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Golden Metropolis International Ltd – IPO: ‘424B4’ on 12/28/18

On:  Friday, 12/28/18, at 4:15pm ET   ·   Accession #:  1213900-18-17988   ·   File #:  333-221955

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/28/18  Golden Metropolis Int’l Ltd       424B4                  1:2.7M                                   Edgar Agents LLC/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus Supplement                               HTML    979K 

Filed pursuant to Rule 424(b)(4)

Registration No. 333-221955

1,200,000 Ordinary Shares

Golden Metropolis International Limited

This prospectus relates to 1,200,000 of our ordinary shares with no par value (the “Ordinary Shares”), of Golden Metropolis International Limited that may be sold from time to time by the selling shareholders named in this prospectus (the “Selling Shareholders”). We will not receive any of the proceeds from the sale of our Ordinary Shares by the Selling Shareholders.

Our securities are presently not traded on any market or securities exchange. We have applied to list our Ordinary Shares on the Nasdaq Capital Market under the symbol “WALL”.

Since there is currently no public market established for our securities, the Selling Shareholders will sell at a fixed price of $5.00 per share, the price at which we sell our ordinary shares the IPO (defined below). Once, and if, our Ordinary Shares are listed on the Nasdaq Capital Market and there is an established market for these resale shares, the Selling Shareholders may sell the resale shares from time to time at the market price prevailing on the Nasdaq Capital Market at the time of offer and sale, or at prices related to such prevailing market prices or in negotiated transactions or a combination of such methods of sale directly or through brokers.

The selling stockholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the Securities Act), with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation.

On December 26, 2018, a registration statement under the Securities Act with respect to our initial public offering on a “best efforts, minimum/maximum” basis of up to 2,000,000 ordinary shares (the “IPO”) was declared effective by the Securities and Exchange Commission. To date, we have received no net proceeds from the offering after payment of estimated expenses of the offering.

Investing in our Ordinary Shares involves a high degree of risk. See “Risk Factors” beginning on page 9 to read about factors you should consider before investing in shares of our Ordinary Shares. 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.

The date of this prospectus is December 28, 2018.

(Finished Project: Wuxi Grand Theatre – Total Curtain Wall Coverage: 79,135 m²)

TABLE OF CONTENTS

Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

You should rely only on information contained in this prospectus. We have not authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

Risk Factors

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

Risks Related to Our Business and Industry

Our industry is very competitive in China.

The domestic market for curtain wall is fragmented and highly competitive. According to the China Building Decorating Association, as of July 2016, there are a total of 260 companies with Class A Curtain Wall Designing Qualifications, 210 companies which possess Level I Curtain Wall Contracting Qualifications, and 947 companies holding Level I Building Decoration Contracting Qualifications. A considerable number of these companies have a competitive advantage in this industry, however, we believe that we are one of the few companies that has obtained all of the above-mentioned qualifications. To the extent these competitors are able to grow and consolidate, they may be able to take advantage of economies of scale, which could put further pressure on our margins. If we do not continue to improve our operational and technical advantages to stay competitive, we may not be able to continue to stay competitive in our industry.

Our operation is very concentrated in Jiangsu Province

A major portion of our sales revenue is generated from Jiangsu Province of China. For the six months ended June 30, 2018 and 2017, our revenue generated from the Jiangsu Province accounted for approximately 81% and 75% of our total revenue, respectively. For the fiscal years ended December 31, 2017 and 2016, our revenue generated from the Jiangsu Province accounted for approximately 70% and 62% of our total revenue, respectively. We have set up branches outside of Jiangsu Province to establish our presence in top-tier cities such as Shanghai, Beijing and Zhengzhou and have expanded our sales coverage to include Zhejiang Province, Shanxi Province, Henan Province, and Xinjiang Province. However, if we are not able to successfully diversify our revenue sources into other regions, we may face risks due to the market concentration in Jiangsu Province.

A failure to obtain new contracts (given the non-recurring nature of our contracts) could materially affect our financial performance

Our contracts are on a project-basis. The duration of our completed projects during the Track Record Period typically range between 1 to 24 months with an average duration of approximately 8 months. As our revenue is not recurring in nature, we cannot guarantee that we will continue to secure new projects from our customers after the completion of the existing awarded projects. Our Company has to go through a competitive tendering or quotation process to secure new contracts. Our tender/quotation success rate was approximately 25% and 15% for the two fiscal years ended December 31, 2017 and 2016 and our success rate is affected by a range of factors, such as our pricing and our competitors’ pricing and the level of competition. There is no guarantee that we will be able to achieve a tender success rate in the future. There is also no guarantee that we will not have to lower our pricing due to competition. In addition, so far as our management is aware, most of our customers have maintained some form of an evaluation system to track their subcontractors’ performance, financial capability, reputation and certifications. If a contractor receives a poor safety performance review or an accident occurs due to workplace safety negligence, it may lead to a poor evaluation and affect our tender success rate. Our reputation, business operations, financial results and profitability may also be adversely affected.

In the event we are unable to maintain business relationship with existing customers or unable to secure new contracts or obtain similar number of projects, our revenue will be adversely affected. It is critical to our Company to secure new projects of similar or larger value or similar number of projects on a continual basis, and should we fail to do so, the financial performance of our Company will be adversely affected.

Failure to complete our projects on a timely basis could materially affect our financial performance, reputation or we may be subject to claims

Our revenue is recognized based on the stage of completion method, and billing is based on monthly progress claims. A delay in a project will therefore affect our billings, revenue, operational cash flows and financial performance. We are also required to pay our suppliers and subcontractors notwithstanding the delay in the project if the purchase orders or scope of services have been fulfilled or rendered, therefore affecting our operational cash flows. A delay in a project will also cause increase in our cost such as storage cost to keep the fabricated curtain walls, additional transportation cost to transport the fabricated curtain walls to storage site rather than the project site and higher rental of machineries as machines may be left idle. A delay in a project can be due to various factors, including but not limited to, a shortage of manpower, a shortage of raw materials, delays by subcontractors, adverse weather or factors attributable to the main contractor of the project. If the delay is caused by us, we are liable to pay our contracting parties for the liquidated damages stipulated in our contracts and our reputation could also be materially and adversely affected.

Inability to renew our existing qualifications, licenses and permits or the existing qualifications or licenses are cancelled or suspended could materially affect our operations and financial performance

Our business and construction activities in PRC are regulated by the relevant construction laws in the PRC. If we fail to comply with the applicable requirements or any required conditions to keep the qualifications and licenses, then our qualifications and licenses may be downgraded, suspended or cancelled. Delay or refusal may occur when renewing such qualifications and licenses upon expiry. Failure to comply with regulatory requirements could result in suspension of our business operations, restriction or prohibition of certain business activities, or commencement of new business, thereby materially and adversely affecting our business, financial position, results of operations and prospects.

If we are unable to maintain existing customers, attract new customers or broaden our market, our business and results of operations will be adversely affected.

To maintain the high growth momentum, we must continuously increase the customer base by retaining current customers and attracting more customers. We intend to continue to dedicate significant resources to our customer acquisition efforts, including establishing new acquisition channels, particularly as we continue to grow and introduce new services. The overall number of customers may be affected by several factors, including our brand recognition and reputation, the effectiveness of our risk control, the efficiency of our production, the macroeconomic environment and other factors. Currently, we promote our brand through direct communications with potential customers and referrals. If we are unable to broaden our marker or attract new customers, or if the existing customers do not continue to purchase our products or services, we might be unable to increase our customer base, revenues, and market shares as we expect, and our business and results of operations may be adversely affected.

The loss of any of our key customers could reduce our revenues and our profitability.

We consider our major customers in each period to be those customers that accounted for more than 10% of overall revenues in such period. We did not have any such customer during fiscal year ended December 31, 2017 and 2016, and during the six months ended June 30, 2018 and 2017. It is common practice for us rely on individual projects from our customers without any long-term contracts. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. As the majority of our revenues are driven by individual projects, our major customers often change each period based on when a given project is placed. If we cannot maintain our ability to obtain projects from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

The loss of any of our key vendors could have a materially adverse effect on our results of operations.

We consider our major vendors in each period to be those vendors that accounted for more than 10% of overall purchases in such period. We did not have such vendors during fiscal years ended December 31, 2017 and 2016, and during the six months ended June 30, 2018 and 2017. We purchase raw materials on the market at prevailing market prices. We believe that we can locate replacement vendors readily on the market for prevailing prices and that we would not have significant difficulty replacing a given vendor, any difficulty in replacing such a vendor could adversely affect our company’s performance to the extent it results in higher prices, slower supply chain and ultimately less desirable results of operations.

Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products.

As to the products we process, we must manage our supply chain for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further complicates supply chain disruption risks. Local administrative bodies and physical infrastructure built to protect local interests pose transportation challenges for raw material transportation as well as product delivery. In addition, profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products.

Our short-term revenue and profitability may not be indicative of the long-term results of operations

Revenue from some ongoing contracts may be recognized across financial years, depending on the stage of completion of each contract. The revenue and profitability for different contracts vary and should the amount of works performed be higher for a certain financial year, that particular financial year will record better short-term results. There is, therefore, no assurance that our short-term results of operations will be indicative of our long-term results of operations.

Incorrect estimation of our project costs and costs overruns will affect our costs and materially and adversely affect our financial performance

Most of our contracts with our customers have a fixed and pre-determined fee throughout the contract period and do not permit any price adjustment. We generally fix our fees when we submit our tender or quotation, after carrying out internal costing and budgeting estimates of raw materials, rentals for machineries, labor costs and subcontracting services (if applicable) based either on existing market price or should the projects be larger in scale, quotations from certain of our suppliers and/or subcontractors. Except in instances of variation orders initiated by our customers, unilateral adjustments to the contract price or scope of works on our own are not accepted. Accordingly, we generally have to bear the risk of cost fluctuations. Therefore, cost management is critical in ensuring that the project meets its budgeted profit margin.

The duration of our completed projects generally span from 1 to 24 months. There is no assurance that the costs estimated at the beginning of a contract will not be exceeded during the course of the contract period. Cost overrun may result from inaccurate estimation of costs, increase in cost of materials and wages of our workers, delay in the project, change in the regulatory requirements, disputes with subcontractors, labor disputes as well as accidents and other unforeseen circumstances. The risk of cost overruns also increases with the duration of a project, due to possible increases in the price of materials and labor. If we are unable to keep our costs (including costs to be paid to our suppliers and subcontractors) within our original estimates, or the price adjustment mechanisms are not provided, or we are not able to fully cover the increases in costs during the project, our business operations, financial results and profitability will be adversely affected.

