424B4 1 d204090d424b4.htm 424(B)(4) 424(B)(4)
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Filed pursuant to Rule 424(b)(4)
Registration No. 333-265756

 

1,000,000 American Depositary Shares

 

LOGO

Intchains Group Limited

Representing 2,000,000 Class A Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Intchains Group Limited. We are offering 1,000,000 ADSs. Each ADS represents two Class A ordinary shares, par value US$0.000001 per share.

Prior to this offering, there has been no public market for the ADSs or our Class A ordinary shares.

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and we will be a �controlled company� as defined under the Nasdaq Stock Market Rules because our co-founders, namely, Mr. Qiang Ding and Mr. Chaohua Sheng, will beneficially own all of our issued Class B ordinary shares and will be able to exercise approximately 92.3% of the total voting power of our issued and outstanding share capital immediately following the completion of this offering, assuming that the underwriters do not exercise their over-allotment option to purchase additional ADSs. As a �controlled company�, we are permitted to elect not to comply with certain corporate governance requirements. If we rely on these exemptions, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes, subject to certain conditions, and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

We have been approved for listing the ADSs on the Nasdaq Capital Market, or Nasdaq, under the symbol �ICG�.

We are an �emerging growth company� as defined in the Jumpstart Our Business Act of 2012, as amended, and are eligible for reduced public company reporting requirements.

 

 

Investing in the ADSs involves risks. See �Risk Factors� beginning on page 16 of this prospectus. We are not a Chinese operating company but a Cayman Islands holding company with operations conducted by our subsidiaries based in China. The �Company� and �our Company� refer to Intchains Group Limited, a Cayman Islands company. �We,� �us,� and �our� refer to Intchains Group Limited and its subsidiaries. We currently conduct our business through Jerryken Intelligent Technology (Shanghai) Co., Ltd., or Jerryken Shanghai, and Shanghai Intchains Technology Co., Ltd., or Shanghai Intchains, each an indirect wholly owned subsidiary of the Company, and two operating subsidiaries wholly owned by Shanghai Intchains. All of these four operating subsidiaries are established under the laws of the PRC. This operating structure may involve unique risks to investors. Under relevant PRC laws and regulations, foreign investors are permitted to own 100% of the equity interests in a PRC-incorporated company engaged in the business of IC design. However, the PRC government may implement changes to the existing laws and regulations in the future, which may result in the prohibition or restriction of foreign investors from owning equity interests in our PRC operating subsidiaries. See �Risk Factors�Risks Relating to Doing Business in the PRC�The Chinese government may intervene in or influence our operations at any time, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs� for a detailed discussion. There are significant legal and operational risks associated with being based in or having the majority of operations in China, including that changes in the legal, political and economic policies of the Chinese government, the relations between China and the United States, or Chinese or U.S. regulations may materially and adversely affect our business, financial condition and results of operations. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors, and could cause the value of our securities to significantly decline or become worthless. Recent statements made and regulatory actions undertaken by Chinese government, such as the Opinions on Strictly Cracking Down on Illegal Securities Activities issued on July 6, 2021 by the Chinese government, and any other future laws and regulations could significantly limit or completely hinder our ability to conduct our business, accept foreign investments, or list on an U.S. or other foreign exchange. Our auditor, which is based in New York, is currently subject to inspection by the PCAOB at least every three years. However, our auditor�s China affiliate is located in, and organized under the laws of, the PRC. On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by PRC authorities in those jurisdictions. On August 26, 2022, the PCAOB entered into a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the PRC and, as summarized in the �Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong� published on the U.S. Securities and Exchange Commission�s official website, the parties agreed to the following: (i) in accordance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation; (ii) the PCAOB shall have direct access to interview or take testimony from all personnel of the audit firms whose issuer engagements are being inspected or investigated; (iii) the PCAOB shall have the unfettered ability to transfer information to the SEC, in accordance with the Sarbanes-Oxley Act; and (iv) the PCAOB inspectors shall have access to complete audit work papers without any redactions, with view-only procedures for certain targeted pieces of information such as personally identifiable information. The PCAOB is required to reassess its determinations as to whether it is able to carry out inspection and investigation completely and without obstruction by the end of 2022. We cannot assure you that we will not be identified by the SEC under the Holding Foreign Companies Accountable Act, or the HFCA Act, as an issuer that has retained an auditor that has a branch or office located in a foreign jurisdiction that the PCAOB determines it is unable to inspect or investigate completely because of a position taken by an authority in that foreign jurisdiction. In addition, there can be no assurance that, if we have a �non-inspection� year, we will be able to take any remedial measures. If any such event were to occur, trading in our securities could in the future be prohibited under the HFCA Act and, as a result, we cannot assure you that we will be able to maintain the listing of the ADRs on Nasdaq or that you will be allowed to trade the ADRs in the United States on the �over-the-counter� markets or otherwise. Should the ADRs become not listed or tradeable in the United States, the value of the ADRs could be materially affected. See �Risk Factors�Risks Relating to Doing Business in the PRC� for a detailed discussion.

Intchains Group Limited holds all of the equity interests in its PRC subsidiaries through subsidiaries incorporated in the British Virgin Islands, or BVI, and Hong Kong. As we have a direct equity ownership structure, we do not have any agreement or contract between our Company and any of its subsidiaries that are typically seen in a variable interest entity structure. Within our direct equity ownership structure, funds from foreign investors can be directly transferred to our PRC subsidiaries by way of capital injection or in the form of a shareholder loan from Intchains Group Limited following this offering. If the Company plans to distribute dividends to its shareholders, our PRC operating subsidiaries will transfer the funds to the Company through our subsidiaries incorporated in the BVI and Hong Kong, and the Company will then distribute dividends to all shareholders in proportion to the shares they hold, regardless of the citizenship or domicile of the shareholders. For the three years ended December 31, 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, except for unsecured and interest-free inter-company funding of RMB11,040,000 transferred between our PRC subsidiaries in connection with our purchase of a 17.51% of equity interest in Shanghai Intchains Technology Co., Ltd and inter-company transactions that occurred in the ordinary course of business, no cash or other asset transfers occurred among Intchains Group Limited and its subsidiaries, and no dividends or distributions from a subsidiary were made to Intchains Group Limited or other investors. See �Corporate History and Structure� for additional details.

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per ADS    Total

Initial public offering price

   US$8.00    US$8,000,000

Underwriting discount and commissions(1)

   US$0.56    US$560,000

Proceeds, before expenses, to us

   US$7.44    US$7,440,000

 

(1)

In addition to the underwriting discounts listed above, we have agreed to issue, upon closing of this offering, warrants to Maxim Group LLC (or its permitted assignees) to purchase a number of our ADSs equal to an aggregate of three percent (3.0%) of the total number of ADSs sold in this offering, or the Underwriter�s Warrants. The Underwriter�s Warrants will have an exercise price equal to 125% of the offering price of the ADSs sold in this offering and may be exercised on a cashless basis. The registration statement of which this prospectus is a part also covers the Underwriter�s Warrants and the ADSs representing our Class A ordinary shares issuable upon the exercise thereof. See �Underwriting� for additional information regarding total underwriter compensation.

The underwriters have an option to purchase up to an aggregate of 150,000 additional ADSs from us at the initial public offering price, less underwriting discounts and commissions.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on March 20, 2023.

Maxim Group LLC

Prospectus dated March 15, 2023


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

The Offering

     11  

Summary Consolidated Financial and Operating Data

     13  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements and Industry Data

     56  

Use of Proceeds

     57  

Dividend Policy

     58  

Capitalization

     59  

Dilution

     61  

Enforcement of Civil Liabilities

     63  

Corporate History and Structure

     65  

Selected Consolidated Financial and Operating Data

     67  

Management�s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Industry Overview

     88  

Business

     97  

Regulation

     109  

Management

     121  

Principal Shareholders

     128  

Related Party Transactions

     131  

Description of Share Capital

     132  

Description of American Depositary Shares

     142  

Shares Eligible for Future Sale

     152  

Taxation

     154  

Underwriting

     161  

Expenses Relating to this Offering

     172  

Legal Matters

     173  

Experts

     174  

Where You Can Find More Information

     175  

Index to Consolidated Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus that we filed with the Securities and Exchange Commission. We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or the sale of any ADS.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who came into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

Until April 9, 2023 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should carefully read this entire prospectus, including the �Risk Factors� section and �Management�s Discussion and Analysis of Financial Condition and Results of Operations� section and the financial statements and the related notes, before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., or Frost & Sullivan, an independent third-party research firm, to provide information regarding our industry and market position in mainland China. We refer to this report as the Frost & Sullivan report.

Overview

We are a provider of integrated solutions consisting of high-performance computing ASIC chips and ancillary software and hardware for blockchain applications. We utilize a fabless business model and specialize in the front-end and back-end of IC design, which are the major components of the IC product development chain. We have established strong supply chain management with a leading foundry, which helps to ensure our product quality and stable production output.

Our products consist of high-performance computing ASIC chips that have high computing power and superior power efficiency as well as ancillary software and hardware, which cater to the evolving needs of the blockchain industry. We have built a proprietary technology platform named �Xihe� Platform, which allows us to develop a wide range of ASIC chips with high efficiency and scalability. We design our ASIC chips in-house, which enables us to leverage proprietary silicon data to deliver products reflecting the latest technological developments ahead of our competitors. As of September 30, 2022, we had completed a total of eight tape-outs using our �Xihe� Platform for 22nm ASIC chips, achieving a 100% success rate for all our tape-outs.

Our strong commitment to advanced research and development enables us to innovate continuously and create ASIC chips with superior performance to power ratio at reasonable cost. According to Frost & Sullivan, we have a leading market share in ASIC chips designed for several key blockchain algorithms including Blake2bsha3, sha512MD160, Cryptonight V4, Eaglesong and Blake2s, in terms of the accumulative computing power sold for the years ended December 31, 2019, 2020 and 2021. We will continue to devote significant resources to design and tailor our ASIC chips for use in high-technology applications.

As a result of fast-increasing market demand for our products, we have been growing rapidly. Our total revenue increased from RMB35.8 million for 2019 to RMB54.6 million for 2020, and further increased significantly to RMB631.8 million (US$88.8 million) for 2021. Our total revenue increased significantly from RMB330.3 million for the nine months ended September 30, 2021 to RMB440.1 million (US$61.9 million) for the nine months ended September 30, 2022. We recognized net loss of RMB3.0 million for 2019, net income of RMB8.2 million for 2020 and net income of RMB450.1 million (US$63.3 million) for 2021. Our net income increased significantly from RMB251.6 million for the nine months ended September 30, 2021 to RMB342.5 million (US$48.2 million) for the nine months ended September 30, 2022.

Our Competitive Strengths

We believe that the following strengths have contributed to our success and will continue to differentiate us from our competitors:

 

   

Leading fabless provider of high-performance computing ASIC chips for several key blockchain algorithms

 

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Innovative technology platform enabling fast time-to-market product launch and higher gross profit margin

 

   

Broad product portfolio tailored to capture market growth potential

 

   

Leading provider of high-performance computing ASIC chips for blockchain algorithms used by individual end users

 

   

Close and stable relationships with our major suppliers

 

   

Visionary and experienced management team as well as talented research and development personnel

Our Strategies

We intend to become a leading provider of integrated solutions that include both high-performance computing chips and advanced computing systems and structures. Through our research and development efforts, we plan to integrate general computing power and specialized computing power represented by ASIC by way of enhancing computing systems and structures. We intend to pursue the following strategies:

 

   

Continue to develop and iterate our �Xihe� Platform and �Wangshu� Platform to maintain our advantages in technology development and diversify our product offerings

 

   

Develop software systems based on high-performance computing chips to achieve synergistic development of high-performance computing chips and software systems

 

   

Expand our overseas operations

 

   

Strengthen our talent pool

Summary of Risk Factors

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under the �Risk Factors� section beginning on page 16, including the risks described under the subsections headed �Risks Relating to Our Business and Industry�, �Risks Relating to Doing Business in the PRC� and �Risks Relating to the ADSs and this Offering�, and the other information contained in this prospectus before you decide whether to purchase our ADSs.

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

 

   

There is no assurance that a cryptocurrency will maintain its long-term value, and volatility in the market prices of cryptocurrencies may adversely affect our business and results of operations.

 

   

The industry in which we operate is characterized by constant changes. If we fail to innovate or to provide products that meet the expectations of our customers, we may be unable to attract new customers or retain existing customers, and as a result our business and results of operations may be adversely affected;

 

   

We are subject to risks associated with legal, political or other conditions or developments regarding holding, using or mining of cryptocurrencies and related products and services, which could negatively affect our business, financial condition, and results of operations;

 

   

We derive a significant portion of our revenue from our ASIC chips. If the market for ASIC chips used in cryptocurrency mining machines ceases to exist or diminishes significantly, our business and results of operations would be materially harmed.

 

   

Our ASIC chips business depends mainly on supplies from a single third-party foundry, and any failure to obtain sufficient foundry capacity from this foundry would significantly delay the shipment of our products;

 

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We may be unable to make the substantial investments in research and development that are required to remain competitive in our business.

 

   

If we fail to adequately protect our intellectual property rights, our ability to compete effectively or to defend ourselves from litigation could be impaired, which could reduce our total revenue and increase our costs;

 

   

The loss of any member of our senior management team, or our failure to attract, train and retain qualified personnel, especially our research and development personnel, could impair our ability to grow our business and effectively execute our business strategy;

 

   

Our research and development activities may not result in the successful development of new products;

 

   

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors or their affiliates that are located in China. The delisting of our ADSs, or the threat of such delisting, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors of the benefits of such inspections;

 

   

As a business operating in China, we are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little notice to us or our shareholders. New regulations and policies, which may be adopted with little notice, could result in a material change in our operations and/or the value of our ADSs;

 

   

Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers. Although our business is not of the type currently subject to government review in China prior to a foreign securities offering, any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the PRC government could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities to significantly decline or be worthless;

 

   

The approval of the CSRC, or CAC or other Chinese regulatory agencies may be required in connection with this offering under Chinese law, and, if required, we cannot predict whether we will be able to obtain such approval or complete such filing;

 

   

The Chinese government may intervene in or influence our operations at any time, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs. The Chinese government has significant oversight and discretion over the conduct of our business and may intervene or influence our operations as the government deems appropriate to further regulatory, political and societal goals;

 

   

Changes to and uncertainties in the legal system of the PRC may have a material adverse impact on our business, financial condition and results of operations. Legal protections available to you under the legal system of the PRC may be limited;

 

   

You may experience difficulties enforcing judgments against us and our management in the PRC; and

 

   

Our corporate structure may restrict our ability to receive dividends from, and transfer funds to, our PRC operating subsidiaries, which could restrict our ability to act in response to changing market conditions in a timely manner.

 

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Corporate History and Structure

We conduct our operations in China through our subsidiaries incorporated under the laws of the PRC. In this offering, investors will be purchasing ADSs representing Class A ordinary shares issued by our Cayman Islands holding company, Intchains Group Limited, which is the ultimate owner of 100% of the equity interests in the PRC subsidiaries. Our Cayman Islands holding company does not conduct operations. We began our operations in December 2017 when Shanghai Intchains Technology Co., Ltd., or Shanghai Intchains, was founded in Shanghai, China.

With the growth of our business and in order to facilitate international capital raising, we underwent an offshore reorganization in the second half of 2021. Intchains Group Limited was incorporated in the Cayman Islands as our offshore holding company in June 2021 and became the ultimate holding company of our operating subsidiaries in December 2021.

The structure of cash flows within our corporate organization, together with a summary of the applicable PRC regulations, is as follows:

1. We do not have a variable interest entities structure, or VIE structure. Intchains Group Limited directly controls Jerryken Intelligent Technology (Shanghai) Co., Ltd., or WFOE, as well as Shanghai Intchains and our other two operating subsidiaries in the PRC through its wholly owned subsidiaries, namely, Intchains BVI and Intchains HK. See �Corporate History and Structure� for additional details.

2. Within our direct holding structure, the cross-border transfer of funds within our corporate group is legal and compliant with the laws and regulations of the PRC. After foreign investors� funds enter into Intchains Group Limited at the close of this offering, the funds can be directly transferred to WFOE by way of capital injection; WFOE can also transfer the funds into the other PRC subsidiaries of Intchains Group Limited through a capital injection or by providing a shareholder loan after the conversion of currency from U.S. dollar to RMB in accordance with the PRC foreign exchange laws and regulations.

If the Company intends to distribute dividends, our PRC subsidiaries will transfer the dividends to Intchains HK in accordance with the laws and regulations of the PRC including but not limited to laws and regulations on withholding tax on dividend distributions, Intchains HK will then transfer the dividends to Intchains Group Limited through Intchains BVI, then the dividends will be distributed from Intchains Group Limited to all shareholders respectively in proportion to the shares they hold, regardless of whether the shareholders are U.S. investors or investors in other countries or regions.

3. For the three years ended December 31, 2019, 2020 and 2021 and the nine months ended September 30, 2022, except for unsecured and interest-free inter-company funding of RMB11,040,000 transferred from Shanghai Intchains to WFOE for its settlement on the purchase of a 17.51% equity interest in Shanghai Intchains (see �Corporate History and Structure� for details of such share transfer) and inter-company transactions that occurred in the ordinary course of business, no cash or other asset transfers occurred among Intchains Group Limited and its subsidiaries; and no dividends or distributions of a subsidiary were made to Intchains Group Limited or other investors. For the foreseeable future, Intchains Group Limited intends to retain most, if not all, of its available funds and any future earnings to operate and expand its business. We have no intention to declare or pay any dividends in the near future on our ordinary shares or the ADSs representing our ordinary shares.

4. Our PRC subsidiaries� ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if

 

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any, to fund a statutory reserve until such reserve reaches 50% of each of their registered capital. These reserves are not distributable as cash dividends. See �Regulations Relating to Dividend Distributions� for more information.

To address persistent capital outflows and the RMB�s depreciation against the U.S. dollar in the fourth quarter of 2016, the People�s Bank of China and the State Administration of Foreign Exchange of the People�s Republic of China, or SAFE, implemented a series of capital control measures, including stricter vetting procedures for mainland China-based companies to remit foreign currency for overseas acquisitions and dividend payments. The Notice on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control promulgated by SAFE in January 2017, stipulates several capital control measures with respect to outbound remittances of profits from domestic entities to offshore entities, including the following: (1) under the principle of genuine transaction, banks shall check board resolutions regarding profit distributions, the original version of tax filing records and audited financial statements; and (2) domestic entities shall hold income to account for previous years� losses before remitting the profits. Moreover, domestic entities are required to make detailed explanations of sources of capital and utilization arrangements, and to provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries� dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. As a result, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.

In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC- resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident. Pursuant to the tax agreement between mainland China and the Hong Kong Special Administrative Region, the withholding tax rate in respect of the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiaries.

We have been advised by Jingtian & Gongcheng, our PRC legal adviser, that (i) we have obtained all necessary permissions or approvals and authorizations in mainland China in all material aspects in relation to conducting our IC design business operations in mainland China; and (ii) we are not required to obtain any permission or approval from any Chinese authority to issue securities to foreign investors or in connection with this offering under Chinese laws or regulations in effect. Except for the business licenses issued by the local branch of the State Administration for Market Regulation, which our PRC subsidiaries have obtained and are in full force and effect as of the date of this prospectus, Intchains Group Limited and our PRC subsidiaries are not required to obtain other licenses, approvals or permits to conduct our IC design business operations in mainland China.

To the best of our knowledge, as of the date of this prospectus, there are no laws or regulations that are or will be adopted in the near future by PRC government authorities that would prevent us from maintaining the business licenses we have obtained or would require us to obtain additional licenses or qualifications in order to operate our IC design business.

 

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Our Corporate Structure

The chart below illustrates our corporate structure as of the date of this prospectus:

 

 

LOGO

For a more detailed description of our history and a diagram that illustrates our current corporate structure as of the date of this prospectus, see �Corporate History and Structure.�

Corporate Information

The principal executive offices of our operating subsidiaries are located at 9/F, A Block, No.333 Haiyang No.1 Road, Lingang Science and Technology Park, Pudong New Area, Shanghai, 201306, the People�s Republic of China. Our telephone number at this address is +86 021 5896 1080 and our fax number is +86 021 5896 1085.

Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.

Our agent for service of process in the United States is Puglisi & Associates.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.intchains.com. The information contained on our website is not a part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than US$1.235 billion in revenue for our last fiscal year, we qualify as an �emerging growth company� pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared

 

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to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404 in the assessment of the emerging growth company�s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period provided under the JOBS Act for complying with new or revised accounting standards. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenue of at least US$1.235 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a �large accelerated filer� under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We are an �emerging growth company� as the term is used in the JOBS Act and, as such, we are subject to certain reduced public company reporting requirements. See the applicable disclosure under the section captioned �Risk Factors�Risks Relating to the ADSs and this Offering.�

Implications of Being a Foreign Private Issuer

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards. Currently, we plan to rely on home country practices with respect to our corporate governance after we complete this offering.

Conventions That Apply to This Prospectus

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

 

   

�ADRs� are to the American depositary receipts, which, if issued, evidence our ADSs;

 

   

�ADSs� are to our American depositary shares, each of which represents two Class A ordinary shares;

 

   

�ASICs� are to application-specific ICs, meaning ICs designed for a specific application;

 

   

�CAGR� are to compound average growth rate;

 

   

�China� or the �PRC�, in each case, are to the People�s Republic of China, including Hong Kong, Macau and Taiwan. The term �Chinese� has a correlative meaning for the purpose of this prospectus. When used in the case of laws and regulations, of �China� or �the PRC�, it refers to only such laws and regulations of mainland China;

 

   

�Class A ordinary shares� are to our class A ordinary shares, par value US$0.000001 per share;

 

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�Class B ordinary shares� are to our class B ordinary shares, par value US$0.000001 per share;

 

   

�EIT� are to enterprise income tax;

 

   

�IC� or �chips� are to integrated circuits;

 

   

�IoT� are to Internet-of-Things, the extension of internet connectivity into physical devices and everyday objects;

 

   

�iterate� or �iteration� are to the act of repeating a process, either to generate an unbounded sequence of outcomes, or with the aim of approaching a desired goal, target or result;

 

   

�mainland China� are to the People�s Republic of China, excluding, solely for the purpose of this prospectus, Hong Kong, Macau and Taiwan. The term �mainland Chinese� has a correlative meaning for the purpose of this prospectus;

 

   

�nm� are to nanometer;

 

   

�ordinary shares� or �shares� prior to the completion of this offering are to our ordinary shares of par value US$0.000001 per share, and upon and after the completion of this offering are to our Class A ordinary shares and Class B ordinary shares;

 

   

�PoW� are to proof-of-work;

 

   

�Risc-V� are to an open source instruction set architecture, which is a set of instructions that describes the way in which software talks to an underlying processor, and Risc-V�s open source nature means that anyone can build a processor to support it without paying high royalty fees;

 

   

�RMB� and �Renminbi� are to the legal currency of mainland China;

 

   

�SoC� are to a chip that integrates all components of a computer or other electronic systems;

 

   

�tape-out� are to the final result of the design process for ICs when the graphic for the photomask of the IC is sent to the fabrication facility, and a successful tape-out means all the stages in the design and verification process of ICs have been completed;

 

   

�US$� and �U.S. dollars� are to the legal currency of the United States;

 

   

�U.S. GAAP� are to generally accepted accounting principles in the United States; and

 

   

�we,� �us,� �our company,� �the Group� and �our� are to Intchains Group Limited, a Cayman Islands company and its subsidiaries.

