Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
An aggregate of 11,421,393 ordinary shares,
par value US$0.0001 per share, as of March 31, 2020.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Unless the context otherwise
requires, in this annual report on Form 20-F references to:
Discrepancies in any
table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report
on Form 20-F includes our audited consolidated financial statements for the years ended March 31, 2020, 2019 and 2018.
This annual report
contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, the translation
of Renminbi into U.S. dollars has been made at RMB7.09 to US$1.00, the noon buying rate in effect on March 31, 2020 as set forth
in the H.10 Statistical Release of the Federal Reserve Board. We make no representation that any Renminbi or U.S. dollar amounts
could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated
below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of
the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On August 7, 2020, the noon buying
rate was RMB 6.97 to US$1.00.
This annual report on Form 20-F contains
‘forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Known and unknown risks,
uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” may
cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking
statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking
statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,”
“continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations
and projections about future events that we believe may affect our financial condition, results of operations, business strategy
and financial needs. These forward-looking statements include statements relating to:
These forward-looking statements involve
various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable,
our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Other
sections of this annual report include additional factors that could adversely impact our business and financial performance. Moreover,
we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our
management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual
future results may be materially different from, or worse than, what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
This annual report contains certain data
and information that we obtained from various government and private publications. Statistical data in these publications also
include projections based on a number of assumptions. The insurance industry may not grow at the rate projected by market data,
or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the
market price of the Ordinary Shares. In addition, the rapidly evolving nature of this industry results in significant uncertainties
for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or
more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections
based on these assumptions. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in
this annual report relate only to events or information as of the date on which the statements are made in this annual report.
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence
of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and exhibits
to this annual report completely and with the understanding that our actual future results may be materially different from what
we expect.
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following selected
consolidated statements of comprehensive income data for the years ended March 31, 2020, 2019 and 2018 and the selected consolidated
balance sheet data as of March 31, 2020 and 2019 have been derived from our audited consolidated financial statements included
elsewhere in this annual report. The following selected consolidated statements of comprehensive income data for the years ended
March 31, 2017 and 2016, and the selected consolidated balance sheet data as of March 31, 2018, 2017 and 2016 have been derived
from our audited consolidated financial statements that are not included in this annual report. The consolidated financial statements
are prepared and presented in accordance with GAAP. Historical results are not necessarily indicative of the results for any future
periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference
to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”
below.
Selected Statements of Operations Information:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
Consolidated Statements of Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,252
|
|
|
|
2,757,229
|
|
|
|
4,278,729
|
|
|
|
3,590,217
|
|
|
|
1,662,406
|
|
Selling, general, and administrative expenses
|
|
|
2,130,282
|
|
|
|
4,991,878
|
|
|
|
3,894,688
|
|
|
|
1,575,069
|
|
|
|
983,783
|
|
Results from operating activities
|
|
|
(2,119,030
|
)
|
|
|
(2,234,649
|
)
|
|
|
384,041
|
|
|
|
2,015,148
|
|
|
|
678,623
|
|
Gain on sale of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
230,202
|
|
Impairment on investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,118
|
)
|
Net other income (expense)
|
|
|
(5,376
|
)
|
|
|
138,523
|
|
|
|
62,021
|
|
|
|
93,989
|
|
|
|
682
|
|
Net interest income (expense)
|
|
|
667,898
|
|
|
|
636,489
|
|
|
|
312,855
|
|
|
|
69,161
|
|
|
|
163
|
|
Profit before tax
|
|
|
(1,456,511
|
)
|
|
|
(1,459,770
|
)
|
|
|
758,918
|
|
|
|
2,178,298
|
|
|
|
817,669
|
|
Tax expenses (benefits)
|
|
|
(27,413
|
)
|
|
|
-
|
|
|
|
(633,614
|
)
|
|
|
(464,327
|
)
|
|
|
(164,817
|
)
|
Profit for the year/period
|
|
|
(1,483,924
|
)
|
|
|
(1,459,770
|
)
|
|
|
125,304
|
|
|
|
1,713,971
|
|
|
|
652,852
|
|
Comprehensive income for the year/period
|
|
|
(1,899,183
|
)
|
|
|
(1,265,400
|
)
|
|
|
174,207
|
|
|
|
1,564,354
|
|
|
|
649,243
|
|
Basic and dilutive earning per share
|
|
|
(0.12
|
)
|
|
|
(0.09
|
)
|
|
|
0.02
|
|
|
|
0.17
|
|
|
|
0.07
|
|
Selected Balance Sheets Information:
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Consolidated Statements of Financial Position Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,926
|
|
|
|
38,600
|
|
|
|
3,937,490
|
|
|
|
3,222,361
|
|
|
|
2,480
|
|
Total assets
|
|
|
9,964,361
|
|
|
|
12,314,125
|
|
|
|
13,017,698
|
|
|
|
4,212,535
|
|
|
|
2,010,926
|
|
Total equity
|
|
|
7,373,020
|
|
|
|
9,317,118
|
|
|
|
10,993,493
|
|
|
|
3,021,573
|
|
|
|
1,453,610
|
|
Current liabilities
|
|
|
2,591,341
|
|
|
|
2,930,110
|
|
|
|
2,024,205
|
|
|
|
1,190,962
|
|
|
|
557,316
|
|
Total liabilities
|
|
|
2,591,341
|
|
|
|
2,997,007
|
|
|
|
2,024,205
|
|
|
|
1,190,962
|
|
|
|
557,316
|
|
Exchange Rate Information
Our business is primarily
conducted in China and all of our revenues are received, and all of our expenses are paid, and denominated in RMB. Capital accounts
of our condensed financial statements are translated into United States dollars from RMB at their historical exchange rates when
the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income
and expenditures are translated at the average exchange rate of the period. RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts
could have been, or could be, converted into United States dollars at the rates used in translation.
The following table
sets forth information concerning exchange rates between the RMB and the United States dollar for the periods indicated.
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Period/year end RMB:US$ exchange rate
|
|
|
7.08760
|
|
|
|
6.71111
|
|
|
|
6.61843
|
|
Period/annual average RMB:US$ exchange rate
|
|
|
6.97980
|
|
|
|
6.71075
|
|
|
|
6.50682
|
|
Period/year end HKD:US$ exchange rate
|
|
|
7.77050
|
|
|
|
7.84934
|
|
|
|
7.77047
|
|
Period/annual average HKD:US$ exchange rate
|
|
|
7.75880
|
|
|
|
7.84162
|
|
|
|
7.75883
|
|
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of
Proceeds
Not Applicable.
D. Risk Factors
Risks Relating to our Business and Industry
We have a limited operating history
and are subject to the risks encountered by early-stage companies.
Through our operating
entity in the PRC, Long Yun, we have only been in business since October 2014, we launched our 5etou platform in March 2015 and
our auto-parts service operation in January 2018. We did not generate any revenue until the year ended March 31, 2016. We then
suspended our 5etou platform operation and auto-parts service operation in September 2018 and April 2019, respectively. Our current
Supply Chain Management Platform Service was only established in October 2019.
As a fairly new company,
our business strategies and model are constantly being tested by the market, and we pursue to adjust our allocation of resources
among our current two business segments (namely, incubation services and supply chain management platform services) accordingly.
As such, our business may be subject to significant fluctuations in operating results in terms of amounts of revenues and percentages
of total with respect to the business segments.
We are, and expect
for the foreseeable future to be, subject to all the risks and uncertainties, which, for our supply chain management platform service
and incubation service business, inherent in a new business and in an industry, which is in the early stages of development in
China. As a result, we must establish many functions necessary to operate a business, including expanding our managerial and administrative
structure, assessing and implementing our marketing program, implementing financial systems and controls and personnel recruitment.
Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered
by companies with a limited operating history. In particular, you should consider that there is a significant risk that:
|
●
|
The
incubation services we operate in may in the future be subject to increasing regulation by various governmental agencies in China;
|
|
●
|
We
may require additional capital to develop and expand our operations which may not be available to us when we require it;
|
|
●
|
We
may not be able to expand supply chain management platform service operation in a manner which will enable us to generate revenue
and meet the requirements of both the auto-parts suppliers and the auto-repair shops that use our supply chain management platform
services;
|
|
●
|
Our
marketing and growth strategy may not be successful; and
|
|
●
|
Our
business may be subject to significant fluctuations in operating results.
|
Our future growth
will depend substantially on our ability to address these and the other risks described in this annual report. If we do not successfully
address these risks, our business would be significantly harmed.
Our Supply Chain Management Platform
Service is heavily dependent on our business partnership with the sole logistic partner we work with so far. Any disruptions in
our relationship with such partner may have an adverse effect on our profitability and operating results.
Our Supply Chain
Management Platform Service currently relies upon our sole logistic partner’s ability to deliver auto parts timely and collect
payments from auto repair shops fully. We could suffer significant disruption in business in the event of the loss of our business
partnership with such partner, which may further damage our supply chain service network and our reputation. The Company is planning
to expand the number of logistic partners it works with, but there is no guarantee that such plan will be successful.
We may need additional capital to
fund our future operations and, if it is not available when needed, we may need to reduce our planned expansion and marketing efforts,
which may reduce our revenue.
We believe that our
existing working capital and cash available from operations will enable us to meet our working capital requirements for at least
the next twelve months. However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currently
unanticipated uses, we may need additional capital. In addition, if we fail to generate sufficient net revenues from our incubation
services and supply chain management platform services, we may continue to consume significant amounts of capital. As a result,
we could be required to raise additional capital. To the extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities could result in dilution of the shares held by existing shareholders.
If additional funds are raised through the issuance of debt or equity securities, such securities may provide the holders certain
rights, preferences, and privileges senior to those of shareholders holding Ordinary Shares, and the terms of any such debt securities
could impose restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptable
terms, or at all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our business, financial condition and operating results.
We face significant competition in
an industry experiencing rapid technological change, and there is a possibility that our competitors may achieve regulatory approval
and develop new online supply chain management platform service before us, which may harm our financial condition and our ability
to successfully market or commercialize any of our services.
The Chinese auto parts
procurement industry is highly competitive and is characterized by rapidly changing technologies, significant competition and a
strong emphasis on client attraction. Even though we have found business opportunities in a niche market, we will very likely face
competition with respect to our integrated supply chain management platform services from major auto parts suppliers in China in
their effort to further reduce operation costs and improve their cash flows.
Some of these auto parts suppliers may
have significantly greater financial resources and expertise in research and development, online testing, obtaining regulatory
approvals and marketing approved services than we do. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established auto parts suppliers. These competitors also compete
with us in recruiting and retaining qualified research and marketing personnel. Our commercial opportunity could be reduced or
eliminated if our competitors develop and commercialize services that are more effective, more convenient or are less expensive
than the supply chain services we currently offer. Our competitors also may obtain regulatory approval for their services more
rapidly than we may obtain approval for any that we develop, which could result in our competitors establishing a strong market
position before our new services are able to enter the market. The availability of our competitors’ services could limit
the demand, and the price we are able to charge, for any services that we currently offer.
As the operator of an operating website
key to our revenues, we may be subject to damages resulting from unauthorized access or hacking and other cyber risks.
Hacking is the process
of attempting to gain or successfully gaining unauthorized access to computer system. As with any website, our crowdfunding website
may be subject to hacking regardless of whether we have in place securities systems which limit access to our platform. When a
person engages in website hacking, he or she takes control of the website from the website owner. Password hacking is obtaining
a user’s secret password from data that has been stored in or transmitted by a computer system. Computer hacking is obtaining
access to and viewing, creating or editing material without authorization. Hackers can bring a website down by causing large numbers
of users to seek to access the website without the knowledge of the users, which is known as denial of service hacking. Hacking
can result in the loss of or tampering with confidential information, the editing of information so that it is not in the form
maintained by the sponsor, using password information to take funds from the user’s account or to charge cash advances or
purchases to the unknowing user’s account. Both we and our participants and the project or donation sponsor can suffer significant
monetary losses as a result of hacking. Despite our disclaimers that the participants, projects or donation sponsors sign, injured
parties may seek to obtain damages from us for their loss. Thus, in additional to any financial or reputation losses that we may
sustain, it is possible that a court or administrative body may hold us liable for damages sustained by others. Any such losses
could materially impair our financial condition and our ability to conduct business. Further, although we intend to use an independent
third party to handle payment by participants in reward-based crowdfunding projects, we may be subject to claims and to liability
in the event of a breach of the security of the third-party payment service.
The successful operation of our business
depends on the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.
Our business depends
on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through
state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. In addition, the
national networks in China are connected to the Internet through international gateways controlled by the PRC government. These
international gateways are the only channels through which a domestic user can connect to the Internet. Although the PRC government
has pledged to increase overall internet coverage in the PRC and increase Internet infrastructure investment in its Thirteenth
Five-Year Plan in 2016, a more sophisticated Internet infrastructure may not be developed in China. We or the users of our platform
may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet
infrastructure.
We must regularly apply for VATS
licenses to operate our business and any failure to secure a license could adversely impact our business.
Every five years we
must apply to MIIT to renew the license for value-added telecommunications business, or VATS License for our platform URL to operate
our internet platform. Our current VATS license for our crowdfunding platform will expire in December 2020. While we anticipate
that we will be able to renew such license, there can be no assurance that such license will be renewed as a matter of course and
that new conditions will not be imposed in connection therewith. Any failure to obtain the proper licenses would have a material
adverse effect on our business, results of operations and financial condition.
Our success depends substantially
on the continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support
our growth and execute our business strategy.
If one or more of
our senior executives or other key personnel are unable or unwilling to continue in their present positions, our business may be
disrupted and our financial condition and results of operations may be materially and adversely affected. While we depend on the
abilities and participation of our current management team generally, we rely particularly upon Mr. Limin Liu, our chairman and
chief executive officer who is responsible for the development and implementation of our business plan. The loss of the services
of Mr. Limin Liu for any reason could significantly adversely impact our business and results of operations. Competition for senior
management and senior technology personnel in the PRC is intense and the pool of qualified candidates is very limited. We cannot
assure you that the services of our senior executives and other key personnel will continue to be available to us, or that we will
be able to find a suitable replacement for them if they were to leave.
We may not be able to adequately
protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm
our competitive position.
Our success depends
in part upon our intellectual property rights. We rely primarily on trademark, copyright, service mark and trade secret laws, confidentiality
procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures
and services. Other persons could copy or otherwise obtain and use our technology without authorization, or develop similar IP
independently. We may also pursue the registration of our domain names, trademarks, and service marks in other jurisdictions, including
the United States. Although the protection afforded by copyright, trade secret and trademark law, written agreements and common
law may provide some advantages, these statutory protections along with non-disclosure agreement with our employees may not be
adequate to enable us to protect our intellectual property. However, the intellectual property laws in China are not considered
as strong as comparable laws in the United States or the European Union. The enforcement of intellectual property rights in China
is difficult and, if we seek to commence litigation against any alleged infringer, there is no assurance that we will prevail.
We cannot assure you that we will be able to protect our proprietary rights. Further, our competitors may be able to independently
develop similar or more advanced technology, duplicate our products and services or design around any intellectual property rights
we hold.
Suspension, or elimination of related
party transaction may negatively affect our revenues and business operation.
We relied upon revenues
from related parties and also funds advanced by our principal shareholder in the past that supported our business operation. Going
forward, we may not be able to rely on these related party transactions anymore which may negatively affect our results of operation.
Because we are a Cayman Islands corporation
and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors
or to enforce any judgment you may obtain.
We are incorporated
in the Cayman Islands and conduct our operations primarily in China. Substantially all of our assets are located outside of the
United States. In addition, all of our directors and officers reside outside of 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 Cayman Islands or in China in the event
that you believe we have violated your rights, either under United States federal or state securities laws or otherwise, or if
you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and
of China may not permit you to enforce a judgment against our assets or the assets of our directors and officers.
Economic conditions have had and
may continue to have an adverse effect on the market’s investment power.
The Chinese economy
is impacted by the potential trade war with the U.S. as well as experiencing structural changes, which have reduced discretionary
income of our potential customers. We believe that participants in crowdfunding projects use discretionary funds to make payments
through reward-based crowdfunding. The adverse effect of a sustained economic downturn in China, including sustained periods of
decreased consumer spending, higher unemployment levels, declining consumer or business confidence and continued volatility and
disruption in the credit and capital markets, will likely result in our customers reducing their use of or ceasing to use crowdfunding.
Accordingly, to the extent that economic conditions in China reduce discretionary consumer spending, crowdfunding in general and
our business in particular could be materially impaired.
Our lack of effective internal controls
over financial reporting may affect our ability to accurately report our financial results or prevent fraud which may affect the
market for and price of our Ordinary Share.
To implement Section
404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the
company’s internal control over financial reporting. We are subject to the requirement that we maintain internal controls
and that management perform periodic evaluation of the effectiveness of the internal controls. Effective internal control over
financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects,
as well as the market for and trading price of our Ordinary Shares, may be materially and adversely affected if we do not have
effective internal controls. We do not presently have the financial resources or personnel to develop or implement systems that
would provide us with the necessary information on a timely basis so as to be able to implement financial controls. As a result,
we may not discover any problems in a timely manner and current and potential shareholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our Ordinary Shares. The absence of internal controls over financial
reporting may inhibit investors from purchasing our shares and may make it more difficult for us to raise funds in a debt or equity
financing.
Because we are an “emerging
growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor
confidence in us and our Ordinary Shares.
We are an “emerging
growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from disclosure and other
requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an
emerging growth company and a smaller reporting company. As a result, if we elect not to comply with such auditor attestation requirements,
our investors may not have access to certain information they may deem important. See “Implications of Our Being an ‘Emerging
Growth Company.’”
The tariffs by the U.S. government
and the trade war between the U.S. and China, and on a larger scale, internationally, may dampen global growth. If the U.S. government,
in the future, subjects the services that we provide to proposed tariffs, our business operations and revenues may be negatively
impacted.
The U.S. government
has recently proposed, among other actions, imposing new or higher tariffs on specified products imported from China to penalize
China for what it characterizes as unfair trade practices and China has responded by proposing new or higher tariffs on specified
products imported from the United States. Based on our analysis of the list of products affected by the tariffs, we expect that
the proposed tariffs will not have a material direct impact on our business operations, as we are based in the PRC, and deliver
services to customers exclusively located within the PRC market. However, the proposed tariffs may cause the depreciation of the
RMB currency and a contraction of certain PRC industries that will likely be affected by the proposed tariffs. As such, there may
be potential decrease in the spending powers of our target real estate property buyers and/or a negative impact on the operation
of our developer clients, which in turn, may lead to a contraction of the PRC real estate market. As such, we may have access to
fewer business opportunities and our operation may be negatively impacted. In addition, future actions or escalations by either
the United States or China that affect trade relations may cause global economic turmoil and potentially have a negative impact
on our business and we cannot provide any assurances as to whether such actions will occur or the form that they may take.
Our business, financial condition
and results of operations have been and are likely to continue to be adversely affected by the outbreak of COVID-19.
The recent outbreak of a novel strain of
coronavirus, now named as COVID-19, was reported to have surfaced in China and now spread rapidly to many parts of the world. The
epidemic has resulted in quarantines, travel restrictions, and the temporary closure of facilities in China and many other countries
for the past few months. In March 2020, the World Health Organization declared the COVID-19 a pandemic.
Substantially all
of our operations are concentrated in China. In connection with intensifying efforts to contain the spread of COVID-19, the Chinese
government took a number of measures, which included extending the Chinese New Year holiday, quarantining individuals infected
with or suspected of having COVID-19, restricting residents from travel, encouraging employees of enterprises to work remotely
from home and cancelling public activities, among others. Normal economic life throughout China was sharply curtailed.
The COVID-19 outbreak has negatively impacted our businesses in the following ways:
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Our incubation service depends on a wide array of offline activities such as business meetings, new project seminars, information trainings etc. We have experienced substantive diminutions these activities due to the COVID-19 outbreak and ensuing lockdowns, because our business partners in incubation projects worked remotely between January 2020 and May 2020. This has caused substantial decrease in the Company’s results of operation during the period;
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Between January and March 15 of 2020, the Company’s staff and employees were instructed to work remotely. As a result, we were not able to perform business operations on our supply chain management platform effectively, resulting substantial impacts upon Company’s business performance;
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As of the date of this annual report, COVID-19
had an adverse effect on our operations, which has caused a net 97% decrease in our revenue for the three months ended March 31,
2020 compared to the same period of 2019.
While the Chinese
government has eased up certain travel restrictions as of the date of this report, and we are adopting a series of measures to
cope with the uncertainties and risks brought by COVID-19, there is great uncertainty as to the future progress of the disease.
Currently, there is no vaccine or specific anti-viral treatment for COVID-19. Easing of restrictions on economic and social life
may lead to new cases which may lead to the reintroduction of restrictions. The extent to which this outbreak impacts our business
and financial performance will depend on future developments, which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the duration and severity of this outbreak and the actions taken by authorities and other
entities to contain this outbreak or treat its impact, among others, all of which are beyond our control.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
In addition to COVID-19, our business could
be materially and adversely affected by natural disasters, other health epidemics or other calamities. Fire, floods, typhoons,
earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise
to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the
loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products
and services on our platform.
Our business could also be adversely affected
by the effects of epidemics. In recent years, there have been breakouts of epidemics in and outside China, such as Ebola virus
disease, H1N1 flu, avian flu and the recent outbreak of COVID-19. Our business operations could be disrupted if any of our employees
is suspected of having such epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected.
In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese
economy in general.
Our headquarters are located in Hangzhou,
where most of our directors and management and a large majority of our employees currently reside. Consequently, we are highly
susceptible to factors adversely affecting Hangzhou. If any of the abovementioned natural disasters, health epidemics or other
outbreaks were to occur in Hangzhou, our operation may experience material disruptions, such as temporary closure of our offices
and suspension of services, which may materially and adversely affect our business, financial condition and results of operations.
Risks Relating to Doing Business in
the PRC
Substantial uncertainties exist with
respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and its Implementation Regulations
and how they may impact the viability of our current corporate structure, corporate governance, business operations and financial
results.
On March 15, 2019,
the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020 and replaced
the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign
investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in
relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment”
refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China
but it does not explicitly stipulate the contractual arrangements as a form of foreign investment. On December 26, 2019, the State
Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However,
the Implementation Regulations on the Foreign Investment Law still remains silent on whether contractual arrangements should be
deemed as a form of foreign investment. Though these regulations do not explicitly classify contractual arrangements as a form
of foreign investment, there is no assurance that foreign investment via contractual arrangements would not be interpreted as a
type of foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision
which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods
prescribed by the State Council. Therefore, the Foreign Investment Law still leaves leeway for future laws, administrative regulations
or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any
of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access
requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations
or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure, corporate governance and business operations.
A severe or prolonged downturn in
the Chinese or global economy could materially and adversely affect our business and financial condition.
COVID-19 pandemic had a severe and negative
impact on the Chinese and the global economy in the first quarter of 2020. China’s GDP decreased by 6.8% year-over-year in
the first quarter of 2020 amid the COVID-19 pandemic. Whether this will lead to a prolonged downturn in the economy is still unknown.
Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the
Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary
monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s
leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war
in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship
between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular,
there is significant uncertainty about the future relationship between the United States and China with respect to trade policies,
treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well
as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any
severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations
and financial condition.
Changes in the policies of the PRC
government could have a significant impact upon our ability to operate profitably in the PRC.
We conduct all of
our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC
will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government
can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability
to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws,
regulations or their interpretation, particularly those dealing with the Internet, including censorship and other restriction on
material which can be transmitted over the Internet, security, intellectual property, money laundering, taxation and other laws
that affect our ability to operate our website.
Because our business is dependent
upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair
our ability to operate profitably, if at all.
Although the PRC government
has been pursuing a number of economic reform policies for more than two decades, the PRC government continues to exercise significant
control over economic growth in the PRC. Because of the nature of our business, we are dependent upon the PRC government pursuing
policies that encourage private ownership of businesses. Restrictions on private ownership of businesses would affect the securities
business in general and businesses using crowdfunding in particular. We cannot assure you that the PRC government will pursue policies
favoring a market-oriented economy or that existing policies will not be significantly altered, especially in the event of a change
in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC.
Regulations relating to offshore
investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.
In July 2014, SAFE
promulgated the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing and Roundtrip
Investment by Domestic Residents Via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning Foreign
Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles,
or Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment
or indirect control of an offshore entity, referred to in Circular 37 as a “special purpose vehicle” for the purpose
of holding domestic or offshore assets or interests. Circular 37 further requires amendment to a PRC resident’s registration
in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease in the capital
contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these regulations,
PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign
exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent,
as well as restrictions on capital inflows from the offshore entity to the PRC entity, including restrictions on its ability to
contribute additional capital to its PRC subsidiaries. Further, failure to comply with the SAFE registration requirements could
result in penalties under PRC law for evasion of foreign exchange regulations.
Mr. Limin Liu and
Ms. Koulin Han, who are our beneficial owners and are PRC residents, have completed the initial foreign exchange registrations.
However, as the promulgation of Circular 37 is relatively recent, it is unclear how these regulations will be interpreted and implemented.
We cannot assure you that our ultimate shareholders who are PRC residents will in the future provide sufficient supporting documents
required by the SAFE or complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our
shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations
could subject us to fines or sanctions imposed by the PRC government, including restrictions on WFOE II’s ability to pay
dividends or make distributions to us and on our ability to increase our investment in the WFOE II.
Although we believe
that our agreements relating to our structure are in compliance with current PRC regulations, we cannot assure you that the PRC
government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements,
with existing policies or with requirements or policies that may be adopted in the future.
Because our business is conducted
in RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect
the value of your investments.
Our business is conducted
in the PRC, our books and records are maintained in RMB, which is the currently of the PRC, and the financial statements that we
file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between
the RMB and dollar affect the value of our assets and the results of our operations in United States dollars. The value of the
RMB against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in the
PRC’s political and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant
revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. Further, our Ordinary
Shares offered by this report are offered in United States dollars, we will need to convert the net proceeds we receive into RMB
in order to use the funds for our business. Changes in the conversion rate between the United States dollar and the RMB will affect
that amount of proceeds we will have available for our business.
Under the PRC Enterprise Income Tax
Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax
consequences to us and our non-PRC shareholders.
The EIT Law and its
implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located
in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT
Law define the term “de facto management bodies” as a management body which substantially manages, or has control over
the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation, or SAT, issued
a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management
bodies” of a PRC-controlled enterprise that is incorporated offshore is located in China. However, there are no further detailed
rules or precedents governing the procedures and specific criteria for determining “de facto management body.” Although
our board of directors and management are located in the PRC, it is unclear if the PRC tax authorities would determine that we
should be classified as a PRC “resident enterprise.”
If we are deemed as
a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax
rate of 25%, although dividends distributed to us from our existing PRC subsidiary and any other PRC subsidiaries which we may
establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient”
status. This could have a material and adverse effect on our overall effective tax rate, our income tax expenses and our net income.
Furthermore, dividends, if any, paid to our shareholders may be decreased as a result of the decrease in distributable profits.
In addition, if we were considered a PRC “resident enterprise”, any dividends we pay to our non-PRC investors, and
the gains realized from the transfer of our ordinary shares may be considered income derived from sources within the PRC and be
subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case,
subject to the provisions of any applicable tax treaty). It is unclear whether holders of our Ordinary Shares would be able to
claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a
PRC resident enterprise. This could have a material and adverse effect on the value of your investment in us and the price of our
Ordinary Shares.
There are significant uncertainties
under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary
to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under the PRC EIT
Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed
to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement
between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity
interest in the PRC company. Our PRC subsidiary is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the
State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on
February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions
include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive
dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding
the receipt of the dividends. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize
the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial owner” to individuals,
projects or other organizations normally engaged in substantive operations, and sets forth certain detailed factors in determining
the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from
the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue
such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate
from the relevant Hong Kong tax authority. As of the date of this report, we have not commenced the application process for a Hong
Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted such
a Hong Kong tax resident certificate.
Even after we obtain
the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file required forms and materials
with relevant PRC tax authorities to prove that we can enjoy 5% lower PRC withholding tax rate. Long Yun HK intends to obtain the
required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance
that the PRC tax authorities will approve the 5% withholding tax rate on dividends received from Long Yun HK.
Our contractual arrangements with
Long Yun and its shareholders may not be effective in providing control over Long Yun.
Foreign ownership
of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and
regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications
services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment
promulgated in 2007, as amended in 2011 and in 2015, respectively, and other applicable laws and regulations. To comply with PRC
laws and regulations, we do not intend to have an equity ownership interest in Long Yun but rely on contractual arrangements with
Long Yun to control and operate its business. However, as discussed above, these contractual arrangements may not be effective
in providing us with the necessary control over Long Yun and its operations. Any deficiency in these contractual arrangements may
result in our loss of control over the management and operations of Long Yun, which will result in a significant loss in the value
of an investment in our company. Because of the practical restrictions on direct foreign equity ownership imposed by the Zhejiang
provincial government authorities, we must rely on contractual rights through our VIE structure to effect control over and management
of Long Yun, which exposes us to the risk of potential breach of contract by the shareholders of Long Yun.
