UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38876
ATIF Holdings
Limited
(Exact name of registrant as specified in its charter)
|
British
Virgin Islands |
|
Not Applicable |
| (State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
| Incorporation
or Organization) |
|
Identification
Number) |
| |
|
|
|
25391
Commercentre Dr., Ste 200, Lake Forest, CA |
|
92630 |
| (Address
of principal executive offices) |
|
(Zip
Code) |
308-888-8888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
|
Ordinary Shares |
|
ATIF |
|
The
Nasdaq Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
☐ No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. 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 issuer 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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
| Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
| Non-accelerated
filer |
☒ |
Smaller
reporting company |
☒ |
| Emerging
growth company |
☒ |
|
|
If an emerging growth company, 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 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. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
As of January 31, 2022, the last business day of the registrant’s
most recently completed second fiscal quarter, the registrant had
9,627,452 shares of common stock outstanding.
As of October 25, 2022, the registrant had 9,627,452 shares of
common stock outstanding.
Documents incorporated by reference: None.
Table
of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference herein
and therein may contain “forward-looking statements” within the
meaning of, and intended to qualify for the safe harbor from
liability established by, the United States Private Securities
Litigation Reform Act of 1995. These statements are based on our
management’s beliefs and assumptions and on information currently
available to us. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from those
expressed or implied by the forward-looking statements.
These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations
regarding future events, which may or may not occur. These
statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or
achievements to be materially different from those expressed or
implied by the forward-looking statements. In some cases, you can
identify these forward-looking statements by words or phrases such
as “aim,” “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “should,” “will,” “would,” or
similar expressions, including their negatives. We have based these
forward-looking statements largely on our current expectations and
projections about future events and financial trends that we
believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking
statements include:
| |
● |
any
changes in the laws of the PRC or local province that may affect
our operation; |
| |
● |
future
financial and operating results, including revenues, income,
expenditures, cash balances and other financial items; |
| |
● |
our
ability to execute our growth and expansion, including our ability
to meet our goals; |
| |
● |
current
and future economic and political conditions; |
| |
● |
inflation
and fluctuations in foreign currency exchange rates; |
| |
● |
our
ability to compete in an industry with low barriers to
entry; |
| |
● |
our
capital requirements and our ability to raise any additional
financing which we may require; |
| |
● |
our
ability to attract new clients, and further enhance our brand
recognition; |
| |
● |
our
ability to hire and retain qualified management personnel and key
employees in order to enable us to develop our
business; |
| |
● |
our
on-going ability to obtain all mandatory and voluntary government
and other industry certifications, approvals, and/or licenses to
conduct our business; |
| |
● |
our
ability to maintain effective internal control over financial
reporting; |
| |
● |
trends
and competition in the financial consulting services industry;
and |
| |
● |
other
assumptions described in this annual report underlying or relating
to any forward-looking statements. |
You should thoroughly read this annual report and the documents
that we refer to in this annual report with the understanding that
our actual results in the future may be materially different from
or worse than what we expect. We qualify all of our forward-looking
statements by these cautionary statements. Other sections of this
annual report include additional factors which could adversely
affect 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.
The forward-looking statements made in this annual report relate
only to events or information as of the date on which these
statements are made in this annual report. We undertake no
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise,
after the date of this annual report. You should not rely upon
forward-looking statements as predictions of future events.
USE OF CERTAIN DEFINED TERMS
All references to “We,” “us,” “our,” or “Company” are to ATIF
Holdings Limited (“ATIF”), a British Virgin Islands business
company, and its Affiliated Entities (defined below), as the case
may be. Neither ATIF nor any of its Affiliated Entities are in any
way or manner related to or associated with a digital publishing
company incorporated and registered in Hong Kong, Asia Times
Holdings Limited. ATIF is a holding company for its operating
subsidiaries. We currently do not, and we do not plan to use
variable interest entities to execute our business plan or to
conduct our China-based operations.