Fluctuations in raw materials prices may adversely affect our profit margins

Our curtain wall manufacturing operations depends heavily on the availability of various raw materials, including but limited to aluminum, steel, glass and rock. The cost of raw materials accounts for a major portion of our total cost of revenue. For the six months ended June 30, 2018 and 2017, the cost of raw materials accounted for 67% and 54% of the total cost of revenue during those periods, respectively. For the fiscal years ended December 31, 2017 and 2016, the cost of raw materials accounted for 46% and 51% of the total cost of revenue during those periods, respectively. The availability of raw materials may decline and their prices may fluctuate greatly. In the event that raw material prices increase significantly, we usually have mechanisms in the contracts with our clients to adjust our prices in response to such significant increase. However, it could still have an adverse impact on our operational performance if the raw material prices increase materially. Any decline in the availability or significant and long-term increase in raw material prices as compared with the prices of substitutes may result in the construction industry turning to the use of alternative construction materials. Any fall in the demand for structural curtain walls because of the use of alternatives would in turn adversely affect our business operations and financial performance. To the extent that we have entered into contracts with our customers and we have not obtained confirmed quotations from our suppliers for the amount of raw materials required for that contract, fluctuations in raw materials prices would affect us. We also do not engage in hedging contracts for the raw materials. In such instances, should there be an increase in raw materials prices and if we are not able to pass the increase in raw materials prices to our customers, our financial performance will be adversely affected.

Our inability to raise additional capital could have material adverse effect on our financial condition and results of operations.

Our production can be improved with additional production units and better infrastructure within the facility. We are raising additional capital through the IPO in order for us to purchase additional equipment and build necessary infrastructure within our production facility to meet the demand of our customers. If we cannot raise additional capital and is unable to execute our business expansion plan successfully, our customers may experience substantial delay in receiving our products, which could have a material adverse effect on our business relationship with them and our financial performance.

Our revenue will decrease if the industries in which our customers operate experience a protracted slowdown.

Our products mainly serve as key components in projects and machines operated by our customers which are mostly in the construction industry. Therefore, we are subject to the general changes in economic conditions affecting those industry segments of the economy. If the industry segments in which our customers operate do not grow or if there is a contraction in those industries, demand for our products will decrease. Demand for our products is typically affected by a number of overarching economic factors, including, but not limited to, interest rates, the availability and magnitude of private and governmental investment in infrastructure projects and the health of the overall global economy. If there is a decline in economic activity in China and the other markets in which we operate or a protracted slowdown in industries on which we rely for our sales, demand for our products and our revenue will likewise decrease.

Expansion of our operations may strain resources, and our failure to manage growth effectively could harm our ability to attract and retain key personnel and adversely impact our operating results.

Increased orders for our product and service have placed, and may continue to place, a strain on our operational, financial, and managerial resources and personnel. In addition, execution of our growth strategy will require further substantial capital and effective planning. Significant rapid growth on top of our current operations could greatly strain our internal resources, leading to a lower quality of customer service, reporting problems, and delays, resulting in a loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place an additional strain on our personnel, management systems, liquidity, and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower, no, or negative growth, critical shortages of cash, and a failure to achieve or sustain profitability.

Outstanding bank loans may reduce our available funds.

We have approximately $3,778,376 in outstanding bank loans as of June 30, 2018. There can be no guarantee that we will be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.

We may experience delays or defaults in receiving our receivables, and a failure to receive payment on time and in full, or that delay in the release of retention monies or that retention monies are not fully released to us after expiry of the defect liability period may affect our liquidity position

We make monthly progress claims to our customers in respect of the value of the work we have performed, and subject to our customer’s confirmation, thereafter we will proceed to issue the invoices with a credit term in accordance with the provision of the contract. As of June 30, 2018, we have net accounts receivable of $32,190,834 which accounts for 127% of our total revenue for the six months ended June 30, 2018.  As of December 31, 2017, and 2016, we had net accounts receivable of $53,071,542 and $ 43,872,122, respectively, accounting for 75% and 57% of total revenue for the respective fiscal periods. While we are actively collecting the remaining balance of these accounts receivable, we cannot assure you that we will be able to do so. If we continue to experience an increase in accounts receivable without substantial collection, this could have a material adverse effect on our financial performance.

If a client delays payment or fails to release our retention monies as scheduled, our cash flow and working capital may be materially and adversely affected. Even where we are able to recover any losses incurred pursuant to the terms of the contract, the process of such recovery is usually time-consuming and requires financial and other resources to settle the disputes. Furthermore, there can be no assurance that any outcome will be in our favor or that any dispute will be resolved in a timely manner. Failure to secure adequate payments in time or to manage past due debts effectively could have a material and adverse effect on our business, financial position, results of operations and prospects.

Our high debt to asset ratio might increase liquidity risk

For the six months ended June 30, 2018, we had a debt to asset ratio of 74.3%. For the fiscal years ended December 31, 2017 and 2016, we had a debt to asset ratio of 76%, and 82%, respectively. Our debt to asset ratio is relatively high compared with companies in other industries but is normal compared with companies in our industry. This is mainly caused by the lengthy project and receivable cycle which is common in our industry. In addition to our operational cash flow, we mainly finance our operations through bank loans and business credits given by our vendors and clients. We may face liquidity risk if our debt/asset ratio continues to increase.

Our operations are working capital intensive and our cash flows may fluctuate due to the payment practice applied to our projects

Our projects normally require significant cash outflow at the early stage particularly to purchase our raw material, prior to receiving payment from our customers. Our projects typically do not have deposit from customers prior to starting work, although we may request if deposit can be made for higher value contracts. Our customers will pay progress payments after our works commence and such works and payments are certified by our customers. Accordingly, the cash flows of a particular project will turn from net outflows at the early stage into accumulative net inflows gradually as the works progress. Should the progress of our projects be delayed, our cash flow position may be adversely affected. We undertake a number of projects at any given period, and the cash outflow of a particular project could be compensated by the cash inflows of other projects. Should the mix of the projects be such that more are at the initial stage, our corresponding cash flow position may be adversely affected. Net cash provided by operating activities were $4,481,585 and $7,703,593 for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by operating activities were $1,313,961 and $10,805,192 for the fiscal year ended December 31, 2017 and 2016, respectively.

Our ability to secure performance bonds will affect our ability to undertake our projects

It is a common practice in the construction industry that contractors are required by their customers to take out performance bonds furnished by a bank or acceptable financial institution at a fixed sum or in a certain percentage of the contract value to secure the contractual performance of the project.  If the contractor fails to comply with the requirements in the contract, the customer is guaranteed a compensation for monetary loss up to the amount of the performance bond. Our ability to secure a performance bond is critical to fulfill the conditions of and undertake such contracts. In the event that we are unable to secure the requisite performance bonds for any reason, our award of these construction projects will be revoked. This may materially and adversely affect our revenue and profitability.

Our operations may subject us to claims relating to late delivery, personal injuries and other matters which may expose us to significant liability claims

We may from time to time encounter disputes arising from contracts with customers, subcontractors, suppliers or other third parties, which may involve claims against them or us. Claims against us may involve defective works, sub-standard works, unfinished work or delays in the completion of the contracts, defective designs, casualties, property damages which may result in us incurring liquidated damages under the terms of our contracts with our customers or delay of payment to subcontractors or suppliers. Claims involving us could result in time-consuming and costly litigations, arbitration, administrative proceedings or other legal procedures. Expenses we incur in legal proceedings or arising from claims brought by or against us could have a material and adverse effect on our business, financial position, results of operations and prospects. Moreover, legal proceedings resulting in unfavorable judgment or findings may harm our reputation, cause financial losses and damage our prospects of winning future contracts, thereby materially and adversely affecting our business, financial position, results of operations and prospects.

Our employees who have suffered an injury arising out of and in the course of his employment can choose to either submit a claim under the Work Injury Compensation Act for compensation without needing to prove negligence or breach of statutory duty by employer or commence legal proceedings to claim damages under common law against employer for breach of duty or negligence. Pursuant to the Work Injury Compensation Act, an injured employee is entitled to claim medical leave, wages, medical expenses and lump sum compensation for permanent incapacity or death, subject to certain stipulated limits. We may also face claims from third parties from time to time, including those who suffer personal injuries at premises where we provide our services.

Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and financial performance.

Manufacturing or design defects (including in products or components that we source from third parties), unanticipated use of, or inadequate disclosure of risks relating to, the use of products or equipment that we make and sell may lead to personal injury, death or property damage. These events could lead to recalls or alerts relating to our products, result in the removal of a product or equipment from the market or result in product liability claims being brought against us. Product and equipment recalls, removals and liability claims can lead to significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and equipment.

Our business plan may not be implemented successfully which may adversely affect our prospects

Our Directors are of the view that the future plan has been prepared after due enquiry by reference to, among other matters, the expected future prospects of the construction industry in China and the continuation of our competitive advantages and other factors considered relevant. Some of our future business plans are based on certain assumptions. The successful implementation of our business plan may be affected by a number of factors including the availability of sufficient funds, government policies relevant to our industry, the economic conditions, our ability to maintain our existing competitive advantages, our relationship with our customers and the threat of substitutes and new market entrants. There is no assurance that our business plan can be successfully implemented. Should there be any material adverse change in our operating environment which results in our failure to implement any part of our business plan, our prospects may be adversely affected.

Our business involves inherent industrial risks and occupational hazards and the materialization of such risks will affect our business operations and financial results

While we did not record any accident during the six months ended June 30, 2018, and for the fiscal years ended December 31, 2017 and 2016, our business involves inherent industrial risks and occupational hazards, which may not be eliminated through implementing safety measures. We participate in certain activities presenting risks and dangers, among which are fabrication, welding and erection of structural steelworks where we may have to work at height and/or at the construction sites. Our employees will also have to work with machinery and tools that have to be handled appropriately. Thus we are exposed to risks related to such activities, such as equipment failure, industrial accidents and fire. We cannot ensure that such risks will not cause a material and adverse impact to us in the future. The materialization of any of the risks mentioned above in the worst case scenario may disrupt our business and lead to delay in the project and damage our reputation, which may also adversely affect the validity of our relevant qualifications, business operations and results of operations. Our insurance coverage may not be sufficient, and it may not be possible to obtain adequate insurance (or any insurance at all) to cover certain risks on commercially reasonable terms. In addition, we may also be fined by the regulators, penalized with demerit points which may lead to debarment in hiring foreign workers and issued stop work orders which could severely disrupt our operations and lead to delays in the project.