Because we conduct our business through
Long Yun, a VIE, if we fail to comply with applicable law, we could be subject to severe penalties and our business could be adversely
affected.
We operate our business
through Long Yun, a VIE, the equity of which is controlled by Mr. Limin Liu, our chief executive officer, and Ms. Koulin Han, through
a series of contractual arrangements, as a result of which, under United States generally accepted accounting principles, the assets
and liabilities of Long Yun are treated as our assets and liabilities and the results of operations of Long Yun are treated in
all respects as if they were the results of our operations. There are uncertainties regarding the interpretation and application
of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement
of the contractual arrangements between WFOE II and Long Yun.
For example, on March
15, 2019, the National People’s Congress of the PRC adopted the PRC Foreign Investment Law, which came into force on January
1, 2020. The PRC Foreign Investment Law defines the “foreign investment” as the investment activities in China conducted
directly or indirectly by foreign investors in the following manners: (i) the foreign investor, by itself or together with other
investors establishes a foreign invested enterprises in China; (ii) the foreign investor acquires shares, equities, asset tranches,
or similar rights and interests of enterprises in China; (iii) the foreign investor, by itself or together with other investors,
invests and establishes new projects in China; (iv) the foreign investor invests through other approaches as stipulated by laws,
administrative regulations or otherwise regulated by the State Council. The PRC Foreign Investment Law keeps silent on how to define
and regulate the “variable interest entities,” while adding a catch-all clause that “other approaches as stipulated
by laws, administrative regulations or otherwise regulated by the State Council” can fall into the concept of “foreign
investment,” which leaves uncertainty as to whether the foreign investor’s controlling PRC onshore variable interest
entities via contractual arrangements will be recognized as “foreign investment.”
The PRC Foreign Investment
Law leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements
as a form of foreign investment. If WFOE II, Long Yun or their ownership structure or the contractual arrangements are determined
to be in violation of the PRC Foreign Investment Law, or any existing or future PRC laws, rules or regulations, or WFOE or Long
Yun fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities
would have broad discretion in dealing with such violations, including:
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revoking
the business and operating licenses of WFOE II or Long Yun;
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discontinuing
or restricting the operations of WFOE II or Long Yun;
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imposing
conditions or requirements with which we, WFOE II, or Long Yun may not be able to comply;
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requiring
us, WFOE II, or Long Yun to restructure the relevant ownership structure or operations which may significantly impair the rights
of the holders of our Ordinary Shares in the equity of Long Yun;
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restricting
or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and
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We cannot assure you
that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements violate
PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in
violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable, and
Long Yun will not be treated as a VIE entity and we will not be entitled to treat Long Yun’s assets, liabilities and results
of operations as our assets, liabilities and results of operations, which could effectively eliminate the assets, revenue and net
income of Long Yun from our balance sheet, which would most likely require us to cease conducting our business and would result
in the delisting of our Ordinary Shares from Nasdaq Capital Market and a significant impairment in the market value of our Ordinary
Shares.
If we become directly subject to
the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, stock price and reputation.
U.S. public companies
that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity
by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity
has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of
the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased
in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and
SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect
this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the
subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant
resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract
our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations
will be severely affected and you could sustain a significant decline in the value of our stock.
The disclosures in our reports and
other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the
PRC.
We are regulated by
the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated
by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not
subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings
are not subject to the review by the China Securities Regulatory Commission, a PRC regulator that is responsible for oversight
of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with
the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public
pronouncements.
The failure to comply with PRC regulations
relating to mergers and acquisitions of domestic projects by offshore special purpose vehicles may subject us to severe fines or
penalties and create other regulatory uncertainties regarding our corporate structure.
On August 8, 2006,
MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, the SAT, the
State Administration for Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated regulations entitled the
Provisions Regarding Mergers and Acquisitions of Domestic Projects by Foreign Investors (the “M&A Rules”), which
took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, have certain provisions
that require offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled directly
or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to
obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006,
the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for
obtaining CSRC approval.
The application of
the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC
law firms regarding the scope and applicability of the M&A Rules. Thus, it is possible that the appropriate PRC government
agencies, including MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM
or other PRC regulatory agencies in connection with WFOE II’s control of Long Yun through contractual arrangements. If the
CSRC, MOFCOM, or another PRC regulatory agency determines that government approval was required for the VIE arrangements between
WFOE II and Long Yun, or if prior CSRC approval for overseas financings is required and not obtained, we may face severe regulatory
actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may
impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the
repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to
us or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory agencies may also
take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure our current corporate
structure, or to seek regulatory approvals that may be difficult or costly to obtain.
The M&A Rules,
along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition
strategy. For example, Long Yun’s ability to remit its profits to us or to engage in foreign-currency-denominated borrowings,
may be conditioned upon compliance with the SAFE registration requirements by Mr. Limin Liu and Ms. Koulin Han, both shareholders
of the Registrant and the VIE Entity, over whom we may have no control.
Our agreements with Long Yun are
governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these contractual arrangements.
As all of our contractual
arrangements with Long Yun are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC,
they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system
could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable
in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise
not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be
able to exert effective control over Long Yun, and our ability to conduct our business may be materially and adversely affected.
We do not intend to pay dividends
for the foreseeable future.
We currently intend
to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any
dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the
market price of our Ordinary Shares increases.
If securities or industry analysts
do not publish research or reports about our business, or if the publish a negative report regarding our Ordinary Shares, the price
of our Ordinary Shares and trading volume could decline.
The trading market
for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price
of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary Shares and
the trading volume to decline.
We incur increased costs as a result
of being a public company, particularly after we cease to qualify as an “emerging growth company.”
As a public company,
we have been incurring significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley
Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Capital Market, impose various requirements on
the corporate governance practices of public companies. As an “emerging growth company” pursuant to the JOBS Act, we
may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to 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
additional expenses and devote substantial management effort toward ensuring compliance increased disclosure requirements.
If we cease to qualify as a foreign
private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic
issuers, and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private
issuer.
As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial
statements with the SEC as frequently or as promptly as United States domestic issuers, and we are not required to disclose in
our periodic reports all of the information that United States domestic issuers are required to disclose. While we currently qualify
as a foreign private issuer, we may cease to qualify as a foreign private issuer in the future.
Volatility in our Ordinary Shares
price may subject us to securities litigation.
The market for our
Ordinary Shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may
continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities
and could divert management’s attention and resources.
As a foreign
private issuer, we are permitted to, and we may rely on exemptions from certain Nasdaq Global Market corporate governance standards
applicable to U.S. issuers. This may afford less protection to holders of our Ordinary Shares.
Nasdaq
Listing Rule 5605(b)(1) requires listed companies to have, among other things, a majority of its board members be independent.
As a foreign private issuer, however, we are permitted to, and we may follow home country practice in lieu of the above requirements,
or we may choose to comply with the above requirement within one year of listing. The corporate governance practice in our home
country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Currently, a majority
of our board members are independent. However, we may consider following home country practice in lieu of the requirements under
Nasdaq Listing Rules with respect to certain corporate governance standards which may afford less protection to investors.
If we cannot continue to satisfy
listing requirements and other rules of Nasdaq Capital Market, although we exempt from certain corporate governance standards applicable
to US issuers as a Foreign Private Issuer, our securities may not be listed or may be delisted, which could negatively impact the
price of our securities and your ability to sell them.
In order to maintain
our listing on the Nasdaq Capital Market, we are required to comply with certain rules of Nasdaq Capital Market, including those
regarding minimum shareholder’s equity, minimum share price and certain corporate governance requirements. We may not be
able to continue to satisfy continuing listing requirements and other applicable rules of the Nasdaq Capital Market. If we are
unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.
If the Nasdaq Capital
Market subsequently delists our securities from trading, we could face significant consequences, including:
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a
limited availability for market quotations for our securities;
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reduced
liquidity with respect to our securities;
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a
determination that our ordinary share is a “penny stock,” which will require brokers trading in our ordinary shares
to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for
our ordinary shares;
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limited
amount of news and analyst coverage; and
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a
decreased ability to issue additional securities or obtain additional financing in the future.
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Anti-takeover provisions in our amended
and restated memorandum and articles of association may discourage, delay or prevent a change in control.
Some provisions of
our amended and restated memorandum and articles of association, which became effective on July 25, 2017, prior to the date of
this report, may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable,
including, among other things, the following:
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provisions
that authorize our board of directors to issue shares with preferred, deferred or other special rights or restrictions without
any further vote or action by our shareholders; and
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provisions
that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder
meetings.
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Our board of directors may decline
to register transfers of Ordinary Shares in certain circumstances.
Our board of directors
may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have
a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with
us, accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably
require to show the right of the transferor to make the transfer; (ii) the instrument of transfer is in respect of only one class
of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders,
the number of joint holders to whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any
lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq Capital Market may determine to be payable, or such lesser sum
as our board of directors may from time to time require, is paid to us in respect thereof.
If our directors refuse
to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each
of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being
given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such times
and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers
shall not be suspended nor the register closed for more than 30 days in any year.
The laws of the Cayman Islands may
not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United
States.
Our corporate affairs
are governed by our amended and restated memorandum and articles of association, by the Companies Law (2013 Revision) of the Cayman
Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by
minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court
of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions
of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are
not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive
but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular,
the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders
may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
You may be unable to present proposals
before annual general meetings or extraordinary general meetings not called by shareholders.
Cayman Islands law
provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right
to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association.
Our articles of association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share
capital in issue, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting.
Advance notice of at least twenty-one clear days is required for the convening of our annual general shareholders’ meeting
and at least fourteen clear days’ notice any other general meeting of our shareholders. A quorum required for a meeting of
shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of
the total issued voting shares in our company.
If we are classified as a passive
foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax
consequences.
A non-U.S. corporation
such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if,
for such year, either
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At
least 75% of our gross income for the year is passive income; or
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The
average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income
or which are held for the production of passive income is at least 50%.
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Passive income generally
includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets.
If we are determined
to be a PFIC for any taxable year (or portion thereof which we are currently unable to determine) that is included in the holding
period of a U.S. taxpayer who holds our ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax
liability and may be subject to additional reporting requirements.
Depending on the amount
of cash we have raised in our initial public offering, together with any other assets held for the production of passive income,
it is possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce
passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is
unclear, we are treating Long Yun as being owned by us for United States federal income tax purposes, not only because we control
their management decisions, but also because we are entitled to the economic benefits associated with Long Yun, and as a result,
we are treating Long Yun as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis,
in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it
is considered to own at least 25% of the equity by value. Therefore, the income and assets of Long Yun should be included in the
determination of whether or not we are a PFIC in any taxable year.
For a more detailed
discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC,
see “Item 10. Additional Information – E. Taxation — United States Federal Income Taxation — Passive
Foreign Investment Company.”
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated
in the Cayman Islands on June 19, 2015. Sweet Lollipop Co., Ltd. (“Sweet Lollipop”) was incorporated in the British
Virgin Islands on May 8, 2014, with Lili Xiang, a non-related third party, as the sole shareholder. From its inception until June
25, 2015, Sweet Lollipop had no business activities. On June 25, 2015, Lili Xiang transferred her 100% equity interest in Sweet
Lollipop to us and Sweet Lollipop became our wholly-owned subsidiary. After June 25, 2015 and until now, Sweet Lollipop has no
business operation other than being a pass-through entity and holding the 100% equity interest in Long Yun International Holdings
Limited (“Long Yun HK”). Long Yun HK was incorporated in Hong Kong on May 2, 2015. WFOE II, Sweet Lollipop’s
wholly owned subsidiary, was organized pursuant to PRC laws on February 27, 2017. Our variable interest entity, Hangzhou Long Yun
Network Technology Co., Ltd., which we refer to as Long Yun, was established on October 9, 2014 in the City of Hangzhou, PRC pursuant
to PRC laws. Long Yun’s shareholders include certain PRC residents and corporate entities controlled by PRC residents.
On November 3, 2017,
we entered into a strategic cooperation agreement with Mr. Jiawei Cao to establish a joint venture, namely, Hangzhou Dacheng, in
which we would hold approximately 60% of the equity interests. Hangzhou Dacheng, in which we indirectly hold a 60% equity interest,
was organized pursuant to PRC laws on October 31, 2017. Mr. Jiawei Cao subsequently transferred his 40% of equity interest in Hangzhou
Dacheng to Mr. Mangyue Sun in January 2018 pursuant to a share transfer agreement. Mr. Mangyue Sun subsequently transferred approximately
2% of the equity interest in Hangzhou Dacheng to Wenbin Liu in March 2018 pursuant to a share transfer agreement.
On August 3, 2018,
we entered into a strategic cooperation agreement with Shenzhen Jintai Tourism Development Co., Ltdpursuant to which we formed
a new joint venture company on August 3, 2018 under the laws of People’s Republic of China, Shenzhen Guanpeng Information
Technology Co., Ltd. Through WFOE II, we hold approximately 51% of the shares of Shenzhen Guanpeng Information Technology Co.,
Ltd.
Pursuant to PRC laws,
each entity formed under PRC law shall have certain business scope approved by the Administration of Industry and Commerce or its
local counterpart. As such, WFOE II’s business scope is to primarily engage in technology development, provision of technology
service, technology consulting; development of computer software and hardware, computer network technology, game software; provision
of enterprise management and related consulting service, human resource consulting service and intellectual property consulting
service. Since the sole business of WFOE II is to provide Long Yun with technical support, consulting services and other management
services relating to its day-to-day business operations and management in exchange for a service fee approximately equal to the
net income of Long Yun, such business scope is necessary and appropriate under the PRC laws. Long Yun, on the other hand, has been
granted a business scope different from WFOE II to enable it to provide internet crowdfunding, and incubation management service
and function as a financing channel for small and micro businesses.
We control Long Yun
through contractual arrangements, which are described under “— Contractual Arrangements between WFOE II and Long
Yu.” Dragon Victory is a holding company with no business operation other than holding the shares in Sweet Lollipop. Long
Yun HK is a pass-through entity with no business operation. WFOE II is exclusively engaged in the business of managing the operation
of Long Yun.
Our principal executive
offices are located at Hanshi Tower 22nd Floor, No.1786 Binsheng Road, Binjiang District, Hangzhou, Zhejiang Province,
PRC, and our phone number is + 86-571-82213772. We maintain a corporate website at http://www.dvintinc.com/. The information
contained in, or accessible from, our website or any other website does not constitute a part of this report.
The SEC maintains
a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC using its EDGAR system.
Our corporate structure
as of the date of this report is as follows:
Previously, we controlled
Long Yun through WFOE I, a then wholly owned subsidiary of the Company, which was dissolved on September 28, 2018. On August 19,
2016, WFOE I entered into a series of contractual arrangements, also known as the VIE Agreements, with Long Yun and its shareholders
(the “VIE Agreements”). The VIE Agreements were designed to provide WFOE I with the power, rights and obligations equivalent
in all material respects to those it would possess as the sole equity holder of Long Yun, including absolute control rights and
the rights to the assets, property and revenue of Long Yun.
Effective March 20,
2018, WFOE I, Long Yun and the shareholders of Long Yun executed a Termination Agreement to the Exclusive Business Cooperation
Agreement, Termination Agreement to the Share Pledge Agreement, Termination Agreement to the Exclusive Option Agreement and Termination
Agreement to the Powers of Attorney that terminated each of the VIE Agreements. As a result WFOE I does not have control rights
and rights to the assets, property and revenue of Long Yun.
On March 20, 2018,
WFOE II, a newly formed wholly owned subsidiary of the Company, entered into a series of contractual arrangements (the “New
VIE Agreements”) with Long Yun and its shareholders. The New VIE Agreements are designed to provide WFOE II with the power,
rights and obligations equivalent in all respects to those it would possess as the sole equity holder of Long Yun, including absolute
control rights and the rights to the assets, property and revenue of Long Yun. There is no change to Long Yun’s capital structure.
The Company decided
to replace WFOE I with WFOE II in order to take full advantage of certain preferential tax treatments and subsidies granted by
the local government of Shangcheng District of Hangzhou, Zhejiang province, where WFOE II was incorporated. Based on the amount
of income tax and value-added tax payment that is attributable to the District, the Company will receive comparable tax refund
in the form of projects subsidies, 100% for the first three years and 50% for the latter two years. Executives of the Company will
receive refund of their personal income tax that is attributable to the District in the form of living subsidies, 100% for the
first three years and 50% for the latter two years.
Contractual Arrangements between
WFOE II and Long Yun
Due to PRC legal restrictions
on foreign ownership in the telecommunications sector, see “Regulations — Foreign Ownership Restrictions”,
neither we nor our subsidiaries own any equity interest in Long Yun. Instead, we control and receive the economic benefits of Long
Yun’s business operation through a series of contractual arrangements. WFOE II, Long Yun and its shareholders entered into
a series of contractual arrangements, also known as the New VIE Agreements, on March 20, 2018. The New VIE Agreements are designed
to provide WFOE II with the power, rights and obligations equivalent in all material respects to those it would possess as the
sole equity holder of Long Yun, including absolute control rights and the rights to the assets, property and revenue of Long Yun.
According to the Exclusive
Business Cooperation Agreement, Long Yun is obligated to pay service fees to WFOE II approximately equal to the net income of Long
Yun.
Each of the New VIE
Agreements is described in detail below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive
Business Cooperation Agreement between Long Yun and WFOE II, WFOE II provides Long Yun with technical support, consulting services
and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its
advantages in technology, human resources, and information. Additionally, Long Yun granted an irrevocable and exclusive option
to WFOE II to purchase from Long Yun, any or all of Long Yun’s assets at the lowest purchase price permitted under PRC law.
Should WFOE II exercise such option, WFOE II, Long Yun and its shareholders shall enter into a separate asset transfer or similar
agreement. For services rendered to Long Yun by WFOE II under the Exclusive Business Cooperation Agreement, WFOE II is entitled
to collect a service fee calculated based on the amount time spent by WFOE II to render such services, multiplied by the corresponding
billing rate of WFOE II, plus a services fee determined by the board of directors of WFOE II based on the value of the services
rendered by WFOE II and taking into account the actual net income of Long Yun.
The Exclusive Business
Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE II with 30-day prior notice. Long Yun
does not have the right to terminate the agreement unilaterally. WFOE II may unilaterally extend the term of the Exclusive Business
Cooperation Agreement with prior written notice.
The CEO and president
of WFOE II, Mr. Limin Liu, will effectively be managing Long Yun pursuant to the terms of the Exclusive Business Cooperation Agreement.
WFOE II has absolute authority relating to the management of Long Yun, including but not limited to decisions with regard to expenses,
salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business Cooperation Agreement does not
prohibit related party transactions, provided, however, that the audit committee of the Company is required to review and approve
in advance any related party transactions, including transactions involving WFOE II or Long Yun.
Share Pledge Agreement
Under the Share Pledge
Agreement among Mr. Limin Liu, Ms. Koulin Han, together holding 100% of the shares of Long Yun (“Long Yun Shareholders”)
and WFOE II, the Long Yun Shareholders pledged all of their equity interests in Long Yun to WFOE II to guarantee the performance
of Long Yun’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the Share Pledge Agreement,
should Long Yun or the Long Yun Shareholders breach their respective contractual obligations under the Exclusive Business Cooperation
Agreement, WFOE II, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends
generated by the pledged equity interests. The Long Yun Shareholders also agreed that upon the occurrence of any event of default,
as set forth in the Share Pledge Agreement, WFOE II is entitled to dispose of the pledged equity interest in accordance with applicable
PRC law. The Long Yun Shareholders further agreed not to dispose of the pledged equity interests or take any actions that would
prejudice WFOE II’s interest.
The Share Pledge Agreement
shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Long Yun. WFOE II
shall cancel or terminate the Share Pledge Agreement upon Long Yun’s full payment of all fees payable under the Exclusive
Business Cooperation Agreement.
The Share Pledge Agreement
serves several functions: (1) guarantee the performance of Long Yung’s obligations under the Exclusive Business Cooperation
Agreement, (2) ensure the Long Yung Shareholders do not transfer or assign the pledged equity interests, or create or allow any
encumbrance that would prejudice WFOE II’s interests without WFOE II’s prior written consent, and (3) provide WFOE
II control over Long Yun. In the event Long Yun or the Long Yun Shareholders breach their respective contractual obligations under
the Exclusive Business Cooperation Agreement, WFOE II will be entitled to foreclose on the Long Yun Shareholders’ equity
interests in Long Yun and may (1) exercise its option to purchase or designate third parties to purchase part or all of their equity
interests in Long Yun and in this situation, WFOE II may terminate the New VIE Agreements after acquisition of all equity interests
in Long Yun or form new VIE structure with the third parties designated by WFOE II; or (2) dispose of the pledged equity interests
retain the proceeds from such sale. In the event of such a sale of the pledged equity interests, the VIE structure evidenced by
the New VIE Agreements will be terminated.
Exclusive Option Agreement
Under the Exclusive
Option Agreement, the Long Yun Shareholders irrevocably granted WFOE II (or its designee) an exclusive option to purchase, to the
extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Long Yun. The
option price is equal to the capital paid in by the Long Yun Shareholders subject to any appraisal or restrictions required by
applicable PRC laws and regulations. As of the date of this report, if WFOE II exercised such option, the aggregate option exercise
price that would be paid to the Long Yun Shareholders would be approximately $1.5 million, which is the aggregate registered capital
of Long Yun. The option exercise price may increase in in the event the Long Yun Shareholders make additional capital contributions
to Long Yun.
The Exclusive Option
Agreement, together with the Share Pledge Agreement and the Power of Attorney, enable WFOE II to exercise effective control over
Long Yun.
The Exclusive Option
Agreement remains effective for a term of ten years and may be renewed at WFOE II’s election.
Powers of Attorney
Under the Powers of
Attorney, each of the Long Yun Shareholders authorizes WFOE II to act on their behalf as their exclusive agent and attorney with
respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising
all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles
of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c)
designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive
officer and other senior management members of Long Yun.
Although it is not
explicitly stipulated in the Powers of Attorney, the term of the Powers of Attorney shall be the same as the term of that of the
Exclusive Option Agreement.
Each Power of Attorney
is coupled with an interest and shall be irrevocable and continuously valid from the date of execution, so long as the applicable
Long Yun Shareholder is a shareholder of Long Yun.
Emerging Growth Company Status
As a company with
less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined
in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage
of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth
company, we:
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may
present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis
of Financial Condition and Results of Operations, or MD&A;
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are
not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing
how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and
analysis”;
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are
not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
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are
not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements
(commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute”
votes);
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are
exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
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are
eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of
the JOBS Act; and
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will
not be required to conduct an evaluation of our internal control over financial reporting for two years.
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We intend to take
advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption
of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may
make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies
that have opted out of the phase-in periods under §107 of the JOBS Act.
Under the JOBS Act,
we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial
sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, herein
referred to as the Securities Act, or such earlier time that we no longer meet the definition of an emerging growth company.
We will remain an
emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenue
exceeds $1.07 billion; (ii) the last day of the fiscal year during which the fifth anniversary of the date of our initial
public offering occurs; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under
the Exchange Act, which would occur if the market value of our ordinary shares that are held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter; or (iv) the date on which
we have issued more than $1.00 billion in non-convertible debt securities during any three-year period.
We report under the
Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging
growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions
of the Exchange Act that are applicable to U.S. domestic public companies, including:
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the
sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered
under the Exchange Act;
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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
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the
rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited
financial and other specific information, or current reports on Form 8-K, upon the occurrence of specified significant
events.
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Both foreign private
issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus,
even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt
from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign
private issuer.
Foreign Private Issuer Status
We are a foreign private
issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As such, even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under
the Exchange Act we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies.
For example:
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we
are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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for
interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules
that apply to domestic public companies;
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we
are not required to provide the same level of disclosure on certain issues, such as executive compensation;
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we
are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
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we
are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations
in respect of a security registered under the Exchange Act; and
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we
are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership
and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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B. Business Overview
Overview
We have suspended
our crowdfunding platform business on September 30, 2018 during the last fiscal year and we have not generated revenue from such
business. We suspended such business indefinitely in anticipation of certain changes to the Chinese financial regulations, and
have kept our crowdfunding platform (including 5etou platform, source code, serves, and others) intact in case of a future need
to resume our crowdfunding business. As of the date of this report, we do not have an expectation or plan on when to resume our
crowdfunding business. The following business description regarding our crowdfunding platform is historical information only.
In addition, we ended
our auto-parts procurement services in April 2019, and the following business description regarding such business is historical
information only. We commenced our supply chain management platform service in October 2019, which was developed and upgraded from
our former auto-parts procurement services, to provide consolidated supply chain management platform services (the “Supply
Chain Management Platform Service”). We did not generate any revenues from our incubation services during the past fiscal
year due to the severe disruption caused by the COVID-19 pandemic. All of our business revenues generated for the fiscal year ended
March 31, 2020 were entirely from our Supply Chain Management Platform Service.
Historically, our
revenues were generated from following four sources:
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Platform
services fees equal to a percentage of the funds raised through our crowdfunding platform;
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Consulting
fees for incubation services;
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Finder’s
fees for assisting a project in raising funds, as a portion of the proceeds; and
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Procurement service fees paid for providing sourcing
or procurement pursuant to our Dacheng auto parts operation.
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Currently, our revenues
are generated from the following two sources:
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Fees paid for providing our incubation services. These fees are paid pursuant to a consulting agreement between us and the project receiving incubation service.
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Transaction fee paid to us for providing supply chain management platform service to auto parts suppliers through our supply chain management platform. We receive a certain percentage of fees based on the aggregate amounts of purchase payments from our auto parts supplier partners.
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Crowdfunding is a
process by which a project or project is funded by raising money from a large number of people, primarily through an internet-based
platform. The participants in crowdfunding are the crowdfunding platforms, such as our platform, the entrepreneurs or project sponsors,
and the participants or other funding sources who make a payment for the reward. There are five basic types of crowdfunding programs — equity
crowdfunding, reward-based crowdfunding, debt-based crowdfunding, by which loans are made to an individual or business, royalty-based
crowdfunding, which the participant receives payments based on revenue generated by the project, to the extent that the project
generates revenue, and donation-based crowdfunding. We were historically only engaged in reward-based crowdfunding in China.
We
launched our online crowdfunding platform, 5etou (“
”), at www.5etou.cn in March 2015. Our 5etou platform is
designed to enable projects searching for funding to connect with participants, who are the funding sources looking for projects.
Our platform enables projects to seek to raise initial seed money and to try to establish a credible track-record in product/service
development and cash flow, and participants become involved in opportunities for rewards, often the product for which the business
is seeking funding, as well as being involved in a project that the participant believes has the possibility of offering products,
services and technology of interest to him.
We used to offer business
incubation services pursuant to agreements on an ongoing and as-needed basis. We offered these services, commencing from the time
when a project first initiates a contribution campaign using our platform to the completion of project prototypes and/or product/service,
and continuing until the project becomes profitable or no longer requires or desires our services. These services include business
and operation advisory services relating to marketing, sales and strategic planning, and guidance and general resources in ancillary
services such as human resources, legal, accounting, assisting with feasibility studies and other types of services that projects
need. We are not intended to substitute for professional services providers such as business operation professionals, accountants,
or lawyers and will make referrals to third-party providers when needed. For the fiscal year ended March 31, 2020, we did not generate
any revenues through our incubation services. For the fiscal year ended March 31, 2019, we generated revenue of $2,260,376 through
our incubation services, or approximately 81.98% of our total revenue for that year.
In January 2018, we
commenced providing auto-parts related services through Hanghzou Dacheng, Historically, we provided procurement services, in the
form of sourcing, accounts receivables financing, and logistics services to auto-repair shops that had demands for auto-parts from
auto-parts suppliers, and auto-parts suppliers transacting with auto-repair shops. We received a 0.8% procurement fee based upon
the total transaction amount of auto-parts that we procure or source for the auto-parts suppliers and the auto-repair shops, in
addition to any logistics fees applicable. The Company suspended such services in April 2019 and we did not generate any revenues
from such services for the fiscal year ended March 31, 2020.
Our Supply Chain Management Platform Service
Since October 2019,
we began to provide supply chain management platform services to several auto parts suppliers and one auto parts logistics company.
We aim to address the existing supply chain management issues in the Chinese auto parts industry—namely, there is no systematic
purchase and payment processing system for auto parts procurement in China. Conventionally, auto repair shops that purchase from
auto parts suppliers have to rely on a series of unregulated and disarranged practices that vary greatly from transaction to transaction.
This has resulted in substantive business problems for both auto parts suppliers and auto repair shops alike, such as high transaction
costs, high liquidity risks, high default risks, inequitable accountability, and many others.
