm, our PRC counsel, insofar as it relates to legal conclusions with respect to matters of Chinese tax law.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes,
| ● | an individual who is a citizen or resident of the United States; |
| ● | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
| ● | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| ● | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
Generally
Lichen China Limited is an exempted company incorporated in Cayman Islands which is not currently subject to any Cayman Islands taxes. Legend Consulting BVI is a tax-exempt company incorporated in the British Virgin Islands. Legend Consulting HK is subject to Hong Kong law. Lichen Zixun and Lichen Education are subject to PRC laws.
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Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands, except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is a party to a double tax arrangement entered with the United Kingdom in 2010, but otherwise is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
As an exempted company incorporated in the Cayman Islands, the Company is required to pay an annual government fee (“Government Fee”), which is determined on a sliding scale by reference to the level of its authorized share capital. The Government Fee is payable at the end of January in every year and is based on the level of the authorized share capital at the time when the fee is due.
Payments of dividends and capital in respect of our Class A Ordinary Shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our Class A Ordinary Shares, nor will gains derived from the disposal of our Class A Ordinary Shares be subject to Cayman Islands income or corporation tax.
No stamp duty is payable in the Cayman Islands in respect of the issue of the shares or on an instrument of transfer in respect of a share of a Cayman company except those which hold interests in land in the Cayman Islands and except where the relevant document or instrument is executed in or brought to the Cayman Islands, or produced before a Cayman Islands court.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
On March 17, 2017, the State Tax Administration promulgated the “Administrative Measures for Adjustment of Special Tax Investigation and Mutual Consultation Procedures” (State Administration of Tax Practice Announcement No.6, 2017), which came into force on May 1, 2017), which provides that tax authorities have implemented special tax adjustment monitoring and management for enterprises through related declaration review, contemporaneous data management, profit level monitoring and other means. If an enterprise is found to have special tax adjustment risks, the tax authorities may serve a “Notice” to remind such enterprise of the tax risks. If an enterprise receives a special tax adjustment risk alert or finds that it has a special tax adjustment risk, it may adjust the supplementary tax on its own. If the enterprise adjusts the supplementary tax by itself, the tax authorities may still carry out special tax investigation and adjustment in accordance with the relevant provisions. If an enterprise requires the tax authorities to confirm the special tax adjustment matters, such as the pricing principles and methods of related party transactions, the tax authorities shall initiate the special tax investigation procedures. It also stipulates that if the principle of independent transactions is not met, tax authorities may implement a special tax adjustment in the full amount of the amount deducted before tax under the following circumstances:
| (1) | The enterprise and its affiliated parties transfer or accept the right to use intangible assets that do not bring economic benefits and collect or pay royalties; |
| (2) | The enterprise pays royalties to related parties that only own intangible assets but do not contribute to their value; |
| (3) | An enterprise establishes a holding company or a financing company overseas for the main purpose of financing and listing, and pays royalties to overseas affiliated parties only for the incidental benefits arising from the financing and listing activities; |
| (4) | The taxable income or income amount of the enterprise or its affiliated party is reduced because the payment or collection of the price of the labor service transaction between the enterprise and its affiliated party does not meet the principle of independent transactions; and |
| (5) | The enterprise pays fees to overseas related parties that fail to perform their functions, bear risks and have no substantial business activities. |
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Although we believe all our related party transactions, including all payments by our PRC subsidiaries and consolidated affiliated entities to our non-PRC entities, are made on an arm’s-length basis and our estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. We do not believe that Lichen China Limited meets all of the conditions above. Lichen China Limited is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its Board of Directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us.
However, if the PRC tax authorities determine that Lichen China Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 20% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of Class A Ordinary Shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of Lichen China Limited would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that Lichen China Limited is treated as a PRC resident enterprise.
Provided that the Company is not deemed to be a PRC resident enterprise, holders of our Class A Ordinary Shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares. However, under SAT Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee 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. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Circular 7, and we may be required to expend valuable resources to comply with SAT Circular 7, or to establish that we should not be taxed under these circulars. See “Risk Factors — Risks Relating to Doing Business in China — Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
United States Federal Income Tax Considerations
The following discussion is a summary of United States federal income tax considerations relating to the ownership and disposition of our Class A Ordinary Shares by a U.S. holder (as defined below) that holds our Class A Ordinary Shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations and may be changed, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, including investors subject to special tax rules (for example, banks or other financial institutions, insurance companies, broker-dealers, pension plans, cooperatives, traders in securities that have elected the mark-to-market method of accounting for their securities, partnerships and their partners, regulated investment companies, real estate investment trusts, and tax-exempt organizations (including private foundations)), holders who are not U.S. holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, holders who will hold their Class A Ordinary Shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not discuss any non-United States, alternative minimum tax, state, or local tax considerations, or the Medicare tax on net investment income. Each U.S. holder is urged to consult its tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations with respect to the ownership and disposition of our Class A Ordinary Shares.
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General
For purposes of this discussion, a “U.S. holder” is a beneficial owner of our Class A Ordinary Shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under applicable United States Treasury regulations.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our Class A Ordinary Shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our Class A Ordinary Shares and partners in such partnerships are urged to consult their tax advisors as to the particular United States federal income tax consequences of an investment in our Class A Ordinary Shares.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for United States federal income tax purposes, if, in any particular taxable year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the average quarterly value of its assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income. For this purpose, cash is categorized as a passive asset and the company’s unbooked intangibles associated with active business activities may generally be classified as active assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
Based upon our income and assets and the value of our Class A Ordinary Shares, we do not believe that we were a PFIC for the taxable years ended December 31, 2021 and 2020, and do not anticipate becoming a PFIC in the foreseeable future.
Although we do not believe that we were a PFIC for the taxable year ended December 31, 2021 and 2020 and do not anticipate becoming a PFIC in the foreseeable future, the determination of whether we are or will become a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles (which will depend upon the market value of our Class A Ordinary Shares from time-to-time, which may be volatile). In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become a PFIC for the current or future taxable years. It is also possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being or becoming a PFIC for the current or one or more future taxable years.
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The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public offering. If we determine not to deploy significant amounts of cash for active purposes, our risk of being classified as a PFIC may substantially increase. Because our PFIC status for any taxable year is a factual determination that can be made only after the close of a taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. If we are a PFIC for any year during which a U.S. holder held our Class A Ordinary Shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. holder held our Class A Ordinary Shares.
The discussion below under “Dividends” and “Sale or Other Disposition of Ordinary Shares” is written on the basis that we will not be or become a PFIC for United States federal income tax purposes. The United States federal income tax rules that apply if we are a PFIC for the current taxable year or any subsequent taxable year are generally discussed below under “Passive Foreign Investment Company Rules.”
Dividends
Subject to the PFIC rules discussed below, any cash distributions (including the amount of any tax withheld) paid on our Class A Ordinary Shares out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally be includible in the gross income of a U.S. holder as dividend income on the day actually or constructively received by the U.S. holder. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be reported as a “dividend” for United States federal income tax purposes. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a reduced United States federal tax rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met.
A non-United States corporation (other than a corporation that is a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will generally be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. In the event we are deemed to be a resident enterprise under the PRC Enterprise Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty (which the U.S. Treasury Department has determined is satisfactory for this purpose) and in that case we would be treated as a qualified foreign corporation with respect to dividends paid on our Class A Ordinary Shares. Each non-corporate U.S. holder is advised to consult its tax advisors regarding the availability of the reduced tax rate applicable to qualified dividend income for any dividends we pay with respect to our Class A Ordinary Shares. Dividends received on the Class A Ordinary Shares will not be eligible for the dividends received deduction allowed to corporations.
Dividends will generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. In the event that we are deemed to be a PRC “resident enterprise” under the Enterprise Income Tax Law, a U.S. holder may be subject to PRC withholding taxes on dividends paid on our Class A Ordinary Shares. (See “—People’s Republic of China Taxation”). In that case, a U.S. holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on Class A Ordinary Shares. A U.S. holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such U.S. holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. holders are advised to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
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Sale or Other Disposition of Class A Ordinary Shares
Subject to the PFIC rules discussed below, a U.S. holder will generally recognize capital gain or loss upon the sale or other disposition of Class A Ordinary Shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. holder’s adjusted tax basis in such ordinary shares. Any capital gain or loss will be long-term if the Class A Ordinary Shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. Long-term capital gain of non-corporate U.S. holders is generally eligible for a reduced rate of taxation. The deductibility of a capital loss may be subject to limitations. In the event that we are treated as a PRC “resident enterprise” under the Enterprise Income Tax Law and gain from the disposition of the Class A Ordinary Shares is subject to tax in the PRC, a U.S. holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. U.S. holders are advised to consult tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our Class A Ordinary Shares, including the availability of the foreign tax credit under their particular circumstances and the election to treat any gain as PRC source.
Passive Foreign Investment Company Rules
If we are a PFIC for any taxable year during which a U.S. holder holds our Class A Ordinary Shares, and unless the U.S. holder makes a mark-to-market election (as described below), the U.S. holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, for subsequent taxable years, on (i) any excess distribution that we make to the U.S. holder (which generally means any distribution paid during a taxable year to a U.S. holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. holder’s holding period for the Class A Ordinary Shares), and (ii) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of Class A Ordinary Shares. Under the PFIC rules:
| ● | such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the Class A Ordinary Shares; |
| ● | such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior to the first taxable year in which we are a PFIC, or pre-PFIC year, will be taxable as ordinary income; |
| ● | such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for that year; and |
| ● | an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. |
If we are a PFIC for any taxable year during which a U.S. holder holds our Class A Ordinary Shares and any of our non-United States subsidiaries is also a PFIC, such U.S. holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. holders are advised to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. holder of “marketable stock” in a PFIC may make a mark-to-market election. Since we plan to have our Class A Ordinary Shares listed on Nasdaq, and provided that the Class A Ordinary Shares will be regularly traded on Nasdaq, a U.S. holder holds Class A Ordinary Shares will be eligible to make a mark-to-market election if we are or were to become a PFIC. If a mark-to-market election is made, the U.S. holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of Class A Ordinary Shares held at the end of the taxable year over the adjusted tax basis of such Class A Ordinary Shares and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the Class A Ordinary Shares over the fair market value of such Class A Ordinary Shares held at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. holder’s adjusted tax basis in the Class A Ordinary Shares would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. holder makes an effective mark-to-market election, in each year that we are a PFIC, any gain recognized upon the sale or other disposition of the Class A Ordinary Shares will be treated as ordinary income and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If a U.S. holder makes a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the Class A Ordinary Shares are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election.
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If a U.S. holder makes a mark-to-market election in respect of a PFIC and such corporation ceases to be a PFIC, the U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not a PFIC.
Because a mark-to-market election cannot be made for any lower-tier PFICs that a PFIC may own, a U.S. holder who makes a mark-to-market election with respect to our Class A Ordinary Shares may continue to be subject to the general PFIC rules with respect to such U.S. holder’s indirect interest in any of our non-United States subsidiaries if any of them is a PFIC.
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if available, would result in tax treatment different from the general tax treatment for PFICs described above.
As discussed above under “Dividends,” dividends that we pay on our Class A Ordinary Shares will not be eligible for the reduced tax rate that applies to qualified dividend income if we are a PFIC for the taxable year in which the dividend is paid or the preceding taxable year. In addition, if a U.S. holder owns our Class A Ordinary Shares during any taxable year that we are a PFIC, such holder would generally be required to file an annual IRS Form 8621. Each U.S. holder is advised to consult its tax advisors regarding the potential tax consequences to such holder if we are or become a PFIC, including the possibility of making a mark-to-market election.
Information Reporting
Certain U.S. holders may be required to report information to the IRS relating to an interest in “specified foreign financial assets,” including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000 (or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including an exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose penalties if a U.S. holder is required to submit such information to the IRS and fails to do so.
In addition, U.S. holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our Class A Ordinary Shares. Each U.S. holder is advised to consult with its tax advisor regarding the application of the United States information reporting rules to their particular circumstances.
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ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of the Cayman Islands with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as:
| ● | political and economic stability; |
| ● | an effective judicial system; |
| ● | a favorable tax system; |
| ● | the absence of exchange control or currency restrictions; and |
| ● | the availability of professional and support services. |
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:
| ● | the Cayman Islands has a less developed body of securities laws as compared to the United States and provides fewer protections to investors; and |
| ● | Cayman Islands companies may not have standing to sue before the federal courts of the United States. |
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.
Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against them or against us, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
We have appointed Cogency Global Inc as our agent upon whom process may be served in 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 of 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.
Tianyuan Law Firm, our counsel as to Chinese law, has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the Cayman Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.
According to the Civil Procedure Law of the People’s Republic of China (amended in 2017), if a legally effective judgment or ruling made by a foreign court requires recognition and enforcement by a people’s court of the People’s Republic of China, the party concerned may directly apply to an intermediate people’s court with jurisdiction over for recognition and enforcement, or the foreign court may request recognition and enforcement by a people’s court in accordance with the provisions of an international treaty concluded or acceded to by the country and the People’s Republic of China, or in accordance with the principle of reciprocity.
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If the people’s courts are of the opinion that the legally effective judgment or ruling made by the foreign court applying for or requesting recognition and enforcement does not violate the basic principles of the laws of the People’s Republic of China or the sovereignty, security and public interests of the country after the people’s court reviews the legally effective judgment or ruling made by the foreign court applying for or requesting recognition and enforcement in accordance with the international treaties concluded or acceded to by the People’s Republic of China or in accordance with the principle of reciprocity, then the people’s court shall issue a ruling that recognizes its validity and, if enforcement is necessary, issues an enforcement order, which order shall be implemented in accordance with the relevant laws. A judgment or ruling that violates the basic principles of the laws of the People’s Republic of China or the sovereignty, security and public interests of the country will not be recognized and implemented.
If an award made by a foreign arbitration institution requires recognition and enforcement by the people’s court of the People’s Republic of China, the party concerned shall directly apply to the intermediate people’s court in the place where the person subjected to enforcement has his domicile or where his property is located. The people’s court shall handle the matter in accordance with international treaties concluded or acceded to by the People’s Republic of China or in accordance with the principle of reciprocity.
We have been advised by Appleby, our counsel as to Cayman Islands law, that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. We have been further advised that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, any final and conclusive judgment for a definite sum (not being a sum payable in respect of taxes or other charges of a like nature nor a fine or other penalty) and/or certain non-monetary judgments rendered in any action or proceedings brought against the Company in a court in the United States will be recognized as a valid judgment by the courts of the Cayman Islands without re-examination of the merits of the case, provided that the court which gave the judgment was competent to hear the action in accordance with private international law principles as applied in the Cayman Islands and the judgment is not contrary to public policy in the Cayman Islands, has not been obtained by fraud or in proceedings contrary to natural justice.
We believe that there is uncertainty as to whether the courts of the BVI 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 BVI against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. We believe that the United States and the BVI do not have a treating providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws would not be enforceable in the BVI. A final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable as compensatory damages (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the BVI under the common law doctrine of obligation. Furthermore, it is uncertain that BVI courts would: (1) recognize or enforce judgments of U.S. courts obtained in actions against us or our directors or officers predicated upon the civil liability provisions of the U.S. federal securities laws; or (2) entertain original actions brought against us or other persons predicated upon the Securities Act.
We believe that there is uncertainty as to whether the courts of Hong Kong would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in Hong Kong against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. A judgment of a court in the United States predicated upon U.S. federal or state securities laws may be enforced in Hong Kong at common law by bringing an action in a Hong Kong court on that judgment for the amount due thereunder, and then seeking summary judgment on the strength of the foreign judgment, provided that the foreign judgment, among other things, is (1) for a debt or a definite sum of money (not being taxes or similar charges to a foreign government taxing authority or a fine or other penalty) and (2) final and conclusive on the merits of the claim, but not otherwise. Such a judgment may not, in any event, be so enforced in Hong Kong if (a) it was obtained by fraud; (b) the proceedings in which the judgment was obtained were opposed to natural justice; (c) its enforcement or recognition would be contrary to the public policy of Hong Kong; (d) the court of the United States was not jurisdictionally competent; or (e) the judgment was in conflict with a prior Hong Kong judgment. Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, there is uncertainty as to the enforceability in Hong Kong, in original actions or in actions for enforcement, of judgments of United States courts of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any State or territory within the United States.
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We will enter into an underwriting agreement with Univest Securities, LLC, or the representative, to act as the representative of the underwriters named below. Subject to the terms and conditions of the underwriting agreement, the underwriters named below have agreed to purchase, and we have agreed to sell to them, the number of our Class A Ordinary Shares at the initial public offering price, less the underwriting discounts, as set forth on the cover page of this prospectus and as indicated below:
| Name | Number of Class A Ordinary Shares | |||
| Univest Securities, LLC | [● | ] | ||
| Total | 6,250,000 | |||
The underwriters are offering the shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.
We have granted to the representative an option, exercisable for 45 days from the closing of this offering, to purchase up to an additional 937,500 Class A Ordinary Shares at the initial public offering price listed on the cover page of this prospectus, less underwriting discounts. The option may be exercised in whole or in part, and may be exercised more than once, during the 45-day option period. The representative may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering contemplated by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase the same percentage of the additional shares as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares listed next to the names of all underwriters in the preceding table.
The underwriters will offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $0.28 per share. After this offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representative. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The securities are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.
Discounts and Expenses
The underwriting discounts are equal to 7% of the initial public offering price.
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The following table shows the price per share and total initial public offering price, underwriting discounts, and proceeds before expenses to us. The total amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option.
| Total | ||||||||||||
| Per Share | No Exercise of Over-allotment Option | Full Exercise of Over-allotment Option | ||||||||||
| Initial public offering price | $ | 4.00 | $ | 25,000,000 | $ | 28,750,000 | ||||||
| Underwriting discounts to be paid by us | $ | 0.28 | $ | 1,750,000 | $ | 2,012,500 | ||||||
| Proceeds to us, before expenses | $ | 3.72 | $ | 23,250,000 | $ | 26,737,500 | ||||||
We will also pay to the representative by deduction from the net proceeds of the offering contemplated herein, a non-accountable expense allowance equal to 1.0% of the gross proceeds received by us from the sale of the shares, including any shares issued pursuant to the exercise of the representative’s over-allotment option.
We have agreed to reimburse the representative up to a maximum of $250,000 for out-of-pocket accountable expenses (including the legal fees and other disbursements as disclosed below). As of the date of this prospectus, we have paid $30,000 to the representative as an advance against out-of-pocket accountable expenses. Any expenses advancement will be returned to us to the extent the representative’s out-of-pocket accountable expenses are not actually incurred in accordance with FINRA Rule 5110(g)(4)(A).
We estimate that the total expenses of the offering payable by us, excluding the underwriting discounts and non-accountable expense allowance, will be approximately $1,440,758.
Underwriters Warrants
In addition, we have agreed to issue the warrants, for a nominal consideration of $0.01, to the representative to purchase up to an aggregate number of ordinary shares equal to one percent (1%) of the total number of Class A Ordinary Shares sold in this offering, including any shares issued pursuant to the exercise of the representative’s over-allotment option. Such warrants shall have an exercise price equal to 120% of the initial public offering price of the Class A Ordinary Shares sold in this offering. The representative’s warrants may be purchased in cash or via cashless exercise, will be exercisable for five years from the commencement of sales in this offering and will terminate on the fifth anniversary of the date of commencement of sales of this offering. The representative’s warrants and the underlying shares will be deemed compensation by FINRA, and therefore will be subject to FINRA Rule 5110(e). In accordance with FINRA Rule 5110(e)(1), and except as otherwise permitted by FINRA rules, neither the representative’s warrants nor any of our shares issued upon exercise of the representative’s warrants may be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities by any person, for a period of 180 days beginning on the date of commencement of sales of the offering. In addition, although the representative’s warrants and the underlying ordinary shares are being registered in the registration statement of which this prospectus forms a part, we have also agreed that the warrants will provide for registration rights in certain cases. These registration rights apply to all of the securities directly and indirectly issuable upon exercise of the underwriter warrants. The one demand registration right provided will not be greater than five years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(D). The piggyback registration right provided will not be greater than seven years from the commencement of sales of the public offering in compliance with FINRA Rule 5110(g)(8)(C).
We will bear all fees and expenses attendant to registering the ordinary shares underlying the representative’s warrants, other than any underwriting commissions incurred and payable by the warrant holders. The exercise price and number of ordinary shares issuable upon exercise of the representative’s warrants may be adjusted in certain circumstances, including in the event of a share dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. The warrant exercise price and/or underlying shares may also be adjusted for issuances of ordinary shares at a price below the warrant exercise price.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
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Right of First Refusal
We have agreed to grant the representative of the underwriters for the 12-month period following the closing of this offering, a right of first refusal to provide investment banking services to the Company on an exclusive basis in all matters for which investment banking services are sought by the Company. In accordance with FINRA Rule 5110(g)(6)(A)(i), such right of first refusal shall not have a duration of more than three years from the commencement of sales of this offering or the termination date of the engagement between the us and the underwriters.
Lock-Up Agreements
We have agreed, for a period of twelve months from the date of this prospectus, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of, or otherwise dispose of, except in this offering, any of our ordinary shares or securities that are substantially similar to our ordinary shares, including but not limited to any options or warrants to purchase our ordinary shares, or any securities that are convertible into or exchangeable for, or that represent the right to receive, our ordinary shares or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date such lock-up agreement was executed), without the prior written consent of the representative.
Our officers, directors and 5% or greater shareholders have agreed, subject to certain exceptions, to a twelve-month lock-up period from the date of this prospectus, with respect to the Class A or Class B Ordinary Shares that they beneficially own, including the issuance of shares upon the exercise of convertible securities and options that may be currently outstanding or which may be issued. This means that, for a period of twelve months following the date of this prospectus, such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of the representative or as otherwise agreed.
The representative has no present intention to waive or shorten the lock-up period; however, the terms of the lock-up agreements may be waived at its discretion. In determining whether to waive the terms of the lock-up agreements, the representative may base its decision on its assessment of the relative strengths of the securities markets and companies similar to ours in general, and the trading pattern of, and demand for, our securities in general.
Listing
We intend to apply to list our ordinary shares on the Nasdaq Capital Market under the symbol “LICN.” We make no representation that such application will be approved or that our ordinary shares will trade on such market either now or at any time in the future. However, we will not complete this offering unless we are so listed.
Electronic Offer, Sale and Distribution
A prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters or selling group members, if any, or by their affiliates, and the underwriters may distribute prospectus electronically. The underwriters may agree to allocate a number of ordinary shares to selling group members for sale to their online brokerage account holders. The ordinary shares to be sold pursuant to internet distributions will be allocated on the same basis as other allocations. Other than the prospectus in electronic format, the information on, or that can be accessed through, these websites and any information contained in any other website maintained by these entities is not part of, and is not incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters, and should not be relied upon by investors.
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.
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Passive Market Making
Any underwriter who is a qualified market maker on Nasdaq may engage in passive market making transactions on Nasdaq, in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. Passive market makers must comply with applicable volume and price limitations and must be identified as a passive market maker. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security. If all independent bids are lowered below the passive market maker’s bid, however, the passive market maker’s bid must then be lowered when certain purchase limits are exceeded.
Pricing of this Offering
Prior to this offering, there has been no public market for our ordinary shares. The initial public offering price for our ordinary shares will be determined through negotiations between us and the representative. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representative believe to be comparable to us, estimate of our business potential and earning prospects, the present state of our development and other factors deemed relevant. The initial public offering price of our ordinary shares in this offering does not necessarily bear any direct relationship to the assets, operations, book or other established criteria of value of our company.
Potential Conflicts of Interest
The underwriters and their affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In the ordinary course of their various business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own accounts and for the accounts of their customers and such investment and securities activities may involve securities and/or instruments of our Company. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
No Sales of Similar Securities
We have agreed not to offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any ordinary shares or any securities convertible into or exercisable or exchangeable for ordinary shares or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our ordinary shares, whether any such transaction is to be settled by delivery of ordinary shares or such other securities, in cash or otherwise, without the prior written consent of the representative, for a period of 180 days from the date of this prospectus.
Selling Restrictions
Other than in the United States, no action may be taken, and no action has been taken, by us or the underwriters that would permit a public offering of the ordinary shares offered by, or the possession, circulation or distribution of, this prospectus in any jurisdiction where action for that purpose is required. The ordinary shares offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any ordinary shares offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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In addition to the offering of the ordinary shares in the United States, the underwriters may, subject to applicable foreign laws, also offer the ordinary shares in certain countries.
Stamp Taxes
If you purchase ordinary shares offered by this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the initial public offering price listed on the cover page of this prospectus.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the ordinary shares offered by this prospectus is completed, rules of the SEC may limit the ability of the underwriters to bid for and to purchase our ordinary shares. As an exception to these rules, the underwriters may engage in transactions effected in accordance with Regulation M under the Exchange Act that are intended to stabilize, maintain or otherwise affect the price of our ordinary shares. The underwriters may engage in over-allotment sales, syndicate covering transactions, stabilizing transactions and penalty bids in accordance with Regulation M.
| ● | Stabilizing transactions consist of bids or purchases made by the managing underwriter for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress. |
| ● | Short sales and over-allotments occur when the managing underwriter, on behalf of the underwriting syndicate, sells more of our shares than they purchase from us in this offering. In order to cover the resulting short position, the managing underwriter may exercise the over-allotment option described above and/or may engage in syndicate covering transactions. There is no contractual limit on the size of any syndicate covering transaction. The underwriters will deliver a prospectus in connection with any such short sales. Purchasers of shares sold short by the underwriters are entitled to the same remedies under the federal securities laws as any other purchaser of units covered by the registration statement. |
| ● | Syndicate covering transactions are bids for or purchases of our securities on the open market by the managing underwriter on behalf of the underwriters in order to reduce a short position incurred by the managing underwriter on behalf of the underwriters. |
| ● | A penalty bid is an arrangement permitting the managing underwriter to reclaim the selling concession that would otherwise accrue to an underwriter if the ordinary shares originally sold by the underwriter were later repurchased by the managing underwriter and therefore were not effectively sold to the public by such underwriter. |
Stabilization, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our ordinary shares or preventing or delaying a decline in the market price of our ordinary shares. As a result, the price of our ordinary shares may be higher than the price that might otherwise exist in the open market.
Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of our ordinary shares. These transactions may occur on Nasdaq or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.
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Notice to Prospective Investors in Hong Kong
The contents of this prospectus have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice. Please note that (i) our shares may not be offered or sold in Hong Kong, by means of this prospectus or any document other than to “professional investors” within the meaning of Part I of Schedule 1 of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) (SFO) and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32, Laws of Hong Kong) (CO) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO, and (ii) no advertisement, invitation or document relating to our shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the SFO and any rules made thereunder.