A reduction in the construction projects could materially affect our financial performance

We are highly dependent on the construction projects in China. The majority of our projects are for the curtain wall designing and construction of office buildings, commercial complexes, hotels, airports, museums, libraries, sport stadiums, schools and hospitals. The market demand for commercial and public buildings can be affected by the macro economy and public policy and therefore we could experience negative impact from economic and public policy changes. Fewer available projects will result in more intense competition and a downturn in our industry may lead to tighter liquidity, delay and/or cancellation of projects and slower collection and/or recovery of trade receivables. A downturn in the Chinese economy could dampen the general sentiments in the construction industry and reduce construction demand, which will adversely affect our business and financial performance.

A cyclical fluctuation in Chinese market, particularly the construction industry, will affect our financial performance

Our revenue has been derived solely from our operations in China. Any unforeseen circumstances, such as natural disasters in China, recession in Chinese economy, outbreak of an epidemic in China and any other incidents happening in China may adversely affect our business, prospects, financial conditions and results of operations.

We are dependent on the construction industry in China, which is subject to cyclical fluctuations. A downturn in the Chinese construction industry is likely to have an adverse impact on our business and profitability due to the possibility of postponement, delay or cancellation of construction projects and delay in recovery of receivables.

The operations of commercial and public building construction companies in China are subject to compliance with a number of regulatory requirements and any changes in such requirements may affect our operating costs and profitability

Our operations are required to comply with various safety, employee protection and environmental protection laws, regulations and requirements in China. Any changes in such requirements may result in us incurring additional costs to comply which may increase our operating costs and adversely affect our profitability.

Our patent rights are limited in China.

We rely on many patented products to establish our market share for our products. Our patent rights are granted by the State Intellectual Property Office of the PRC. While we have sold our products outside of the PRC and plan to continue expanding the export of our products overseas, we have not been granted any patent in countries outside of the PRC. As of the date hereof, most of our products are sold within the PRC. However, in the event that we begin to generate substantial revenue from sales abroad and if we cannot successfully protect our intellectual properties outside of the PRC, we may not be able to execute our business plan, which could have a material adverse effect on our financial performance.

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

We rely on a combination of patent, copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own various patents in China covering our production technology.

The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or circumvented.

We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.

Implementation of PRC intellectual property-related laws have historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. See “Business — Intellectual Property.” If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other countries in Asia. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.

We must manage growth in operations to maximize our potential growth and achieve our expected revenues and any failure to manage growth will cause a disruption of our operations and impair our ability to generate revenue.

In order to maximize potential growth in our current and potential markets, we believe that we must expand the scope of our manufacturing and production facilities and capabilities and continue to develop new and improved products. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures and management information systems. We will also need to effectively train, motivate and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

We cannot assure you that our internal growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

One of our strategies is to grow internally through increasing the development of new products and improve the quality of existing products. However, many obstacles to this expansion exist, including, but not limited to, increased competition from similar businesses, our ability to improve our products and product mix to realize the benefits of our research and development efforts, international trade and tariff barriers, unexpected costs, costs associated with marketing efforts abroad and maintaining attractive foreign exchange rates. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our services in any additional markets. Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.

Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.

Our growth strategy includes building our brand, increasing market penetration of our existing products, developing new products, increasing our targeting of the pharmaceutical market in China, and increasing our exports. Pursuing these strategies has resulted in, and will continue to result in substantial demands on management resources. In particular, the management of our growth will require, among other things:

If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.

Our bank accounts are not insured or protected against loss.

We maintain our cash with various banks and trust companies located in the PRC. Our cash accounts are not insured or otherwise protected. While China is currently considering implementation of banking insurance policies, it has not yet done so. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.

We are substantially dependent upon our senior management and key research and development personnel.

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on Zuoliang Zha, our Chairman of the Board, and Minpei Zha, our CEO, to manage our operations.

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel including Zuoliang Zha and Minpei Zha. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

We compete for qualified personnel with other hardware manufacturing companies and related technology research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may not be able to meet our business and financial goals.

Conflicts of interests may arise from other business activities of Mr. Ni, our Chief Financial Officer.

We not have any other employee besides our Chief Financial Officer, Mr. Min Ni, with substantial US GAAP experience. Mr. Ni is involved in other business activities, including his current position with CAN Partners LLP and Bluehill Consulting Inc. Mr. Ni may also become involved in other business opportunities. If a specific business opportunity becomes available, Mr. Ni may face a conflict in selecting between our company and those other business interests. We have not formulated a policy for the resolution of such conflicts. In addition, Mr. Ni’s inability to commit full-time to our company may have a material adverse effect on the result of our operation.

We are substantially dependent upon CFO’s expertise and knowledge in our financial reporting.

We engaged the CFO’s firm to prepare our financial statements for the six months ended June 30, 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016. We did not have any employee with substantial US GAAP experience until the appointment of Mr. Ni as our CFO. We will continue to rely on Mr. Ni’s expertise and knowledge in our financial reporting going forward. In the meantime, we will train our full-time accounting staff and identify and resolve complex accounting issues using US GAAP, as well as provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results. We will also continue to recruit qualified accounting staff with sufficient US GAAP experience and knowledge to join the financial reporting team.  We do not plan to engage CFO’s firm to prepare our future financial statements  as our CFO prepared the financial statements for the 6 months ended June 30, 2018 and 2017. The loss of CFO and our inability to find a suitable candidate to replace CFO may have a material adverse effect on our financial reporting.

We are heavily dependent upon the services of experienced personnel who possess skills that are valuable in our industry, and we may have to actively compete for their services.

We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired. See “Our Business – Employees.”

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing clients. Successful promotion of our brand and our ability to attract clients depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

New lines of business or new services may subject us to additional risks.

From time to time, we may implement new lines of business or offer new services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new service. Furthermore, any new line of business and/or new service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new services could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

A lack of insurance could expose us to significant costs and business disruption.

We have not yet purchased insurance to cover our assets and property of our business, which could leave our business inadequately protected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. Furthermore, Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs.

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

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology failures or internet failures, which could cause the delay and failure in delivering products and providing service to our customers.

Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

Risks Related to Doing Business in China

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

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

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

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

Labor laws in the PRC may adversely affect our results of operations.

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008, which was further amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a comparative disadvantage.

Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.

We may experience barriers to conducting business and trade in our targeted emerging markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes on profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.

A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.

Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect commercial and public construction. Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and there are new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of China’s economic growth since 2012 which may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. If present Chinese and global economic uncertainties persist, many of our customers may reduce the service they require from us. Adverse economic conditions could also reduce the number of customers seeking our service, as well as their ability to make payments. Should any of these situations occur, our net revenues will decline, and our business and financial conditions will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation. On August 11, 2015, the PRC government set the central parity rate for the RMB nearly 2% lower than that of the previous day and announced that it will begin taking into account previous day’s trading in setting the central parity rate. 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 more flexible currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Any significant revaluation of the Renminbi may materially and adversely affect our liquidity and cash flows. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive.

Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

China passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, the State Administration of Taxation of China issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management are often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, it remains unclear as to how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, approximately 94% of our revenue is non-China source income, so could be adversely affected. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

The State Administration of Foreign Exchange, or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing. Moreover, failure to comply with the various SAFE registration requirement could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment (the “2015 Notice”) released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.

We have not filed SAFE Circular 75 reports on behalf of our shareholders who are PRC residents before. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since SAFE Circular 37 and the 2015 Notice were recently promulgated and it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.

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

We provide most of our services through our subsidiaries in China. Although our PRC subsidiaries are not subject to laws and regulations applicable to foreign investments in China, our operations in China are governed by PRC laws and regulations. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Therefore, PRC legislation and regulations provide very little guidance on the industry. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, 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) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. 

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

In connection with the IPO, we will become subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law.

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

Since our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers.

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

Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.

From time to time, the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations, or to otherwise provide information. While the Company will be compliant with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to us or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the capricious nature of Chinese enforcers, and may therefore be impossible to facilitate.

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

In utilizing the proceeds of the IPO in the manner described in “Use of Proceeds,” of the prospectus for the IPO as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested companies, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142 (later supplemented by Circular 88, which was issued on July 18, 2011 and effective starting August 1, 2011), a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless such investments are otherwise provided for in the business scope. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

Furthermore, SAFE promulgated Circular 59 on November 19, 2010, requiring the governmental authority to closely examine the authenticity of settlement of net proceeds from offshore offerings. In particular, it is specifically required that any net proceeds settled from offshore offerings shall be applied in the manner described in the offering documents.

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.

In addition, on March 30, 2015, SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, prohibiting foreign-invested enterprise from using an RMB fund converted from its foreign exchange capital for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises or purchasing real estate not for self-use.

Circular 142, Circular 59, Circular 21, and circular 19 may significantly limit our ability to convert, transfer and use the net proceeds from this offering and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of this offering and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

We must remit the IPO proceeds to the 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 the IPO 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 the IPO. 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 IPO proceeds to the PRC, we will take the following actions:

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. Until the abovementioned approvals, the proceeds of the IPO will be maintained in an interest-bearing account maintained by us in the United States.

Dividends payable to our foreign investors and gains on the sale of our ordinary shares by our foreign investors may become subject to PRC tax law.

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of our ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares, and any gain realized from the transfer of our ordinary shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. See “Regulation — Regulations on Tax.” Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of our ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, holders of our ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our ordinary shares by such investors are subject to PRC tax, the value of your investment in our ordinary shares may decline significantly.

Restrictions on currency exchange may limit PRC investors’ ability to make investment.

In response to the persistent capital outflow in China and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for Chinese citizens to transfer foreign currency overseas and for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, on January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control, or the 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. The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put in place by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC investors to make capital contribution or make other kinds of payments to us could materially and adversely limit our ability to grow.