We started to build
our supply chain management platform in May 2019 with our own research and development team, investing a total of approximately
RMB 2.06 million (USD 295,137). and launched the platform in October 2019 (the “Supply Chain Management Platform”).
The Supply Chain Management Platform is an integrated online supply chain processing center that provides auto parts suppliers,
auto repair shops, and logistics companies with transaction data management, shipping and handling information management, and
transaction financing. These services cover the most important aspects of auto parts procurement transactions in China. Auto parts
suppliers and auto parts suppliers can initiate the supply chain management platform service on our platform by first engaging
our qualified logistics partner. They then enter into an electronic procurement and shipping contract on the platform by logging
in detailed transaction and shipping information. From there on, the Supply Chain Management Platform consolidates transaction
information and shipping information for auto parts suppliers, logistic partner, and auto repair shops.
Auto parts logistics
companies in China are small-sized business entities that transport auto parts purchased by auto repair shops to a designated delivery
address while collecting payments from auto repair shops. These logistics companies typically transfer the payment received from
auto repair shops to the relevant auto parts suppliers for their purchases within 15 to 30 days. Such delay in payment may create
liquidity issues for auto parts suppliers, who would prefer to pay a premium for receiving purchase payment within five days. We
created the Supply Chain Management Platform to address this business need. We typically advance the aggregate amounts of purchase
payments in full to auto parts suppliers within three days upon confirmation from our logistics partner that it has collected purchase
payments from auto repair shops. We charge auto parts suppliers we work with a certain percentage of service fee based on the aggregate
amounts of purchase payments made by the auto repair shops. We do not directly charge auto parts suppliers for the service fee,
but rather, when logistics partner confirms auto repair shops’ receipt of auto parts and its collection of payments, we advance
only a certain percentage of the aggregate amounts of purchase to the auto parts suppliers and keeping a certain percentage of
the aggregate amounts as our service fee. After the logistics partner collects the payment from the repair shop, it returns 100%
of the payment to us, usually within three days. We do not obtain promissory notes or other financial instruments from our logistics
partner for the purchase advance; however, we require the legal representative of such logistics partner to sign a unlimited personal
liability agreement for each separate transaction so that we can seek repayment from such legal representative through court proceedings
in case of a payment default by our logistics partner.
During the 2020 fiscal
year, we offered supply chain management platform service for transactions ranging from RMB 800 to RMB 2,000 per transaction, with
an average amount of RMB 1,200. We processed a total of 10,605 transactions since we launched this business and during the 2020
fiscal year. To repay purchase advances made by us to auto parts suppliers, our logistics partner may pay with cash or electronic
transfer. We have not experienced any delays or delinquencies from our logistics partner since October, 2019. For the fiscal year
ended March 31, 2020, we generated 100% of our total revenue from our supply chain management platform service business.
We have obtained all
necessary permits and licenses to conduct our supply chain management platform service business.
Registration Process on the Supply
Chain Management Platform
The logistics partner
and auto part suppliers we currently work with went through the following procedures to register their accounts on the Supply Chain
Management Platform and were required to:
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Provide required due diligence documents including, but not limited to, business licenses, legal representative’s social identification card, transaction information in the past six months;
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Schedule an onsite inspection of their respective business by our due diligence staff members,
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Review and sign a Software-as-a-Service Agreement,
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Review and sign a Supply Chain Management Platform Service Agreement that governs the responsibilities and cooperative relationship between the Supply Chain Management Platform and the applicant, and
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Review and sign an unlimited personal liability agreement that clarify the personal payment responsibility of logistics partner’s legal representative when the logistics partner defaults on its payments.
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As a general rule,
we do not set limits or restrictions to the aggregate purchase amounts that a customer can engage in our Supply Chain Management
Platform. However, we do refrain from providing Supply Chain Management Platform Services to any auto repair shop who have records
in payment delays or delinquencies.
Upon completing review
of all required items for application, the approval process is complete and a Supply Chain Management Platform account is created.
At that point, all transactions and related shipping, handling, and logistics information are recorded in the Supply Chain Management
Platform. We charge a certain percentage of service fee per auto parts transaction for our Supply Chain Management Platform Services
payable by our partnered auto parts suppliers.
Beyond the steps described
above, we do not make any further determination of the eligibility of potential business partners. We rely mostly on our business
partners’ representation to us and our on-site due diligence procedures. In general, our due diligence procedures and background
checks are very different from those used by banks or other financial institutions, which typically go to greater length to minimize
the risk of default. Even though we have yet to experience any delay or defaults in payments, we cannot guarantee that we will
continue experience zero or lower default rate than that of financial industry’s practice.
Risks Associated
with Supply Chain Management Platform Services —Default and Collection
We do not obtain security
for our advances principally because, even assuming our logistics partner would have potential collateral to offer as security,
the small size of each particular transaction does not justify the time, effort and expense of identifying the collateral and properly
obtaining a security interest in such collateral. As a consequence, all of our payments made to auto parts suppliers are unsecured.
This means that, absent court or other legal action compelling our logistics partner to repay us, we rely principally on the willingness
and ability of our logistic partner to send us the payment it collected from the auto repair shops.
We have not experienced
any delay or default in payment in the short period of time since we started our Supply Chain Management Platform Services business
in October 2019. In case of a default, we will first engage in industrial collection practices that include attempts to contact
the logistics partner and obtain payment, and attempts to contact the logistics partner’s legal representative to satisfy
the owed amount. The costs involved in these initial collection efforts are minimal as they only involve some employee time. If
initial collection efforts prove to be futile, we would then proceed through litigation and court procedures, for which the default
logistics partner would pay for all legal costs we would incur in the process according to the laws of the People’s Republic
of China. According to the signed unlimited personal liability agreement, the legal representative or the controller of the logistics
company would be liable for the default amount, and his or her personal assets such as bank deposits, real assets, or personal
properties would be used to pay off the amount owed to us.
Marketing
Since we have suspended
our crowdfunding business in the past fiscal year, we did not engage in any marketing activities with third-parties or incur any
marketing expenses during the period for such services.
During the past fiscal
year, our marketing efforts for our incubation services were limited to the following:
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Good-will
referrals from past project partners;
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Social
media campaigns, principally Wechat and Weibo; and
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Newsletters
to our data base of participants.
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Since we have suspended
our auto parts related services through Hanghzou Dacheng in the past fiscal year, we did not engage in any marketing activities
with third-parties or incur any marketing expenses during the period for such services.
With respect to our
Supply Chain Management Platform Service, our marketing efforts focus on establishing working relationships through frequent on-site
visits with local logistic companies, who has close business relationship with local auto-parts suppliers and repair shops. Such
personal marketing method involves minimal expenses, and we did not engage in any marketing activities with third-parties or incur
any marketing expenses with respect to our Supply Chain Management Platform Services. As of the date of this annual report, we
have served a total of 4 auto-parts suppliers as clients, whose business coverages include over 620 auto-repair shops located in
Jiaxing, Suzhou City, Zhoushan Island, Dongyang and Yiwu, China.
Competition
We believe that we
are one of the few platforms in the PRC market that provides high-quality business incubation services to entrepreneurs, although
we are aware that there are a number of incubation facilities, including those with which we have a formal or informal relationship.
By providing these value-added services, we believe that projects on our platform could have a better chance of success in both
product development and completing a fundraising campaign. We believe that we are the leading Company for business incubation projects,
and facing only moderate level of competitions in PRC.
The supply chain in
the United States and European countries has experience a long period of development, resulting a high level of integration and
automation while achieving a high level of procurement efficiency. Companies such as Auto Zone and Advance Auto Parts, through
series of mergers and acquisitions, gained vertical control of both upstream and downstream procurement controls, achieving an
economic of scales in auto parts procurement while significantly reducing their procurement costs in the process.
In comparison, the
Chinese auto parts procurement industry has a large yet fragmented market. The Chinese auto parts procurement industry does not
have a standard model of auto parts procurement, handling, delivery and transactions, resulting a highly fragmented, decentralized,
and inefficient market. With breakthroughs in computer technology, we are able to integrate all essential aspects of auto parts
procurement procedures and consolidate information as well as economic resources. The end product, Supply Chain Management Platform,
is a one of its kind supply chain management platform in the industry. Even though we have found business opportunities in a niche
market, we will very likely face competition with respect to our integrated supply chain management platform services from major
auto parts suppliers in China in their effort to further reduce operation costs and improve their cash flows. Some of our major
competitions in supply chain management platform service are as follows:
Business Category
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Name of the Competitor
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The Core Business
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Traditional Auto-Parts Supplier and Manufacturer
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Jingu Co.,Ltd, (Auto Parts Business Trade Name: Automobile Superman)
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Supply Chain B to B and
B to C Services
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E-Commerce and Retail Company
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Alibaba Group Holding Limited (Auto Parts Business Trade Name: New Carzone)
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Supply Chain B to B and
B to C Services.
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E-Commerce and Retail Company
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JD.com, Inc.
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Supply Chain B to B and
B to C Services.
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Online Auto Parts Trading Platform
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Guangzhou Baturu Information Technology Co., Ltd.
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Supply Chain B to B Services.
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Online Auto Parts Trading Platform
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Kaisi Times Technology (Shenzhen) Co., Ltd.
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Supply Chain B to B and
B to C Services.
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Our Strategy
As we have suspended
two of our previous business segments (crowdfunding business and auto parts procurement business), our new business strategies
for our current two business segments (namely, incubation services and supply chain management platform services) are constantly
being tested by the market. Our current business strategy for our two business segments are: (1) expand our partnership with local
and regional logistic companies while attracting business cooperation opportunities with major auto parts suppliers, and (2) grow
and maintain a loyal customer base for our incubation business.
(1) Expand our
partnership with local and regional logistic companies while attracting business cooperation opportunities with major auto parts
suppliers. Our Supply Chain Management Platform Services depend on highly qualified and well-connected logistic partners and
auto parts suppliers, through which we will further engage in auto parts procurement and transactions of different sizes at local
and national scales. Currently, we only work with one logistic partner and four auto parts suppliers. We plan to expand our marketing
efforts and reach more logistic partner and auto parts suppliers in Hangzhou, Zhejiang Province and beyond, attracting auto repair
shops and fulfilling their procurement needs through our connection with logistic partners and auto parts suppliers via our platform.
(2) Grow and maintain
a loyal customer base for our incubation business. Our incubation service depends on a wide array of offline activities such
as business meetings, new project seminars, information trainings etc. We have experienced substantive diminutions these activities
due to the COVID-19 outbreak and ensuing lockdowns, because our business partners in incubation projects worked remotely between
January 2020 and May 2020. This has caused substantial decrease in the Company’s business activities for such business segment.
However, our incubation service remains as one of our core business segments, and the Company plan to resume backlogged incubation
projects after the COVID-19 pandemic. The management remains confident about the future outlook of our incubation business and
we have engaged in new incubation projects in the past fiscal year. We believe that the key to resuming our incubation services
after the COVID-19 pandemic is to maintain and further grow a loyal customer base; in this way, we will be able to continue establishing
new incubation projects with new and old customers.
With respect to both
our incubation business and our supply chain management platform service, we have no current plans to acquire any businesses or
to engage in any businesses other than our current business as described in this report.
Seasonality
Currently, our business
operations do not experience any seasonality.
Employees
As of August 14, 2020,
we had an aggregate of 21 employees, of which 10 are Long Yun employees, 9 are Hangzhou Dacheng employees and 1 is an employee
of Shenzhen Guanpeng. All of them are full-time employees. None of our employees are represented by a labor union. We have not
experienced any work stoppages, and we consider our relations with our employees to be good.
Intellectual Property
We rely on a combination
of copyright, trade secret and other rights, as well as confidentiality procedures and contractual provisions to protect our technology,
processes and other intellectual property. We own and operate, through Long Yun, the intellectual property underlying our crowdfunding
platform. We own and operate, through Hangzhou Dacheng, the intellectual property underlying our auto-parts service operation.
Hangzhou Dacheng is in the process of applying for trademark registration for Dacheng Qipei E-House. Even though intellectual property
is not one of our competitive advantages compared to other crowdfunding platforms, it is an essential aspect of our platform operation.
Tax
Longyun, as a PRC
entity, is subject to state and local enterprise income tax (“EIT”) according to applicable PRC tax rules and regulations.
Hangzhou Dacheng, as a PRC entity, is subject to state and local enterprise income tax (“EIT”) according to applicable
PRC tax rules and regulations. We are currently subject to the authority of Hangzhou Shangcheng Tax Bureau of Zhejiang Province.
PRC enterprises are
required to file provisional EIT returns with the local tax authorities within 15 days of the end of each quarter based on actual
quarterly profits. Enterprises that have difficulty in paying quarterly tax based on actual quarterly profits may make payments
based on the quarterly average taxable income in the preceding calendar year, or by any other methods approved by the relevant
tax authorities. Longyun and Hangzhou Dacheng have filed all quarterly EIT returns based on actual quarterly profits since its
inception.
Final settlement of
tax liability must be made within five months of the end of each calendar year in China, the EIT tax year end is December 31 and
all enterprises are required to file their income tax return within 5 months after December 31. All EIT returns shall be based
on Chinese GAAP. Since Longyun and Hangzhou Dacheng’s financial statements are prepared on U.S. GAAP and used March 31 as
fiscal year end, the annual EIT return for tax year ended December 31, 2020 and December 31, 2019 were filed timely based on China
GAAP. As such, the accrued tax payables in the EIT return may be different from the annual audited financial statement.
REGULATIONS
We operate our business
in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative
body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries
and agencies under its authority, including the Ministry of Industry and Information Technology, SAIC and their respective local
offices. This section summarizes the principal PRC regulations related to our business.
Regulations on Crowdfunding Related
Activities
Regulations on Operation of Online
Crowdfunding Platform
The operation of an
online crowdfunding platform includes provision of commercial internet information services via the Internet. Certain areas related
to the Internet, such as telecommunications, Internet information services, international connections to computer information networks,
information security and censorship, are covered extensively by a number of existing laws and regulations issued by various PRC
governmental authorities, including:
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the State Secrecy Bureau;
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the Ministry of Commerce, or the MOFCOM;
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the Ministry of Culture, or the MOC;
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the Ministry of Industry and Information Technology, or the MIIT (formerly the Ministry of Information Industry);
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the Ministry of Public Security;
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the State Administration of Foreign Exchange, or the SAFE;
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the State Administration of Industry and Commerce, or the SAIC;
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the State Administration of Press, Publication, Radio, Film and Television;
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the National Copyright Administration, or the NCAC; and
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the State Council Information Office
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The State Council
issued the Administrative Measures on Internet Information Services, effective in September 2000, and amended in January 2011.
Pursuant to these measures, “internet information services” refer to provision of internet information to online users,
and are divided into “commercial internet information services” and “non-commercial internet information services.”
A commercial internet information services operator must register for an ICP License, from the relevant government authorities
before engaging in any commercial internet information services operations in China. The ICP License has a term of five years and
can be renewed within 90 days before expiration.
Additionally, the
Telecommunications Regulations promulgated by the State Council and its related implementation rules, including the Catalog of
Classification of Telecommunications Business issued by the MIIT, categorize various types of telecommunications and telecommunications-related
activities into basic or value-added telecommunications services, and internet information services, or ICP services, are classified
as value-added telecommunications businesses. In 2009, the MIIT promulgated the Administrative Measures on Telecommunications Business
Operating Licenses, which set forth more specific provisions regarding the types of licenses required to operate value-added telecommunications
services, the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses.
Under these regulations, a commercial operator of value-added telecommunications services must first obtain a license for value-added
telecommunications business, or VATS License, from the MIIT or its provincial level counterparts.
As the operation of
an online crowdfunding platform includes provision of commercial internet information services and provision of Telecommunication
Value Added Services Permit License, we believe that with respect to the operation of our 5etou platform, we have obtained from
PRC authorities all required approval and license to operate the platform, including but not limited to, (1) the Internet Content
Provider (ICP) record filing for our platform URL; and (2) the required VATS License obtained from the requisite regulatory branch
in Zhejiang Province, effective until December 24, 2020. The VATS License may be renewed and the ICP record filing is effective
for as long as the platform URL operator fulfills the annual examination procedures online.
Regulations on Crowdfunding Activities
The PRC Crowdfunding Regulatory Realm
On March 5, 2016,
the PRC government laid out its priorities for the year 2016, when Prime Minister Li Keqiang gave his annual state-of-the-nation
report to the legislature, the National People’s Congress. Major areas of work for the PRC government in 2016 include encouraging
more business startups, technological innovation and crowdfunding as some of its prerogatives emphasized that favorable government
policies including employment-related and possible tax incentives will be promulgated to support business startups, technological
innovation and crowdfunding, both on the national level and provincial and local level. According to Mr. Li, “platforms will
be created for crowd innovation, crowd support, crowdsourcing, and crowdfunding, and mechanisms will be built to encourage new
types of business startups and innovation-making through cooperation between enterprises, institutions of higher learning, research
institutes, and makers…” As such, we believe that (even though the) regulatory framework of internet-based fundraising,
etc. has not been completely established, the PRC government is planning to promulgate a variety of industrial/incentive policies,
to encourage innovation, business start-ups and crowdfunding economy.
Previously on July
18, 2015, People’s Bank of China and other nine ministries issued the Guiding Opinions on Promoting the Healthy Development
of Internet Finance (No. 221 [2015], PBOC, hereinafter referred to as the “Guiding Opinions”) on promoting the sound
development of internet-based financing. The Guiding Opinions attracted extensive attention from all circles of the society. According
to the division of regulatory responsibilities for the Internet finance as specified in the Guiding Opinions, the China Securities
Regulatory Commission (the “CSRC”) is accelerating the research and development of regulatory rules for the pilot program
of equity crowd funding and actively promoting all preparations for the pilot program. In December 2014, proposed private equity-based
crowdfunding rules (the “Draft Rules”) were promulgated by the Securities Association of China, an industry self-regulatory
association. The Draft Rules are not yet finalized and have not been adopted.
On August 17, 2016,
the China Banking Regulatory Commission (“CBRC”), the Ministry of Industry and Information Technology; the Ministry
of Public Security and the State Internet Information Office jointly issued the Interim Measures for Administration of the Business
Activities of Internet Borrowing Information Intermediary Agencies, or the Interim Measures. The Interim Measures are aimed to
promote the healthy development of internet borrowing industry, prevent financial risks and protect investors’ legitimate
interests. The Interim Measures emphasize the role of peer-to-peer lending companies as financial information service intermediaries
providing assessment and exchange of borrowing information for unrelated borrowers and lenders via internet platforms, and provided
a negative list to draw the business boundaries of peer-to-peer lending companies, forbidding them from cash pooling, absorbing
public savings or providing any form of guarantee for borrowers. The Interim Measures also set a ceiling for borrowers to control
the size of loans on peer-to-peer platforms. To be specific, the borrowing balance of an individual borrower shall not exceed RMB
200,000 on a single peer-to-peer lending platform and RMB 1 million on different platforms. Similarly, the borrowing balance of
a legal entity shall not exceed RMB 1 million on a single platform and RMB 5 million on different platforms. To better ensure the
investors’ money safety, peer-to-peer lending platforms are also required to have their investors’ money deposited
and managed by qualified banking institutions and to disclose information on the borrowers, financing projects and platform operation
accurately on a timely basis. The Interim Measures took effect once promulgated, however, which provided a period of 12 months
for any peer-to-peer lending companies established prior to the implementation of the Interim Measures to make rectification.
As such, the proposed
Draft Rules and the Interim Measures referenced above only apply to private equity-based and debt-based crowdfunding, respectively.
Our crowdfunding platform currently only provides reward-based crowdfunding in the PRC market, and do not provide equity-based
or debt-based crowdfunding in the PRC market. Therefore, Guantao, our PRC Counsel, believes that we are not subject to the proposed
Draft rules or the Interim Measures.
Regulations Prohibiting “Illegal
Fundraising.”
PRC general securities
regulations prohibit “illegal fundraising.” Under PRC securities laws, any individual or entity is prohibited from
publicly selling securities without meeting statuary requirements and being approved by the securities regulatory authority under
the State Council or any department as authorized by the State Council. Any activity meeting the following criteria constitutes
“publicly selling”, 1) selling securities to the general public, 2) selling securities to more than 200 specific persons
accumulatively; 3) other activity as prescribed by any law or administrative regulation. “Illegal fundraising” also
has consequences under general PRC criminal laws, which defines any fundraising activity meeting the following criteria as “illegal
fund raising”, 1) raising funds from general public or without the legal approval from relevant governmental authorities
or under the disguise of lawful business operations, 2) publicizing by means of media, recommendation fairs, leaflets or mobile
phone text messages, etc.; and 3) promising to repay the principal and interests or make payments in the form of currency, real
objects, equities, etc. within a certain time limit. Further, the Supreme People’s Court promulgated the Judicial Interpretations
to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising Judicial
Interpretations, effective January 2011, which provides that a public fundraising will constitute a criminal offense related to
“illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four criteria:
(i) the fund-raising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii)
the fund-raising employs general solicitation or advertising such as social media, promotion meetings, leafleting and SMS advertising;
(iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash,
properties in kind and other forms; and (iv) the fund-raising targets at the general public as opposed to specific individuals.
Regulations on Our Reward-Based Crowdfunding
Activities in the PRC
As discussed above,
the existing PRC crowdfunding rules and regulations are primarily focused on equity-based or debt-based crowdfunding. Our crowdfunding
platform currently only provides reward-based crowdfunding in the PRC market, and do not provide equity-based or debt-based crowdfunding
in the PRC market. We may provide donation-based crowdfunding in the future. There is no Chinese regulation currently in effect
which specifically applies to reward-based or donation-based crowdfunding or requires special license or regulatory approval prior
to conducting reward-based or donation-based crowdfunding activities in the PRC.
In addition, our contributors
and entrepreneurs are limited to PRC residents and projects located in the PRC. We do not presently engage in crowdfunding offerings
in the U.S. or to U.S. investors, and we have no plans to enter the crowdfunding market in the U.S., and therefore are not subject
to any U.S. regulations governing securities-based crowdfunding such as Title III of the JOBS Act adopted formally and finally
on October 30, 2015 in the U.S.
Since the crowdfunding
industry is still at an early stage of development in China, new laws and regulations may be adopted from time to time to require
additional licenses and permits to those we currently have and to address new issues that arise from time to time. As a result,
there are substantial uncertainties with respect to the interpretation and implementation of current and any future Chinese laws
and regulations applicable to the crowdfunding industry. See “Item 3. Key Information – D. Risk Factors — General
Risks Relating to our Business and Industry — If our activities are found to be treated by PRC regulatory authorities
as unapproved and not exempt from securities regulations, we may be required to suspend our crowdfunding platform business and
we may be subject to fines and administrative penalties.”
Regulations on Incubation Services
and Finder’s Services
With respect to our
business incubation and finder’s services, which is within the business scope set forth in Long Yun’s business license,
we believe we have obtained all required licenses and governmental approvals. Unlike in the United States, where an issuer is not
allowed to pay to an individual or entity without the relevant registration or license a finder’s fee or broker’s fee
for raising capital in either a public or private offering, in the PRC, as long as the issuer is (a) not a public company, and
(b) the fundraising transaction does not involve any “public offering” of equity or debt securities pursuant to PRC
securities laws, a finder is not required to obtain any special administrative approval for receiving finder’s fee or broker’s
fee for making business introductions or referrals, and assisting fundraising in private financing transactions. Under PRC securities
laws, “securities” refers to publicly-issued stock, privately-issued stock by a public company, company bonds, listed
government bonds, listed securities investment fund units, securities derivatives and other securities identified by the State
Council of the PRC. Pursuant to PRC securities laws, a non-public issuer conducting private financings of either equity or loan,
is a financing transaction that does not involve “an offer or sale of securities,” and thus such a non-public issuer
may pay a finder’s fee to us, and we may receive a finder’s fee without any special administrative approval.
Regulations on Procurement Services
With respect to our
auto-parts procurement services, which is within the business scope set forth in Hangzhou Dacheng’s business license, we
believe we have obtained all required licenses and governmental approvals.
Regulation on Supply Chain Management
Platform Services
The operation of our
Supply Chain Management Platform Services includes operations related to commercial internet information services via the Internet.
Certain categories of practices related to the Internet, such as telecommunications, Internet information services, international
connections to computer information networks, information security and censorship, are covered extensively by a number of existing
laws and regulations issued by various PRC governmental authorities, including:
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●
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the Ministry of Commerce, or the MOFCOM
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China’s National Bureau of Administration for
Commerce and Industries; and
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the Ministry of Industry and Information
Technology, or the MIIT (formerly the Ministry of Information Industry).
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The State Council issued
the Administrative Measures on Internet Information Services, effective in September 2000, and amended in January 2011. Pursuant
to these measures, “internet information services” refer to provision of internet information to online users, and
are divided into “commercial internet information services” and “non-commercial internet information services.”
A commercial internet information services operator must register for an ICP License, approved by relevant government authorities,
before engaging in any commercial internet information services related operations in China. The ICP License has a term of five
years and can be renewed within 90 days before expiration.
The Company has obtained
its ICP License in August, 2019 and is in full compliance regarding relevant PRC laws and regulations governing its Supply Chain
Management Platform Services operations, which remains effective as long as the platform URL operator fulfills the annual examination
procedures online.
The online payment
processing is an integral part of our platform service. We use Allin Pay, who is in full compliance with PRC laws and regulations
governing payment acceptance and transmissions. Allin Pay helps us handle the payment flows on our platform. Allin Pay is subject
to numerous regulations relating to such matters as privacy, receipt and transmission of payments and money laundering. Allin Pay
is in full compliance regarding these laws.
Provisions on Foreign Investment
All limited liability
companies and joint stock limited companies incorporated and operating in the PRC are governed by the Company Law of the People’s
Republic of China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s
Congress on December 28, 2013 and came into effect on March 1, 2014. In the latest amendment, paid-in capital registration, minimum
requirement of registered capital and timing requirement of capital contribution were abolished. Foreign invested projects must
also comply with the Company Law, with exceptions as specified in foreign investment laws.
With respect to the
establishment and operation of wholly foreign-owned projects, the MOFCOM, and the National Development and Reform Commission, or
NDRC, promulgated the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, as amended on June 28, 2017,
which came into effect on July 28, 2017. The Catalogue serves as the main basis for management and guidance for the MOFCOM to manage
and supervise foreign investments. The Catalogue divides industries for foreign investment into three categories: encouraged, restricted
and prohibited. Those industries not set out in the Catalogue shall be classified as industries permitted for foreign investment.
According to the Catalogue, rewards based crowd funding, charity based crowdfunding, business incubation services, and business
advisory services sectors are neither restricted nor prohibited.
On September 3, 2016,
the Standing Committee of the National People’s Congress promulgated the Decision of the Standing Committee of the National
People’s Congress on Amending Four Laws Including the Law of the People’s Republic of China on Wholly Foreign-owned
Enterprises (the “Decision”), which provides record-filing in lieu of administrative approval for the establishments
and alterations of foreign invested enterprises (the “FIEs”) not subject to special administrative measures. On October
8, 2016, the MOFCOM issued the Interim Measures for Record-filing for the Establishment and Alteration of Foreign-invested Enterprises
(the “Interim Measure”), and the MOFCOM and the NDRC jointly issued a statement (the “Joint Statement”),
clarifying that the special administrative measures in this case are implemented by referencing the Catalogue. To be specific,
the special administrative measures to be implemented are the restricted and prohibited industry categories as well as encouraged
industry categories having shareholding and executive management requirements prescribed in the Catalogue. Since then, FIE establishments
and alterations that are not subject to special administrative measures have been changed from a pre-approval system to a more
standardized and convenient filing process.
Foreign Ownership Restrictions
Foreign direct investment
in telecommunications companies in China is regulated by the Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises, or the FITE Regulations, which limit foreign ownership of companies that provide value-added telecommunications services,
including Internet content provision, to 50% of the outstanding equity.
On July 13, 2006,
the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunication Services,
or the MIIT Circular 2006. The MIIT Circular 2006 requires that (i) foreign investors can only operate a telecommunications business
in China by establishing a telecommunications enterprise with a valid telecommunications business operation license; (ii) domestic
ICP license holders are prohibited from leasing, transferring or selling telecommunications business operation licenses to foreign
investors in any form, or providing any resource, sites or facilities to foreign investors to facilitate the illegal operation
of telecommunications business in China; (iii) ICP license holders (including their shareholders) must directly own the domain
names and registered trademarks they use in their daily operations; (iv) each ICP license holder must have the necessary facilities
for its approved business operations and to maintain such facilities in the regions covered by its license and (v) all value-added
telecommunication service providers must improve the network and information security, draft relevant information safety administration
regulations and set up networks and information safety emergency plans. The provincial communications administration bureaus in
charge of telecommunications services are required to ensure that existing ICP license holders would conduct a self-assessment
of their compliance with the Notice and to submit status reports to the MIIT before November 1, 2006, and may revoke the operating
licenses of those who fail to comply with the above requirements and fail to rectify such non-compliance within the limited period
set by provincial communications administration bureaus. Due to the lack of further necessary interpretation from the regulator,
it remains unclear what impact the Notice will have on us or the other Chinese Internet companies that have adopted the same or
similar corporate and contractual structures.