Notice to Prospective Investors in the People’s Republic of China
This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws, rules and regulations of the PRC. For the purpose of this paragraph only, the PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.
Notice to Prospective Investors in Taiwan, the Republic of China
The Class A Ordinary Shares have not been and will not be registered with the Financial Supervisory Commission of Taiwan, the Republic of China, pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in any manner which would constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or would otherwise require registration with or the approval of the Financial Supervisory Commission of Taiwan.
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EXPENSES RELATING TO THIS OFFERING
Set forth below is an itemization of the total expenses, excluding underwriting discounts, that we expect to incur in connection with this offering. With the exception of the SEC registration fee, the Nasdaq listing fee and the FINRA filing fee, all amounts are estimates.
| Securities and Exchange Commission Registration Fee | $ | 2,485 | ||
| Nasdaq listing fee | $ | 75,000 | ||
| FINRA | $ | 3,273 | ||
| Legal Fees and Expenses | $ | 575,000 | ||
| Accounting Fees and Expenses | $ | 600,000 | ||
| Printing and Engraving Expenses | $ | 20,000 | ||
| Transfer Agent | $ | 15,000 | ||
| Miscellaneous | $ | 150,000 | ||
| Total Expenses | $ | 1,440,758 |
Under the Underwriting Agreement, we will pay underwriting discounts equal to 7% of the public offering price multiplied by the shares sold in the offering. In addition, we will also pay the Representative a non-accountable expenses of 1% of the gross proceeds raised in the offering, in addition to its accountable expenses relating to the Offering, including but not limited to reasonable travel and out-of-pocket expenses, including due diligence and legal expense, up to $250,000.
Ortoli Rosenstadt LLP is acting as counsel to our company regarding U.S. securities law matters. The validity of the Class A Ordinary Shares offered hereby will be opined upon for us by Appleby. Hunter Fischer Taubman & Li, LLC is acting as U.S. securities counsel to Univest Securities LLC. Certain legal matters as to PRC law will be passed upon for us by Tianyuan Law Firm for the Company. Ortoli Rosenstadt LLP may rely upon Appleby with respect to matters governed by the law of the Cayman Islands and Tianyuan Law Firm with respect to matters governed by PRC law.
The consolidated financial statements of the Company for the year ended December 31, 2021, as set forth in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of TPS Thayer, an independent registered public accounting firm, given on their authority as experts in accounting and auditing. The office of TPS Thayer is located at 1600 Hwy 6 Suite 100, Sugar Land, TX 77478. The consolidated financial statements of the Company for the year ended December 31, 2020, as set forth in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of Briggs & Veselka Co., an independent registered public accounting firm, given on their authority as experts in accounting and auditing. The office of Briggs & Veselka Co. is located at 9 Greenway Plaza #1700, Houston, TX 77046.
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Changes in Company’s Certifying Accountant
| (1) | Previous Independent Registered Public Accounting Firm |
| (i) | In January 2022, Crowe LLP (“Crowe”) acquired Briggs & Veselka Co. (“B&V”). As a result, B&V withdrew its registration from the Public Company Accounting Oversight Board (“PCAOB”) on January 27, 2022. The Company was informed by B&V of the acquisition in January before it withdrew its registration. Since Crowe no longer provides audit services to foreign private issuers, the Company terminated its engagement with B&V as its independent registered public accounting firm on January 4, 2022. |
| (ii) | The reports of B&V on the financial statements of the Company for the fiscal years ended December 31, 2020, and the related statements of operations and comprehensive income (loss), changes in stockholders’ equity (deficit), and cash flows for the fiscal years ended December 31, 2020 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. |
| (iii) | The decision to change the independent registered public accounting firm was approved by the Board of Directors of the Company. |
| (iv) | During the Company’s most recent fiscal year ended December 31, 2021 and through January 4, 2022, the date of dismissal, (a) there were no disagreements with B&V on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of B&V, would have caused it to make reference thereto in its reports on the financial statements for such years and (b) there were no “reportable events” as described in Item 304(a)(1)(v) of Regulation S-K. |
| (2) | New Independent Registered Public Accounting Firm |
The Company then engaged TPS Thayer, LLC (“TPS”) as the successor independent registered public accounting firm on January 12, 2022. TPS was one of the public accounting firms referred and introduced by B&V. After the introduction, the Company conducted a thorough due diligence on TPS, including their track record with China- based issuers, their bilingual competence and professional knowledge. The Board of Directors of the Company ratified the appointment of TPS as its new independent registered public accounting firm to audit the Company’s financial statements.
On January 12, 2022, the Board of Directors of the Company approved and ratified the appointment of TPS Thayer, LLC (“TPS”) as its new independent registered public accounting firm to audit and review the Company’s financial statements for the fiscal year ended December 31, 2021. During the two fiscal years ended December 31, 2020 and 2019 and any subsequent interim periods through the date hereof prior to the engagement of TPS, neither the Company, nor someone on its behalf, has consulted TPS regarding:
| (i) | either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company or oral advice was provided that the new independent registered public accounting firm concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or |
| (ii) | any matter that was either the subject of a disagreement as defined in paragraph 304(a)(1)(iv) of Regulation S-K or a reportable event as described in paragraph 304(a)(1)(v) of Regulation S-K. |
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the Class A Ordinary Shares offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the Class A Ordinary Shares offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. However, statements in the prospectus contain the material provisions of such contracts, agreements and other documents. We currently do not file periodic reports with the SEC. Upon closing of our public offering, we will be required to file periodic reports and other information with the SEC pursuant to the Exchange Act. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lichen China Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Lichen China Limited. (“the Company”), as of December 31, 2021, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year ended December 31, 2021 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year ended December 31, 2021, in conformity with U.S generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provided a reasonable basis for our opinion.
/s/ TPS Thayer, LLC
We have served as the Company’s auditor since 2022
Sugar Land, Texas
May 2, 2022
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lichen China Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lichen China Limited and subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Briggs & Veselka Co.
Houston, Texas
August 12, 2021, except for Note 1 and Note 10, as to which the date is January 14, 2022
We have served as the Company’s auditor since 2021.
F-3
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2020
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 16,845 | $ | 8,665 | ||||
| Accounts receivable | 3,942 | 2,417 | ||||||
| Other receivables – related party | 419 | 416 | ||||||
| Inventories | 150 | 23 | ||||||
| Prepayments, deposits, and other current assets | 2,532 | 130 | ||||||
| Total current assets | 23,888 | 11,651 | ||||||
| Property and equipment, net | 14,937 | 15,771 | ||||||
| Intangible assets, net | 3,868 | 5,589 | ||||||
| Other assets | 250 | 337 | ||||||
| Total assets | $ | 42,943 | $ | 33,348 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 123 | $ | 95 | ||||
| Accrued expenses and other current liabilities | 3,061 | 3,018 | ||||||
| Unearned revenues | 1,273 | 1,103 | ||||||
| Taxes payable | 1,203 | 1,049 | ||||||
| Due to the related parties | 106 | 103 | ||||||
| Short-term bank loan | 345 | 337 | ||||||
| Total current liabilities | 6,111 | 5,705 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Class A Ordinary Share, $0.00004 par value, 1,000,000,000 shares authorized; 13,500,000 shares issued and outstanding | 1 | 1 | ||||||
| Class B Ordinary Share, $0.00004 par value, 250,000,000 shares authorized; 9,000,000 shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 1,487 | 1,487 | ||||||
| Statutory surplus reserves | 789 | 789 | ||||||
| Retained earnings | 33,014 | 24,552 | ||||||
| Accumulated other comprehensive income | 1,541 | 814 | ||||||
| Total shareholders’ equity | 36,832 | 27,643 | ||||||
| Total liabilities and shareholders’ equity | $ | 42,943 | $ | 33,348 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
| 2021 | 2020 | |||||||
| Revenues | ||||||||
| Financial and taxation solution services | $ | 26,491 | $ | 23,338 | ||||
| Education support services | 4,635 | 4,558 | ||||||
| Software and maintenance services | 3,169 | 2,771 | ||||||
| Total revenues | 34,295 | 30,667 | ||||||
| Cost of revenues | (13,820 | ) | (11,831 | ) | ||||
| Gross profit | 20,475 | 18,836 | ||||||
| Operating expenses: | ||||||||
| Selling and marketing | (2,009 | ) | (1,590 | ) | ||||
| General and administrative | (7,168 | ) | (8,459 | ) | ||||
| Total operating expenses | (9,177 | ) | (10,049 | ) | ||||
| Income from operations | 11,298 | 8,787 | ||||||
| Other income (expense) | ||||||||
| Other income, net | 188 | 106 | ||||||
| Interest income | 28 | 103 | ||||||
| Income before income tax | 11,514 | 8,996 | ||||||
| Provision for income tax | (3,052 | ) | (2,589 | ) | ||||
| Net income | $ | 8,462 | $ | 6,407 | ||||
| Comprehensive income: | ||||||||
| Net income | $ | 8,462 | $ | 6,407 | ||||
| Foreign currency translation adjustments | 727 | 1,859 | ||||||
| Comprehensive income | $ | 9,189 | $ | 8,266 | ||||
| Weighted average number of ordinary shares outstanding – basic and diluted | 22,500,000 | 22,500,000 | ||||||
| Earnings per ordinary share – basic and diluted | 0.38 | 0.28 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
Class A Ordinary Shares (US$ 0.00004 par value) | Class B Ordinary Shares (US$ 0.00004 par value) | Additional paid-in | Statutory surplus | Retained | Accumulated other comprehensive income | Total shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | reserves | earnings | (loss) | equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 13,500,000 | $ | 1 | 9,000,000 | - | $ | 1,487 | $ | 789 | $ | 22,493 | $ | (1,045 | ) | 23,725 | |||||||||||||||||||||
| Net income | - | - | - | - | - | - | 6,407 | - | 6,407 | |||||||||||||||||||||||||||
| Dividend | - | - | - | - | - | - | (4,348 | ) | - | (4,348 | ) | |||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | - | - | 1,859 | 1,859 | |||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 13,500,000 | $ | 1 | 9,000,000 | - | $ | 1,487 | $ | 789 | $ | 24,552 | $ | 814 | $ | 27,643 | |||||||||||||||||||||
| Net income | - | - | - | - | - | - | 8,462 | - | 8,462 | |||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | - | - | 727 | 727 | |||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 13,500,000 | $ | 1 | 9,000,000 | $ | - | $ | 1,487 | $ | 789 | $ | 33,014 | $ | 1,541 | $ | 36,832 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(All amounts in thousands of USD, except for share and per share data, unless otherwise noted)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 8,462 | $ | 6,407 | ||||
| Adjustments to reconcile net income to net cash provided by activities: | ||||||||
| Depreciation of property and equipment | 660 | 719 | ||||||
| Amortization of intangible assets | 1,786 | 1,441 | ||||||
| Amortization of other assets | 93 | 87 | ||||||
| Loss on disposal of property and equipment | (30 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,451 | ) | (465 | ) | ||||
| Prepayments and other current assets | (2,370 | ) | (6 | ) | ||||
| Other receivables – related party | 7 | (1,007 | ) | |||||
| Accounts payable | 25 | 4 | ||||||
| Unearned revenues | 142 | (145 | ) | |||||
| Accrued expenses and other current liabilities | (26 | ) | 71 | |||||
| Due to the related parties | 1 | 886 | ||||||
| Tax payables | 131 | 347 | ||||||
| Inventories | (126 | ) | 11 | |||||
| Net cash provided by operating activities | 7,304 | 8,350 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of intangible assets | - | (1,160 | ) | |||||
| Purchases of property and equipment | (28 | ) | - | |||||
| Disposal of property and equipment | 589 | - | ||||||
| Net cash provided by (used in) investing activities | 561 | (1,160 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Dividend paid | - | (4,348 | ) | |||||
| Net cash provided by (used in) financing activities | - | (4,348 | ) | |||||
| Effects of foreign currency exchange rate changes on cash | 315 | 433 | ||||||
| Net increase in cash | 8,180 | 3,275 | ||||||
| Cash, beginning of year | 8,665 | 5,390 | ||||||
| Cash, end of year | $ | 16,845 | $ | 8,665 | ||||
| Supplemental disclosure of cash flows information: | ||||||||
| Cash paid for income taxes | $ | 2,976 | $ | 2,310 | ||||
| Cash paid for interest | $ | 15 | $ | 15 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Lichen China Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND NATURE OF OPERATIONS |
Legend China Limited was incorporated in the Cayman Islands on April 13, 2016 as a limited liability company. Pursuant to a special resolution dated November 8, 2016, Legend China Limited changed its name to Legend China Ltd. Pursuant to a special resolution dated April 6, 2017, Legend China Ltd. changed its name to Lichen China Limited. (“Lichen”).
Lichen is an investment holding company. Through its wholly owned subsidiaries, Lichen is principally engaged in the provision of: (i) financial and taxation solution services; (ii) education support services to partnered institutions; and (iii) software and maintenance services.
Lichen owns 100% interests in its subsidiaries, all of which are private limited liability companies, the particulars of which are set out below:
| Name of subsidiaries | Place of incorporation | Date of incorporation | Percentage of direct or indirect interests | Principal activities | ||||||
| Legend Consulting Investments Limited (“Legend Consulting BVI”) | The British Virgin Islands (“BVI”) | December 20, 2013 | 100 | % | Investment holding | |||||
| Legend Consulting Limited (“Legend Consulting HK”) | Hong Kong | January 8, 2014 | 100 | % | Investment holding | |||||
| Fujian Province Lichen Management and Consulting Company Limited (“Lichen Zixun”) | Fujian, the People’s Republic of China (“PRC”) | April 14, 2004 | 100 | % | Provision of financial and taxation solution services, education support services and software and maintenance services | |||||
| Xiamen City Legend Education Services Company Limited (“Lichen Education”) | Fujian, PRC | July 30, 2014 | 100 | % | Provision of financial and taxation solution services and education support services | |||||
F-8
As shown above, Legend Consulting BVI is an investment holding company wholly owned by Lichen.
Legend Consulting HK is an investment holding company wholly owned by Legend Consulting BVI.
Lichen Zixun, which is wholly owned by Legend Consulting HK, is engaged in providing financial and taxation solution services and education support services.
Lichen Education, which is wholly owned by Lichen Zixun, is engaged in providing financial and taxation solution services and education support services.
Reorganization and Share Issuance
On April 28, 2021, Lichen passed a resolution to increase the share capital. Pursuant to such resolution, the authorized share capital of Lichen was increased from HK$50,000 divided into 5,000,000 shares with a nominal or par value of HK$0.01 each (“HKD Shares”) to the aggregate of (i) HK$50,000 divided into 5,000,000 HKD Shares and (ii) US$50,000 divided into (a) 400,000,000 Class A Ordinary Shares with a nominal or par value of US$0.0001 each and (b) 100,000,000 Class B Ordinary Shares with a nominal or par value of US$0.0001 each. 5,400,000 Class A Ordinary Shares and 3,600,000 Class B Ordinary Shares (collectively, the “USD Shares”) were issued at the consideration of US$0.0001 per share. Upon the completion of the share issuance, all HKD Shares issued were repurchased by Lichen at the consideration HK$0.01 per share and cancelled immediately upon repurchase. Upon completion of the repurchase, the 5,000,000 unissued HKD Shares of the Company were cancelled resulting in the reduction of the authorized share capital of the Company to US$50,000 divided into (a) 400,000,000 Class A Ordinary Shares with a nominal or par value of US$0.0001 each and (b) 100,000,000 Class B Ordinary Shares with a nominal or par value of US$0.0001, each in accordance with section 13 of the Cayman Islands Companies Act. The issuance of 5,400,000 Class A Ordinary Shares and 3,600,000 Class B Ordinary Shares, the repurchase and the cancellation of HKD Shares were completed on April 28, 2021.
On December 15, 2021, Lichen executed a special resolution to change the par value of the ordinary shares from $0.0001 to $0.00004. Pursuant to such resolution, the authorized share capital of Lichen was US$50,000 divided into (a) 1,000,000,000 Class A Ordinary Shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 Class B Ordinary Shares with a nominal or par value of US$0.00004, each in accordance with section 13 of the Cayman Islands Companies Act. The changes were completed on December 23, 2021.
The consideration paid by Lichen and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the consolidated financial statements.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements include the financial statements of Lichen and its wholly owned subsidiaries (collectively, the “Company”). All significant inter-company transactions and balances have been eliminated upon consolidation.
F-9
Use of estimate and assumptions
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, useful lives of long-lived assets, impairment of long-lived assets, allowance for deferred tax assets, and uncertain tax position. Actual results could differ from these estimates.
Risk and uncertainty – the outbreak of COVID-19
The outbreak and spread of the Coronavirus Disease 2019 (the “COVID-19”) throughout PRC and worldwide has caused significant volatility in the PRC markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities, and school closures. The Directors consider that the COVID-19 outbreak would not have a material financial impact to the Company. However, given the inherent unpredictable nature and rapid development relating to COVID-19, the Company’s business might be affected should the situation in PRC deteriorate in 2022.
Functional currency and foreign currency translation
The reporting currency of the Company is the United States dollar (“US$”). The Company’s operations are principally conducted through its subsidiaries in PRC in the local currency, Renminbi (RMB), as its functional currency. The functional currency of the Company’s entities incorporated in Hong Kong is the Hong Kong dollars (“HK$”). The determination of the respective functional currency is based on the criteria of Accounting Standard Codification (“ASC”) 830, Foreign Currency Matters. Assets and liabilities are translated at the unified exchange rate as quoted by the PBOC (“The People’s Bank of China”) at the balance sheet date. The statement of income accounts is translated at the average exchange rates for the periods and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss). Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated other comprehensive income (loss) amounted to $1.54 million and $0.81 million as of December 31, 2021 and 2020, respectively. The shareholders’ equity accounts were stated at their historical rate. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Translation of foreign currencies into US$1 have been made at the following exchange rates for the respective periods:
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Period-end RMB: US$1 exchange rate | 6.3757 | 6.5249 | ||||||
| Period-end HK$: US$1 exchange rate | 7.7981 | 7.7530 | ||||||
F-10
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Period-average RMB: US$1 exchange rate | 6.4515 | 6.8976 | ||||||
| Period-average HK$: US$1 exchange rate | 7.7729 | 7.7562 | ||||||
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence, such as a family member or relative, shareholder, or a related corporation.
Fair value of financial instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
The fair value of the Company’s financial instruments, including cash, accounts receivable, other receivables – related party, accounts payable, accrued expenses and other current liabilities, due to the related parties, and short-term bank loans, approximate their recorded values due to their short-term maturities as of December 31, 2021 and 2020.
Cash
Cash represents demand deposits placed with banks, which are unrestricted as to withdrawal or use. The Company maintains most of its bank accounts in the PRC.
Accounts receivable and allowance for doubtful accounts
Accounts receivable represents the Company’s right to consideration in exchange for goods and services that the Company has transferred to the customers before payment is due. Accounts receivable is stated at the historical carrying amount, net of an estimated allowance for uncollectible accounts. The Company reviews on a periodic basis for doubtful accounts for the outstanding trade receivable balances based on historical collection trends, aging of receivables and other information available. Additionally, the Company evaluates individual customer’s financial condition, credit history, and the current economic conditions to make specific bad debt provisions when it is considered necessary, based on (i) the Company’s specific assessment of the collectability of all significant accounts; and (ii) any specific knowledge we have acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial judgment in assessing its collectability. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. There was no allowance for doubtful accounts deemed necessary as of December 31, 2021 and 2020, respectively.
F-11
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost elements of inventories comprise the purchase price of products, shipping charges to receive products from the suppliers when they are embedded in the purchase price. Cost is determined using the weighted average method. Provisions are made for excessive, slow moving, expired and obsolete inventories as well as for inventories with carrying values in excess of market. Certain factors could impact the realizable value of inventory, so the Company continually evaluates the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historical usage, inventory aging, expiration date, expected demand, anticipated sales price, product obsolescence and other factors. The reserve or write-down is equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact the Company’s gross margin and operating results. If actual market conditions are more favorable, the Company may have higher gross margin when products that have been previously reserved or written down are eventually sold. As of December 31, 2021 and 2020, management compared the cost of inventories with their net realizable value and determined no inventory write-down was necessary.
Prepayments
Represents cash deposited for software development service. The deposits are refundable and bear no interest pursuant to terms of contract. The project is in progress and anticipated to be completed by July, 2022.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and impairment if any. Depreciation is computed using the straight-line method over the following estimated useful lives.
| Useful Life | Estimated Residual Value | |||
| Building | 20-50 years | 5% | ||
| Motor vehicles | 10 years | 5% | ||
| Furniture and equipment | 3-5 years | 5% |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible assets
Intangible assets consist primarily of licensed software acquired, which are stated at cost less accumulated amortization and impairment, if any. Intangible assets are amortized using the straight-line method over the estimated useful lives, which are generally 5-10 years or based on the contract term. The estimated useful lives of amortized intangible assets are reassessed if circumstances occur that indicate the original estimated useful lives have changed.
Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment and intangibles with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Company evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Company did not recognize any impairment loss on long-lived assets for the years ended December 31, 2021 and 2020. There can be no assurance that future events will not have impact on the Company’s revenue or financial position which could result in impairment in the future.
F-12
Contingencies
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.
Revenue recognition
The Company adopted ASC Topic 606, Revenue from Contracts with Customers, effective as of January 1, 2019. Accordingly, the consolidated financial statements for the years ended December 31, 2021 and 2020 are presented under ASC 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is the transaction price the Company expects to be entitled to in exchange for the promised goods or services in a contract in the ordinary course of the Company’s activities and is recorded net of value-added tax (“VAT”). To achieve that core principle, the Company applies the following steps:
Step 1: Identify the contract (s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
No practical expedients were used when the Company adopted the ASC 606. Revenue recognition policies for each type of revenue stream are as follows:
Financial and taxation solution services
Revenues from financial and taxation solution services for which control of services is transferred over time is recognized progressively based on the contract costs incurred to date (primarily comprising staff costs and industry expert cost by reference to the time as recorded in the monthly working record incurred to date) as compared to the total costs to be incurred under the transaction (by reference to the total budgeted time of the respective project) to depict the Company’s performance in transferring control of services promised to a customer. The Company recognizes revenues over time only if it can reasonably measure its progress toward complete satisfaction of the performance obligation. The Company normally requires the customers to pay a deposit upon entering into the service contracts. Progress payments are normally billed with the final payment received upon completion of the contract.
Education support services - sales of teaching and learning materials
Revenues from the sales of educational materials for which control of assets is transferred at a point in time is recognized when the goods are delivered to customers. The Company does not provide any sales-related warranties. There is no right of return by customers under the Company’s standard contract terms.
F-13
Education support services - Provision of marketing, operation and technical support services
Revenues from provision of marketing, operation and technical support services from the partnered institutions is recognized on a straight-line basis over the term of the partnership agreement. The transaction price inclusive of value added tax as received from customers in advance is recognized as a unearned revenue at the time of the initial transaction and is released on a straight-line basis over the period of service (usually one year).
Software and maintenance services
Standard software is a right to use license because the software has standalone functionality and the customer can use the software as it is available at a point in time. The Company recognizes revenues for such licenses at a point in time when the customer has received licenses and thus has control over the software. In case there is an update of the standard software, end customers or distributors are required to pay additional consideration to buy upgraded version. Revenues from maintenance services is recognized over time within the service period.
Unearned revenues
Unearned revenue is recorded when a payment is received from a customer before the Company transfers the related services. Unearned revenue is recognized as revenue when the Company performs the services under the contract.
Disaggregated information of revenues by services:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | In thousands of USD | |||||||
| Financial and taxation solution services | $ | 26,491 | $ | 23,338 | ||||
| Education support services | 4,635 | 4,558 | ||||||
| Software and maintenance services | 3,169 | 2,771 | ||||||
| Total | $ | 34,295 | $ | 30,667 | ||||
Segment reporting
The Company’s Chief Executive Officer, Mr.Ya Li, has been identified as the chief operating decision-maker (“CODM”), who is responsible for overall performance of all the service lines and reviews of the consolidated results when making decisions about allocating resources and assessing the performance of the Company as a whole. We set up departments by functionality but not by service lines. All services lines are supervised by one vice president, who directly reports to CEO; and selling and operation functions are supervised by other vice presidents. As our clients from all the three services could be the same, and we treated the services as a whole consulting package to our clients. For example, while providing our financial solution services, we also try to sell our software to the clients to assist them with office software upgrades. Additionally, we do not separate or allocate our research and development activities to selling functions or other supporting functions into these services. The Company prepares the forecast annually by departments instead of services. We set up certain revenue targets by service lines; however, we do not prepare other forecasts by services lines for costs or expenses. Our CEO, the CODM, reviews the forecasts annually and reviews finance performance monthly. He reviews the consolidated balance sheets, statements of operations, and cash flows thoroughly and raises his review comments at the group level. The Board of Directors reviews the finance performance annually at the group level as well. Furthermore, there is no compensation based on the performance of a single service line as the Company considered the compensation is based on the performance result of the total target set at the beginning of the year, which is based on the whole performance of the three service lines. Hence, the Company has only one single operating segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. The Company’s long-lived assets are all located in the PRC and substantially all of the Company’s revenues are derived from the PRC. Therefore, no geographical segments are presented in these financial statements.
F-14
Value added tax (“VAT”)
Revenue represents the invoiced value of goods and service, net of VAT. The VAT is based on gross sales price and VAT rates range up to 17%, depending on the type of products sold or service provided. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in taxes payable. All of the VAT returns filed by the Company’s subsidiaries in PRC remain subject to examination by the tax authorities for five years from the date of filing.
Income taxes
The Company follows the liability method of accounting for income taxes in accordance with ASC 740 (’‘ASC 740’’), Income Taxes. The Company accounts 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 expected to apply to taxable income in the 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.
The Company is not subject to tax on income or capital gain under the current tax laws of U.S. And the Company is subject to tax on income or capital gain under the tax laws of PRC.
An uncertain tax position is recognized as a benefit 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. For the years ended December 31, 2021 and 2020, no uncertain tax position is recognized. 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 years ended December 31, 2021 and 2020. All of the tax returns of the Company’s subsidiaries in PRC remain subject to examination by the tax authorities for five years from the date of filing.
Statutory surplus reserves
The Company’s PRC subsidiaries are required to allocate at least 10% of their after-tax profit to the general reserve in accordance with the PRC accounting standards and regulations. The allocation to the general reserve will cease if such reserve has reached to 50% of the registered capital of respective company. These reserves can only be used for specific purposes and are not transferable to the Company in form of loans, advances, or cash dividends. There is no such regulation of providing statutory reserve in Hong Kong. None of the statutory surplus reserves were recognized for the years ended December 31, 2021 and 2020.