Risks Related to Our Corporate Structure and Operation

Our net profit may decline.

Our services have generated a significant amount of revenue as compared to our expenses. However, the reason that our expense for the year 2017 and 2016 was low was because that most of research and development expense, as well as marketing expense were incurred before the establishment of the company, thus was not reflected in the Financial Statements. Also, labor cost in China is relatively low as compared to the labor cost in western countries. In the future, we might incur more expense due to the expansion of our business and the possible increase in labor cost. If the expansion of our business was not successful or was not able to generate great revenue in a short term, our net profit may decline.

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

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

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if they are dissatisfied with the conduct of our affairs.

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Business Companies Act 2004 (the “BVI Act”) dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the company’s memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the company’s memorandum and articles of association.

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

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

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, 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 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our Ordinary Shares held by non-affiliates exceeds $700 million as of any June 30 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 Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

As a “controlled company” under the rules of the NASDAQ Capital Market, we may exempt our company from certain corporate governance requirements that could adversely affect our public shareholders.

Following the IPO, our directors and officers will beneficially own a majority of the voting power of our 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 to 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 Capital Market rules, we could elect to rely on this exemption in the future. 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 compensation committees might not consist entirely of independent directors. Accordingly, 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.

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

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

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 the IPO 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” in the prospectus for the IPO 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 the IPO. 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 the IPO in a manner that does not produce income or that loses value.

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

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

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

Prior to the IPO, there has been no public market for our Ordinary Shares. An active trading market for our Ordinary Shares may not develop or be sustained following the IPO. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price, of which the fixed price of the ordinary shares offered for resale by the Selling Shareholders is based on, was determined by negotiations between us and the Underwriters based upon a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

Investors of the IPO risk loss of use of funds allocated for purchases, with no right of return, during the offering period.

We cannot assure you that all or any shares will be sold in the IPO. The Underwriters in the IPO are offering our shares on a “best efforts, minimum-maximum basis.” We have no firm commitment from anyone to purchase all or any of the shares offered. If offers to purchase a minimum of 1,000,000 shares are not received on or before 180 days from the effective date of the Registration Statement (and for a period of up to 60 additional days if extended by agreement of the Company and the Representative), escrow provisions require that all funds received be promptly refunded. If refunded, investors of the IPO will receive no interest on their funds. During the offering period, investors will not have any use or right to return of the funds.

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 the IPO, 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 Ordinary Shares could decline.

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

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

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

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

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

Upon completion of the IPO, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our 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.

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

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. 11,200,000 ordinary shares will be outstanding immediately after the IPO, if the minimum offering is raised and 12,200,000 ordinary shares if the maximum is offering is raised. All of the ordinary shares sold in the IPO and the ordinary shares offered for resale by the Selling Shareholders will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

Investors in the IPO will experience immediate and substantial dilution.

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Assuming the completion of the minimum offering, investors purchase shares in the IPO will incur immediate dilution of approximately $2.83 or approximately 56.7% in the pro forma net tangible book value per share from the price per share that they pay for the shares. Assuming the completion of the maximum offering, investors purchase shares in the IPO will incur immediate dilution of approximately $2.63 or approximately 52.6% in the pro forma net tangible book value per share from the price per share that they pay for the Ordinary Shares. Accordingly, investors purchase shares in the IPO will incur immediate and substantial dilution of their investment. See “Dilution.”

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.

Use of Proceeds

We will not receive any of the proceeds from the sale of our ordinary shares by the Selling Shareholders. In addition, the Underwriters will not receive any compensation from the sale of the ordinary shares by the Selling Shareholders. The Selling Shareholders will receive all of the net proceeds from the sales of ordinary shares offered by them under this prospectus. We have agreed to bear the expenses relating to the registration of the ordinary shares for the Selling Shareholders

Dividend Policy

We have never declared or paid any cash dividends on our Ordinary Shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the board of directors may deem relevant.

Under British Virgin Islands law and our memorandum and articles of association, the board of directors may only authorize the payment of a dividend or another distribution if the directors are satisfied on reasonable grounds that, immediately after the dividend or other distribution is paid, the value of the company’s assets will exceed its liabilities and the company will be able to pay its debts as they fall due. The resolution of directors authorizing the payment of the dividend or other distribution must contain a statement that, in the directors’ opinion, the company will satisfy these two tests immediately after the payment of the dividend or other distribution.

If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries. Current Hong Kong regulations permit our HK subsidiary, Hong Kong Hansheng to pay dividends to Golden Metropolis only out of profits available for distribution. Withholding tax regarding dividends is exempted in Hong Kong.

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

In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations in China may be used to pay dividends to our company.

Exchange Rate Information

Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:

The consolidated balance sheet balances, with the exception of equity at December 31, 2017 and 2016 were translated at RMB 6.5063 and RMB 6.9430 to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to consolidated statements of income and cash flows for the fiscal years ended December 31, 2017 and December 31, 2016 were RMB 6.7569 and RMB 6.6400 to $1.00, respectively.

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

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. (www.federalreserve.gov).

As of December 21, 2018, the exchange rate was RMB 6.9048 to $1.00. Until July 2015 and over the past several years, the Renminbi moved from a period of being tightly linked to the U.S. dollar to a period of revaluation and strengthening against the dollar. Since July 2015, however, the Renminbi has experienced a period of significant weakening against the U.S. dollar.

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 “Risk Factors.” All amounts included herein with respect to the six months ended June 30, 2018 and 2017 (“Interim Financial Statements”) are derived from our unaudited consolidated financial statements for the six months ended June 30, 2018 and 2017 included elsewhere in this prospectus. All amounts in included in the fiscal years ended December 31, 2017 and 2016 (“Annual Financial Statements”) are derived from our audited consolidated financial statements included elsewhere in this prospectus. These Interim Financial Statements and Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP.

Overview of Company

Golden Metropolis International Limited (“GM International” or “the Company”), is a limited liability company established under the laws of the British Virgin Islands (“BVI”) on January 20, 2017, formerly known as Yun Han International Limited. The Company, through its subsidiaries, is a leading civil construction company that specializes in designing, processing and installation of curtain walls and steel structures for residential and commercial buildings in the People’s Republic of China (“PRC”).

A Reorganization of the legal structure was completed in June 2017. The Reorganization involved the incorporation of GM International, a BVI holding company; Hong Kong Hansheng Limited (“Hansheng”), a holding company established in Hong Kong, PRC; Jiangsu Aiwen Limited (“Jiangsu Aiwen”) and Jiangsu Wenhan Limited (“Jiangsu Wenhan”), two holding companies established in PRC; and the transfer of Wuxi Jincheng Curtain Wall Engineering Co., Ltd. (“Wuxi Jincheng”) from the Controlling Shareholders to Jiangsu Aiwen and Jiangsu Wenhan.

Mr. Zuoliang Zha, the Chairman of the Board, is the controlling shareholder (“the Controlling Shareholder”) of the Company. Prior to the reorganization, Mr. Zuoliang Zha, together with his son, Mr. Minpei Zha, who is the Chief Executive Officer (“CEO”) of the Company (collectively the “Controlling Group”), owns 100% of Wuxi Jincheng. On June 16, 2017, the Controlling Group transferred their 100% ownership interest in Wuxi Jincheng to Jiangsu Aiwen and Jiangsu Wenhan, which are 100% owned by Hansheng, respectively. After the reorganization, GM International ultimately owns 100% equity interests of the entities mentioned above.

Since the Company and its subsidiaries are effectively controlled by the same group of the Controlling Shareholders before and after the reorganization, they are considered under common control. The above mentioned transactions were accounted for as a recapitalization. The consolidation of the Company 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 accompanying consolidated financial statements.

The Company is a national provider, and is dedicated in providing professional curtain wall design, process and installation services for more than 30 years. We operate primarily for civil and commercial buildings invested in by various levels of the government, state-owned entities and real-estate developers. We are one of the earliest qualified engineering companies having the qualification and capacity to install curtain walls in PRC. We have completed many large civil and commercial projects, and many of them received national and provincial rewards. We have been ISO9001:2008 certified since 1998, and were recognized as a High-tech Enterprise for our continuous innovations in achieving an efficient, safe and high quality installation process of curtain walls for high-rise buildings. We are recognized as one of the Top 50 Glass Curtain Wall Installation Companies in PRC.

Factors Affecting Our Results of Operations

We believe the most significant factors that affect our business and results of operations include the following:

Outlook

The markets in which we participate in are closely linked to the economic conditions nationally and globally, as well as the urbanization process in China, which affect the manner in which our customers proceed with capital investments. China is still in the early stage of urbanization. By the end of 2017, the urbanization rate in China was approximately 58.5% according to the National Bureau of Statistics, and there are still great gaps among different provinces. By studying the urbanization process internationally, we expect that China will continue to have rapid growth in the next 10 years before the urbanization rate reaches 70%. The strong economic growth in China, rapid urbanization process and the unbalanced developments among provinces, provide us great business opportunities in curtain wall installation service industry.

Our emphasis for 2018 and future years will be on execution, including a focus on receivable collection, cost discipline, efficient project performance, labor force development, and competing more real estate projects for commercial and residential buildings. Based on our backlog, and in light of the relatively slow growth of China economy in 2018, we expect that revenue and profitability in 2018 will be similar or slightly lower than that we experienced in 2017.

We believe that our strong working capital position, cash available, low bank debt position and borrowing capacity under our existing credit facilities should be sufficient to finance future operating activities, research and development initiatives, capital improvements and debt repayments for the foreseeable future. We will continue to monitor the factors that drive our markets and strive to maintain our leadership and competitive advantage in the markets we serve while aligning our cost structures with market conditions. 

Key Component of Operation

Almost all of our revenue is earned on a project basis for installation service of curtain wall for civil and commercial buildings. The project normally required us to design curtain walls in terms of the shape and size based on the material required, such as glasses, metals, flagstones, and ceramic plates. The design is a very customized process in accordance with the building’s originally architectural design. The design is also the key component of the whole process, which leads to a successful completion of the project with high quality. Our project management responsibilities include staging equipment and materials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project.

We need to go through a public bidding process when competing for a project. We estimate the costs that will incur on a project, and then propose a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that we incur to support our operations but which are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the criteria on which customers select a service provider vary widely and include factors such as quality, technical expertise, on-time performance, post-project support and service, and company history and financial strength, we believe that price for value and the track records are the most influential factor for most customers in choosing a curtain wall installation service provider.