Unless otherwise indicated, (a) information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs, (b) references in this prospectus to this offering are to our offering of ADSs pursuant to this prospectus, and (c) information in this prospectus does not include the ordinary shares reserved for future issuance under our share incentive plan.

Our reporting currency is RMB. This prospectus contains translations from RMB to U.S. dollars solely for the convenience of the reader. Unless otherwise stated, the translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB7.1135 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on September 30, 2022. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus 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.

Internet site addresses in this prospectus are included for reference only and the information contained in any website, including our website, is not incorporated by reference into, and does not form part of, this prospectus.

 

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Market and Industry Data

This prospectus contains estimates and information concerning our industry, including our market position and the size and growth rates of the markets in which we participate, that are based on industry publications and the reports. This prospectus contains statistical data and estimates published by Frost & Sullivan, an independent research firm, for which we paid a fee. This information involves a number of assumptions and limitations, and you are cautioned not to place undue reliance on these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the �Risk Factors� section. These and other factors could cause results to differ materially from those expressed in these publications and reports.

Industry publications, research, surveys, studies and forecasts generally state that the information they contain has been obtained from sources believed to be reliable but that the accuracy and completeness of such information is not guaranteed. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements in this prospectus. These forecasts and forward-looking information are subject to uncertainty and risk due to a variety of factors, including those described under �Risk Factors�. These and other factors could cause results to differ materially from those expressed in the forecasts or estimates from independent third parties and us.

Impact of COVID-19

The COVID-19 outbreak has adversely affected (and a significant outbreak of other infectious diseases could result in an additional widespread health crisis that could adversely affect) the economies and financial markets worldwide, and our business could be materially and adversely affected by the COVID-19 outbreak and any such other outbreak. Furthermore, our business may be adversely affected if continued concerns relating to COVID-19 continue to restrict travel, or result in our personnel, vendors and services providers being unavailable to pursue their business objectives free of COVID-19 related restrictions. The extent to which COVID-19 impacts our business in the future will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions by different governments to contain COVID-19 or treat its impact, among others. If the disruptions caused by COVID-19 or other matters of global concern continue for an extended period of time, our ability to pursue our business objectives may be materially and adversely affected. In addition, our ability to raise equity and debt financing which may be adversely impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to us or at all.

Recent Developments

Prices of alternative cryptocurrencies were relatively stable between September and November 2022 after experiencing declines generally in the second and third quarters of 2022. In November 2022, cryptocurrencies experienced a significant price decline as a result of further industry developments. In response to recent shifts in market trends, we have examined the expected returns of cryptocurrency mining activities, prices of ASIC chips that are used in mining equipment for different alternative cryptocurrencies, and end users� demonstrated faith and preferences for different alternative cryptocurrencies, and adjusted our product development, production plans as well as product pricing accordingly. Despite our adjustments, as a result of significant industry-wide decline in cryptocurrency prices, the sales volume and average selling price of our products in the fourth quarter of 2022 decreased significantly compared to the same period in 2021. In September 2022 we successfully completed tape-outs of new ASIC chips, which are currently under testing and we expect to launch commercial sales in the first half of 2023.

 

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Between September and November 2022, many regions in China experienced a resurgence of COVID-19, and local governments of mainland China implemented pandemic control measures that put restrictions on travel and group gatherings. Since the beginning of December 2022, China has removed its previous COVID-19 control measures including mandatory quarantines and PCR tests, travel restrictions and gathering restrictions. While we experienced delays earlier in 2022 ranging from one to four days in custom clearance for ASIC chips from our Foundry Partner and transportation to our outsourced semiconductor assembly and testing service providers, our operations have returned to normal since the third quarter of 2022. Currently, our business operations and logistics are no longer affected by COVID-19 related pandemic control measures. To mitigate the possible impact on our business of any similar pandemic in the future, we intend to use more than one foundry facility operated by our Foundry Partner as well as explore cooperative opportunities with other established foundries. We currently do not expect disruptions to our supply chain in the foreseeable future.

In the fourth quarter of 2022, we sold 666,420 units of ASIC chips and our average selling price was approximately RMB41. By comparison, in the fourth quarter of 2021 we sold 2,615,828 units of ASIC chips and our average selling price was approximately RMB97. Our average selling price for the fourth quarter of 2021 was significantly higher primarily because in 2021 the prices of cryptocurrencies began to increase rapidly and there was a fast-growing market demand for cryptocurrency mining equipment which in turn fueled demand for our ASIC chips. The prices of cryptocurrencies began to experience declines in mid-2022, which negatively impacted the contract prices of our ASIC chips which were to be delivered in the fourth quarter of 2022. Our average selling price was further negatively impacted in the fourth quarter of 2022 by developments in the cryptocurrency industry that resulted in industry-wide price declines.

 

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THE OFFERING

 

Offering price:

US$8.00 per ADS.

 

ADSs Offered by us:

1,000,000 ADSs (or 1,150,000 ADSs if the underwriters exercise the option to purchase additional ADSs in full).

 

ADSs Outstanding Immediately After This Offering

1,000,000 ADSs (or 1,150,000 ADSs if the underwriters exercise the option to purchase additional 150,000 ADSs in full).

 

Ordinary Shares Outstanding Immediately After This Offering

119,647,000 ordinary shares, comprised of 54,559,000 Class A ordinary shares and 65,088,000 Class B ordinary shares (or 119,947,000 ordinary shares, comprised of 54,859,000 Class A ordinary shares and 65,088,000 Class B ordinary shares if the underwriters exercise the option to purchase additional 150,000 ADSs in full).

 

Option to Purchase Additional ADSs

We have granted to the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to an aggregate of 150,000 additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

 

The ADSs

Each ADS represents two Class A ordinary shares, par value US$0.000001 per share.

 

  The depositary will hold the Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement, the form of which is filed as an exhibit to the registration statement that includes this prospectus.

 

  We do not expect to pay any cash dividends on our Class A ordinary shares in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares, after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may surrender your ADSs to the depositary to withdraw the Class A ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended.

 

 

To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled �Description of American

 

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Depositary Shares.� You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Listing

The ADSs have been approved for listing on the Nasdaq under the symbol ICG. Our ADSs and ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on March 20, 2023.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$4.4 million (or US$5.5 million if the underwriters exercise their option to purchase additional ADSs in full) from this offering, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for (i) the continuing development and enhancement of our �Xihe� Platform and �Wangshu� Platform; (ii) the establishment of research and development centers in China, Singapore and selected locations overseas, research and development projects in cooperation with software companies in China and overseas, and the expansion of our research and development team; (iii) the establishment of an overseas operating center in Singapore, which will have business operation management functions, end application development capabilities and sales operations; (iv) the purchase of wafers and other raw materials from qualified suppliers; and (v) other working capital and general corporate purposes. See �Use of Proceeds� for additional information.

 

Risk Factors

See �Risk Factors� and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.

 

Depositary

Deutsche Bank Trust Company Americas.

 

Lock-Up

We, our directors and executive officers and all other existing holders of 5.0% or more of our outstanding shares have agreed with the underwriters not to offer, issue, sell, encumber, transfer or otherwise dispose of any of our securities, including our ADSs and ordinary shares for a period of six months after the completion of this offering without the consent of the representatives of the underwriters. See �Underwriting� for more information.

 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations and comprehensive (loss) income data and cash flow data for the years ended December 31, 2019, 2020 and 2021 and summary consolidated balance sheets data as of December 31, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with the U.S. GAAP. The following summary consolidated statements of operations and comprehensive (loss) income data and cash flows data for the nine months ended September 30, 2021 and 2022, summary consolidated balance sheets data as of September 30, 2022, have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes and �Management�s Discussion and Analysis of Financial Condition and Results of Operations� included elsewhere in this prospectus.

Summary Consolidated Statements of Operations and Comprehensive (Loss) Income

 

    Years ended December 31,     For the nine months ended
September 30,
 
    2019     2020     2021     2021     2022  
    RMB�000     RMB�000     RMB�000     US$�000     RMB�000     RMB�000     US$�000  

Net revenue

             

Products revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Total net revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Cost of revenue

    (29,581     (23,331     (113,955     (16,020     (47,547 )      (67,030 )      (9,423

Gross profit

    6,235       31,272       517,883       72,802       282,784       373,046       52,442  

Operating expenses:

             

Research and development expenses

    (9,062     (22,481     (53,153     (7,472     (25,416     (38,429     (5,403

Sales and marketing expenses

    (1     (91     (3,006     (423     (1,846     (2,989     (420

General and administrative expenses

    (5,036     (3,165     (14,403     (2,025     (5,404     (9,867     (1,387

Total operating expenses

    (14,099     (25,737     (70,562     (9,920     (32,666 )      (51,285 )      (7,210 ) 

(Loss) Income from operations:

             

Interest income

    16       37       2,518       354       1,146       7,658       1,077  

Interest expense and guarantee fee

    (132     (168     (197     (28     (98     (58     (8

Foreign exchange (loss)/gains, net

    (55     348       (238     (34     (95     3,566       501  

Other income

    5,323       2,495       740       104       519       19,196       2,699  

(Loss)/Income before income tax expenses

    (2,712     8,247       450,144       63,278       251,590       352,123       49,501  

Income tax expense

    (238     �         �         �         �         9,575       1,346  

Net (loss)/ income and total comprehensive (loss)/income

    (2,950     8,247       450,144       63,278       251,590       342,548       48,155  

Weighted average number of shares used in per share calculation(1):

             

� Basic and diluted

    100,000,000       100,000,000       100,870,300       100,870,300       100,000,000       117,647,000       117,647,000  

Net (loss)/earnings per share

             

� Basic and diluted

    (0.03     0.08       4.46       0.63       2.52       2.91       0.41  

 

Note:

(1)

Retroactively restated to reflect the 1:100 split of our ordinary shares effected on July 8, 2022, as described in Note 1 to our consolidated financial statements included in this prospectus.

 

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Summary Consolidated Balance Sheets

 

     As of December 31,      As of September 30,  
     2020      2021      2022  
     RMB�000      RMB�000      US$�000      RMB�000      US$�000  

ASSETS

              

Current assets:

              

Cash and cash equivalents

     19,627        502,420        70,629        703,105        98,841  

Accounts receivable

     6,530        �          �          �          �    

Inventories

     9,481        66,818        9,393        76,598        10,768  

Prepayments and other current assets

     7,616        38,124        5,360        42,923        6,035  

Amount due from a related party

     �          �          �          �          �    

Total current assets

     43,254        607,362        85,382        822,626        115,644  

Non-current assets:

              

Property, equipment, and software, net

     406        1,623        229        4,441        625  

Right of use assets

     239        2,275        320        1,566        220  

Prepayments on long-term assets

     �          �          �          112,856        15,865  

Total non-current assets

     645        3,898        549        118,863        16,710  

Total assets

     43,899        611,260        85,931        941,489        132,354  

LIABILITIES, AND SHAREHOLDERS� EQUITY

              

Current liabilities:

              

Accounts payable

     621        6,583        926        2,259        318  

Short-term debts

     �          �          �          �          �    

Contract liabilities

     �          3,002        422        1,115        157  

Income tax payable

     �          �          �          2,377        334  

Lease liabilities

     239        934        131        963        135  

Amounts due to related parties

     4,803        �          �          �          �    

Provision for warranty

     �          463        65        385        54  

Accrued liabilities and other current liabilities

     3,997        20,615        2,898        12,905        1,814  

Total current liabilities

     9,660        31,597        4,442        20,004        2,812  

Non-current liabilities:

              

Lease liabilities

     �          1,267        178        541        76  

Other non-current liabilities

     46        �          �          �          �    

Total non-current liabilities

     46        1,267        178        541        76  

Total liabilities

     9,706        32,864        4,620        20,545        2,888  

Total shareholders� equity

     34,193        578,396        81,311        920,944        129,466  

Total liabilities and shareholders� equity

     43,899        611,260        85,931        941,489        132,354  

 

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Summary Consolidated Statements of Cash Flow

 

    Years ended December 31,     For the nine months ended
September 30,
 
    2019     2020     2021     2021     2022  
    RMB�000     RMB�000     RMB�000     US$�000     RMB�000     RMB�000     US$�000  

Net cash (used in) provided by operating activities

    (5,987     15,586       395,420       55,587       220,332       316,209       44,452  

Net cash used in investing activities

    (165     (251     (1,770     (249     (1,070 )      (115,524 )      (16,240

Net cash provided by financing activities

    3,388       251       89,143       12,532       4,099       �         �    

Net (decrease)/increase in cash and cash equivalents

    (2,764     15,586       482,793       67,870       223,361       200,685       28,212  

Cash and cash equivalents, at the beginning of year

    6,805       4,041       19,627       2,759       19,627       502,420       70,629  

Cash and cash equivalents, at the end of year

    4,041       19,627       502,420       70,629       242,988       703,105       98,841  

Key Operating Data

The following table sets forth the breakdown of revenue, sales volume and average selling price (per unit) of ASIC chips delivered for the periods indicated:

 

    Years ended December 31,     For the nine months ended September 30,  
    2019     2020     2021     2021     2022  
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
 
    (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)  

ASIC chips

                             

ICQ510

    3,312       362,000       9.15       15,189       1,308,351       11.61       �         �         �         �         �         �         �         �         �    

SIPC100

    211       3,500       60.29       884       66,240       13.35       �         �         �         �         �         �         �         �         �    

ICQ520

    �         �         �         1,313       114,789       11.44       �         �         �         �         �         �         �         �         �    

ICT560

    �         �         �         10,486       622,015       16.86       83,770       1,437,544       58.27       29,437       439,816       66.93       42,793       598,264       71.53  

ICT570

    �         �         �         1,111       34,885       31.85       7,380       74,592       98.94       4,227       49,712       85.03       5,197       34,464       150.80  

ICT580

    �         �         �         1,075       36,350       29.57       �         �         �         �         �         �         3,858       32,880       117.34  

ICC590

    �         �         �         18,553       123,130       150.68       131,975       1,169,405       112.86       71,744       622,281       115.29       48,924       517,096       94.61  

ICA585

    �         �         �         �         �         �         �         �         �         �         �         �         148,079       328,924       450.19  

ICA586

    �         �         �         �         �         �         108,092       411,944       262.39       64,097       231,656       276.69       70,797       166,756       424.55  

ICA588

    �         �         �         �         �         �         206,823       1,706,716       121.18       119,275       894,300       133.37       61,605       533,100       115.56  

ICA589

    �         �         �         �         �         �         22,065       306,952       71.88       16,620       253,560       65.55       5,692       60,756       93.69  

IAA561

    �         �         �         �         �         �         �         �         �         �         �         �         19,148       252,727       75.77  

ICC551

    �         �         �         �         �         �         �         �         �         �         �         �         3,570       43,848       81.42  

Total

    3,523       365,500       9.64       48,611       2,305,760       21.08       560,105       5,107,153       109.67       305,400       2,491,325       122.59       409,663       2,568,815       159.48  

 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

There is no assurance that a cryptocurrency will maintain its long-term value, and volatility in the market prices of cryptocurrencies may adversely affect our business and results of operations.

As a relatively new product based on technologies developed in recent years, cryptocurrencies have only recently been accepted as a means of payment for goods and services by selected industries and in selected markets, and the use of cryptocurrencies by consumers to make payment remains limited. Additionally, as the value of most cryptocurrencies is not anchored by any reserve currency or precious metal, nor is it backed by any government or commercial enterprise, the long-term value of cryptocurrencies is uncertain, which may further increase the volatility in cryptocurrency prices. Banks and other established financial institutions may refuse to process funds for cryptocurrency transactions, process wire transfers to or from cryptocurrency exchanges, or maintain accounts for persons or entities transacting in cryptocurrencies.

Meanwhile, a significant portion of cryptocurrency demand is generated by speculators and investors seeking to profit from the short or long term holding of cryptocurrencies. The prices of cryptocurrencies may also be impacted by evolving and uncertain regulatory environment and the development of blockchain technology. According to Frost & Sullivan, the prices of alternative cryptocurrencies have experienced significant fluctuations during their limited history and may continue to fluctuate significantly in the future. As a result of the foregoing, the prices of cryptocurrencies have been quite volatile during its limited history.

Our business and financial condition highly correlate with market prices of cryptocurrencies. Our ASIC chip is the core component of the cryptocurrency mining machine. We price our ASIC chips with reference to the market price of cryptocurrencies and the expected economic return of cryptocurrency mining, among other factors. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, respectively, almost all of our revenue was generated from the sales of ASIC chips for cryptocurrency mining machines. Any wild fluctuations in the market price of cryptocurrencies may have a material adverse impact on our business, financial condition and results of operations. In addition, if there is a steep increase in the market price of cryptocurrencies, market demand for our ASIC chips is also likely to surge. In the event that our production and service capabilities cannot quickly catch up, we may lose our customers and market share. In addition, if market demand increases beyond our expectations, we may not be able to maintain an adequate inventory level of our finished goods, and may lose sales and market share to our competitors as a result.

On the other hand, if the market price of cryptocurrencies falls significantly, economic returns for mining activities as well as demand for our ASIC chips will likely drop rapidly. We may be exposed to increased inventory risks due to accumulating excessive inventory of our products or raw materials, parts and components for our products.

The industry in which we operate is characterized by constant changes. If we fail to innovate or to provide products that meet the expectations of our customers, we may be unable to attract new customers or retain existing customers, and as a result our business and results of operations may be adversely affected.

The industry in which we operate is characterized by constant changes, including rapid technological evolution, continual shifts in customer demand, frequent introductions of new products and solutions and

 

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constant emergence of new industry standards and practices. For example, algorithms used for mining a certain cryptocurrency may change from time to time, and our customers may demand ASIC chips with the latest algorithms that meet their requirements. Thus, our success will depend, in part, on our ability to respond to these changes in a cost-effective and timely manner. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant resources in research and development in order to keep our products competitive in the market.

However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our research and development results, which could result in excessive research and development expenses or delays. Given the fast pace with which blockchain technologies have been and will continue to be developed, we may not be able to timely upgrade our technologies in an efficient and cost-effective manner, or at all. In addition, new developments in deep learning, IoT, computer vision, blockchain and cryptocurrency could render our products obsolete or unattractive. If we are unable to keep up with the technological developments and anticipate market trends, or if new technologies render our technologies or solutions obsolete, customers may no longer be attracted to our products. As a result, our business, results of operations and financial condition would be materially and adversely affected.

As our current ASIC chips are mainly designed for cryptocurrency mining, any limitation on the usage and adaptation of cryptocurrency and any actual or perceived adverse development in the cryptocurrency market, which is rapidly and continuously evolving, can adversely affect our results of operations. As there is no wide consensus with respect to the value and application of cryptocurrency, any future development may continue to affect the price of cryptocurrency and as a result affect the demand for our current ASIC chips. In addition, any event or rumor that generates negative publicity for the cryptocurrency industry and market, such as allegations that cryptocurrency is used for money laundering or other illicit activities, could result in harm to our reputation, which in turn may negatively affect our results of operations.

Decentralization, or the lack of control by a central authority, is a key reason that cryptocurrencies have attracted many committed users. However, the decentralized nature of cryptocurrency is subject to growing discussion and suspicion. Individuals, companies or groups, as well as cryptocurrency exchanges that own vast amounts of cryptocurrencies, can affect the market price of cryptocurrency. Furthermore, mining equipment production and mining pool locations are becoming centralized. The suspicion about the decentralized nature of cryptocurrency may cause our customers to lose confidence in the prospects of the cryptocurrency industry. This in turn could adversely affect the market demand for our ASIC chips and our business.

We are subject to risks associated with legal, political or other conditions or developments regarding holding, using or mining of cryptocurrencies and related products and services, which could negatively affect our business, financial condition, and results of operations.

End users of our products are based across the world. As such, changes in government policies, taxes, general economic and fiscal conditions, as well as political, diplomatic or social events, expose us to financial and business risks. In particular, changes in domestic or overseas policies and laws regarding holding, using and/or mining of cryptocurrencies and related products and services could result in an adverse effect on our business operations and results of operations. Moreover, if any domestic or international jurisdiction where we operate or sell our ASIC chips prohibits or restricts cryptocurrency mining activities, we may face legal and other liabilities and may experience a material loss of revenue.

There are significant uncertainties regarding future regulations pertaining to the holding, using or mining of cryptocurrencies and related products and services, which may adversely affect our results of operations. While cryptocurrency has gradually gained more market acceptance and attention, it is anonymous and may be used for black market transactions, money laundering, tax evasion, terrorism or other illegal activities. As a result, governments may seek to regulate, restrict, control or ban the mining, use and holding of cryptocurrencies and related products and services. Our existing policies and procedures for the detection and prevention of money

 

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laundering and terrorism-funding activities through our business activities have only been adopted in recent years and may not completely eliminate instances in which we or our products may be used by other parties to engage in money laundering and other illegal or improper activities. We cannot assure you that there will not be a failure in detecting money laundering or other illegal or improper activities which may adversely affect our reputation, business, financial condition and results of operations.