Unless the context otherwise requires, in this annual report on
Form 10-K references to:
| |
● |
“Affiliated
Entities” are to our operating subsidiaries; |
| |
● |
“ATIF
HK” means ATIF Limited, a Hong Kong corporation and a wholly-owned
subsidiary of ATIF; |
| |
|
|
| |
● |
“ATIF
USA” means ATIF Inc., a California corporation and a wholly-owned
subsidiary of ATIF; |
| |
|
|
| |
● |
“ATIF
LP” means ATIF-1, LP, a Delaware limited partnership; |
| |
● |
“AT
Consulting Center” are to Asia Era International Financial
Consulting Center; |
| |
● |
“BVI”
are to the “British Virgin Islands”; |
| |
● |
“China”
or the “PRC” are to the People’s Republic of China, excluding
Taiwan and the special administrative regions of Hong Kong and
Macau for the purposes of this annual report only; |
| |
● |
“CNNM”
are to www.chinacnnm.com, a news and
media platform owned and operated by ATIF HK; |
| |
● |
“Exchange
Act” are to the Securities Exchange Act of 1934, as
amended; |
| |
● |
“Huaya”
are to Huaya Consultant (Shenzhen) Co., Ltd., a limited
liability company organized under the laws of the PRC, a wholly
owned subsidiary of ATIF; |
| |
● |
“initial
public offering” or “IPO” are to our initial public offering of
Ordinary Shares at $5.00 per Unit which closed in April 29,
2019; |
| |
● |
“LGC”
are to Leaping Group Co., Ltd. a limited liability organized
under the laws of Cayman Islands; |
| |
● |
“preferred
shares,” or “Preferred Shares” are to the Class A preferred
shares of the Company, par value $0.001 per share; |
| |
● |
“RMB”
and “Renminbi” are to the legal currency of the PRC; |
| |
● |
“SEC”
are to the Securities and Exchange Commission; |
| |
● |
“Securities
Act” are to the Securities Act of 1933, as amended; |
| |
● |
“shares,”
“Shares,” or “Ordinary Shares” are to the Ordinary Shares of the
Company, par value $0.001 per share; and |
| |
● |
“U.S.
dollars” and “$” are to the legal currency of the United
States. |
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 10-K includes our audited
consolidated financial statements for the fiscal years ended
July 31, 2021 and 2022.
This annual report contains translations of certain Renminbi
(“RMB”) and Hong Kong Dollar (“HK$”) amounts into U.S. dollars at
specified rates. Unless otherwise stated, the translation of RMB
into U.S. dollars has been made at RMB 6.7433 to US$1.00 and the
translation of HK$ into U.S. dollars has been made at HK$7.8000 to
US$1.00 in effect on July 31, 2022. We make no representation
that any RMB/HK$ or U.S. dollar amounts could have been, or could
be, converted into U.S. dollars or RMB/HK$, 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 RMB into
foreign exchange and through restrictions on foreign
trade.
PART I
ITEM 1.
BUSINESS
Overview
We are a business consulting company providing financial consulting
services to small and medium-sized enterprises (“SMEs”) and prior
to August 1, 2022, we manage a private equity fund with
approximately $1.3 million assets under management (“AUM”). Since
our inception in 2015, the main focus of our consulting business
has been providing comprehensive going public consulting services
designed to help SMEs become public companies on suitable markets
and exchanges. Our goal is to become an international financial
consulting company with clients and offices throughout Asia and
North America. On January 4, 2021, we established an office in
California, USA, through our wholly owned subsidiary ATIF Inc., a
California corporation, which was incorporated on October 26, 2020,
and launched, in addition to our business consulting services,
additional service models consisting of asset management,
investment holding and media services to expand our business with a
flexible business concept to achieve a goal of high growth revenue
and strong profit growth.
We have to date primarily focused on helping clients going public
on the OTC markets and exchanges in the U.S., but we are in the
process of expanding our service to listing clients on domestic
exchanges in China as well as the Hong Kong Stock Exchange.
Recent Developments
On February 3, 2021, we terminated our VIE agreements with Qianhai
and upon termination, Qianhai transferred all of its business and
employees to Huaya. In addition, on January 29, 2021, we sold our
51.2% equity interest in LGC. As a result of termination of
relationship with shareholders of Qianhai and sale of all our
equity interests in LGC, since February 3, 2021, we have no VIE
structure in connection with our operations.
On February 16, 2021, we established ATIF-1, LP (“ATIF LP”) as a
private equity fund through our indirectly-wholly owned subsidiary,
ATIF-1 GP, LLC (“ATIF GP”), a Delaware limited liability company,
as the general partner. As of July 31, 2022, we own a 76.6%
interest in ATIF LP as a limited partner. As of July 31, 2022, ATIF
LP manages, approximately $1.3 million assets under management
(“AUM”). The investment strategy of the fund involves directional
long and short investments in equity securities, primarily issued
by U.S. large capitalization companies, and American Depositary
Receipts (“ADRs”) related to Chinese companies of various sizes,
including private companies. The investment manager for the fund is
ATIF Inc. Due to significant volatility in stock market, the
private equity fund lost $1.5 million in fiscal year 2022 as
compared to gain $0.2 million in fiscal year 2021. On August 1,
2022, ATIF USA entered into and closed a Sale and Purchase
Agreement with Asia Time (HK) International Finance Service Limited
(the “Buyer”) pursuant to which ATIF US sold all of its membership
interests in ATIF GP (the “Agreement”) to the Buyer for cash
consideration of US$50,000. Upon the closing of the Agreement on
August 1, 2022, ATIF GP is no longer our subsidiary and ATIF USA
ceased to be the investment manager of ATIF LP.