In order to comply
with such foreign ownership restrictions, we operate a part of our business in China through Long Yun, which is owned 85% by Mr.
Limin Liu and 15% by Ms. Koulin Han, and controlled by WFOE II through a series of contractual arrangements. Another part of our
business in China, we operate through Hangzhou Dacheng, in which our wholly owned subsidiary WFOE II owns 60% of equity interest.
In the opinion of our PRC legal counsel, Guantao Law Firm, except as otherwise disclosed in this report, our ownership structure
complies with existing PRC laws and regulations.
Information Security
Internet content in
China is regulated and restricted from a state security standpoint. The National People’s Congress, China’s national
legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (i) gain improper entry into
a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv)
spread false commercial information or (v) infringe intellectual property rights.
The Ministry of Public
Security has promulgated measures that prohibit using the Internet in ways which, among other things, result in a leakage of state
secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in
this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures,
the PRC government may revoke its ICP license and shut down its websites.
PRC Regulation of Intellectual Property
Rights
The State Council
and the NCAC have promulgated various rules and regulations and rules relating to protection of software in China. Under these
rules and regulations, software owners, licensees and transferees may register their rights in software with Copy Protection Center
of China or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory
under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered
software rights may be entitled to better protections.
The PRC Trademark
Law, adopted in 1982 and revised in 2001 and 2013, respectively, with its implementation rules adopted in 2002 and revised in 2014,
protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of
ten years to registered trademarks.
Privacy Protection
In recent years, PRC
government authorities have enacted laws and regulations on the use of Internet to protect personal information from any unauthorized
disclosure. The Administrative Measures on Internet Information Services prohibit ICP service operators, like our platform, from
insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. Additionally, under
the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in 2011, an ICP service
operator may not collect any user personal information or provide any such information to third parties without the consent of
a user. An ICP service operator must expressly inform the users of the method, content and purpose of the collection and processing
of such user personal information and may only such information necessary for the provision of its services. An ICP service operator
is also required to properly store users’ personal information, and in case of any leak or potential leak of users’
personal information, the ICP service operator must take immediate remedial measures and, in extraordinary circumstances, report
immediately to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection
of Online Information issued by the Standing Committee of the National People’s Congress in December 2012 and the Order for
the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and
use of users’ personal information are subject to the consent of the users, abide by the principles of legality, rationality
and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also maintain such information
strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or selling or
proving such information to other parties. Any violation of the above decision or order may subject the ICP service operator to
warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even
criminal liabilities. We require our users to accept a user agreement whereby they agree to provide certain personal information
to us, and have established information security systems to protect users’ privacy.
C. Organizational Structure
The following diagram
illustrates our corporate structure as of the date of this annual report:
D. Property, Plants and Equipment
Our registered address
and principal executive office is Room 2101, No.4 Phoenix City, 28 Qiutao Road, Shangcheng District, Hangzhou, Zhejiang Province,
China, where we lease premises of 1,177.1 square meters, pursuant to a lease agreement by and between WFOE II and a non-related
third-party landlord, for the period of February 15, 2018 to February 14, 2021. The annual rent is approximately $396,176, $419,947,
and $445,038 for each of the 12 months beginning on February 15, 2018 to February 14, 2021, respectively. WFOE II may terminate
the lease with 2 months' prior notice. WOFE II has a preferential right to enter into a new lease with the landlord at the expiration
of the term subject to certain customary conditions.
On January 11, 2019,
Long Yun entered into an office space lease agreement with Zhejiang Niuruosi Medical Technology Co., Ltd. (“Niuruosi”)
for renting Niuruosi’s property of approximately 600 square meters located at Hanshi Tower 22nd Floor, No 1786 Binsheng Road,
Binjiang District, Hangzhou. The lease term is from February 1, 2019 to January 31, 2021 and the rent is RMB 525,600 ($75,303)
for the first year and RMB 551,880 ($79,068.17) for the second year.
Item 4.A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW
AND PROSPECTS
The following discussion
of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial
statements and their related notes included in this annual report. This report contains forward-looking statements. See “G.
Safe Harbor” in this Item 5, In evaluating our business, you should carefully consider the information provided under
the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our business
and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
Overview
We have suspended
our crowdfunding platform business during the last fiscal year and we have not generated revenue from such business. The following
business description regarding our crowdfunding platform is historical information only. In addition, we suspended our auto-parts
procurement services in April 2019, and the following business description regarding such business is historical information only.
We commenced our Supply Chain Management Platform Service in October 2019, which was developed and upgraded from our suspended
auto-parts procurement services, to provide consolidated supply chain management platform services. We did not generate any revenues
from our incubation services during the past fiscal year due to the severe disruption caused by the COVID-19 pandemic. All of our
business revenues generated for the fiscal year ended March 31, 2020 were entirely from our Supply Chain Management Platform Service.
Historically, our
revenues were generated from following four sources:
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We receive a percentage of the funds raised through our crowdfunding platform as platform service fee directly from the third-party payment processor, Union Mobile Pay. The percentage is generally 3%, but has ranged from 0% to 3%.
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Fees paid for providing our incubation services. These fees are paid pursuant to a consulting agreement between us and the project receiving incubation service.
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Finder’s fees paid to us for assisting a project in raising funds, as a portion of the proceeds, generally from one or more funding sources with which we have relationships, although we may seek to obtain funds from other sources, and from introductions to business partners, acquisition candidates or other strategic relationships.
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Procurement service fees paid
to us for providing sourcing or procurement pursuant to our Dacheng auto parts operation. We receive a 0.8% procurement service
fee based upon the amount of total transaction amount of auto-parts that we procure or source for the auto-parts suppliers and
the auto-repair shops, in addition to any logistics fees applicable.
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Currently, our revenues
are generated from the following two sources:
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Fees paid for providing our incubation services. These fees are paid pursuant to a consulting agreement between us and the project receiving incubation service.
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Transaction fee paid to us for providing Supply Chain Management Platform Services to auto parts suppliers through our Supply Chain Management Platform. We receive a service fee based on the certain percentage of aggregate amounts of purchase payments from our partnered auto parts suppliers.
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Crowdfunding is a
process by which a project or project is funded by raising money from a large number of people, primarily through an internet-based
platform. The participants in crowdfunding are the crowdfunding platforms, such as our platform, the entrepreneurs or project sponsors,
and the participants or other funding sources who make a payment for the reward. There are five basic types of crowdfunding programs — equity
crowdfunding, reward-based crowdfunding, debt-based crowdfunding, by which loans are made to an individual or business, royalty-based
crowdfunding, which the participant receives payments based on revenue generated by the project, to the extent that the project
generates revenue, and donation-based crowdfunding. Currently, we are only engaged in reward-based crowdfunding in China, and we
may offer other types of crowdfunding in compliant with PRC laws and regulations in the future.
We
launched our online crowdfunding platform, 5etou (“
”), at www.5etou.cn in March
2015. Our 5etou platform is designed to enable projects searching for funding to connect with participants, who are the funding
sources looking for projects. Our platform enables projects to seek to raise initial seed money and to try to establish a credible
track-record in product/service development and cash flow, and participants become involved in opportunities for rewards, often
the product for which the business is seeking funding, as well as being involved in a project that the participant believes has
the possibility of offering products, services and technology of interest to him.
We currently offer
business incubation services to the projects utilizing our platform for their projects, at the election of the projects. We provide
our consulting services pursuant to agreements with the projects on an ongoing and as-needed basis, until the projects no long
need or desire the consulting services. We offer these services, commencing from the time when a project first initiates a contribution
campaign using our platform to the completion of project prototypes and/or product/service, and continuing until the project becomes
profitable or no longer requires or desires our services. These services include business and operation advisory services relating
to marketing, sales and strategic planning, and guidance and general resources in ancillary services such as human resources, legal,
accounting, assisting with feasibility studies and other types of services that projects need. We are not intended to substitute
for professional services providers such as business operation professionals, accountants, or lawyers and will make referrals to
third-party providers when needed. For the fiscal year ended March 31, 2020, we did not generate any revenues through our incubation
services. For the fiscal year ended March 31, 2019, we generated revenue amounted to $ 2,260,376 through our incubation services,
or approximately 81.98% of our total revenue.
The first project
was launched on our platform on April 12, 2015. Since then, through March 31, 2020, 255 projects have initiated and completed fundraising
campaigns using our platform, for which they raised approximately $139,175,501. All of the 255 projects successfully met their
target amounts on our platform. Approximately 92% of the 255 projects successfully completed their fundraising between one month
and three months from the date they launched their fundraising campaign on our platform. For the fiscal year ended March 31, 2020,
we have not initiated or completed any projects.
In January 2018, we
commenced providing auto-parts related services through Hanghzou Dacheng, Historically, we provided procurement services, in the
form of sourcing, accounts receivables financing, and logistics services to auto-repair shops that had demands for auto-parts from
auto-parts suppliers, and auto-parts suppliers transacting with auto-repair shops. We received a 0.8% procurement fee based upon
the total transaction amount of auto-parts that we procure or source for the auto-parts suppliers and the auto-repair shops, in
addition to any logistics fees applicable. The Company suspended such services in April 2019 and we did not generate any revenues
from such services for the fiscal year ended March 31, 2020. The Company had further upgraded such suspended business through the
effort of our internal research and development, and developed an online consolidated supply chain management platform system called
“Supply Chain Management Platform”. We commenced our business operations on the Supply Chain Management Platform in
October 2019 and it has become our major business operations during the fiscal year ended March 31, 2020.
Our Supply Chain Management Platform Service
Since October 2019,
we began to provide supply chain management platform service to our qualified business partners, which consist of several highly-qualified
auto parts suppliers and one trustworthy auto parts logistics company. We started to build our Supply Chain Management Platform
in May 2019 with our own research and development team, investing a total of approximately RMB 2.06 million. We launched our Supply
Chain Management Platform in October 2019. The Supply Chain Management Platform is an integrated online supply chain processing
center that provides auto parts suppliers, auto repair shops, and logistics companies with transaction data management, shipping
and handling information management, and Supply Chain Management Platform Services. These services provided by the Supply Chain
Management Platform cover the most important aspects of auto parts procurement transactions in China. Auto parts suppliers and
auto parts suppliers can initiate the supply chain management platform service on our platform by first engage our qualified logistics
partner. They then enter into an electronic procurement and shipping contract on the platform by logging in detailed transaction
and shipping information. From there on, the Supply Chain Management Platform would serve as a source for consolidated transaction
information and shipping information for all three parties.
Auto parts logistics
companies in China are small-sized business entities whose only service is to transport auto parts purchased by auto repair shops
to designated delivery address while collecting payments from auto repair shops. These logistics companies typically transfer the
payment received form auto repair shop to auto parts suppliers for their purchases within 15 to 30 days. Such delay in payment
may create liquidity issues for auto parts suppliers, who would prefer to pay a premium for receiving purchase payment within five
days. We created the Supply Chain Management Platform to address this business need. We typically advance the aggregate amounts
of purchase payments in full to auto parts suppliers within three days upon confirmation of our logistics partner have collected
purchase payments from auto repair shops. We charge a certain percentage of service fees based on the aggregate amounts of purchase
payments to our partnered auto parts suppliers. We do not obtain any instruments from our logistics partner such as promissory
notes for the purchase advance. However, we require the legal representative of such logistics partner to sign an unlimited personal
liability agreement for each transaction so we can seek repayment through court proceedings in case of a payment default by our
logistics partner.
During the fiscal
year of 2020, we offered Supply Chain Management Platform Service typically covering transactions ranging from RMB 800 to RMB 2,000
per transaction, with the average amount to be approximately RMB 1,200. To repay our accelerated payments to the auto parts suppliers,
our logistics partner may pay with cash or electronic transfer. We have not experienced any delays or delinquents from our logistics
partner since October, 2019. For the fiscal year ended March 31, 2020, we generated 100% of our total revenue from our Supply Chain
Management Business.
For the year ended
March 31, 2019, we generated revenue of $2,757,229; of which $483,960 of our revenue, or approximately 17.55%, was from crowdfunding;
$2,260,376 of our revenue, or approximately 81.98%, was from our incubation services; and $12,893 of our revenue, or 0.47%, was
from Procurement Services.
For the year ended
March 31, 2020, we generated revenue of $11,252, which was entirely from our Supply Chain Management Platform Services business.
We did not generate any revenue from our crowdfunding, incubation, auto parts business, or listing service during the past fiscal
year.
Factors Affecting Our Results of Operations
COVID-19
The outbreak of the
novel coronavirus, commonly referred to as “COVID-19”, and the ensuing governmental measures designed to contain the
spread of the virus, including travel restrictions, widespread mandatory quarantines, and suspension of business activities within
China, have significantly affected business and manufacturing activities within China. Accordingly, our business, results of operations
and financial condition were adversely affected.
More specifically, the COVID-19 outbreak
has negatively impacted our businesses in the following ways:
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Our incubation service depends on a wide array of offline activities such as business meetings, new project seminars, information trainings etc. We have experienced substantive diminutions these activities due to the COVID-19 outbreak and ensuing lockdowns, because our business partners in incubation projects worked remotely between January 2020 and May 2020. This has caused substantial decrease in the Company’s results of operation during the period;
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Between January
and March 15 of 2020, the Company’s staff and employees were instructed to work remotely. As a result, we were not able
to effectively provide supply chain management platform services, resulting substantial impacts upon Company’s business
performance;
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We received about the same amount of net income for the six months ended March 31, 2020 compared to same period in 2019 even after suspending two of our business lines and experiencing substantive impact by COVID-19. The reason was that we were able to reduce leasing and administrative expenses significantly for the fiscal year ended March 31, 2020.
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As of the date of
this annual report, Chinese industries have gradually resumed businesses as government officials started to ease the restrictive
measures since April 2020. Our supply chain management platform service business recovered during the fiscal quarter ended June
30, 2020. Our management expects that our business will grow in the coming fiscal quarter ended September 30, 2020.
Key Line Items Affecting Our Results
of Operations
Revenue
The following table
sets forth revenue generated from each revenue source, both in absolute amount and as a percentage of total revenue for the years
indicated:
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For the Years Ended
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March 31,
2019
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March 31,
2019
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March 31,
2018
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Revenues
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Crowdfunding
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$
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-
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$
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483,960
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$
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1,074,101
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Incubation Service
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|
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-
|
|
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2,260,376
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3,197,865
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Procurement Services
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|
|
-
|
|
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12,893
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|
|
|
6,763
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Platform Services
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11,252
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|
|
|
-
|
|
|
|
-
|
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Total
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11,252
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|
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2,757,229
|
|
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4,278,729
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Operating Cost and Expenses
Operating Expenses
|
|
|
|
|
|
|
|
|
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Professional Fees
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|
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457,764
|
|
|
|
410,746
|
|
|
|
1,329,279
|
|
Wages & Benefits
|
|
|
576,995
|
|
|
|
1,261,940
|
|
|
|
1,691,204
|
|
Travel Expenses
|
|
|
51,727
|
|
|
|
111,945
|
|
|
|
203,701
|
|
Depreciation & Amortization
|
|
|
86,407
|
|
|
|
101,929
|
|
|
|
20,174
|
|
Data Services
|
|
|
-
|
|
|
|
56,169
|
|
|
|
127,355
|
|
Rent Expense
|
|
|
-
|
|
|
|
505,798
|
|
|
|
308,238
|
|
Advertising
|
|
|
-
|
|
|
|
931
|
|
|
|
19,769
|
|
Business Taxes and Surcharges
|
|
|
3,956
|
|
|
|
223
|
|
|
|
10,168
|
|
Meals & Entertainment
|
|
|
34,312
|
|
|
|
156,941
|
|
|
|
117,874
|
|
Other
|
|
|
38,326
|
|
|
|
1,267,647
|
|
|
|
66,926
|
|
Promotional expense
|
|
|
-
|
|
|
|
1,043,102
|
|
|
|
-
|
|
Impairment loss on investments
|
|
|
-
|
|
|
|
74,507
|
|
|
|
-
|
|
Provision for doubtful debt
|
|
|
880,795
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,130,282
|
|
|
$
|
4,991,878
|
|
|
$
|
3,894,688
|
|
Results of Operations
The following table
sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a percentage
of our total operating revenue for the years presented. This information should be read together with our consolidated financial
statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily
indicative of our future trends.
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
11,252
|
|
|
|
11,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,425,443
|
|
|
|
106,146
|
|
|
|
598,693
|
|
|
|
2,130,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
582,173
|
|
|
|
(310
|
)
|
|
|
80,656
|
|
|
|
662,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(843,270
|
)
|
|
|
(106,456
|
)
|
|
|
(506,785
|
)
|
|
|
(1,456,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
26,917
|
|
|
|
-
|
|
|
|
496
|
|
|
|
27,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(870,187
|
)
|
|
|
(106,456
|
)
|
|
|
(507,281
|
)
|
|
|
(1,483,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to Dragon Victory
|
|
|
(870,187
|
)
|
|
|
(63,876
|
)
|
|
|
(482,654
|
)
|
|
|
(1,416,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations for the
years ended March 31, 2020, 2019:
For the year ended
March 31, 2020, we generated total revenue of $11,252, 100% of which originated from our supply chain management platform service
business. We did not generate any revenue from our crowdfunding, incubation, auto-parts platform procurement business, or listing
service during the past fiscal year. For the year ended March 31, 2019, we generated total revenue of $ 2,757,229, of which $2,074,959,
or approximately 75.26%, was from our incubation services, $483,960, or approximately 17.55% was from crowdfunding platform service,
and $12,893, or 0.47%, was from auto-platform procurement business and $185,358, or approximately 6.7% was from listing services.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenses (SG&A) consist primarily of professional fees (including consulting, audit and legal fees) and data
service fees for our corporate and technical staff and the personnel supporting our corporate and technical staff, wages and salaries,
impairment loss, travel expenses, rent expenses, business taxes and surcharges, and advertising expenses.
Our selling, general
and administrative expenses were $2,130,282 for the year ended March 31, 2020, representing $2,861,596, or 57.33% decrease from
$4,991,878 for the year ended March 31, 2019. The decrease was due to a general decrease in our labor costs, rent fees, and business
activity expenses. We were able to adjust flexible costs in business operations to significantly decrease our selling, general
and administrative expenses.
Other Income and Expenses
The Company’s
other income was $662,519 for the year ended March 31, 2020, representing a decrease of $112, 360, or 14.5 %, from $774,879 for
the year ended March 31, 2019. The decrease was due to the interest income generated from wealth management investments.
Net Loss
For the year ended
March 31, 2020, the Company’s business operations resulted in a net loss of $1,483,924, which represents a $24,154, or 0.02%,
increase from a net loss of $1,459,770 for the year ended March 31, 2019. The increase in net loss was mainly due to the increase
of selling, general and administrative expenses and deduction of net income attributable to non-controlling interest.
Taxation
We are incorporated
in the Cayman Islands and conduct our primary business operations through our subsidiary and affiliated entities in the PRC. Under
the current laws of the Cayman Islands, we are not subject to tax on income or capital gains. Additionally, upon payments of dividends
to our shareholders, no Cayman Islands withholding tax will be imposed.
Under the Hong Kong
tax laws, the statutory income tax rate is 16.5%. Subsidiaries in Hong Kong are exempted from income tax on their foreign-derived
income and there are no withholding taxes in Hong Kong on remittance of dividends.
Under the Enterprise
Income Tax Law, or the EIT Law, domestic enterprises and foreign investment enterprises, or FIE, are subject to a unified 25% enterprise
income tax rate, except for certain entities that are entitled to tax holidays or exemptions.
Under the current EIT
Law, dividends paid by an FIE to any of its foreign non-resident enterprise investors are subject to a 10% withholding tax. Thus,
the dividends, if and when payable by our PRC subsidiary to its offshore parent entities, would be subject to a 10% withholding
tax. A lower tax rate will be applied if such foreign non-resident enterprise investor’s jurisdiction of incorporation has
signed a tax treaty or arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes
on income with China. There is such a tax arrangement between the PRC and Hong Kong. Thus, the dividends, if and when payable by
our PRC subsidiary to the offshore parent entity located in Hong Kong, would be subject to a 5% withholding tax rather than the
statutory rate of 10%, provided that the offshore entities located in Hong Kong meet the requirements stipulated by relevant PRC
tax regulations. Furthermore, pursuant to the applicable circular and interpretations of the current EIT Law, dividends from earnings
created prior to 2008 but distributed after 2008 are not subject to withholding income tax. We have not provided for deferred income
tax liabilities on the PRC entities’ undistributed earnings/loss of $(753,022), $663,695, and $1,799,879 as of March 31,
2020, 2019 and 2018, respectively because we control the timing of the undistributed earnings and it is probable that the earnings
will not be distributed. We plan to reinvest those earnings in the PRC indefinitely in the foreseeable future.
Critical Accounting Policies, Estimates
and Judgments
The consolidated financial
statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of
America. This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized
when earned, and expenses and losses are recognized when incurred. The Company’s consolidated financial statements are expressed
in U.S. Dollars.
The accompanying
consolidated financial statements include the accounts of the Company and its significant subsidiaries on a consolidated basis.
The Company also includes subsidiaries over which a direct or indirect legal or effective control exists and for which the Company
is deemed to direct the significant activities and has the obligation to absorb the losses or benefits of the entities. All intercompany
accounts, balances and transactions with consolidated entities have been eliminated.
The preparation of
financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
We derive revenue
principally from two main business:
|
●
|
Fees paid for providing our incubation
services. These fees are paid pursuant to a consulting agreement between us and the project receiving incubation service.
|
|
|
|
|
●
|
Transaction fee
paid to us for providing supply chain management platform service to auto parts suppliers through our Supply Chain Management
Platform. We charge a certain percentage of fees based on the aggregate amounts of purchase payments from our auto parts suppliers
partners.
|
Crowdfunding
The Company generates
its revenue from success fees from transactions on the crowdfunding platform. Revenue from these transactions is accounted for
at the moment a project is successfully funded.
At the start of a
funding campaign, the entrepreneur enters into a contract with the Company pursuant to which he or she agrees to pay the Company
a success fee once a successful fund-raising campaign for that entrepreneur closes. Once the funding campaign has closed, the Company’s
success fee is either collected from the funds raised prior to transferring the net proceeds of the funding to the entrepreneur
or to be collected from the entrepreneur after the net proceeds of the funding are transferred to the entrepreneur.
Upon completion of
the funding campaign, services delivered under the contract with the entrepreneur have been completed and the Company recognizes
its success fee revenues, net of any discounts given at the time the campaign has been closed successfully. Also, because the success
fee percentage is stated in the contract with the entrepreneur prior to the start of the funding campaign, the Company believes
that this amount is fixed and, assuming the successful conclusion of the funding campaign, collectible from the entrepreneur. This
revenue recognition policy complies with ASC 606 in that it is based on written agreements with the entrepreneurs, contractual
services have been completed, pricing is fixed and determinable based on agreements with the customer and collectability is reasonably
assured as the customers of the Company have just received their new funding.
Incubation Service
The Company generates
its revenue by providing business and operation advisory services relating to matters related to marketing, sales, and strategic
planning, and ancillary services such as coordinating human resources, legal, accounting, operations, assisting with feasibility
studies and other types of services at the election of the entrepreneur. The Company provides its incubation services on an ongoing
and/or as-needed basis, pursuant to consulting agreements with the entrepreneurs. For ongoing basis services, revenue is recognized
on an ongoing basis for the agreed periodic service fee. For as-needed basis, revenue is recognized when the contractual services
have been completed.
Finder’s Service Fee
The Company generates
its revenue for assisting any business entity in raising funds as well as for introducing business partners, acquisition candidates
or other strategic relationships to the business entity, usually from one or more sources with which the Company or personnel have
relationships. The Company provides its finder services pursuant to an agreement and revenue is recognized when the contractual
services have been completed and the terms and conditions in the agreements have been met.
Procurement Service
We generate our revenues
from service fees by providing procurement services relating to auto parts and accessories on an as needed basis. The transaction
price is determined when the customer place an order with us. We recognize revenues when the procured goods have been transferred
to and accepted by the customers as our performance obligation is completed.
In 2014, the FASB
issued guidance on revenue recognition (“ASC 606”), with final amendments issued in 2016. The underlying principle
of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes
(1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. Our Company has applied the five-step model to recognize revenue when we
are probable that we will collect the consideration we are entitled to in exchange for the services we transfers to our clients.
Our Company has concluded that the new guidance did not require any significant change to its revenue recognition processes.
Supply Chain Management Platform
Services Fee
The Company generates
fees through its Supply Chain Management Platform Services. We charge a certain percentage of service fees based on the aggregate
amounts of purchase payments to our partnered auto parts suppliers. The Company recognizes such revenues when the procured auto
parts are transferred to and accepted by the auto repair shops as the logistic company’s performance obligation is completed.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable
are carried at the amount billed to a customer, net of the allowance for doubtful accounts, which is an estimate for credit losses
based on a review of all outstanding amounts on a regular basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic
conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written
off are recorded when received.
Our Company reviews
the collectability of accounts receivable based on an assessment of historic experience, current economic conditions, and other
collection indicators. During the fiscal year ended March 31, 2020, due to the unfavorable economic conditions as a result of COVID-19,
the Company anticipates a recollection period longer than its usual cycle. As such, the Company provided allowances for certain
long outstanding receivables to account for the uncertainty. For the years ended March 31, 2020 and 2019, the Company recorded
allowances for doubtful accounts of $922,817 and $0, respectively.
Investments
Cost Method Investments
Direct and or indirect
investments in business entities in which our Company does not have a controlling financial interest and has no ability to exercise
significant influence over operating and financial policies (generally 0-20 percent ownership), are accounted for by the cost method.
Equity Method Investments
Direct and or indirect
investments in business entities in which our Company does not have a controlling financial interest, and yet over whose operating
and financial policies our Company has the ability to exercise significant influence (generally 20 – 50 percent
ownership), are accounted for by the equity method.
Held-to-Maturity Investments
Our Company invested
in certain held-to-maturity debt instruments. These investments were not impaired, and were recorded at their carrying values based
on their amortized cost, which approximated their fair market value. Our Company has not recognized any unrecognized gain or losses
in the other comprehensive income. There were no derivative instruments that were used to hedge these investments.
These investments
derived interests in the amount of $667,764 and $636,489 for the years ended March 31, 2020 and 2019, respectively. The interests
were recognized to our Company’s results of operations when they were earned. These investments were not collateralized with
underlying assets by their issuers.
These investments
are recorded as short-term investments as they had maturities with one year or less.
Fair Value of Financial Instruments
The accounting standard
for fair value establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under the provisions
of the pronouncement, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
(i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
ASC 820 establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
|
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
|
|
Level 2:
|
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
|
|
Level 3:
|
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
The Company’s
current financial assets and liabilities approximate fair value due to their short-term nature and include cash accounts. The Company’s
borrowings approximate fair value as the rates of interest are similar to what they would receive from other financial institutions.
The following table
summarizes our Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized
using the fair value hierarchy:
|
|
Carrying Amount
|
|
|
Estimated
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at (amortized) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,587,984
|
|
|
|
5,587,984
|
|
Related party investment -wealth management product
|
|
|
-
|
|
|
|
-
|
|
|
|
3,378,706
|
|
|
|
3,378,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at (amortized) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
9,461,918
|
|
|
|
9,461,918
|
|
Our Company evaluates
its cost method investments in accordance to ASC 325-20-35. Impairment charges in connection with its cost method investments were
$0 and $0 for the years ended March 31, 2020 and 2019, respectively.
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
JiaXing YiTou ShangMa Investments Limited Partnership Company
|
|
$
|
0
|
|
|
$
|
0
|
|
Total, net
|
|
$
|
0
|
|
|
$
|
0
|
|
The details on property and
equipment consist of the following:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Leasehold improvements
|
|
$
|
-
|
|
|
$
|
-
|
|
Computer and equipment
|
|
|
198,309
|
|
|
|
216,977
|
|
Automobiles
|
|
|
150,411
|
|
|
|
158,857
|
|
Capitalized lease
|
|
|
-
|
|
|
|
160,551
|
|
|
|
|
348,720
|
|
|
|
536,385
|
|
less: Accumulated depreciation
|
|
|
(214,114
|
)
|
|
|
(158,684
|
)
|
Total, net
|
|
$
|
134,606
|
|
|
$
|
377,701
|
|
The Company made non-refundable
prepayments for improvements to an event and meeting space; architectural and construction work commenced in 2018 and that has
not been completed as of the date of this report. Management decided to expense the costs related to these improvements as promotional
and marketing expenses as this event and meeting space is designated for attracting potential incubation clientele. Also, Management
did not believe that capitalizing the improvements were appropriate because at the time of this report, Management was not able
to forecast with reasonably accuracy when these improvements would generate future benefits in the form of cash flows to the Company.