After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customer via what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by the customer until after we have completed the work. Amounts withheld under this practice are known as retention or retainage.

Raw material, labor and overhead costs account for the majority of our cost of revenue. Accordingly, labor management and utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we could experience reduced profits or even significant losses on fixed price project work.

Starting from fiscal 2016, we emphasize our new biddings on residential and commercial projects developed by real estate developers. These projects are relatively small compared to the projects invested in by the government and state-owned companies. However, real estate developers normally provide better payment terms, which will improve our cash flow and reduce the accounts receivables. We expect there will be more projects from real estate developers in the coming years due to the urbanization process in China.

Backlog

Backlog increases with the awarding of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles. However, it is a common measurement used in our industry.

We include a project within our backlog at such time as a contract is awarded and agreement on contract terms has been reached. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of services contracts.

However, we do not include in backlog contracts for which we are paid on a time and material basis and a fixed amount cannot be determined, and if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues provided for in the contract award.

Our backlog at December 31, 2017 was $62.5 million compared to $58.8 million at December 31, 2016. The following table presents our backlog by customer category and the respective percentages of total backlog as of December 31, 2017 and 2016:

Our backlog at June 30, 2018 was $66.6 million compared to $50.8 million at June 30, 2017. The following table presents our backlog by customer category and the respective percentages of total backlog as of June 30, 2018 and 2017:

Critical Accounting Policies 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there was no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Use of Estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the recognition of revenue and earnings from construction contracts under the percentage-of-completion method, the valuation of accounts receivable, prepayments, deposits and other assets, useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities and realization of deferred tax assets. Actual results could differ from those estimates.

Accounts Receivable, net

Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. 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. Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones and certified by the third party inspection agencies.

Costs and estimated earnings in excess of billings on uncompleted contracts may also include certain costs associated with unapproved change orders. These costs are included when the approval of the change order is probable. Amounts are carried at the lower of cost or net realizable value. Revenue is recognized to the extent of costs incurred when recovery is probable. The amounts recorded involve the use of judgments and estimates; thus, actual recoverable amounts could differ from original assumptions.

In accordance with industry practice, assets and liabilities related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year; thus, collection of amounts related to these contracts may extend beyond one year.

Inventories

Inventories are stated at the lower of cost and net realizable value, and cost is calculated on the weighted average basis. Inventories mainly include the cost of raw materials for installation and construction. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products.

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from contracts with customers, using the modified retrospective method for transition. Under this transition method, periods prior to 2018 have not been restated and the cumulative effect of initially applying the new standard was recorded as an adjustment to Retained earnings at January 1, 2018. The standard replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single model for recognizing revenue from contracts with customers. Prior to implementing ASC 606 on January 1, 2018, the Company’s methods for recognizing revenue were very similar to the current method under ASC 606.  

Revenue from processing and installation of curtain walls and steel structures

The Company’s revenues are primarily generated from processing and installation of curtain walls and steel structures under fixed-price long-term contracts that may last from several months to several years. Revenue from the fixed-price contracts are recognized when there is persuasive evidence of an arrangement, when the fee is fixed or determinable and when collection is reasonably certain.

These contracts require the Company to perform customized services of designing, planning and integrating based on customers’ specific needs which requires significant customization. Upon delivery of the services, customer acceptance is generally required. In the same contract, the Company sometimes is required to provide a warranty period for a period from three to five years (“warranty period”) after the customized project is delivered. The type of service for warranty clause is generally not specified in the contract or stand-ready service on when-and-if-available basis.

The Company determines there are two separated performance obligations in the fixed-fee contract: 1) Project development service and 2) Warranty, if applicable. In those cases where a contract is determined to have more than one performance obligation, the contract price is allocated to each performance obligation based on its standalone sales price.

Revenue allocates to project development service component is recognized using the percentage-of-completion method, under which the percentage of revenue to be recognized for a given project is measured by the estimates of the extent of progress towards project completion. Such contracts provide that the customer accept completion of progress to date and compensate the Company for services rendered, which may be measured in terms of costs incurred, units installed, or some other measure of progress. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct material costs, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, and all costs associated with operation of equipment.

The cost estimation process is based upon the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Management conducts monthly reviews of its estimated costs to complete, percentage-of-completion estimates and revenues and margins recognized, on a contract-by-contract basis. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.

The financial impact of any revisions to an individual contract is a function of the amount of the revision and the percentage of completion of the contract itself. An amount up to the costs that have been incurred involving unapproved change orders and claims is included in the total estimated revenue when the realization is probable and the amount can be reliably estimated. The amount of unapproved change orders and claim revenues is included in the Consolidated Balance Sheets as part of costs and estimated earnings in excess of billings. Any profit as a result of change orders or claims is recorded in the period in which the change order or claim is resolved.

Certain fixed-price contracts with customers include warranty terms of three to five years from the date of completion. These contracts are accounted for as a separated performance obligation and accordingly, the contract revenue allocated to this performance obligation is recognized when the warranty period ends and cash is collected due to uncertainties in collection. Because of the nature of the projects, including contract owner inspections of the work both during construction and prior to acceptance, the Company has not experienced material warranty costs and, therefore, does not believe an accrual for these costs is necessary.

Revenue from standalone design services

Revenues generated from standalone design services are recognized when: (i) the contracted services have been performed and (ii) collectability is reasonably assured. Expenses related to these types of services are recognized as incurred.

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 provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures.

Results of Operations

For the years ended December 31, 2017 and 2016

The following table summarizes the results of our operations for the years ended December 31, 2017 and 2016, 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) 

Revenues

Revenues from installation projects

Revenues from installation projects decreased by approximately $6.5 million, to approximately $70.1 million for the year ended December 31, 2017 from approximately $76.6 million for the year ended December 31, 2016. The decrease in revenue was mainly due to the Company entered into more smaller contracts associated with commercial and residential real estate development projects which have lower average contract prices during fiscal 2017 comparing to fiscal 2016.

The following table presents our net revenues by contract price for the years ended December 31, 2017 and 2016.

The following table presents our net revenues by customer category for the years ended December 31, 2017 and 2016.

Revenues from standalone design services

Revenues from design services increased by approximately $0.08 million, or 43%, to approximately $0.27 million for the year ended December 31, 2017 from approximately $0.19 million for the year ended December 31, 2016. The slight increase was mainly due to more design services were completed during fiscal 2017 comparing to fiscal 2016.

Gross profit

Our gross profit from installation projects decreased by approximately $2.7 million, or 22%, to approximately $9.5 million for the year ended December 31, 2017 from approximately $12.2 million for the year ended December 31, 2016. Gross profit margin was 14% for the year ended December 31, 2017, as compared to 16% for the year ended December 31, 2016. The decrease of gross profit was consistent with the decrease of revenue for fiscal 2017 as compared to fiscal 2016. The decrease of gross profit margin was mainly due to lower gross profit margin for the projects funded by government, stated owned entities and private companies for fiscal 2017 comparing to fiscal 2016.

Our gross profit from standalone design services increased by approximately $0.07 million, or 37%, to approximately $0.26 million for the year ended December 31, 2017 from approximately $0.19 million for the year ended December 31, 2016. Gross profit margin was 95% for the year ended December 31, 2017, as compared to 99% for the year ended December 31, 2016.

Selling expenses

Selling expenses decreased by $0.2 million to approximately $34,000 for the year ended December 31, 2017 as compared to approximately $190,000 for the year ended December 31, 2016. The decrease of selling expenses was mainly due to less marketing activities in fiscal 2017 as compared to fiscal 2016.

General and administrative expenses

Our general and administrative expenses increased by approximately $0.6 million, or 24%, to approximately $3.3 million for the year ended December 31, 2017 from approximately $2.7 million for the year ended December 31, 2016. As a percentage of revenues, general and administrative expenses were 5% and 3% of our total revenues for the year ended December 31, 2017 and 2016, respectively. The increase of general and administrative expenses was primarily attributable to the increased legal fees related to the accounts receivable collections from one customer in fiscal 2017.

Research and development (“R&D”) expenses  

Our research and development expenses increased approximately $0.4 million, or 18%, to $ 3.0 million for the year ended December 31, 2017 as compared to $2.5 million for the year ended December 31, 2016. Management is committed to expanding our research and development activities to enhance competitive advantage.

Interest expense, net

Our interest expense (net) decreased by approximately $0.04 million to $0.56 million for the year ended December 31, 2017, from approximately $0.6 million for the year ended December 31, 2016.  The decrease of interest expense was mainly due to less bank borrowings in fiscal 2017 as compared to fiscal 2016.

Income before income taxes

Our income before income taxes was approximately $1.6 million for the year ended December 31, 2017, a decrease of approximately $3.8 million as compared to approximately $5.4 million for the year ended December 31, 2016. The decrease was primarily attributable to decreased sales and gross margin, the increase of selling, general and administrative expenses and the increase of bad debts allowance for accounts receivables.

Provision for income taxes

Our provision for income taxes was approximately $0.03 million for the year ended December 31, 2017, a decrease of $1.8 million from approximately $1.8 million for the year ended December 31, 2016.

Our current tax provision decreased by approximately $0.6 million while deferred tax provision decreased by $1.2 million. The decrease of the current tax was mainly due to much lower income before income tax in fiscal 2017 as compared to fiscal 2016. The decrease of deferred tax provision was mainly because in fiscal 2017, we increased our allowance for doubtful accounts to $11.6 million in fiscal 2017 from $10.4 million in fiscal 2016, which resulted in a deferred tax benefit of $0.1 million comparing to a deferred tax provision of $1.1 million in fiscal 2016.   

For the six months ended June 30, 2018 and 2017

The following table summarizes the results of our operations for the six months ended June 30, 2018 and 2017, 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) 

Revenues

Revenues from installation projects

Revenues from installation projects decreased by approximately $8.2 million, to approximately $24.9 million for the six months ended June 30, 2018 from approximately $33.1 million for the same period in 2017. The decrease in revenue was mainly due to the Company had fewer on-going projects invested by government and state-owned companies, and lower average contract price for the six months ended June 30, 2018 comparing to the same period in 2017.

The following table presents our net revenues by contract price for the six months ended June 30, 2018 and 2017.