With advances in technology, cryptocurrencies are likely to undergo significant changes in the future. It remains uncertain whether cryptocurrency will be able to cope with, or benefit from, those changes. In addition, as cryptocurrency mining employs sophisticated and high computing power devices that need to consume a lot of electricity to operate, future developments in the regulation of energy consumption, including possible restrictions on energy usage in the jurisdictions where we sell our products, may also affect our business operations and the demand for our current ASIC chips. There has been public backlash surrounding the environmental impact of cryptocurrency mining, particularly the large consumption of electricity, and governments of various jurisdictions have responded. For example, in the United States, certain local governments of the state of Washington have discussed measures to address environmental impact of cryptocurrency-related operations, such as the high electricity consumption of cryptocurrency mining activities. Pursuant to the Announcement on Prevention of Risks from Offering and Financing of Cryptocurrencies promulgated by seven PRC governmental authorities including the PBOC on September 4, 2017, and Guarding against the Speculative Risks of Cryptocurrency Trading promulgated by the National Internet Finance Association of China, the China Banking Association; and the Payment & Clearing Association of China on May 18, 2021, illegal activities in offering and financing of cryptocurrencies, including initial coin offerings (ICOs), are forbidden in the PRC because such activities may be considered to constitute illegal offering of securities or illegal fundraising. Furthermore, financial institutions and payment institutions shall not engage in businesses related to cryptocurrency offering or financing transactions. Pursuant to the Circular of the Regulating Cryptocurrency Mining Activities promulgated by eleven PRC governmental authorities including the PBOC on September 3, 2021, which aims to dispose of the �hidden risks� in cryptocurrency mining as it pursues China�s carbon-neutrality goals, and cryptocurrency mining is to be classified as a phased-out industry. This circular does not outlaw cryptocurrency mining completely, rather it orders local authorities to clamp down on illegal mining activities with plans to gradually phase out the industry. Investing in and constructing new mining projects will not be allowed and the existing mining projects will be given time to exit, and the entire industrial chain of the upstream and downstream of cryptocurrency mining activities will be tighten regulated. On September 15, 2021, ten PRC governmental authorities including the People�s Bank of China, or the PBOC, issued the Notice on Further Preventing and Disposing of Risks in Cryptocurrency Trading and Speculation. This notice reiterates that cryptocurrencies do not have the same legal status as legal currencies, and emphasizes that cryptocurrency-related businesses are illegal financing activities such as conducting exchanges between legal currencies and cryptocurrencies, exchanges among different cryptocurrencies, trading cryptocurrencies as a central counterparty, matching and pricing services for cryptocurrency transactions, token issuance and financing, and cryptocurrencies derivatives transactions. Cryptocurrency exchanges providing services to domestic residents are also illegal financial activities, and the relevant domestic staff and subjects providing marketing and promotion, payment and settlement, and technical support services for them will be investigated for knowingly participating in the cryptocurrency industry.

We derive a significant portion of our revenue from our ASIC chips. If the market for ASIC chips used in cryptocurrency mining machines ceases to exist or diminishes significantly, our business and results of operations would be materially harmed.

Historically, we derived a significant portion of our revenue from the sales of our proprietary ASIC chips, and this is expected to continue in the foreseeable future. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, sales of our ASIC chips accounted for 9.8%, 89.0%, 88.6%, 92.5% and 93.1% of our revenue, respectively. If the market for ASIC chips used in cryptocurrency mining machines ceases to exist or diminishes significantly, we would experience a significant loss of sales, cancelation of orders, or loss of customers for our ASIC chips. If we cannot maintain the scale and profitability of our ASIC chips, our business,

 

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results of operations and ability to continue to grow will suffer. Furthermore, excess inventories, inventory markdowns, brand image deterioration and margin squeeze caused by declining economic returns for miners or pricing competition for our ASIC chips could all have a material and adverse impact on our business, financial condition and results of operations.

We generate all of our revenue from sales to customers in the PRC. Any adverse development in the regulatory environment in the PRC could have a negative impact on our business, financial condition and results of operations.

We sell all of our ASIC chips to distributors in the PRC which in turn sell our products to cryptocurrency miners. We generate all of our revenue from customers in the PRC. If there is any adverse development in the regulatory environment concerning cryptocurrency mining in the PRC, our business, financial condition and results of operations will be materially and adversely affected. For example, on September 15, 2021, ten PRC governmental authorities including the PBOC issued the Notice on Further Preventing and Disposing of Risks in Cryptocurrency Trading and Speculation. This notice reiterates that cryptocurrencies do not have the same legal status as legal currencies, and emphasizes that cryptocurrency-related businesses are illegal financing activities such as conducting exchanges between legal currencies and cryptocurrencies, exchanges among different cryptocurrencies, trading cryptocurrencies as a central counterparty, matching and pricing services for cryptocurrency transactions, token issuance and financing, and cryptocurrencies derivatives transactions. See �Regulation � Regulations and Government Policies Relating to the Cryptocurrency� for details. There is no assurance that we will be able to effectively respond to any changes in PRC industrial policies as well as their implementation and interpretation. To the extent we are not able to generate sufficient sales from overseas markets to offset any decrease in demand from our PRC customers, our business and results of operations will be negatively impacted. In particular, if the PRC government completely bans the mining, even the upstream and downstream industry of the mining, possession and use of cryptocurrency, we will not be able to sell our products in the PRC, and we may not be able to generate sufficient sales overseas to make up for such loss of business in the PRC.

In addition, PRC government authorities have broad powers to adopt regulations and other requirements affecting or restricting our operations, including tax policies. Moreover, these relevant regulatory authorities possess significant powers to enforce applicable regulatory requirements in the event of our non-compliance, including the imposition of fines, sanctions or the revocation of licenses or permits to operate our business. We cannot assure you that we will not face administrative fines or penalties concerning our operations or our subsidiaries, which could have a material adverse impact on our results of operation.

Our ASIC chips business depends mainly on supplies from a single third-party foundry, and any failure to obtain sufficient foundry capacity from this foundry would significantly delay the shipment of our products.

As a fabless IC design company, we do not own any IC fabrication facilities. A leading semiconductor foundry has been our major third-party foundry partner for our ASIC chips business (the �Foundry Partner�). In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, the value of the ICs we purchased from the Foundry Partner accounted for 60.6%, 84.0%, 45.3%, 47.4% and 58.9%, respectively, of our total procurement for the respective periods. It is important for us to have a reliable relationship with the Foundry Partner and other future foundry service providers to ensure adequate product supply to respond to customer demand.

We cannot guarantee that the Foundry Partner will be able to meet our manufacturing requirements. The ability of the Foundry Partner to provide us with foundry services is limited by its technology migration, available capacity and existing obligations. If the Foundry Partner fails to succeed in its technology migration, it will not be able to deliver to us qualified ICs, which will significantly affect our technological advancement and shipment of ASIC chips. This could in turn result in lost sales and have a material adverse effect on our relationships with our customers and on our business and financial condition. In addition, we do not have a

 

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guaranteed level of production capacity from the Foundry Partner. We do not have long-term contracts with the Foundry Partner, and we source our supplies on a purchase order basis and prepay the purchase amount. As a result, we depend on the Foundry Partner to allocate to us a portion of its manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable final test yields and to deliver those products to us on a timely basis and at acceptable prices. If the Foundry Partner raises its prices or is unable or unwilling to meet our required capacity for any reason, such as shortages or delays in the shipment of semiconductor equipment or raw materials required to manufacture our ICs, or if our business relationships with the Foundry Partner deteriorate, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all. Moreover, it is possible that other customers of the Foundry Partner that are larger and/or better financed than we are, or that have long-term contracts with it, may receive preferential treatment in terms of capacity allocation or pricing. In addition, if we do not accurately forecast our capacity needs, the Foundry Partner may not have available capacity to meet our immediate needs or we may be required to pay higher costs to fulfill those needs, either of which could materially and adversely affect our business, operating results or financial condition.

In particular, the production of our ASIC chips may require advanced IC fabrication technologies, and foundries other than the Foundry Partner might not have sufficient production capacity for such technologies, if at all, to meet our requirements. This may expose us to risks associated with engaging new foundries. For example, using foundries with which we have not established relationships could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation.

Other risks associated with our dependence on a single third-party foundry include limited control over delivery schedules and quality assurance, lack of capacity in periods of excess demand, unauthorized use of our intellectual property and limited ability to manage inventory and parts. In particular, although we have entered into confidentiality agreements with our Foundry Partner for the protection of our intellectual property, it may not protect our intellectual property with the same degree of care as we use to protect our intellectual property. See ��If we fail to adequately protect our intellectual property rights, our ability to compete effectively or to defend ourselves from litigation could be impaired, which could reduce our total revenue and increase our costs.� If we fail to properly manage any of these risks, our business and results of operations may be materially and adversely affected.

Moreover, if the Foundry Partner suffers any damage to its facilities, suspends manufacturing operations, loses benefits under material agreements, experiences power outages or computer virus attacks, lacks sufficient capacity to manufacture our products, encounters financial difficulties, is unable to secure necessary raw materials from its suppliers or suffers any other disruption or reduction in efficiency, we may encounter supply delays or disruptions.

Mining difficulty for any reason would negatively affect the economic returns of cryptocurrency mining activities, which in turn would decrease the demand for and/or pricing of our products.

The difficulty of cryptocurrency mining, or the amount of computational resources required for a set amount of reward for recording a new block, directly affects the expected economic returns for cryptocurrency miners, which in turn affects the demand for our ASIC chips. Cryptocurrency mining difficulty is a measure of how much computing power is required to record a new block and it is affected by the total amount of computing power in the cryptocurrency network. The cryptocurrency algorithm is designed so that one block is generated within a certain time period, no matter how much computing power is in the network. Thus, as more computing power joins the network, and assuming the rate of block creation does not change, the amount of computing power required to generate each block increases and hence the mining difficulty also increases. In other words, based on the current design of the cryptocurrency network, cryptocurrency mining difficulty would increase together with the total computing power available in the cryptocurrency network, which is in turn affected by the number of cryptocurrency mining machines in operation. As a result, strong growth in sales of our ASIC chips can contribute to further growth in the total computing power in the network, thereby driving up the difficulty of

 

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cryptocurrency mining and resulting in downward pressure on the expected economic return of cryptocurrency mining and the demand for, and pricing of, our products.

Cryptocurrency exchanges and wallets, and to a lesser extent, the cryptocurrency network itself, may suffer from hacking and fraud risks, which may erode user confidence in cryptocurrency which would in turn decrease the demand for our ASIC chips that are used in cryptocurrency mining machines.

Cryptocurrency transactions are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. Hackers can target cryptocurrency exchanges and cryptocurrency transactions so as to gain access to thousands of accounts and digital wallets where cryptocurrencies are stored. Cryptocurrency transactions and accounts are not insured by any type of government program and all cryptocurrency transactions are permanent because there is no third party or payment processor. Cryptocurrency has suffered from hacking and cyber-theft as such incidents have been reported by several cryptocurrency exchanges and miners, highlighting concerns about the security of cryptocurrency and therefore affecting its demand and price. Also, the price and exchange of cryptocurrency may be affected due to fraud risk. While cryptocurrency uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false cryptocurrencies. All of the above may adversely affect the operation of the cryptocurrency network which would erode user confidence in cryptocurrency, and which would negatively affect demand for our products

Cryptocurrency mining activities are energy-intensive. The availability and cost of electricity will restrict the geographic locations of mining activities, thereby restricting the geographic locations of miners and sales of our products.

Cryptocurrency mining activities are inherently energy-intensive and electricity costs account for a significant portion of the overall mining costs. The availability and cost of electricity will restrict the geographic locations of mining activities. Any shortage of electricity supply or increase in electricity cost in a jurisdiction may negatively impact the viability and the expected economic return for cryptocurrency mining activities in that jurisdiction, which may in turn decrease the sales of our ASIC chips in that jurisdiction.

In addition, the significant consumption of electricity may have a negative environmental impact, including contribution to climate change, which may give rise to public opinion against allowing the use of electricity for cryptocurrency mining activities or government measures restricting or prohibiting the use of electricity for cryptocurrency mining activities. Any such development in the jurisdictions where we sell our ASIC chips that are used in cryptocurrency mining machines could have a material and adverse effect on our business, financial condition and results of operations.

Failure at tape-out or failure to achieve the expected final test yields for our ASIC chips could negatively impact our operating results.

The tape-out process is a critical milestone in our business. A successful tape-out means all the stages in the design and verification process of our ASIC chips have been completed, and the product is ready to be sent for manufacturing. A tape-out will be either a success or a failure, and in the latter case design modifications will be needed. The tape-out process is very costly, and repeated failures can significantly increase our costs, lengthen our product development period and delay our product launch. While we have consistently achieved successful initial tape-outs in the initial batch historically, we cannot assure you that we will be able to continue to have a high tape-out success rate in the future.

Once tape-out is successful, the ASIC design is sent for manufacturing, and the final test yield is a measurement of the production success rate. The final test yield is a function of both of product design, which is developed by us, and process technology, which typically belongs to a third-party foundry, such as the Foundry Partner in our case. While we have historically achieved high final test yields, such as 97% in 2019, 99% in

 

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2020, 99% in 2021, 98% in the nine months ended September 30, 2021 and 99% in the nine months ended September 30, 2022, we cannot assure you that we will be able to maintain such high final test yields in the future. Low final test yields can result from either a product design deficiency or a process technology failure or a combination of both. As such, we may not be able to identify problems causing low final test yields until our product designs go to the manufacturing stage, which may substantially increase our per unit costs and delay the launch of new products.

For example, if the Foundry Partner experiences manufacturing inefficiencies or encounters disruptions, errors or difficulties during production, we may fail to achieve acceptable final test yields or experience product delivery delays. We cannot be certain that the Foundry Partner will be able to develop, obtain or successfully implement process technologies needed to manufacture future generations of our products on a timely basis. Moreover, during the periods in which foundries are implementing new process technologies, their manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to smaller geometry process technologies could have a material and adverse effect on us, particularly if our competitors transition to such technologies before us.

In addition, resolution of yield problems requires cooperation among us, the Foundry Partner and package and test partners. We cannot assure you that the cooperation will be successful and that any yield problems can be fixed.

Any failure of our products to meet the necessary quality standards could adversely affect our reputation, business and results of operation.

The quality of our products is critical to the success of our business and depends significantly on the effectiveness of our and of our manufacturing service providers� quality control systems. In our efforts to quickly meet new market trends and demand and to adopt new technologies, our products may not have adequate time to go through our normal rigorous testing procedures and final inspection, which could result in instances where our products cannot reach the required performance standard, or our products are found to be defective. These instances could result in our customers suffering losses. Defects detected before product delivery to our customers may result in additional costs for remediation and rework. Defects detected after the delivery and installation of our products may result in our incurring further costs relating to inspection, installation, remediation or product return, which may result in damages to our reputation, loss of customers, government fines and disputes and/or litigation.

In addition, we outsource a portion of our product manufacturing process to certain production partners, and in those instances we require these production partners to purchase parts and components from other third-party suppliers. Although we carry out quality inspections for the manufacturing process and the parts and components purchased by our production partners, we cannot assure you that we will always be able to detect defects in the manufacturing process or the parts and components purchased. Any defect in our third party manufacturing process or parts and components purchased by them may lead to defects in our finished products, which may in turn increase our costs as well as damage our reputation and market share. We may not be able to procure contractual or other indemnities from the suppliers of the defective parts and components adequately, or at all. We may be subject to product liability claims and litigation for compensation which could result in substantial and unexpected expenditures and could materially and adversely affect our cash flow and operating results.

We may be unable to make the substantial investments in research and development that are required to remain competitive in our business.

Advances in cryptocurrency mining technology and the semiconductor industry have led to increased demand for ICs of higher speed and power efficiency for solving computational problems of increasing complexity. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, we incurred research and development expenses of RMB9.1 million, RMB22.5 million, RMB53.2 million (US$7.5 million),

 

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RMB25.4 million and RMB38.4 million (US$5.4 million), respectively. We are committed to investing in new product development in order to stay competitive in our markets. We are driven by market demand, and we intend to continue to broaden and enhance our product portfolio in order to deliver the most effective solutions to our customers. Nevertheless, if we are unable to generate enough revenue or raise enough capital to make adequate research and development investments going forward, our product development and relevant research and development initiatives may be restricted or delayed, or we may not be able to keep pace with the latest market trends and satisfy our customers� needs, which could materially and adversely affect our results of operations. Furthermore, our research and development expenditures may not yield the expected results that enable us to roll out new products, which in turn will harm our prospects and results of operations.

Failure to maintain inventory levels in line with the approximate level of demand for our products could cause us to lose sales, expose us to increased inventory risks and subject us to increases in holding costs, risk of inventory obsolescence, increases in markdown allowances and write-offs, any of which could have a material adverse effect on our business, financial condition and results of operations.

To operate our business successfully and meet our customers� demands and expectations, we must maintain a certain level of finished goods inventory to ensure immediate delivery when required. However, forecasts are inherently uncertain. If our forecasted demand is lower than actual demand, we may not be able to maintain an adequate inventory level of our finished goods or produce our products in a timely manner, and we may lose sales and market share to our competitors. On the other hand, we may also be exposed to increased inventory risks due to accumulated excess inventory of our products or raw materials, parts and components for our products. Excess inventory levels may lead to increases in inventory holding costs, risks of inventory obsolescence and provisions for write-downs. The carrying value of our inventories were RMB9.5 million, RMB66.8 million (US$9.4 million) and RMB76.6 million (US$10.8 million) as of December 31, 2020 and 2021 and September 30, 2022, respectively.

The average selling prices of our products may decrease from time to time due to technological advancement and we may not be able to pass such decreases onto our suppliers, which may in turn adversely affect our profitability.

The IC design industry is characterized by rapid launches of new products, continuous technological advancements and changing market trends and customer preferences, all of which have generally translated to a shorter life cycle and a gradual decrease in the average selling prices of products over time. Because we compete in the environment of rapidly-evolving technology advancement and market trends and developments of the IC design industry, there are no assurances that we will be able to pass on any decrease in average selling prices of our products to our suppliers. In the event that average selling prices of our products unusually or significantly decrease and such decreases cannot be offset by a corresponding decrease in the prices of the principal components of our products, our gross profit margins may be materially and adversely affected, which in turn, may adversely affect our profitability.

If we are unable to effectively execute our growth strategies, maintain our rapid growth trends and manage risks associated with expanding the scale of our operations, our ability to grow our business and establish our overseas market may be negatively affected.

We have experienced rapid growth and significantly expanded our business in recent years. Our total revenue grew from RMB35.8 million for 2019 to RMB54.6 million for 2020 and further grew significantly to RMB631.8 million (US$88.8 million) for 2021. Our total revenue increased significantly from RMB330.3 million for the nine months ended September 30, 2021 to RMB440.1 million (US$61.9 million) for the nine months ended September 30, 2022. We may not be able to grow our revenue in the future if we are not able to successfully execute our product development and diversification, geographic expansion and other growth plans. In addition, our rapid growth has placed and will continue to place significant demands on our management and our administrative, operational, research and development and financial resources.

 

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To accomplish our growth strategies and manage the future growth of our operations, we will be required to enhance our research and development capabilities, improve our operational and financial systems and internal controls, and expand, train and manage our growing employee base. Furthermore, we need to maintain and expand our relationships with our customers, suppliers, research institutions, third-party manufacturers and other third parties. Moreover, as we introduce new products or enter new markets, we may face new market, technological, operational and regulatory risks and challenges with which we are unfamiliar.

Our current and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth and expansion. The success of our growth strategies depends on a number of external factors, such as the growth of the semiconductor market and the demand for cryptocurrency, the level of competition we face and evolving customer behavior and preferences. If we are unable to execute our growth strategies or manage our growth effectively, we may not be able to capture market opportunities or respond to competitive pressures, which may materially and adversely affect our business prospects and results of operations.

As part of our growth strategy, we plan to expand our sales outside of the PRC. As we continue to grow our business and expand our operations globally, we will continue to sell our products into new jurisdictions in which we have limited or no experience and in which our brands may be less recognized. The expansion exposes us to a number of risks, including:

 

   

difficulty in managing multinational operations;

 

   

we may face competitors in the overseas markets who are more dominant and have stronger ties with customers and greater financial and other resources;

 

   

fluctuations in currency exchange rates;

 

   

challenges in providing customer services and support in these markets;

 

   

challenges in managing our international sales channels effectively;

 

   

unexpected transportation delays or interruptions or increases in international transportation costs;

 

   

difficulties in and costs of exporting products overseas while complying with the different commercial, legal and regulatory requirements of the overseas markets in which we offer our products;

 

   

difficulty in ensuring that our customers comply with the sanctions imposed by the Office of Foreign Assets Control of the U.S., or OFAC, on various foreign states, organizations and individuals;

 

   

inability to obtain, maintain or enforce intellectual property rights;

 

   

inability to effectively enforce contractual or legal rights or intellectual property rights in certain jurisdictions under which we operate;

 

   

changes in a specific country or region�s political or economic conditions or policies;

 

   

unanticipated changes in prevailing economic conditions and regulatory requirements; and

 

   

governmental policies favoring domestic companies in certain foreign markets or trade barriers including export requirements, tariffs, taxes and other restrictions and charges. In particular, there have been concerns over the exit of the United Kingdom from the European Union, a worldwide trend in favor of nationalism and protectionist trade policy and the ongoing trade dispute between the United States and China as well as other potential international trade disputes, all of which could cause turbulence in international markets. These government policies or trade barriers could increase the prices of our products and make us less competitive in such countries.

If we are unable to effectively manage these risks, our ability to expand our business abroad will be impaired, which could have a material and adverse effect on our business, financial condition, results of operations and prospects.

 

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Our limited operating history and rapid revenue growth may make it difficult for us to forecast our customer demand and our business development, or to assess the volatility in our business.

As the markets for ASIC chips are relatively young and still developing, we cannot forecast longer-term demand or order patterns for our products. We commenced our operation in December 2017. Because of our limited operating history and historical data, as well as the limited visibility into future demand trends for our products, we may not be able to accurately forecast our future revenue and budget our operating expenses accordingly. As most of our expenses are fixed in the short-term or incurred in advance of anticipated total revenue, we may not be able to adjust our expenses in a timely manner in order to offset any shortfall in revenue.

We have experienced fluctuations in orders during our limited operating history, and we expect such volatility to occur in the future. For example, foundries need other electronic components to manufacture our ASIC chips. These electronic components are also used in the manufacture of traditional consumer electronic products. As a result, to the extent there are cycles and fluctuations in the consumer electronics industry, they may have an impact on the supply of our raw materials. If we or our foundry partner are unable to secure raw materials due to these factors, or if any of our third-party manufacturing service providers are unable to increase production of new or existing products to meet any increases in demand, our total revenue would be adversely affected and our reputation with our customers may be damaged.

We rely on a limited number of third parties to package and test our products.

In addition to IC fabrication, we rely on a limited number of production partners, including the ASE Group and ACCESS for IC packaging and testing services. We also maintain collaborative relationships with several semiconductor component manufacturers. Reliance on these third parties for the testing and packaging of our ASIC chips presents significant risks to us, including the following:

 

   

limited control over delivery schedules, quality assurance, final test yields and production costs;

 

   

potential failure to obtain, or delay in obtaining, key process technologies;

 

   

failure by us to find an alternative supplier;

 

   

capacity shortages during periods of high demand;

 

   

shortages of materials;

 

   

unauthorized use of our intellectual property;

 

   

limited warranties on ICs or products supplied to us; and

 

   

potential increases in prices.

The ability and willingness of our production partners to adequately and timely perform is largely beyond our control. If one or more of these production partners fail to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. If any of our production partners fail to deliver quality products and components to us on time and at reasonable prices, we could face difficulties in fulfilling our customers� orders, our total revenue could decline and our business, financial condition and results of operations would be adversely affected.

Our prepayments to suppliers may subject us to counterparty risk associated with such suppliers and negatively affect our liquidity and cash position.