Impact of Inflation
We do not believe
the impact of inflation on our company is material.
Impact of Foreign Currency Fluctuations
Our subsidiaries and
VIE maintain their books and records in RMB. Our reporting currency is USD. In general, for consolidation purposes, we translate
assets and liabilities into USD using the applicable exchange rates prevailing at the balance sheet date, and the statement of
income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their
financial statements are recorded as accumulated other comprehensive income. The foreign currency translation from RMB to USD could
materially affect our financial condition and results of operations due to the fluctuation of exchange rate. The exchange rates
in effect is shown below:
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Period/year end RMB:US$ exchange rate
|
|
|
7.08760
|
|
|
|
6.71111
|
|
|
|
6.61843
|
|
Period/annual average RMB:US$ exchange rate
|
|
|
6.97980
|
|
|
|
6.71075
|
|
|
|
6.50682
|
|
Period/year end HKD:US$ exchange rate
|
|
|
7.77050
|
|
|
|
7.84934
|
|
|
|
7.77047
|
|
Period/annual average HKD:US$ exchange rate
|
|
|
7.75880
|
|
|
|
7.84162
|
|
|
|
7.75883
|
|
We did not have any
foreign currency investments hedged by currency borrowings or other hedging instruments in fiscal year ended March 31, 2020, 2019
and 2018.
Recent Accounting Pronouncements
In January 2017, the
FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides
a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business.
The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a
single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively,
the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that
together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition
of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired
sets are expected to be considered businesses. For the Company, this ASU is effective January 1, 2018 on a prospective basis with
early adoption permitted. The Company has adopted this guidance, and determined that there was no material impact to the financial
statements presented herein.
In June 2016, the
FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology,
which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim
periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact
of the adoption on its consolidated financial statements.
In August 2016, the
FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in
practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides
guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments
made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method
investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of
cash flows. The Company has adopted the new guidance.
B. Liquidity and Capital Resources
The following table
sets forth a summary of our cash flows for the periods presented:
|
|
For the Year Ended March 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
Net cash (used in)/provided by operating activities
|
|
|
(1,011,881
|
)
|
|
|
774,482
|
|
|
|
(815,311
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
(6,273,576
|
)
|
|
|
(4,814,672
|
)
|
|
|
71,399
|
|
Net cash provided by/(used in) financing activities
|
|
|
7,903,578
|
|
|
|
259,890
|
|
|
|
298,688
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
97,008
|
|
|
|
(118,590
|
)
|
|
|
422,550
|
|
Net (decrease)/increase in cash and cash equivalents and restricted cash
|
|
|
618,121
|
|
|
|
(3,780,300
|
)
|
|
|
(445,224
|
)
|
Cash and cash equivalents and restricted cash at beginning of the year
|
|
|
3,222,361
|
|
|
|
3,937,490
|
|
|
|
38,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash at end of the year
|
|
|
3,937,490
|
|
|
|
38,600
|
|
|
|
15,926
|
|
Cash and cash equivalents.
Our cash and cash equivalents consist of cash, bank deposits, and other currency of value. As of March 31, 2020 and 2019, our cash
and cash equivalents were $15,926 and $38,600, respectively. As of March 31, 2020, our other receivables and prepayments, prepaid
tax, short-term investments were $705,164, $57,232, $5,587,984, and $3,378,706, respectively. As of March 31, 2019, our other receivables
and prepayments, prepaid tax, short-term investments were $621,232, $0, $9,461,918, and $0, respectively.
A majority of our
future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi
may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade and
service-related foreign exchange transactions.
We expect that substantially
all of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can
be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore,
our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine
procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated
in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions
in the future.
Operating Activities
Net
cash used in operating activities for the fiscal year ended March 31, 2020 was $815,311, representing a decrease
of $1,589,793 or 205%, from net cash provided by operating activities in the amount of $774,482 for the fiscal year ended March
31, 2019. Net loss for the fiscal year ended March 31, 2020 was $1,483,923, representing an increase of $24,153 or 2%, from a net
loss of $1,459,770 for the fiscal year ended March 31, 2019. Changes in various asset and liability account balances throughout
the fiscal year ended March 31, 2020 also contributed to the net change in cash used in operating activities. Among such changes,
the increases in the ending balances of other receivable and prepayment balances from March 31,2019
to March 31, 2020 as shown on the consolidated balance sheet contributed to a decrease to net cash in the amount of $121,463 for
the fiscal year ended March 31, 2020, as compared to an increase to net cash in the amount of $595,234 for the fiscal year ended
March 31, 2019. This represented a decrease of 120%, or $716,696 in cash provided by operating cash flows. In addition, the decreases
in the ending balances of accounts payable balance from March 31, 2019 to March 31, 2020, as shown on the consolidated balance
sheet contributed to an increase of net cash in the amount of $58,709 for the fiscal year ended March 31, 2020, as compared to
an increase of net cash in the amount of $634,212 for the fiscal year ended March 31, 2019. This represented a decrease of 91%,
or $575,503 in cash provided by operating cash flows. The Company also had a net decrease in other payables and accrued liabilities.
The decreases in other payables and accrued liabilities led to a decrease of net cash flow provided by operating activities in
the amount of $420,772, or 189%, from net cash provided in the amount of $222,331 for the fiscal year ended March 31, 2019 to net
cash used in the amount of $198,391 for the fiscal year ended March 31, 2020.
Net cash provided
by operating activities for the fiscal year ended March 31, 2019 was $774,482, an increase of $1,786,363 or 177%, from net cash
used in operating activities in the amount of $1,011,881 for the fiscal year ended March 31, 2018. Net loss for the fiscal year
ended March 31, 2019 was $1,459,770, representing a decrease of $1,585,074 from a net income of $125,304 for the fiscal year ended
March 31, 2018. Changes in various asset and liability account balances throughout the fiscal year ended March 31, 2019 also contributed
to the net change in cash used in operating activities. Among such changes, the decreases in the ending balances of other receivable
and prepayment balancesn from March 31, 2018 to March 31, 2019 as shown on the consolidated balance sheet contributed to an increase
of net cash in the amount of $595,234 for the fiscal year ended March 31, 2019, as compared to a decrease of net cash in the amount
of $825,169 for the fiscal year ended March 31, 2018. This represented an increase of 172%, or $1,420,403 in net cash provided
by operating cash flows. In addition, the increases in the ending balances of accounts payable balance from March 31, 2018 to March
31, 2019 as shown on the consolidated balance sheet contributed to an increase of net cash in the amount of $634,212 for the fiscal
year ended March 31, 2019, as compared to a decrease of net cash in the amount of $33,206 for the fiscal year ended March 31, 2018.
This represented an increase of 2,010%, or $667,418 in net cash provided by operating cash flows. The Company also had a net increase
in other payables and accrued liabilities. The decreases in other payables and accrued liabilities led to an increase of net cash
flow provided by operating activities in the amount of $240,817, or 1,303%, from net cash used in the amount of $18,486 for the
fiscal year ended March 31, 2018 to net cash provided in the amount of $222,331 for the fiscal year ended March 31, 2019.
Investing Activities
Net cash provided
by investing activities for the fiscal year ended March 31, 2020 was $71,399, primarily resulted from return of investment not
reinvested.
Net cash used in investing
activities for the fiscal year ended March 31, 2019 was $4,814,672, primarily due to investments in corporate bonds and purchases
of equipment and improvements.
Financing Activities
Net cash provided
by financing activities for the fiscal year ended March 31, 2020 was $298,688, primarily resulting from the contributed capital
paid up in various newly incorporated subsidiaries and advances from related parties.
Net cash provided
by financing activities for the fiscal year ended March 31, 2019 was $259,890, primarily due to advances from related parties.
Capital Expenditures
Our capital expenditure
was $0 and $0 for the fiscal years ended March 31, 2020 and 2019. We intend to fund our future capital expenditures with our existing
cash balance and cash flow from operating activities. We will continue to make capital expenditures to meet the expected growth
of our business.
Holding Company Structure
Dragon Victory International
Limited is a holding company with no material operations of its own. We conduct our operations primarily through our WFOE II and
its subsidiaries, and our VIE and its subsidiary in China. As a result, our ability to pay dividends depends upon dividends paid
by our WFOE II. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments
governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China
are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. Under PRC law, each of our subsidiaries and our VIE in China is required to set aside at least 10% of
its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their registered
capital. In addition, our wholly foreign-owned subsidiaries in China may allocate a portion of their after-tax profits based on
PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion, and our VIE may allocate
a portion of its after-tax profits based on PRC accounting standards to a surplus fund at their discretion. The statutory reserve
funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company
out of China is subject to examination by the banks designated by SAFE. Our WFOE II has not paid dividends and will not be able
to pay dividends until it generates accumulated profits and meet the requirements for statutory reserve funds.
C. Research and Development, Patents
and Licenses, etc.
Intellectual Property
As of March 31, 2020,
we hold 20 registered trademarks in the PRC, and had 23 domain names relating to our business, including our corporate website,
www.dvintinc.com, our crowdfunding operation, website www.5etou.cn, and www.taxiqi.com for displaying our
business and operation information, with the Internet Corporation for Assigned Names and Numbers and China Internet Network Information
Center. Our current ICP license for our crowdfunding operation will expire in December 2020. We are not required to acquire an
ICP license for our www.taxiqi.com website because Hangzhou Dacheng does not provide services through this website, and
the website is used for information distribution and display only.
D. Trend Information
Other than as disclosed
elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from
April 1, 2019 to March 31, 2020 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
E. Off-Balance Sheet Arrangements
There were no off-balance
sheet arrangements for the year-ended March 31, 2020 that have or that in the opinion of management are likely to have, a current
or future material effect on our financial condition or results of operations.
F. Contractual Obligations
Operating lease commitments for office
facility
As of March 31, 2020,
the Company has leased office premises under an operating lease agreement. The future aggregate minimum lease payments under operating
leases are as follows:
|
|
Payment Due by Period
|
|
|
|
As of
March 31,
2020
|
|
|
|
US$
|
|
Operating Lease Obligations
|
|
|
|
Within one year (including one year)
|
|
|
46,391
|
|
One to two years (including two years)
|
|
|
48,710
|
|
Total
|
|
|
95,101
|
|
For the years ended
March 31, 2020 and 2019, the Company incurred rental expenses under operating leases of $75,930 and $505,798, respectively. The
substantial decrease in rental expenses was due to our Company’s decision to change its operating venues and the locations
of its office.
In February 2019,
the Company ended its prior lease agreement and moved its office to a new location where it entered into a two-year lease that
expires on January 31, 2021. The Company paid $62,570 as a security deposit for the office lease.
Leases Commitments
For the years
ended March 31, 2020, 2019, 2018, 2017, and 2016, the Company incurred interest expenses under capital leases of $0, $0, $0,
$0, and $2,763, respectively.
Capital Commitments
There were no capital commitments for the
fiscal year ended March 31, 2020.
G. Safe Harbor
See “Forward-Looking
Statements” of this annual report.
Item 6. DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES
A. Directors and Senior Management
Set forth below is
information concerning our directors, executive officers and other key employees.
Name
|
|
Age
|
|
|
Position(s)
|
Jianjun Sun (1)
|
|
43
|
|
|
Chief Executive Officer; Chairman and Director
|
Limin Liu (2)
|
|
49
|
|
|
Chief Executive Officer; Chairman and Director
|
Hongyu Zhang (3)
|
|
31
|
|
|
Director
|
Wei Wang (4)
|
|
48
|
|
|
Director
|
Cloris Li (5)
|
|
37
|
|
|
Director
|
Bin Liu (6)
|
|
46
|
|
|
Director
|
Wenbing Wang
|
|
48
|
|
|
Director
|
Han Zhang (7)
|
|
39
|
|
|
Director
|
Jingxin Tian (8)
|
|
40
|
|
|
Director
|
Xiaohua Gu
|
|
45
|
|
|
Chief Financial Officer
|
Chao Fu Chen
|
|
53
|
|
|
Chief Operating Officer
|
Bo Lyu (9)
|
|
41
|
|
|
Board Secretary
|
|
(1)
|
Jianjun Sun resigned as the Company’s Chief Executive
Officer, Chairman of the Board of Directors, and Director on August 20, 2019.
|
|
(2)
|
Limin Liu was appointed as Company’s Chief Executive
Officer, Chairman of the Board of Directors, and Director on August 21, 2019.
|
|
(3)
|
Hongyu Zhang resigned as the Company’s Director on
August 20, 2019.
|
|
(4)
|
Wei Wang was appointed as the Company’s Director
on August 21, 2019.
|
|
(5)
|
Cloris Li resigned as the Company’s Director on September
3, 2019.
|
|
(6)
|
Bin Liu was appointed as the Company’s Director on
September 4, 2019.
|
|
(7)
|
Han Zhang resigned as the Company’s Director on April
1, 2019.
|
|
(8)
|
Jingxin Tian was appointed as the Company’s Director
on June 3, 2019.
|
|
(9)
|
Bo Lyu resigned as the Company’s Board Secretary
on April 1, 2019.
|
The following is a
brief biography of each of our executive officers and directors:
Mr. Jianjun Sun
served as our former CEO and Chairman of the Board of Directors, and he resigned on August 20, 2019. Mr. Sun was a director responsible
for administrative affairs, human resources, accounting and asset management, for Hangzhou Qinghefang Asset Management Co. Ltd.,
a state-owned enterprise from June 2015 to September 2017. Mr. Sun was a director of Hangzhou Qinghefang District Joint Committee,
responsible for managing Hangzhou Qinghefang Historical District Management Committee, a governmental agency from June 2015 to
September 2017. Mr. Sun was the Division Chief of Administrative and Management Affairs Division, Hangzhou Qinghefang Historical
District Management Committee, and was responsible for administrative affairs, human resources, accounting and asset management
from July 2012 to May 2015. He graduated Nanjing University of Political Science in 2004 with a major in Economics and Administration.
Mr. Limin Liu has
served as our CEO, Chairman of the Board of Directors, and Director since August 21, 2019. From July 2014 to June 2019, Mr. Liu
served as the Global Lead of Department of Financial Service Industry of Huawei Technologies Co., Ltd. From 2006 to 2014, Mr. Liu
served as the vice president for sales and technology of Beijing Futong Dongfang Technology Co., Ltd. From 1994 to 2006, Mr. Liu
worked at IBM China subsequently as an engineer, business representative, and director of sales. Mr. Liu graduated from Zhejiang
University in 1993 with a major in motor control.
Mr. Hongyu Zhang
was our former Director and resigned on August 20, 2019. He has served as the Director of Sales for IBM Greater China Region Business
Unit since 2012, and has served as the evaluation director of the Export-Import Bank of China Evaluation department since 2013.
Mr. Zhang graduated from China Foreign Affairs University with a degree in 2011 and the University of Alberta with a degree in
2012.
Mr. Wei Wang
has served as our Director since August 21, 2019. Mr. Wang has served as the general manager of Zhejiang Getai Curtain Wall Decoration
Engineering Co., Ltd. since January 2014. From February 1991 to December 2013, Mr. Wang worked in the Fire Department of Hangzhou
City. Mr. Wang received a bachelor’s degree in business management from Party School of the Central Committee of C.P.C. in
2000.
Ms. Cloris Li was
our former independent director and resigned on September 3, 2019. Ms. Li has served as the Chief Financial Officer of China Education
Alliances, Inc. since 2011 to present. From 2010 to 2011, Ms. Li worked as a consultant with PricewaterhouseCoopers, focusing on
the function of assurance and risk & control, providing audit, internal control advice and SOX compliance services to both
public and private companies. From 2004 to 2006, Ms. Li served as senior auditor and tax advisor in national accounting firm in
Australia, providing financial auditing, planning and tax advice to both local and multinational companies. Ms. Li graduated from
Queensland University Technology Australia with a Bachelor of Business (Accountancy) in 2004.
Mr. Bin Liu
has served as our Director since September 4, 2019. Mr. Liu has over 20 years of experience in accounting, finance, and capital
markets areas. Mr. Liu has been a deputy manager of Beijing Houyi Capital Management Co., Ltd., a private equity fund headquartered
in Beijing, since July 2019. From September 2017 to June 2019, Mr. Liu served as deputy manager at Jianwen Financial Holding Co.,
Ltd. From February 2003 to August 2017, Mr. Liu worked as an official at Shanghai Securities Regulatory Bureau. From January 2002
to February 2003, Mr. Liu served as financial manager at Winsan (Shanghai) Industrial Corporation Ltd. From July 1996 to December
2001, Mr. Liu served as a partner and manager at Beijing Zhongtian Huazheng Accounting Firm. Mr. Liu received his bachelor’s
degree in finance from Liaoning University in 1996. Mr. Liu received his master’s degree in banking from Chinese Academy
of Social Sciences in 1999, and his second master’s degree in law from Fudan University in 2010.
Mr. Wenbing Wang
is one of our independent directors. Mr. Wang has served in key roles in U.S. listed Chinese companies and prestigious financial
institutions. In addition to investment banking and private equity experience at Credit Suisse First Boston (Hong Kong) Ltd., Century
Investment Corporation, and Redwood Capital, Mr. Wang has served as the President and Chief Financial Officer of Fushi Copperweld.
Mr. Wang holds a bachelor’s degree in Scientific English from University of Science and Technology Beijing and a MBA degree
in Finance and Corporate Accounting from University of Rochester.
Ms. Han Zhang was
our former independent director and resigned on April 1, 2019. Ms. Zhang has served as the legal director of Shinecome Technology
Limited since 2015. From 2014 to 2015, Ms. Zhang worked as an attorney at Guantao Law Firm (Hangzhou). From 2008 to 2013, Ms. Zhang
worked as an International Law Specialist at Morris, Manning and Martin LLP. From 2007 to 2008, Ms. Zhang worked as a Chinese Law
Specialist at Womble Carlyle Sandridge & Rice, PLLC. Ms. Zhang received her Master of Laws degree (L.L.M) from Emory University
School of Law in 2007. Ms. Zhang was chosen as a director because of her experience with capital market and her legal background.
Ms. Jingxin Tian
has served as our Director since June 3, 2019. Ms. Tian has been a partner of Jingsh Law Firm, a law firm headquartered in Beijing
with more than 40 branch offices in China, since 2016, and serves as the director of construction biddings department of the firm.
Ms. Tian has over 13 years of experience as a litigation and transaction lawyer, especially in areas including legal risk management
and dispute resolution. Ms. Tian also serves as member of mergers, acquisitions, reorganizations, and financially-distressed assets
committee of Beijing Lawyers Association, member of Chinese Society of International Law, and arbitrator of Hainan International
Arbitration Court of China. Ms. Tian received a bachelor’s degree in law from Capital University of Economics and Business
in China, and a master degree in civil and business law from University of Chinese Academy of Sciences.
Mr. Xiaohua Gu
has been our CFO since August 1, 2016. Mr. Gu is well suited for this position with more than 10 years of experience in financial
auditing and accounting. Mr. Gu has been the CFO of Long Yun since October 2015. From July 2006 to February 2010, Mr. Gu was the
Hangzhou branch manager of the KPMG Consulting (China) CO., Ltd. From March 2010 to February 2012, Mr. Gu Xiaohua was the partner
of RichLink International Investment Co., Ltd. From March 2012 to present, Mr. Gu has been a Director of China Education Group,
Associate Director of HEP CPA Shanghai Branch and a Director of Hailiang Education Group Inc. Mr. Gu holds a Master’s Degree
in Newcastle University and a Master’s Degree in Finance in Leeds Metropolitan University.
Mr. Chao Fu Chen
has been our COO since August 1, 2016. Mr. Chen is well qualified for this position because he has many years of operating and
management experience in internet and technology companies. From January 2015 to present, Mr. Chen has been the COO of our Long
Yun. From 2010 to 2015, he was the Independent Director of Japan Raikoku Company Limited. Mr. Chen holds a Bachelor Degree from
Chung Yuan Christian University for Business Administration.
Mr. Bo Lyu was
our former Board Secretary and resigned on April 1, 2019. Mr. Lyu served as the board secretary of Hailiang Education Group Inc.
(Nasdaq Listed: HLG) from 2014 to August 2017. From 2009 to 2013, Mr. Lyu worked as an investment manager in Hailiang Group Co.
Ltd., which was the then parent company of Hailiang Education Group Inc., Zhejiang Hailiang Co. Ltd. (SSE Listed: 002203) and Hailiang
International Holding Co. Ltd. (HKSE listed: 02336). Mr. Lv received his bachelor’s degree in International Investment from
Wuhan University in 2001 and his master degree in Finance from the National Economics Department of Albert-Ludwigs-Universität
Freiburg in 2008.
Pursuant to our amended
and restated articles of association, the minimum number of directors shall consist of not less than one person unless otherwise
determined by the shareholders in a general meeting. Unless removed or re-appointed, each director shall be appointed for a term
expiring at the next-following annual general meeting, if any is held. At any annual general meeting held, our directors will be
elected by a majority vote of shareholders eligible to vote at that meeting. At each annual general meeting, each director so elected
shall hold office for a one-year term and until the election of their respective successors in office or removed.
B. Compensation of Directors and Executive
Officers
For the year ended
March 31, 2020, we paid an aggregate amount of RMB1,268,232.24 (approximately US$181,700.37) in cash as compensation to our directors
and executive officers.
Our PRC subsidiary
is required by PRC laws and regulations to make contributions equal to certain percentages of each employee’s salary for
his or her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory benefits. Our PRC subsidiary
paid retirement and similar benefits for our officers and directors in the year ended March 31, 2020.
C. Board Practices
Board of Directors
Our board of directors
currently consists of five (5) directors, including three (3) independent directors. A director is not required to hold any shares
in our company to qualify to serve as a director. Subject to any separate requirement for Audit Committee’s (as defined in
our articles of association) approval under applicable law or the listing rules of Nasdaq Capital Market, a director may vote with
respect to any contract, transaction or arrangement in which he or she is materially interested provided the nature of the interest
is disclosed prior to its consideration and as long as he has not been disqualified by the chairman of the relevant board meeting.
All of the directors will serve until and will stand for re-election on the date of the next annual general meeting, unless resigned
or otherwise removed prior to such date.
Committees of the Board of Directors
We have established
three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance
committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described
below.
Audit Committee.
Our audit committee
consists of Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian. Mr. Wenbing Wang is the chairman of our audit committee. We have
determined that Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian satisfy the “independence” requirements of Section
5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange Act. Our board also has determined that Mr.
Bin Liu qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses financial sophistication
within the meaning of the Nasdaq Listing Rules. The audit committee will oversee our accounting and financial reporting processes
and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:
|
●
|
appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
|
|
|
|
|
●
|
reviewing with the independent auditors any audit problems or difficulties and management’s response;
|
|
|
|
|
●
|
discussing the annual audited financial statements with management and the independent auditors;
|
|
|
|
|
●
|
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;
|
|
|
|
|
●
|
reviewing and approving all proposed related party transactions;
|
|
|
|
|
●
|
meeting separately and periodically with management and the independent auditors; and
|
|
|
|
|
●
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
|
Compensation Committee.
Our compensation committee
consists of Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian upon the effectiveness of their appointments. Ms. Tian is the chairperson
of our compensation committee. We have determined that Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian will satisfy the “independence”
requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. The compensation
committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee will be responsible for, among other things:
|
●
|
reviewing and approving to the board with respect to the total compensation package for our most senior executive officers;
|
|
|
|
|
●
|
approving and overseeing the total compensation package for our executives other than the most senior executive officers;
|
|
|
|
|
●
|
reviewing and recommending to the board with respect to the compensation of our directors;
|
|
|
|
|
●
|
reviewing periodically and approving any long-term incentive compensation or equity plans;
|
|
|
|
|
●
|
selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and
|
|
|
|
|
●
|
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
Nominating and Corporate Governance
Committee.
Our nominating and
corporate governance committee consists of Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian. Ms. Tian is the chairperson of our
nominating and corporate governance committee. Mr. Bin Liu, Mr. Wenbing Wang and Ms. Jingxin Tian satisfy the “independence”
requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. The nominating
and corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors
and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible
for, among other things:
|
●
|
identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy;
|
|
|
|
|
●
|
reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us;
|
|
|
|
|
●
|
identifying and recommending to our board the directors to serve as members of committees;
|
|
|
|
|
●
|
advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and
|
|
|
|
|
●
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
|
Director Independence
Our board of directors
reviewed the materiality of any relationship that each of our proposed directors has with us, either directly or indirectly. Based
on this review, it is determined that Bin Liu, Wenbing Wang, and Jingxin Tian satisfy the “independence” requirements
of Section 5605(a)(2) of the NASDAQ Listing Rules.
Family Relationships
There is no family
relationship among any of our directors or executive officers.
Terms of Directors and Officers
Our officers are elected
by and serve at the discretion of the board of directors and the shareholders voting by ordinary resolution.
Employment Agreements
We have entered into
employment agreements with each of our executive officers where each is employed for a specified time period, which will be renewed
upon both parties’ agreement thirty days before the end of the current employment term. We may terminate the employment for
cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the
commitments of any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of
a criminal offense, willful disobedience of a lawful and reasonable order, fraud or dishonesty, receipt of bribery, or severe neglect
of his or her duties. An executive officer may terminate his or her employment at any time with a one-month prior written notice.
Each executive officer has agreed to hold, both during and after the employment agreement expires, in strict confidence and not
to use or disclose to any person, corporation or other entity without written consent, any confidential information.
D. Employees
As of August 14, 2020,
we had an aggregate of 21 employees, of which 10 are Long Yun employees, 9 are Hangzhou Dacheng employees, and 1 is Shenzhen Guanpeng
employee, all of which are full-time employees. None of our employees are represented by a labor union. We have not experienced
any work stoppages, and we consider our relations with our employees to be good. As required by PRC laws and regulations, we participate
in various employee social security plans for our employees that are administered by local governments, including housing, pension,
medical insurance and unemployment insurance. We compensate our employees with basic salaries.
E. Share Ownership
The following table
sets forth information with respect to the beneficial ownership of our ordinary shares as of August 14, 2020 by:
|
●
|
each of our directors and executive officers; and
|
|
|
|
|
●
|
each person known to us to beneficially own more than 5% of our ordinary shares.
|
The calculations in
the table below are based on there being 11,421,393 ordinary shares outstanding as of August 14, 2020.
Beneficial ownership
is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60
days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares,
however, are not included in the computation of the percentage ownership of any other person.
Name of Beneficial Owners
|
|
Number
|
|
|
%
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Limin Liu
Chief Executive Officer and Chairman
|
|
|
544,500
|
|
|
|
4.8
|
|
Chao Fu Chen
Chief Operating Officer
|
|
|
0
|
|
|
|
0
|
|
Xiaohua Gu
Chief Financial Officer
|
|
|
0
|
|
|
|
0
|
|
Wei Wang (3)
Director
|
|
|
800,000
|
|
|
|
7
|
|
Bin Liu
Director
|
|
|
0
|
|
|
|
0
|
|
Wenbing Wang
Director
|
|
|
0
|
|
|
|
0
|
|
Jinxing Tian
Director
|
|
|
0
|
|
|
|
0
|
|
All directors and executive officers as a group (7 individuals)
|
|
|
1344,500
|
|
|
|
11.8
|
|
5% Shareholders:
|
|
|
|
|
|
|
|
|
Hong Limited
Start Chambers, Wickham’s Cay II,
P.O. Box 2221, Road Town,
Tortola, British Virgin Islands (1)
|
|
|
3,224,351
|
|
|
|
28.2
|
|
Destiny Links Management Limited
Start Chambers, Wickham’s Cay II,
P.O. Box 2221, Road Town,
Tortola, British Virgin Islands (2)
|
|
|
760,000
|
|
|
|
6.7
|
|
White Knight Limited
Start Chambers, Wickham’s Cay II,
P.O. Box 2221, Road Town,
Tortola, British Virgin Islands (3)
|
|
|
800,000
|
|
|
|
7
|
|
All 5% Shareholders as a group (7 individuals)
|
|
|
4,784,351
|
|
|
|
41.9
|
|
|
(1)
|
Hongyu
Zhang is the 100% owner of Hong Limited that holds 3,224,351 Ordinary Shares.
|
|
(2)
|
Koulin
Han is the 100% owner of Destiny Links Management Limited. that holds 760,000 Ordinary Shares.
|
|
(3)
|
Wei
Wang is a Director and also the 100% owner of White Knight Limited that holds 800,000 Ordinary Shares.
|
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item
6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Related parties’ relationships are as follows:
Name
|
|
Relationship
|
Mr. Jianjun Sun
|
|
Company’s Chief Executive Officer, Chairman of the Board of Directors, and Director until August 20, 2019; Shareholder
|
Mr. Hongyu Zhang
|
|
Shareholder; director of various subsidiaries
|
HangZhou TianQi Network Technology Co. Ltd.
|
|
Common control by legal representative and shareholder of Taikexi, Mr, Mangyue Sun
|
Hangzhou Qianlu Information Technology Co. Ltd.
|
|
Common control by Mr. Hongyu Zhang
|
Hangzhou Yuao Investment Management Partnership (Yuao)
|
|
Common control by legal representative of Guanpeng
|
Short-term investment – related party consist of the
following:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Hangzhou YuAo
|
|
$
|
3,378,706
|
|
|
$
|
-
|
|
Total
|
|
|
3,378,706
|
|
|
|
-
|
|
The Company currently subscribes to certain
wealth management product from Hangzhou YuAo, which is a related party to the Company. The maturity date for such investment is
less than one year.