Advertising expenses
Advertising expenditures are expensed as incurred and such expenses were included as part of selling and marketing expenses. For the years ended December 2021 and 2020, the advertising expenses amounted to approximately $1.35 million and $1.1 million, respectively.
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of equity but are excluded from net income. Other comprehensive income consists of a foreign currency translation adjustment resulting from the Company not using the U.S. dollar as its functional currencies.
F-15
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, Earnings per Share. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common share outstanding for the period. Diluted EPS presents the dilutive effect on a per-share basis of the potential Ordinary Shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential Ordinary Shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Recent accounting pronouncements
The Company considers the applicability and impact of all ASUs. Management periodically reviews new accounting standards that are issued. Under the Jumpstart Our Business Startups Act of 2012, as amended (“the JOBS Act”), the Company meets the definition of an emerging growth company, or EGC, and has elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updates (“ASUs”) 2016-02, “Leases (Topic 842),” which increases lease transparency and comparability among organizations. The new guidance, which creates new accounting and reporting guidelines for leasing arrangements, requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for public business entities for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which further clarifies the determination of fair value of the underlying asset by lessors that are not manufacturers or dealers and modifies transition disclosure requirements for changes in accounting principles and other technical updates. The amendments in ASU 2019-01 amend Topic 842 and the effective date of those amendments is for fiscal years beginning December 15, 2019, and interim periods within those fiscal years for public business entities. For all other entities, ASC 842 is effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of the new pronouncement on its consolidated financial statements but does not expect it to have a significant impact.
In June 2016, the FASB amended guidance related to the impairment of financial instruments as part of ASU 2016-13: Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarified that receivables from operating leases are not within the scope of Topic 326 and instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. On May 15, 2019, the FASB issued ASU 2019-05, which provides transition relief for entities adopting the Board’s credit losses standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of the credit losses guidance in ASC 326-20, (3) are eligible for the fair value option under ASC 825-10, and (4) are not held-to-maturity debt securities. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date of ASU 2016-13. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. In February 2020, the FASB issued ASU No. 2020-02, which provides clarifying guidance and minor updates to ASU No. 2016-13 – Financial Instruments – Credit Loss (Topic 326) (“ASU 2016-13”) and related to ASU No. 2016-02 - Leases (Topic 842). ASU 2020-02 amends the effective date of ASU 2016-13, such that ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures, for the two-year period ended December 31, 2021, the Company did not have any financial instruments.
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In October 2020, the FASB issued Accounting Standards Update No. 2020-10, Codification Improvements – Disclosures (“ASU 2020-10”) to align with the SEC’s regulations. This ASU improves consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The Company adopted ASU 2020-10 as of the reporting period beginning January 1, 2021. This ASU did not affect the Company’s results of operations, cash flows or financial position and the Company does not expect the adoption to have a material impact on the disclosures to the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The amendments in these ASUs are effective for the Company’s fiscal years, and interim periods within those fiscal years beginning October 1, 2022. The Company does not expect to early adopt this guidance and is in the process of evaluating the impact of adoption of this guidance on the Company’s consolidated financial statements.
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have a material impact on the consolidated financial position, statements of operations and cash flows.
| 3. | Cash |
Cash represent cash on hand and demand deposits placed with banks, which are unrestricted as to withdrawal or use. Cash is denominated in the following currencies:
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| RMB | $ | 16,844 | $ | 8,664 | ||||
| HKD | 1 | 1 | ||||||
| Total | $ | 16,845 | $ | 8,665 | ||||
| 4. | Prepayments, deposits, and other current assets |
Prepaid expenses and other current assets consisted of the following as of March 31, 2021 and 2020:
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Deposits to software developer | $ | 2,196 | $ | - | ||||
| Prepayments to suppliers | 290 | 82 | ||||||
| Other current assets | 46 | 48 | ||||||
| Total | $ | 2,532 | $ | 130 | ||||
In fiscal year 2021, the Company made a deposit of $2.2M (RMB 14 million) to Xiamen Zhuyuan Education technology Co., Ltd. (Zhuyuan Education) to purchase the Financial System Intelligent Analysis System.
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| 5. | Property and equipment, net |
Property and equipment, net consisted of the following:
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Buildings | $ | 16,201 | $ | 16,444 | ||||
| Furniture and equipment | 977 | 930 | ||||||
| Motor vehicles | 16 | 16 | ||||||
| Office improvements | 977 | 955 | ||||||
| Subtotal | 18,171 | 18,345 | ||||||
| Less: accumulated depreciation | (3,234 | ) | (2,574 | ) | ||||
| Property and equipment, net | $ | 14,937 | $ | 15,771 | ||||
Depreciation expenses for the years ended December 31, 2021 and 2020 amounted to approximately $0.66 million and $0.81 million, respectively.
The Company has no pledged property and equipment at 31 December 2021 and 2020 to secure general banking facilities.
The Company did not recognize any impairment loss on property and equipment for the years ended December 31, 2021 and 2020.
| 6. | Intangible assets |
The Company’s intangible assets with definite useful lives primarily consisted of licensed software, which are for sales or support the Company’s business and operation. The following table summarizes the components of acquired intangible asset balances.
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Licensed software | $ | 9,476 | $ | 9,411 | ||||
| Less: accumulated amortization | (5,608 | ) | (3,822 | ) | ||||
| Intangible assets, net | $ | 3,868 | $ | 5,589 | ||||
Amortization expense recognized in cost of revenues for the years ended December 31, 2021 and 2020 amounted to approximately $1.79 million and $1.44 million, respectively. The weighted average amortization period for licensed software is approximately 5.28 years and 5.04 years as of December 31, 2021 and 2020, respectively.
The Company has no pledged intangible assets at 31 December 2021 and 2020 to secure general banking facilities.
The Company did not recognize any impairment loss on intangible asset for the years ended December 31, 2021 and 2020.
The future amortization expense of the intangible assets for the twelve months ending December 31 of the following years is expected as follows:
| Year ending December 31, | Amortization expenses | |||
| In thousands of USD | ||||
| 2022 | $ | 1,679 | ||
| 2023 | 1,644 | |||
| 2024 | 337 | |||
| 2025 | 208 | |||
| 2026 | - | |||
| Total | $ | 3,868 | ||
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| 7. | Related party transactions and balances |
The table below sets forth the major related parties and their relationships with the Company as of December 31, 2021 and 2020:
| Name of related parties | Relationship with the Company | |
| Jinjiang Xingminqi Accounting Vocational Training School (“Jinjiang School”) | A company controlled by the Company’s controlling shareholder | |
| Quanzhou City Lichen Accounting Vocational Training School (“Quanzhou School”) | A company controlled by the Company’s controlling shareholder |
| i) | Significant transactions with related parties were as follows: |
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Provision of marketing, operation and technical support services to Jinjiang School | $ | 70 | $ | 70 | ||||
| Provision of marketing, operation and technical support services to Quanzhou School | 132 | 130 | ||||||
| Processing of academic education applications to Jinjiang School | 90 | 176 | ||||||
| Processing of academic education applications to Quanzhou School | 113 | 229 | ||||||
| Sales of teaching and learning materials to Jinjiang School | 70 | 80 | ||||||
| Sales of teaching and learning materials to Quanzhou School | 66 | 77 | ||||||
| Online training to Jinjiang School | 24 | 7 | ||||||
| Online training to Quanzhou School | 23 | 7 | ||||||
| Total revenues – related parities | $ | 588 | $ | 776 | ||||
| ii) | Significant balances with related parties were as follows: |
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Other receivable – related party | ||||||||
| Ya Li | $ | 419 | $ | 416 | ||||
| Due to the related parties | ||||||||
| Quanzhou School | $ | 105 | $ | 103 | ||||
| Jinjiang School | 1 | - | ||||||
| Total | $ | 106 | $ | 103 | ||||
Balances due from Ya Li and due to Quanzhou School and Jinjiang School are the result of the normal business transactions stated above. The balances were all unsecured, non-interest bearing and payable on demand.
| 8. | Short-term bank loan |
On January 31, 2019, the Company entered into a short-term loan facility agreement with China Construction Bank Jinjiang Branch for which a total facility up to approximately $0.32 million (RMB 2.2 million) was made available to the Company and shall mature on January 30, 2022. This loan bears interest at 4.3% and 4.3% on December 31, 2021 and 2020 and shall be repaid on demand. Thus, the Company recorded it as short-term bank loan. This short-term loan was collateralized by the real estate and land use right amounted to approximately $0.6 million, owned by Mrs Meiying Li. The balance of short-term loans was $0.34 million and $0.34 million as of December 31, 2021 and 2020, respectively.
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| 9. | Accrued expenses and other current liabilities |
Accrued expenses and other current liabilities consisted of the following:
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Payable for property purchased | $ | 1,782 | $ | 1,741 | ||||
| Salary payable | 1,110 | 1,088 | ||||||
| Other | 169 | 189 | ||||||
| Total | $ | 3,061 | $ | 3,018 | ||||
| 10. | Unearned revenue |
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Unearned revenue | $ | 1,273 | $ | 1,103 | ||||
| Total | $ | 1,273 | $ | 1,103 | ||||
| 11. | Taxes |
| (a) | Taxes payable |
Taxes payable consisted of the following:
As of December 31, 2021 | As of December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Income tax payable | $ | 434 | $ | 408 | ||||
| VAT payable | 320 | 214 | ||||||
| Other tax payable | 449 | 427 | ||||||
| Total | $ | 1,203 | $ | 1,049 | ||||
| (b) | Corporate Income Taxes (“CIT”) |
Cayman Islands
Under the current tax laws of Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
BVI
Under the current tax laws of BVI, the Company is not subject to tax on income or capital gain. Additionally, the BVI does not impose a withholding tax on payments of dividends to shareholders.
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Hong Kong
Under the current Hong Kong Inland Revenue Ordinance, the Company’s subsidiaries incorporated in Hong Kong are subject to 16.5% on its taxable income generated from operations in Hong Kong. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Company are not subject to any Hong Kong withholding tax. The Company did not make any provision for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception.
PRC
The Company’s PRC subsidiaries are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. For the years ended December 31, 2021 and 2020, there is no preferential tax rate.
| i) | The components of the income tax provision are as follows: |
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Provisions for current income tax | $ | 3,052 | $ | 2,589 | ||||
| Provisions for deferred income tax | - | |||||||
| Total | $ | 3,052 | $ | 2,589 | ||||
There is no deferred tax assets due to full valuation allowance for the years ended December 31, 2021 and 2020.
| ii) | The following table reconciles PRC statutory rates to the Company’s effective tax rate: |
The following table reconciles the China statutory rates to the Company’s effective tax rate for the years ended December 31, 2021 and 2020:
Year ended December 31,
2021 | Year ended December 31,
2020 | |||||||
| PRC statutory income tax rate | 25.0 | % | 25.0 | % | ||||
| Effect of different tax jurisdiction | 0.1 | % | 0.5 | % | ||||
| Non-deductible expenses (1) | 0.6 | % | 0.6 | % | ||||
| Change in valuation allowance | 1.1 | % | 2.6 | % | ||||
| Effective income tax rate | 26.8 | % | 28.7 | % | ||||
| (1) | Non-deductible expenses represented meal and entertainment fees not-deductible in PRC tax returns. |
| iii) | Deferred tax assets |
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| Deferred tax assets: | In thousands of USD | |||||||
| Net accumulated loss-carry forward | $ | 1,400 | $ | 1,292 | ||||
| Less: valuation allowance | (1,400 | ) | (1,292 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
F-21
Movement of valuation allowance is as follows:
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| In thousands of USD | ||||||||
| Beginning balance | $ | 1,292 | $ | 1,072 | ||||
| Write-off | (22 | ) | (18 | ) | ||||
| Change of valuation allowance | 130 | 238 | ||||||
| Ending balance | $ | 1,400 | $ | 1,292 | ||||
Certain subsidiaries had tax loss of approximately $0.53 million and $1.2 million for the years ended December 31, 2021and 2020, respectively, which can be carried forward to offset future taxable income. The carryforwards period for net operating losses under the EIT Law is five years. Valuation allowance is provided against deferred tax assets when the Company determines that it is more likely than not that the deferred tax assets will not be utilized in the future.
As of December 31, 2021, part of the valuation allowance related to previous years’ tax losses has expired, which cannot be used to offset future taxable income. The Company recognized a write-off of approximately $0.02 million and $0.02 million for the year ended December 31, 2021 and 2020, respectively.
Uncertain tax positions
The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2021 and 2020, the Company did not have any significant unrecognized uncertain tax positions. The Company did not incur interest and penalties during the years ended December 31, 2021 and 2020.
| 12. | Ordinary shares |
The Company was established as a holding company under the laws of Cayman Islands. The Company’s authorized share capital of US$50,000 is divided into (a) 1,000,000,000 Class A Ordinary Shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 Class B Ordinary Shares with a nominal or par value of US$0.00004 each. As of December 31, 2021 and 2020, 13,500,000 Class A Ordinary Shares and 9,000,000 Class B Ordinary shares were issued and outstanding. Each Class A Ordinary Share has one (1) vote and each Class B Ordinary Share has ten (10) votes. Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time at the option of the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.
| 13. | Statutory surplus reserves |
The Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory surplus reserve as determined pursuant to PRC statutory laws totaled approximately $0.79 million as of December 31, 2021 and 2020. As of December 31, 2021, the statutory reserves fund of the Company has reached 50% of the registered capital of the enterprise. No additional statutory reserve was recognized in the years ended December 31, 2021 and 2020.
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| 14. | Restricted assets |
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiary. Relevant PRC statutory laws and regulations permit payments of dividends by the PRC subsidiaries only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the PRC entities.
The PRC entities are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the PRC entities may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The PRC entities may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.
As a result of the foregoing restrictions, the PRC entities are restricted in their ability to transfer their assets to the Company. Foreign exchange and other regulation in the PRC may further restrict the PRC entities from transferring funds to the Company in the form of dividends, loans and advances. As of December 31, 2021 and 2020, amounts restricted are the paid-in-capital and statutory reserve of the PRC entities, which amount to $2.3 million and $2.3 million, respectively. During the fiscal years ended December 31, 2020, Lichen Zixun made dividend payments of RMB30 million (approximately $4.3 million) to the then eventual shareholders of Lichen Zixun, who are PRC individuals.
| 15. | Risks and Concentration |
| a) | Interest rate risk |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s interest rate risk arises primarily from short-term borrowings. Borrowings issued at variable rates and fixed rates expose the Company to cash flow interest rate risk and fair value interest rate risk respectively.
| b) | Concentration of credit risk |
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of December 31, 2021 and 2020, approximately $16.84 million and $8.67 million were deposited with financial institutions located in the PRC, respectively. These balances are not covered by insurance. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
The Company is also exposed to risk from its accounts receivable and other receivables. These assets are subjected to credit evaluations. An allowance has been made for estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the PBOC. Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
The Company’s functional currency is RMB, and its consolidated financial statements are presented in U.S. dollars. The RMB appreciated by 2.29% in fiscal year 2021 from December 31, 2020 to December 31, 2021 and appreciated by 6.47% in fiscal year 2020 from December 31, 2019 to December 31, 2020. 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. The change in the value of the RMB relative to the U.S. dollar may affect its financial results reported in the U.S. dollar terms without giving effect to any underlying changes in its business or results of operations. Currently, the Company’s assets, liabilities, revenues and costs are denominated in RMB.
To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.
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| c) | Concentration of customers and suppliers |
All revenue was derived from customers located in PRC. There are no customers from whom revenues individually represent greater than 10% of the total revenues of the Company in any of the periods presented.
For the year ended December 31, 2021, Guangzhou Xingjinhui Trade Co., Ltd, Beijing Duoying Times Culture Media Co., Ltd and Jimei university contributed approximately 29%, 26% and 17% of total purchases of the Company, respectively. For the year ended December 31, 2020, Guangzhou Xingjinhui Trade Co., Ltd, Beijing Duoying Times Culture Media Co., Ltd and one personal professional advisor contributed approximately 21%, 20% and 10% of total purchases of the Company, respectively.
| 16. | Commitments and contingencies |
| (a) | Commitments |
The Company did not have any significant commitments, long-term obligations, or guarantees as of December 31, 2021 and 2020.
| (b) | Contingencies |
The Company is subject to legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome arising out of any such matter will have a material adverse effect on our consolidated financial position, cash flows or results of operations on an individual basis or in the aggregate. As of December 31, 2021 and 2020, the Company is not a party to any material legal or administrative proceedings.
| 17. | Subsequent events |
On January 26, 2022, Lichen has repaid off the bank loan amounted to $0.34 million.
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through May 2, 2022, the date the consolidated financial statements were available to be issued. No other events require adjustment to or disclosure in the consolidated financial statements.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and Officers
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
The underwriting agreement, the form of which will be filed as Exhibit 1.1 to this registration statement, provides for indemnification by the underwriters of us and our officers and directors for certain liabilities, including liabilities arising under the Securities Act, but only to the extent that such liabilities are caused by information relating to the underwriters furnished to us in writing expressly for use in this registration statement and certain other disclosure documents.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 7. Recent Sales of Unregistered Securities
Founding Transactions
Lichen China Limited was incorporated on April 13, 2016. The Company issued 13,500,000 Class A Ordinary Shares with a par value of US$0.00004 to 14 shareholders and issued 9,000,000 Class B Ordinary Shares with a par value of US$0.00004 to Silver Sky Investment Limited, respectively, as founder shares. Silver Sky Investment Limited, a British Virgin Islands company, is controlled by our CEO and Chairman of the Board Ya Li. The transaction was not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption from registration set forth in Section 4(a)(2) and/or Regulation S thereof.
Item 8. Exhibits and Financial Statement Schedules
(23) Exhibits. The following exhibits are included herein or incorporated herein by reference:
The following documents are filed as part of this registration statement:
EXHIBIT INDEX
| + | Filed herewith. |
* ** |
To be filed by Amendment. Previously filed. |
II-1
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or the Notes thereto.
Item 9. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated firm commitment offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
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(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B (§230.430B of this chapter):
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
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(6) To file a post-effective amendment to the registration statement to include any financial statements required by item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements.
(7) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(8) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jinjiang, People’s Republic of China, on July 11, 2022.
| Lichen China Limited | ||
| By: | /s/ Ya Li | |
| Ya Li | ||
Chief Executive Officer and Chairman of the Board | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Capacity | Date | ||
| /s/ Ya Li | Chief Executive Officer and Chairman of the Board | July 11, 2022 | ||
| Ya Li | (Principal Executive Officer) | |||
| /s/ Zhixiang Fang | Chief Financial Officer | July 11, 2022 | ||
| Zhixiang Fang | (Principal Financial Officer) | |||
| /s/ Yi Deng | Director | July 11, 2022 | ||
| Yi Deng |
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SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933 as amended, the undersigned, the duly authorized representative in the United States of America, has signed this registration statement thereto in New York, NY on July 11, 2022.
| Authorized U.S. Representative | ||
| By: | /s/ Colleen A. De Vries | |
| Name: | Colleen A. De Vries | |
| Title: | Senior Vice-President on behalf of Cogency Global Inc. | |
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Exhibit 1.1
LICHEN CHINA LIMITED
UNDERWRITING AGREEMENT
[●], 2022
Univest Securities, LLC
75 Rockefeller Plaza, Suite 18 C
New York, NY 10019
As Representative of the Underwriters
named on Schedule A hereto
Ladies and Gentlemen:
The undersigned, Lichen China Limited, a Cayman Islands exempted company (collectively with its subsidiaries and affiliates, including, without limitation, all entities disclosed or described in the Registration Statement (as hereinafter defined) as being subsidiaries or affiliates of the Company, the “Company”), hereby confirms its agreement (this “Agreement”) with several underwriters (such underwriters, including the Representative (as defined below), the “Underwriters” and each an “Underwriter”) named in Schedule A hereto for which Univest Securities, LLC acting as the representative to the several Underwriters (in such capacity, the “Representative”) to issue and sell an aggregate of 6,250,000 series A ordinary shares of the Company (“Firm Shares”), par value $0.00004 per share (“Class A Ordinary Shares”). The Company has also granted to the several Underwriters an option to purchase up to 937,500 additional Class A Ordinary Shares, on the terms and for the purposes set forth in Section 2(c) hereof (the “Additional Shares”). The Firm Shares and any Additional Shares purchased pursuant to this Agreement are herein collectively referred to as the “Offered Securities.” The offering and sale of the Offered Securities contemplated by this Agreement is referred to herein as the “Offering.” The Company’s issued share capital has a dual class structure consisting of Class A Ordinary Shares and class B ordinary shares (“Class B Ordinary Shares”). The Class A Ordinary Shares and Class B Ordinary Shares are collectively referred to as the “Ordinary Shares” in this Agreement.
The Company confirms its agreement with the Underwriters as follows:
SECTION 1. Representations and Warranties of the Company.
The Company represents and warrants to the Underwriters as follows with the understanding that the same may be relied upon by the Underwriters in this offering, as of the date hereof and as of the Closing Date (as defined below) and each Option Closing Date (as defined below), if any:
(a) Filing of the Registration Statement. The Company has prepared and filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement on Form F-1 (File No. 333- 264624), which contains a form of prospectus to be used in connection with the public offering and sale of the Offered Securities. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto contained in the registration statement at the time such registration statement became effective, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder (the “Securities Act Regulations”), and including any required information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, or pursuant to the Securities Exchange Act of 1934, as amended (collectively, the “Exchange Act”) and the rules and regulations promulgated thereunder (the “Exchange Act Regulations”), is called the “Registration Statement.” Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the “Rule 462(b) Registration Statement,” and from and after the date and time of filing of the Rule 462(b) Registration Statement, the term “Registration Statement” shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first filed pursuant to Rule 424(b) under the Securities Act after the date and time that this Agreement is executed and delivered by the parties hereto, or, if no filing pursuant to Rule 424(b) under the Securities Act is required, the form of final prospectus relating to the Offered Securities included in the Registration Statement at the effective date of the Registration Statement, is called the “Prospectus.” All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, the preliminary prospectus included in the Registration Statement (each, a “preliminary prospectus”), the Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). The preliminary prospectus that was included in the Registration Statement immediately prior to the Applicable Time (as defined below) is hereinafter called the “Pricing Prospectus.” Any reference to the “most recent preliminary prospectus” shall be deemed to refer to the latest preliminary prospectus included in the registration statement. Any reference herein to any preliminary prospectus or the Prospectus or any supplement or amendment to either thereof shall be deemed to refer to and include any documents incorporated by reference therein as of the date of such reference.
(b) “Applicable Time” means [●], Eastern Time, on the date of this Agreement.
(c) Compliance with Registration Requirements. The Registration Statement has been declared effective by the Commission under the Securities Act and the Securities Act Regulations on [●], 2022. The Company has complied, to the Commission’s satisfaction, with all requests of the Commission for additional or supplemental information. No stop order preventing or suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied or will comply in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical in content to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Offered Securities, other than with respect to any artwork and graphics that were not filed. Each of the Registration Statement, any Rule 462(b) Registration Statement, and any post-effective amendment to either the Registration Statement or the Rule 462(b) Registration Statement, at the time it became effective and at all subsequent times until the expiration of the prospectus delivery period required under Section 4(3) of the Securities Act, complied and will comply in all material respects with the Securities Act and the Securities Act Regulations and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times until the Underwriters have completed the placement of the offering of the Offered Securities, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement or any Rule 462(b) Registration Statement, or any post-effective amendment to either the Registration Statement or the Rule 462(b) Registration Statement, or in the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, made in reliance upon and in conformity with information relating to the Underwriters furnished to the Company in writing expressly for use therein, it being understood and agreed that the only such information furnished on behalf of any of the Underwriters consists of (i) the name of the Underwriters contained on the cover page of the Pricing Prospectus and Prospectus and (ii) the sub-sections titled “Electronic Offer, Sale and Distribution,” “Pricing of this Offering” and “Price Stabilization, Short Positions, and Penalty Bids” in each case under the caption “Underwriting” in the Prospectus (the “Underwriter Information”). There are no contracts or other documents required to be described in the Pricing Prospectus or the Prospectus or to be filed as exhibits to the Registration Statement that have not been fairly and accurately described in all material respects or filed as required.
(d) Disclosure Package. The term “Disclosure Package” shall mean (i) the Pricing Prospectus, as amended or supplemented, (ii) each issuer free writing prospectus, as defined in Rule 433 under the Securities Act (each, an “Issuer Free Writing Prospectus”), if any, identified in Schedule B hereto, (iii) the pricing terms set forth in Schedule C to this Agreement, and (iv) any other free writing prospectus that the parties hereto shall hereafter expressly agree in writing to treat as part of the Disclosure Package. As of the Applicable Time, the Disclosure Package did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Disclosure Package based upon and in conformity with the Underwriter Information.
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(e) Company Not Ineligible Issuer. (i) At the time of filing the Registration Statement and (ii) as of the date of the execution and delivery of this Agreement, the Company was not and is not an Ineligible Issuer (as defined in Rule 405 under the Securities Act), without taking account any determination by the Commission pursuant to Rule 405 under the Securities Act that it is not necessary that the Company be considered an Ineligible Issuer.
(f) Issuer Free Writing Prospectuses. No Issuer Free Writing Prospectus includes any information that conflicts with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. The foregoing sentence does not apply to statements in or omissions from any Issuer Free Writing Prospectus based upon and in conformity with the Underwriter Information.
(g) Offering Materials Furnished to the Underwriters. The Company has delivered to the Underwriters copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and each preliminary prospectus and the Prospectus, as amended or supplemented, in such quantities and at such places as the Underwriters has reasonably requested in writing.
(h) Distribution of Offering Material by the Company. The Company has not distributed and will not distribute, prior to the completion of the Underwriters’ purchase of the Offered Securities, any offering material in connection with the offering and sale of the Offered Securities other than a preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus reviewed and consented to by the Underwriters, and the Registration Statement.
(i) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.
(j) Authorization of the Offered Securities and Underwriter’s Securities. The Offered Securities to be sold by the Company through the Underwriters have been duly and validly authorized by all required corporate action and have been reserved for issuance and sale pursuant to this Agreement and, when so issued and delivered by the Company, will be validly issued, fully paid and non-assessable, free and clear of all Liens (as defined in Section 1(r)) imposed by the Company. The Class A Ordinary Shares underlying the Underwriter’s Warrants (the “Underlying Shares” and together with the Underwriter’s Warrants, the “Underwriter’s Securities”) are duly authorized and, when issued and paid for in accordance the terms of the Underwriter’s Warrants, as applicable, will be duly and validly issued, fully paid and non-assessable, free and clear of all Liens imposed by the Company. The Company has sufficient Class A Ordinary Shares for the issuance of the maximum number of Offered Securities and Underlying Shares issuable pursuant to the Offering as described in the Prospectus.