On August 23, 2021, we completed a five (5) for one (1) reverse
stock split (the “Reverse Split”) of our issued and outstanding
ordinary shares, par value $0.001 per share.
On December 22, 2021, we established ATIF BD LLC, a California
limited liability company (“ATIF BD”) and our wholly-owned
subsidiary, engaged in consultancy and information technology
support services.
On April 25, 2022, we established ATIF Investment Limited, a
British Virgin Islands company (“ATIF Investment”) and our
wholly-owned subsidiary, engaged in consultancy and information
technology support services.
On May 31, 2022, we completed the transfer of our equity interest
in ATIF HK and Huaya to Mr. Pishan Chi, our former director and
CEO, for $nil consideration. The transfer of equity interest was to
mitigate the potential risks arising from the PRC government
provision of new guidance to and restrictions on China-based
companies raising capital offshore. We determined that the transfer
of our equity interest in ATIF HK and Huaya did not have a major
effect on its operations and financial results as we did not change
our way of running business. We also determined that the transfer
of equity interest does not represent a strategic shift in our
business because there was no change to our operation of our
consulting services. There was no change to the nature of our
business, and did not affect our customers in North America, which
is the major geographic market area of our business.
On October 3, 2022, we established ATIF Southern US, LLC (“ATIF
Southern”), a California LLC, of which we own 60% of its membership
interest, and is engaged in equity investment business in
Texas.
On October 6, 2022, we established ATIF Business Consulting LLC, a
California LLC (“ATIF Consulting”) and our wholly-owned subsidiary,
engaged in IPO consulting services in North America.
On October 7, 2022, we established ATIF Business Management LLC, a
California LLC (“ATIF Management”) and our wholly-owned subsidiary,
engaged in comprehensive services such as IR, legal services and
secretarial services in North America in future.
Competitive Strengths
We believe that the following strengths enable us to capture
opportunities in the financial service industry in China and
differentiate us from our competitors:
Experienced and Highly Qualified Team
We have a highly qualified professional service team with extensive
experience in going public consulting services. Our professional
team members have an average of five years of experience in their
respective fields of international finance and capital market,
cross-border and domestic listing services, and marketing. The
majority of the members of our team previously worked in the
technology or finance industries. We highly value members of our
qualified professional team and are on the constant lookout for new
talents to join our team.
Recognition and Reputation Achieved from Our Previous
Success
Since our inception in 2015, we have successfully helped eight
clients to be quoted on the U.S. OTC markets and one client listed
on the U.S Nasdaq market, respectively. Our proven track records
and professionalism have won us recognition and reputation within
the consulting service industry in China. We believe we are one of
the few going public consulting service providers that possess the
necessary resources and expertise to provide comprehensive
personalized one-stop going public consulting services to
clients.
Long-Term Cooperation Relationship with Third-Party Professional
Providers
We have established long-term professional relationships with a
group of well-known third-party professional providers both
domestically and in the U.S., such as investment banks, certified
public accounting firms, law firms, and investor relations
agencies, whose services and support are necessary for us to
provide high-quality one-stop going public consulting service to
our clients. It took us years of hard work to demonstrate to these
professional organizations that we are a worthy partner capable of
providing high-quality professional services that conforms to their
high standards. As a result, our clients are able to gain direct
access to and obtain high-quality professional services from our
third-party professional providers.
Long-Term Cooperation Relationships with Local Chamber of
Commerce and Associations
We believe our recent success was at least partially attributable
to our long-term cooperation relationships with local chambers of
commerce and associations. There are no contractual relationships
between us and these organizations. We were able to gain access to
many prospective clients through events organized by these
organizations. Our cooperation relationships with these local
organizations help us to: (1) understand the evolving needs of
our potential clients; (2) recognize the trends of the local
business community we strive to serve; and (3) provide timely
feedbacks to our potential clients and maintain open communication
channels with local business communities.
DESCRIPTION OF OUR BUSINESS
Our Business
We are a British Virgin Islands business company. We are a business
consulting company providing financial consulting services to small
and medium-sized enterprises (“SMEs”). Since our inception in 2015,
the focus of our consulting business has been providing
comprehensive going public consulting services designed to help
SMEs become public companies on suitable markets and exchanges. Our
goal is to become an international financial consulting company
with clients and offices throughout Asia and North America. On
January 4, 2021, we established an office in California, USA,
through our wholly owned subsidiary ATIF Inc., a California
corporation, which was incorporated on October 26, 2020, and
launched, in addition to our business consulting services,
additional service models consisting of asset management,
investment holding and media services to expand our business with a
flexible business concept to achieve a goal of high growth revenue
and strong profit growth. Clients located within United States will
be serviced by ATIF Inc., while clients outside United States will
be supported by ATIF Inc.’s business strategic cooperative partner
Huaya.