The following table presents our net revenues by customer category for the six months ended June 30, 2018 and 2017.

Revenues from standalone design services

Revenues from design services increased by approximately $0.19 million to approximately $0.34 million for the six months ended June 30, 2018 from approximately $0.15 million for the same period in 2017. The slight increase was mainly due to more design services were completed during the six months ended June 30, 2018.

Gross profit

Our gross profit decreased by approximately $1.3 million, or 27%, to approximately $3.6 million for the six months ended June 30, 2018 from approximately $5.0 million for the same period in 2017. Gross profit margin was 14% for the for the six months ended June 30, 2018, as compared to 15% for the same period in 2017. The decrease of gross profit was consistent with the decrease of revenue for the six months ended June 30, 2018 as compared to the same period in 2017. The decrease of gross profit margin was mainly due to lower gross profit margin for the residential and commercial projects developed by real estate developers for the for the six months ended June 30, 2018 as compared to the same period in 2017.

Selling expenses

Selling expenses increased by $98,000 to approximately $194,000 for the six months ended June 30, 2018 as compared to approximately $96,000 for the same period in 2017. The increase of selling expenses was mainly due to the fact that we attended more marketing activities and bidding processes for residential and commercial projects during the six months ended June 30, 2018 as compared to the same period in 2017.

General and administrative expenses

Our general and administrative expenses increased by approximately $0.1 million or 12%, to approximately $1.1 million for the six months ended June 30, 2018 from approximately $1.0 million for same period in 2017. As a percentage of revenues, general and administrative expenses were 4% and 4% of our total revenues for the six months ended June 30, 2018 and 2017, respectively. The small increase in general and administration expenses was primarily attributable to the increased salary expenses, travel and legal fees during the six months ended June 30, 2018 as compared to the same period in 2017.

Research and development (“R&D”) expenses  

Our research and development expenses decreased approximately $0.2 million to $1.2 million for the six months ended June 30, 2018 as compared to $1.4 million for the same period in 2017. The decrease was due to we incurred less research and development activities during the six months ended June 30, 2018.

Interest income (expense)

Our interest expense (net) decreased by approximately $205,000 to $82,000 for the six months ended June 30, 2018, from $287,000 for the same period in 2017.  The decrease of interest expense was mainly due to less interest-bearing bank loan balance for the six months ended June 30, 2018 comparing to the same period in 2017.

Income before income taxes

Our income before income taxes was approximately $0.8 million for the six months ended June 30, 2018, a decrease of approximately $0.7 million as compared to approximately $1.5 million for the same period in 2017. The decrease was primarily attributable to the decreased gross margin, increased selling expenses and general and administrative expense, and offset by slight decreased research and development expenses as discussed above and decreased provision for bad debts.

Provision for income taxes

Our provision for income taxes was approximately $37,000 for the six months ended June 30, 2018, a decrease of approximately $80,000 from approximately $117,000 for the same period in 2017. The decrease of the income tax expense was mainly due to much lower income before income tax for the six months ended June 30, 2018 as compared to the same period in 2017.

Cash flows

For the years ended December 31, 2017 and 2016

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

(All amounts in thousands of U.S. dollars)

Operating Activities

Net cash provided by operating activities was approximately $1.3 million for the year ended December 31, 2017, compared to net cash provided by operating activities of approximately $10.8 million for the year ended December 31, 2016. The decrease in net cash provided by operating activities was primarily attributable to: 

And offset by the following factors:

Investing Activities

Net cash used in investing activities was approximately $0.3 million for the year ended December 31, 2017, compared to $1.7 million of cash used in investing activities for the year ended December 31, 2016. During fiscal 2016, the investing activities were mainly for the construction and purchase of equipment for our new facilities in Wuxi Jincheng. There were less capital expenditures during fiscal 2017.

Financing Activities

Net cash used in financing activities was approximately $7.5 million for the year ended December 31, 2017, including repayment of bank loans of $8.1 million, repayment of third parties loans of $10.3 million, and dividend payment of $1.2 million, offset by proceeds from bank loans of $3.7 million, proceeds from third parties loans of $3.2 million, and proceeds from related parties loans of $4.9 million.

Net cash used in financing activities was approximately $3.3 million for the year ended December 31, 2016, including repayment of bank loans of $12.5 million and repayment of third parties loans of $14.6 million, offset by proceeds from bank loans of $8.3 million, proceeds from third parties loans of $8.9 million, and proceeds from related parties loans of $6.7 million.

For the six months ended June 30, 2018 and 2017

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

(All amounts in thousands of U.S. dollars)

Operating Activities

Net cash provided by operating activities was approximately $4.5 million for the six months ended June 30, 2018, compared to cash provided by operating activities of approximately $7.7 million for the same period in 2017. The decreased in net cash provided by operating activities was primarily attributable to:

And offset by the following factors:

Investing Activities

Net cash used in investing activities was approximately $0.3 million for the six months ended June 30, 2018, compared to $0.5 million for the same period in 2017. The decrease was mainly due to we spent less on equipment during six months ended June 30, 2018.

Financing Activities

Net cash used in financing activities was approximately $5.9 million for the six months ended June 30, 2018, including proceeds from third parties loans of $0.3 million, offset by repayment of third parties loans of $3.4 million and repayment of related parties loans of $2.7 million.

Net cash used in financing activities was approximately $12.0 million for the six months ended June 30, 2017, including proceeds from third parties loans of $2.7 million, offset by repayment of third parties loans of $6.9 million, repayment of related parties loans of $6.7 million, and payment of dividend of $1.1 million.

Liquidity and Capital Resources

As of June 30, 2018, December 31, 2017 and 2016, we had cash and cash equivalents of approximately $2.6 million, $4.6 million and $10.6 million, respectively. We did not have any other short-term investments. As of June 30, 2018, December 31, 2017 and 2016, our current assets were approximately $69.1 million, $86.2 million and $86.9 million, respectively, and our current liabilities were approximately $58.1 million, $72.0 million and $78.4 million, respectively.

As of June 30, 2018, December 31, 2017 and 2016, the Company had accounts receivable net of allowance of $ 32.2 million, $53.1 million and $43.9 million, respectively. The Company’s customers are for the most part, various levels of government, state-owned entities and real-estate developers. Due to the nature of the customers and the practice of the industry, the Company generally allows credit period of 180 – 365 days to its customers. However, our customers sometimes still require additional time for payment, depending on their internal cash flow budget or various levels of approvals. Due to uncertainty of the timing of collection, the Company established allowance for doubtful account based on the management’s assessment of the recoverability of accounts receivable. Judgment is required in assessing the realizability of these receivables, including the current credit worthiness of each customer and the related aging analysis. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. There were no written-off accounts receivable for the six months ended June 30, 2018, and for the years ended December 31, 2017 and 2016.

The following is an aged analysis of trade receivables (net of allowance for doubtful debts) as of June 30, 2018, December 31, 2017 and 2016, respectively.

Changes of allowance for doubtful accounts for the six months ended June 30, 2018 and 2017, and for the years ended December 31, 2017 and 2016 are as follow:

The Company had a receivable amount of approximately $2.60 million (RMB 16,954,442) due from Wuxi Liyue Real Estate Development Inc (“Liyue”). Due to the fact that the bankruptcy court declared the bankruptcy of Liyue on September 28, 2015 and entered into a liquidation procedure, the Company recorded the full receivable amount from Liyue as bad debt allowance as of December 31, 2015 and 2016. On February 13, 2018, the Company received total amount of approximately $2.32 million (RMB 15,010,865 for the preferred claim after deducting certain costs of RMB 331,688, and RMB 90,652 for ordinary claim) from the Bankruptcy Administrator, with the remaining balance of the preferred claim, approximately $0.20 million (RMB 1,241,889), to be paid after Liyue’s assets are further disposed. As a result of this collection, the Company reversed the bad debt allowance of $2.47 million (RMB 16,675,095) previously recorded for this project.

As of June 30, 2018, December 31, 2017 and 2016, due to significant accounts receivable balance aged over 365 days, management established approximately $11.6 million, $11.6 million and $10.4 million of allowance for doubtful account, respectively. The allowance was mostly related to the historical aged receivables from our government and state-owned entities customers with uncertainties on the timing of the collection. However, we did not write-off any balances of accounts receivable because we consider our accounts receivable balances are not clearly uncollectible at this moment.

Since 2016, with improved collection effort, we successfully collected certain historical account receivables, for which the Company had provided full bad debt allowance in fiscal 2015 or previous years. For the six months ended June 30, 2018 and 2017, the Company recorded negative bad debt expenses of approximately $1.8 million and $3.1 million, respectively, For the years ended December 31, 2017 and 2016, the Company recorded negative bad debt expenses of approximately $5.7 million and $4.3 million, respectively. These were the results of the collections of certain historical account receivables for which the Company had provided bad debt allowances in previous years. Management believed that the related allowance for doubtful account balance were sufficient as of June 30, 2018 and December 31, 2017 and 2016.

The Company does not believe it has a material collection risk under its business model, nor does it believe that macroeconomic issues will have a negative impact on its collectability. The Company expects the business will continue to grow due to innovation and the urbanization process in China. Thus, the Company does not believe the collection issues will impact its liquidity adversely.

Notes receivable consisted of bank notes of $1.7 million and $0.06 million as of June 30, 2018 and December 31, 2017, respectively. These notes with 3-6 months maturity dates were issued by our customers to repay their balance with us and these notes were guaranteed by the banks. The Company subsequently fully collected or utilized the note receivable as of December 31, 2017. The Company expects to fully collect or utilize the note receivable as of June 30, 2018 by the end of November 30, 2018.

Total shareholders’ equity as of June 30, 2018 and December 31, 2017 was approximately $20.1 million and $19.7 million, respectively. We believe that we will have sufficient working capital for the next 12 months.

In assessing our liquidity, we monitor and analyze our cash on hand, our ability to generate sufficient revenue sources in the future and our operating and capital expenditure commitments. The Company plans to fund working capital through its operations, bank borrowings, third parties loans, working capital loans from shareholders, private placements and other capital financings.

For the six months ended June 30, 2018, and for the years ended December 31, 2017 and 2016, our operating activities generated positive cash flows. We have historically funded our working capital needs from operations, bank loans, third parties loans and advances from shareholders and related parties. Our working capital requirements are influenced by the level of our operations, the size and dollar value of our projects, the progress of completing the projects, and the timing of accounts receivable collections.