Other related parties’ payables consist of the following:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Mr. Jianjun Sun
|
|
$
|
-
|
|
|
$
|
16,374
|
|
Mr. Hongyu Zhang
|
|
|
8,100
|
|
|
|
|
|
HangZhou TianQi Network Technology Co. Ltd.
|
|
|
41,766
|
|
|
|
44,109
|
|
Hangzhou Qianlu Information Technology Co. Ltd.
|
|
|
353,824
|
|
|
|
|
|
Total
|
|
$
|
403,690
|
|
|
$
|
60,483
|
|
Outstanding payables to Mr. Jianjun
Sun, Mr. Hongyu Zhang, and Hangzhou Qianlu Information Techonology Co. Ltd. consist of working capital advances and borrowings.
These amounts are due on demand and non-interest bearing.
Outstanding payable to HangZhou
TianQi Network Technology Co. Ltd., consist of rent owed which is non-interest bearing and due on demand.
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other
Financial Information
See “Item
18. Financial Statements,” which contains our financial statements prepared in accordance with United States GAAP.
Legal Proceedings
We are not currently
a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably
expected to have a material adverse effect on our business, operating results, cash flows or financial condition.
Dividend Policy
We intend to keep
any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in
the foreseeable future.
Under Cayman Islands
law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no
circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course
of business.
If we determine to
pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from
our BVI subsidiary, Sweet Lollipop Co., Ltd.
Current PRC regulations
permit our indirect PRC subsidiaries to pay dividends to Sweet Lollipop only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to
set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of
its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to
fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors.
Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in
excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the
event of liquidation.
The PRC government
also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore,
we may experience difficulties in 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 and affiliates in the PRC incur debt on their own
in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or
our subsidiaries are unable to receive all of the revenues from our operations through the current contractual arrangements, we
may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if
any, on our Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes,
any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC
withholding tax at a rate of up to 10.0%. See “Item 10. Additional Information – E. Taxation — People’s
Republic of China Enterprise Taxation.”
In order for us to
pay dividends to our shareholders, we will rely on payments made from Long Yun to WFOE II, pursuant to contractual arrangements
between them, and the distribution of such payments to Longyun HK as dividends from our PRC subsidiaries. Certain payments from
our Long Yun to WFOE II are subject to PRC taxes, including business taxes and VAT. In addition, if Long Yun or our PRC subsidiary
incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make
other distributions to us.
B. Significant Changes
Except as disclosed
elsewhere in this annual report on Form 20-F, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offering and Listing Details
Our ordinary shares are listed on the NASDAQ
Capital Market under the symbol “LYL.” Our ordinary shares began trading on October 20, 2017.
The following table provides the high and
low trading prices for our ordinary shares on the NASDAQ Capital Market for the periods specified.
|
|
Sales Price (US $)
|
|
|
|
High
|
|
|
Low
|
|
Annual High and Low
|
|
|
|
|
|
|
2018 (from October 20, 2017)
|
|
|
11.38
|
|
|
|
2.84
|
|
2019
|
|
|
|
|
|
|
|
|
Quarterly High and Low
|
|
|
|
|
|
|
|
|
First Quarter 2019
|
|
|
2.08
|
|
|
|
1.32
|
|
Second Quarter 2019
|
|
|
|
|
|
|
|
|
Third Quarter 2019
|
|
|
|
|
|
|
|
|
Fourth Quarter 2019
|
|
|
|
|
|
|
|
|
First Quarter 2020
|
|
|
|
|
|
|
|
|
Second Quarter 2020
|
|
|
|
|
|
|
|
|
Monthly High and Low
|
|
|
|
|
|
|
|
|
February 2019
|
|
|
2.15
|
|
|
|
1.35
|
|
March 2019
|
|
|
2.38
|
|
|
|
1.34
|
|
April 2019
|
|
|
1.75
|
|
|
|
1.25
|
|
May 2019
|
|
|
1.43
|
|
|
|
0.92
|
|
June 2019
|
|
|
1.1
|
|
|
|
0.85
|
|
July 2019
|
|
|
1.14
|
|
|
|
0.88
|
|
August 2019
|
|
|
1.11
|
|
|
|
0.78
|
|
September 2019
|
|
|
1.8
|
|
|
|
0.88
|
|
October 2019
|
|
|
1.64
|
|
|
|
1.36
|
|
November 2019
|
|
|
1.74
|
|
|
|
1.22
|
|
December 2019
|
|
|
1.38
|
|
|
|
1.04
|
|
January 2020
|
|
|
1.552
|
|
|
|
1
|
|
February 2020
|
|
|
1.46
|
|
|
|
1.06
|
|
March 2020
|
|
|
1.39
|
|
|
|
0.85
|
|
April 2020
|
|
|
1.3
|
|
|
|
0.853
|
|
May 2020
|
|
|
1.4
|
|
|
|
0.869
|
|
June 2020
|
|
|
2.5
|
|
|
|
0.88
|
|
July 2020
|
|
|
1.75
|
|
|
|
1.05
|
|
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares, have been listed on
the NASDAQ Capital Market since September 15, 2017 under the symbol “LYL.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by
reference into this annual report our amended and restated memorandum and articles of association filed as Exhibits 3.1 and 3.2
to our F-1/A (file No. 333-214932) filed with the Securities and Exchange Commission on July 19, 2017.
C. Material Contracts
On December 31, 2019,
Hangzhou Longyun Network Technology Co., Ltd. (“Hangzhou Longyun”), a limited liability company organized under the
laws of the People’s Republic of China (“PRC”) and a variable interest entity of Dragon Victory International
Limited (the “Company”), entered into a Share Exchange Agreement (the “Agreement”) with Shenzhen Dao Wuxing
Technology Co., Ltd. (“Dao Wuxing”), a limited liability company organized under the laws of PRC. Pursuant to the
Agreement, Hangzhou Longyun agreed to transfer to Dao Wuxing 20% of the equity interests of its wholly-owned subsidiary Dacheng
Liantong (Zhejiang) Information Technology Co., Ltd., a limited liability company organized under the laws of the PRC. In return,
Dao Wuxing agreed to transfer to Hangzhou Longyun 100% of the equity interests of Shenzhen Aipu Hongfu Technology Co., Ltd. and
Shenzhen Excellence Heritage Jewelry Co., Ltd., both of which are limited liability companies organized under the laws of the
PRC, with both of these entities becoming wholly-owned subsidiaries of Hangzhou Longyun.
D. Exchange Controls
See “Item
4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange” and
“Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Dividend Distribution.”
E. Taxation
The following summary of the Cayman Islands,
PRC and U.S. federal income tax considerations of an investment in the Ordinary Shares is based upon laws and relevant interpretations
thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all
possible tax considerations relating to an investment in the Ordinary Shares, such as the tax considerations under U.S. state and
local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the
United States.
Cayman Islands Taxation
The Cayman Islands
currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation
in the nature of inheritance tax or estate duty. There are no other taxes levied by the Government of the Cayman Islands that are
likely to be material to holders of ordinary shares. The Cayman Islands is not party to any double tax treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Enterprise
Taxation
Under the corporate
income tax Law (“CIT Law”), an enterprise established outside the PRC with a “de facto management
body” within the PRC is considered a PRC resident enterprise for PRC corporate income tax purposes and is generally
subject to a uniform 25% corporate income tax rate on its worldwide income as well as tax reporting obligations. Under the Implementation
Rules, 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 SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated enterprises controlled by PRC
enterprises or PRC enterprise groups will be classified as PRC resident enterprises if all of the following conditions are met:
(a) senior management personnel and core management departments in charge of the daily operations of the enterprises have their
presence mainly in the PRC; (b) their financial and human resources decisions are subject to determination or approval by persons
or bodies in the PRC; (c) major assets, accounting books and company seals of the enterprises, and minutes and files of their board’s
and shareholders’ meetings are located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior
management personnel with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45,
which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides
for procedures and administration details of determination on PRC resident enterprise status and administration on post-determination
matters. If the PRC tax authorities determine that we are a PRC resident enterprise for PRC corporate income tax purposes, a number
of unfavorable PRC tax consequences could follow. For example, we may be subject to corporate income tax at a rate of 25% with
respect to its worldwide taxable income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise
shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our ordinary shares and
potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with respect
to gains derived by our non-PRC individual shareholders from transferring our ordinary shares.
It is unclear whether,
if we are considered a PRC resident enterprise, holders of our ordinary shares would be able to claim the benefit of income tax
treaties or agreements entered into between China and other countries or areas. See “Item 3. Key Information—D.
Risk Factors—Risk Factors Relating to Doing Business in China—Under the PRC corporate income tax Law, we may be classified
as a PRC resident enterprise for PRC corporate income tax purposes. Such classification would likely result in unfavorable tax
consequences to us and our non-PRC Shareholders and have a material adverse effect on our results of operations and the value of
your investment”.
United States Federal Income Tax Considerations
The following does not address the tax
consequences to any particular investor or to persons in special tax situations such as:
|
●
|
banks;
|
|
|
|
|
●
|
financial institutions;
|
|
|
|
|
●
|
insurance companies;
|
|
|
|
|
●
|
regulated investment companies;
|
|
|
|
|
●
|
real estate investment trusts;
|
|
|
|
|
●
|
broker-dealers;
|
|
|
|
|
●
|
persons that elect to mark their securities to market;
|
|
|
|
|
●
|
U.S. expatriates or former long-term residents of the U.S.;
|
|
|
|
|
●
|
governments or agencies or instrumentalities thereof;
|
|
|
|
|
●
|
tax-exempt entities;
|
|
|
|
|
●
|
persons liable for alternative minimum tax;
|
|
|
|
|
●
|
persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
|
|
|
|
|
●
|
persons that actually or constructively own 10% or more of our voting power or value (including by reason of owning our Ordinary Shares);
|
|
|
|
|
●
|
persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as compensation;
|
|
|
|
|
●
|
persons holding our Ordinary Shares through partnerships or other pass-through entities;
|
|
|
|
|
●
|
beneficiaries of a Trust holding our Ordinary Shares; or
|
|
|
|
|
●
|
persons holding our Ordinary Shares through a Trust.
|
Material Tax Consequences Applicable
to U.S. Holders of Our Ordinary Shares
The following sets
forth the material U.S. federal income tax consequences related to the ownership and disposition of our Ordinary Shares. It is
directed to U.S. Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant interpretations thereof
in effect as of the date of this annual report, all of which are subject to change. This description does not deal with all possible
tax consequences relating to ownership and disposition of our Ordinary Shares or U.S. tax laws, other than the U.S. federal income
tax laws, such as the tax consequences under non-U.S. tax laws, state, local and other tax laws.
The following brief
description applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar
as their functional currency. This brief description is based on the federal income tax laws of the United States in effect as
of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this
annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing
authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The brief description
below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner
of Ordinary Share and you are, for U.S. federal income tax purposes,
|
●
|
an individual who is a citizen or resident of the United States;
|
|
|
|
|
●
|
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;
|
|
|
|
|
●
|
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
|
|
|
|
|
●
|
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
|
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the PFIC (defined below) rules
discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount
of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by
you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined
under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders,
including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income,
provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are
eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information
program, (2) we are not a PFIC (defined below) for either our taxable year in which the dividend is paid or the preceding taxable
year, and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and
the Cayman Islands, clause (1) above can be satisfied only if the Ordinary Shares are readily tradable on an established securities
market in the United States. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause
(1) above to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq Capital
Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect
to our Ordinary Shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source
income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to
the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income”
but could, in the case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated
first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution exceeds
your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal
income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary
Shares
Subject to the passive foreign investment
company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a
share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars)
in the Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual
U.S. Holder, who has held the Ordinary Shares for more than one year, you will generally be eligible for reduced tax rates. The
deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as
United States source income or loss for foreign tax credit limitation purposes which will generally limit the availability of foreign
tax credits.
Passive Foreign Investment Company
Considerations
A non-U.S. corporation, such
as our company, will be classified as a PFIC for U.S. federal income tax purposes for any taxable year if, applying applicable
look-through rules, either (i) 75% or more of its gross income for such year consists of certain types of “passive”
income or (ii) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) during such year
is attributable to assets that produce or are held for the production of passive income (the “asset test”). For this
purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s goodwill and other
unbooked intangibles not reflected on its balance sheet are taken into account. Passive income generally includes, among other
things, dividends, interest, income equivalent to interest, rents, royalties, and gains from the disposition of passive assets.
We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation
in which we own, directly or indirectly, 25% or more (by value) of the stock.
Based upon our current and projected income
and assets, including the proceeds we received from our initial public offering and the value of our Ordinary Shares, we do not
expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because
the determination of whether we are or will become a PFIC for any taxable year is a factual determination made annually that will
depend, in part, upon the composition and classification of our income and assets. Furthermore, fluctuations in the market price
of our Ordinary Shares may cause us to be classified as a PFIC for the current or future taxable years because the value of our
assets for purposes of the asset test, including the value of our goodwill and other unbooked intangibles, may be determined by
reference to the market price of our Ordinary Shares from time to time (which may be volatile). In addition, the composition of
our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial
public offering. Under circumstances where our revenue from activities that produce passive income significantly increases relative
to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts
of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.
If we are a PFIC for any year during which
a U.S. Holder holds our Ordinary Shares, we generally will continue to be treated as a PFIC for all succeeding years during which
such U.S. Holder holds our Ordinary Shares, unless we were to cease to be a PFIC and the U.S. Holder were to make a “deemed
sale” election with respect to the Ordinary Shares.
Information Reporting and Backup
Withholding
Dividend payments with respect to our Ordinary
Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting to the
U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the US Internal Revenue Code with at a
current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification
number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup
withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal
Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional
tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain
a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup
withholding), and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore
Employment Act of 2010, certain U.S. Holders are required to report information relating to our Ordinary Shares, subject to certain
exceptions (including an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each
year in which they hold Ordinary Shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to
the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after
the end of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may be
obtained at prescribed rates at the public reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer,
we are exempt from the rules of the Exchange Act prescribing, among other things, the furnishing and content of proxy statements
to shareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act.
In accordance with
Rule 5250(d) of the NASDAQ Listing Rules, we will post this annual report on Form 20-F on our website www.dvintinc.com.
In addition, we will provide hardcopies of our annual report free of charge to upon request.
I. Subsidiary Information
For a listing of our
subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
Item 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
You should read
the following information in conjunction with Item 5, “Operating and Financial Review and Prospects;” Item 3, “Risk
Factors;” and our consolidated financial statements, including the related notes thereto, both of which are included elsewhere
in this annual report on Form 20-F. The following discussion about our financial risk management activities includes “forward-looking
statements” that involve risks and uncertainties. Actual results could differ materially from those projected in these forward-looking
statements.
Foreign Exchange Risk
Our financial statements
are expressed in Renminbi, and substantially all of our revenue, costs and expenses are denominated in Renminbi. Additionally,
our cash and cash equivalents are held in both Renminbi and U.S. dollars. As a result, fluctuations in the exchange rates between
the U.S. dollar and Renminbi may affect our results of operations and financial condition.
The Renminbi’s
exchange rate with the U.S. dollar is affected by, among other things, changes in China’s political and economic conditions
and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under such policy, the Renminbi was permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. Later on, the People’s Bank of China has decided to further implement
the reform of the RMB exchange regime and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted
in a significant appreciation of the Renminbi against the U.S. dollar since 2005 though there have been periods when the U.S. dollar
has appreciated against the Renminbi as well. There remains significant international pressure on the PRC government to adopt a
more flexible currency policy, which could result in a further and more significant adjustment of the Renminbi against the U.S.
dollar.
To the extent that
we need to convert U.S. dollars we receive from financing activities into the Renminbi for our operations or other uses within
the PRC, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive
from the conversion. On the other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar
equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future,
if any, all of which may have a material adverse effect on the prices of our ordinary shares
In addition, very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter
into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able
to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert Renminbi into foreign currency.
Credit Risk
Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of March 31, 2020,
$ 5,587,984 of the Company’s cash were on deposit at financial institutions in the RMB where there currently is no rule or
regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure. While
management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable
are typically unsecured and derived from incubation and crowd funding, thereby exposed to credit risk. The risk is mitigated by
the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Inflation Risk
In recent years, inflation
has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the consumer
price index in China increased by 2.25%, and 2.9%, in 2020, 2019, respectively. Although we have not in the past been materially
affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates
of inflation in China. If inflation rises, it may materially and adversely affect our business.
Item 12. DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
DRAGON VICTORY INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2020 AND 2019
(Amounts in U.S. dollars)
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,926
|
|
|
$
|
38,600
|
|
Trade accounts receivable, net
|
|
|
-
|
|
|
|
1,727,645
|
|
Other receivables and prepayments
|
|
|
705,164
|
|
|
|
621,232
|
|
Prepaid tax
|
|
|
57,232
|
|
|
|
-
|
|
Short-term investments
|
|
|
5,587,984
|
|
|
|
9,461,918
|
|
Short-term investments – related party
|
|
|
3,378,706
|
|
|
|
-
|
|
Total current assets
|
|
|
9,745,012
|
|
|
|
11,849,395
|
|
Property, plant and equipment, net
|
|
|
134,606
|
|
|
|
377,701
|
|
Intangible assets, net
|
|
|
490
|
|
|
|
927
|
|
Right of use assets
|
|
|
63,343
|
|
|
|
-
|
|
Other assets
|
|
|
20,910
|
|
|
|
86,102
|
|
TOTAL ASSETS
|
|
|
9,964,361
|
|
|
|
12,314,125
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
14,337
|
|
|
|
13,320
|
|
Taxes payable
|
|
|
1,796,608
|
|
|
|
1,794,570
|
|
Accrued liabilities and other current liabilities
|
|
|
313,363
|
|
|
|
981,461
|
|
Related party payable
|
|
|
403,690
|
|
|
|
60,483
|
|
Right of use liabilities
|
|
|
63,343
|
|
|
|
80,276
|
|
Total current liabilities
|
|
|
2,591,341
|
|
|
|
2,930,110
|
|
Capital lease – non-current portion
|
|
|
-
|
|
|
|
66,897
|
|
TOTAL LIABILITIES
|
|
|
2,591,341
|
|
|
|
2,997,007
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS & CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Dragon Victory Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Ordinary Shares, $0.0001 par value, 500,000,000 shares authorized; 11,421,393 and 11,421,393 shares issued and outstanding as of March 31, 2020 and 2019, respectively
|
|
|
1,142
|
|
|
|
1,142
|
|
Additional paid-in capital
|
|
|
8,943,065
|
|
|
|
8,929,968
|
|
Statutory reserves
|
|
|
589,659
|
|
|
|
589,659
|
|
(Accumulated deficits) / Retained earnings
|
|
|
(753,022
|
)
|
|
|
663,695
|
|
Accumulated other comprehensive loss
|
|
|
(860,047
|
)
|
|
|
(377,581
|
)
|
Total Dragon Victory stockholders’ equity
|
|
|
7,920,797
|
|
|
|
9,806,883
|
|
Noncontrolling interest
|
|
|
(547,777
|
)
|
|
|
(489,765
|
)
|
TOTAL EQUITY
|
|
|
7,373,020
|
|
|
|
9,317,118
|
|
TOTAL LIABILITIES AND STOCHOLDERS’ EQUITY
|
|
$
|
9,964,361
|
|
|
$
|
12,314,125
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
DRAGON VICTORY INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS)
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
|
For the year ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
11,252
|
|
|
$
|
2,757,229
|
|
|
$
|
4,278,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,130,282
|
|
|
|
4,991,878
|
|
|
|
3,894,688
|
|
Total operating expenses
|
|
|
2,130,282
|
|
|
|
4,991,878
|
|
|
|
3,894,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(2,119,030
|
)
|
|
|
(2,234,649
|
)
|
|
|
384,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
74
|
|
|
|
140,709
|
|
|
|
93,639
|
|
Other expenses
|
|
|
(5,450
|
)
|
|
|
(2,186
|
)
|
|
|
(31,617
|
)
|
Interest income
|
|
|
667,898
|
|
|
|
636,489
|
|
|
|
312,855
|
|
Interest expense
|
|
|
(3
|
)
|
|
|
(133
|
)
|
|
|
-
|
|
Total other income
|
|
|
662,519
|
|
|
|
774,879
|
|
|
|
374,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before tax
|
|
|
(1,456,511
|
)
|
|
|
(1,459,770
|
)
|
|
|
758,918
|
|
Income tax
|
|
|
(27,413
|
)
|
|
|
-
|
|
|
|
(633,614
|
)
|
Net
(loss) income including noncontrolling interest
|
|
|
(1,483,924
|
)
|
|
|
(1,459,770
|
)
|
|
|
125,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: loss attributable to noncontrolling interest
|
|
|
(67,207
|
)
|
|
|
(403,410
|
)
|
|
|
(67,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income attributable to Dragon Victory
|
|
$
|
(1,416,717
|
)
|
|
$
|
(1,056,360
|
)
|
|
$
|
193,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income including
noncontrolling interest
|
|
|
(1,483,924
|
)
|
|
$
|
(1,459,770
|
)
|
|
$
|
125,304
|
|
Other comprehensive (loss)
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(482,468
|
)
|
|
|
(216,605
|
)
|
|
|
(29,887
|
)
|
Comprehensive
(loss) income including noncontrolling interest
|
|
$
|
(1,966,392
|
)
|
|
$
|
(1,676,375
|
)
|
|
$
|
95,417
|
|
Comprehensive loss attributable to noncontrolling interest
|
|
$
|
(67,207
|
)
|
|
$
|
(410,975
|
)
|
|
$
|
(78,790
|
)
|
Comprehensive
(loss) income attributable to Dragon Victory
|
|
$
|
(1,899,185
|
)
|
|
$
|
(1,265,400
|
)
|
|
$
|
174,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings per share
attributable to Dragon Victory common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-Dragon Victory
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
Diluted
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
DRAGON VICTORY INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
|
Available to Dragon Victory International Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
Additional
|
|
|
|
|
|
Earnings/
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
paid-in
|
|
|
Statutory
|
|
|
(Accumulated
|
|
|
comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
reserves
|
|
|
deficits)
|
|
|
income
|
|
|
interest
|
|
|
Totals
|
|
Balances at April 1, 2017
|
|
|
10,000,000
|
|
|
$
|
1,000
|
|
|
$
|
1,053,607
|
|
|
$
|
65,331
|
|
|
$
|
2,051,252
|
|
|
$
|
(149,617
|
)
|
|
$
|
-
|
|
|
$
|
3,021,573
|
|
Proceeds from sale of Common Stock
|
|
|
1,421,393
|
|
|
|
142
|
|
|
|
7,731,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,731,271
|
|
Capital contributions by owners
|
|
|
-
|
|
|
|
-
|
|
|
|
145,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
145,232
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193,131
|
|
|
|
-
|
|
|
|
(67,827
|
)
|
|
|
125,304
|
|
Appropriations of retained earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
368,148
|
|
|
|
(368,148
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cumulative translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,924
|
)
|
|
|
(10,963
|
)
|
|
|
(29,887
|
)
|
Balances at March 31, 2018
|
|
|
11,421,393
|
|
|
$
|
1,142
|
|
|
$
|
8,929,968
|
|
|
$
|
433,479
|
|
|
$
|
1,876,235
|
|
|
$
|
(168,541
|
)
|
|
$
|
(78,790
|
)
|
|
$
|
10,993,493
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(1,056,360
|
)
|
|
|
-
|
|
|
|
(403,410
|
)
|
|
|
(1,459,770
|
)
|
Appropriations of retained earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156,180
|
|
|
|
(156,180
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cumulative translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(209,040
|
)
|
|
|
(7,565
|
)
|
|
|
(216,605
|
)
|
Balances at March 31, 2019
|
|
|
11,421,393
|
|
|
$
|
1,142
|
|
|
$
|
8,929,968
|
|
|
$
|
589,659
|
|
|
$
|
663,695
|
|
|
$
|
(377,581
|
)
|
|
$
|
(489,765
|
)
|
|
$
|
9,317,118
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,416,717
|
)
|
|
|
-
|
|
|
|
(67,207
|
)
|
|
|
(1,483,924
|
)
|
Capital contributions by owners
|
|
|
-
|
|
|
|
-
|
|
|
|
13,097
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,195
|
|
|
|
22,292
|
|
Cumulative translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(482,466
|
)
|
|
|
-
|
|
|
|
(482,466
|
)
|
Balances at March 31, 2020
|
|
|
11,421,393
|
|
|
$
|
1,142
|
|
|
$
|
8,943,065
|
|
|
$
|
589,659
|
|
|
$
|
(753,022
|
)
|
|
$
|
(860,047
|
)
|
|
$
|
(547,777
|
)
|
|
$
|
7,373,020
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
DRAGON VICTORY INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income (loss) including noncontrolling interest
|
|
$
|
(1,483,923
|
)
|
|
$
|
(1,459,770
|
)
|
|
$
|
125,304
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
86,406
|
|
|
|
101,929
|
|
|
|
19,895
|
|
Bad debt expense
|
|
|
922,817
|
|
|
|
-
|
|
|
|
-
|
|
Impairment on investments
|
|
|
-
|
|
|
|
74,507
|
|
|
|
-
|
|
Write off leasehold improvements
|
|
|
-
|
|
|
|
745,073
|
|
|
|
-
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivables
|
|
|
(79,466
|
)
|
|
|
(139,034
|
)
|
|
|
(925,092
|
)
|
(Increase)/decrease in other receivables and prepayments
|
|
|
(121,463
|
)
|
|
|
595,234
|
|
|
|
(825,169
|
)
|
(Increase)/decrease in related party receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
(207,505
|
)
|
Decrease in other current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
33,042
|
|
Increase/(decrease) in accounts payables
|
|
|
58,709
|
|
|
|
634,212
|
|
|
|
(33,206
|
)
|
Increase in taxes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
819,336
|
|
(Decrease)/increase in accrued liabilities and other current liabilities
|
|
|
(198,391
|
)
|
|
|
222,331
|
|
|
|
(18,486
|
)
|
Net cash (used in)/provided by operating activities
|
|
|
(815,311
|
)
|
|
|
774,482
|
|
|
|
(1,011,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal/(acquisitions) of investments
|
|
|
64,139
|
|
|
|
(4,783,370
|
)
|
|
|
(4,825,706
|
)
|
(Purchase)/disposal of equipment and improvements
|
|
|
7,260
|
|
|
|
(30,868
|
)
|
|
|
(1,447,870
|
)
|
Decrease in rent and utility deposits
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
Purchase of intangible assets
|
|
|
-
|
|
|
|
(464
|
)
|
|
|
-
|
|
Net cash (used in)/provided by investing activities
|
|
|
71,399
|
|
|
|
(4,814,672
|
)
|
|
|
(6,273,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares
|
|
|
-
|
|
|
|
-
|
|
|
|
7,731,271
|
|
Capital contribution from owners
|
|
|
19,657
|
|
|
|
-
|
|
|
|
145,232
|
|
Increase in related party payable
|
|
|
279,031
|
|
|
|
259,890
|
|
|
|
27,075
|
|
Net cash provided by financing activities
|
|
|
298,688
|
|
|
|
259,890
|
|
|
|
7,903,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase/(decrease) of Cash and Cash Equivalents
|
|
|
(445,224
|
)
|
|
|
(3,780,300
|
)
|
|
|
618,121
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
422,550
|
|
|
|
(118,590
|
)
|
|
|
97,008
|
|
Cash and cash equivalents–beginning of year
|
|
|
38,600
|
|
|
|
3,937,490
|
|
|
|
3,222,361
|
|
Cash and cash equivalents–end of year
|
|
$
|
15,926
|
|
|
$
|
38,600
|
|
|
$
|
3,937,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
$
|
586,650
|
|
|
$
|
220,698
|
|
|
$
|
312,856
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
-
|
|
Income taxes (refund)/paid
|
|
$
|
(40,751
|
)
|
|
$
|
-
|
|
|
$
|
285,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets through capital lease
|
|
$
|
-
|
|
|
$
|
160,560
|
|
|
$
|
-
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
1.
|
BUSINESS AND ORGANIZATION
|
Dragon Victory International Limited (“Dragon
Victory”) was formed in the Cayman Islands on July 19, 2015. Dragon Victory’s wholly-owned subsidiary, Sweet Lollipop
Co., Ltd. (“Sweet Lollipop”) was formed in the British Virgin Islands on May 8, 2014. Long Yun International Holdings
Limited (“Long Yun HK”), which is a wholly-owned subsidiary of Sweet Lollipop, was formed in Hong Kong on May 2, 2015.