(k) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any securities of the Company registered for sale under the Registration Statement.
(l) No Material Adverse Change. Except as otherwise disclosed in the Disclosure Package, subsequent to the respective dates as of which information is given in the Disclosure Package: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, prospects or operations, whether or not arising from transactions in the ordinary course of business, of the Company (any such change, a “Material Adverse Change”); (ii) the Company has not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company in respect of its capital stock.
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(m) Independent Accountant. TPS Thayer, LLC and Briggs & Veselka Co. (the “Accountants”), which have expressed their opinions with respect to the audited financial statements (which term as used in this Agreement includes the related notes thereto) of the Company filed with the Commission as a part of the Registration Statement and included in the Disclosure Package and the Prospectus, are independent registered public accounting firms as required by the Securities Act and the Exchange Act.
(n) Preparation of the Financial Statements. Each of the historical financial statements of the Company, respectively, filed with the Commission as a part of the Registration Statement and included in the Disclosure Package and the Prospectus, presents fairly the information provided as of and at the dates and for the periods indicated. Such financial statements comply as to form with the applicable accounting requirements of the Securities Act and the Securities Act Regulations and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement. Each item of historical financial data relating to the operations, assets or liabilities of the Company set forth in summary form in each of the preliminary prospectuses and the Prospectus fairly presents such information on a basis consistent with that of the complete financial statements contained in the Registration Statement.
(o) Incorporation and Good Standing. The Company has been duly incorporated or formed and is validly existing and in good standing as a company limited by shares under the laws of the jurisdiction of its formation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement. As of the Closing, the Company does not own or control, directly or indirectly, any corporation, association or other entity that is not otherwise disclosed in the Disclosure Package.
(p) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in each of the Disclosure Package and the Prospectus (other than for subsequent issuances, if any, pursuant to employee benefit plans described in each of the Disclosure Package and the Prospectus or upon exercise of outstanding options or warrants described in the Disclosure Package and Prospectus, as the case may be). The Ordinary Shares conform, and, when issued and delivered as provided in this Agreement, the Offered Securities will conform, in all material respects to the description thereof contained in each of the Disclosure Package and Prospectus. All of the issued and outstanding Ordinary Shares have been duly authorized and validly issued, are fully paid and non-assessable and have been issued in compliance with applicable laws. None of the outstanding Ordinary Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company other than those described in the Disclosure Package and the Prospectus. The description of the Company’s stock option and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Disclosure Package and the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. No further approval or authorization of any shareholder, the Board of Directors or others is required for the issuance and sale of the Offered Securities and the Underlying Shares. Except as set forth in the Disclosure Package and the Prospectus, there are no shareholders agreements, voting agreements or other similar agreements with respect to the Company’s Ordinary Shares to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s shareholders.
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(q) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. The Company is not in violation of its memorandum and articles of association or in default (or, with the giving of notice or lapse of time, would be in default) (“Default”) under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which it is a party or by which it may be bound (including, without limitation, any agreement or contract filed as an exhibit to the Registration Statement or to which any of the property or assets of the Company are subject (each, an “Existing Instrument”)), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Disclosure Package and the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the memorandum of association of the Company, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, or require the consent of any other party to, any Existing Instrument and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company, except in the case of each of clauses (ii) and (iii), to the extent such conflict, breach Default or violation could not reasonably be expected to result in a Material Adverse Effect. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Disclosure Package and the Prospectus, except the registration or qualification of the Offered Securities under the Securities Act and applicable state securities or blue sky laws and from the Financial Industry Regulatory Authority (“FINRA”).
(r) Subsidiaries. Each of the Company’s direct and indirect subsidiaries (each a “Subsidiary” and collectively, the “Subsidiaries”) has been identified on Schedule E hereto. Each of the Subsidiaries has been duly formed, is validly existing under the laws of British Virgin Islands, Hong Kong or the People’s Republic of China (the “PRC”), as the case may be, and in good standing under the laws of the jurisdiction of its incorporation, has full power and authority (corporate or otherwise) to own its property and to conduct its business as described in the Prospectus, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not result in a Material Adverse Change on the Company and its Subsidiaries, taken as a whole. Except as otherwise disclosed in the Disclosure Package and the Prospectus, all of the equity interests of each Subsidiary have been duly and validly authorized and issued, are owned directly or indirectly by the Company, are fully paid in accordance with its memorandum and articles of association and non-assessable and are free and clear of all liens, encumbrances, equities or claims (“Liens”). None of the outstanding share capital or equity interest in any Subsidiary was issued in violation of preemptive or similar rights of any security holder of such Subsidiary. All of the constitutive or organizational documents of each of the Subsidiaries comply with the requirements of applicable laws of its jurisdiction of incorporation or organization and are in full force and effect. Apart from the Subsidiaries, the Company has no direct or indirect subsidiaries or any other company over which it has direct or indirect effective control. Other than the Subsidiaries, the Company does not directly or indirectly control any entity through contractual arrangements or otherwise such that the entity would be deemed a consolidated affiliated entity whose financial results would be consolidated under U.S. GAAP with the financial results of the Company on the consolidated financial statements of the Company, regardless of whether the Company directly or indirectly owns less than a majority of the equity interests of such person.
(s) No Material Actions or Proceedings. Except as otherwise disclosed in the Disclosure Package and the Prospectus, there are no legal, governmental or regulatory investigations, actions, demands, claims, suits, arbitrations, inquiries or proceedings (collectively, “Actions”) pending or, to the Company’s knowledge, threatened (i) against the Company, (ii) which have as the subject thereof any officer or director (in such capacities) of, or property owned or leased by, the Company, where in any such case (A) there is a reasonable possibility that such Action might be determined adversely to the Company and (B) any such Action, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. Except as otherwise disclosed in the Disclosure Package and the Prospectus, no material labor dispute with the employees of the Company exists or, to the Company’s knowledge, is threatened or imminent. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. No executive officer, to the knowledge of the Company, is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company and its Subsidiaries are in compliance with all applicable laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change. Neither the Company or any Subsidiary, nor any director or officer thereof, is or has within the last 10 years been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company.
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(t) Intellectual Property Rights. The Company owns, possesses or licenses, and otherwise has legally enforceable rights to use all patents, patent applications, trademarks, trade names, copyrights, domain names, licenses, approvals and trade secrets (collectively, “Intellectual Property Rights”) necessary to conduct its business as now conducted or, otherwise, as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, except to the extent such failure to own, possess or have other rights to use such Intellectual Property would not be expected to result in a Material Adverse Change. Except as otherwise disclosed in the Registration Statement, the Disclosure Package and the Prospectus: (i) the Company has not received any written notice of infringement or conflict with asserted Intellectual Property Rights of others; (ii) the Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, Disclosure Package and the Prospectus and are not described in all material respects; (iii) none of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, in violation of the rights of any persons; and (iv) the Company is not subject to any judgment, order, writ, injunction or decree of any court or any governmental department, commission, board, bureau, agency or instrumentality, or any arbitrator, nor has it entered into nor is it a party to any agreement made in settlement of any pending or threatened litigation, which materially restricts or impairs its use of any Intellectual Property Rights.
(u) All Necessary Permits, etc. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company possesses such valid and current certificates, authorizations or permits issued by the applicable regulatory agencies or bodies necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit.
(v) Title to Properties. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company has good and marketable title to all the properties and assets reflected as owned by it in the financial statements referred to in Section 1(n) above (or elsewhere in the Disclosure Package and the Prospectus), in each case free and clear of any security interest, mortgage, lien, encumbrance, equity, adverse claim or other defect, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company. The real property, improvements, equipment and personal property held under lease by the Company are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company.
(w) Tax Law Compliance. The Company and its Subsidiaries have each filed all necessary income tax returns or have timely and properly filed requested extensions thereof and have paid all taxes required to be paid by them and, if due and payable, any related or similar assessment, fine or penalty levied against it. Specifically, each of Lichen Zixun and Lichen Education (each defined in Section 1(ll) below) has filed its tax returns for the fiscal years 2020 and 2021 and no taxes or duties with respect to such years are outstanding in China to any Chinese taxing authority. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(n) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined.
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(x) Company Not an “Investment Company.” The Company is not, and after giving effect to payment for the Offered Securities and the application of the proceeds as contemplated under the caption “Use of Proceeds” in each of the Disclosure Package and the Prospectus will not be, required to register as an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”).
(y) FINRA Affiliation. No officer, director or any beneficial owner of 10% or more of the Company’s unregistered securities has any direct or indirect affiliation or association with any Participating Member (as defined under FINRA rules). The Company will advise the Representative and HTFL if it learns that any officer, director or owner of 10% or more of the Company’s outstanding Ordinary Shares is or becomes an affiliate or registered person of a Participating Member.
(z) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to cause or result in, stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Offered Securities.
(aa) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any other person required to be described or filed in the Registration Statement, or described in the Disclosure Package or the Prospectus, that have not been as set forth in the Registration Statement, the Prospectus and the Pricing Prospectus.
(bb) Disclosure Controls and Procedures. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act Regulations) designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company is not aware of (a) any significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or any material weaknesses in internal controls or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls.
(cc) Company’s Accounting System. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company maintains a system of accounting controls designed to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(dd) Money Laundering Law Compliance. The operations of the Company are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any competent governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
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(ee) OFAC. (i) Neither the Company, any of its Subsidiaries, nor, to the knowledge of the Company, any director, officer, employee or affiliate of the Company, of any other person authorized to act on behalf of the Company, is an individual or entity (“Person”) that is, or is owned or controlled by a Person that is:
A. the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the United Nations Security Council (“UNSC”), the European Union (“EU”), Her Majesty’s Treasury (“HMT”), or other relevant sanctions authority (collectively, “Sanctions”), nor
B. located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, Libya, North Korea, Sudan and Syria).
(ii) The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary or affiliated entity, joint venture partner or other Person:
A. to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or
B. in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise).
(ff) Foreign Corrupt Practices Act. Neither the Company, any of its Subsidiaries, nor, to the best of the Company’s knowledge, any director, officer, employee or affiliate of the Company or any other person authorized to act on behalf of the Company has, directly or indirectly, knowingly given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding.
(gg) Compliance with Sarbanes-Oxley Act of 2002. The Company is in full compliance with any provision applicable to it of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules and regulations promulgated in connection therewith, including, without limitation, Section 402 related to loans and Sections 302 and 906 related to certifications of the Sarbanes-Oxley Act.
(hh) Exchange Act Filing. A registration statement in respect of the Class A Ordinary Shares has been filed on Form 8-A pursuant to Section 12(b) of the Exchange Act, which registration statement complies in all material respects with the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Class A Ordinary Shares under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration.
(ii) Foreign Private Issuer Status. The Company is a “foreign private issuer” within the meaning of Rule 405 under the Act.
(jj) Earning Statements. The Company will make generally available (which includes filings pursuant to the Exchange Act made publicly through the EDGAR system) to its security holders as soon as practicable, but in any event not later than 16 months after the end of the Company’s current fiscal year, an earnings statement (which needs not be audited) covering a 12-month period that shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations.
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(kk) Periodic Reporting Obligations. During the Prospectus Delivery Period, the Company shall file, on a timely basis, with the Commission all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds from the issuance of the Firm Shares as may be required under Rule 463 under the Securities Act.
(ll) Valid Title. Each of Fujian Province Lichen Management and Consulting Company Limited (“Lichen Zixun”) and Xiamen City Legend Education Services Company Limited (“Lichen Education is a limited liability company organized under the laws of the PRC and, except as otherwise disclosed in the Disclosure Package and the Prospectus, has legal and valid title to all of its properties and assets, free and clear of all Liens, charges, encumbrances, equities, claims, options and restrictions except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by such entity; each lease agreement to which it is a party is duly executed and legally binding; its leasehold interests are set forth in and governed by the terms of any lease agreements, and, to the best of the Company’s knowledge such agreements are valid, binding and enforceable in accordance with their respective terms under PRC law; and, neither Lichen Zixun nor Lichen Education owns, operates, manages or has any other right or interest in any other material real property of any kind, except as described in the Prospectus or the Disclosure Package.
(mm) Foreign Tax Compliance. Except as otherwise disclosed in the Disclosure Package and the Prospectus, no transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding taxes or duties are payable in China, Hong Kong, Cayman Islands or the British Virgin Islands to any Chinese, Hong Kong, Cayman Islands or British Virgin Islands taxing authority in connection with the issuance, sale and delivery of the Offered Securities, and the delivery of the Offered Securities to or for the account of the Investors.
(nn) Compliance with SAFE Rules and Regulations. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company has taken reasonable steps to cause the Company’s shareholders who are residents or citizens of the PRC, to comply with any applicable rules and regulations of the State Administration of Foreign Exchange (“SAFE”) relating to such shareholders’ shareholding with the Company (the “SAFE Rules and Regulations”), including, without limitation, taking reasonable steps to require each shareholder that is, or is directly or indirectly owned or controlled by, a resident or citizen of the PRC to complete any registration and other procedures required under applicable SAFE Rules and Regulations.
(oo) M&A Rules. The Company is aware of and has been advised as to the content of the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors jointly promulgated by the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Tax Administration, the State Administration of Industry and Commerce, the China Securities Regulatory Commission (“CSRC”) and SAFE on August 8, 2006 (the “M&A Rules”), in particular the relevant provisions thereof that purport to require offshore special purpose vehicles formed for the purpose of obtaining a stock exchange listing outside of the PRC and controlled directly or indirectly by companies or natural persons of the PRC, to obtain the approval of the CSRC prior to the listing and trading of their securities on a stock exchange located outside of the PRC; the Company has received legal advice specifically with respect to the M&A Rules from its PRC counsel and based on such legal advice, the Company confirms with the Underwriters:
(i) Except as disclosed in the Disclosure Materials, Registration Statement and the Prospectus, the issuance and sale of the Offered Securities, the listing and trading of the Offered Securities on the Nasdaq Capital Market and the consummation of the transactions contemplated by this Agreement are not and will not be, as of the date hereof, at the Closing Date or the Option Closing Date, materially affected by the M&A Rules or any official clarifications, guidance, interpretations or implementation rules in connection with or related to the M&A Rules as amended as of the date hereof (collectively, the “M&A Rules and Related Clarifications”).
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(ii) Except as disclosed in the Disclosure Materials, Registration Statement and the Prospectus, as of the date hereof, the M&A Rules and Related Classifications did not and do not require the Company to obtain the approval of the CSRC prior to the issuance and sale of the Offered Securities, the listing and trading of the Offered Securities on the Nasdaq Capital Market, or the consummation of the transactions contemplated by this Agreement.
(pp) D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers prior to the Offering (the “Insiders”) as well as in the Lock-Up Agreement in the form attached hereto as Exhibit B provided to the Representative is true and correct in all respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires completed by each Insider to become inaccurate and incorrect.
Any certificate signed by an officer of the Company and delivered to the Representative or to counsel for the Representative shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters set forth therein. The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 5 hereof, counsel to the Company, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.
(qq) Solvency. Based on the consolidated financial condition of the Company as of each Closing Date, after giving effect to the receipt by the Company of the proceeds from the sale of the Offered Securities hereunder, the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, are sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). Except as set forth in the Registration Statement and the Prospectus, the Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from each Closing Date. The Registration Statement and the Prospectus set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with U.S. GAAP. Except as set forth in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
(rr) Regulation M Compliance. The Company has not, and to its knowledge no one authorized to act on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Offered Securities or Underlying Shares, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Offered Securities of the Underlying Shares, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Underwriter in connection with the Offering.
(ss) Testing the Waters Communications. The Company (a) has not alone engaged in any Testing-the-Waters Communication other than Testing-the-Waters Communications with the consent of the Underwriter with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (b) has not authorized anyone other than the Underwriter to engage in Testing-the-Waters Communications. The Company reconfirms that the Underwriter has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications.
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(tt) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries owns or controls, directly or indirectly, five percent or more of the outstanding shares of any class of voting securities or 25% or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
(uu) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon the Underwriters’ request.
(vv) Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Offered Securities or Warrants to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.
(ww) Integration. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities under the Securities Act.
(xx) No Fiduciary Duties. The Company acknowledges and agrees that the Underwriter’s responsibility to the Company is solely contractual in nature and that none of the Underwriter or its affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement. Notwithstanding anything in this Agreement to the contrary, the Company acknowledges that the Underwriter may have financial interests in the success of the Offering that are not limited to the difference between the price to the public and the purchase price paid to the Company by the Underwriter for the Offered Securities and the Warrants and the Underwriter has no obligation to disclose, or account to the Company for, any of such additional financial interests. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriter with respect to any breach or alleged breach of fiduciary duty.
SECTION 2. Firm Shares; Additional Shares and Underwriter’s Warrants.
(a) Purchase of Firm Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters an aggregate of 6,250,000 Class A Ordinary Shares (the “Firm Shares”) at a purchase price (net of discounts)1 of $[●] per Share. The Underwriters agree to purchase from the Company the Firm Shares.
(b) Delivery of and Payment for Firm Shares. Delivery of and payment for the Firm Shares shall be made at 10:00 A.M., Eastern time, on the third (3rd) Business Day following the Applicable Time, or at such time as shall be agreed upon by the Underwriters and the Company, at the offices of the Representative’s counsel or at such other place as shall be agreed upon by the Underwriters and the Company. The hour and date of delivery of and payment for the Firm Shares is called the “Closing Date.” The closing of the payment of the purchase price for is referred to herein as the “Closing.” Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds upon delivery to the Underwriters of certificates (in form and substance reasonably satisfactory to the Underwriters) representing the Firm Shares (or if uncertificated through the full fast transfer facilities of the Depository Trust Company (the “DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such names and in such denominations as the Underwriters may request in writing at least two Business Days prior to the Closing Date. If certificated, the Company will permit the Underwriters to examine and package the Firm Shares for delivery at least one full Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Underwriters for all the Firm Shares.
| 1 | 7% |
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(c) Additional Shares. The Company hereby grants to the Underwriters an option (the “Over-allotment Option”) to purchase up to an additional 937,5002 Class A Ordinary Shares (the “Additional Shares”), in each case solely for the purpose of covering over-allotments of such securities, if any. The Over-allotment Option is, at the Underwriters’ sole discretion, for Additional Shares.
(d) Exercise of Over-allotment Option. The Over-allotment Option granted pursuant to Section 2(c) hereof may be exercised by the Representative on or within 45 days after the Closing Date. The purchase price to be paid per Additional Shares shall be equal to the price per Firm Share in Section 2(a). The Underwriters shall not be under any obligation to purchase any Additional Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Underwriters, which shall be confirmed in writing via overnight mail or facsimile or other electronic transmission, setting forth the number of Additional Shares to be purchased and the date and time for delivery of and payment for the Additional Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Underwriters, at the offices of the Representative’s counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Underwriters. If such delivery and payment for the Additional Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Additional Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Additional Shares specified in such notice and (ii) the Underwriters shall purchase that portion of the total number of Additional Shares.
(e) Delivery and Payment of Additional Shares. Payment for the Additional Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, upon delivery to the Underwriters of certificates (in form and substance satisfactory to the Underwriters) representing the Additional Shares (or through the facilities of DTC) for the account of the Underwriters. The Additional Shares shall be registered in such name or names and in such authorized denominations as the Underwriters may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Additional Shares except upon tender of payment by the Underwriters for applicable Additional Shares. The Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term “Closing Date” shall refer to the time and date of delivery of the Firm Shares and Additional Shares.
(f) Underwriting Discount. In consideration of the services to be provided for hereunder, the Company shall pay to the Underwriters, with respect to any Offered Securities sold to investors in this Offering, a seven percent (7%) underwriting discount.
| 2 | 15% of the Firm Shares |
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(g) Underwriter’s Warrant. The Company hereby agrees to issue to the Representative (and/or its designees) on the applicable Closing Date and Option Closing Date (if applicable), Warrants, substantially in the form of Exhibit A attached hereto, to purchase such number of Class A Ordinary Shares equal to one percent (1%) of the Offered Securities sold by the Company (the “Underwriter’s Warrant”) for a nominal consideration of $0.01, including any Class A Ordinary Shares issued pursuant to the exercise of Over-allotment Option. The Underwriter’s Warrant shall be exercisable, in whole or in part, commencing anytime from the commencement of sales of the Offering and expiring on the fifth-year anniversary of the commencement of sale of the Offering at an initial exercise price of $[●] per Ordinary Share, which is equal to one hundred twenty percent (120%) of the initial public offering price of a Firm Share.
The Firm Shares, the Additional Shares and the Underwriter’s Warrants are hereinafter referred to collectively as the “Securities.”
SECTION 3. Covenants of the Company.
The Company covenants and agrees with the Underwriters as follows:
(a) Underwriter’s Review of Proposed Amendments and Supplements. During the period beginning at the Applicable Time and ending on the later of the Closing Date or such date as, in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by the Underwriters or selected dealers, including under circumstances where such requirement may be satisfied pursuant to Rule 172 under the Securities Act (the “Prospectus Delivery Period”), prior to amending or supplementing the Registration Statement or the Prospectus, including any amendment or supplement through incorporation by reference of any report filed under the Exchange Act, the Company shall furnish to the Underwriters for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Underwriters reasonably objects.
(b) Securities Act Compliance. After the date of this Agreement, during the Prospectus Delivery Period, the Company shall promptly advise the Underwriters in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to the Pricing Prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order or notice preventing or suspending the use of the Registration Statement, the Pricing Prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Offered Securities from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order or order or notice of prevention or suspension at any time, the Company will use commercially reasonable efforts to obtain the lifting of such order at the earliest possible moment, or will file a new registration statement and use commercially reasonable efforts to have such new registration statement declared effective as soon as practicable. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b) and 430A, as applicable, under the Securities Act, including with respect to the timely filing of documents thereunder and will confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission.
(c) Exchange Act Compliance. During the Prospectus Delivery Period, to the extent the Company becomes subject to reporting obligation under the Exchange Act, the Company will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the Exchange Act in the manner and within the time periods required by the Exchange Act.
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(d) Amendments and Supplements to the Registration Statement, Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event or development shall occur or condition exist as a result of which the Disclosure Package or the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in the light of the circumstances under which they were made, as the case may be, not misleading, or if it shall be necessary to amend or supplement the Disclosure Package or the Prospectus, in order to make the statements therein, in the light of the circumstances under which they were made, as the case may be, not misleading, or if in the opinion of the Underwriters it is otherwise necessary to amend or supplement the Registration Statement, the Disclosure Package or the Prospectus, or to file a new registration statement containing the Prospectus, in order to comply with law, including in connection with the delivery of the Prospectus, the Company agrees to (i) notify the Underwriters of any such event or condition (unless such event or condition was previously brought to the Company’s attention by the Underwriters during the Prospectus Delivery Period) and (ii) promptly prepare (subject to Section 3(a) and Section 3(f) hereof), file with the Commission (and use its commercially reasonable efforts to have any amendment to the Registration Statement or any new registration statement to be declared effective) and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Registration Statement, the Disclosure Package or the Prospectus, or any new registration statement, necessary in order to make the statements in the Disclosure Package or the Prospectus as so amended or supplemented, in the light of the circumstances under which they were made, as the case may be, not misleading or so that the Registration Statement, the Disclosure Package or the Prospectus, as amended or supplemented, will comply with law.
(e) Permitted Free Writing Prospectuses. The Company represents that it has not made, and agrees that, unless it obtains the prior written consent of the Underwriters, it will not make, any offer relating to the Offered Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus” (as defined in Rule 405 under the Securities Act) required to be filed by the Company with the Commission or retained by the Company under Rule 433 under the Securities Act; provided that the prior written consent of the Underwriters hereto shall be deemed to have been given in respect of each free writing prospectuses listed on Schedule B hereto. Any such free writing prospectus consented to by the Underwriters is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company agrees that (i) it has treated and will treat, as the case may be, each Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus, and (ii) has complied and will comply, as the case may be, with the requirements of Rules 164 and 433 under the Securities Act applicable to any Permitted Free Writing Prospectus, including in respect of timely filing with the Commission, legending and record keeping.
(f) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Underwriters, without charge, during the Prospectus Delivery Period, as many copies of each of the preliminary prospectuses, the Prospectus and the Disclosure Package and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Underwriters may reasonably request.
(g) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Offered Securities sold by it in the manner described under the caption “Use of Proceeds” in the Disclosure Package and the Prospectus.
(h) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Offered Securities.
(i) Internal Controls. The Company will maintain a system of internal accounting controls designed to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with U.S. GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The internal controls, upon consummation of the offering of the Offered Securities, will be, overseen by the Audit Committee (the “Audit Committee”) of the Board in accordance with the rules of the Nasdaq Stock Market (“Nasdaq”).
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(j) Exchange Listing. The Class A Ordinary Shares has been duly authorized for listing on the Nasdaq Capital Market, subject to official notice of issuance. The Company is in material compliance with the provisions of the rules and regulations promulgated by Nasdaq and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements (to the extent applicable to the Company as of the date hereof, the Closing Date or the Option Closing Date; and subject to all exemptions and exceptions from the requirements thereof as are set forth therein, to the extent applicable to the Company). Without limiting the generality of the foregoing and subject to the qualifications above: (i) all members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of each of the audit committee, compensation committee and nominating committee of the Company’s board of directors, meet the qualifications of independence as set forth under such laws, rules and regulations, (ii) the audit committee of the Company’s board of directors has at least one member who is an “audit committee financial expert” (as that term is defined under such laws, rules and regulations), and (iii) that, based on discussions with Nasdaq, the Company meets all requirements for listing on the Nasdaq Capital Market.
(k) Future Reports to the Underwriters. For one year after the date of this Agreement, the Company will furnish, if not otherwise available on EDGAR, to the Representative at 75 Rockefeller Plaza, Suite 18 C, New York, NY 10019, Attention: Edric Guo, CEO: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders’ equity and cash flows for the year then ended and the opinion thereon of the Company’s independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 20-F, quarterly financial statements using a Form 6-K or other report filed by the Company with the Commission; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock.
(l) No Manipulation of Price. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.
(m) Existing Lock-Up Agreements. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, there are no existing agreements between the Company and its security holders that prohibit the sale, transfer, assignment, pledge or hypothecation of any of the Company’s securities. The Company will direct the transfer agent to place stop transfer restrictions upon the securities of the Company that are bound by such “lock-up” agreements for the duration of the periods contemplated therein.
(n) Company Lock-Up.
(i) The Company will not, without the prior written consent of the Representative, from the date of execution of this Agreement and continuing for a period of twelve months from the commencement of the Company’s first day of trading (the “Lock-Up Period”), (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any Ordinary Shares or any securities convertible into or exercisable or exchangeable for Ordinary Shares, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Ordinary Shares or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or such other securities, in cash or otherwise, except to the Underwriter pursuant to this Agreement. The Company agrees not to accelerate the vesting of any option or warrant or the lapse of any repurchase right prior to the expiration of the Lock-Up Period.