Capital Expenditures

Our capital expenditures consist primarily of expenditures for the construction of facilities, purchase of fixed assets and intangible assets as a result of our business growth. Our capital expenditures amounted to $0.3 million for the six months ended June 30, 2018, and $0.3 million and $1.7 million for the years ended December 2017 and 2016, respectively.

Contractual Obligations 

There were no contractual obligations and commercial commitments as of June 30, 2018, December 31, 2017 and 2016.

Off-balance Sheet Commitments and Arrangements 

There were no off-balance sheet arrangements for the six months ended June 30, 2018 and 2017, and for the years ended December 31, 2017 and 2016, that have or that in the opinion of management are likely to have, a current or future material effect on our financial condition or results of operations.

Related Party Transactions

In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since January 1, 2016, to which we have been a participant, in which the amount involved in the transactions is material to us or the related party.

Mr. Zuoliang Zha, the Chairman of the Board, with his son, Mr. Minpei Zha, the CEO of the Company, and their relatives (“Mr. Zha Family”) periodically provide working capitals to support the Company’s operations when needed. The Company repaid $2,736,769 and $6,744,765 to Mr. Zha family during the six months ended June 30, 2018 and 2017, respectively. The Company borrowed approximately $4.9 million and $6.7 million from Mr. Zha family for the years ended December 31, 2017 and 2016, respectively. As of June 30, 2018, December 31, 2017 and 2016, the balance due to Mr. Zha Family was approximately $26.4 million, $29.5 million and $22.9 million, respectively. Such loans do not bear interest and are due on demand.

Future Related Party Transactions

After completion of the IPO, the Corporate Governance Committee of our Board of Directors (which we will establish and which will consist solely of independent directors) must approve all related party transactions. All related party transactions will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties.

Impact of Inflation

We do not believe the impact of inflation on our company is material. Our operations are in China and China’s inflation rates have been relatively stable in the last three years: 1.6% for 2017 and 2.0% in 2016.   

Holding Company Structure

We are a holding company with no material operations of our own. We conduct our operations through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. Our PRC subsidiaries may purchase foreign exchange from relevant banks and make distributions to offshore companies after completing relevant foreign exchange registration with the SAFE. Our offshore companies may inject capital into or provide loans to our PRC subsidiaries through capital contributions or foreign debts, subject to applicable PRC regulations. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.

As of June 30, 2018, our PRC subsidiaries had an aggregate retained earnings of RMB 42.6 million (US$ 6.7 million). Under PRC law, each of our affiliates in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reached 50% of its registered capital, after which any mandatory appropriation stops. Our PRC subsidiaries had an aggregate statutory reserve in the amount of US$1.56 million as of June 30, 2018. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of the companies. At the discretion of our PRC subsidiaries, they may allocate a portion of their after-tax profits to discretionary funds for staff welfare and bonus. Such discretionary funds, similar to statutory reserves, are not distributable as cash dividends.

Quantitative and Qualitative Disclosure 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

Our exposure to interest rate risk primarily relates to the floating interest rates from our borrowings with banks. We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future.

Price Risk

We are subject to market risk from fluctuating market prices of certain raw materials used in our products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We attempt to pass along such commodity price increases to our customers on a contract-by-contract basis to avoid a negative effect on profit margin. While we may do so in the future, we have not currently entered into any derivative contracts to hedge our exposure to commodity risk. We continue to experience price volatility with some of our key raw materials and components. Fixed-price contracts may limit our ability to pass cost increases to our customers, thus negatively impacting our earnings. Fluctuations in commodity prices may have a material impact on our future earnings and cash flows.

Credit Risk 

Our cash and cash equivalents are invested primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a small amount of interest income.

As of June 30, 2018, we have net accounts receivable which accounts for 127% of our total revenue for the first half of fiscal 2018. As of December 31, 2017 and 2016, we had net accounts receivable which was accounting for 75% and 57% of total revenue for the respective fiscal periods. If we continue experiencing an increase in accounts receivable without substantial collection, this could have a material adverse effect on our financial performance.

Liquidity Risk

Our debt to asset ratio is relatively high compared with companies in other industries but is normal compared with companies in our industry. This is mainly caused by the lengthy projects and receivable cycle that are common in our industry. In addition to our operational cash flow, we mainly finance our operations through bank loans and business credits given by our vendors and clients. We may face liquidity risk if our debt to asset ratio continues to increase.

Recent Accounting Pronouncements 

The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.

In May 2014, the Financial Accounting Standard Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606),” which delayed the effective date of ASU 2014-09 by one year. In addition, between March 2016 and December 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net)” (“ASU 2016-08”), ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and ASU No. 2016- 20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”). ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 clarify certain aspects of ASU 2014-09 and provide additional implementation guidance. ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”) became effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Entities are permitted to adopt ASC 606 using one of two methods: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted ASC 606 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company has evaluated the impact of ASC 606 and has determined that the Company’s current revenue recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09, and the adoption did not result in a cumulative catch-up adjustment to the opening balance sheet of retained earnings at the effective date.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company does not expect this update will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”) to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance nonfinancial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any noncontrolling interest it receives or retains at fair value. The guidance requires companies to recognize a full gain or loss on the transaction. ASU 2017-05 is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The effective date of this guidance coincides with revenue recognition guidance. The Company does not expect this update will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-09 (“ASU 2017-09”) to provide guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective. The Company does not expect this update will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05 — Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Company does not believe this guidance will have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, 7 Table of Contents with early adoption permitted, but no earlier than a company’s adoption of ASC 606. The Company does not expect ASU 2018-07 to have a material impact on its consolidated financial statements or financial statement disclosures.

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

Business

Overview

Incorporated on January 20, 2017, under the laws of the British Virgin Islands (“BVI”), we primarily conduct our business through our subsidiary, Wuxi Jincheng Curtain Wall Co. Ltd. (“Wuxi Jincheng”). We are one of the leading companies to provide systematic solutions to construction projects of high-rise steel frame and curtain wall buildings in China. Our core business focuses on designing, processing, manufacturing, modifying and installing of metal doors, windows, and curtain wall and processing and installing steel structure. Headquartered in Wuxi, a regional business hub in southern Jiangsu Province, China, we have completed projects throughout China with specialized materials, complex geometry, novel structural and mechanical system designs. Our curtain wall systems combine innovative design with state-of-the-art materials and performance.

Industry Overview

Curtain wall is a product in high demand and represents a new trend in architecture in China. According to the statistics of the China Decoration Association Curtain Wall Committee, in 2016, China’s curtain wall market had a total output of 370 billion yuan, an 8.8% increase from 340 billion yuan in 2015. The output in 2015 had a 6.3% increase from 320 billion yuan in 2014. The Curtain Wall Committee estimated that during the “Thirteenth Five Years” from 2016 to 2020, the market scale will increase from 370 billion yuan to 550 billion yuan, with an average annual growth rate of 9.7%.

The increasing demand for curtain wall comes from the increased investment in large-scale constructions such as high-end office buildings, hotels, stadiums, airports, railway stations, exhibition centers, shopping malls and other commercial or public buildings. Because of the continuous high growth of China’s macro economy, the steady growth of fixed assets investments and constructions will have a lasting effect on the curtain wall industry.

Curtain wall is an urban industry. The market is mainly concentrated in large- and medium- sized cities, such as those based in the Yangtze River Delta, the Pearl River Delta, and Beijing-Tianjin-Hebei Area, where the economic volume and population are large. Urbanization in China continued to grow rapidly. According to the date released by the National Bureau of Statistics, the population of urban residents at the end of 2015 was 771.16 million, which was an increase of 22 million from the end of 2014. Urban population consisted 56.1% of the total population, which was 1.3% higher than that in 2014. According to the United Nations, the Chinese Academy of Social Sciences and other institutions, it can be estimated that the urban population in the portion of the total population will continue to increase at 0.8% to 1% per year during 2016 to 2020. The rapid speed in urbanization will directly increase the demand for large-scale construction, which in turn will increase the demand for curtain walls. In addition, the market center will expand from first-tier cities such as Beijing, Shanghai and Guangzhou to second-tier cities such as Hangzhou, Nanjing and Wuhan.

“Green buildings” with sustainable technology and energy are the trend in architecture and construction. Research and Development in energy conservation and environmental protection, new product and new technology will become the theme of the curtain wall industry’s development. It is estimated that from 2016 to 2020, with the “green building” policy, the curtain wall industry will be able to accelerate its transformation and upgrading in order to enhance its core competence.

The curtain wall industry has witnessed three generations of products. The first generation of curtain walls refers to those applied from the early to late 1970s, which were mostly stick curtain walls composed of a variety of components assembled onsite, with individual mullions and rails forming a supporting grid for curtain wall panels.

The second generation of curtain walls refers to those applied from the early 1980s to mid-1990s, which are represented by unitized curtain walls which are a type of frame-supporting curtain wall composed of modulated panels that are fabricated in factories and delivered to construction sites in one piece for installation. The development of the unitized system of the second generation greatly reduced construction costs.

The third generation of curtain walls refers to those applied from the mid-1990s onwards, the majority of which are unitized curtain walls characterized by energy efficiency, the use of new technologies or diverse functions. Technologies to allow in daylight to reduce heating costs and shading technologies in order to reduce cooling costs are in demand throughout the world due to environmental concerns. We believe that the development of new energy-efficient technologies, such as triple-glazed curtain walls and solar-control glass will continue to shape the industry. In addition, the demands of architects will continue to influence the industry, as many have sought features such as photovoltaic curtain walls, as well as glasses of differing colors, sizes, materials, coatings and quality levels.

Industry in China

The PRC curtain wall market has grown from approximately US$7.58 billion in 2006 to approximately US$51.82 billion in 2016 at a CAGR of 21.19%. The following chart illustrates the total annual output value of the PRC curtain wall industry for the periods specified.

(Source: Qianzhan Industrial Research)

To accommodate the increasing market demand, the industry has expanded the production output to meet the market opportunities. Since 2001, the domestic production output of curtain wall has grown rapidly from approximately 16 million m² in 2001 to approximately 156.4 million m² in 2016 at a CAGR of 21.19%. The following chart illustrates the total market size of the PRC curtain wall industry for the periods specified.