HangZhou Yuyao Network Technology Co., Ltd (“WFOE I”), our wholly foreign-owned entity, was organized pursuant to PRC
laws on May 30, 2016.
HangZhou Longyun Network Technology Co., Ltd (“HangZhou
Longyun”, “VIE”) was established on October 9, 2014 in HangZhou, PRC pursuant to PRC laws, which is owned by
Mr. Yu Han holding 85% equity ownership interest and Koulin Han holding 15% equity ownership interest.
HangZhou Longyun’s operation includes offering
reward-based crowdfunding opportunities in the PRC to entrepreneurs and funding sources primarily through an internet-based platform,
offering business incubation services to the ventures utilizing its platform for their projects, and offering to act as a finder
to also assist these companies to obtain loans or additional equity financing, and introduce them to potential business partners,
find merger candidates or other strategic relationships, or assist with feasibility studies.
On August 19, 2016, WFOE I and Mr. Yu Han and Ms. Koulin
Han, the owners of HangZhou Longyun; entered into a series of agreements known as variable interest agreements (the “VIE
Agreements”) pursuant to which HangZhou Longyun became WFOE I’s contractually controlled affiliate. The purpose and
effect of the VIE Agreements is to provide HangZhou Longyun (our indirect wholly-owned subsidiary) with all management control
and net profits earned by HangZhou Longyun.
On November 3, 2017, Dragon Victory entered into a
Strategic Cooperation Agreement (the “Agreement”) under a joint venture where Dragon Victory through its subsidiaries
will own 60% of Hangzhou Taikexi Dacheng Automotive Technology Service Co., Ltd (“Taikexi”) to upgrade the current
platform to set-up a business ecosystem to offer online auto-insurance and to provide a full range of off-line auto parts and advisory
services to consumers.
Effective March 20, 2018, WFOE I, HangZhou Longyun,
and HangZhou Longyun’s owners executed a Termination Agreement to terminate each of the VIE Agreements dated August 19, 2016.
As a result of entering into such Termination Agreements, WFOE I will no longer be the sole equity holder of HangZhou Longyun and
will have no control rights and no rights to the assets, property and revenue of HangZhou Longyun. The Company is in the process
of dissolving WFOE I.
On March 20, 2018, Hangzhou Dacheng Investment Management
Co., Ltd. (“WFOE II”), a newly formed wholly owned subsidiary of the Company, entered into a series of contractual
arrangements (the “New VIE Agreements”) with HangZhou Longyun and its owners. The New VIE agreements are designed to
provide WFOE II (which replaced WFOE I) with the power, rights and obligations equivalent in all respects to those it would possess
as the sole equity holder of HangZhou Longyun, including absolute control rights and the rights to the assets, property and revenue
of HangZhou Longyun. There is no change to Long Yun’s capital structure.
The Company decided to replace WFOE I with WFOE II
in order to take full advantage of certain preferential tax treatments and subsidies granted by the local government of Shangcheng
District of Hangzhou, Zhejiang province, where WFOE II was incorporated.
On August 3, 2018, WFOE II established Shenzhen Guanpeng
International Technology Co., Ltd (“Guanpeng”). WFOE II holds a 51% interest in Guanpeng.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
On May 5, 2019, WFOE II participated in the establishment
of Zhejiang Shengyuan Business Consulting Co., Ltd (“Shengyuan”). WFOE II held a 49% interest in Shengyuan. On September
19, 2019, the Company sold its interest in Shengyuan to a third party. The Company had not paid up any capital and Shengyuan had
not begun operations; accordingly, no gain or loss was incurred as a result of the transfer of ownership.
On July 7, 2019, Hanzhou Longyun
incorporated a subsidiary, Dacheng Liantong Zhejiang Information Technology Co., Ltd (“Dacheng Liantong”). Hangzhou
Longyun currently holds 80% of interest in Dacheng Liantong. Dacheng Liantong is engaged in the business of providing a supply
chain management platform for automotive parts suppliers, automobile repair shops, and logistics companies.
On August 22, 2019, the Company incorporated a wholly
owned subsidiary, Zhejiang Shengqian Business Consulting Co., Ltd. (“Shengqian”). Shengqian has not commenced operations.
On December 31, 2019, Hangzhou Longyun entered into
a Share Exchange Agreement (the “Agreement”) with Shenzhen Dao Wuxing Technology Co., Ltd. (“Dao Wuxing”),
a limited liability company organized under the laws of PRC. Pursuant to the Agreement, Hangzhou Longyun agreed to transfer to
Dao Wuxing 20% of the equity interests of its wholly-owned subsidiary Dacheng Liantong (Zhejiang) Information Technology Co., Ltd.,
a limited liability company organized under the laws of the PRC. In return, Dao Wuxing agreed to transfer to Hangzhou Longyun 100%
of the equity interests of Shenzhen Aipu Hongfu Technology Co., Ltd. (“Shenzhen Aipu”) and Shenzhen Zhuoyue Chuancheng
Jewelry Co., Ltd. (“Shenzhen Zhuoyue”), both of which are limited liability companies organized under the laws of the
PRC and wholly-owned subsidiaries of Dao Wuxing. Shenzhen Aipu and Shenzhen Zhuoyue hold 30% of equity interest and 70% of equity
interest, respectively, in Guo Ronghong Business Factoring Shenzhen Co. Ltd. (“Guo Ronghong”), a limited liability
company organized under the laws of the PRC.
Dragon Victory, Sweet Lollipop, Long Yun HK, WFOE I,
WFOE II, Taikexi, Guanpeng, Shengqian, Hangzhou Longyun, Dacheng Liantong, Shenzhen Aipu, Shenzhen Zhuoyue and Guo Ronghong shall
be collectively referred to as the “Company”.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
a)
|
Principles of Presentation
|
The consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles in the United States of America. This basis of accounting
involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and
losses are recognized when incurred. The Company’s consolidated financial statements are expressed in U.S. dollars.
|
b)
|
Principles of Consolidation
|
The accompanying consolidated financial statements
include the accounts of the Company and its significant subsidiaries on a consolidated basis. The Company also includes subsidiaries
over which a direct or indirect legal or effective control exists and for which the Company is deemed to direct the significant
activities and has the obligation to absorb the losses or benefits of the entities. All intercompany accounts, balances and transactions
with consolidated entities have been eliminated.
Acquisition of Sweet Lollipop, Long Yun HK
by Dragon Victory
The acquisitions were accounted under US GAAP as
a business combination under common control with Dragon Victory being the acquirer and Sweet Lollipop and Long Yun HK being the
acquirees because all entities were controlled directly or indirectly by the same majority shareholder Mr. Yu Han. The consolidation
has been presented at historical costs and on a retroactive basis to reflect the capital structure of Sweet Lollipop and Long Yun
HK as a recapitalization.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The business combination transaction of Sweet Lollipop
was completed and effective on June 26, 2015 and Sweet Lollipop became a 100% owned subsidiary of Dragon Victory.
The business combination transaction of Long Yun
HK was completed and effective on August 10, 2015 and Long Yun HK became a 100% owned subsidiary of Sweet Lollipop.
VIE Agreements between WFOE I and HangZhou
Longyun and its shareholders (subsequently between WFOE II and HangZhou Longyun)
The Company evaluates the need to consolidate its
VIE in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support.
The transactions contemplated by the Original VIE
agreements consummated on August 19, 2016, and subsequent terminated were replaced by New VIE Agreements consummated on March 20,
2018 to take full advantage of certain preferential tax treatments and subsidies granted by the local government of Shangcheng
District of Hangzhou, Zhejiang province, where WFOE II was incorporated. WFOE I and WFOE II shall be collectively referred to as
the “WFOEs”
The purpose and design of the VIE Agreements between
the WFOEs and HangZhou Longyun, was to consolidate Hangzhou Longyun under the Company by way of common control. ASC 810-10-25-38F
states that a reporting entity’s involvement in the design of a VIE may indicate that the reporting entity had the opportunity
and the incentive to establish arrangements that result in the reporting entity being the variable interest holder with the power
to direct the activities that most significantly impact the VIE’s economic performance. As both the Company and HangZhou
Longyun are commonly control by Mr. Yu Han and Ms. Koulin Han, both immediately before and after the acquisition, this transaction
was accounted for as a merger under common control, using merger accounting as if the merger had been consummated at the beginning
of the earliest period presented, and no gain or loss was recognized. All the assets and liabilities of HangZhou Longyun are carried
using their original basis. Hence, HangZhou Longyun was consolidated under the Company since its inception due to the purpose and
design of the establishment of the VIE Agreements.
The purpose of the VIE Agreements is solely to give
the WFOEs the exclusive control over HangZhou Longyun’s management and operations. While there is no restriction for HangZhou
Longyun, our VIE entity, to pay the WFOEs, our wholly owned subsidiary, there are certain restrictions for the WFOEs to make payments
to the holding companies due to certain regulations imposed by the Chinese government on out-going foreign currency wire transfers.
Additionally, there could be potential tax implications when moving the cash flows up to the Company. Therefore, the Company intends
to retain any earnings within HangZhou Longyun, and the retained cash flows would be utilized in expanding the Company’s
business.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The significant terms of the VIE Agreements are summarized
below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation Agreement
between HangZhou Longyun and the WFOEs, the WFOEs provides HangZhou Longyun with technical support, consulting services and other
management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages
in technology, human resources, and information. Additionally, HangZhou Longyun grants an irrevocable and exclusive option to the
WFOEs to purchase from HangZhou Longyun, any or all of its assets, to the extent permitted under the PRC laws. the WFOEs shall
own all intellectual property rights that are developed during the course of the agreement. For services rendered to HangZhou Longyun
by the WFOEs under the Agreement, the service fee HangZhou Longyun is obligated to pay shall be calculated based on the time of
services rendered multiplied by the corresponding rate, which is approximately equal to the net income of HangZhou Longyun.
The Exclusive Business Cooperation Agreement shall
remain in effect for ten years until it is terminated by the WFOEs with 30-day prior notice. HangZhou Longyun does not have the
right to terminate the agreement u0aterally.
Share Pledge Agreement
Under the Share Pledge Agreement between the shareholders
of HangZhou Longyun and the WFOEs, the various shareholders of HangZhou Longyun pledged all of their equity interests in HangZhou
Longyun to the WFOEs to guarantee the performance of HangZhou Longyun’s obligations under the Business Cooperation Agreement.
Under the terms of the Agreement, in the event that HangZhou Longyun or its shareholders breach their respective contractual obligations
under the Exclusive Business Cooperation Agreement, the WFOEs, as pledgee, will be entitled to certain rights, including, but not
limited to, the right to collect dividends generated by the pledged equity interests. The shareholders of HangZhou Longyun also
agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, the WFOEs is entitled to dispose
of the pledged equity interest in accordance with applicable PRC laws. The shareholders of HangZhou Longyun further agree not to
dispose of the pledged equity interests or take any actions that would prejudice the WFOEs’s interest.
Exclusive Option Agreement
Under the Exclusive Option Agreement, the shareholders
of HangZhou Longyun irrevocably granted the WFOEs (or its designee) an exclusive option to purchase, to the extent permitted under
PRC law, all of the equity interests in HangZhou Longyun. The option price is equal to the capital paid in by the HangZhou Longyun
shareholders. The agreement remains effective for a term of ten years and may be renewed at the WFOEs’ election.
Power of Attorney
Under the Power of Attorney, the shareholders of
HangZhou Longyun authorize the WFOEs to act on their behalf as their exclusive agent and attorney with respect to all rights as
shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s
rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including
but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing
on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior
management members of HangZhou Longyun.
Under these contractual arrangements with the VIEs,
the Company has the power to direct activities of the VIE and can have assets transferred out of the VIE under its control. Therefore,
the Company considers that there is no asset in any of the consolidated VIE that can be used only to settle obligations of the
VIE, except for registered capital and PRC statutory reserves. As the consolidated VIE is incorporated as limited liability companies
under the PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of the liabilities
of the consolidated VIE. The Company’s management has determined that via the VIE agreements, it is the primary beneficiary
of Hangzhou Longyun.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The Company’s total assets and liabilities
presented in the consolidated financial statements represent substantially portion of the total assets and liabilities of the VIE
because the other entities in the consolidation are non-operating holding entities with significantly less assets and liabilities.
The following financial statement amounts and balances
of the VIE, were included in the accompanying consolidated financial statements as of March 31, 2020 and 2019, and for the years
ended March 31, 2020, 2019 and 2018, respectively:
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,463
|
|
|
$
|
17,536
|
|
Investment
|
|
|
4,600,344
|
|
|
|
7,971,856
|
|
Investment - related party
|
|
|
3,378,706
|
|
|
|
74,503
|
|
Amounts due from non-VIE subsidiaries of the Company
|
|
|
926,161
|
|
|
|
1,114,579
|
|
Other assets
|
|
|
577,968
|
|
|
|
432,927
|
|
|
|
|
9,511,642
|
|
|
|
9,611,401
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
80,796
|
|
|
|
169,871
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
9,592,438
|
|
|
$
|
9,781,272
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts and other payable
|
|
|
104,588
|
|
|
|
790,375
|
|
Customer advances
|
|
|
225,129
|
|
|
|
237,923
|
|
Amounts due to related party
|
|
|
395,590
|
|
|
|
94,771
|
|
Amounts due to non-VIE subsidiaries of the Company
|
|
|
1,228,332
|
|
|
|
1,334,938
|
|
Provision for taxation
|
|
|
1,796,580
|
|
|
|
1,854,113
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
3,750,219
|
|
|
$
|
4,312,120
|
|
|
|
For the year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net revenues
|
|
$
|
11,159
|
|
|
$
|
2,744,277
|
|
|
$
|
4,271,966
|
|
Net loss
|
|
$
|
(922,923
|
)
|
|
$
|
1,767,306
|
|
|
$
|
1,918,839
|
|
Net cash provided by operating activities
|
|
$
|
(56,317
|
)
|
|
$
|
2,278,534
|
|
|
$
|
2,349,945
|
|
Net cash used in investing activities
|
|
$
|
71,399
|
|
|
$
|
(4,610,931
|
)
|
|
$
|
(4,755,442
|
)
|
Net cash provided by financing activities
|
|
$
|
310,577
|
|
|
$
|
96,137
|
|
|
$
|
99,150
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
c)
|
Noncontrolling interests
|
For the Company’s non-wholly owned subsidiaries,
a noncontrolling interest is recognized to reflect the portion of equity that is not attributable, directly or indirectly, to the
Company.
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires that management make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As of
March 31, 2020, the Company considered the economic implications of the COVID-19 pandemic on its significant judgments and estimates.
Given the impact and other unforeseen effects on the global economy from the COVID-19 pandemic, these estimates required increased
judgment, and actual results could differ from these estimates.
|
e)
|
Foreign Currency Translation
|
The Company uses the United States dollar (“U.S.
dollars” or “USD”) for financial reporting purposes and to maintain its books and records. The Company’s
subsidiaries maintain their books and records in their functional currency which is in Chinese Renminbi (“RMB”).
In general, for consolidation purposes, the Company
translates its assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date,
the statements of operations and cash flows are translated at average exchange rates during the reporting period, and the equity
accounts are translated at historical rates. As a result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Adjustments resulting from
the translation of the financial statements are recorded as accumulated other comprehensive income or loss.
Exchange rate used for the translation as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Period/year end RMB:US$ exchange rate
|
|
|
7.08760
|
|
|
|
6.71111
|
|
|
|
6.61843
|
|
Period/annual average RMB:US$ exchange rate
|
|
|
6.97980
|
|
|
|
6.71075
|
|
|
|
6.50682
|
|
Period/year end HKD:US$ exchange rate
|
|
|
7.77050
|
|
|
|
7.84934
|
|
|
|
7.77047
|
|
Period/annual average HKD:US$ exchange rate
|
|
|
7.75880
|
|
|
|
7.84162
|
|
|
|
7.75883
|
|
|
f)
|
Cash and cash equivalents
|
The Company considers all short-term, highly liquid
investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents
primarily represent bank deposits, fixed deposits with maturities of less than three months, and investments in money market funds.
|
g)
|
Accounts Receivable and Allowance for Doubtful Accounts
|
Accounts receivable are carried at the amount billed
to a customer, net of the allowance for doubtful accounts, which is an estimate for credit losses based on a review of all outstanding
amounts on a regular basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable
are written off when deemed uncollectible against allowances provided. Recoveries of accounts receivable previously written off
are recorded when received.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The Company reviews the collectability of accounts
receivable based on an assessment of historical experience, current economic conditions, and other collection indicators. For the
years ended March 31, 2020, 2019 and 2018, the Company has not
experienced any uncollectible balances and after management assessed the credibility related to balances outstanding at March 31,
2020, it determined that no additional allowance was necessary; accordingly, the Company has recorded allowances for doubtful accounts
of $0 and $0, respectively.
Cost Method Investments
Direct and or indirect investments in business entities
in which the Company does not have a controlling financial interest and has no ability to exercise significant influence over operating
and financial policies (generally 0 – 20 percent ownership), are accounted for by the cost method.
Equity Method Investments
Direct and or indirect investments in business entities
in which the Company does not have a controlling financial interest but has the ability to exercise significant influence over
operating and financial policies (generally 20 – 50 percent ownership), are accounted for by the equity method.
Held-to-Maturity Investments
The Company had certain held-to-maturity debt instrument
as investments. These investments were not impaired and were recorded at their carrying values which were based on the amortized
cost basis approximate their fair market value; accordingly, the Company has not recognized any unrecognized gain or losses in
the other comprehensive income. There were no derivative instruments that were used to hedge these investments.
These investments are accounted as short-term investments
as they had maturities with one year or less.
|
i)
|
Property and Equipment
|
Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is charged to operations using the straight-line method over the estimated useful lives
of the assets. Property and equipment and its estimated useful lives as follows:
Computer Equipment
|
|
1 – 3 years
|
Office Equipment
|
|
4 – 5 years
|
Motor Vehicle
|
|
4 years
|
Expenditures for maintenance and repairs are charged
to operations as incurred. Expenditures for betterments and major renewals are capitalized. The cost of assets sold or retired
and the related amounts of accumulated depreciation are eliminated from the accounts in the year of disposal, and any resulting
gains or losses are included in operations.
|
j)
|
Intangible Assets with Definite Lives
|
Intangible assets are stated at cost, net of accumulated
amortization. Amortization is charged to operations using the
straight-line method over the estimated useful lives of the assets. Intangible assets and its estimated useful lives as follows:
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
k)
|
Impairment of long-lived assets other than goodwill
|
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash
flows expected to be generated by the asset. If the assets are considered to be impaired, the impairment recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Impairment of long-lived assets
recognized for the years ended March 31, 2020, 2019 and 2018 was nil, nil and nil, respectively.
In April 2019, the Company adopted ASU 2016-02, “Leases
(Topic 842)”, including certain transitional guidance and subsequent amendments within ASU 2018-01, ASU 2018-10, ASU 2018-11,
ASU 2018-20 and ASU 2019-01 (collectively, including ASU 2016-02, “ASC 842”).
ASC 842 supersedes the lease requirements in ASC
840 “Leases”, and generally requires lessees to recognize operating and finance lease liabilities and corresponding
right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of
cash flows arising from leasing arrangements. Leases that transfer substantially all of the benefits and risks incidental to the
ownership of assets are accounted for as finance leases as if there was an acquisition of an asset and incurrence of an obligation
at the inception of the lease. All other leases are accounted for as operating leases. The Company has no significant finance leases.
The Company adopted the new lease standard using
the modified retrospective method by applying the new lease standard to all leases existing as of April 1, 2019, the date of initial
application, and no adjustments were made to the comparative periods. Upon the initial application of ASC 842 on April 1, 2019,
the Company’s office lease with a total carrying amount of $160,552 was identified as operating lease right-of-use assets
(Note 13). Such amount is included in the opening balance of operating lease right-of-use assets as of April 1, 2019 with no adjustments
made to the comparative periods.
The Company elected the package of practical expedients
permitted under the transition guidance, which allowed the Company to carry forward previous lease classification, the assessment
on whether a contract was or contained a lease, and the initial direct costs for any leases that existed prior to April 1, 2019.
Adoption of the new standard resulted in the recognition of operating lease right-of-use assets and liabilities of approximately
$147,172 on the consolidated balance sheet as of April 1, 2019. The adoption of the new lease standard does not have any significant
impact on the consolidated statements of comprehensive income and cash flows and there was no adjustment to the beginning retained
earnings on April 1, 2019.
Under ASC 842, the Company determines if an arrangement
is a lease at inception. Operating lease right-of-use assets and operating lease liabilities are initially recognized based on
the present value of future lease payments at lease commencement. The operating lease right-of-use asset also includes any lease
payments made prior to lease commencement and the initial direct costs incurred by the lessee and is recorded net of any lease
incentives received. As the interest rates implicit in most of the leases are not readily determinable, the Company uses the incremental
borrowing rates based on the information available at lease commencement to determine the present value of the future lease payments.
Operating lease expenses are recognized on a straight-line basis over the term of the lease.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The Company elected to combine the lease and non-lease
components for leases of certain asset classes. Lease and non-lease components for leases of other asset classes are accounted
for separately. The Company also elected not to recognize short-term leases with an initial lease term of twelve months or less.
In 2014, the
FASB issued guidance on revenue recognition (“ASC 606”), with final amendments issued in 2016. The underlying principle
of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes
(1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. The Company has applied the five-step model to recognize revenue when it is
probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes.
Crowdfunding Fees
The Company generates its revenue from success fees
from transactions on the crowdfunding platform. Revenue from these transactions is accounted for at the moment a project is successfully
funded.
At the start of a funding campaign, the entrepreneur
enters into a contract with the Company pursuant to which he or she agrees to pay the Company a success fee once a successful fund-raising
campaign for that entrepreneur closes. Once the funding campaign has closed, the Company’s success fee is either collected
from the funds raised prior to transferring the net proceeds of the funding to the entrepreneur or to be collected from the entrepreneur
after the net proceeds of the funding are transferred to the entrepreneur.
Upon completion of the funding campaign, services
delivered under the contract with the entrepreneur have been completed and the Company recognizes its success fee revenues, net
of any discounts given at the time the campaign has been closed successfully. Also, because the success fee percentage is stated
in the contract with the entrepreneur prior to the start of the funding campaign, the Company believes that this amount is fixed
and, assuming the successful conclusion of the funding campaign, collectible from the entrepreneur. This revenue recognition policy
complies with ASC 606 in that it is based on written agreements with the entrepreneurs, contractual services have been completed,
pricing is fixed and determinable based on agreements with the customer and collectability is reasonably assured as the customers
of the Company have just received their new funding.
Incubation Service Fees
The Company generates its revenue by providing business
and operation advisory services relating to matters related to marketing, sales, and strategic planning, and ancillary services
such as coordinating human resources, legal, accounting, operations, assisting with feasibility studies and other types of services
at the election of the entrepreneur. The Company provides its incubation services on an ongoing and/or as-needed basis, pursuant
to consulting agreements with the entrepreneurs. For ongoing basis services, revenue is recognized on an ongoing basis for the
agreed periodic service fee. For as-needed basis, revenue is recognized when the contractual services have been completed.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
Finder’s Service Fees
The Company generates its revenue for assisting any
business entity in raising funds as well as for introducing business partners, acquisition candidates or other strategic relationships
to the business entity, usually from one or more sources with which the Company or personnel have relationships. The Company provides
its finder services pursuant to an agreement and revenue is recognized when the contractual services have been completed and the
terms and conditions in the agreements have been met.
Procurement Service Fees
The Company generates its revenues from service fees
by providing procurement services for sourcing, accounts receivables financing, and logistics services relating to auto parts and
accessories on an as needed basis. The transaction price is determined when the customer places an order with the Company. The
Company recognize revenues when the procured goods have been transferred to and accepted by the customers as its performance obligation
is completed.
Supply Chain Management Platform Service Fee
The Company generates platform
fee through its supply chain management platform service. The transaction price is determined based on a percentage of the aggregate
amounts of purchase payments to our partnered auto parts suppliers. The Company recognize revenues when the procured auto parts
have been transferred to and accepted by the customers as the Company’s performance obligation is completed.
|
n)
|
Fair Value of Financial Instruments
|
The accounting standard for fair value establishes
a framework for measuring fair value and enhances fair value measurement disclosure. Under the provisions of the pronouncement,
fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs
that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when
little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The Company’s current financial assets and
liabilities approximate fair value due to their short-term nature and include cash accounts. The Company’s borrowings approximate
fair value as the rates of interest are similar to what they would receive from other financial institutions.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The
following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized
using the fair value hierarchy:
|
|
Carrying Amount
|
|
|
Estimated
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at (amortized) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,587,984
|
|
|
|
5,587,984
|
|
Related party investment -wealth management product
|
|
|
-
|
|
|
|
-
|
|
|
|
3,378,706
|
|
|
|
3,378,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at (amortized) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
9,461,918
|
|
|
|
9,461,918
|
|
Advertising
costs are expensed as incurred as selling expenses. Advertising expenses were $19,769, $8,808, and $0 for the years ended March
31, 2020, 2019, and 2018, respectively.
Income
taxes have been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered
or paid. Deferred taxes result from differences between the financial statement and tax bases of the Company’s assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether
or not a valuation allowance is required often requires significant judgment.
|
q)
|
Earnings
(Loss) Per Common Share
|
Basic
and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, for all periods presented. In
accordance with this guidance, basic and diluted net loss per share was determined by dividing net loss applicable to common stockholders
by the weighted-average common shares outstanding during the period. In a period where there is a net loss position, diluted weighted
average shares are the same as basic weighted average shares. Shares used in the diluted net loss per common share calculation
exclude potentially dilutive share equivalents as the effect would be antidilutive.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
r)
|
Comprehensive
Income (Loss)
|
Comprehensive income/(loss) refers
to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income/(loss), but are excluded from
net loss as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive
loss is comprised of foreign currency translation adjustments.
Operating
segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (the “CODM”),
which is comprised of certain members of the Company’s management team. The Company had three operating and reportable segments
during the periods presented as set out in Note 15.
|
t)
|
Commitments
and Contingencies
|
In
the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its
business, that cover a wide range of matters. Liabilities for the contingencies are recorded when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated.
Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company,
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses these contingent liabilities,
which inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the
Company or unasserted claims that may result in legal proceedings, the Company, in consultation with its legal counsel, evaluates
the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been
incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the consolidated financial
statements. If the assessment indicates that a potentially material loss contingency is not probable, or is probable but cannot
be estimated, the nature of the contingent liability, together with an estimate of the range of the reasonably possible loss,
if determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee
would be disclosed.
|
u)
|
Recent
Accounting Pronouncements
|
In
January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition
of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal)
of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired
is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets
and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input
and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the
definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill.
Under the new guidance, fewer acquired sets are expected to be considered businesses. For the Company, this ASU is effective January
1, 2018 on a prospective basis with early adoption permitted. The Company has adopted this guidance and determined that there
was no material impact to the financial statements presented herein.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
In
June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected
credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with
an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process
of evaluating the impact of the adoption on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to
reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows.
The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent
consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions
received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects
of more than one class of cash flows. The Company has adopted the new guidance.
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Accounts receivable
|
|
$
|
805,350
|
|
|
$
|
1,727,645
|
|
Allowance for doubtful accounts
|
|
|
(805,350
|
)
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
1,727,645
|
|
The
movements in the allowance for doubtful accounts were as follows:
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
Balances as of April 1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Amount charged to expenses
|
|
|
805,350
|
|
|
|
-
|
|
|
|
-
|
|
Amounts written off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
805,350
|
|
|
$
|
-
|
|
|
$
|
-
|
|
4.
|
OTHER
RECEIVABLES AND PREPAYMENTS
|
Other
receivables and prepayments consist of the following:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Referral services
|
|
$
|
98,762
|
|
|
$
|
-
|
|
Advance to service providers
|
|
|
458,702
|
|
|
|
196,456
|
|
Deposits for leases due within one operating period
|
|
|
1,905
|
|
|
|
2,982
|
|
Interest receivables
|
|
|
138,432
|
|
|
|
415,791
|
|
Others
|
|
|
110,796
|
|
|
|
6,003
|
|
|
|
|
808,597
|
|
|
|
621,232
|
|
Allowance for doubtful accounts
|
|
|
(103,433
|
)
|
|
|
-
|
|
|
|
$
|
705,164
|
|
|
$
|
621,232
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
5.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consist of the following:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Leasehold improvements
|
|
$
|
-
|
|
|
$
|
-
|
|
Computer and equipment
|
|
|
198,309
|
|
|
|
216,977
|
|
Automobiles
|
|
|
150,411
|
|
|
|
158,857
|
|
Capitalized lease
|
|
|
-
|
|
|
|
160,551
|
|
|
|
|
348,720
|
|
|
|
536,385
|
|
less: Accumulated depreciation
|
|
|
(214,114
|
)
|
|
|
(158,684
|
)
|
Total, net
|
|
$
|
134,606
|
|
|
$
|
377,701
|
|
The Company made non-refundable
prepayments for improvements to an event and meeting space; architectural and construction work commenced in 2018 and has not
been completed as of the date of this report. Management decided to expense the costs related to these improvements as promotional
and marketing expenses as this event and meeting space is designated for attracting potential incubation clientele. At the time
of this report, Management is not able to reasonably and accurately forecast when these improvements would generate future benefits
to the Company in the form of positive cash flows; accordingly, the Company has written off these assets as selling and marketing
expenses included in the Company’s results of operations for the year ended March 31, 2019.