We may incur net cash outflows at an early stage of our production because we are required to prepay the Foundry Partner before the service is provided in order to secure the foundry service provider�s production capacity. As of December 31, 2020 and 2021 and September 30, 2022, the outstanding balance of prepayments we made to our foundry service providers amounted to approximately RMB5.7 million, RMB31.6 million

 

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(US$4.4 million) and RMB24.0 million (US$3.4 million), respectively. The amount of our prepayments can significantly increase at the beginning of our launch of advanced products in the future. We are subject to counterparty risk exposure to our suppliers. Any failure by our suppliers to perform their contractual obligations in a timely manner and/or in accordance with our requested quality may result in us not being able to fulfill customers� orders accordingly. In such event, we may not be able to receive back the prepayments in a timely manner or in full, or at all, notwithstanding that our suppliers are obligated to return such prepayments upon meeting certain conditions. Furthermore, such prepayments also put cash pressure on us and if the cash outflows for the prepayments significantly exceed the cash inflows during any period, our future liquidity and cash position will be adversely affected.

We had a concentration of credit risk because we derived our revenue from a limited number of customers

We sell our ASIC chips to distributors, who then install the chips in end applications and sell the products embedded with our chips to end users, including both companies and individuals. Our customer base consists of distributors located in the PRC. For the year ended December 31, 2019, we derived our revenue from five customers, with the top two customers contributing approximately 97.9% of our total revenue. For the year ended December 31, 2020, we had 12 customers, among which two customers each accounted for over 10% of our total revenue with one accounting for approximately 60.4% and the other accounting for 15.1%. For the year ended December 31, 2021, we had 24 customers with three contributing more than 10% of our revenue each, accounting for 24.6%, 22.9% and 17.8%, respectively, of our revenue. For the nine months ended September 30, 2022, we had five customers with three contributing more than 10% of our total revenue each, accounting for 45.6%, 34.1% and 18.3%, respectively. Generally, we either require prepayment in full or offer alternate payment plans for customers to prepay a certain percentage with the remainder to be settled after delivery of our products. We cannot assure you that we will not see concentration of accounts receivable from a small number of customers in the future. In such case, if any of these customers defaults on its payment obligations to us, we will not be able to recover the related accounts receivable, and our business, financial condition and results of operations may be materially and adversely affected.

Power shortages, labor disputes and other factors may result in constraints on our production activities.

The production of our ASIC chips is dependent on adequate supplies of power and labor. If our production partner experiences power shortages or labor disputes for any reason, it would likely result in disruptions to the production activities we outsource to them. For example, in October 2021, one of our production partners in Guangdong province had to reduce the number of workdays in a week due to government-mandated power outages. There can be no assurance that our operations will not be affected by power shortages, labor disputes or other factors in the future, thereby causing material production disruptions and delays in our delivery schedule. In such event, our business, results of operations and financial condition could be materially and adversely affected.

We face intense competition and our competitors may employ aggressive pricing strategies, which can lead to a price reduction of our products and material adverse effect on our results of operations.

We operate in highly competitive industries for ASIC chips used in cryptocurrency mining solutions, and we may look to enter into markets with very competitive landscapes. Our competitors include many well-known domestic and international players, and we face competitors that are larger than us and have advantages over us in terms of economies of scale and financial and other resources. We expect that competition in our markets will continue to be intense, as we compete not only with existing players that have been focusing on the design of ASIC chips, but also new entrants that include well-established players in the semiconductor industry, or players that have not been predisposed to this industry in the past. Some of these competitors may also have stronger brand names, greater access to capital, longer histories, longer relationships with their suppliers or customers and more resources than we do. Furthermore, these competitors may be able to adapt to changes in the industry more promptly and efficiently. Intense competition from existing and potential competitors could result in material price reductions in the products we sell or a decrease in our market share. Aggressive pricing strategies by our

 

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competitors and an abundant supply of ASIC chips in the market may cause us to reduce the prices of our products and also negatively affect the demand for our products or harm our profitability. If we fail to compete effectively and efficiently or fail to adapt to changes in the competitive landscape, our business, financial condition and results of operations may be materially and adversely affected.

If we fail to adequately protect our intellectual property rights, our ability to compete effectively or to defend ourselves from litigation could be impaired, which could reduce our total revenue and increase our costs.

We develop and protect our intellectual property portfolio by registering our patents, copyrights, IC layout design rights, utility models, trade secret laws and confidentiality agreements, non-compete agreements and nondisclosure agreement with our employees and others to protect our proprietary rights. However, we cannot assure you that the strategies and steps we are taking are sufficient to protect our intellectual property rights or that, notwithstanding legal protection, others do not or will not infringe or misappropriate our intellectual property rights. If we fail to adequately protect our intellectual property rights, or if changes in laws diminish or remove the current legal protections available to them, the competitiveness of our products may be eroded and our business could suffer. As of the date of this prospectus, we have registered five trademarks and a total of seven patents in the PRC, including three inventions and four utility model patents. As of the same date, we have registered ten software copyrights and 23 IC layout-design rights in the PRC. The rights granted to us under our patents, IC layout-design rights and copyrights, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage. In addition, they could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Any failure of our patents, copyrights and IC layout-design rights to adequately protect our technologies may allow our competitors to offer similar products or technologies. We may not be able to protect our intellectual property rights in some countries where our products may be sold in the future. Even if intellectual property rights are granted outside of the PRC, effective enforcement in those countries may not be available to us, primarily due to the relatively weak legal regime protecting intellectual property rights in those countries and the difficulties to defend and enforce such rights. Accordingly, we may not be able to effectively protect our intellectual property rights in those countries. Many companies have encountered substantial intellectual property infringement in the PRC as well as in many of the countries where we may sell our products in the future.

Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may already have occurred or may occur in the future without our knowledge. Any failure by us to effectively protect our intellectual property could reduce the value of our technologies and impair our ability to compete. We may in the future need to initiate infringement claims or litigation. Litigation can be expensive and time-consuming and may divert the efforts of our technical staff and managerial personnel, which could result in lower total revenue and higher expenses, whether or not such litigation results in a determination favorable to us.

We may face intellectual property infringement claims or other related disputes, which could be time-consuming, costly to defend or settle and result in the loss of significant rights and lower sales.

As is typical in the semiconductor industry, we may be subject to infringement claims from time to time or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties that may cover some of our technology, products and services. The semiconductor industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce these rights. Patent litigation has increased in recent years owing to increased assertions made by intellectual property licensing entities and to increasing competition and overlap of product functionality in our markets. Additionally, we have in the past entered into and may continue in the future continue to enter into licensing agreements with third parties for the use of their proprietary technologies, primarily software development tools, in the development of our products. As with any business relationship, we may face disputes and lawsuits related to those intellectual property licensing agreements. As our operations

 

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continue to grow in size and scale, the likelihood of us becoming involved in intellectual property related lawsuits and disputes to protect or defend our intellectual property rights and the use of third-party intellectual property rights will likely increase.

In addition, it is extremely difficult for us to monitor all of the patent applications that have been filed in the PRC, the United States or in other countries or regions and to determine whether, if such pending patents are granted, such patents would have a material and adverse effect on our business if our product and service offering were to infringe upon them.

Third parties may file claims against us or our customers alleging that our products, processes, or technologies infringe their patents or intellectual property rights. Regardless of their merits or resolutions, such claims would likely be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. In addition, some of our customer agreements in the future may require us to indemnify and defend our customers from third-party infringement claims and to pay damages in the case of adverse rulings. As such, claims of this sort also could harm our relationships with our customers and may deter future customers from doing business with us. We do not know whether we could prevail in any such proceeding given the complex technical issues and inherent uncertainties involved in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

   

cease the manufacturing, use or sale of the infringing products, processes or technologies;

 

   

stop shipment to certain geographic areas;

 

   

pay substantial damages for infringement;

 

   

expend significant resources to develop non-infringing processes, technologies or products;

 

   

license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

 

   

cross-license our technology to a competitor in order to resolve an infringement claim, which could weaken our ability to compete with that competitor; or

 

   

pay substantial damages to our customers to discontinue their use of or replace infringing products sold to them with non-infringing products.

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

We have identified two material weaknesses in our internal controls as of December 31, 2021. If we fail to maintain an effective system of internal controls, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of the ADSs may be adversely affected.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls. In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2019, 2020 and 2021, we and our independent registered public accounting firm identified two material weaknesses in our internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The two material weaknesses identified relate to the following: (a) during its audit, our independent registered public accounting firm noted that our internal control over financial reporting was not effective due to (i) inadequate segregation of duties and effective risk assessment; (ii) lack of personnel adequately trained in U.S. GAAP; and (iii) insufficient written policies and procedures for accounting and financial reporting with

 

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respect to the requirements and application of both U.S. GAAP and SEC guidelines for reporting and compliance; and (b) we do not have control in place to ensure that all Board meetings are documented in the meeting minutes.

In addition, we and our independent registered public accounting firm identified a significant deficiency relating to our cash management in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2019 and 2020. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. During its audit, our independent registered public accounting firm noted that our bank reconciliations were not signed by the preparer and reviewer. This significant deficiency was subsequently fully remedied and no longer existed in 2021.

We have begun and will continue to implement measures to address the material weaknesses. See �Management�s Discussion and Analysis of Financial Condition and Results of Operations�Internal Control over Financial Reporting.� However, the implementation of those measures may not fully remediate these material weaknesses in a timely manner. In the future, we may determine that we have additional material weakness or other deficiencies, or our independent registered public accounting firm may disagree with our management�s assessment of the effectiveness of our internal controls. Our failure to correct these material weakness or our failure to discover and address any other material weakness could result in inaccuracies in our financial statements and impair our ability to comply with the applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

We have incurred negative cash flows from operating activities in the past and can provide no assurance of our future operating results.

We have experienced negative cash flows from operating activities in the amount of RMB6.0 million for the year ended December 31, 2019. We will need to generate and sustain increased revenue levels in future periods in order to increase profitability, and, even if we do, we may not be able to maintain or increase our level of profitability over the long term. We cannot assure you that we will be able to generate positive cash flow from operating activities in the future or that we will be able to continue to obtain financing on acceptable terms or at all. Our ability to achieve profitability and positive cash flow from operating activities will depend on a mix of factors, some of which are beyond our control, including the price of cryptocurrencies, our ability to grow our business and our ability to secure favorable commercial terms from suppliers.

The loss of any member of our senior management team, or our failure to attract, train and retain qualified personnel, especially our research and development personnel, could impair our ability to grow our business and effectively execute our business strategy.

Since our inception, the growth and expansion of our business operations have been dependent upon the business strategies and foresight of our senior management. Our future success depends, in large part, on the continued contributions of our senior management team, specifically our founders Mr. Qiang Ding and Mr. Chaohua Sheng.

In addition, our future success depends on our ability to retain, attract and incentivize qualified personnel, including our management, sales, marketing, finance and especially research and development personnel. As the driver of our technological and product innovations, our research and development personnel represent a very significant asset of ours. As the technology in the semiconductor industry is advancing at a quick pace, there is an increasing need for skilled engineers. Many companies across the world are struggling to find suitable candidates for their research and development positions. The process of hiring employees with the combination of skills and characteristics required to implement our strategy can be extremely competitive and time-consuming. We cannot assure you that we will be able to attract adequate personnel as we continue to pursue our business strategies.

 

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Moreover, we cannot assure you that we will be able to retain key existing employees. The loss of any of our founders, senior management or research and development team members could harm our ability to implement our business strategies and respond to the rapidly changing market conditions in which we operate, or could result in other operating risks. The loss of one or more of our key employees, especially our key research and development personnel which includes our founders, or our inability to retain, attract and motivate qualified research and development personnel, could have a material adverse effect on our business, financial condition and results of operations.

Our research and development activities may not result in the successful development of new products.

We are committed to various research and development activities for the growth of our business. These activities and efforts include launch of new products in the field of IoT through the development of our two technology platforms to diversify our product offerings and broaden the applications of our proprietary technologies. For details of our research and development, please refer to the section headed �Business � Our Strategies� in this prospectus.

There is no assurance that any research and development activities conducted by us will be completed within the anticipated time frame or that the costs of such research and development activities can be fully or partially recovered. We cannot assure you that we can ultimately commercially produce and market new products. Furthermore, if our research and development activities do not result in the successful development of new products, our reputation, business prospects, financial conditions and results of operations could be materially and adversely affected.

Our corporate actions are significantly influenced by our co-founders, who have the ability to exert significant influence over important corporate matters that require approval of shareholders while their interests may differ from those of the other shareholders. This may deprive you of the opportunity to receive a premium for your ADSs and materially reduce the value of your investment.

Immediately prior to the completion of this offering, our outstanding share capital will be re-designated into Class A ordinary shares and Class B ordinary shares. Each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to ten votes at general meetings of our shareholders. Immediately after the completion of this offering, our co-founders Mr. Qiang Ding and Mr. Chaohua Sheng, will beneficially own 100% of our issued and outstanding Class B ordinary shares, representing approximately 92.3% of the aggregate voting power of our issued and outstanding share capital assuming the underwriters do not exercise their option to purchase additional ADSs. The interests of our co-founders may differ from the interests of other shareholders. This concentration of ownership and the protective provisions in our amended and restated memorandum and articles of association, which will become effective upon the completion of this offering, may, among other things, discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. We may not be able to enter into other transactions that could be beneficial to us without the consent of our co-founders. As a result of the foregoing, the value of your investment could be materially reduced.

We will be a �controlled company� within the meaning of the rules of Nasdaq and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

Upon the completion of this offering, we will be a �controlled company� as defined under the rules of Nasdaq because Mr. Qiang Ding, one of our co-founders, the chairman of the board of directors and chief executive officer, will hold more than 50% of the aggregate voting power of our total issued and outstanding share capital. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including exemptions from the rule that a nomination and corporate governance committee composed entirely of independent directors and a compensation committee composed entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

 

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We may engage in acquisitions or strategic alliances that could disrupt our business, result in increased expenses, reduce our financial resources and cause dilution to our shareholders. We cannot assure you that such acquisitions or strategic alliances may be successfully implemented.

Although we have not engaged in acquisitions or strategic alliances in the past, we may look for potential acquisitions or strategic alliances in the future to expand our business. However, we may not be able to find suitable acquisition candidates, complete acquisitions on favorable terms, if at all, or integrate any acquired business, products or technologies into our operations. If we do complete acquisitions, they may be viewed negatively by customers or investors and they may not enable us to strengthen our competitive position or achieve our goals. In addition, any acquisitions that we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Moreover, acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and other uses, and could result in increases in amortization expenses related to identifiable intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt. We cannot predict the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating results.

Cyber-security incidents, including data security breaches or computer viruses, could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.

We receive, process, store and transmit, often electronically, the data of our customers and others, much of which is confidential. Unauthorized access to our computer systems or stored data could result in the theft, including cyber-theft, or improper disclosure of confidential information, and the deletion or modification of records could cause interruptions in our operations. These cyber-security risks increase when we transmit information from one location to another, including over the internet or other electronic networks. Despite the security measures we have implemented, our facilities, systems and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our customers and others. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information of our customers or others, whether by us or a third party, could (i) subject us to civil and criminal penalties, (ii) have a negative impact on our reputation, or (iii) expose us to liability to our customers, third parties or government authorities. We are not aware of such breaches to date. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

Preferential tax treatment currently available to us in the PRC could be discontinued or reduced.

As a foreign-invested enterprise in the PRC in IC design industry, according to Announcement on Corporate Income Tax Policies for Promoting High-quality Development of the Integrated Circuit and Software Industries issued by the Ministry of Finance and other relevant authorities on December 11, 2020, our PRC subsidiary Shanghai Intchains qualifies for preferential tax treatment which allows it to be exempt from paying EIT for the first two years after it begins to generate taxable income, and to pay EIT at half of the statutory rate for the following three years. Shanghai Intchains expects to generate taxable income for the first time for the year ending December 31, 2021. When the benefits we currently receive under this preferential tax treatment expire in the future and if we do not receive any new and comparable preferential tax treatment, our financial condition and results of operations may be materially and adversely affected. In addition, we received tax refund of VAT, EIT, personal income tax and stamp duty from local government at certain percentages according to agreements entered annually since 2019. We cannot assure you that we will continue to qualify for these tax abatements or refunds in the future, or that the policies providing for them will remain in effect.

Shanghai Intchains was certified as a High-tech Enterprise in Shanghai, and has also been entitled to an EIT rate of 15.0% from October 28, 2019 to October 28, 2022. Under the PRC Enterprise Income Tax Law, or the

 

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EIT Law, and its relevant regulations, PRC companies are typically subject to an income tax rate of 25% under the EIT Law. Meanwhile, we shall, in accordance with the requirements of the tax authority and other relevant authorities, retain and submit our financial statements together with details of our research and development activities and other technological innovation activities for future reference to enjoy the preferential tax treatment. As advised by Jingtian & Gongcheng, our PRC legal adviser, if we fail to provide materials retained for future reference, we will not be entitled to enjoy the preferential tax treatment, as well as other benefits conferred under the accreditations.

We require various approvals, licenses, permits and certifications to operate our business. Any failure to obtain or renew any of these approvals, licenses, permits or certifications could materially and adversely affect our business and results of operations.

In accordance with the laws and regulations in the jurisdictions in which we operate, we are required to maintain various approvals, licenses, permits and certifications in order to operate our business. Complying with such laws and regulations may require substantial expense, and any non-compliance may expose us to liability. In the event of non-compliance, we may have to incur significant expenses and divert substantial management time to rectify any such non-compliance. In the future, if we fail to obtain all the necessary approvals, licenses, permits and certifications, we may be subject to fines or the suspension of operations at the production facilities and research and development facilities that do not have all the requisite approvals, licenses, permits and certifications, which could materially and adversely affect our business and results of operations. See �Regulation� for further details on the requisite approvals, licenses, permits and certifications necessary for our business operations. We may also experience adverse publicity arising from non-compliance with government regulations, which would negatively impact our reputation.

We cannot assure you that we will be able to fulfill all the conditions necessary to obtain and maintain all required government approvals, or that relevant government officials will always, if ever, exercise their discretion in our favor, or that we will be able to comply with any new laws, regulations or policies. There may also be delays on the part of government authorities in reviewing our applications and granting approvals, whether due to the lack of human resources or the imposition of new rules, regulations, government policies or their implementation, interpretation and enforcement. If we are unable to obtain, or if we experience material delays in obtaining, necessary government approvals, our operations may be substantially disrupted, which could materially and adversely affect our business, financial condition and results of operations.

We may be involved in legal and other disputes from time to time arising out of our operations, including disputes with our raw material or component suppliers, production partners, customers or employees.

We may from time to time be involved in disputes with various parties arising out of our operations, including raw material or electronic components suppliers, production partners, customers or employees. These disputes may lead to protests or legal or other proceedings and may result in damage to our reputation, substantial costs and diversion of resources and management�s attention from our core business activities. In addition, we may encounter compliance issues with regulatory bodies in the course of our operations, in respect of which we may face administrative proceedings or unfavorable decisions that may result in liabilities and cause delays to our production and delivery. We may be involved in other proceedings or disputes in the future that may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our insurance coverage is limited and may not be adequate to cover potential losses and liabilities. A significant uninsured loss or a loss in excess of our insurance coverage could have a material adverse effect on our results of operations and financial condition.

We do not maintain any insurance covering our properties, equipment, inventory or employees, and we do not carry any business interruption or product liability insurance or any third-party liability insurance to cover claims in respect of personal injuries or any damages arising from accidents on our properties or in relation to our

 

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operations. The occurrence of certain incidents including severe weather, earthquake, fire, war, power outages, flooding and the consequences resulting from them may not be covered by our insurance policies adequately, or at all. If we were subject to substantial liabilities we could incur costs and losses that could materially and adversely affect our results of operations and financial condition.

We may need additional capital but may not be able to obtain it in a timely manner and on favorable terms or at all.

Our operations may require additional capital or financing from time to time in order to achieve further growth. We may require additional cash resources due to the future growth and development of our business. Our future capital requirements may be substantial as we seek to expand our operations and diversify our product offering. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities.

Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations and cash flows and the liquidity of international capital and lending markets. In addition, our loan agreements may contain financial covenants that restrict our ability to incur additional indebtedness or to distribute dividends. Any indebtedness that we may incur in the future may also contain operating and financial covenants that could further restrict our operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. A large amount of bank borrowings and other debt may result in a significant increase in interest expense while at the same time exposing us to increased interest rate risks. Equity financings could result in dilution to our shareholders, and the securities issued in future financings may have rights, preferences and privileges that are senior to those of our ordinary shares or ADSs. Any failure to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations.

We face risks related to natural disasters, health epidemics or pandemics, and other outbreaks, most notably those related to the outbreak of COVID-19.

Our business could be adversely affected by the effects of epidemics or pandemics, including COVID-19, avian influenza, severe acute respiratory syndrome (SARS), influenza A (H1N1), ebola or any other epidemic or pandemic. Any such occurrences could cause severe disruption to our daily operations, including our fulfillment infrastructure and our customer service centers, and may even require a temporary closure of our facilities.

The outbreak of COVID-19 has spread throughout the world. On March 11, 2020, the World Health Organization declared the outbreak a global pandemic. Many businesses and social activities in China and other countries and regions have been severely disrupted starting in the first quarter of 2020, including those of our suppliers, customers and employees. This global outbreak has also caused market panics, which materially and negatively affected the global financial markets, such as the plunge of global stocks on major stock exchanges in March 2020. Such disruption and the potential slowdown of the world�s economy in 2020 and beyond could have a material adverse effect on our results of operations and financial condition. We and our customers experienced and may continue to experience significant business disruptions and suspension of operations due to quarantine measures to contain the spread of the pandemic, which may cause shortage in the supply of raw materials, increase the likelihood of default from our customers and delay our product delivery. The pandemic has also led to great volatility in the cryptocurrency price, which may negatively affect the demand for our ASIC chips both in terms of the price and the quantity. Our business operations were disrupted, and may continue to be disrupted, if any of our employees are suspected of having contracted any contagious disease or condition, since it could require our employees to be quarantined or our offices to be closed down and disinfected. All of these had, and may continue to, have a material adverse effect on our results of operations and financial condition in the near term. We are closely monitoring the development of the COVID-19 pandemic and continuously evaluating any further potential impact on our business, results of operations and financial condition, which we believe will

 

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depend on the duration and degree of the pandemic. If the outbreak persists or escalates, we may be subject to further negative impact on our business operations and financial condition.

The occurrence of any of the foregoing or other natural or man-made disasters could cause damage or disruption to us, our employees, operations, markets and customers, which could result in significant delays in deliveries or substantial shortages of our products and could adversely affect our business, financial condition, results of operations or prospects.