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(ii) The restrictions contained in Section 3(n)(i) hereof shall not apply to: (A) the Offered Securities, (B) the Underlying Shares, (C) any Ordinary Shares issued under Company Stock Plans or warrants issued by the Company, in each case, described as outstanding in the Registration Statement, the Disclosure Package or the Prospectus, (D) any options and other awards granted under a Company Stock Plan or Ordinary Shares issued pursuant to an employee stock purchase plan, in each case, as described in the Registration Statement, the Disclosure Package or the Prospectus, and (E) Ordinary Shares or other securities issued in connection with a transaction with an unaffiliated third party that includes a bona fide commercial relationship (including joint ventures, marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) or any acquisition of assets or acquisition of not less than a majority or controlling portion of the equity of another entity; provided that (x) the aggregate number of Ordinary Shares issued pursuant to clause (E) shall not exceed five percent (5%) of the total number of outstanding Ordinary Shares immediately following the issuance and sale of the Offered Securities pursuant hereto and (y) the recipient of any such Ordinary Shares or other securities issued or granted pursuant to clause (E) during the Lock-Up Period shall enter into an agreement substantially in the form of Exhibit B hereto.
(o) Restriction on Continuous Offerings. Notwithstanding the restrictions contained in Section 3(n), the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Underwriter, it will not, for a period of twelve months from the commencement of the Company’s first day of trading, directly or indirectly in any “at-the-market” or continuous equity transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of the Company or any securities convertible into or exercisable or exchangeable for shares of the Company.
SECTION 4. Payment of Fees and Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay all costs, fees and expenses incurred in connection with the transactions contemplated hereby, including without limitation (i) all of the reasonable and documented out-of-pocket expenses (including, but not limited to, travel, due diligence expenses, reasonable fees and expenses of its legal counsel, roadshow and background check on the Company’s principals) incurred by the Representative in an aggregate amount not to exceed $250,000, (ii) all expenses incident to the issuance and delivery of the Offered Securities (including all printing and engraving costs, if any), (iii) all fees and expenses of the clearing firm, registrar and transfer agent of the Offered Securities, (iv) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Offered Securities, (v) all fees and expenses of the Company’s counsel, independent public or certified public accountants and other advisors, (vi) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each Issuer Free Writing Prospectus, each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, and (vii) all filing fees, attorneys’ fees and expenses incurred by the Company, or the Representative, in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Offered Securities for offer and sale under the state securities or blue sky laws, and, if requested by the Representative, preparing and printing a “Blue Sky Survey” or memorandum, and any supplements thereto, advising the Representative of such qualifications, registrations and exemptions. The Company has advanced $30,000 to the Representative to cover its out-of-pocket expenses. The advance will be returned to the Company to the extent such out-of-pocket accountable expenses are not actually incurred in accordance with FINRA Rule 5110(g)(4)(A). The Company also agrees to pay to the Underwriters or their respective designees a non-accountable expense allowance of one percent (1.0%) of the gross proceeds of the Offering.
SECTION 5. Conditions of the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Offered Securities as provided herein on the Closing Date or the Option Closing Date shall be subject to (1) the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the Closing Date or the Option Closing Date as though then made; (2) the timely performance by the Company of its covenants and other obligations hereunder; and (3) each of the following additional conditions:
(a) Accountants’ Comfort Letters. On the date hereof, the Representative shall have received from each of the Accountants, a letter dated the date hereof addressed to the Representative, in form and substance satisfactory to the Representative, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to Representative, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus.
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(b) Effectiveness of Registration Statement; Compliance with Registration Requirements; No Stop Order. During the period from and after the execution of this Agreement to and including the Closing Date or the Option Closing Date, as applicable:
(i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; and
(ii) no stop order suspending the effectiveness of the Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission.
(c) No Material Adverse Change. For the period from and after the date of this Agreement to and including the Closing Date or the Option Closing Date, in the reasonable judgment of the Representative there shall not have occurred any Material Adverse Change.
(d) CFO Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a written certificate executed by the Chief Financial Officer of the Company, dated as of such date, on behalf of the Company, with respect to certain financial data contained in the Registration Statement, Disclosure Package and the Prospectus, providing “management comfort” with respect to such information, in form and substance reasonably satisfactory to the Underwriter.
(e) Officers’ Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a written certificate executed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated as of such date, to the effect that the signers of such certificate have reviewed the Registration Statement, the Disclosure Package and the Prospectus and any amendment or supplement thereto, each Issuer Free Writing Prospectus and this Agreement, to the effect that:
(i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date;
(ii) No stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or, to the Company’s knowledge, threatened under the Securities Act; no order having the effect of ceasing or suspending the distribution of the Offered Securities or any other securities of the Company has been issued by any securities commission, securities regulatory authority or stock exchange in the United States and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, contemplated by any securities commission, securities regulatory authority or stock exchange in the United States; and
(iii Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been: (a) any Material Adverse Change; (b) any transaction that is material to the Company and the Subsidiaries taken as a whole, except transactions entered into in the ordinary course of business; (c) any obligation, direct or contingent, that is material to the Company and the Subsidiaries taken as a whole, incurred by the Company or any Subsidiary, except obligations incurred in the ordinary course of business; (d) any material change in the capital stock (except changes thereto resulting from the exercise of outstanding options or warrants or conversion of outstanding indebtedness into Ordinary Shares of the Company) or outstanding indebtedness of the Company or any Subsidiary (except for the conversion of such indebtedness into Ordinary Shares of the Company); (e) any dividend or distribution of any kind declared, paid or made on Ordinary Shares of the Company; or (f) any loss or damage (whether or not insured) to the property of the Company or any Subsidiary which has been sustained or will have been sustained which has a Material Adverse Effect.
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(f) Secretary’s Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated such Closing Date, certifying: (i) that each of the Company’s Amended and Restated Memorandum and Articles of Association attached to such certificate is true and complete, has not been modified and is in full force and effect; (ii) that each of the Subsidiaries articles of association, memorandum of association or charter documents attached to such certificate is true and complete, has not been modified and is in full force and effect; (iii) that the resolutions of the Company’s Board of Directors relating to the Offering attached to such certificate are in full force and effect and have not been modified; and (iv) the good standing of the Company and each of the Subsidiaries (except in such jurisdictions where the concept of good standing is not applicable). The documents referred to in such certificate shall be attached to such certificate.
(g) Bring-down Comfort Letters. On the Closing Date and/or the Option Closing Date, the Representative shall have received from each of the Accountants, a letter dated such date, in form and substance satisfactory to the Representative, to the effect that the Accountants reaffirm the statements made in the letter furnished by it pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the Closing Date and/or the Option Closing Date.
(h) Lock-Up Agreement from Certain Securityholders of the Company. On or prior to the date hereof, the Company shall have furnished to the Representative an agreement substantially in the form of Exhibit B hereto from each of the Company’s officers, directors, security holders of 5% or more of the Company’s Ordinary Shares or securities convertible into or exercisable for the Company’s Ordinary Shares listed on Schedule D hereto.
(i) Exchange Listing. The Offered Securities to be delivered on the Closing Date and/or the Option Closing Date shall have been approved for listing on the Nasdaq Capital Market, subject to official notice of issuance.
(j) Company Counsel Opinions. On the Closing Date and/or the Option Closing Date, the Representative shall have received
(i) the favorable opinion of Ortoli Rosenstadt LLP, U.S. securities counsel to the Company, dated as of such date, addressed to the Representative, including negative assurances, in form and substance reasonably satisfactory to the Representative;
(ii) the favorable opinion of Appleby, Cayman Islands counsel to the Company, in form and substance reasonably satisfactory to the Representative; and
(iii) the favorable opinion of Tianyuan Law Firm, PRC counsel to the Company, in form and substance reasonably satisfactory to the Representative.
The Underwriter shall rely on the opinions of (i) the Company’s Cayman Islands counsel, Appleby, filed as Exhibit 5.1 to the Registration Statement, as to the due incorporation, validity of the Offered Securities and the Underlying Shares and due authorization, execution and delivery of the Agreement and (ii) the Company’s PRC counsel, Tianyuan Law Firm, filed as Exhibit 8.1 to the Registration Statement.
(k) Additional Documents. On or before the Closing Date and/or the Option Closing Date, the Representative and counsel for the Representative shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Offered Securities as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representative by written notice to the Company at any time on or prior to the Closing Date and/or the Option Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4 (with respect to the reimbursement of out-of-pocket accountable, bona fide expenses actually incurred by the Representative) and Section 7 shall at all times be effective and shall survive such termination.
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SECTION 6. Effectiveness of this Agreement. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification (including by way of oral notification from the reviewer at the Commission) by the Commission to the Company of the effectiveness of the Registration Statement under the Securities Act.
SECTION 7. Indemnification.
(a) Indemnification by the Company. The Company shall indemnify and hold harmless the Underwriters, their respective affiliates and each of their respective directors, officers, members, employees and agents and each person, if any, who controls such Underwriters within the meaning of Section 15 of the Securities Act of or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each a “Underwriter Indemnified Party”) from and against any losses, claims, damages or liabilities (including in settlement of any litigation if such settlement is effected with the prior written consent of the Company) arising out of (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Securities Act Regulations, or arise out of or are based upon the omission from the Registration Statement, or alleged omission to state therein, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or (ii) an untrue statement or alleged untrue statement of a material fact contained in the Prospectus, or any amendment or supplement thereto, or in any other materials used in connection with the Offering, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and shall reimburse such Underwriter Indemnified Party for any legal or other expenses reasonably incurred by it in connection with evaluating, investigating or defending against such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon an untrue statement in, or omission from any preliminary prospectus, any Registration Statement or the Prospectus, or any such amendment or supplement thereto, or any Issuer Free Writing Prospectus or in any other materials used in connection with the Offering made in reliance upon and in conformity with the Underwriter Information. The indemnification obligations under this Section 7(a) are not exclusive and will be in addition to any liability, which the Underwriters might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party.
(b) Indemnification by the Underwriters. The Underwriters shall indemnify and hold harmless the Company and the Company’s affiliates and each of their respective directors, officers, employees, agents and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Company Indemnified Parties” and each a “Company Indemnified Party”) from and against any losses, claims, damages or liabilities (including in settlement of any litigation if such settlement is effected with the prior written consent of the Underwriters) arising out (i) any untrue statement of a material fact contained in any preliminary prospectus, any Issuer Free Writing Prospectus, any “issuer information” filed or required to be filed pursuant to Rule 433(d) of the Securities Act Regulations, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, or (ii) the omission to state in any preliminary prospectus, any Issuer Free Writing Prospectus, any “issuer information” filed or required to be filed pursuant to Rule 433(d) of the Securities Act Regulations, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or omission was made in reliance upon and in conformity with the Underwriters Information and shall reimburse the Company for any legal or other expenses reasonably incurred by such party in connection with investigating or preparing to defend or defending against or appearing as third party witness in connection with any such loss, claim, damage, liability, action, investigation or proceeding, as such fees and expenses are incurred. Notwithstanding the provisions of this Section 7(b), in no event shall any indemnity by the Underwriters under this Section 7(b) exceed the total discounts received by the Underwriters in connection with the Offering. The indemnification obligations under this Section 7(b) are not exclusive and will be in addition to any liability, which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Company Indemnified Party.
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(c) Procedure. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify such indemnifying party in writing of the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent it has been materially adversely prejudiced by such failure; and, provided, further, that the failure to notify an indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 7. If any such action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense of such action with counsel reasonably satisfactory to the indemnified party (which counsel shall not, except with the written consent of the indemnified party, be counsel to the indemnifying party). After notice from the indemnifying party to the indemnified party of its election to assume the defense of such action, except as provided herein, the indemnifying party shall not be liable to the indemnified party under Section 7(a) or 7(b), as applicable, for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense of such action other than reasonable costs of investigation; provided, however, that any indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense of such action but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be at the expense of such indemnified party unless (i) the employment thereof has been specifically authorized in writing by the Company in the case of a claim for indemnification under Section 7(a), (ii) such indemnified party shall have been advised by its counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party, or (iii) the indemnifying party has failed to assume the defense of such action and employ counsel reasonably satisfactory to the indemnified party within a reasonable period of time after notice of the commencement of the action or the indemnifying party does not diligently defend the action after assumption of the defense, in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of (or, in the case of a failure to diligently defend the action after assumption of the defense, to continue to defend) such action on behalf of such indemnified party and the indemnifying party shall be responsible for legal or other expenses subsequently incurred by such indemnified party in connection with the defense of such action; provided, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time any such indemnified party (in addition to any local counsel), which firm shall be designated in writing by the Underwriters if the indemnified party under this Section 7 is an Underwriter Indemnified Party or by the Company if an indemnified party under this Section 7 is a Company Indemnified Party. Subject to this Section 7(c), the amount payable by an indemnifying party under Section 7 shall include, but not be limited to, (x) reasonable legal fees and expenses of counsel to the indemnified party and any other expenses in investigating, or preparing to defend or defending against, or appearing as a third party witness in respect of, or otherwise incurred in connection with, any action, investigation, proceeding or claim, and (y) all amounts paid in settlement of any of the foregoing. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of judgment with respect to any pending or threatened action or any claim whatsoever, in respect of which indemnification or contribution could be sought under this Section 7 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party in form and substance reasonably satisfactory to such indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. Subject to the provisions of the following sentence, no indemnifying party shall be liable for settlement of any pending or threatened action or any claim whatsoever that is effected without its written consent (which consent shall not be unreasonably withheld or delayed), but if settled with its written consent, if its consent has been unreasonably withheld or delayed or if there be a judgment for the plaintiff in any such matter, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, if at any time an indemnified party shall have requested that an indemnifying party reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated herein effected without its written consent if (i) such settlement is entered into more than forty-five (45) days after receipt by such indemnifying party of the request for reimbursement, (ii) such indemnifying party shall have received notice of the terms of such settlement at least thirty (30) days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
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(d) Contribution. If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a) or Section 7(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid, payable or otherwise incurred by such indemnified party as a result of such loss, claim, damage, expense or liability (or any action, investigation or proceeding in respect thereof), as incurred, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified parry or parties on the other hand from the offering of the Offered Securities, or (ii) if the allocation provided by clause (i) of this Section 7(d) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) of this Section 7(d) but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party or parties on the other with respect to the statements, omissions, acts or failures to act which resulted in such loss, claim, damage, expense or liability (or any action, investigation or proceeding in respect thereof) as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total proceeds from the offering of the Offered Securities purchased by investors as contemplated by this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company by the Underwriters for use in any preliminary prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriter’s Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(d) be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage, expense, liability, action, investigation or proceeding referred to above in this Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third party witness in respect of, or otherwise incurred in connection with, any such loss, claim, damage, expense, liability, action, investigation or proceeding. Notwithstanding the provisions of this Section 7(d), the Underwriters shall not be required to contribute any amount in excess of the total discounts received in cash by the Underwriters in connection with the Offering less the amount of any damages that the Underwriters have otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement, omission or alleged omission, act or alleged act or failure to act or alleged failure to act. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
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SECTION 8. Termination of this Agreement. Prior to the Closing Date, whether before or after notification by the Commission to the Company of the effectiveness of the Registration Statement under the Securities Act, this Agreement may be terminated by the Underwriters by written notice given to the Company if at any time (i) trading or quotation in any of the Company’s securities shall have been suspended or limited by the Commission or by Nasdaq; (ii) a general banking moratorium shall have been declared by any U.S. federal or Cayman Islands authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States’ or international political, financial or economic conditions that, in the reasonable judgment of the Underwriters, is material and adverse and makes it impracticable to market the Offered Securities in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; and (iv) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative’s opinion, make it inadvisable to proceed with the delivery of the Offered Securities, (v) if the Company is in material breach of any of its representations, warranties or covenants hereunder, or (vi) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Offered Securities or to enforce contracts made by the Underwriters for the sale of the Offered Securities. Any termination pursuant to this Section 8 shall be without liability on the part of (a) the Company to any of the Underwriters, except that the Company shall be, subject to demand by the Underwriters, obligated to reimburse the Underwriters for only those out-of-pocket expenses (including the reasonable fees and expenses of their counsel, and expenses associated with a due diligence report), actually incurred by the Underwriters in connection herewith as allowed under FINRA Rule 5110, less any amounts previously paid by the Company; provided, however, that all such expenses shall not exceed $150,000 in the aggregate, (b) the Underwriters to the Company, or (c) of any party hereto to any other party except that the provisions of Section 4 (with respect to the reimbursement of out-of-pocket accountable, bona fide expenses actually incurred by the Underwriters) and Section 7 shall at all times be effective and shall survive such termination.
SECTION 9. No Advisory or Fiduciary Responsibility. The Company hereby acknowledges that the Underwriters are acting solely as underwriters in connection with the offering of the Offered Securities. The Company further acknowledges that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s-length basis and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, shareholders, creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the offering of the Offered Securities, either before or after the date hereof. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Company, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company hereby confirms its understanding and agreement to that effect. The Company hereby further confirms its understanding that no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the Offering contemplated hereby or the process leading thereto, including, without limitation, any negotiation related to the pricing of the Offered Securities; and the Company has consulted its own legal and financial advisors to the extent it has deemed appropriate in connection with this Agreement and the Offering. The Company and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions, and that any opinions or views expressed by the Underwriters to the Company regarding such transactions, including but not limited to any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of any fiduciary or similar duty to the Company in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.
SECTION 10. Representations and Indemnities to Survive Delivery; Third Party Beneficiaries. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Offered Securities sold hereunder and any termination of this Agreement. Each Investor shall be a third party beneficiary with respect to the representations, warranties, covenants and agreements of the Company set forth herein.
Section 11. Right of First Refusal. The Company agreed to grant the Representative for the 12-month period following the Closing Date a right of first refusal to provide investment banking services to the Company on an exclusive basis in all matters for which investment banking services are sought by the Company. In accordance with FINRA Rule 5110(g)(6)(A)(i), such right of first refusal shall not have a duration of more than three years from the commencement of sales of the Offering or the termination date of the engagement between the Company and the Underwriters.
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SECTION 12. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered, or emailed to the parties hereto as follows:
If to the Underwriters:
Univest Securities, LLC
75 Rockefeller Plaza, Suite 18 C
New York, NY 10019
Attn: Edric Guo
| Email: | yguo@univest.us |
Phone No.: 212 343-8888
Fax No.: 212-966-0648
With a copy (which shall not constitute notice) to:
Hunter Taubman Fischer & Li LLC
48 Wall Street, Suite 1100
New York, NY 10005
| Attn: | Ying Li, Esq. |
| Attn.: | Guillaume de Sampigny. Esq. |
| Email: | yli@htflawyers.com |
| gdesampigny@htflawyers.com |
If to the Company:
Lichen China Limited
B2306, Block B, Tower 3, Jinjiang Wanda Plaza Commercial Complex
888 Century Avenue, Meiling Street
Jinjiang City, Fujian Province, China
| Attn: | Ya Li |
| Email: | xmqcw@163.com |
With a copy (which shall not constitute notice) to:
Ortoli Rosenstadt LLP
366 Madison Avenue, 3rd Floor
New York, NY 10017
Attn: William S. Rosenstadt, Esq.
Attn: Mengyi “Jason” Ye, Esq.
| Email: | wsr@orllp.legal |
jye@orllp.legal
Any party hereto may change the address for receipt of communications by giving written notice to the others.
SECTION 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term “successors” shall not include any purchaser of the Offered Securities as such merely by reason of such purchase.
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SECTION 14. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 15. Governing Law Provisions. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof.
SECTION 16. Consent to Jurisdiction. No legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby (each, a “Related Proceeding”) may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts (collectively, the “Specified Courts”) shall have jurisdiction over the adjudication of any Related Proceeding, and the parties to this Agreement hereby irrevocably consent to the exclusive jurisdiction the Specified Courts and personal service of process with respect thereto. The parties to this Agreement hereby irrevocably waive any objection to the laying of venue of any Related Proceeding in the Specified Courts and irrevocably waive and agree not to plead or claim in any Specified Court that any Related Proceeding brought in any Specified Court has been brought in an inconvenient forum.
SECTION 17. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the Offering, except for those specific provisions of the Engagement Letter between the Company and the Representative, dated as of May 13, 2021 (the “Engagement Letter”) that are not related to the Offering, each of which provisions shall remain in full force and effect for the term of the Engagement Letter. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification and contribution provisions of Section 7, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Section 7 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act.
The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Underwriters, the officers or employees of the Underwriters, any person controlling any of the Underwriters, the Company, the officers or employees of the Company, or any person controlling the Company, (ii) acceptance of the Offered Securities and payment for them as contemplated hereby and (iii) termination of this Agreement.
Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters’ officers and employees, any controlling persons referred to herein, the Company’s directors and the Company’s officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term “successors and assigns” shall not include a purchaser of any of the Offered Securities from the Underwriters merely because of such purchase.
[Signature Page Follows]
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If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.
| Very truly yours, | |||
| Lichen CHINA LIMITED | |||
| By: | |||
| Name: | Ya Li | ||
| Title: | CEO | ||
The foregoing Underwriting Agreement is hereby confirmed and accepted by the Underwriters as of the date first above written.
| For itself and on behalf of the several | |||
| Underwriters listed on Schedule A hereto | |||
| UNIVEST SECURITIES, LLC | |||
| By: | |||
| Name: | Edric Guo | ||
| Title: | CEO | ||
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SCHEDULE A
| Underwriter | Number of Firm Shares | |||
| Univest Securities, LLC | ||||
| Total | 6,250,000 | |||
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SCHEDULE B
Issuer Free Writing Prospectus(es)
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SCHEDULE C
Pricing Information
Number of Firm Shares: 6,250,000
Number of Additional Shares: 937,500
Public Offering Price per one Share:
Underwriting Discount per one Share:
Proceeds to Company per one Share (before expenses):
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SCHEDULE D
Lock-Up Parties
| Name | # of Shares |
| Ya Li | 9,000,000 Class B Ordinary Shares* |
| Zhixiang Fang | 0 |
| Yi Deng | 0 |
| Zhihuang Deng | 0 |
| Lourdes Felix | 0 |
| Kipton Cariaga | 0 |
| Silver Sky Investment Limited | 9,000,000 Class B Ordinary Shares |
| Sensation Investment Limited | 2,250,000 Class A Ordinary Shares |
| China EC Investment (Hong Kong) Limited | 1,125,000 Class A Ordinary Shares |
| Dong Chang Ventures Limited | 1,125,000 Class A Ordinary Shares |
| Suqin Deng | 1,012,500 Class A Ordinary Shares |
| Chunyan Wei | 1,012,500 Class A Ordinary Shares |
| Shengbi Chen | 900,000 Class A Ordinary Shares |
| Meizhen Li | 900,000 Class A Ordinary Shares |
| Hongyu Wang | 900,000 Class A Ordinary Shares |
| Zhen Wang | 900,000 Class A Ordinary Shares |
| Shishan Wu | 900,000 Class A Ordinary Shares |
| Peng Ye | 675,000 Class A Ordinary Shares |
| * | Ya Li is deemed to beneficially own 9,000,000 Class B Ordinary Shares through Silver Sky Investment Limited, a British Virgin Islands company holding 9,000,000 shares of our Class B Ordinary Shares. Ya Li has the sole voting and dispositive power of all the shares held by Silver Sky Investment Limited. |
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SCHEDULE E
Subsidiaries
| Subsidiary | Jurisdiction of Incorporation | ||
| Legend Consulting Investments Limited | British Virgin Islands | ||
| Legend Consulting Limited (HK) | Hong Kong | ||
| Fujian Province Lichen Management and Consulting Company Limited | PRC | ||
| Xiamen City Legend Education Services Company Limited | PRC |
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EXHIBIT A
Form of Warrant
As attached.
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EXHIBIT B
Form of Lock-Up Agreement
As attached.
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Exhibit 3.1
AMENDED AND
RESTATED
MEMORANDUM
AND
ARTICLES
OF ASSOCIATION
OF
Lichen China Limited
Incorporated on 13 April 2016
INCORPORATED IN THE CAYMAN ISLANDS
THE COMPANIES ACT (AS REVISED)
Company Limited by Shares
AMENDED AND RESTATED
MEMORANDUM OF ASSOCIATION
OF
Lichen China Limited
| 1. | The name of the Company is Lichen China Limited. |
| 2. | The Registered Office of the Company shall be at the offices of Ocorian Trust (Cayman) Limited, Windward 3, Regatta Office Park, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands or at such other place as the Directors may from time to time decide. |
| 3. | The objects for which the Company is established are unrestricted and shall include, but without limitation, the following: |
| (a) | (i) | To carry on the business of an investment company and to act as promoters and entrepreneurs and to carry on business as financiers, capitalists, concessionaires, merchants, brokers, traders, dealers, agents, importers and exporters and to undertake and carry on and execute all kinds of investment, financial, commercial, mercantile, trading and other operations. |
| (ii) | To carry on whether as principals, agents or otherwise howsoever the business of realtors, developers, consultants, estate agents or managers, builders, contractors, engineers, manufacturers, dealers in or vendors of all types of property including services. |
| (b) | To exercise and enforce all rights and powers conferred by or incidental to the ownership of any shares, stock, obligations or other securities including without prejudice to the generality of the foregoing all such powers of veto or control as may be conferred by virtue of the holding by the Company of some special proportion of the issued or nominal amount thereof, to provide managerial and other executive, supervisory and consultant services for or in relation to any company in which the Company is interested upon such terms as may be thought fit. |
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| (c) | To purchase or otherwise acquire, to sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with real and personal property and rights of all kinds and, in particular, mortgages, debentures, produce, concessions, options, contracts, patents, annuities, licences, stocks, shares, bonds, policies, book debts, business concerns, undertakings, claims, privileges and choses in action of all kinds. |
| (d) | To subscribe for, conditionally or unconditionally, to underwrite, issue on commission or otherwise, take, hold, deal in and convert stocks, shares and securities of all kinds and to enter into partnership or into any arrangement for sharing profits, reciprocal concessions or cooperation with any person or company and to promote and aid in promoting, to constitute, form or organise any company, syndicate or partnership of any kind, for the purpose of acquiring and undertaking any property and liabilities of the Company or of advancing, directly or indirectly, the objects of the Company or for any other purpose which the Company may think expedient. |
| (e) | To stand surety for or to guarantee, support or secure the performance of all or any of the obligations of any person, firm or company whether or not related or affiliated to the Company in any manner and whether by personal covenant or by mortgage, charge or lien upon the whole or any part of the undertaking, property and assets of the Company, both present and future, including its uncalled capital or by any such method and whether or not the Company shall receive valuable consideration thereof. |
| (f) | To engage in or carry on any other lawful trade, business or enterprise which may at any time appear to the Directors of the Company capable of being conveniently carried on in conjunction with any of the aforementioned businesses or activities or which may appear to the Directors or the Company likely to be profitable to the Company. |
In the interpretation of this Memorandum of Association in general and of this Clause 3 in particular no object, business or power specified or mentioned shall be limited or restricted by reference to or inference from any other object, business or power, or the name of the Company, or by the juxtaposition of two or more objects, businesses or powers and that, in the event of any ambiguity in this clause or elsewhere in this Memorandum of Association, the same shall be resolved by such interpretation and construction as will widen and enlarge and not restrict the objects, businesses and powers of and exercisable by the Company.