For
the years ended March 31, 2020, 2019, and 2018 depreciation expense was $90,977, $101,043, and $18,852, respectively.
Intangible
asset consists of the following:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Software
|
|
$
|
2,183
|
|
|
$
|
2,305
|
|
Less-Accumulated Amortization
|
|
|
(1,693
|
)
|
|
|
(1,378
|
)
|
Total, net
|
|
$
|
490
|
|
|
$
|
927
|
|
For
the years ended March 31, 2020, 2019, and 2018, amortization expense was $394, $886, and $322, respectively. The weighted average
remaining useful life of the asset is approximately 12 months.
Leases
are classified as operating leases or finance leases in accordance with ASC 842. The Company’s operating leases mainly related
to the Company’s office facilities. For leases with terms greater than 12 months, the Company records the related asset
and lease liability at the present value of lease payments over the term. The Company’s current lease does not include rental
escalation clauses, renewal options and/or termination options. If such options exist, the Company will factor these considerations
into the Company’s determination of lease payments when appropriate. As of March 31, 2020, the Company has no outstanding
finance lease.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
As
of March 31, 2020, the weighted average remaining lease term was 1 year and weighted average discount rate was 5% for the Company’s
operating leases.
Operating lease cost for the
year ended March 31, 2020 was $75,950, which excluded cost of short-term contracts. Short-term lease cost for the year ended March
31, 2020 was $4,334. There was no variable lease cost during the year ended March 31, 2020. For the year ended March 31, 2020,
no lease cost was capitalized.
Future
lease payments under operating leases as of March 31, 2020 were as follows:
Year ending March 31,
|
|
March 31, 2020
|
|
2021
|
|
$
|
68,528
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
2025
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total future lease payments
|
|
$
|
68,528
|
|
|
|
|
|
|
Less: Imputed interest
|
|
|
5,185
|
|
Total lease liability balance
|
|
$
|
63,343
|
|
On
February 2017, the Company has cancelled certain lease agreements prior to the end of the lease terms. The Company’s rent
was waived by the unaffiliated third-party landlord of the property as the Company satisfied certain annual obligations according
to the terms and conditions of the lease agreement. For the year ended March 31, 2018, as a result of the cancellation of these
lease agreements, the Company accrued rent expenses and penalties totaling $111,885 (RMB 770,950).
In
February 2019, the Company ended its prior lease agreement and moved to new office location where it entered into a two year lease
that expires on January 31, 2021. The Company paid $62,570 as a security deposit for the office lease.
8.
|
SHORT-TERM
INVESTMENTS AND SHORT-TERM INVESTMENTS, RELATED PARTY
|
The
amortized cost and fair value of investment securities held-to-maturity as follows:
|
|
Investment
Securities Held-to-Maturity
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
fair
value
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
5,587,984
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,587,984
|
|
Related party investment -wealth management product
|
|
|
3,378,706
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,378,706
|
|
Total
|
|
$
|
8,966,690
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,966,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
9,461,918
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,461,918
|
|
Total
|
|
$
|
9,461,918
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,461,918
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The
Company’s investment securities held-to-maturity approximate fair value due to their short-term nature with maturity range
from thirty days to a year.
The Company’s investment
in such securities are not insured against loss of principal.
The
amortized cost and fair value of investment securities, by maturity, for held-to-maturity investment securities as follows:
Periods
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Due in one year or less
|
|
$
|
8,966,690
|
|
|
$
|
9,461,918
|
|
Due after one year through five years
|
|
|
-
|
|
|
|
-
|
|
Due after five years through ten years
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,966,690
|
|
|
$
|
9,461,918
|
|
The
maturities of the investments are based on final contractual maturity date.
The
Company continually performs assessments to determine whether unrealized losses in its investment securities portfolio are temporary
or other-than-temporary by carefully considering all reasonably available information. The Company considers factors such as financial
statements, credit ratings, news releases and other pertinent information of the underlying issuer or company to make its determination.
If the decline in fair value is deemed to be other than temporary, the carrying value of the investment is written down to fair
value and the amount of write-down is included as a realized loss in earnings.
The
Company evaluate the investments in accordance to ASC 320-10-35. Impairment charges in connection with the investments were $0,
$0, and $0 for the years ended March 31, 2020, 2019, and 2018, respectively.
These
investments earned interest of $667,764, $636,489, and $310,105 for the years ended March 31, 2020, 2019, and 2018, respectively
that was recognized to the Company’s results of operations when interest have been earned. These investments are not collateralized
with underlying assets by their issuers.
9.
|
INVESTMENTS
IN ENTITIES AND ITS VALUATIONS
|
JiaXing
YiTou ShangMa Investments Limited Partnership Company
On
December 2014, the Company acquired 10% ownership interest in JiaXing YiTou ShangMa Investments Limited Partnership Company (“JiaXing
YiTou”). JiaXing YiTou invests in industrial companies and investment management. It is located in Jiaxing City, Zhejiang
Province, PRC. Such investment is accounted for under the cost method. The Company recognized an investment income of $0, $0 and
$0 as other income for the years ended March 31, 2020, 2019, and 2018, respectively. The Company recognized an impairment loss
on investment in the amount of $0, $74,507, and $0 for the years ended March 31, 2020, 2019, and 2018.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
Investments
Valuation
The
Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying
value is other than temporary. The primary factors the Company considers in its determination are the length of time that the
fair value of the investment is below the Company’s carrying value; the financial condition, operating performance and the
prospects of the equity investee; and other company specific information such as industry data, general economic conditions, cash
flows forecasts or any recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying
value of the equity investee is written down to fair value.
The
Company evaluates its cost method investments in accordance to ASC 325-20-35. Impairment charges in connection with its cost method
investments were $0, $75,547, and $0 for the years ended March 31, 2020, 2019 and 2018, respectively.
The
carrying amount of the investments consist of the following:
|
|
|
As of March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
JiaXing YiTou ShangMa Investments Limited Partnership Company
|
|
$
|
-
|
|
|
$
|
-
|
|
Total, net
|
|
$
|
-
|
|
|
$
|
-
|
|
10.
|
RELATED
PARTY TRANSACTIONS
|
Related
parties’ relationships as follows:
Name
|
|
Relationship
|
Mr. Jianjun Sun
|
|
Company’s Chief Executive Officer, Chairman of the Board of Directors, and Director until August 20, 2019; Shareholder
|
Mr. Hongyu Zhang
|
|
Shareholder; director of various subsidiaries
|
HangZhou TianQi Network Technology Co. Ltd.
|
|
Common control by legal representative and shareholder of Taikexi, Mr, Mangyue Sun
|
Hangzhou Qianlu Information Technology Co. Ltd.
|
|
Common control by Mr. Hongyu Zhang
|
Hangzhou Yuao Investment Management Partnership (Yuao)
|
|
Common control by legal representative of Guanpeng
|
Short-term
investment – related party consist of the following:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Hangzhou Yuao
|
|
$
|
3,378,706
|
|
|
$
|
-
|
|
Total
|
|
|
3,378,706
|
|
|
|
-
|
|
Yuao is controlled by the legal
representative of Guanpeng, our 51% owned subsidiary. The Company earns a 5% interest from subscribing certain wealth management
product from Hangzhou Yuao. The maturity date for the investment is less than one year.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
Other
related parties’ payables consist of the following:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Mr. Jianjun Sun
|
|
$
|
-
|
|
|
$
|
16,374
|
|
Mr. Hongyu Zhang
|
|
|
8,100
|
|
|
|
-
|
|
HangZhou TianQi Network Technology Co. Ltd.
|
|
|
41,766
|
|
|
|
44,109
|
|
Hangzhou Qianlu Information Technology Co. Ltd.
|
|
|
353,824
|
|
|
|
-
|
|
Total
|
|
$
|
403,690
|
|
|
$
|
60,483
|
|
Outstanding
payables to Mr. Jianjun Sun, Mr. Hongyu Zhang, and Hangzhou Qianlu Information Techonology Co. Lrd. consist of working capital
advances and borrowings. These amounts are due on demand and non-interest bearing.
Outstanding
payable to HangZhou TianQi Network Technology Co. Ltd., consist of rent owed which are non-interest bearing and due on demand.
Ordinary
Shares
The
Company is authorized to issue of 500,000,000 ordinary shares, at $0.0001 par value. Since inception, the Company has issued 10,000,000
shares of ordinary shares for proceeds of $1,000.
During
the year ended March 31, 2016, the Company’s shareholders have contributed capital of $1,053,607 (RMB 6,800,000) in the
Company’s subsidiary — HangZhou LongYun.
On
July 25, 2017, the Company’s shareholders and Board of Directors authorized a 1-for-10 reverse stock split of the Company’s
outstanding Ordinary Shares (the “Reverse Stock Split”). The Reverse Stock Split was effectuated on July 25, 2017.
References to shares in the consolidated financial statements and the accompanying notes, including, but not limited to, the number
of shares and per share amounts, have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
On
August 2017, the Company’s shareholder has contributed capital of $145,232 (RMB 945,000) in the Company’s subsidiary — HangZhou
LongYun.
On
September 15, 2017, the Company issued 1,421,394 ordinary shares at $6.00 per share for net proceeds of $7,731,271 ($8,528,363
in gross proceeds less underwriter discounts, commissions and offering expenses of $797,092) during an initial public offering
(“IPO”) of the Company’s ordinary shares and concurrent listing on NASDAQ Capital Market stock exchange.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
12.
|
EARNINGS
(LOSS) PER SHARE
|
|
|
For the year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Basic (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Profit for the year attributable to owners of the Company
|
|
$
|
(1,416,717
|
)
|
|
$
|
(1,056,360
|
)
|
|
$
|
193,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Profit for the year attributable to owners of the Company
|
|
$
|
(1,416,717
|
)
|
|
$
|
(1,056,360
|
)
|
|
$
|
193,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss)/Earnings Per Share Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Original shares:
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,000,000
|
|
Additions from actual events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Issuance of common stock, weighted
|
|
|
-
|
|
|
|
-
|
|
|
|
771,058
|
|
Basic weighted average shares outstanding
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
Dilutive shares: Potential additions from dilutive events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Weighted Average Shares Outstanding:
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.02
|
|
- Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.02
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
- Diluted
|
|
|
11,421,393
|
|
|
|
11,421,393
|
|
|
|
10,771,058
|
|
13.
|
STATEMENT
OF OPERATIONS — DETAILS
|
|
|
For the Years Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Crowdfunding
|
|
$
|
-
|
|
|
$
|
483,960
|
|
|
$
|
1,074,101
|
|
Incubation Service
|
|
|
-
|
|
|
|
2,260,376
|
|
|
|
3,197,865
|
|
Procurement Services
|
|
|
-
|
|
|
|
12,893
|
|
|
|
6,763
|
|
Platform Services
|
|
|
11,252
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
11,252
|
|
|
|
2,757,229
|
|
|
|
4,278,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
|
457,764
|
|
|
|
410,746
|
|
|
|
1,329,279
|
|
Wages & Benefits
|
|
|
576,995
|
|
|
|
1,261,940
|
|
|
|
1,691,204
|
|
Travel Expenses
|
|
|
51,727
|
|
|
|
111,945
|
|
|
|
203,701
|
|
Depreciation & Amortization
|
|
|
86,407
|
|
|
|
101,929
|
|
|
|
20,174
|
|
Data Services
|
|
|
-
|
|
|
|
56,169
|
|
|
|
127,355
|
|
Rent Expense
|
|
|
-
|
|
|
|
505,798
|
|
|
|
308,238
|
|
Advertising
|
|
|
-
|
|
|
|
931
|
|
|
|
19,769
|
|
Business Taxes and Surcharges
|
|
|
3,956
|
|
|
|
223
|
|
|
|
10,168
|
|
Meals & Entertainment
|
|
|
34,312
|
|
|
|
156,941
|
|
|
|
117,874
|
|
Other
|
|
|
38,326
|
|
|
|
1,267,647
|
|
|
|
66,926
|
|
Promotional expense
|
|
|
-
|
|
|
|
1,043,102
|
|
|
|
-
|
|
Impairment loss on investments
|
|
|
-
|
|
|
|
74,507
|
|
|
|
-
|
|
Provision for doubtful debt
|
|
|
880,795
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,130,282
|
|
|
$
|
4,991,878
|
|
|
$
|
3,894,688
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
14.
|
CONCENTRATION,
GEOGRAPHIC
|
As of March 31, 2020, the Company’s
gross accounts receivables was comprised of three customers, of those three, each contributed 15.91%, 28.03%, and 56.06% to the
total outstanding balance. For the year ended March 31, 2020, there was no concentration in the Company’s revenues.
As
of March 31, 2019, the Company’s gross accounts receivables was comprised of eight customers, of those eight, five contributed
11.47%, 12.94%, 10.30%, 15.53%, and 30.19% to the total outstanding balance. For the year ended March 31, 2019, fifteen customers
comprised 75.82% of the Company’s revenues. There was one customer that contributed 15.0% of the Company total revenues.
As
of March 31, 2018, the Company has customers representing 12.7%, 12.2%, 11.2%, and 10.3% of total accounts receivable; with each
customer generating revenues representing 5.8%, 5.4%, 4.6%, and 4.4% of total revenues for the year ended March 31, 2018.
The
following provides the results of operations and the financial position of the Company’s operating segments as of and during
the year ended March 31, 2020. The Longyun operating segment reflects the Company’s crowdfunding and incubation business.
The Taikexi operating segment reflects the Company’s business of auto parts sourcing and logistics services.
Results of Operations
For the year ended March 31, 2020
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
11,252
|
|
|
|
11,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,425,443
|
|
|
|
106,146
|
|
|
|
598,693
|
|
|
|
2,130,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
582,173
|
|
|
|
(310
|
)
|
|
|
80,656
|
|
|
|
662,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(843,270
|
)
|
|
|
(106,456
|
)
|
|
|
(506,785
|
)
|
|
|
(1,456,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
26,917
|
|
|
|
-
|
|
|
|
496
|
|
|
|
27,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(870,187
|
)
|
|
|
(106,456
|
)
|
|
|
(507,281
|
)
|
|
|
(1,483,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to Dragon Victory
|
|
|
(870,187
|
)
|
|
|
(63,876
|
)
|
|
|
(482,654
|
)
|
|
|
(1,416,717
|
)
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
Financial Position
as of March 31, 2020
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
6,288,120
|
|
|
|
279
|
|
|
|
3,456,613
|
|
|
|
9,745,012
|
|
Non-current assets
|
|
|
101,705
|
|
|
|
68,052
|
|
|
|
49,592
|
|
|
|
219,349
|
|
Total assets
|
|
|
6,389,825
|
|
|
|
68,331
|
|
|
|
3,506,205
|
|
|
|
9,964,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
225,129
|
|
|
|
10,765
|
|
|
|
2,355,447
|
|
|
|
2,591,341
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
225,129
|
|
|
|
10,765
|
|
|
|
2,355,447
|
|
|
|
2,591,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
6,164,696
|
|
|
|
57,566
|
|
|
|
1,150,758
|
|
|
|
7,373,020
|
|
Results
of Operations
For
the year ended March 31, 2019
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
2,744,277
|
|
|
|
12,893
|
|
|
|
59
|
|
|
|
2,757,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,510,442
|
|
|
|
973,548
|
|
|
|
2,507,888
|
|
|
|
4,991,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
533,471
|
|
|
|
166
|
|
|
|
241,242
|
|
|
|
774,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before tax
|
|
|
1,767,306
|
|
|
|
(960,489
|
)
|
|
|
(2,266,587
|
)
|
|
|
(1,459,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,767,306
|
|
|
|
(960,489
|
)
|
|
|
(2,266,587
|
)
|
|
|
(1,459,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to Dragon Victory
|
|
|
1,767,306
|
|
|
|
(576,293
|
)
|
|
|
(2,247,372
|
)
|
|
|
(1,056,360
|
)
|
Financial Position
as of March 31, 2019
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
10,202,318
|
|
|
|
67,156
|
|
|
|
1,579,921
|
|
|
|
11,849,395
|
|
Non-current assets
|
|
|
191,954
|
|
|
|
111,275
|
|
|
|
161,501
|
|
|
|
464,730
|
|
Total assets
|
|
|
10,394,272
|
|
|
|
178,431
|
|
|
|
1,741,422
|
|
|
|
12,314,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,977,181
|
|
|
|
6,916
|
|
|
|
(53,987
|
)
|
|
|
2,930,110
|
|
Non-current liabilities
|
|
|
66,897
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,897
|
|
Total liabilities
|
|
|
3,044,078
|
|
|
|
6,916
|
|
|
|
(53,987
|
)
|
|
|
2,997,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
7,350,194
|
|
|
|
171,515
|
|
|
|
1,795,409
|
|
|
|
9,317,118
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
Results of Operations
For the year ended March 31, 2018
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
4,271,966
|
|
|
|
6,763
|
|
|
|
-
|
|
|
|
4,278,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,105,441
|
|
|
|
176,543
|
|
|
|
1,612,704
|
|
|
|
3,894,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
248,655
|
|
|
|
211
|
|
|
|
126,011
|
|
|
|
374,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before tax
|
|
|
2,415,180
|
|
|
|
(169,569
|
)
|
|
|
(1,486,693
|
)
|
|
|
758,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
633,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
633,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,781,566
|
|
|
|
(169,569
|
)
|
|
|
(1,486,693
|
)
|
|
|
125,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to Dragon Victory
|
|
|
1,781,566
|
|
|
|
(101,742
|
)
|
|
|
(1,486,693
|
)
|
|
|
193,131
|
|
Financial
Position
as of March 31, 2018
|
|
Longyun
|
|
|
Taikexi
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
11,096,311
|
|
|
|
828,844
|
|
|
|
(132,088
|
)
|
|
|
11,793,067
|
|
Non-current assets
|
|
|
2,218,191
|
|
|
|
139,639
|
|
|
|
(1,133,199
|
)
|
|
|
1,224,631
|
|
Total assets
|
|
|
13,314,502
|
|
|
|
968,483
|
|
|
|
(1,265,287
|
)
|
|
|
13,017,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
4,993,098
|
|
|
|
1,992
|
|
|
|
(2,970,885
|
)
|
|
|
2,024,205
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
4,993,098
|
|
|
|
1,992
|
|
|
|
(2,970,885
|
)
|
|
|
2,024,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
8,321,404
|
|
|
|
966,491
|
|
|
|
1,705,598
|
|
|
|
10,993,493
|
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The
Company formed in Cayman Islands is not subject to tax on its income or capital gains. In addition, upon payments of dividends
by the Company to its shareholders, no Cayman Islands withholding tax is imposed.
The
Company subsidiary formed in British Virgin Island is not subject to tax on its income or capital gains. In addition, upon payments
of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed.
The
Company’s subsidiary formed in Hong Kong is subject to the profits tax rate at 16.5% for income generated and operation
in the special administrative region.
The
Company’s subsidiaries incorporated in the PRC are subject to profits tax rate at 25% for income generated and operation
in the country.
The
full realization of the tax benefit associated with the carry forward depends predominantly upon the Company’s ability to
generate taxable income during the carry forward period.
The
Company’s subsidiaries incorporated in the PRC has unused net operating losses (“NOLs”) available for carry
forward to future years for PRC income tax reporting purposes up to five years. The Company recorded a deferred tax asset in the
amount of $0 and $0 at March 31, 2020 and 2019, respectively.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A
valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is uncertain.
Based
on the assessment, the Company has established a deferred tax asset relating to NOLs at March 31, 2020 due to the Company’s
performance in the upcoming years. However, the Company established a full valuation allowance against all of the deferred tax
asset relating to NOLs because the benefit from utilization of NOL carry forwards could be subject to limitations as material
structural changes resulted from the Company going public through VIE arrangement on August 19, 2016.
Longyun
was granted a two year tax holiday by the local PRC government; accordingly, the have not accrued any income tax expense for the
year ended March 31, 2020.
The
following table reconciles the statutory rates to the Company’s effective tax rate:
|
|
For the Years Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Statutory rates in Cayman Islands and BVI
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Statutory rates in Hong Kong
|
|
|
16.5
|
%
|
|
|
16.5
|
%
|
|
|
15.0
|
%
|
Statutory rates in PRC
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Temporary tax holiday in the PRC
|
|
|
-25.0
|
%
|
|
|
-25.0
|
%
|
|
|
0.0
|
%
|
Foreign earned income not subject to taxes in the Cayman Island
|
|
|
-16.5
|
%
|
|
|
-16.5
|
%
|
|
|
-40.0
|
%
|
Additional accruals in the PRC
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
83.5
|
%
|
Effect of valuation allowance
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
83.5
|
%
|
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
|
|
For the Years Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
Cayman Islands
|
|
$
|
(311,778
|
)
|
|
$
|
(700,400
|
)
|
|
$
|
(1,550,037
|
)
|
BVI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hong Kong
|
|
|
(1,062
|
)
|
|
|
(45,955
|
)
|
|
|
63,343
|
|
PRC
|
|
|
(1,143,671
|
)
|
|
|
(1,020,951
|
)
|
|
|
2,245,611
|
|
Total income (loss) before taxes
|
|
|
(1,456,511
|
)
|
|
|
(1,767,306
|
)
|
|
|
758,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes (benefits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cayman Islands
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BVI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hong Kong
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
633,614
|
|
Provision for income taxes (benefits)
|
|
|
-
|
|
|
|
-
|
|
|
|
633,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cayman Islands
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BVI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hong Kong
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
179,665
|
|
Less: Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
(179,665
|
)
|
Currency effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
633,614
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
83.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of tax holiday inside the PRC on basic earnings per share
|
|
|
-
|
|
|
|
-
|
|
|
|
0.06
|
|
17.
|
RESTRICTED
NET ASSETS AND STATUTORY RESERVES
|
PRC
laws and regulations permit payments of dividends by the Company’s subsidiaries and VIEs incorporated in the PRC only out
of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the
Company’s subsidiaries and VIEs incorporated in the PRC are required to annually appropriate 10% of their net income to
the statutory reserve prior to payment of any dividends, unless such reserve have reached 50% of their respective registered capital.
In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount
of net assets held in each subsidiary and VIE. As a result of the restrictions described above and elsewhere under PRC laws and
regulations, the Company’s subsidiaries and VIEs incorporated in the PRC are restricted in their ability to transfer a portion
of their net assets to the Company in the form of dividends. Even though the Company currently does not require any such dividends,
loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future require
additional cash resources from them due to changes in business conditions, funding of future acquisitions and development, or
merely to declare and pay dividends or distributions to its shareholders. Except for the above or disclosed elsewhere, there is
no other restriction on the use of proceeds generated by the Company’s subsidiaries and VIEs to satisfy any obligations
of the Company.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
18.
|
COMMITMENTS
& CONTINGENCIES
|
Capital
commitments
The
Company entered into a contract with a general contractor for $1,174,338 (RMB 8,000,000) to perform improvements to an event and
meeting space at a new building in the Yuehuangshan South Fund Village Area of Hangzhou. As of March 31, 2019, the Company had
prepaid $1,043,102 (RMB 7,000,000) and under the terms of the contract, is required to pay an additional $671,075 (RMB 1,000,000).
The prepayments have been expensed to the Company’s result of operations and have been classified as promotional expense
during the year ended March 31, 2019.
Risk,
Uncertainties, and Contingencies
The
Company has cash balances held at financial institutions located in China, PRC which are not federally insured deposit protection.
Accordingly, the Company has a concentration of credit risk related to these uninsured bank deposits. The Company has not experienced
any losses in such accounts and believes it is not exposed to significant credit risk in this area.
Customer
accounts typically are collected within a short period of time, and based on its assessment of current conditions and its experience
collecting such receivables, management believes it has no significant risk related to its concentration within its accounts receivable.
The
Company is incorporated in the Cayman Islands and considered as a foreign entity under PRC laws. Due to the restrictions on foreign
investment and ownership on the business related to Internet content provision, telecom value-added services, financial services
and others, the Company conducts its business through various contractual arrangements with its VIE that are generally owned and
controlled by certain management members or founders of the Company. The VIE holds the licenses and approvals that are essential
for their business operations in the PRC and the Company has entered into various agreements with the VIE and their equity holders
such that the Company has the right to benefit from their licenses and approvals and generally has control of the VIE. In the
Company’s opinion, the current ownership structure and the contractual arrangements with the VIE and their equity holders
as well as the operations of the VIE are in substantial compliance with all existing PRC laws, rules and regulations. However,
there may be changes and other developments in PRC laws, rules and regulations. Accordingly, the Company gives no assurance that
PRC government authorities will not take a view in the future that is contrary to the opinion of the Company. If the current ownership
structure of the Company and its contractual arrangements with the VIE and their equity holders were found to be in violation
of any existing or future PRC laws or regulations, the Company’s ability to conduct its business could be impacted and the
Company may be required to restructure its ownership structure and operations in the PRC to comply with the changes in the PRC
laws which may result in deconsolidation of the VIE.
The
PRC market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties
extend to the ability of the Company to operate or invest in online and mobile commerce or other Internet related businesses,
representing the principal services provided by the Company, in the PRC. The information and technology industries are highly
regulated. Restrictions are currently in place or are unclear regarding what specific segments of these industries foreign owned
enterprises, like the Company, may operate. If new or more extensive restrictions were imposed on the segments in which the Company
is permitted to operate, the Company could be required to sell or cease to operate or invest in some or all of its current businesses
in the PRC.
The
Company’s sales, purchase and expense transactions are generally denominated in RMB and a significant portion of the Company’s
assets and liabilities are denominated in RMB. The RMB is not freely convertible into foreign currencies. In the PRC, foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by
the PBOC. Remittances in currencies other than RMB by the Company in the PRC must be processed through the PBOC or other PRC foreign
exchange regulatory bodies and require certain supporting documentation in order to affect the remittance. If such foreign exchange
control system prevents the Company from obtaining sufficient foreign currencies to satisfy its currency demands, the Company
may not be able to pay dividends in foreign currencies and the Company’s ability to fund its business activities that are
conducted in foreign currencies could be adversely affected.
DRAGON VICTORY INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020, 2019,
AND 2018
(Amounts in U.S. dollars)
The
securities financing industry is heavily regulated by the PRC government. Various regulatory authorities of the PRC central government,
such as the China Securities Regulatory Commission (the “CSRC”), State Administration for Industry and Commerce (the
“SAIC”), the China Banking Regulatory Commission (the “CBRC”), the State Administration of Foreign Exchange
(the “SAFE”), the State Administration of Taxation (the “SAT”), and the Supreme People’s Court (the
“SPC”) have the authority to issue and implement regulations governing various aspects of the securities offerings.
Currently, there are no regulations or rules specifically governing crowdfunding offerings in the PRC. Although on December 2014,
a set of proposed private equity-based crowdfunding rules were promulgated by the Securities Association of China, an industry
self-regulatory association, they are not yet finalized or adopted. Our crowdfunding platform currently only provides reward-based
crowdfunding in the PRC market, and do not provide equity-based or debt-based crowdfunding in the PRC market. As such, the Company
believes that it is not subject to the PRC proposed rules regarding equity-based crowdfunding.
The
Company has acted on behalf of one of its client as part of an agent agreement to enter into various third-party suppliers’
and customers’ agreements. If any dispute is to be arose and unresolved between the client, third party suppliers, third-party
customers, and the Company, the Company may be subject to potential obligation or held responsible for certain actions.
The
Company has engaged third-party agents to collect and disburse certain cash which are held by the third-party agent as an escrow
without insurance. Accordingly, the Company has a credit risk related to these uninsured deposits. The Company has not experienced
any losses in such accounts and believes it is not exposed to significant credit risk in this area. If any dispute is to be arose
and unresolved between the escrow agent, third-party suppliers, third-party customers, and the Company, the Company may be subject
to potential obligation or held responsible for certain losses.
The
Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued.
There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements,
and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance
sheet but arose subsequent to that date.
As
of August 17, 2020, except for any subsequent events detailed above, the Company has determined that there are no other material
subsequent events that occurred after the balance sheet date, and up to the issuance date of these financial statements that required
disclosure.
F-32
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