Any global systemic economic and financial crisis could negatively affect our business, results of operations, 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. 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 the PRC�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 the PRC. There have also been concerns over unrest several geographic areas in the world, which have resulted in volatility in financial and other markets. There have also been concerns over the United Kingdom leaving the European Union as well as the significant potential changes to United States trade policies, treaties and tariffs, including trade policies and tariffs regarding the PRC. There have also been concerns about the economic effect of the tensions in the relationship between the PRC and surrounding Asian countries. There could be in the future a number of domino effects from such turmoil on our business, including significant decreases in orders from our customers; insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; and counterparty failures negatively impacting our operations. Any systemic economic or financial crisis could cause revenue for the semiconductor industry as a whole to decline dramatically and could materially and adversely affect our results of operations.

If counterfeit products are sold under our brand names and trademarks, our reputation and financial results could be materially and adversely affected.

Third-party merchants and dealers are separately responsible for sourcing counterfeit products that are sold under our brand names and trademarks. Counterfeit products may be defective or inferior in quality as compared to authentic products. If our customers are not satisfied by counterfeit products sold under our brand names and trademarks, we may be subject to reputational damage. We believe our brand and reputation are important to our success and our competitive position. The discovery of counterfeit products sold under our brand names and trademarks may severally damage our reputation and cause customers to refrain from making future purchases from us, which would materially and adversely affect our business operations and financial results.

Risks Relating to Doing Business in the PRC

Changes in the political and economic policies of the Chinese government or in relations between China and the United States may materially and adversely affect our business, financial condition, results of operations and the market price of our ADSs.

Due to our extensive operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. China�s economy differs from the economies of developed

 

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countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange, allocation of resources and legal system. While China�s economy has experienced significant growth over the past four decades, growth has been uneven across different regions and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are currently applicable to us. In addition, in the past the Chinese government implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations. In July 2021, the Chinese government provided new guidance to and placed restrictions on mainland China-based companies raising capital outside of mainland China. In light of the recent developments in China and the overall risks with the China-based variable interest entities, or VIE, structure, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. Although we do not have a VIE structure, due to our extensive operations in China, any future Chinese, U.S. or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect our business and results of operations. If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States or other governments deteriorate, the Chinese government may intervene with our operations and our business in China and United States, as well as the market price of our ADSs, may also be adversely affected.

The Chinese government may intervene in or influence our operations at any time, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs.

We have been advised by Jingtian & Gongcheng, our PRC legal adviser, that we have obtained all necessary permissions or approvals and authorizations in mainland China in all material aspects in relation to conducting our IC design business operations in mainland China. Except for the business licenses issued by the local branch of the State Administration for Market Regulation, which our PRC subsidiaries have obtained and are in full force and effect as of the date of this prospectus, Intchains Group Limited and our PRC subsidiaries are not required to obtain other licenses, approvals or permits to conduct our IC design business operations in mainland China.

To the best of our knowledge, as of the date of this prospectus, there are no laws or regulations that are or will be adopted in the near future by PRC government authorities that would prevent us from maintaining the business licenses we have obtained or would require us to obtain additional licenses or qualifications in order to operate our IC design business.

However, the Chinese government has significant oversight and discretion over the conduct of our business and may intervene or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The Chinese government has recently published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our business operations that could require us to seek permission from Chinese authorities to continue to operate our business, we may be unable to obtain such approval requirements or maintain our business licenses which may adversely affect our business, financial condition and results of operations, and could have a material adverse effect on the trading price of the ADSs. Furthermore, recent statements made by the Chinese government have indicated an intent to increase the government�s oversight and control over offerings of companies with significant operations in mainland China that are to be conducted in foreign markets, as well as foreign investment in mainland China-based issuers like us. Any such action, once taken by the Chinese government, could significantly limit or completely hinder our ability to offer or continue to offer ADSs to our investors, and could cause the value of our ADSs to significantly decline or become worthless.

 

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Changes in U.S. and Chinese regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our ADSs.

The U.S. government, including the SEC, has made statements and taken certain actions that led to changes to United States and international relations, and will impact companies with connections to China, including imposing several rounds of tariffs affecting certain products manufactured in China, imposing certain sanctions and restrictions in relation to China and issuing statements indicating enhanced review of companies with significant China-based operations. On October 7, 2022, the Bureau of Industry and Security (�BIS�) under the Commerce Department of the U.S. issued rules aimed at restricting China�s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductor products (the �Rule�). Although the Rule is intended to restrict China�s ability to purchase and manufacture certain high-end chips used in military applications, it may result in negative impact on companies that provide advanced computing chips, products containing such chips, or items related to supercomputers and semiconductors to customers based in China. The Rule sets forth the following restrictions, among others, (i) adding certain advanced and high-performance computing chips and computer products that contain such chips to the Commerce Control List of BIS (�CCL�); (ii) adding new license requirements for items destined for an end use relating to supercomputer or semiconductor development or production in China; (iii) adding certain semiconductor manufacturing equipment and related items to the CCL; and (iv) adding new license requirements for items intended for any semiconductor fabrication facility in China that fabricates ICs meeting specified criteria. Historically, we provided integrated solutions consisting of high-performance computing ASIC chips and ancillary software and hardware for blockchain applications only. While it does not appear that the Rule is directly applicable to us, we cannot assure you that regulatory authorities will not reach a different conclusion. Should our products be deemed to come within the purview of the Rule, our business, financial condition and results of operations may be materially and adversely affected.

It is unknown whether and to what extent new U.S. government legislation, executive orders, tariffs, laws or regulations will be adopted, or the effect that any such actions would have on companies with significant connections to China, on our industry or on us. Any unfavorable government policies on cross-border relations and/or international trade, including increased scrutiny on companies with significant China-based operations, capital controls or tariffs, may affect our ability to raise capital, the market price of our ADSs or prevent us from selling our products in certain countries. Furthermore, the SEC has issued statements primarily focused on companies with significant China-based operations, such as us.

If any new legislation, executive orders, tariffs, laws and/or regulations are implemented, if existing trade agreements are renegotiated, if the U.S. or Chinese governments take retaliatory actions due to the recent U.S.-China tensions or if the Chinese government exerts more oversight and control over securities offerings that are conducted in the United States, such changes could have an adverse effect on our business, financial condition and results of operations, our ability to raise capital and the market price of our ADSs.

While we have implemented internal control measures to mitigate our risk exposure to international sanctions, sanctions laws and regulations are constantly evolving, and new persons and entities are regularly added to the list of sanctioned persons. Further, new requirements or restrictions could come into effect which might increase the scrutiny on our business or result in one or more of our business activities being deemed to have violated sanctions. Our business and reputation could be adversely affected if the authorities of the United States, the European Union, the United Nations or any other jurisdictions were to determine that any of our future activities constitutes a violation of the sanctions they impose or provides a basis for a sanctions designation of our group.

 

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The approval of the CSRC, CAC or other Chinese regulatory agencies may be required in connection with this offering under Chinese law. and, if required, we cannot predict whether we will be able to obtain such approval or complete such filing.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the �M&A Rules�) purport to require offshore special purpose vehicles that are controlled by Chinese companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of Chinese domestic companies or assets in exchange for the shares of the offshore special purpose vehicles shall obtain approval from the China Securities Regulatory Commission, or the CSRC, prior to publicly listing their securities on an overseas stock exchange.

Based on our understanding of the Chinese laws and regulations in effect at the time of this prospectus, we will not be required to submit an application to the CSRC for its approval of this offering and the listing and trading of our ADSs on the Nasdaq under the M&A Rules. As of the date of this prospectus, we, or any of our subsidiaries have not applied for, received or been denied approval from any Chinese authorities to issue securities in this offering and/or the listing and trading of our ADSs on the Nasdaq nor have we, or any of our subsidiaries received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other PRC governmental authorities. However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant Chinese government agencies, including the CSRC, would reach the same conclusion.

On December 28, 2021, the Cyberspace Administration of China, or the CAC, together with other PRC governmental authorities, promulgated the Measures for Cybersecurity Review, or Cybersecurity Measures, which took effect on February 15, 2022. Pursuant to the Cybersecurity Measures, online platform operators holding personal information of more than one million users and seeking a listing outside China must file for a cybersecurity review with the Cybersecurity Review Office before conducting any listing on a foreign stock exchange. In addition, the purchase of network products and services of a critical information infrastructure operator, or CIIO, and data processing activities of an online platform operator that affect or may affect national security, shall be subject to a cybersecurity review. Alternatively, relevant governmental authorities in the PRC may initiate a cybersecurity review if such governmental authorities determine any network products and services and data processing activities affect or may affect national security.

On November 14, 2021, the CAC published the Regulations on the Administration of Cyber Data Security (Draft for Comments), or Draft Cyber Data Regulations, pursuant to which a �data processor� processing personal information of more than one million individuals and seeking a listing outside China must file for a cybersecurity review. Also, a data processor shall also be subject to cybersecurity review if it conducts other activities that affect or may affect national security. As of the date of this prospectus, the Draft Cyber Data Regulations is still in draft form and is not yet legally effective.

As we do not operate any online platform in China, we are not an �online platform operator� holding personal information of more than one million users which is required to file for a cybersecurity review for this offering pursuant to the Cybersecurity Measures and we are not an CIIO, or an �online platform operator� holding personal information of more than one million users or conducting data processing activities or affect or may affect national security which shall be subject to the cybersecurity review. Therefore, the Measures for Cybersecurity Review will not have material impact on our business and our offering. However, we cannot guarantee that the relevant PRC regulatory authority will not take a view that is contrary to or otherwise different from the opinion stated above. Currently, the Cybersecurity Measures and the Draft Cyber Data Regulations have not materially affected our business and operations, but in anticipation of the strengthened implementation of cybersecurity laws and regulations and the continued expansion of our business, we face potential risks if we are deemed as a CIIO or an �online platform operator� or a �data processor� who collects, stores, uses and processes important data under the PRC cybersecurity laws and regulations.

 

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Furthermore, on July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, pursuant to which Chinese regulators are required to accelerate rulemaking related to the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border data flow, and management of confidential information. Numerous regulations, guidelines and other measures have been or are expected to be adopted under the umbrella of or in addition to the Cyber Security Law and Data Security Law.

On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting guidelines, which will come into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures within three working days following its submission of initial public offerings or listing application. If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. See �Regulations�Regulations on M&A Rules and Overseas Listings.�

On February 24, 2023, the CSRC, together with Ministry of Finance of the PRC, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing which was issued by the CSRC, National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions. The revised Provisions is issued under the title the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, and will come into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding its application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require that, including but not limited to (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations.

As of the date of this prospectus, the revised Provisions have not come into effect. On or after March 31, 2023, any failure or perceived failure by the Company or PRC subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in that the relevant entities would be held legally liable by competent authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.

As there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure you that we will be able to comply with new regulatory requirements relating to our future overseas capital-raising activities and we may become subject to more stringent requirements with respect to matters including data privacy and cross-border investigation and enforcement of legal claims. Notwithstanding the foregoing, as of the date of this prospectus, we are not aware of any Chinese laws or regulations in effect requiring that we obtain permission from any Chinese authority to issue securities to foreign investors, and we have not received any inquiry, notice, warning, sanction or any regulatory objection to this offering from the CSRC, the Cyberspace Administration of China, or the CAC, or any other Chinese authorities that have jurisdiction over our operations.

Based on the above and our understanding of the Chinese laws and regulations currently in effect as of the date of this prospectus, we are not required to submit an application to the CSRC or the CAC for the approval of

 

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this offering and the listing and trading of our ADSs on the Nasdaq. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. If it is determined that we are subject to the Trial Measures for the listing of the ADRs on the Nasdaq, we may fail to obtain required approval, complete required filing or meet such requirements in a timely manner or at all, or completion could be rescinded. Any failure to obtain or delay in obtaining such approval, complete required filing or procedures for this offering, or a rescission of any such approval or filing obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities. These regulatory agencies may impose fines and penalties on our operations in mainland China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds from this offering into mainland China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs. The CSRC, the CAC or other Chinese regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the CAC or other regulatory agencies later promulgate new rules requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of the ADSs.

Recent negative publicity surrounding China-based companies listed in the United States may negatively impact the trading price of our ADSs.

We believe that recent negative publicity surrounding companies with operations in China that are listed in the United States have negatively impacted the stock prices of these companies. Certain politicians in the United States have publicly warned investors to shun China-based companies listed in the United States. The SEC and the Public Company Accounting Oversight Board (United States), or the PCAOB, also issued a joint statement on April 21, 2020, reiterating the disclosure, financial reporting and other risks involved in the investments in companies that are based in emerging markets as well as the limited remedies available to investors who might take legal action against such companies. Furthermore, various equity-based research organizations have recently published reports on China-based companies after examining their corporate governance practices, related party transactions, sales practices and financial statements, and these reports have led to special investigations and listing suspensions on U.S. national exchanges. Any similar scrutiny on us, regardless of its lack of merit, could cause the market price of our ADSs to fall, divert management resources and energy, cause us to incur expenses in defending ourselves against rumors, and increase the premiums we pay for director and officer insurance.

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors or their affiliates that are located in China. The delisting of our ADSs, or the threat of such delisting, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors of the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issued the audit report included with our most recent annual report in the prospectus, as auditor of companies that are traded publicly in the United States and as a firm registered with the PCAOB is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor, which is based in New York, is currently subject to inspection by the PCAOB at least every three years. However, our auditor�s China affiliate is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities.

 

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On March 18, 2021, the SEC adopted on an interim basis rules disclosure requirements for companies with PCAOB member auditors whom the PCAOB has determined that it cannot inspect their operations within a foreign jurisdiction (�Covered Issuers�). Covered companies are required to disclose in their annual reports on Form 20-F: (i) that, during the period covered by the form, the registered public accounting firm has prepared an audit report for the issuer; (ii) the percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized; (iii) whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer; (iv) the name of each official of the Chinese Communist Party (�CCP�) who is a member of the board of directors of the issuer or the operating entity with respect to the issuer; and (v) whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the CCP, including the text of any such charter. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer�s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On September 22, 2021, the PCAOB adopted rules governing its procedures for making determinations as to its inability to inspect or investigate registered firms headquartered in a particular foreign jurisdiction or which has an office in a foreign jurisdiction (a �PCAOB-Identified Firm�). Promptly after the effective date of this rule, the PCAOB will make determinations under the HFCA Act to the extent such determinations are appropriate. Thereafter, the PCAOB will consider, at least annually, whether changes in facts and circumstances support any additional determinations. The PCAOB will make additional determinations as and when appropriate, to allow the SEC on a timely basis to identify Covered Issuers pursuant to the SEC rules. The rule became effective when the SEC approved the rule on November 4, 2021. On December 2, 2021, the SEC finalized its rules regarding disclosure by Covered Issuers. In addition, the release discussed the procedures the SEC will follow in implementing trading prohibitions for Covered Issuers. A foreign company would have to be designated a Covered Issuer three years in a row to be subject to a trading prohibition on that basis. The trading suspension would prohibit trading of the Covered Issuer�s securities on any exchange or in the over-the-counter markets. The trading prohibition will be terminated if the Covered Issuer certifies to the SEC that the issuer has retained a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC and files financial statements that include an audit report signed by the non-PCAOB-Identified Firm. The SEC is not required to engage in rulemaking to implement the trading prohibition provisions of the HFCA Act. Neither the Act nor the SEC�s release create an obligation for an exchange to delist the Covered Issuer, but the SEC noted that under existing listing rules of the exchanges, a trading prohibition would be grounds for delisting.

On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by PRC authorities in those jurisdictions.

On August 26, 2022, the PCAOB entered into a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the PRC and, as summarized in the �Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong� published on the U.S. Securities and Exchange Commission�s official website, the parties agreed to the following: (i) in accordance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation; (ii) the PCAOB shall have direct access to interview or take testimony from all personnel of the audit firms whose issuer engagements are being inspected or investigated; (iii) the PCAOB shall have the unfettered ability to transfer information to the SEC, in accordance with the Sarbanes-Oxley Act; and (iv) the PCAOB inspectors shall have access to complete audit work papers without any redactions, with view-only procedures for certain targeted pieces of information such as personally identifiable information. The PCAOB is required to reassess its determinations as to whether it is able to carry out inspection and investigation completely and without obstruction by the end of 2022.

The auditor of our PRC-based subsidiaries is located in the PRC and that auditor is an affiliate of our New York based auditor that signs our audit report. We cannot assure you that the PCAOB will be able to inspect and investigate our auditor�s China affiliate, or that it will be able to obtain complete access to the audit work papers,

 

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audit personnel and other information it needs to conduct such inspection or investigation. Given the current question as to how �retain� should be understood for purposes of the HFCA Act, we cannot assure you that we will not be identified by the SEC as an issuer that has retained an auditor that has a branch or office that is located in a foreign jurisdiction that the PCAOB determines it is unable to inspect or investigate completely because of a position taken by an authority in that foreign jurisdiction as a result of the fact that the auditor of our China affiliates is located in, and organized under the laws of, the PRC. In addition, there can be no assurance that, if we have a �non-inspection� year, we will be able to take remedial measures in response thereto. If any such event were to occur, trading in our securities could in the future be prohibited under the HFCA Act, so we cannot assure you that we will be able to maintain the listing of the ADRs on Nasdaq or that you will be allowed to trade the ADRs in the United States on the �over-the-counter� markets or otherwise. Should the ADRs not be listed or tradeable in the United States, the value of the ADRs could be materially affected.

This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in the ADRs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm�s China affiliate�s audit procedures or quality control procedures as compared to auditor outside of China that are subject to PCAOB inspections, which could cause investors and potential investors in the ADRs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Economic, political and social conditions as well as governmental policies in the PRC could adversely affect our business, prospects, financial condition and financial results.

A majority of our business operations is currently conducted in the PRC and we derive a majority of our revenue from the PRC. The PRC economy differs from the economies of most developed countries in many aspects, including:

 

   

political structure;

 

   

level of government involvement and control;

 

   

growth rate and level of development;

 

   

level and control of capital investment and reinvestment;

 

   

control of foreign exchange;

 

   

allocation of resources; and

 

   

legal systems.

The PRC economy has been transitioning from a centrally planned economy to a more market-oriented economy for approximately four decades as the PRC government has implemented economic reform measures to utilize market forces in the development of the PRC economy. We cannot predict whether changes in the economic, political and social conditions of the PRC and in its laws, regulations and policies will have any adverse effect on our current or future business, financial condition or results of operations.

More specifically, many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to be refined and improved over time. This refining and adjustment process may not necessarily have a positive effect on our operations and business development. These actions, as well as other actions and policies of the government of the PRC, could cause a decrease in the overall level of economic activity in the PRC and the surrounding regions and, in turn, have an adverse impact on our business and financial condition.

Changes to and uncertainties in the legal system of the PRC may have a material adverse impact on our business, financial condition and results of operations. Legal protections available to you under the legal system of the PRC may be limited.

The PRC is still in the process of developing a comprehensive statutory framework. Since 1979, the PRC government has established a commercial law system, and significant progress has been made in promulgating

 

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laws and regulations relating to economic affairs and matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, many of these laws and regulations are relatively new, and the implementation and interpretation of these laws and regulations remain uncertain in many areas. It may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. Consequently, developments and changes in the PRC laws and regulations, including their interpretation and enforcement, may have a material and adverse effect on our business, financial condition and results of operations. Furthermore, the legal protections available to you under the PRC legal system may be limited.

You may experience difficulties enforcing judgments against us and our management in the PRC.

We are not a Chinese operating company but a Cayman Islands holding company. Substantially all of our assets are located outside of the United States, and substantially all of our current operations are conducted in the PRC. In addition, our current directors and executive officers, including Mr. Qiang Ding, Mr. Chaohua Sheng and Mr. Chaowei Yan, are nationals and residents of countries other than the United States. Substantially all or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the civil liability provisions of the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see �Enforceability of Civil Liabilities.�

PRC regulations relating to the establishment of offshore special purpose vehicles by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to make capital contributions into our PRC subsidiaries, limit our PRC subsidiaries� ability to distribute profits to us, or otherwise adversely affect our financial position.

Under several regulations promulgated by SAFE, PRC residents and PRC corporate entities are required to register with and obtain approval from local branches of SAFE or designated qualified foreign exchange banks in mainland China in connection with their direct or indirect offshore investment activities. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update the previously filed registration with the local branch of SAFE, with respect to any material change involving that offshore company, such as an increase or decrease in capital, transfer or swap of shares, merger or division. These regulations apply to all direct and indirect shareholders and beneficial owners of our company who are PRC residents, or PRC-Resident Shareholders, and may apply to any offshore acquisitions that we make in the future. To the best of our knowledge, as of the date of this prospectus, each of our principal shareholders who is required to make the foreign exchange registration under SAFE Circular 37 had completed such registration. However, we may not at all times be fully aware or informed of the identities of all the PRC residents holding direct or indirect interests in our company, and we cannot assure you that all of our shareholders and beneficial owners who are PRC residents will comply with these foreign exchange regulations.

If any PRC-Resident Shareholder fails to make the required registration or update a previously filed registration, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into our PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability on the related PRC-Resident shareholder or our PRC subsidiaries under the PRC laws for evasion of applicable foreign exchange restrictions.

Our corporate structure may restrict our ability to receive dividends from, and transfer funds to, our PRC operating subsidiaries, which could restrict our ability to act in response to changing market conditions in a timely manner.

We are a Cayman Islands holding company and a certain portion of our operations are conducted through our operating subsidiaries. The ability of our operating subsidiaries to make dividend and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.

 

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In particular, under the PRC law, each of our PRC operating subsidiaries may only pay dividends after 10% of its net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. In addition, the profit available for distribution from our PRC operating subsidiaries is determined in accordance with generally accepted accounting principles in the PRC. This calculation may differ if it were performed in accordance with U.S. GAAP. As a result, we may not have sufficient distributions from our PRC operating subsidiaries to enable necessary profit distributions to our shareholders in the future, which would be based upon our financial statements prepared under U.S. GAAP.

Distributions by our PRC operating subsidiaries to us other than as dividends may be subject to governmental approval and taxation. Any transfer of funds from our company to our PRC operating subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of PRC governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. These limitations on the free flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market conditions in a timely manner.

Dividends payable by us to our foreign investors and gains on the sale of the ADSs may become subject to withholding taxes under the PRC tax laws.

Under the EIT Law and EIT Implementation Rules, our foreign corporate shareholders may be subject to a 10% income tax upon any gains realized from the transfer of their ADSs and dividends distributable to such foreign corporate shareholder, if such income is regarded as income from �sources within the PRC.� According to the EIT Implementation Rules, whether income generated from transferring equity investments is to be regarded as sources within the PRC or from foreign territory shall depend upon the locations in which the enterprises accepting the equity investment are located. However, it is unclear whether income received by our shareholders will be deemed to be income from sources within the PRC and whether there will be any exemption or reduction in taxation for our foreign corporate shareholders due to the promulgation of the EIT Law. If our foreign corporate shareholders are required to pay PRC income tax on the transfers of the ADSs that they hold or on the gains on the sale of the ADSs by them, the value of our foreign corporate shareholders� investments in the ADSs may be materially and adversely affected.