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| 4. | Except as prohibited or limited by the Companies Act (as revised), the Company shall have full power and authority to carry out any object and shall have and be capable of from time to time and at all times exercising any and all of the powers at any time or from time to time exercisable by a natural person or body corporate in doing in any part of the world whether as principal, agent, contractor or otherwise whatever may be considered by it necessary for the attainment of its objects and whatever else may be considered by it as incidental or conducive thereto or consequential thereon, including, but without in any way restricting the generality of the foregoing, the power to make any alterations or amendments to this Memorandum of Association and the Articles of Association of the Company considered necessary or convenient in the manner set out in the Articles of Association of the Company, and the power to do any of the following acts or things, viz: to pay all expenses of and incidental to the promotion, formation and incorporation of the Company; to register the Company to do business in any other jurisdiction; to sell, lease or dispose of any property of the Company; to draw, make, accept, endorse, discount, execute and issue promissory notes, debentures, bills of exchange, bills of lading, warrants and other negotiable or transferable instruments; to lend money or other assets and to act as guarantors; to borrow or raise money on the security of the undertaking or on all or any of the assets of the Company including uncalled capital or without security; to invest monies of the Company in such manner as the Directors determine; to promote other companies; to sell the undertaking of the Company for cash or any other consideration; to distribute assets in specie to Members of the Company; to make charitable or benevolent donations; to pay pensions or gratuities or provide other benefits in cash or kind to Directors, officers, employees, past or present and their families; to purchase Directors and officers liability insurance and to carry on any trade or business and generally to do all acts and things which, in the opinion of the Company or the Directors, may be conveniently or profitably or usefully acquired and dealt with, carried on, executed or done by the Company in connection with the business aforesaid PROVIDED THAT the Company shall only carry on the businesses for which a licence is required under the laws of the Cayman Islands when so licensed under the terms of such laws. |
| 5. | The liability of each Member is limited to the amount from time to time unpaid on such Member’s shares. |
| 6. | The share capital of the Company is US$50,000 divided into (a) 1,000,000,000 series A ordinary shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 series B ordinary shares with a nominal or par value of US$0.00004 each with power for the Company insofar as is permitted by law, to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Act (as revised) and the Articles of Association and to issue any part of its capital, whether original, redeemed or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be preference or otherwise shall be subject to the powers hereinbefore contained PROVIDED ALWAYS that, notwithstanding any provision to the contrary contained in this Memorandum of Association, the Company shall have no power to issue bearer shares, warrants, coupons or certificates. |
| 7. | If the Company is registered as exempted, its operations will be carried on subject to the provisions of Section 174 of the Companies Act (as revised) and, subject to the provisions of the Companies Act (as revised) and the Articles of Association, it shall have the power to register by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. |
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THE COMPANIES ACT (AS REVISED)
Company Limited by Shares
AMENDED AND
RESTATED
ARTICLES OF ASSOCIATION
OF
Lichen China Limited
| 1. | In these Articles Table A in the Schedule to the Statute does not apply and, unless there be something in the subject or context inconsistent therewith, |
| “Articles” | means the Articles as originally framed or as from time to time altered by Special Resolution. |
| “Auditors” | means the persons for the time being performing the duties of auditors of the Company. |
| “Company” | means the above named Company. |
| “debenture” | means debenture stock, mortgages, bonds and any other such securities of the Company whether constituting a charge on the assets of the Company or not. |
| “Directors” | means the directors for the time being of the Company. “dividend” includes bonus. |
| “Designated Stock Exchanges” | means NASDAQ Capital Markets in the United States of America for so long as the Company’s Shares are there listed and any other stock exchange on which the Company’s Shares are listed for trading. |
| “fully paid” | shall bear the meaning as ascribed to it in the Statute. “Member” shall bear the meaning as ascribed to it in the Statute. |
| “month” | means calendar month. |
| “ordinary resolution” | shall mean (a) a resolution passed by a simple majority of the votes cast by such Members as, being entitled so to do, vote in person or, by proxy or, in the cases of Members which are corporations, by their respective duly authorised representatives at a general meeting held in accordance with these Articles; or (b) a written resolution signed by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments, if more than one, is executed. |
| “paid-up” | means paid-up and/or credited as paid-up. |
“Series
A Ordinary |
shall mean series A ordinary shares in the capital of the Company with a nominal or par value of US$0.00004 each. |
“Series
B Ordinary |
shall mean series B ordinary shares in the capital of the Company with a nominal or par value of US$0.00004 each. |
| “registered office” | means the registered office for the time being of the Company. |
| “Seal” | means the common seal of the Company and includes every duplicate seal. |
| “Secretary” | includes an Assistant Secretary and any person appointed to perform the duties of Secretary of the Company. |
| “share” | includes a fraction of a share. |
| “Special Resolution” | shall mean (a) a resolution passed by a majority of not less than 2/3 of the votes cast by such Members as, being entitled so to do, vote in person or by proxy or, in the cases of Members which are corporations, by their respective duly authorised representatives at a general meeting held in accordance with these Articles; or (b) a written resolution signed by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments, if more than one, is executed. |
| “Statute” | means the Companies Act of the Cayman Islands as amended and every statutory modification or re-enactment thereof for the time being in force. |
| “written”
and “in writing” | include all modes of representing or reproducing words in visible form. |
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Words importing the singular number only include the plural number and vice versa.
Words importing the masculine gender only include the feminine gender.
Words importing persons only include corporations.
| 2. | The business of the Company may be commenced as soon after incorporation as the Directors shall see fit, notwithstanding that part only of the shares may have been allotted. |
| 3. | The Directors may pay, out of the capital or any other monies of the Company, all expenses incurred in or about the formation and establishment of the Company including the expenses of registration. |
CERTIFICATES FOR SHARES
| 4. | Certificates representing shares of the Company shall be in such form as shall be determined by the Directors. Such certificates may be under Seal. All certificates for shares shall be consecutively numbered or otherwise identified and shall specify the shares to which they relate. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered in the register of Members of the Company. All certificates surrendered to the Company for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled. The Directors may authorise certificates to be issued with the seal and authorised signature(s) affixed by some method or system of mechanical process. |
| 5. | Notwithstanding Article 4 of these Articles, if a share certificate be defaced, lost or destroyed, it may be renewed on payment of a fee of one dollar (US$l.00) or such less sum and on such terms (if any) as to evidence and indemnity and the payment of the expenses incurred by the Company in investigating evidence, as the Directors may prescribe. |
RIGHTS ATTACHING TO SHARES
| 5A. | The holders of Series A Ordinary Shares and Series B Ordinary Shares shall at all times vote together as one class on all resolutions of the Members. On each resolution subject to a vote at general meetings on a poll, each Series A Ordinary Share shall entitle its holder to one vote and each Series B Ordinary Share shall entitle its holder to ten votes. On each resolution subject to a vote at general meetings on a show of hands, each Series A Ordinary Share shall entitle its holder to one vote and each Series B Ordinary Share shall entitle its holder to ten votes. |
|
CONVERSION OF SERIES B ORDINARY SHARES
| |
| 5B. |
A holder of Series B Ordinary Shares (a “Series B Holder”) may at any time, by notice in writing to the Company (“Conversion Notice”), require the conversion of all or only some of the Series B Ordinary Shares held by him/her/it into Series A Ordinary Shares.
|
| 5C. |
Those Series B Ordinary Shares specified in a Conversion Notice shall convert automatically on the date such Conversion Notice is served on the Company unless the Conversion Notice states that conversion is to be effective on some later date, or when any conditions specified in the Conversion Notice have been fulfilled, in which case conversion shall take effect on that later date, or when such conditions have been fulfilled (as the case may be) (the “Conversion Date”).
|
| 5D. |
Within five (5) days after the Conversion Date each Series B Holder shall deliver the share certificate (or an indemnity in a form reasonably satisfactory to the Directors in respect of any lost share certificate(s)) in respect of the Series B Ordinary Shares being converted to the Company at the office of its registered agent for the time being.
|
| 5E. |
In the case where a conversion is subject to any condition(s) specified in the Conversion Notice being fulfilled, if such condition(s) has not been satisfied or waived by the relevant Series B Holder by the time of the Conversion Date such conversion shall be deemed not to have occurred.
|
5
| 5F. |
On the Conversion Date, the relevant Series B Ordinary Shares (specified in the relevant Conversion Notice) shall without any further authority or actions stand converted into Series A Ordinary Shares on the basis of one fully paid Series A Ordinary Share for each Series B Ordinary Share held (the “Conversion”) and the Series A Ordinary Shares resulting from the Conversion shall in all respects rank pari passu with the existing issued Series A Ordinary Shares.
|
| 5G. | The registered agent of the Company shall, on the Conversion Date, enter the name of the Series B Holder on the register of members of the Company as the holder of the appropriate number of fully paid Series A Ordinary Shares in accordance with the Conversion and, subject to the relevant Series B Holder delivering his/her/its share certificate(s) (or an indemnity in a form reasonably acceptable to the Directors) in respect of the Series B Ordinary Shares being converted in accordance with Article 5D, the Company shall within ten (10) days of the Conversion Date forward to such Series B Holder by post to his/her/its address shown in the register of members, free of charge, a new share certificate for the appropriate number of fully paid Series A Ordinary Shares in accordance with the Conversion. |
ISSUE OF SHARES
| 6. | Subject to the provisions, if any, in that behalf in the Memorandum of Association and to any direction that may be given by the Company in general meeting and without prejudice to any special rights previously conferred on the holders of existing shares, the Directors may allot, issue, grant options over or otherwise dispose of shares of the Company (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper PROVIDED ALWAYS that, notwithstanding any provision to the contrary contained in these Articles of Association, the Company shall be precluded from issuing bearer shares, warrants, coupons or certificates. |
| 7. | The Company shall maintain a register of its Members and every person whose name is entered as a Member in the register of Members shall be entitled without payment to receive within two months after allotment or lodgement of transfer (or within such other period as the conditions of issue shall provide) one certificate for all his shares or several certificates each for one or more of his shares upon payment of fifty cents (US$0.50) for every certificate after the first or such less sum as the Directors shall from time to time determine provided that in respect of a share or shares held jointly by several persons the Company shall not be bound to issue more than one certificate and delivery of a certificate for a share to one of the several joint holders shall be sufficient delivery to all such holders. |
TRANSFER OF SHARES
| 8. | The instrument of transfer of any share shall be in writing and shall be executed by or on behalf of the transferor and the transferor shall be deemed to remain the holder of a share until the name of the transferee is entered in the register in respect thereof. |
| 9. | The Directors may in their absolute discretion decline to register any transfer of shares which is not a fully paid share or on which the Company has a lien. If the Directors refuse to register a transfer they shall notify the transferee within two months of such refusal. |
| 10. | The registration of transfers may be suspended at such time and for such periods as the Directors may from time to time determine, provided always that such registration shall not be suspended for more than 45 days in any year. |
REDEEMABLE SHARES
| 11. | (a) | Subject to the provisions of the Statute and the Memorandum of Association, shares may be issued on the terms that they are, or at the option of the Company or the holder are, to be redeemed on such terms and in such manner as the Company, before the issue of the shares, may by Special Resolution determine and the rights attaching to any issued shares may, subject to the provisions of these Articles, by special resolution, be varied so as to provide that such shares are to be or are liable to be so redeemed. |
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| (b) | Subject to the provisions of the Statute and the Memorandum of Association, the Company may purchase its own shares (including fractions of a share), including any redeemable shares, provided that the manner of purchase has first been authorised by the Company in general meeting and may make payment therefor in any manner authorised by the Statute, including out of capital and provided that the Company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the Company other than shares held as treasury shares. |
| 12. | Subject to the provisions of these Articles, the manner and any of the terms of any such redemption or purchase of shares may be determined by either the Company by ordinary resolution or by the Directors. The Company may make a payment in respect of the redemption or purchase of its own shares otherwise than out of its profits, share premium account, or the proceeds of a fresh issue of shares. |
TREASURY SHARES
| 13. | The Company may, subject to the provisions of the Law, acquire, hold and dispose of its own shares as treasury shares. |
VARIATION OF RIGHTS OF SHARES
| 14. | If at any time the share capital of the Company is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound up, be varied with the consent in writing of the holders of three-fourths of the issued shares of that class, or with the sanction of a Special Resolution passed at a general meeting of the holders of the shares of that class. |
The provisions of these Articles relating to general meetings shall apply to every such general meeting of the holders of one class of shares except that the necessary quorum shall be one person holding or representing by proxy at least one-third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a show of hands.
| 15. | The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. |
COMMISSION ON SALE OF SHARES
| 16. | The Company may in so far as the Statute from time to time permits pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any shares of the Company. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid-up shares or partly in one way and partly in the other. The Company may also on any issue of shares pay such brokerage as may be lawful. |
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NON-RECOGNITION OF TRUSTS
| 17. | No person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future, or partial interest in any share, or any interest in any fractional part of a share, or (except only as is otherwise provided by these Articles or the Statute) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder. |
LIEN ON SHARES
| 18. | The Company shall have a first and paramount lien and charge on all shares (not being a fully paid-up share) registered in the name of a Member (whether solely or jointly with others) for all debts, liabilities or engagements to or with the Company (whether presently payable or not) by such Member or his estate, either alone or jointly with any other person, whether a Member or not, but the Directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The registration of a transfer of any such share shall operate as a waiver of the Company’s lien (if any) thereon. The Company’s lien (if any) on a share shall extend to all dividends or other monies payable in respect thereof. |
| 19. | The Company may sell, in such manner as the Directors think fit, any shares on which the Company has a lien, but no sale shall be made unless a sum in respect of which the lien exists is presently payable, nor until the expiration of fourteen days after a notice in writing stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder or holders for the time being of the share, or the person, of which the Company has notice, entitled thereto by reason of his death or bankruptcy. |
| 20. | To give effect to any such sale the Directors may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. |
| 21. | The proceeds of such sale shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable and the residue, if any, shall (subject to a like lien for sums not presently payable as existed upon the shares before the sale) be paid to the person entitled to the shares at the date of the sale. |
CALL ON SHARES
| 22. | (a) | The Directors may from time to time make calls upon the Members in respect of any monies unpaid on their shares (whether on account of the nominal value of the shares or by way of premium or otherwise) and not by the conditions of allotment thereof made payable at fixed terms, provided that no call shall be payable at less than one month from the date fixed for the payment of the last preceding call, and each Member shall (subject to receiving at least fourteen days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on the shares. A call may be revoked or postponed as the Directors may determine. A call may be made payable by instalments. |
| (b) | A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed. |
| (c) | The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. |
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| 23. | If a sum called in respect of a share is not paid before or on a day appointed for payment thereof, the persons from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate not exceeding ten per cent per annum as the Directors may determine, but the Directors shall be at liberty to waive payment of such interest either wholly or in part. |
| 24. | Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium or otherwise, shall for the purposes of these Articles be deemed to be a call duly made, notified and payable on the date on which by the terms of issue the same becomes payable, and in the case of non-payment all the relevant provisions of these Articles as to payment of interest forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. |
| 25. | The Directors may, on the issue of shares, differentiate between the holders as to the amount of calls or interest to be paid and the times of payment. |
| 26. | (a) | The Directors may, if they think fit, receive from any Member willing to advance the same, all or any part of the monies uncalled and unpaid upon any shares held by him, and upon all or any of the monies so advanced may (until the same would but for such advances, become payable) pay interest at such rate not exceeding (unless the Company in general meeting shall otherwise direct) seven per cent per annum, as may be agreed upon between the Directors and the Member paying such sum in advance. |
| (b) | No such sum paid in advance of calls shall entitle the Member paying such sum to any portion of a dividend declared in respect of any period prior to the date upon which such sum would, but for such payment, become presently payable. |
FORFEITURE OF SHARES
| 27. | (a) | If a Member fails to pay any call or instalment of a call or to make any payment required by the terms of issue on the day appointed for payment thereof, the Directors may, at any time thereafter during such time as any part of the call, instalment or payment remains unpaid, give notice requiring payment of so much of the call, instalment or payment as is unpaid, together with any interest which may have accrued and all expenses that have been incurred by the Company by reason of such non-payment. Such notice shall name a day (not earlier than the expiration of fourteen days from the date of giving of the notice) on or before which the payment required by the notice is to be made, and shall state that, in the event of non-payment at or before the time appointed the shares in respect of which such notice was given will be liable to be forfeited. |
| (b) | If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before the forfeiture. |
| (c) | A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit. |
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| 28. | A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture were payable by him to the Company in respect of the shares together with interest thereon, but his liability shall cease if and when the Company shall have received payment in full of all monies whenever payable in respect of the shares. |
| 29. | A certificate in writing under the hand of one Director or the Secretary of the Company that a share in the Company has been duly forfeited on a date stated in the declaration shall be conclusive evidence of the fact therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration given for the share on any sale or disposition thereof and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of and he shall thereupon be registered as the holder of the share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. |
| 30. | The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium as if the same had been payable by virtue of a call duly made and notified. |
REGISTRATION OF EMPOWERING INSTRUMENTS
| 31. | The Company shall be entitled to charge a fee not exceeding one dollar (US$l.00) on the registration of every probate, letters of administration, certificate of death or marriage, power of attorney, notice in lieu of distringas, or other instrument. |
TRANSMISSION OF SHARES
| 32. | In case of the death of a Member, the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognised by the Company as having any title to his interest in the shares, but nothing herein contained shall release the estate of any such deceased holder from any liability in respect of any shares which had been held by him solely or jointly with other persons. |
| 33. | (a) | Any person becoming entitled to a share in consequence of the death or bankruptcy or liquidation or dissolution of a Member (or in any other way than by transfer) may, upon such evidence being produced as may from time to time be required by the Directors and subject as hereinafter provided, elect either to be registered himself as holder of the share or to make such transfer of the share to such other person nominated by him as the deceased or bankrupt person could have made and to have such person registered as the transferee thereof, but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by that Member before his death or bankruptcy as the case may be. |
| (b) | If the person so becoming entitled shall elect to be registered himself as holder he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. |
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| 34. | A person becoming entitled to a share by reason of the death or bankruptcy or liquidation or dissolution of the holder (or in any other case than by transfer) shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company PROVIDED HOWEVER that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share and if the notice is not complied with within ninety days the Directors may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the share until the requirements of the notice have been complied with. |
AMENDMENT OF MEMORANDUM OF ASSOCIATION, CHANGE OF LOCATION OF
REGISTERED OFFICE & ALTERATION OF CAPITAL
| 35. | (a) | Subject to and in so far as permitted by the provisions of the Statute, the Company may from time to time by ordinary resolution alter or amend its Memorandum of Association otherwise than with respect to its name and objects and may, without restricting the generality of the foregoing: |
| (i) | increase the share capital by such sum to be divided into shares of such amount or without nominal or par value as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as the Company in general meeting may determine. |
| (ii) | consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; |
| (iii) | by subdivision of its existing shares or any of them divide the whole or any part of its share capital into shares of smaller amount than is fixed by the Memorandum of Association or into shares without nominal or par value; |
| (iv) | cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person. |
| (b) | All new shares created hereunder shall be subject to the same provisions with reference to the payment of calls, liens, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. |
| (c) | Subject to the provisions of the Statute, the Company may by Special Resolution change its name or alter its objects. |
| (d) | Without prejudice to Article 11 hereof and subject to the provisions of the Statute, the Company may by Special Resolution reduce its share capital and any capital redemption reserve fund. |
| (e) | Subject to the provisions of the Statute, the Company may by resolution of the Directors change the location of its registered office. |
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CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE
| 36. | For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any dividend, or in order to make a determination of Members for any other proper purpose, the Directors of the Company may provide that the register of Members shall be closed for transfers for a stated period but not to exceed in any case 40 days. If the register of Members shall be so closed for the purpose of determining Members entitled to notice of or to vote at a meeting of Members such register shall be so closed for at least ten days immediately preceding such meeting and the record date for such determination shall be the date of the closure of the register of Members. |
| 37. | In lieu of or apart from closing the register of Members, the Directors may fix in advance a date as the record date for any such determination of Members entitled to notice of or to vote at a meeting of the Members and for the purpose of determining the Members entitled to receive payment of any dividend the Directors may, at or within 90 days prior to the date of declaration of such dividend fix a subsequent date as the record date for such determination. |
| 38. | If the register of Members is not so closed and no record date is fixed for the determination of Members entitled to notice of or to vote at a meeting of Members or Members entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this section, such determination shall apply to any adjournment thereof. |
GENERAL MEETING
| 39. | (a) | Subject to paragraph (c) hereof, the Company shall within one year of its incorporation and in each year of its existence thereafter hold a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as the Directors shall appoint and if no other time and place is prescribed by them, it shall be held at the registered office on the second Wednesday in December of each year at ten o’clock in the morning. |
| (b) | At these meetings the report of the Directors (if any) shall be presented. |
| (c) | If the Company is exempted as defined in the Statute it may but shall not be obliged to hold an annual general meeting. |
| 40. | (a) | The Directors may whenever they think fit, and they shall on the requisition of Members of the Company holding at the date of the deposit of the requisition not less than one-tenth of such of the paid-up capital of the Company as at the date of the deposit carries the right of voting at general meetings of the Company, proceed to convene a general meeting of the Company. |
| (b) | The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the registered office of the Company and may consist of several documents in like form each signed by one or more requisitionists. |
| (c) | If the Directors do not within 21 days from the date of the deposit of the requisition duly proceed to convene a general meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of the said 21 days. |
| (d) | A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors. |
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NOTICE OF GENERAL MEETINGS
| 41. | At least five days notice shall be given of an annual general meeting or any other general meeting. Every notice shall be exclusive of the day on which it is given or deemed to be given and of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company PROVIDED that a general meeting of the Company shall, whether or not the notice specified in this regulation has been given and whether or not the provisions of Article 40 have been complied with, be deemed to have been duly convened if it is so agreed: |
| (a) | in the case of a general meeting called as an annual general meeting by all the Members entitled to attend and vote thereat or their proxies; and |
| (b) | in the case of any other general meeting by a majority in number of the Members having a right to attend and vote at the meeting, being a majority together holding not less than 75 per cent in nominal value or in the case of shares without nominal or par value 75 per cent of the shares in issue, or their proxies. |
| 42. | The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a meeting by any person entitled to receive notice shall not invalidate the proceedings of that meeting. |
PROCEEDINGS AT GENERAL MEETINGS
| 43. | No business shall be transacted at any general meeting unless a quorum of Members is present at the time when the meeting proceeds to business; the quorum shall be: |
| (a) | if the Company has only one Member: that Member; |
| (b) | if the Company has more than one Member: |
| i. | subject to Article 43(b)(ii) below, two or more Members; or |
| ii. | for so long as any shares are listed on a Designated Stock Exchange, one or more Members holding shares that represent not less than one-third of the outstanding issued shares carrying the right to vote at such general meeting. |
| 44. | A resolution (including a Special Resolution) in writing (in one or more counterparts) signed by all Members for the time being entitled to receive notice of and to attend and vote at general meetings (or being corporations by their duly authorised representatives) shall be as valid and effective as if the same had been passed at a general meeting of the Company duly convened and held. |
| 45. | If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Members, shall be dissolved and in any other case it shall stand adjourned to the same day in the next week at the same time and place or to such other time or such other place as the Directors may determine and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Members present shall be a quorum. |
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| 46. | The Chairman, if any, of the Board of Directors shall preside as Chairman at every general meeting of the Company, or if there is no such Chairman, or if he shall not be present within fifteen minutes after the time appointed for the holding of the meeting, or is unwilling to act, the Directors present shall elect one of their number to be Chairman of the meeting. |
| 47. | If at any general meeting no Director is willing to act as Chairman or if no Director is present within fifteen minutes after the time appointed for holding the meeting, the Members present shall choose one of their number to be Chairman of the meeting. |
| 48. | The Chairman may, with the consent of any general meeting duly constituted hereunder, and shall if so directed by the meeting, adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a general meeting is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting; save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned general meeting. |
| 49. | At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is, before or on the declaration of the result of the show of hands, demanded by the Chairman or any other Member present in person or by proxy PROVIDED HOWEVER that so long as any share are listed on the Nasdaq Capital Markets in the United States of America or any other stock exchange for trading, at any general meeting a resolution put to the vote of the meeting shall be decided on a poll. |
| 50. | Unless a show of hand be so demanded a declaration by the Chairman that a resolution has on a poll been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the Company’s Minute Book containing the Minutes of the proceedings of the meeting shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded in favour of or against such resolution. |
| 51. | The demand for a show of hand may be withdrawn. |
| 52. | Except as provided in Article 54, if a show of hand is duly demanded it shall be taken in such manner as the Chairman directs and the result of the show of hand shall be deemed to be the resolution of the general meeting at which the show of hand was demanded. |
| 53. | In the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the general meeting at which the poll takes place or at which the show of hand is demanded, shall be entitled to a second or casting vote. |
| 54. | A show of hand demanded on the election of a Chairman or on a question of adjournment shall be taken forthwith. A show of hand demanded on any other question shall be taken at such time as the Chairman of the general meeting directs and any business other than that upon which a show of hand has been demanded or is contingent thereon may be proceeded with pending the taking of the show of hand. |
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VOTES OF MEMBERS
| 55. | The holders of Series A Ordinary Shares and Series B Ordinary Shares shall at all times vote together as one class on all resolutions of the Members. At each general meeting of the Company, on a poll or a show of hands each Member who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one (1) vote for each Series A Ordinary Share and ten (10) votes for each Series B Ordinary Share which such Member holds. |
| 56. | In the case of joint holders of record the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of Members. |
| 57. | A Member of unsound mind, or in respect of whom an order has been made by any court, having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, receiver, curator bonis, or other person in the nature of a committee, receiver or curator bonis appointed by that court, and any such committee, receiver, curator bonis or other persons may vote by proxy. |
| 58. | No Member shall be entitled to vote at any general meeting unless he is registered as a shareholder of the Company on the record date for such meeting nor unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. |
| 59. | No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at such general meeting shall be valid for all purposes. Any such objection made in due time shall be referred to the Chairman of the general meeting whose decision shall be final and conclusive. |
| 60. | On a poll or on a show of hands votes may be given either personally or by proxy. |
PROXIES
| 61. | The instrument appointing a proxy shall be in writing and shall be executed under the hand of the appointor or of his attorney duly authorised in writing, or, if the appointor is a corporation under the hand of an officer or attorney duly authorised in that behalf. A proxy need not be a Member of the Company. |
| 62. | The instrument appointing a proxy shall be deposited at the registered office of the Company or at such other place as is specified for that purpose in the notice convening the meeting no later than the time for holding the meeting, or adjourned meeting provided that the Chairman of the Meeting may at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited upon receipt of telex, cable or telecopy confirmation from the appointor that the instrument of proxy duly signed is in the course of transmission to the Company. |