(Source: Qianzhan Industrial Research)

Global Industry Overview

The following chart illustrates the total market size of the global curtain wall industry for the periods specified.

(Source: GosReports)

The global curtain wall market value increased from approximately US$61 billion in 2014 to approximately US$80 billion in 2017 at a CAGR of 9.46%. Moreover, it is expected to further increase to approximately US$88.2 billion in 2018, representing a CAGR of 9.66% from 2014 to 2018.

The global curtain wall market is primarily driven by the world economy in general and the construction industry in particular. Specifically, the growth of the world economy drives fixed assets investment, including construction of various public facilities, commercial buildings and high-end residential buildings, which in turn drives the market demand for curtain walls. Such construction has provided the foundation for the growth of the curtain wall market.

The following chart illustrates the total market size of the global construction industry for the periods specified.

(Source: Euler Hermes)

Geographical Distribution of Global Market

The following chart illustrates the market segmentation of the global curtain wall industry by countries and regions for the periods specified.

(Source: Synovate Report)

(Source: Global Commercial Glass Curtain Wall Market Research Report 2018 to 2025 by QY research)

The data above offers an overview of how the market size in different regions changed in the past. China has shown the fastest growth in demand for curtain walls compared to the rest of the world at a CAGR of 21% from 2005 to 2012 and has kept the trend growing from 2012 to 2017. This strong growth is mainly driven by the overall growth of the PRC economy and its construction industry. In particular, rapid urbanization in China has contributed significantly to such growth. We have not obtained current data regarding the market size.

Market Segmentation

Curtain walls are extensively used in commercial buildings, public facilities and residential buildings to protect the interior and provide a visually appealing outer architecture. The product is used in commercial buildings due to the availability of high construction budgets among corporations. We believe that the rise in the number of commercial buildings, such as retail stores, hotels, medical centers, warehouses and garages in China will catapult the product demand over the next 5 years. The following chart illustrates the market segmentation of the curtain wall industry by industries for the periods specified.

(Source: Synovate Report)

Commercial buildings are the largest market segment of curtain wall products and applications in China, accounting for approximately 68.6% of the total curtain wall market in 2012. It grew at a CAGR of 16.87% from 2005 to 2012. As both domestic and foreign companies are expected to set up or further expand their operations in the major cities in China, more commercial skyscrapers with extensive use of curtain walls, which are necessary components of such skyscrapers, are expected to be built in the future.

The demand for curtain walls for public facilities grew significantly from 2005 to 2009, with a CAGR of 22.0% in market value. The market size for public facilities increased to approximately 28.0% of the total curtain wall market in 2012. The main drivers for the increasing use of curtain wall in public facilities are the PRC government’s policies to boost the development of public infrastructure and large international events that require the construction of more public facilities, such as the Beijing 2008 Olympic Games, Expo 2010 Shanghai China and the 16th Asian Games in Guangzhou in 2010.

The residential housing segment represents a small portion of the whole market, yet the segment grew rapidly at a CAGR of 14.63% from 2015 to 2012. The main driver for the increasing use of curtain wall in residential buildings is the rapid urbanization that led to increasing demand for high-rise buildings.

In terms of structure, market demand has been shifting slowly from stick-built to unitized structures, which rely less on skilled labor, provide more consistent quality, and are more capable of offering advanced technological products. The following chart illustrates the market segmentation of the global curtain wall industry by product type for the periods specified.

(Source: Synovate Report)

The market share of unitized curtain wall structures in the total market increased from approximately 48.7% in 2005 to approximately 53.1% in 2012. On the other hand, the market share of stick-built curtain wall structures decreased from approximately 30.9% in 2005 to approximately 26.7% in 2012.

We are usually positioned in the middle of the raw material supplier and the project owner or general contractor. The project owner is the investor of a project while a general contractor is the coordinator of the whole project (sometimes they can be the same company). The upstream industry consists of the raw material suppliers who supply materials necessary to produce curtain wall and door and window products. The following chart illustrates our upstream and downstream industries.

We adopted the Lean Production Principles which is a systematic method for waste minimization within a manufacturing system without sacrificing productivity, by closely partnering with our upstream companies to implement the Just-in-Time (JIT) production system. By implementing JIT we are able to minimize inventory and working capital occupation and maximize flexibility and responsiveness to downstream clients’ ever changing demands.

Corporate Structure

Below is a chart illustrating our current corporate structure:

Incorporated on January 20, 2017 under the name of “Yun Han International Limited”, Golden Metropolis International Limited is a limited liability company formed under the laws of British Virgin Islands. We changed our name from “Yun Han International Limited” to “Golden Metropolis International Limited” on October 6, 2017. We completed a reorganization of our legal structure on September 26, 2017, on which date our prior shareholders Minpei Zha and Zuoliang Zha transferred 35,000 and 15,000 ordinary shares, respectively to our current parent entity Wenhan Consulting Limited (“Wenhan Consulting”). As part of the legal restructuring, we also formed wholly-owned subsidiaries Hong Kong Hansheng Limited (“HK Hansheng”), Jiangsu Aiwen Investment Co. Ltd. (“Jiangsu Aiwen”) and Jiangsu Wenhan Investment Co. Ltd. (“Jiangsu Wenhan”). Mr. Zuoliang Zha, our Chairman of the Board, is currently the controlling shareholder of Wenhan Consulting. Prior to the reorganization, Mr. Zuoliang Zha, together with his son, Mr. Minpei Zha, who is the Chief Executive Officer (“CEO”) of the Company (collectively the “Controlling Group”), owned 100% of Wuxi Jincheng Curtain Wall Co. Ltd. (“Wuxi Jincheng”). On June 16, 2017, the Controlling Group transferred their 100% ownership interest in Wuxi Jincheng to Jiangsu Aiwen and Jiangsu Wenhan, which are 100% owned by Hansheng, respectively. After the reorganization, Wuxi Jincheng has become a wholly-owned subsidiary of our company and our parent entity Wenhan Consulting.

Since the Company and its subsidiaries are effectively controlled by the same group of the controlling shareholders before and after the reorganization, they are considered under common control. The above mentioned transactions were accounted for as a recapitalization. The consolidation of the Company 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 accompanying consolidated financial statement.

As of incorporation, we were authorized to issue 50,000 ordinary shares of a single class, par value $1 per ordinary share. Upon formation of our company, Mr. Minpei Zha and Mr. Zuoliang Zha received 35,000 and 15,000 Ordinary Shares, respectively. On September 26, 2017, as part of the reorganization described above, both individuals entered into equity interest transfer agreements with Wenhan Consulting and transferred all of their respective shareholding to Wenhan Consulting. As a result, we are now a wholly-owned subsidiary of Wenhan Consulting, which is controlled by Mr. Zuoliang Zha. In May 2018, we completed a 180:1 forward share split whereby every ordinary share was exchanged for 180 new ordinary shares (the “Forward Split”). We also increased our authorized shares to an unlimited number of ordinary shares with no par value (the “Share Increase”).

HK Hansheng was incorporated on March 31, 2017 under the law of Hong Kong SAR. The registered share capital is HKD 10,000, with 100% of the equity interest held by our Company. HK Hansheng is currently not engaging in any active business and merely acting as a holding company.

Jiangsu Aiwen was incorporated on June 5, 2017 in Wuxi under the laws of the People’s Republic of China. A wholly-owned subsidiary of HK Hansheng and a wholly foreign-owned entity under the PRC laws, Jiangsu Aiwen’s registered capital is USD 10,000,000 and the registered principal activity of the company is foreign outbound investments. Jiangsu Aiwen currently hold 99% of total outstanding shares of our operating company, Wuxi Jincheng. Jiangsu Aiwen is currently not engaging in any active business and merely acting as a holding company.

Jiangsu Wenhan was incorporated on June 2, 2017 under the laws of the People’s Republic of China. A wholly-owned subsidiary of HK Hansheng and a wholly foreign-owned entity under the PRC laws, Jiangsu Wenhan’s registered capital is USD 10,000,000 and the registered principal activity of the company is foreign outbound investments. Jiangsu Wenhan currently hold 1% of total outstanding shares of our operating company, Wuxi Jincheng. Jiangsu Wenhan is currently not engaging in any active business and merely acting as a holding company.

Wuxi Jincheng was incorporated on January 9, 1993. Wuxi Jincheng’s registered and paid in capital is RMB 80,000,000. Through equity transfers, Wuxi Jincheng are currently held by Jiangsu Aiwen and Jiangsu Wenhan. Its principal activity is designing, processing, and installation of doors, windows, and curtain walls, and installation of steel structures. Company’s legal representative is Minpei Zha and its registered address is No. 229 Changjiang East Road, Shuofang, Xinwu District, Wuxi, Jiangsu Province, P.R. China.

Our Products and Services

Curtain Wall Systems

A curtain wall system is a building facade system that hangs on the structure of a building to protect its occupants from natural discomforts. It is characterized by being non-load bearing and is generally made of aluminum, glass, granite and other cladding materials.

Curtain wall systems are widely used for offices, public or functional buildings, hotels, shopping centers and residential buildings. The popularity of curtain wall systems stems from its reduced construction period and cost, lightweight nature, simplification of temporary construction and strong performance. Specifically, it has the following advantages over other wall constructions:

Categorized by Framework Solutions

To fit a specific clients’ project, whether big or small, we process door, window and steel pieces to help our clients achieve their goals. We have various types of framework solutions to fit projects which have distinguished sizes and shapes. We have an expertise in engineering which allows us to tailor framework solutions to fit projects with specific budgets and construction period requirements.

Unitized Curtain Wall Systems. This system is composed of large glass units that are created and glazed within a factory and then sent to the construction site. Once on site, the units can then be hoisted onto anchors connected to the building. High quality, due to tight tolerances of fabrication in a climate-controlled environment, is only one hallmark of this type of system. Since there is no on-site glazing, another major benefit of using a unitized system is the speed of installation. The system can be installed in approximately one-third of the time of a stick-built system. This system is well suited for cases where there is a large volume of prefabricated unitized panels required, where there are higher field labor costs (thereby shifting the labor to a more cost-effective factory work force), where higher performance is needed (for wind loads, air/moisture protection, seismic/blast performance), for taller structures and even for regular conditions which want panel optimization.