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

We may transfer funds to our PRC subsidiaries or finance our PRC subsidiaries by means of shareholders� loans or capital contributions after completion of this offering. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed a statutory limit, and shall be filed with SAFE or its local counterparts. Furthermore, any capital contributions we make to our PRC subsidiaries shall be registered with the PRC State Administration for Market Regulation or its local counterparts, and reported to with the Ministry of Commerce or its local counterparts.

On March 30, 2015, SAFE promulgated the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises, or SAFE Circular 19. SAFE Circular 19, however, allows foreign invested enterprises in mainland China to use their registered capital settled in RMB converted from foreign currencies to make equity investments, but the registered capital of a foreign invested company settled in RMB converted from foreign currencies remains not allowed to be used, among other things, for investment in the security markets, or offering entrustment loans, unless otherwise regulated by other laws and regulations. On June 9, 2016, SAFE further issued the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which, among other things, amended certain provisions of Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the RMB capital converted from

 

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foreign currency-denominated registered capital of a foreign invested company is regulated such that RMB capital may not be used for purposes beyond its business scope or to provide loans to non-affiliates unless otherwise permitted under its business scope. On October 23, 2019, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-Border Trade and Investment, or SAFE Circular 28, which removes the restrictions on domestic equity investments by non-investment foreign-invested enterprises with their capital funds, provided that certain conditions are met. The applicable foreign exchange circulars and rules may limit our ability to transfer the net proceeds from this offering to our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our business, financial condition, and results of operations.

We may be classified as a �resident enterprise� for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

The EIT Law provides that enterprises established outside of the PRC whose �de facto management bodies� are located in the PRC are considered �resident enterprises� and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of the PRC as �resident enterprises� clarified that dividends and other income paid by such �resident enterprises� will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This circular also subjects such �resident enterprises� to various reporting requirements with the PRC tax authorities. Under the implementation regulations to the enterprise income tax, a �de facto management body� is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the circular mentioned above sets out criteria for determining whether �de facto management bodies� are located in the PRC for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises established outside of the PRC that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of �de facto management bodies� for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. Therefore, although all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities disagree with our assessment and determine that we are a �resident enterprise� we may be subject to enterprise income tax at a rate of 25% on our worldwide income and dividends paid by us to our non-PRC shareholders as well as capital gains recognized by them with respect to the sale of the ADSs may be subject to a PRC withholding tax.

This will have an impact on our effective tax rate, a material adverse effect on our net income and results of operations, and may require us to withhold tax on our non-PRC shareholders.

Government control of foreign currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Under existing PRC foreign exchange regulations, payments of certain current account items can be made in foreign currencies without prior approval from the local branch of SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The restrictions on foreign exchange transactions under capital accounts could also affect the ability of our subsidiaries in the PRC to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.

 

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Risks Relating to the ADSs and this Offering

An active trading market for our Class A ordinary shares or the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

Prior to this offering, there has been no public market for our ADSs or our Class A ordinary shares underlying our ADSs. We intend to apply for listing our ADSs on the Nasdaq, but we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected.

The initial public offering price for the ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not fall below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

Recent litigation and negative publicity surrounding China-based companies listed in the United States may negatively impact the trading price of our ADSs.

We believe that recent litigation and negative publicity surrounding companies with operations in China that are listed in the United States has negatively impacted the stock prices of these companies. Certain politicians in the United States have publicly warned investors not to invest in China-based companies listed in the United States. The SEC and the Public Company Accounting Oversight Board (PCAOB) also issued a joint statement on April 21, 2020 reiterating the disclosure, financial reporting and other risks involved in investments in companies that are based in emerging markets, as well as the limited remedies available to investors who might take legal action against such companies. Furthermore, various equity-based research organizations have recently published reports on China-based companies after examining their corporate governance practices, related party transactions, sales practices and financial statements, and these reports have led to special investigations and listing suspensions on U.S. national exchanges. Any similar scrutiny regarding our company or business, regardless of its lack of merit, could cause the market price of our ADSs to fall, could divert management resources and energy and could cause us to incur expenses in defending ourselves against rumors.

The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial trading price declines. The trading performances of other PRC companies� securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States in general, and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume of our ADSs may be highly volatile due to factors specific to our own operations, including the following:

 

   

variations in our revenue, earnings and cash flow;

 

   

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

   

announcements of new offerings, solutions and expansions by us or our competitors;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our products or our industry;

 

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additions or departures of key personnel;

 

   

the release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

   

potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In addition, the share price of a number of companies involved in initial public offerings, particularly among companies with relatively smaller public floats, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Such rapid and substantial price volatility, including any share price run-up, may be unrelated to our actual or expected operating performance and financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our ADSs. This volatility may prevent you from being able to sell your securities at or above the price you paid for your securities. If the market price of our ADSs after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management�s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could, in turn, cause the market price or trading volume for the ADSs to decline.

The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.

Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 1,000,000 ADSs (equivalent to 2,000,000 Class A ordinary shares) outstanding immediately after this offering, or 1,150,000 ADSs (equivalent to 2,300,000 Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors and executive officers and all other existing holders of 5.0% or more of our outstanding shares have agreed with the underwriters not to offer, issue, sell, encumber, transfer or otherwise dispose of any of our securities, including our ADSs and ordinary shares for a period of six months after the completion of this offering without the consent of the representatives of the underwriters, subject to

 

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certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See �Underwriting� and �Shares Eligible for Future Sale� for a more detailed description of the restrictions on selling our securities after this offering.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of the ADSs for a return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs, and you may even lose your entire investment in the ADSs.

Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their Class A ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$5.55 per ADS. See �Dilution� for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that will improve our results of operations or increase our ADS price, or that these net proceeds will be placed only in investments that generate income or appreciate in value.

Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial

We will adopt a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Based on our dual-class share structure, holders of Class A ordinary shares are

 

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entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders of Class B ordinary shares are entitled to ten votes per share. We will issue Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares. However, the creation of any pledge, charge, encumbrance or other third party right on any Class B ordinary shares to secure a holder�s contractual or legal obligations, except in cases where and until any such pledge, charge, encumbrance or other third party right is enforced and results in the third party holding legal title to the relevant Class B ordinary shares, will not be considered as a sale, transfer, assignment or disposition and will not trigger the automatic conversion. In addition, the termination of directorship on the board or employment with us of any holder of Class B ordinary shares will not trigger the automatic conversion either.

Due to the disparate voting powers attached to these two classes of ordinary shares, our co-founders, namely, Mr. Qiang Ding and Mr. Chaohua Sheng, will beneficially own all of our issued Class B ordinary shares, representing 54.4% of our total issued and outstanding share capital immediately after the completion of this offering and they will be able to exercise 92.3% of the total voting power of our issued and outstanding share capital immediately following the completing of this offering, assuming that the underwriters do not exercise their over-allotment option to purchase additional ADSs. You will experience further dilution to the extent that additional Class B ordinary shares are issued in the future. As a result, our founders will have considerable influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.

The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.

Certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, that would exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of the total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from stock indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

Our amended and restated memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our Class A ordinary shares and ADSs.

We will adopt an amended and restated memorandum and articles of association that will become effective immediately prior to completion of this offering. Our new memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions, including a provision that entitles each Class B ordinary share to ten votes in respect of all matters subject to a shareholders� vote. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties form seeking to obtain control of our company in a tender offer or similar transaction. Although we expect to issue all of our authorized Class B ordinary shares upon the completion of this offering, if any of such Class B ordinary shares are converted into Class A ordinary shares or canceled for any reasons, our board of

 

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directors will have the authority without further action by our shareholders to issue additional Class B ordinary shares, which will be dilutive to our Class A ordinary shareholders. In addition, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A ordinary shares, in the form of ADS or otherwise. We could issue preferred shares quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under the Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

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

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. We may follow the home country practice for certain corporate governance practices after the closing of this offering which may differ from the requirements of the Nasdaq. If we choose to follow the home country practice, our shareholders may be afforded fewer protections than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

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

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, all of our current directors and executive officers, including Mr. Qiang Ding, Mr. Chaohua Sheng and Mr. Chaowei Yan, are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the civil liability provisions of the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see �Enforcement of Civil Liabilities.�

Fluctuations in the exchange rate between the RMB and the U.S. dollar could result in foreign currency exchange losses and could materially reduce the value of your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government ended its policy of pegging the value of the RMB to the U.S. dollar. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB had depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. This depreciation halted in 2017, and the RMB appreciated approximately 7% against the U.S. dollar during this one-year period. Starting from the beginning of 2019, the RMB has depreciated significantly against the U.S. dollar again. In early August 2019, the PBOC set the RMB�s daily reference rate at RMB7.0039 to US$1.00, the first time that the exchange rate of the RMB to the U.S. dollar exceeded 7.0 since 2008. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

Substantially all of our revenue and costs are denominated in RMB. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the RMB may materially and adversely affect our results of operations and financial position reported in RMB when translated into U.S. dollars, and the value of, and any dividends payable on, the ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an �emerging growth company,� as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies

 

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including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We intend to avail ourselves of the extended transition period.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities laws and regulations in the United States that apply to U.S. domestic issuers, including:

 

   

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

 

   

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

 

   

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of the ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares represented by your ADSs in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares represented by your ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares represented by your ADSs unless you cancel and withdraw such ordinary shares. Under our amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the underlying ordinary shares represented by your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the underlying ordinary shares represented by your ADSs are not voted as you requested.

 

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The depositary for the ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders� meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary may give us a discretionary proxy to vote the ordinary shares underlying the ADSs at shareholders� meetings if we have timely provided the depositary with notice of meeting and related voting materials and (i) we have instructed the depositary that we wish a discretionary proxy to be given, (ii) we have informed the depositary that there is no substantial opposition as to a matter to be voted on at the meeting, and (iii) a matter to be voted on at the meeting would not have a material adverse impact on shareholders.

The effect of this discretionary proxy is that you cannot prevent the underlying ordinary shares represented by the ADSs from being voted, except under the circumstances described above. This may make it more difficult for holders to influence the management of the company. Holders of ordinary shares are not subject to this discretionary proxy.

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York, and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding.

The depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement, although the arbitration provisions do not preclude you from pursuing claims under the Securities Act or the Exchange Act in state or federal courts. See �Description of American Depositary Shares� for more information.

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary�s right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. As the waiver relates to claims arising as a matter of contract in relation to the ADSs, we believe that, as a matter of construction of the clause, the waiver would likely to continue to apply to ADS holders who withdraw the Class A ordinary shares represented by the ADSs from the ADS facility with respect to claims arising before the withdrawal, and the waiver would most likely not apply to ADS holders who subsequently withdraw the Class A ordinary shares represented by ADSs from the ADS facility with respect to claims arising after the withdrawal. However, to our knowledge, there has been no case law on the applicability of the jury trial waiver to ADS holders who subsequently withdraw the Class A ordinary shares represented by the ADSs from the ADS facility.

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United

 

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States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs, including purchasers of ADSs in secondary market transactions, bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of increasing the cost of bringing a claim and limiting and discouraging lawsuits against us and the depositary. If a lawsuit is brought against either or both of us and the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs shall relieve us or the depositary from our respective obligations to comply with the Securities Act and the Exchange Act.

The deposit agreement may be amended or terminated without your consent.

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. However, amendment to certain rights that may increase costs or prejudice a substantial right of ADS holders will not take effect until 30 days after notice thereof in accordance with the deposit agreement. See �Description of American Depositary Shares� for more information.

You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights that are carried by the underlying ordinary shares represented by your ADSs indirectly in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying ordinary shares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares represented by your ADSs in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares represented by your ADSs unless you withdraw such ordinary shares and become the registered holder of such shares prior to the record date for the general meeting.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution

 

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and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an �emerging growth company.�

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

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an �emerging growth company,� we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. In addition, we will incur other additional costs associated with our public company reporting requirements under the SEC rules and regulations. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the requirements of the Nasdaq; these practices may afford fewer protection to shareholders than they would enjoy if we complied fully with the Nasdaq.

As a Cayman Islands exempted company listed on the Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman

 

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Islands, which is our home country, may differ significantly from the Nasdaq corporate governance standards. We intend to follow Cayman Islands corporate governance practices in lieu of the corporate governance requirements of the Nasdaq that listed companies must have for as long as we qualify as a foreign private issuer including:

 

  (a)

a nomination and corporate governance committee composed entirely of independent directors;

 

  (b)

a compensation committee composed entirely of independent directors;

 

  (c)

provide an annual certification by our chief executive officer that he or she is not aware of any non-compliance with any corporate governance rules of the Nasdaq;

 

  (d)

have regularly scheduled executive sessions with only independent directors; or

 

 

  (e)

seek shareholder approval for (i) the implementation and material revisions of the terms of share incentive plans, (ii) the issuance of more than 1% of our outstanding ordinary shares or more than 1% of our outstanding voting power to a related party, (iii) the issuance of more than 20% of our outstanding ordinary shares, and (iv) an issuance that would result in a change of control.

To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under Nasdaq corporate governance standards applicable to U.S. domestic issuers

We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.

Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill (which we have determined based on the expected price of the ADSs in this offering), we do not expect to be a passive foreign investment company, or a PFIC, in the current taxable year or in the foreseeable future, although there can be no assurance in this regard.

In general, we will be a PFIC for any taxable year in which:

 

   

at least 75% of our gross income is passive income, or

 

   

at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. The composition of our assets and income may be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. Because we have valued our goodwill based on the expected market value of the ADSs, a decrease in the price of the ADSs may also result in our becoming a PFIC.

If we are a PFIC for any taxable year during which you hold the ADSs or ordinary shares, our PFIC status could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under �Taxation�U.S. Federal Income Tax Consequences.� For example, if we are or become a PFIC, you may become subject to increased tax liabilities under United States federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See �Taxation�U.S. Federal Income Tax Consequences�Passive Foreign Investment Company Rules.� There can be no assurance that we will not be a PFIC for the current or any future taxable year. Our U.S. counsel expresses no opinion with respect to our PFIC status.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that are based on our management�s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled �Prospectus Summary,� �Risk Factors,� �Management�s Discussion and Analysis of Financial Condition and Results of Operations� and �Business.� These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry�s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our goals and strategies;

 

   

our future business development, financial condition and results of operations;

 

   

expected changes in our revenue, costs or expenditures;

 

   

growth of and competition trends in our industry;

 

   

our expectations regarding demand for, and market acceptance of, our products;

 

   

our expectation regarding the use of proceeds from this offering;

 

   

general economic and business conditions in the markets in which we operate;

 

   

relevant government policies and regulations relating to our business and industry; and

 

   

assumptions underlying or related to any of the foregoing.

In some cases, you can identify forward-looking statements by terms such as �may,� �could,� �will,� �should,� �would,� �expect,� �plan,� �intend,� �anticipate,� �believe,� �estimate,� �predict,� �potential,� �project� or �continue� or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading �Risk Factors� and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

This prospectus also contains certain data and information, which we obtained from various government and private publications. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in these publications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise. You should read this prospectus and the documents that we have referred to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$4.4 million, or US$5.5 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts, commissions and the estimated offering expenses payable by us.

We currently intend to use the net proceeds from this offering for the following purposes:

 

   

approximately 25.0%, or US$1.1 million, is expected to be used for the continuing development and enhancement of our �Xihe� Platform and �Wangshu� Platform;

 

   

approximately 25.0%, or US$1.1 million, is expected to be used for (i) the establishment of research and development centers in China, Singapore and selected locations overseas, (ii) research and development projects in cooperation with software companies in China and overseas, and (iii) the expansion of our research and development team;

 

   

approximately 25.0%, or US$1.1 million, is expected to be used for the establishment of an overseas operating center in Singapore, which will have business operation management functions, end application development capabilities and overseas sales operations;

 

   

approximately 15.0%, or US$0.66 million, is expected to be used to purchase wafers and other raw materials from qualified suppliers; and

 

   

the balance of the net proceeds for other working capital and general corporate purposes.

The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations as holding company to provide funding to our PRC subsidiaries only through loans or capital contributions, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to complete or obtain these governmental filings, registrations or approvals on a timely basis, if at all. See �Risk Factors�Risks Relating to Doing Business in the PRC�PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business operations.�

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends and we have no intention to declare or pay any dividends in the near future on our ordinary shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.

If we pay any dividends on our Class A ordinary shares, we will pay those dividends that are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to holders of ADSs in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See �Description of American Depositary Shares.� Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our existing 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.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2022 presented on:

 

   

an actual basis; and

 

   

a pro forma as adjusted basis, to reflect the issuance and sale of the Class A ordinary shares in the form of ADSs offered hereby at the initial public offering price of US$8.00 per ADS, after deducting underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the option to purchase additional ADSs.

You should read this table in conjunction with �Selected Consolidated Financial and Operating Data,� �Management�s Discussion and Analysis of Financial Condition and Results of Operations� and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2022  
     Actual(1)      Pro Forma(2)
As adjusted
 
     RMB      US$      RMB      US$  
     (in thousands, except for share
and per share data)
 

Shareholders� equity:

           
Ordinary shares (US$0.000001 par value; 50,000,000,000 shares authorized, 117,647,000 shares issued and outstanding as of September 30, 2022; pro forma as adjusted reflects 119,647,000 shares issued and outstanding assuming no exercise of the option to purchase additional ADSs)            

Class A Ordinary shares (US$0.000001 par value; nil shares issued and outstanding on an actual basis as of September 30, 2022; and 54,559,000 shares outstanding on a pro forma as adjusted basis as of September 30, 2022)

     �          �          �          �    

Class B ordinary shares (US$0.000001 par value; nil shares issued and outstanding on an actual basis as of September 30, 2022; and 65,088,000 shares outstanding on a pro forma as adjusted basis as of September 30, 2022)

     �          �          �          �    

Additional paid-in capital

     144,577        20,324        177,262        24,716  

Statutory reserve

     43,674        6,140        43,674        6,140  

Retained earnings

     732,693        103,002        732,693        103,002  

Total shareholders� equity

     920,944        129,466        953,629        133,858  

Total capitalization

     920,944        129,466        953,629        133,858  

 

(1)

Retroactively restated to reflect the 1:100 split of our ordinary shares effected on July 8, 2022, as described in Note 1 to our consolidated financial statements included in this prospectus.

(2)

Reflects the sale of Class A ordinary shares in this offering represented by ADSs at the initial public offering price of US$8.00 per ADS, after deducting the estimated underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the option to purchase additional ADSs. The pro forma as adjusted information is for illustrative purposes only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We estimate that net proceeds from this offering will be approximately US$4,392,000 (or US$5,508,000 if the underwriters exercise their option to purchase additional ADSs in full). The net proceeds of US$4,392,000 is calculated as follows:

US$8,000,000 gross offering proceeds, less underwriting discounts and commissions of US$560,000 and estimated offering expenses of US$3,048,000. The pro forma as adjusted total shareholders� equity is the sum of the net proceeds of US$4,392,000 and the actual equity of US$129,466,000.

 

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The net proceeds of US$5,508,000 is calculated as follows:

US$9,200,000 gross offering proceeds, less underwriting discounts and commissions of US$644,000 and estimated offering expenses of US$3,048,000. The pro forma as adjusted total shareholders� equity is the sum of the net proceeds of US$5,508,000 and the actual equity of US$129,466,000.

 

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DILUTION

If you invest in our ADSs, you will experience dilution to the extent of the difference between the initial public offering price per ADS you pay in this offering and the pro forma net tangible book value per ADS immediately after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

We implemented a 1:100 split of our ordinary shares on July 8, 2022, as described in Note 1 to our consolidated financial statements included in this prospectus. Our net tangible book value as of September 30, 2022 was approximately US$129.5 million, or US$1.10 per ordinary share outstanding at that date, and US$2.20 per ADS. Net tangible book value per ordinary share is determined by dividing our net tangible book value by the number of outstanding ordinary shares. Our net tangible book value is determined by subtracting total liabilities from our total assets. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$8.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in such net tangible book value after September 30, 2022, other than to give effect to the issuance and sale of the ordinary shares in the form of ADSs offered hereby at the initial public offering price of US$8.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriter�s option to purchase additional ADSs, our pro forma as adjusted net tangible book value as of September 30, 2022, would have been US$133.9 million, US$1.12 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and US$2.24 per ADS. This represents an immediate increase in pro forma as adjusted net tangible book value of US$0.02 per ordinary share, or US$0.04 per ADS, to existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of US$2.88 per ordinary share, or US$5.76 per ADS, to new investors in this offering. The following table illustrates such per ordinary share dilution:

 

     Per Ordinary Share     Per ADS  

Initial public offering price

   US$ 4.00     US$ 8.00  

Net tangible book value as of September 30, 2022

   US$ 1.10     US$ 2.20  

Increase in net tangible book value attributable to price paid by new investors

   US$ 0.02     US$ 0.04  

Pro forma as adjusted net tangible book value after the offering

   US$ 1.12     US$ 2.24  

Dilution in net tangible book value to new investors in the offering

   US$ (2.88   US$ (5.76

 

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The following table summarizes on a pro forma as adjusted basis as of September 30, 2022, the differences between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total ordinary shares do not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Ordinary shares
purchased
     Total
consideration
     Average price per
ordinary share
equivalent
(US$)
     Average price
per ADS
equivalent
(US$)
 
     Number      %      Amount      %  
                   (US$�000)                       

Existing shareholders(1)

     117,647,000        98.3        22,542.00        73.8        0.19        0.38  
  

 

 

    

 

 

    

 

 

    

 

 

       

New investors

     2,000,000        1.7        8,000.00        26.2        4.00        8.00  
  

 

 

    

 

 

    

 

 

    

 

 

       

Total

     119,647,000        100.0        30,542.00        100.0        
  

 

 

    

 

 

    

 

 

    

 

 

       

 

Note:

(1)

Based on the initial public offering price of US$8.00 per ADS.

The pro forma as adjusted information discussed above is illustrative only.

 

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ENFORCEMENT OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of foreign exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include but are not limited to:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors as compared to the United States; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be subject to arbitration.

Substantially all of our assets are located outside the United States. In addition, our current directors and executive officers, including Mr. Qiang Ding, Mr. Chaohua Sheng and Mr. Chaowei Yan, are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise or to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Conyers Dill & Pearman, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the civil liability provision of the securities laws of the United States or any state in the United States.

In addition, Conyers Dill & Pearman has advised us that there is no statutory recognition in the Cayman Islands of judgments obtained in the U.S., although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the U.S. under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or

 

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other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

However, the courts of the Cayman Islands are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature.

Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

People�s Republic of China

Jingtian & Gongcheng, our PRC legal adviser, has advised us that there is uncertainty as to whether PRC courts would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Jingtian & Gongcheng has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. There exists no treaty and few other forms of reciprocity between China and the United States or the Cayman Islands governing the recognition and enforcement of foreign judgments as of the date of this prospectus. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law before a PRC court against a company for disputes relating to contracts or other property interests, and the PRC court may accept a cause of action based on the laws or the parties� express mutual agreement in contracts choosing PRC courts for dispute resolution if such foreign shareholders can establish sufficient nexus to China for a PRC court to have jurisdiction and meet other procedural requirements, including, among others, that the plaintiff must have a direct interest in the case and that there must be a concrete claim, a factual basis, and a cause for the case. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The foreign shareholder must entrust PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies. However, it will be difficult for U.S. shareholders to originate actions against us in China in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to China for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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CORPORATE HISTORY AND STRUCTURE

Corporate History

We are a holding company incorporated in the Cayman Islands and conduct our operations in China through our PRC subsidiaries. We began our operations in December 2017 when Shanghai Intchains Technology Co., Ltd., or Shanghai Intchains, was founded in Shanghai, China.

With the growth of our business and in order to facilitate international capital raising, we underwent an offshore reorganization in the second half of 2021. In June 2021, Intchains Group Limited was incorporated in the Cayman Islands as our offshore holding company. Shortly after its incorporation, Intchains Group Limited incorporated a wholly-owned subsidiary in the British Virgin Islands, or BVI, namely, Intchains Investment (BVI) Limited, or Intchains BVI. In October 2021, Intchains Global Limited, or Intchains Global, was incorporated in the BVI as a wholly-owned subsidiary of Intchains Group Limited. In February 2022, Intchains Global acquired 100% equity interest in Intchains Pte. Ltd., or Intchains Singapore, a private limited company incorporated in Singapore, for the purpose of holding our planned business in Singapore. Following the incorporation of Intchains BVI, Intchains Technology (Hongkong) Limited, or Intchains HK, was incorporated in Hong Kong in July 2021 as a wholly-owned subsidiary of Intchains BVI. In September 2021, Intchains HK established Jerryken Intelligent Technology (Shanghai) Co., Ltd., or WFOE, as a wholly foreign owned entity in the PRC. In October 2021, Golden Stone Hong Kong Holding Limited, a then independent third party which is wholly owned by Mr. Zhaoyang Ma who is a principal shareholder, acquired 1% equity interest in Shanghai Intchains, upon completion of which, Shanghai Intchains became a sino-foreign equity joint venture. WFOE acquired approximately 82.49% equity interest in Shanghai Intchains in November 2021 and further acquired the remaining 17.51% equity interest in Shanghai Intchains in December 2021, and Intchains Group Limited became the ultimate holding company of our operating subsidiaries.

On July 8, 2022, we subdivided our authorized share capital from US$50,000 divided into US$0.0001 par value each to US$50,000 divided into US$0.000001 par value each.

In our corporate history, we have never directly mined crypto assets, held crypto assets for investment, or converted crypto assets into fiat currency after receipt.

 

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Our Corporate Structure

We do not have a VIE structure. Intchains Group Limited owns 100% of Intchains Global and Intchains BVI. Intchains Global owns 100% of Intchains Singapore. Intchains BVI owns 100% of Intchains HK which owns 100% of WFOE. WFOE, in turn, owns 100% of Shanghai Intchains and our other two operating subsidiaries in the PRC. The chart below illustrates our corporate structure as of the date of this prospectus:

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations and comprehensive (loss) income data and cash flow data for the years ended December 31, 2019, 2020 and 2021 and summary consolidated balance sheets data as of December 31, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations and comprehensive (loss) income data and cash flows data for the nine months ended September 30, 2021 and 2022, summary consolidated balance sheets data as of September 30, 2022, have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our consolidated financial statements are prepared and presented in accordance with the accounting principles generally accepted in the United States of America, or the U.S. GAAP.

Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes and �Management�s Discussion and Analysis of Financial Condition and Results of Operations� included elsewhere in this prospectus.

Consolidated Statements of Operations and Comprehensive (Loss) Income

 

    Year ended December 31,     For the nine months ended
September 30,
 
    2019     2020     2021     2021     2022  
    RMB�000     RMB�000     RMB�000     US$�000     RMB�000     RMB�000     US$�000  

Net revenue

             

Products revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Total net revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Cost of revenue

    (29,581     (23,331     (113,955     (16,020     (47,547 )      (67,030 )      (9,423

Gross profit

    6,235       31,272       517,883       72,802       282,784       373,046       52,442  

Operating expenses:

             

Research and development expenses

    (9,062     (22,481     (53,153     (7,472     (25,416     (38,429     (5,403

Sales and marketing expenses

    (1     (91     (3,006     (423     (1,846     (2,989     (420

General and administrative expenses

    (5,036     (3,165     (14,403     (2,025     (5,404     (9,867     (1,387

Total operating expenses

    (14,099 )      (25,737 )      (70,562     (9,920     (32,666 )      (51,285 )      (7,210 ) 

(Loss) Income from operations:

             

Interest income

    16       37       2,518       354       1,146       7,658       1,077  

Interest expense and guarantee fee

    (132     (168     (197     (28     (98     (58     (8

Foreign exchange (loss)/gains, net

    (55     348       (238     (34     (95     3,566       501  

Other income

    5,323       2,495       740       104       519       19,196       2,699  

(Loss)/Income before income tax expenses

    (2,712     8,247       450,144       63,278       251,590       352,123       49,501  

Income tax expense

    (238     �         �         �         �         9,575       1,346  

Net (loss)/income and total comprehensive (loss)/income

    (2,950     8,247       450,144       63,278       251,590       342,548       48,155  

Weighted average number of shares used in per share calculation(1):

             

� Basic and diluted

    100,000,000       100,000,000       100,870,300       100,870,300       100,000,000       117,647,000       117,647,000  

Net (loss)/earnings per share

             

� Basic and diluted

    (0.03     0.08       4.46       0.63       2.52       2.91       0.41  

 

Note:

(1)

Retroactively restated to reflect the 1:100 split of our ordinary shares effected in July 2022, as described in Note 1 to our consolidated financial statements included in this prospectus.

 

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Consolidated Balance Sheets

 

     As of December 31,      As of September 30,  
     2020      2021      2022  
     RMB�000      RMB�000      US$�000      RMB�000      US$�000  

ASSETS

              

Current assets:

              

Cash and cash equivalents

     19,627        502,420        70,629        703,105        98,841  

Accounts receivable

     6,530        �          �          �          �    

Inventories

     9,481        66,818        9,393        76,598        10,768  

Prepayments and other current assets

     7,616        38,124        5,360        42,923        6,035  

Total current assets

     43,254        607,362        85,382        822,626        115,644  

Non-current assets:

              

Property, equipment and software, net

     406        1,623        229        4,441        625  

Right of use assets

     239        2,275        320        1,566        220  

Prepayments on long-term assets

     �          �          �          112,856        15,865  

Total non-current assets

     645        3,898        549        118,863        16,710  

Total assets

     43,899        611,260        85,931        941,489        132,354  

LIABILITIES, AND SHAREHOLDERS� EQUITY

              

Current liabilities:

              

Accounts payable

     621        6,583        926        2,259        318  

Contract liabilities

     �          3,002        422        1,115        157  

Income tax payable

     �          �          �          2,377        334  

Lease liabilities

     239        934        131        963        135  

Amounts due to related parties

     4,803        �          �          �          �    

Provision for warranty

     �          463        65        385        54  

Accrued liabilities and other current liabilities

     3,997        20,615        2,898        12,905        1,814  

Total current liabilities

     9,660        31,597        4,442        20,004        2,812  

Non-current liabilities:

              

Lease liabilities

     �          1,267        178        541        76  

Other non-current liabilities

     46        �          �          �          �    

Total non-current liabilities

     46        1,267        178        541        76  

Total liabilities

     9,706        32,864        4,620        20,545        2,888  

Total shareholders� equity

     34,193        578,396        81,311        920,944        129,466  

Total liabilities and shareholders� equity

     43,899        611,260        85,931        941,489        132,354  

 

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Consolidated Statements of Cash Flow

 

     Year ended December 31,     For the nine months ended
September 30,
 
     2019     2020     2021     2021     2022  
     RMB�000     RMB�000     RMB�000     US$�000     RMB�000     RMB�000     US$�000  

Net cash (used in) provided by operating activities

     (5,987     15,586       395,420       55,587       220,332       316,209       44,452  

Net cash used in investing activities

     (165     (251     (1,770     (249     (1,070 )      (115,524 )      (16,240

Net cash provided by financing activities

     3,388       251       89,143       12,532       4,099       �         �    

Net (decrease)/increase in cash and cash equivalents

     (2,764     15,586       482,793       67,870       223,361       200,685       28,212  

Cash and cash equivalents, at the beginning of year

     6,805       4,041       19,627       2,759       19,627       502,420       70,629  

Cash and cash equivalents, at the end of year

     4,041       19,627       502,420       70,629       242,988       703,105       98,841  

Key Operating Data

The following table sets forth the breakdown of revenue, sales volume and average selling price (per unit) of ASIC chips delivered for the periods indicated:

 

    Years ended December 31,     For the nine months ended September 30,  
    2019     2020     2021     2021     2022  
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
 
    (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)  

ASIC chips

                             

ICQ510

    3,312       362,000       9.15       15,189       1,308,351       11.61       �         �         �         �         �         �         �         �         �    

SIPC100

    211       3,500       60.29       884       66,240       13.35       �         �         �         �         �         �         �         �         �    

ICQ520

    �         �         �         1,313       114,789       11.44       �         �         �         �         �         �         �         �         �    

ICT560

    �         �         �         10,486       622,015       16.86       83,770       1,437,544       58.27       29,437       439,816       66.93       42,793       598,264       71.53  

ICT570

    �         �         �         1,111       34,885       31.85       7,380       74,592       98.94       4,227       49,712       85.03       5,197       34,464       150.80  

ICT580

    �         �         �         1,075       36,350       29.57       �         �         �         �         �         �         3,858       32,880       117.34  

ICC590

    �         �         �         18,553       123,130       150.68       131,975       1,169,405       112.86       71,744       622,281       115.29       48,924       517,096       94.61  

ICA585

    �         �         �         �         �         �         �         �         �         �         �         �         148,079       328,924       450.19  

ICA586

    �         �         �         �         �         �         108,092       411,944       262.39       64,097       231,656       276.69       70,797       166,756       424.55  

ICA588

    �         �         �         �         �         �         206,823       1,706,716       121.18       119,275       894,300       133.37       61,605       533,100       115.56  

ICA589

    �         �         �         �         �         �         22,065       306,952       71.88       16,620       253,560       65.55       5,692       60,756       93.69  

IAA561

    �         �         �         �         �         �         �         �         �         �         �         �         19,148       252,727       75.77  

ICC551

    �         �         �         �         �         �         �         �         �         �         �         �         3,570       43,848       81.42  

Total

    3,523       365,500       9.64       48,611       2,305,760       21.08       560,105       5,107,153       109.67       305,400       2,491,325       122.59       409,663       2,568,815       159.48  

 

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled �Selected Consolidated Financial and Operating Data� and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under �Risk Factors� and elsewhere in this prospectus.

Overview

We are a provider of integrated solutions consisting of high-performance computing ASIC chips and ancillary software and hardware for blockchain applications. We utilize a fabless business model and specialize in the front-end and back-end of IC design, which are the major components of the IC product development chain. We have established strong supply chain management with a leading foundry, which helps to ensure our product quality and stable production output.

Our products consist of high-performance computing ASIC chips that have high computing power and superior power efficiency as well as ancillary software and hardware, which cater to the evolving needs of the blockchain industry. We have built a proprietary technology platform named �Xihe� Platform, which allows us to develop a wide range of ASIC chips with high efficiency and scalability. We design our ASIC chips in-house, which enables us to leverage proprietary silicon data to deliver products reflecting the latest technological developments ahead of our competitors. As of September 30, 2022, we had completed a total of eight tape-outs using our �Xihe� Platform for 22nm ASIC chips, achieving a 100% success rate for all our tape-outs.

Our strong commitment to advanced research and development enables us to innovate continuously and create ASIC chips with superior performance to power ratio at reasonable cost. According to Frost & Sullivan, we have a leading market share in ASIC chips designed for several key blockchain algorithms including Blake2bsha3, sha512MD160, Cryptonight V4, Eaglesong and Blake2s, in terms of the accumulative computing power sold for the years ended December 31, 2019, 2020 and 2021. We will continue to devote significant resources to design and tailor our ASIC chips for use in high-technology applications.

As a result of fast-increasing market demand for our products, we have been growing rapidly. Our total revenue increased from RMB35.8 million for 2019 to RMB54.6 million for 2020, and further increased significantly to RMB631.8 million (US$88.8 million) for 2021. Our total revenue increased significantly from RMB330.3 million for the nine months ended September 30, 2021 to RMB440.1 million (US$61.9 million) for the nine months ended September 30, 2022. We recognized net loss of RMB3.0 million for 2019, net income of RMB8.2 million for 2020 and net income of RMB450.1 million (US$63.3 million) for 2021. Our net income increased significantly from RMB251.6 million for the nine months ended September 30, 2021 to RMB342.5 million (US$48.2 million) for the nine months ended September 30, 2022.

Major Factors Affecting Our Results of Operations

In addition to the general factors affecting the Chinese and global economy and our industry, our results of operations and financial condition are affected by a number of industry- and company-specific factors, including those set out below:

Expected economic returns on cryptocurrency mining activities and fluctuation of cryptocurrency price especially

Our revenue primarily consists of proceeds of sales of ASIC chips, which are, in general, determined by the demand and pricing of our ASIC chips. An increase in the economic return of cryptocurrency mining activities

 

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would generally stimulate the demand and average selling price for our ASIC chips. An increase in the cryptocurrency price is the most significant factor that could increase the expected economic returns generated by cryptocurrency mining activities. Other factors that may increase the economic return of cryptocurrency mining activities include, among others, increase in transaction fees, decrease in electricity costs or other operating costs, increase in computing power and efficiency of mining machines, reduction of difficulties of mining activities and increase in number of cryptocurrencies awarded for mining activities. According to Frost & Sullivan, the prices of alternative cryptocurrencies have experienced significant fluctuations during their limited history and may continue to fluctuate significantly in the future. The volatility of the cryptocurrency price may significantly affect our business of operations and financial condition.

A decrease in the expected economic returns of cryptocurrency mining activities and the cryptocurrency price may also lead to increase in inventory write-downs, credit sales and write-downs of advances to suppliers as a result of stagnant demand and decrease in the average selling price for our ASIC chips, which may significantly affect our gross margin and extend the billing cycle of our products.

Cryptocurrency prices have fluctuated significantly in the past few years and resulted in a corresponding fluctuation in our sales of ASIC chips. We expect that the cryptocurrency prices may continue to fluctuate in the future, and as such, we would expect to continue to experience a significant corresponding fluctuation in both sales volumes and average selling prices of ASIC chips, as well as write-downs of inventory, which may erode our profitability in the case of a significant cryptocurrency price drop. See �Risk Factors�Risks Relating to Our Business and Industry�There is no assurance that a cryptocurrency will maintain its long-term value, and volatility in the market prices of cryptocurrencies may adversely affect our business and results of operations.�

Market demand for our ASIC chips and development of blockchain technology and cryptocurrency markets

Our current ASIC chips are mainly used for cryptocurrency mining. According to Frost & Sullivan, sales of ASIC chips have surged at a CAGR of 8.2% from approximately US$21.8 billion in 2016 to approximately US$29.9 billion in 2020 and are expected to further increase at a CAGR of 10.2% to approximately US$48.7 billion in 2025. There can be no assurance that such expected growth rate will materialize in the future. Because market demand is dependent on the development of the blockchain technology, as well as innovations in cryptocurrency applications, our results of operations will significantly depend on our ability to keep pace with market demand to attract new customers or retain existing customers as well as to maintain or increase our market share. Our results of operations will also be significantly affected by developments in overall blockchain technology and cryptocurrency markets, and in particular, the cryptocurrency market. Cryptocurrency prices have fluctuated significantly in the past few years and resulted in a corresponding fluctuation in our sales of ASIC chips. The cryptocurrency market may be affected by various factors, including, among others, the cryptocurrency price and expected return on cryptocurrency related activities such as mining and trading, different views regarding the decentralized nature of cryptocurrencies, acceptance of cryptocurrencies as an investment instrument as well as a currency for payment, competing cryptocurrencies to cryptocurrency, and changes in the cryptocurrency algorithm and the mechanism of mining.

Performance and cost of our products

The pricing of and demand for our ASIC chips are closely related to their performance. In general, more advanced process technologies can accommodate designs that produce ASICs with higher power efficiency. The introduction of new process and design technologies also enables us to gradually lower the production costs of ASICs with comparable computing power. However, the application of such process technologies also commands high initial setup costs, particularly when the new production techniques first become available, which translates to higher per unit costs. Our new generation ASICs using the most advanced process technologies will need to achieve strong sales in order to justify the initial setup costs of the new production techniques and maintain our profitability. At the same time, as the most advanced production capabilities of IC foundries ramp up, the initial high unit cost for IC fabrication may also decrease, which will likely translate to lower fabrication costs and a positive effect on our business, results of operations and financial condition.

 

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Competitiveness in research and development

We are a leading ASIC chip design company, and research and development is key to the success of our products. Our research and development expenses were RMB9.1 million, RMB22.5 million, RMB53.2 million (US$7.5 million), RMB25.4 million and RMB38.4 million (US$5.4 million) in 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, respectively. We continue to focus on enhancing our product planning and research and development capabilities to enable us to introduce or improve products that can well address evolving customer needs in a timely manner. As existing competitors may introduce new technologies or provide more competitive offerings and more companies may enter the market to compete with us, competition may intensify in the future and consequently our competitiveness and market share may be affected. As a result, our ability to continue offering new and enhanced ASIC chips for cryptocurrency mining as well as competitive products and technologies will have a significant impact on our results of operations.

Regulatory environment

We have historically generated all of our revenue from customers based in China. We intend to expand to overseas sales in the future to diversify our source of revenue. As such, we need to make efforts and incur costs to ensure that we are compliant with the existing laws and regulations relating to our business in the various jurisdictions that are material to our business and operations, and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future. Our ability to anticipate and respond to potential changes in government policies and regulations will have a significant impact on our business operations in such countries and our overall results of operations. See �Risk Factors�Risks Relating to Our Business and Industry�We are subject to risks associated with legal, political or other conditions or developments regarding holding, using or mining of cryptocurrencies and related products and services, which could negatively affect our business, financial condition, and results of operations.�

Production capacity

As a fabless IC design company, we outsource the fabrication process of our ICs to our Foundry Partner, and we outsource the testing and packaging process to third-party testing and packaging partners. We work closely with a limited number of such production partners. We cannot guarantee that our third-party production partners will be able to meet our manufacturing requirements or capacity or that they will not raise their prices. As a result, our ability to quickly respond to market demand and meet production timelines, as well as to price our products competitively, is highly dependent on our collaboration with third-party production partners. If our production partners are unable to meet our production capacity requirements or deliver products that meet our quality standards on a timely basis, our results of operations will be adversely affected. We may also incur significant cash outflow at the early stages of our production process because we are required to make prepayments to some of our third-party production partners to secure their production capacity beforehand, which may affect our liquidity position. In addition, any failure by our third-party production partners to perform their obligations in a timely manner may subject us to counterparty risk and make it difficult or impossible for us to fulfill our customers� orders, which would harm our reputation and negatively affect our business, results of operations and financial condition.

 

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Key Components of Results of Operations

Revenue

We derive our revenue primarily from sales of ASIC chips, and we also derive revenue from ancillary software and hardware as a unified product. In 2019 and 2020, we also derived revenue from sales of customized IC products that we designed based on specifications and requirements of our customers. During 2019 and 2020, we accepted orders from customers to develop and design customized IC products consisting of ASIC chips, other hardware and embedded software that targeted a certain cryptocurrency or algorithm. These customized IC products and our standard products were substantially similar in terms of chip design. The intellectual property resulting from the customized IC products belongs to us. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, we generated total revenue of RMB35.8 million, RMB54.6 million, RMB631.8 million (US$88.8 million), RMB330.3 million and RMB440.1 million (US$61.9 million), respectively. The following table sets forth the breakdown of our revenue for the periods indicated:

 

     Years ended December 31,      For the nine months ended
September 30,
 
     2019      2020      2021      2021      2022  
     RMB�000      RMB�000      RMB�000      US$�000      RMB�000      RMB�000      US$�000  

Products revenue:

                    

ASIC chips

     3,523        48,611        560,105        78,738        305,400        409,663        57,590  

Ancillary software and hardware

     1,696        1,321        71,733        10,084        24,931        30,413        4,275  

Customized IC products

     30,597        4,671        �          �          �          �          �    

Total

     35,816        54,603        631,838        88,822        330,331        440,076        61,865  

Revenue from sales of our ASIC chips is primarily affected by the number of ASIC chips sold and their average selling price. The following table sets forth the breakdown of sales volume and average selling price (per unit) of ASIC chips delivered for the periods indicated:

 

    Years ended December 31,     For the nine months ended September 30,  
    2019     2020     2021     2021     2022  
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
    Revenue     Sales
volume
    Average
selling
price
per unit
 
    (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)     (RMB�000)     (Unit)     (RMB)  

ASIC chips

                             

ICQ510

    3,312       362,000       9.15       15,189       1,308,351       11.61       �         �         �         �         �         �         �         �         �    

SIPC100

    211       3,500       60.29       884       66,240       13.35       �         �         �         �         �         �         �         �         �    

ICQ520

    �         �         �         1,313       114,789       11.44       �         �         �         �         �         �         �         �         �    

ICT560

    �         �         �         10,486       622,015       16.86       83,770       1,437,544       58.27       29,437       439,816       66.93       42,793       598,264       71.53  

ICT570

    �         �         �         1,111       34,885       31.85       7,380       74,592       98.94       4,227       49,712       85.03       5,197       34,464       150.80  

ICT580

    �         �         �         1,075       36,350       29.57       �         �         �         �         �         �         3,858       32,880       117.34  

ICC590

    �         �         �         18,553       123,130       150.68       131,975       1,169,405       112.86       71,744       622,281       115.29       48,924       517,096       94.61  

ICA585

    �         �         �         �         �         �         �         �         �         �         �         �         148,079       328,924       450.19  

ICA586

    �         �         �         �         �         �         108,092       411,944       262.39       64,097       231,656       276.69       70,797       166,756       424.55  

ICA588

    �         �         �         �         �         �         206,823       1,706,716       121.18       119,275       894,300       133.37       61,605       533,100       115.56  

ICA589

    �         �         �         �         �         �         22,065       306,952       71.88       16,620       253,560       65.55       5,692       60,756       93.69  

IAA561

    �         �         �         �         �         �         �         �         �         �         �         �         19,148       252,727       75.77  

ICC551

    �         �         �         �         �         �         �         �         �         �         �         �         3,570       43,848       81.42  

Total

    3,523       365,500       9.64       48,611       2,305,760       21.08       560,105       5,107,153       109.67       305,400       2,491,325       122.59       409,663       2,568,815       159.48  

The average selling price of our ASIC chips changes from period to period and is primarily affected by the market price of cryptocurrencies, prices of our competitors� products, expected economic return of cryptocurrency mining, product types and demand for the chips. See ��Major Factors Affecting Our Results of Operations� for details of factors affecting economic return on cryptocurrency mining activities and the market demands.