| 63. | The instrument appointing a proxy may be in any usual or common form and may be expressed to be for a particular meeting or any adjournment thereof or generally until revoked. An instrument appointing a proxy shall be deemed to include the power to demand or join or concur in demanding a show of hands. |
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| 64. | A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the share in respect of which the proxy is given provided that no intimation in writing of such death, insanity, revocation or transfer as aforesaid shall have been received by the Company at the registered office before the commencement of the general meeting, or adjourned meeting at which it is sought to use the proxy. |
| 65. | Any corporation which is a Member of record of the Company may in accordance with its Articles or in the absence of such provision by resolution of its Directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual Member of record of the Company. |
| 66. | Shares of its own capital belonging to the Company or held by it in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares at any given time. |
DIRECTORS
| 67. | There shall be a Board of Directors consisting of not less than one or more than twelve persons (exclusive of alternate Directors) PROVIDED HOWEVER that the Company may from time to time by ordinary resolution or by resolution of the Directors increase or reduce the limits in the number of Directors. The first Directors of the Company shall be determined in writing by, or appointed by a resolution of, the subscribers of the Memorandum of Association or a majority of them. |
| 68. | The remuneration to be paid to the Directors shall be such remuneration as the Directors shall determine. Such remuneration shall be deemed to accrue from day to day. The Directors shall also be entitled to be paid their travelling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the Directors, or any committee of the Directors, or general meetings of the Company, or otherwise in connection with the business of the Company, or to receive a fixed allowance in respect thereof as may be determined by the Directors from time to time, or a combination partly of one such method and partly the other. |
| 69. | The Directors may by resolution award special remuneration to any Director of the Company undertaking any special work or services for, or undertaking any special mission on behalf of, the Company other than his ordinary routine work as a Director. Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity shall be in addition to his remuneration as a Director. |
| 70. | A Director or alternate Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his office of Director for such period and on such terms as to remuneration and otherwise as the Directors may determine. |
| 71. | A Director or alternate Director may act by himself or his firm in a professional capacity for the Company and he or his firm shall be entitled to remuneration for professional services as if he were not a Director or alternate Director. |
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| 72. | A shareholding qualification for Directors may be fixed by the Company in general meeting, but unless and until so fixed no qualification shall be required. |
| 73. | A Director or alternate Director of the Company may be or become a director or other officer of or otherwise interested in any company promoted by the Company or in which the Company may be interested as shareholder or otherwise and no such Director or alternate Director shall be accountable to the Company for any remuneration or other benefits received by him as a director or officer of, or from his interest in, such other company. |
| 74. | No person shall be disqualified from the office of Director or alternate Director or prevented by such office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or transaction entered into by or on behalf of the Company in which any Director or alternate Director shall be in any way interested be or be liable to be avoided, nor shall any Director or alternate Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or transaction by reason of such Director holding office or of the fiduciary relation thereby established. A Director (or his alternate Director in his absence) shall be at liberty to vote in respect of any contract or transaction in which he is so interested as aforesaid PROVIDED HOWEVER that the nature of the interest of any Director or alternate Director in any such contract or transaction shall be disclosed by him or the alternate Director appointed by him at or prior to its consideration and any vote thereon. |
| 75. | A general notice that a Director or alternate Director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure under Article 74 and after such general notice it shall not be necessary to give special notice relating to any particular transaction. |
ALTERNATE DIRECTORS
| 76. | Subject to the exception contained in Article 84, a Director who expects to be unable to attend Directors’ Meetings because of absence, illness or otherwise may appoint any person to be an alternate Director to act in his stead and such appointee whilst he holds office as an alternate Director shall, in the event of absence therefrom of his appointor, be entitled to attend meetings of the Directors and to vote thereat and to do, in the place and stead of his appointor, any other act or thing which his appointor is permitted or required to do by virtue of his being a Director as if the alternate Director were the appointor, other than appointment of an alternate to himself, and he shall ipso facto vacate office if and when his appointor ceases to be a Director or removes the appointee from office. Any appointment or removal under this Article shall be effected by notice in writing under the hand of the Director making the same. |
POWERS AND DUTIES OF DIRECTORS
| 77. | The business of the Company shall be managed by the Directors (or a sole Director if only one is appointed) who may pay all expenses incurred in promoting, registering and setting up the Company, and may exercise all such powers of the Company as are not, from time to time by the Statute, or by these Articles, or such regulations, being not inconsistent with the aforesaid, as may be prescribed by the Company in general meeting required to be exercised by the Company in general meeting PROVIDED HOWEVER that no regulations made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made. |
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| 78. | The Directors may from time to time and at any time by powers of attorney appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purpose and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorneys as the Directors may think fit and may also authorise any such attorney to delegate all or any of the powers, authorities and discretions vested in him. |
| 79. | All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Directors shall from time to time by resolution determine. |
| 80. | The Directors shall cause minutes to be made in books provided for the purpose: |
| (a) | of all appointments of officers made by the Directors; |
| (b) | of the names of the Directors (including those represented thereat by an alternate or by proxy) present at each meeting of the Directors and of any committee of the Directors; |
| (c) | of all resolutions and proceedings at all meetings of the Company and of the Directors and of committees of Directors. |
| 81. | The Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any Director who has held any other salaried office or place of profit with the Company or to his widow or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. |
| 82. | The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party. |
MANAGEMENT
| 83. | (a) | The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the three next following paragraphs shall be without prejudice to the general powers conferred by this paragraph. |
| (b) | The Directors from time to time and at any time may establish any committees, local boards or agencies for managing any of the affairs of the Company and may appoint any persons to be members of such committees or local boards or any managers or agents and may fix their remuneration. |
| (c) | The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill up any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any person so appointed and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby. |
| (d) | Any such delegates as aforesaid may be authorised by the Directors to subdelegate all or any of the powers, authorities, and discretions for the time being vested in them. |
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MANAGING DIRECTORS
| 84. | The Directors may, from time to time, appoint one or more of their body (but not an alternate Director) to the office of Managing Director for such term and at such remuneration (whether by way of salary, or commission, or participation in profits, or partly in one way and partly in another) as they may think fit but his appointment shall be subject to determination ipso facto if he ceases from any cause to be a Director and no alternate Director appointed by him can act in his stead as a Director or Managing Director. |
| 85. | The Directors may entrust to and confer upon a Managing Director any of the powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit and either collaterally with or to the exclusion of their own powers and may from time to time revoke, withdraw, alter or vary all or any of such powers. |
PROCEEDINGS OF DIRECTORS
| 86. | Except as otherwise provided by these Articles, the Directors shall meet together for the despatch of business, convening, adjourning and otherwise regulating their meetings as they think fit. Questions arising at any meeting shall be decided by a majority of votes of the Directors and alternate Directors present at a meeting at which there is a quorum, the vote of an alternate Director not being counted if his appointor be present at such meeting. In case of an equality of votes, the Chairman shall have a second or casting vote. |
| 87. | A Director or alternate Director may, and the Secretary on the requisition of a Director or alternate Director shall, at any time summon a meeting of the Directors by notice in writing to every Director and alternate Director which notice shall set forth the general nature of the business to be considered unless notice is waived by all the Directors (or their alternates) either at, before or after the meeting is held and PROVIDED FURTHER if notice is given in person, by cable, telex or telecopy the same shall be deemed to have been given on the day it is delivered to the Directors or transmitting organisation as the case may be. The provisions of Article 42 shall apply mutatis mutandis with respect to notices of meetings of Directors. |
| 88. | The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be two, a Director and his appointed alternate Director being considered only one person for this purpose, PROVIDED ALWAYS that if there shall at any time be only a sole Director the quorum shall be one. For the purposes of this Article an alternate Director or proxy appointed by a Director shall be counted in a quorum at a meeting at which the Director appointing him is not present. |
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| 89. | The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose. |
| 90. | The Directors may elect a Chairman of their Board and determine the period for which he is to hold office; but if no such Chairman is elected, or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the Directors present may choose one of their number to be Chairman of the meeting. |
| 91. | The Directors may delegate any of their powers to committees consisting of such member or members of the Board of Directors (including Alternate Directors in the absence of their appointors) as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors. |
| 92. | A committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members present, and in the case of an equality of votes the Chairman shall have a second or casting vote. |
| 93. | All acts done by any meeting of the Directors or of a committee of Directors (including any person acting as an alternate Director) shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or alternate Director, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and qualified to be a Director or alternate Director as the case may be. |
| 94. | Members of the Board of Directors or of any committee thereof may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. A resolution in writing (in one or more counterparts), signed by all the Directors for the time being or all the members of a committee of Directors (an alternate Director being entitled to sign such resolution on behalf of his appointor) shall be as valid and effectual as if it had been passed at a meeting of the Directors or committee as the case may be duly convened and held. |
| 95. | (a) | A Director may be represented at any meetings of the Board of Directors by a proxy appointed by him in which event the presence or vote of the proxy shall for all purposes be deemed to be that of the Director. |
| (b) | The provisions of Articles 61-64 shall mutatis mutandis apply to the appointment of proxies by Directors. |
VACATION OF OFFICE OF DIRECTOR
| 96. | The office of a Director shall be vacated: |
| (a) | if he gives notice in writing to the Company that he resigns the office of Director; |
| (b) | if he absents himself (without being represented by proxy or an alternate Director appointed by him) from three consecutive meetings of the Board of Directors without special leave of absence from the Directors, and they pass a resolution that he has by reason of such absence vacated office; |
| (c) | if he dies, becomes bankrupt or makes any arrangement or composition with his creditors generally; |
| (d) | if he is found a lunatic or becomes of unsound mind. |
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APPOINTMENT AND REMOVAL OF DIRECTORS
| 97. | The Company may by ordinary resolution or by resolution of the Directors appoint any persons to be a Director and may in like manner remove any Director and may in like manner appoint another person in his instead. |
| 98. | The Directors shall have power at any time and from time to time to appoint any person to be a Director, either to fill a casual vacancy or as an addition to the existing Directors but so that the total number of Directors (exclusive of alternate Directors) shall not at any time exceed the number fixed in accordance with these Articles. |
PRESUMPTION OF ASSENT
| 99. | A Director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the Minutes of the meeting or unless he shall file his written dissent from such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to such person immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favour of such action. |
SEAL
| 100. | (a) | The Company may, if the Directors so determine, have a Seal which shall, subject to paragraph (c) hereof, only be used by the authority of the Directors or of a committee of the Directors authorised by the Directors in that behalf and every instrument to which the Seal has been affixed shall be signed by one person who shall be either a Director or the Secretary or Secretary-Treasurer or some person appointed by the Directors for the purpose. |
| (b) | The Company may have for use in any place or places outside the Cayman Islands a duplicate Seal or Seals each of which shall be a facsimile of the Common Seal of the Company and, if the Directors so determine, with the addition on its face of the name of every place where it is to be used. |
| (c) | A Director, Secretary or other officer or representative or attorney may without further authority of the Directors affix the Seal of the Company over his signature alone to any document of the Company required to be authenticated by him under Seal or to be filed with the Registrar of Companies in the Cayman Islands or elsewhere wheresoever. |
| (d) | A document to be executed as a Deed shall be executed by a Director or other person authorised by the Directors for that purpose. |
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OFFICERS
| 101. | The Company may have officers appointed by the Directors as they consider necessary, all for such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors from time to time prescribe. |
DIVIDENDS, DISTRIBUTIONS AND RESERVE
| 102. | Subject to the Statute, the Directors may from time to time declare dividends (including interim dividends) and distributions on shares of the Company outstanding and authorise payment of the same out of the funds of the Company lawfully available therefore. |
| 103. | The Directors may, before declaring any dividends or distributions, set aside such sums as they think proper as a reserve or reserves which shall at the discretion of the Directors, be applicable for any purpose of the Company and pending such application may, at the like discretion, be employed in the business of the Company. |
| 104. | No dividend or distribution shall be payable except out of the profits of the Company, realised or unrealised, or out of the share premium account or as otherwise permitted by the Statute. |
| 105. | Subject to the rights of persons, if any, entitled to shares with special rights as to dividends or distributions, if dividends or distributions are to be declared on a class of shares they shall be declared and paid according to the amounts paid or credited as paid on the shares of such class outstanding on the record date for such dividend or distribution as determined in accordance with these Articles but no amount paid or credited as paid on a share in advance of calls shall be treated for the purpose of this Article as paid on the share. |
| 106. | The Directors may deduct from any dividend or distribution payable to any Member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise. |
| 107. | The Directors may declare that any dividend or distribution be paid wholly or partly by the distribution of specific assets and in particular of paid up shares, debentures, or debenture stock of any other company or in any one or more of such ways and where any difficulty arises in regard to such distribution, the Directors may settle the same as they think expedient and in particular may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Members upon the footing of the value so fixed in order to adjust the rights of all Members and may vest any such specific assets in trustees as may seem expedient to the Directors. |
| 108. | Any dividend, distribution, interest or other monies payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the holder who is first named on the register of Members or to such person and to such address as such holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. Any one of two or more joint holders may give effectual receipts for any dividends, bonuses, or other monies payable in respect of the share held by them as joint holders. |
| 109. | No dividend or distribution shall bear interest against the Company. |
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CAPITALISATION
| 110. | The Company may upon the recommendation of the Directors by ordinary resolution authorise the Directors to capitalise any sum standing to the credit of any of the Company’s reserve accounts (including share premium account and capital redemption reserve fund) or any sum standing to the credit of profit and loss account or otherwise available for distribution and to appropriate such sum to Members in the proportions in which such sum would have been divisible amongst them had the same been a distribution of profits by way of dividend and to apply such sum on their behalf in paying up in full unissued shares for allotment and distribution credited as fully paid up to and amongst them in the proportion aforesaid. In such event the Directors shall do all acts and things required to give effect to such capitalisation, with full power to the Directors to make such provisions as they think fit for the case of shares becoming distributable in fractions (including provisions whereby the benefit of fractional entitlements accrue to the Company rather than to the Members concerned). The Directors may authorise any person to enter on behalf of all of the Members interested into an agreement with the Company providing for such capitalisation and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned. |
BOOKS OF ACCOUNT
| 111. | The Directors shall cause proper books of account to be kept with respect to: |
| (a) | all sums of money received and expended by the Company and the matters in respect of which the receipt or expenditure takes place; |
| (b) | all sales and purchases of goods by the Company; |
| (c) | the assets and liabilities of the Company. |
Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Company’s affairs and to explain its transactions.
| 112. | The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Members not being Directors and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by Statute or authorised by the Directors or by the Company in general meeting. |
| 113. | The Directors may from time to time cause to be prepared and to be laid before the Company in general meeting profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by law. |
AUDIT
| 114. | The Company may at any annual general meeting or by resolution of the Directors appoint an Auditor or Auditors of the Company who shall hold office until the next annual general meeting and may fix his or their remuneration. |
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| 115. | The Directors may before the first annual general meeting appoint an Auditor or Auditors of the Company who shall hold office until the first annual general meeting unless previously removed by an ordinary resolution of the Members in general meeting in which case the Members at that meeting may appoint Auditors or by resolutions of Directors in which case the Directors may appoint Auditors. The Directors may fill any casual vacancy in the office of Auditor but while any such vacancy continues the surviving or continuing Auditor or Auditors, if any, may act. The remuneration of any appointed by the Directors under this Article may be fixed by the Directors. |
| 116. | Every Auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and Officers of the Company such information and explanation as may be necessary for the performance of the duties of the auditors. |
| 117. | Auditors shall at the next annual general meeting following their appointment and at any other time during their term of office, upon request of the Directors or any general meeting of the Members, make a report on the accounts of the Company in general meeting during their tenure of office. |
NOTICES
| 118. | Notices shall be in writing and may be given by the Company to any Member either personally or by sending it by post, cable, telex or telecopy to him or to his address as shown in the register of Members, such notice, if mailed, to be forwarded airmail if the address be outside the Cayman Islands. |
| 119. | (a) | Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, pre-paying and posting a letter containing the notice, and to have been effected at the expiration of 60 hours after the letter containing the same is posted as aforesaid. |
| (b) | Where a notice is sent by cable, telex, telecopy or electronic message, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organisation and to have been effected on the day the same is sent as aforesaid. |
| 120. | A notice may be given by the Company to the joint holders of record of a share by giving the notice to the joint holder first named on the register of Members in respect of the share. |
| 121. | A notice may be given by the Company to the person or persons which the Company has been advised are entitled to a share or shares in consequence of the death or bankruptcy of a Member by sending it through the post as aforesaid in a pre-paid letter addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description at the address supplied for that purpose by the persons claiming to be so entitled, or at the option of the Company by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred. |
| 122. | Notice of every general meeting shall be given in any manner hereinbefore authorised to: |
| (a) | every person shown as a Member in the register of Members as of the record date for such meeting except that in the case of joint holders the notice shall be sufficient if given to the joint holder first named in the register of Members. |
| (b) | every person upon whom the ownership of a share devolves by reason of his being a legal personal representative or a trustee in bankruptcy of a Member of record where the Member of record but for his death or bankruptcy would be entitled to receive notice of the meeting; and |
No other person shall be entitled to receive notices of general meetings.
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WINDING UP
| 123. | If the Company shall be wound up the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Statute, divide amongst the Members in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no Member shall be compelled to accept any shares or other securities whereon there is any liability. |
| 124. | If the Company shall be wound up, and the assets available for distribution amongst the Members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the Members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if in a winding up the assets available for distribution amongst the Members shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst the Members in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively. This Article is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions. |
INDEMNITY
| 125. | The Directors and officers for the time being of the Company and any trustee for the time being acting in relation to any of the affairs of the Company and their heirs, executors, administrators and personal representatives respectively shall be indemnified out of the assets of the Company from and against all actions, proceedings, costs, charges, losses, damages and expenses which they or any of them shall or may incur or sustain by reason of any act done or omitted in or about the execution of their duty in their respective offices or trusts, except such (if any) as they shall incur or sustain by or through their own wilful neglect or default respectively and no such Director, officer or trustee shall be answerable for the acts, receipts, neglects or defaults of any other Director, officer or trustee or for joining in any receipt for the sake of conformity or for the solvency or honesty of any banker or other persons with whom any monies or effects belonging to the Company may be lodged or deposited for safe custody or for any insufficiency of any security upon which any monies of the Company may be invested or for any other loss or damage due to any such cause as aforesaid or which may happen in or about the execution of his office or trust unless the same shall happen through the wilful neglect or default of such Director, Officer or trustee. |
FINANCIAL YEAR
| 126. | Unless the Directors otherwise prescribe, the financial year of the Company shall end on 31st December in each year and, following the year of incorporation, shall begin on 1st January in each year. |
AMENDMENTS OF ARTICLES
| 127. | Subject to the Statute, the Company may at any time and from time to time by Special Resolution alter or amend these Articles in whole or in part. |
TRANSFER BY WAY OF CONTINUATION
| 128. | If the Company is exempted as defined in the Statute, it shall, subject to the provisions of the Statute and with the approval of a Special Resolution, have the power to register by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. |
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Exhibit 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF ONE HUNDRED AND EIGHTY (180) DAYS BEGINNING ON THE DATE OF COMMENCEMENT OF SALES OF THE OFFERING PURSUANT TO THE REGISTRATION STATEMENT OF THE COMPANY (FILE NO. 333-264264) AND MAY NOT BE (A) SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED TO ANYONE OTHER THAN UNIVEST SECURITIES, LLC, OR BONA FIDE OFFICERS OR PARTNERS OF UNIVEST SECURITIES, LLC, OR (B) CAUSED TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS SECURITIES HEREUNDER, EXCEPT AS PROVIDED FOR IN FINRA RULE 5110(E)(2).
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [●], 2022. VOID AFTER 5:00 P.M., EASTERN TIME, [●], 20271.
UNDERWRITER’S WARRANT
FOR THE PURCHASE OF 62,500 CLASS A ORDINARY SHARES
OF
LICHEN CHINA LIMITED
1. Purchase Warrant. THIS CERTIFIES THAT, pursuant to that certain Underwriting Agreement by and between Lichen China Limited, a Cayman Islands company (the “Company”), on the one hand, and Univest Securities, LLC (the “Holder”), on the other hand, dated [●], 2022 (the “Underwriting Agreement”), the Holder, as registered owner of this Purchase Warrant, is entitled, at any time or from time to time from [●], 2022 (the “Exercise Date”), and at or before 5:00 p.m., Eastern time, on [●], 2027, (the “Expiration Date”), but not thereafter, for a nominal consideration of $0.01, to subscribe for, purchase and receive, in whole or in part, up to such number of series A ordinary shares of the Company, par value $0.00004 per share (the “Class A Ordinary Shares”) as equates to one percent (1%) of the aggregate number of Class A Ordinary Shares sold in the Offering (the “Shares), including any Class A Ordinary Shares sold upon exercise of the over-allotment option, subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[●] per Class A Ordinary Share (which is equal to one hundred and twenty percent (120%) of the price of the Class A Ordinary Shares sold in the Offering); provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Class A Ordinary Share and the number of Class A Ordinary Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price as set forth above or the adjusted exercise price as a result of the events set forth in Section 6 below, depending on the context. Capitalized terms not defined herein shall have the meaning ascribed to them in the Underwriting Agreement.
2. Exercise.
2.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto as Exhibit A must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Class A Ordinary Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern Time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
| 1 | Five (5) years from the commencement of sales of the public offering. |
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2.2 Cashless Exercise. At any time after the Exercise Date and until the Expiration Date, Holder may elect to receive the number of Class A Ordinary Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:
| X | = | Y(A-B) | ||
| A | ||||
| Where, | X | = | The number of Class A Ordinary Shares to be issued to Holder; | |
| Y | = | The number of Class A Ordinary Shares for which the Purchase Warrant is being exercised; | ||
| A | = | The fair market value of one Class A Ordinary Share; and | ||
| B | = | The Exercise Price. | ||
For purposes of this Section 2.2, the “fair market value” of a Class A Ordinary Share is defined as follows:
| (i) | if the Class A Ordinary Shares are traded on a national securities exchange, the value shall be deemed to be the closing price on such exchange for the five consecutive trading days ending on the day immediately prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or |
| (ii) | if the Class A Ordinary Shares are actively traded over-the-counter, the value shall be deemed to be the weighted average price of the Class A Ordinary Shares for the five consecutive trading days ending on the trading day immediately prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or |
| (iii) | if there is no market for the Class A Ordinary Shares, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors. |
2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear the following legends unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”), or are exempt from registration under the Act:
(i) “THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF ONE HUNDRED AND EIGHTY (180) DAYS BEGINNING ON THE DATE OF COMMENCEMENT OF SALES OF THE OFFERING PURSUANT TO THE REGISTRATION STATEMENT OF THE COMPANY(FILE NO. 333-264264) AND MAY NOT BE (A) SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED TO ANYONE OTHER THAN UNIVEST SECURITIES, LLC, OR BONA FIDE OFFICERS OR PARTNERS OF UNIVEST SECURITIES, LLC, OR (B) CAUSED TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS SECURITIES HEREUNDER, EXCEPT AS PROVIDED FOR IN FINRA RULE 5110(E)(2).”
(ii) Any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by a certificate, instrument, or book entry so legended.
3. Transfer.
3.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, for a period of one hundred eighty (180) days from the date of commencement of sales of the public offering (the “Effective Date”), that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant to anyone other than: (i) the Underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of the Underwriter or of any such selected dealer, in each case in accordance with FINRA Rule 5110(e)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(e)(2). On and after that date that is one hundred eighty (180) days after the commencement of sales of the offering, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto as Exhibit B duly executed and completed, together with this Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Class A Ordinary Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
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3.2 Restrictions Imposed by the Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Company that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company, (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities that has been declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and includes a current prospectus or (iii) a registration statement, relating to the offer and sale of such securities has been filed and declared effective by the Commission and compliance with applicable state securities law has been established.
4. Registration Rights.
4.1 Demand Registration.
4.1.1 Grant of Right. Unless all of the Registrable Securities (as defined below) are included in an effective registration statement with a current prospectus or a qualified offering statement with a current registration statement, the Company, upon written demand (a “Demand Notice”) of the Holder(s) of at least fifty-one percent (51%) of the Class A Ordinary Shares (“Majority Holders”), agrees to register, on one occasion, all or any portion of the Class A Ordinary Shares underlying this Purchase Warrant that are permitted to be registered under the Act (collectively, the “Registrable Securities”). On such occasion, the Company will file a registration statement with the Commission (a “Demand Registration Statement”) covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement; or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty days after such offering is consummated. The demand for registration may be made at any time during a period of five years beginning on the date of commencement of sales of the Offering.
4.1.2 Terms. The Company shall bear all fees and expenses attendant to the Demand Registration Statement pursuant to Section 4.1.1, but the Holder(s) shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder(s) to represent the Holder(s)in connection with the sale of the Registrable Securities. The Company agrees to use its best efforts to cause the filing of a Demand Registration Statement required herein to become effective promptly and to qualify or register the Registrable Securities in such states as are reasonably requested by the Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a state in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal shareholders of the Company to be obligated to escrow their Class A Ordinary Shares of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least 12 consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holder(s) shall only use the prospectuses provided by the Company to sell the shares covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder(s) that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder(s) shall be entitled to a Demand Registration Statement under this Section 4.1.2 on only one occasion and such demand registration right shall terminate on the fifth anniversary of the commencement of sales of the Offering in accordance with FINRA Rule 5110(g)(8)(C).
4.2 “Piggy-Back” Registration.
4.2.1 Grant of Right. Unless all of the Registrable Securities are included in an effective registration statement with a current prospectus or a qualified offering statement with a current offering circular, the Holder shall have the right, for a period of five years commencing on the date of commencement of sales of the Offering, to include the remaining Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145 promulgated under the Act or pursuant to Form F-3 or any equivalent form).
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4.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holder(s) shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder(s) to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than 30 days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holder(s) shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been registered under an effective registration statement. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice, within ten days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2. Notwithstanding the provisions of this Section 4.2.2, such piggyback registration rights shall terminate on the fifth anniversary of the commencement of sales of the Offering in accordance with FINRA Rule 5110(g)(8)(D).