 

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Cost of Revenue

Cost of revenue for our ASIC chips represents costs and expenses directly attributable to the manufacture of our products sold and delivered, which comprises product costs, including costs of raw materials, costs of contract manufacturers for production, shipping and handling costs. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, our cost of revenue was RMB29.6 million, RMB23.3 million, RMB114.0 million (US$16.0 million), RMB47.5 million and RMB67.0 million (US$9.4 million), respectively.

Our average cost of ASIC chips per unit primarily comprise and is mainly affected by cost of wafer. The average per unit cost of wafers is affected by our purchase volume and technology advancement. We generally incur higher per unit cost for models with better performance. The average cost of our ASIC chips per unit was RMB8.69, RMB9.38, RMB11.89, RMB11.76 and RMB16.24 in 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, respectively.

Gross profit and gross profit margin

Our gross profit and gross profit margin are primarily affected by cryptocurrency prices, which have a significant effect on the average selling price of our products and, to a lesser extent, the average per unit production costs of our ASIC chips and the product mix. Customized IC products we sold in 2019 and 2020 had lower gross profit margin compared with the ASIC chips wholly designed by ourselves without customization. In 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, our gross profit was RMB6.2 million, RMB31.3 million, RMB517.9 million (US$72.8 million), RMB282.8 million and RMB373.0 million (US$52.4 million), respectively. Our overall gross profit margin was 17.3%, 57.3%, 82.0%, 85.6% and 84.8%, respectively, for the same periods.

Operating Expenses

Our operating expenses include research and development expenses, sales and marketing expenses and general and administrative expenses. The following table sets forth components of our operating expenses for the periods indicated:

 

    Years ended December 31,     For the nine months ended September 30,  
    2019     2020     2021     2021     2022  
    RMB�000     %     RMB�000     %     RMB�000     %     US$�000     RMB�000     %     RMB�000     %     US$�000  

Research and development expenses

    9,062       64       22,481       87       53,153       75.3       7,472       25,416       77.8       38,429       74.9       5,403  

Sales and marketing expenses

    1       0       91       0       3,006       4.3       423       1,846       5.7       2,989       5.8       420  

General and administrative expenses

    5,036       36       3,165       13       14,403       20.4       2,025       5,404       16.5       9,867       19.3       1,387  

Total

    14,099       100.0       25,737       100.0       70,562       100.0       9,920       32,666       100.0       51,285       100.0       7,210  

Research and development expenses. Research and development expenses primarily consist of salary and welfare for research and development personnel, tape-out expenses paid to the Foundry Partner, consulting and contractor expenses, testing and tooling materials and manufacturing for trial, and other expenses relating to research and development personnel. Substantially all of our research and development expenses are related to design of ASIC chips.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salary and welfare for sales and marketing personnel, warranty expenses, traveling expenses and other expenses relating to sales and marketing personnel.

General and administrative expenses. General and administrative expenses consist primarily of salary and welfare for general and administrative personnel, lease expenses and professional service fees.

 

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Taxation

Cayman Islands

We are incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains, or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties, which may be applicable on instruments executed in, or brought within the jurisdiction of, the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

Hong Kong

On March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017, which introduces the two-tiered profits tax rates regime. The bill was signed into law on March 28, 2018 and was gazetted on the following day. Under the two-tiered profits tax rates regime, the first HK$2 million of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. The profits of group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%.

Accordingly, the Hong Kong profits tax of the qualifying group entity is calculated at 8.25% on the first HK$2 million of the estimated assessable profits and at 16.5% on the estimated assessable profits above HK$2 million.

PRC

Our subsidiaries in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income at a rate of 25% in accordance with the relevant PRC income tax laws. The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered resident enterprises for the PRC income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT Law provide that non-resident legal entities will be considered as PRC resident enterprises if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries to be a PRC resident enterprise since a substantial majority of the members of our management team as well as the management team of our overseas subsidiaries are located in China, in which case we or the applicable overseas subsidiaries, as the case may be, would be subject to the PRC EIT at the rate of 25% on worldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a �resident enterprise� for PRC EIT purposes, a number of unfavorable PRC tax consequences could follow. See �Risk Factors�Risk Factors Relating to Doing Business in the PRC � We may be classified as a �resident enterprise� for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.�

Critical Accounting Policies

We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of

 

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estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue Recognition

We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services.

Products revenue

We generate revenue primarily from the sale of ASIC Chips and the ancillary software and hardware as a unified product. Our sales arrangements made commencing in April 2021 usually require full prepayment before the delivery of products after April 2021. Before April 2021, we offered credit sales to certain significant and long-standing customers in China. The payment terms was up to 6 months.

Generally, the sales of ASIC chips and ancillary software and hardware form an integral part of our performance obligations. ASIC chips are the most crucial hardware component embedded into our products that provide computing power and are also the key factor in determining the efficiency of our products. Other key hardware includes the computing board, control board and other accessories such as power supply and structural parts. Software is embedded in hardware to provide basic configuration of relevant hardware that enables end-users to monitor the working condition of the chips in real time, including real-time hash rate, temperature and network connection. All of these components are part of our products in terms of enabling us to complete our performance obligations and therefore we recognize products revenue, including sales of customized IC products designed based on the customer�s specifications and requirements which we could, if the customized IC products had not been purchased by the customers that ordered them, redirect the customized IC products for other use without practical limitations or contractual restrictions with a reasonable profit margin because there was no need to incur significant costs or make any significant reduction in unit selling price, at a point in time based on management�s evaluation of when the control of the products have been passed to customers. The transfer of control is considered complete when products have been picked up by or deliver to carriers of our customers.

We offer a standard product warranty of six months provided that the product operates for normal use. Except for the product warranty, we are not obligated to provide significant after-sale services such as hardware/software upgrades or updates. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of sales and marketing expenses. The reserves established are regularly monitored based upon historical experience and any actual claims charged against the reserve. The amount of total warranty costs incurred was immaterial for the years ended December 31, 2019, 2020 and 2021 and the nine months ended September 30, 2021 and 2022, respectively.

Cost of revenue

Amounts recorded as cost of revenue represent direct expenses incurred in order to generate revenue. Such costs are recorded as incurred. Cost of revenue primarily comprises costs of raw materials, costs of contract manufacturers for production, shipping and handling costs and research and development costs for production of customized hardware and chips in research phase.

 

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Contract liabilities

Cash proceeds received from customers before product delivery is recognized as contract liabilities and is recognized as revenue when revenue recognition criteria are met.

The prepayments received from customers as of December 31, 2020 and 2021 and September 30, 2022 was nil, RMB3.0 million (US$0.4 million) and RMB1.1 million (US$0.2 million), respectively. The revenue recognized for the years ended December 31, 2020 and 2021 and the nine months ended September 30, 2022 for such contract liability was RMB5.7 million, nil and RMB3.0 million (US$0.4 million), respectively.

Inventories

Inventories consist of finished goods, work in process and raw materials, which are purchased from contract manufacturers and component suppliers. Inventories are stated at the lower of cost or net realizable value. Cost of inventory is determined using the weighted average cost method. Adjustments are recorded to write down the cost of inventory to the estimated net realizable value due to slow-moving and obsolete inventory, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment. We take ownership, risks and rewards of the products purchased.

In accordance with FASB Accounting Standards Codification 855-10-55-1(b), we consider all data available, including future demand and subsequent changes in product prices that may provide additional information about the valuation of inventories at the balance sheet date.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

    Years ended December 31,     For the nine months ended
September 30,
 
    2019     2020     2021     2021     2022  
    RMB�000     RMB�000     RMB�000     US$�000     RMB�000     RMB�000     US$�000  

Net revenue

             

Products revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Total net revenue

    35,816       54,603       631,838       88,822       330,331       440,076       61,865  

Cost of revenue

    (29,581     (23,331     (113,955     (16,020     (47,547 )      (67,030 )      (9,423

Gross profit

    6,235       31,272       517,883       72,802       282,784       373,046       52,442  

Operating expenses:

             

Research and development expenses

    (9,062     (22,481     (53,153 )      (7,472     (25,416     (38,429     (5,403

Sales and marketing expenses

    (1     (91     (3,006 )      (423     (1,846     (2,989     (420

General and administrative expenses

    (5,036     (3,165     (14,403 )      (2,025     (5,404     (9,867     (1,387

Total operating expenses

    (14,099     (25,737 )      (70,562     (9,920     (32,666 )      (51,285 )      (7,210 ) 

(Loss)/Income from operations:

             

Interest income

    16       37       2,518       354       1,146       7,658       1,077  

Interest expense and guarantee fee

    (132     (168     (197 )      (28     (98     (58     (8

Foreign exchange (loss)/gains, net

    (55     348       (238 )      (34     (95     3,566       501  

Other income

    5,323       2,495       740       104       519       19,196       2,699  

(Loss)/Income before income tax expenses

    (2,712     8,247       450,144       63,278       251,590       352,123       49,501  

Income tax expense

    (238     �         �         �         �         9,575       1,346  

Net (loss)/income and total comprehensive (loss)/income

    (2,950     8,247       450,144       63,278       251,590       342,548       48,155  

 

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Period Ended September 30, 2021 Compared to Period Ended September 30, 2022

Revenue. Our revenue increased by 33.2% from RMB330.3 million in the nine months ended September 30, 2021 to RMB440.1 million (US$61.9 million) in the nine months ended September 30, 2022, primarily due to an increase in the sales volume of ASIC chips.

Cost of revenue. Our cost of revenue increased by 41.0% from RMB47.5 million in the nine months ended September 30, 2021 to RMB67.0 million (US$9.4 million) in the nine months ended September 30, 2022, primarily due to an increase in the sales volume of our products.

Gross profit. As a result of the foregoing, we recorded a gross profit of RMB373.0 million (US$52.4 million) in the nine months ended September 30, 2022 as compared to a gross profit of RMB282.8 million in the nine months ended September 30, 2021.

Operating expenses. Our total operating expenses increased by 57.0% from RMB32.7 million in the nine months ended September 30, 2021 to RMB51.3 million (US$7.2 million) in the nine months ended September 30, 2022, primarily due to an increase in research and development expenses for the design of ASIC chips.

 

   

Research and development expenses. Our research and development expenses increased by 51.2% from RMB25.4 million in the nine months ended September 30, 2021 to RMB38.4 million (US$5.4 million) in the nine months ended September 30, 2022, primarily due to the investment in several chip design projects to maintain our advantages in chip diversity, computing power and energy consumption. Our research and development expenses as a percentage of our revenue was 8.7% in the nine months ended September 30, 2022 as compared with 7.7% in the nine months ended September 30, 2021.

 

   

Sales and marketing expenses. Our selling expenses increased by 61.9% from RMB1.8 million in the nine months ended September 30, 2021 to RMB3.0 million (US$0.4 million) in the nine months ended September 30, 2022, primarily due to an increase in salary of sales and marketing personnel. Our sales and marketing expenses as a percentage of our revenue was 0.7% in the nine months ended September 30, 2022 as compared with 0.6% in the nine months ended September 30, 2021.

 

   

General and administrative expenses. Our general and administrative expenses increased by 82.6% from RMB5.4 million in the nine months ended September 30, 2021 to RMB9.9 million (US$1.4 million) in the nine months ended September 30, 2022, primarily due to an increase in employee salaries, taxes surcharges and listing expenses. Our general and administrative expenses as a percentage of our revenue was 2.2% in the nine months ended September 30, 2022 as compared with 1.6% in the nine months ended September 30, 2021.

Interest income. Our interest income increased from RMB1.1 million in the nine months ended September 30, 2021 to RMB7.7 million (US$1.1 million) in 2021, primarily in connection with the interest from the increase in our cash balance.

Interest expense and guarantee fee. Our interest expense and guarantee fee decreased from RMB98,000 in the nine months ended September 30, 2021 to RMB58,000 (US$8,000) in the nine months ended September 30, 2022, primarily because we repaid a bank loan.

Foreign exchange (loss)/ gains, net. Our foreign exchange loss, net was RMB95,000 in the nine months ended September 30, 2021 and our foreign exchange gains, net was RMB3.6 million (US$0.5 million) in the nine months ended September 30, 2022, as a result of the exchange rate fluctuation between RMB and U.S. dollars as we make prepayment to our Foundry Partner in U.S. dollars.

Other income. Our other income increased from RMB0.5 million in the nine months ended September 30, 2021 to RMB19.2 million (US$2.7 million) in the nine months ended September 30, 2022, primarily due to an increase in government grants we received from local government.

 

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Net income. As a result of the foregoing, our net income was RMB251.6 million in the nine months ended September 30, 2021 and our net income was RMB342.5 million (US$48.2 million) in the nine months ended September 30, 2022.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenue. Our revenue increased by 1,057.1% from RMB54.6 million in 2020 to RMB631.8 million (US$88.8 million) in 2021, primarily due to the increase in ASIC chips we sold as a result of the increased demand for ASIC chips in line with the growth in the cryptocurrency market and the significant increase in the number of our customers.

Cost of revenue. Our cost of revenue increased by 389.3% from RMB23.3 million in 2020 to RMB114.0 million (US$16.0 million) in 2021, primarily due to the increase in the sales volume of our products.

Gross profit. As a result of the foregoing, we recorded a gross profit of RMB517.9 million (US$72.8 million) in 2021 as compared to a gross profit of RMB31.3 million in 2020.

Operating expenses. Our total operating expenses increased by 174.7% from RMB25.7 million in 2020 to RMB70.6 million (US$9.9 million) in 2021, primarily due to the increase in research and development expenses for the design of ASIC chips.

 

   

Research and development expenses. Our research and development expenses increased by 136.4% from RMB22.5 million in 2020 to RMB53.2 million (US$7.5 million) in 2021, primarily due to the investment in several chip design projects to maintain our advantages in chip diversity, computing power and energy consumption. Our research and development expenses as a percentage of our revenue was 8.4% in 2021 as compared with 41.2% in 2020.

 

   

Sales and marketing expenses. Our selling expenses increased from RMB91,000 in 2020 to RMB3.0 million (US$0.4 million) in 2021, primarily due to the increase in salary of sales and marketing personnel and the accrued warranty provision. Our sales and marketing expenses as a percentage of our revenue was 0.5% in 2021 as compared with 0.2% in 2020.

 

   

General and administrative expenses. Our general and administrative expenses increased by 350.0% from RMB3.2 million in 2020 to RMB14.4 million (US$2.0 million) in 2021, primarily due to the increase in employee salaries, taxes surcharges and listing expenses. Our general and administrative expenses as a percentage of our revenue was 2.3% in 2021 as compared with 5.9% in 2020.

Interest income. Our interest income increased from RMB37,000 in 2020 to RMB2.5 million (US$0.4 million) in 2021, primarily in connection with the interest from the increase in our cash balance.

Interest expense and guarantee fee. Our interest expense and guarantee fee increased by 17.3% from RMB168,000 in 2020 to RMB197,000 (US$28,000) in 2021, primarily in connection with a bank loan we obtained.

Foreign exchange (loss)/ gains, net. Our foreign exchange gain, net was RMB0.3 million in 2020 and our foreign exchange loss, net was RMB0.2 million (US$34,000) in 2021, as a result of the exchange rate fluctuation between RMB and U.S. dollars as we make prepayment to our Foundry Partner in U.S. dollars.

Other income. Our other income decreased from RMB2.5 million in 2020 to RMB0.7 million (US$0.1 million) in 2021, primarily due to the decrease in government grants we received from local government.

Net income. As a result of the foregoing, our net income was RMB8.2 million in 2020 and our net income was RMB450.1 million (US$63.3 million) in 2021.

 

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenue. Our revenue increased by 52.5% from RMB35.8 million in 2019 to RMB54.6 million in 2020, primarily due to the increase in types of ASIC chips we offered and number of customers.

Cost of revenue. Our cost of revenue decreased by 21.3% from RMB29.6 million in 2019 to RMB23.3 million in 2020, primarily due to the decrease in the cost of a customized IC chip project in 2020 which had lower gross profit margin compared with the ASIC chips wholly designed by ourselves without customization.

Gross profit. As a result of the foregoing, we recorded a gross profit of RMB31.3 million in 2020 as compared to a gross profit of RMB6.2 million in 2019.

Operating expenses. Our total operating expenses increased by 82.3% from RMB14.1 million in 2019 to RMB25.7 million in 2020, primarily due to the increase in our research and development expenses for ASIC chips design.

 

   

Research and development expenses. Our research and development expenses increased by 147.3% from RMB9.1 million in 2019 to RMB22.5 million in 2020, primarily due to expenses related to chip design. Our research and development expenses as a percentage of our revenue was 41.2% in 2020 as compared with 25.4% in 2019.

 

   

Sales and marketing expenses. Our selling expenses increased from RMB1,000 in 2019 to RMB91,000 in 2020, primarily because our sales in 2019 primarily consisted of customized IC products ordered by customers who already knew us or found us on their own, and we did not conduct sales and marketing activities. Our sales and marketing expenses as a percentage of our revenue was 0.2% in 2020 as compared with 0.0% in 2019.

 

   

General and administrative expenses. Our general and administrative expenses decreased by 36.0% from RMB5.0 million in 2019 to RMB3.2 million in 2020, primarily due to the decrease in employee salary, share-based compensation expense. Our general and administrative expenses as a percentage of our revenue was 5.9% in 2020 as compared with 14.0% in 2019.

Interest income. Our interest income increased from RMB16,000 in 2019 to RMB37,000 in 2020, primarily in connection with the interest from the increase in our cash balance.

Interest expense and guarantee fee. Our interest expense and guarantee fee increased by 27.3% from RMB132,000 in 2019 to RMB168,000 in 2020, primarily in connection with a bank loan we obtained in 2019.

Foreign exchange (loss)/ gains, net. Our foreign exchange loss, net was RMB55,000 in 2019 and our foreign exchange gain, net was RMB0.3 million in 2020, as a result of the exchange rate fluctuation between RMB and U.S. dollars as we make prepayment to our Foundry Partner in U.S. dollars.

Other income. Our other income decreased by 52.8% from RMB5.3 million in 2019 to RMB2.5 million in 2020, primarily due to the decrease in government grants we received from local government.

Net (loss) income. As a result of the foregoing, our net loss was RMB3.0 million in 2019 and our net income was RMB8.2 million in 2020.

Recent Developments

Prices of alternative cryptocurrencies were relatively stable between September and November 2022 after experiencing declines generally in the second and third quarters of 2022. In November 2022, cryptocurrencies experienced a significant price decline as a result of further industry developments. In response to recent shifts in market trends, we have examined the expected returns of cryptocurrency mining activities, prices of ASIC chips

 

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that are used in mining equipment for different alternative cryptocurrencies, and end users� demonstrated faith and preferences for different alternative cryptocurrencies, and adjusted our product development, production plans as well as product pricing accordingly. Despite our adjustments, as a result of significant industry-wide decline in cryptocurrency prices, the sales volume and average selling price of our products in the fourth quarter of 2022 decreased significantly compared to the same period in 2021. In September 2022 we successfully completed tape-outs of new ASIC chips, which are currently under testing and we expect to launch commercial sales in the first half of 2023.

Between September and November 2022, many regions in China experienced a resurgence of COVID-19, and local governments of mainland China implemented pandemic control measures that put restrictions on travel and group gatherings. Since the beginning of December 2022, China has removed its previous COVID-19 control measures including mandatory quarantines and PCR tests, travel restrictions and gathering restrictions. While we experienced delays earlier in 2022 ranging from one to four days in custom clearance for ASIC chips from our Foundry Partner and transportation to our outsourced semiconductor assembly and testing service providers, our operations have returned to normal since the third quarter of 2022. Currently, our business operations and logistics are no longer affected by COVID-19 related pandemic control measures. To mitigate the possible impact on our business of any similar pandemic in the future, we intend to use more than one foundry facility operated by our Foundry Partner as well as explore cooperative opportunities with other established foundries. We currently do not expect disruptions to our supply chain in the foreseeable future.

In the fourth quarter of 2022, we sold 666,420 units of ASIC chips and our average selling price was approximately RMB41. By comparison, in the fourth quarter of 2021 we sold 2,615,828 units of ASIC chips and our average selling price was approximately RMB97. Our average selling price for the fourth quarter of 2021 was significantly higher primarily because in 2021 the prices of cryptocurrencies began to increase rapidly and there was a fast-growing market demand for cryptocurrency mining equipment which in turn fueled demand for our ASIC chips. The prices of cryptocurrencies began to experience declines in mid-2022, which negatively impacted the contract prices of our ASIC chips which were to be delivered in the fourth quarter of 2022. Our average selling price was further negatively impacted in the fourth quarter of 2022 by developments in the cryptocurrency industry that resulted in industry-wide price declines.

Liquidity and Capital Resources

Our primary source of liquidity historically has been cash generated from our business operations, bank loans and equity contributions from our shareholders, which have historically been sufficient to meet our working capital and capital expenditure requirements.

In 2019, we entered into a short-term loan agreement with Bank of Ningbo with principal amount of RMB2.0 million with interest rate of 5.6% per annum, which was guaranteed by our co-founders and spouse of Mr. Chaohua Sheng, and an independent third party, Shanghai Venture Relay Financing Guarantee Co., Ltd. The loan was fully repaid in October 2020. In addition, in 2019, we entered into a short-term loan agreement with Zhejiang Tailong Commercial Bank Co., Ltd. with principal amount of RMB2.0 million with interest rate of 0.584% per month, which was guaranteed by our co-founders and spouse of Mr. Qiang Ding. The loan was fully repaid in April 2020.

In 2021, we entered into a short-term loan agreement with Shanghai Pudong Development Bank Co., Ltd., new branch of Shanghai Pilot Free Trade Zone with aggregated principal amount of RMB5.0 million (US$0.7 million) with interest rate of 4% per annum which was guaranteed by Shanghai Small, Medium and Micro Enterprise Policy Financing Guarantee Fund Management Center, an independent third party, Mr. Chaohua Sheng, our co-founder and spouse of Mr. Chaohua Sheng. The loan was fully repaid in October 2021.

As of September 30, 2022, our cash and cash equivalents were RMB703.1 million (US$98.8 million). Our cash and cash equivalents primarily consist of cash in bank with no restriction.

 

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We believe that our existing cash and cash equivalents, anticipated cash raised from financings, and anticipated cash flow from operations, together with the net proceeds from this offering, will be sufficient to meet our anticipated cash needs for the next 12 months from the date of this prospectus. We intend to use portion of the net proceeds from this offering to fund our operations over the next 12 months. See �Use of Proceeds.� However, the exact amount of proceeds we use for our operations and expansion plans will depend o