5. New Purchase Warrants to be Issued.
5.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereof, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Class A Ordinary Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Class A Ordinary Shares. The Exercise Price and the number of Class A Ordinary Shares underlying this Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Class A Ordinary Shares is increased by a stock dividend payable in Class A Ordinary Shares or by a split up of Class A Ordinary Shares or other similar event, then, on the effective day thereof, the number of Class A Ordinary Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Class A Ordinary Shares, and the Exercise Price shall be proportionately decreased.
6.1.2 Aggregation of Class A Ordinary Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Class A Ordinary Shares is decreased by a consolidation, combination or reclassification of Class A Ordinary Shares or other similar event, then, on the effective date thereof, the number of Class A Ordinary Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding shares, and the Exercise Price shall be proportionately increased.
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6.1.3 Replacement of Class A Ordinary Shares upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Class A Ordinary Shares other than a change covered by Section 6.1.1 or Section 6.1.2 hereof or that solely affects the par value of such Class A Ordinary Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Class A Ordinary Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of ordinary shares or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Class A Ordinary Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Class A Ordinary Shares covered by Section 6.1.1 or Section 6.1.2, then such adjustment shall be made pursuant to Section 6.1.1, Section 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Fundamental Transaction. If, at any time while this Purchase Warrant is outstanding, the Company enters into the following transactions with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Class A Ordinary Shares (not including any Class A Ordinary Shares held by the other Person or other Persons making or party to, or associated or affiliated with, the other Persons making or party to such stock or share purchase agreement or other business combination): (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any direct or indirect purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Class A Ordinary Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Class A Ordinary Shares, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Class A Ordinary Shares or any compulsory share exchange pursuant to which the Class A Ordinary Shares is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spinoff or scheme of arrangement) with another Person or group of Persons (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Purchase Warrant, the Holder shall have the right to receive, for each Purchase Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number Class A Ordinary Shares of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional or alternative consideration (the “Alternative Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of Class A Ordinary Shares for which this Purchase Warrant is exercisable immediately prior to such Fundamental Transaction. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternative Consideration based on the amount of Alternative Consideration issuable in respect of one Class A Ordinary Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternative Consideration in a reasonable manner reflecting the relative value of any different components of the Alternative Consideration. If holders of Class A Ordinary Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternative Consideration it receives upon any exercise of this Purchase Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Purchase Warrant, and to deliver to the Holder in exchange for this Purchase Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Purchase Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Class A Ordinary Shares acquirable and receivable upon exercise of this Purchase Warrant prior to such Fundamental Transaction, and with an exercise price which applies the Exercise Price hereunder to such shares of capital stock (but taking into account the relative value of the Class A Ordinary Shares pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Purchase Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Purchase Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of, the Company and shall assume all of the obligations of the Company, under this Purchase Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
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6.1.5 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Class A Ordinary Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the date hereof or the computation thereof.
6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Class A Ordinary Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of Class A Ordinary Shares and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Class A Ordinary Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section 6 shall similarly apply to successive consolidations or share reconstructions or amalgamations.
6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Class A Ordinary Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Class A Ordinary Shares or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Class A Ordinary Shares, solely for the purpose of issuance upon exercise of this Purchase Warrant, such number of Class A Ordinary Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of this Purchase Warrant and payment of the Exercise Price therefor, in accordance with the terms hereby, all Class A Ordinary Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of this Purchase Warrant and payment of the exercise price therefor, all Class A Ordinary Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as this Purchase Warrant shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Class A Ordinary Shares issuable upon exercise of this Purchase Warrant to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTCQB Market or any successor quotation system) on which the Class A Ordinary Shares issued to the public in the Offering may then be listed and/or quoted (if at all).
8. Certain Notice Requirements.
8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior to the date fixed as a record date or the date of closing the transfer books (the “Notice Date”) for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.
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8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Class A Ordinary Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Class A Ordinary Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made if made in accordance with the notice provisions of the Underwriting Agreement to the addresses and contact information set forth below:
If to the Holder, then to:
Univest Securities, LLC
75 Rockefeller Plaza, Suite 18C
New York, NY 10019
Attn: Edric Guo
Email: yguo@univest.us
With a copy to:
Hunter Taubman Fischer & Li LLC
48 Wall Street, Suite 1100
New York, NY 10005
Attn: Ying Li, Esq.
Attn.: Guillaume de Sampigny. Esq.
Email: yli@htflawyers.com
gdesampigny@htflawyers.com
If to the Company:
Lichen China Limited
B2306, Block B, Tower 3, Jinjiang Wanda Plaza Commercial Complex
888 Century Avenue, Meiling Street
Jinjiang City, Fujian Province, China
Attn: Ya Li
Email: xmqcw@163.com
With a copy to:
Ortoli Rosenstadt LLP
366 Madison Avenue, 3rd Floor
New York, NY 10017
Attn: William S. Rosenstadt, Esq.
Attn: Mengyi “Jason” Ye, Esq.
Emails: wsr@orllp.legal
jye@orllp.legal
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9. Miscellaneous.
9.1 Amendments. The Company and the Underwriter may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and the Underwriter may deem necessary or desirable and that the Company and the Underwriter deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
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9.7 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and the Underwriter enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
9.8 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
9.9 Holder Not Deemed a Shareholder. Except as otherwise specifically provided herein, the Holder, solely in its capacity as a holder of this Purchase Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Purchase Warrant be construed to confer upon the Holder, solely in its capacity as the Holder of this Purchase Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of share, reclassification of share, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Shares which it is then entitled to receive upon the due exercise of this Purchase Warrant. In addition, nothing contained in this Purchase Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Purchase Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.
9.10 Restrictions. The Holder acknowledges that the Shares acquired upon the exercise of this Purchase Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
9.10 Severability. Wherever possible, each provision of this Purchase Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Purchase Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Purchase Warrant.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ____ day of _______, 2022.
| Lichen China Limited | |||
| By: | |||
| Name: | |||
| Title: | |||
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EXHIBIT A
Exercise Notice
Form to be used to exercise Purchase Warrant:
Date: __________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______ Class A Ordinary Shares of Lichen China Limited, a Cayman Islands company (the “Company”) and hereby makes payment of $____ (at the rate of $____ per Class A Ordinary Share) in payment of the Exercise Price pursuant thereto. Please issue the Class A Ordinary Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Class A Ordinary Shares for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Class A Ordinary Shares under the Purchase Warrant for ______ Class A Ordinary Shares, as determined in accordance with the following formula:
| X | = | Y(A-B) | ||
| A | ||||
| Where, | X | = | The number of Class A Ordinary Shares to be issued to Holder; | |
| Y | = | The number of Class A Ordinary Shares for which the Purchase Warrant is being exercised; | ||
| A | = | The fair market value of one Class A Ordinary Share which is equal to $_____; and | ||
| B | = | The Exercise Price which is equal to $______ per Class A Ordinary Share | ||
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Class A Ordinary Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Class A Ordinary Shares for which this Purchase Warrant has not been converted.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
(Print in Block Letters)
Address:
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
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EXHIBIT B
Assignment Notice
Form to be used to assign Purchase Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, _____________________ does hereby sell, assign and transfer unto the right to purchase _______________ Class A ordinary shares of Lichen China Limited, a Cayman Islands company (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________ 20__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
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Exhibit 5.1
|
Lichen China Limited 理臣中國有限公司 Windward 3, Regatta Office Park PO Box 1350 Grand Cayman KY1 – 1108 Cayman Islands
Attention The Board of Directors |
Email jlee@applebyglobal.com mchoi@applebyglobal.com | |
|
Direct Dial +852 2905 5737 +852 2905 5771 | ||
|
Tel +852 2523 8123 Fax +852 2524 5548 | ||
| Appleby Ref 437495.0003 | ||
| 24 June 2022 |
| Dear Sirs | |||
| Suites 4201 - 03 & 12 | Lichen China Limited 理臣中國有限公司 (Company) | ||
| 42/F, One Island East | |||
| Taikoo Place |
INTRODUCTION | ||
| 18 Westlands Road | |||
| Quarry Bay |
This opinion as to Cayman Islands law is addressed to you in connection with: | ||
| Hong Kong | |||
applebyglobal.com |
(i) |
the offering (Offering) and listing on the Nasdaq of 6,250,000 series A ordinary shares of nominal or par value US$0.00004 each in the share capital of the Company, plus an additional 937, 500 series A ordinary shares that may be issued upon exercise of an underwriter’s over-allotment option at an offering price of US$4.00 per series A ordinary share (IPO Shares); | |
Managing
Partner |
(ii) |
the warrants to be issued to the Underwriters (as defined in the Resolutions) with the right to purchase such number of series A ordinary shares of the Company equal to one percent (1%) of the aggregate number of the IPO Shares allotted and issued in the Offering (collectively Warrants), with an initial exercise price per series A ordinary shares of 120% of the offering price of the IPO Shares in the Registration Statement; and | |
(iii) |
such number of series A ordinary shares of the Company equal to one percent (1%) of the aggregate number of the IPO Shares allotted and issued in the Offering underlying the Warrants to be issued by the Company (the Underlying Shares). |
OUR REVIEW
For the purposes of giving this opinion we have examined and relied upon the documents set out in Schedule 1. We have not examined any other documents, even if they are referred to in the documents.
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
We have not made any other enquiries concerning the Company and in particular we have not investigated or verified any matter of fact or opinion (whether set out in any of the documents or elsewhere) other than as expressly stated in this opinion.
Unless otherwise defined herein, capitalised terms have the meanings assigned to them in Schedule 1.
LIMITATIONS
Our opinion is limited to, and should be construed in accordance with, the laws of the Cayman Islands at the date of this opinion. We express no opinion on the laws of any other jurisdiction.
This opinion is limited to the matters stated in it and does not extend, and is not to be extended by implication, to any other matters.
This opinion is given solely for the benefit of the addressees in connection with the matters referred to herein and, except with our prior written consent it may not be transmitted or disclosed to or used or relied upon by any other person or be relied upon for any other purpose whatsoever.
ASSUMPTIONS AND RESERVATIONS
We give the following opinions on the basis of the assumptions set out in Schedule 2 (Assumptions), which we have not verified, and subject to the reservations set out in Schedule 3 (Reservations).
OPINIONS
| 1. | Incorporation and Status: The Company is an exempted company incorporated with limited liability and existing under the laws of the Cayman Islands and is a separate legal entity. The Company is in good standing with the Registrar of Companies of the Cayman Islands. |
| 2. | Authorised Share Capital: Based solely on our review of the Certificate of Incumbency, as of 24 June 2022, the Company has an authorised share capital of US$50,000 divided into (1) 1,000,000,000 series A ordinary shares with a nominal or par value of US$0.00004 each and (b) 250,000,000 series B ordinary shares with a nominal or par value of US$0.00004 each. |
| 3. | Issue of IPO Shares: The allotment and issue of the IPO Shares by the Company have been duly authorised, and the IPO Shares, when fully paid, allotted and issued by the Company in the manner set out in the Resolutions, will be validly issued, fully paid and non-assessable (meaning that no further sums are payable to the Company on such shares). |
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
2
| 4. | Issue of Warrants: The issue of the Warrants as contemplated by the Resolutions has been duly authorised. |
| 5. | Issue of Underlying Shares: The allotment and issue of the Underlying Shares by the Company upon exercise of the Warrants have been duly authorised, and the Underlying Shares, when fully paid, allotted, issued by the Company in the manner set out in the Resolutions and upon exercise of the Warrants, will be validly issued, fully paid and non-assessable (meaning that no further sums are payable to the Company on such shares). |
| 6. | Disclosures: The statements under the headings “Cayman Islands Taxation”, “Enforceability of Civil Liabilities” and “Description of Ordinary Shares” in the Preliminary Prospectus forming part of the Registration Statement, in so far as such statements constitute statements of Cayman Islands law, are accurate and fairly present the information and summarise the matters referred to therein. |
CONSENT
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the headings “Enforceability of Civil Liabilities” and “Legal Matters” in the Preliminary Prospectus included in the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933 of the United States of America (as amended) or the Rules and Regulations of the Commission thereunder.
Yours faithfully
/s/ Appleby
Appleby
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
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Schedule 1
Documents Examined
| 1. | Scanned copies of: (i) the certificate of incorporation of the Company 13 April 2016; (ii) the certificate of incorporation on change of name dated 11 November 2016; and (iii) the certificate of incorporation on change of name dated 7 April 2017 (collectively, the Certificate of Incorporation). |
| 2. | Scanned copies of the amended and restated memorandum of association and articles of association of the Company adopted on 15 June 2022 (together with item 2 above, the Constitutional Documents). |
| 3. | A scanned copy of the certificate of good standing dated 14 June 2022 issued by the Registrar of Companies in respect of the Company (Certificate of Good Standing). |
| 4. | A scanned copy of the certificate of incumbency dated 24 June 2022 issued by the Company’s registered office provider in respect of the Company (Certificate of Incumbency). |
| 5. | A scanned copy of the written resolutions of the board of directors of the Company held on 16 June 2022 (the Resolutions). |
| 6. | A scanned copy of the register of members of the Company as of 9 June 2022 (Register of Members). |
| 7. | A scanned copy of the register of directors and officers of the Company as of 15 June 2022 (Register of Directors and Officers) (together with item 7 above, the Registers). |
| 8. | A PDF copy of the registration statement on Form F-1 initially filed with the SEC on 2 May 2022 and as amended and supplemented from time to time (Registration Statement). |
| 9. | The Company’s preliminary prospectus dated 15 June 2022 forming part of the Registration Statements initially filed with the SEC on 2 May 2022 and as amended and supplemented from time to time (Preliminary Prospectus). |
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
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Schedule 2
Assumptions
We have assumed:
| 1. | (i) that the originals of all documents examined in connection with this opinion are authentic, accurate and complete; and (ii) the authenticity, accuracy, completeness and conformity to original documents of all documents submitted to us as copies; |
| 2. | that there has been no change to the information contained in the Certificate of Incorporation, the Certificate of Incumbency or the Registers and that the Constitutional Documents remain in full force and effect and are unamended; |
| 3. | that the signatures, initials and seals on all documents and certificates submitted to us as originals or copies of executed originals are authentic, and the signatures and initials on any documents executed by the Company are the signatures and initials of a person or persons authorised by the Company, by resolution of its board of directors or any power of attorney granted by the Company, to execute such document; |
| 4. | that where incomplete documents, drafts or signature pages only have been supplied to us for the purposes of issuing this opinion, the original documents have been duly completed and correspond in all material respects with the last version of the relevant documents examined by us prior to giving our opinion; |
| 5. | that the documents do not differ in any material respects from any draft of the same which we have examined and upon which this opinion is based; |
| 6. | that none of the Company’s directors or its registered office has received any notice of any litigation or threatened litigation to which the Company is or may be party; |
| 7. | that the Company has not (i) received notice of any stop notice under Order 50 of the Grand Court Rules in respect of any of its shares or (ii) issued any restrictions notice under the Companies Act (as revised) in respect of the registration of the beneficial ownership of any of its shares, which restrictions notice has not been withdrawn by the Company or ceased by court order; |
| 8. | that (i) any meetings at which the Resolutions were passed were duly convened and had a duly constituted quorum present and voting throughout and any Resolutions passed in writing were adopted in accordance with the law and the Constitutional Documents, (ii) all interests of the directors of the Company on the subject matter of the Resolutions, if any, were declared and disclosed in accordance with the law and Constitutional Documents, (iv) the Resolutions have not been revoked, amended or superseded, in whole or in part, and remain in full force and effect at the date of this opinion, and (v) the directors of the Company have concluded that the entry by the Company into the documents approved by the Resolutions and the transactions contemplated thereby are bona fide in the best interests of the Company and for a proper purpose of the Company; |
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
5
| 9. | that (i) the Certificate of Incumbency and the Register of Directors and Officers accurately reflects the names of all directors and officers of the Company and (ii) the Certificate of Incumbency and the Register of Members accurately reflects the names of all members of the Company as at the dates the Resolutions were passed or adopted, the date the documents were executed and as at the date of this opinion; |
| 10. | that there are no records of the Company, agreements, documents or arrangements other than the Constitutional Documents, the Resolutions and the documents expressly referred to herein as having been examined by us which materially affect, amend or vary the transactions contemplated in the Resolutions or restrict the powers and authority of the directors of the Company in any way which would affect opinions expressed herein; |
| 11. | that carrying out each of the transaction referred to in the Resolutions will not conflict with or breach any applicable economic money laundering, anti-terrorist financing or other sanctions; |
| 12. | that any applicable escrow conditions have been met; and |
| 13. | that the directors or members of the Company have not taken any steps to have the Company struck off or placed in liquidation, no steps have been taken to wind up the Company and no receiver has been appointed over any of the Company’s property or assets. |
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
6
Schedule 3
Reservations
Our opinion is subject to the following:
| 1. | Good Standing: Our opinion as to good standing is based solely upon receipt of the Certificate of Good Standing issued by the Registrar of Companies. The Company shall be deemed to be in good standing under section 200A of the Companies Act on the date of issue of the certificate if all fees and penalties under the Companies Act have been paid and the Registrar of Companies has no knowledge that the Company is in default under the Companies Act. |
| 2. | Corporate Documents: The Registry of Companies in the Cayman Islands is not public in the sense that copies of the Constitutional Documents and information on shareholders is not publicly available and information on directors is limited. We have therefore obtained scanned copies of the corporate documents specified in Schedule 1 and relied exclusively on such scanned copies for the verification of such corporate information. |
| 3. | Document with an “as of” Date: We express no opinion on the effectiveness of the date of any document which is dated as of or with effect from a date prior to that on which it is authorised, executed, and delivered by all parties thereto. |
| 4. | Issue of shares: Based on the decision in the English case of Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 HL, in the event of a misrepresentation by a Company on which a shareholder relied in agreeing to subscribe for shares in such Company, the shareholder may be entitled to rescind the share subscription agreement and thereafter claim damages against such Company for any additional loss suffered as a result of the misrepresentation. Such a claim for damages will not arise unless and until the shareholder has successfully rescinded the share subscription agreement. A shareholder may be barred from rescinding on the grounds of delay or affirmation and if such Company is wound up (whether voluntarily or compulsorily), such shareholder will lose the right to rescind the share subscription agreement. |
Bermuda ■ British Virgin Islands ■ Cayman Islands ■ Guernsey ■ Hong Kong ■ Isle of Man ■ Jersey ■ Mauritius ■ Seychelles ■ Shanghai
7
Exhibit 5.2
| Ortoli | Rosenstadt LLP | 366 Madison Avenue 3rd Floor New York, NY 10017 tel: (212) 588-0022 fax: (212) 826-9307 |
July 11, 2022
Lichen China Limited
B2306, Block B
Tower 3, Jinjiang Wanda Plaza Commercial Complex
888 Century Avenue
Meiling Street, Jinjiang
Fujian Province
People’s Republic of China 362000
Ladies and Gentlemen:
We are acting as United States counsel to Lichen China Limited, a company incorporated in the Cayman Islands (the “Company”), in connection with the registration statement on Form F-1, File No. 333-264624 (the “Registration Statement”), including all amendments and supplements thereto, and accompanying prospectus filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the offering by the Company of 6,250,000 series A ordinary shares of par value US$0.00004 per share (the “Class A Ordinary Shares”) and an additional 937,500 Class A Ordinary Shares pursuant to an over-allotment option granted to the underwriters (collectively the “IPO Shares”). The IPO Shares are to be sold by the Company pursuant to an underwriting agreement (the “Underwriting Agreement”) to be entered into by and between the Company and Univest Securities, LLC, acting as the representative of the several underwriters (the “Representative”). The Company is also registering (i) warrants to purchase up to 1% of the Class A Ordinary Shares sold in the offering to be issued to the underwriters as compensation pursuant to the Underwriting Agreement (the “Underwriters’ Warrants”), and (ii) the Class A Ordinary Shares issuable upon exercise of the Underwriters’ Warrants (the “Underwriters’ Warrant Shares”).
This opinion is being furnished to you in connection with the Registration Statement.
In connection with this opinion, we have examined the following documents:
| 1. | The Registration Statement, |
| 2. | The form of the Underwriting Agreement, filed as Exhibit 1.1 to the Registration Statement, |
| 3. | The form of the Underwriters’ Warrants, filed as Exhibit 4.1 to the Registration Statement, |
| 4. | a copy of the executed written resolution of the directors of the Company dated June 15, 2022, and |
| 5. | such other documents and corporate records as we have deemed necessary or appropriate in order to enable us to render the opinion below. |
For purposes of this opinion, we have assumed (i) the validity and accuracy of the documents and corporate records that we have examined, (ii) the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents and (iii) that all relevant documents have been, or will be, validly authorized, executed, delivered and performed by all of the relevant parties. As to any facts material to the opinion expressed herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Company and have assumed that such statements and representations are true, correct and complete without regard to any qualification as to knowledge or belief. Our opinion is conditioned upon, among other things, the initial and continuing truth, accuracy, and completeness of the items described above on which we are relying.
Subject to the foregoing and the qualifications set forth in the Registration Statement, we are of the opinion that the Underwriters’ Warrants, when issued as contemplated in the Registration Statement and the Underwriting Agreement, will be valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms.
Ortoli | Rosenstadt LLP
| Lichen China Limited | July 11, 2022 |
Our opinion is limited to the application of the laws of the State of New York, the Securities Act and the rules and regulations of the SEC promulgated thereunder only and we express no opinion with respect to the applicability of other federal laws, the laws of other countries, the laws of any state of the United States or any other jurisdiction, or as to any matters of municipal law or the laws of any other local agencies within any state. No opinion is expressed as to any federal securities laws except as specifically set forth herein. Our opinion represents only our interpretation of the law and has no binding, legal effect on, without limitation, the service or any court. It is possible that contrary positions may be asserted by the service and that one or more courts may sustain such contrary positions. Our opinion is expressed as of the date hereof, and we are under no obligation to supplement or revise this opinion to reflect any changes, including changes which have retroactive effect (i) in applicable law, or (ii) in any fact, information, document, corporate record, covenant, statement, representation, or assumption stated herein that becomes untrue, incorrect or incomplete.
This letter is furnished to you for use in connection with the Registration Statement and is not to be used, circulated, quoted, or otherwise referred to for any other purpose without our express written permission. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Registration Statement wherever it appears. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the SEC thereunder.
| Very truly yours, | |
| /s/ Ortoli Rosenstadt LLP | |
| Ortoli Rosenstadt LLP |
Exhibit 8.2
Ortoli | Rosenstadt LLP |
366 Madison Avenue 3rd Floor New York, NY 10017 tel: (212) 588-0022 fax: (212) 826-9307 |
July 11, 2022
Lichen China Limited
B2306, Block B
Tower 3, Jinjiang Wanda Plaza Commercial Complex
888 Century Avenue
Meiling Street, Jinjiang
Fujian Province
People’s Republic of China 362000
Ladies and Gentlemen:
We are acting as United States counsel to Lichen China Limited, a company incorporated in the Cayman Islands (the “Company”), in connection with the registration statement on Form F-1, File No. 333-264624 (the “Registration Statement”) and the related prospectus (the “Prospectus”) with respect to the Company’s public offering of its series A ordinary shares, par value $0.00004 (the “Class A Ordinary Shares”). The Company is filing the Registration Statement with the Securities and Exchange Commission under the Securities Act of 1933, as amended.
This opinion is being furnished to you in connection with the Registration Statement.
In connection with this opinion, we have examined the Registration Statement and such other documents and corporate records as we have deemed necessary or appropriate in order to enable us to render the opinion below. For purposes of this opinion, we have assumed (i) the validity and accuracy of the documents and corporate records that we have examined, (ii) the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents and (iii) that all relevant documents have been, or will be, validly authorized, executed, delivered and performed by all of the relevant parties. As to any facts material to the opinion expressed herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Company and have assumed that such statements and representations are true, correct and complete without regard to any qualification as to knowledge or belief. Our opinion is conditioned upon, among other things, the initial and continuing truth, accuracy, and completeness of the items described above on which we are relying.
In rendering the opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended, regulations of the United States Department of the Treasury promulgated thereunder, pertinent judicial authorities, interpretive rulings and other administrative guidance of the Internal Revenue Service (the “Service”), and such other authorities as we have considered relevant, all as of the date hereof. It should be noted that statutes, regulations, judicial decisions and administrative guidance are subject to change at any time and that any such changes may be effective retroactively. A change in the authorities or in the truth, accuracy or completeness of any of the facts, information, documents, corporate records, covenants, statements, representations or assumptions on which our opinion is based could affect our conclusions.
Subject to the foregoing and the qualifications set forth in the Registration Statement, the discussion set forth in the Registration Statement under the caption “Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares” insofar as such discussion sets forth legal conclusions on United States federal income tax law, constitutes our opinion as to the material United States federal income tax consequences to U.S. Investors (as such term is defined in the Registration Statement) of the ownership and sale, exchange or other disposition of the Company’s Class A ordinary shares.
Our opinion is limited to the application of the federal income tax laws of the United States only and we express no opinion with respect to the applicability of other federal laws, the laws of other countries, the laws of any state of the United States or any other jurisdiction, or as to any matters of municipal law or the laws of any other local agencies within any state. No opinion is expressed as to any federal income tax laws except as specifically set forth herein. Our opinion represents only our interpretation of the law and has no binding, legal effect on, without limitation, the service or any court. It is possible that contrary positions may be asserted by the service and that one or more courts may sustain such contrary positions. Our opinion is expressed as of the date hereof, and we are under no obligation to supplement or revise this opinion to reflect any changes, including changes which have retroactive effect (i) in applicable law, or (ii) in any fact, information, document, corporate record, covenant, statement, representation, or assumption stated herein that becomes untrue, incorrect or incomplete.
This letter is furnished to you for use in connection with the Registration Statement and is not to be used, circulated, quoted, or otherwise referred to for any other purpose without our express written permission. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Registration Statement wherever it appears. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the SEC thereunder.
| Very truly yours, | |
| /s/ Ortoli Rosenstadt LLP | |
| Ortoli Rosenstadt LLP |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Amendment No.2 to Form F-1 of Lichen China Limited and subsidiaries (the “Company”) of our report dated August 12, 2021, except for Note 1 and Note 10, as to which the date is January 14, 2022, relating to our audit of the consolidated financial statements of the Company as of and for the year ended December 31, 2020, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference of our Firm under the caption “Experts” in this Registration Statement.
/s/ Briggs & Veselka Co.
Briggs & Veselka Co.
Houston, Texas
July 11, 2022
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated May 2, 2022 with respect to the consolidated financial statements of Lichen China Limited for the year ended December 31, 2021 in this Amendment No. 2 to the Registration Statement on Form F-1 of Lichen China Limited and the related Prospectus of Lichen China Limited with the Securities and Exchange Commission.
TPS Thayer, LLC
Sugar Land, Texas
July 11, 2022