Since our inception, our revenue has been mainly generated from our
going public consulting services. In April 2020, we acquired a
51.2% equity interest in Leaping Group Co., Ltd. (“LGC”) and our
revenue was mainly comprised of going public consulting services
and event execution and planning services for the year ended July
31, 2020. On January 29, 2021, we completed a disposition of 51.2%
of the equity interest of LGC with three individuals. For the years
ended July 31, 2021 and 2020, we reported net loss of $6.6 million
and $11.0 million from discontinued operations of LGC as a separate
component in the consolidated statements of operations.
Beginning
in August 2018, to complement and facilitate the growth of our
going public consulting service, we launched AT Consulting Center
to offer financial consulting programs in Shenzhen, and in
September 2018, we acquired CNNM, or www.chinacnnm.com, a news and
media website focused on distributing financial news and
information. In July 2019, we launched an investment and financing
analysis reporting business. We have not generated any revenue from
this financial and news platform since its acquisition, and based
on our current financial condition and operating performance, our
management has assessed that the likelihood of future use of the
financial and news platform is remote, and we provided full
impairment on the financial and news platform in the year ended
July 31, 2020.
In China, a fast-growing economy and a positive market environment
have created many entrepreneurial and high-growth enterprises, many
of which need assistance in obtaining development funds through
financing. Due to restrictions imposed by China’s foreign exchange
regulations, it is difficult for foreign capital to enter China’s
capital market. Because of the strict listing policies and a
relatively closed financial environment in mainland China, most
small to medium sized enterprises in the development stage are
unable to list on domestic exchanges in China. Therefore, many
Chinese enterprises strive to enter international capital markets
through overseas listing for equity financing. However, in China,
there is a general lack of understanding of the international
capital markets, as well as a lack of professional institutions
that provide overseas going public consulting services to these
companies, and many of them may not be familiar with overseas
listing requirements.
We launched our consulting services in 2015. Our aim was to assist
these Chinese enterprises by filling the gaps and forming a bridge
between PRC companies and overseas markets and exchanges. We have a
team of qualified and experienced personnel with legal, regulatory,
and language expertise in several overseas jurisdictions. Our
services are designed to help SMEs in China achieve their goal of
becoming public companies. We create a going public strategy for
each client based on many factors, including our assessment of the
client’s financial and operational situations, market conditions,
and the client’s business and financing requirements. Since our
inception and up to July 31, 2022, we have successfully helped
eight Chinese enterprises to be quoted on the U.S. OTC markets and
are currently assisting our other clients in their respective going
public efforts. All of our current and past clients have been
Chinese companies, and we plan to expand our operations to other
Asian countries, such as Malaysia, Vietnam, and Singapore, by as
opportunities arises.
On January 4, 2021, we announced the relocation of our operating
headquarter to California, USA, through our wholly owned subsidiary
ATIF Inc., a California corporation incorporated on October 26,
2020, and launched, in addition to our business consulting
services, additional service models consisting of asset management,
investment holding and media services to expand our business with a
flexible business concept to achieve a goal of high growth revenue
and strong profit growth. As part of this relocation and to
streamline the management chain and to improve management control
with a goal of lower costs, we transition the services from our
variable interest entity (“VIE”), Qianhai Asia Times (Shenzhen)
International Financial Services Co., Ltd. (“Qianhai”), to ATIF
Inc. and Huaya, and terminated the VIE agreements with Qianhai on
January 31, 2021. Before the termination, operating revenue
generated through Qianhai VIE amounted to $645,127, and net income
(loss) amounted to $(1,562,037) for the years ended July 31, 2020.
The termination of the Qianhai VIE agreements did not cause a
material impairment of our long-lived assets (primarily including
fixed assets such as office furniture and equipment and automobile)
because such assets only amounted to $184,740 and $68,375 as of
July 31, 2020 and 2019, respectively. All of the fixed assets were
transferred to Huaya upon termination of the VIE agreement. In
addition, we had discussions with other business organizations to
collaborate with a goal of leveraging their resources to assist us
to grow our business centers in other jurisdictions. We believe
that this streamlined management model and strategic partnership
strategy is in line with the current fast-changing and competitive
business environment and will provide us with strong growth
capability. The termination of the VIE agreement with Qianhai did
not adversely affect Huaya, our business, financial condition, and
results of operations.
On January 14, 2021, the Company entered into the Sale and Purchase
Agreement with the majority shareholders of LGC consisting of Jiang
Bo, Jiang Tao and Wang Di (collectively the “LGC Buyers”) to sell
all interests in LGC. Pursuant to the Sales and Purchase Agreement,
the Company sold 10,217,230 ordinary shares of LGC in exchange for
(i) 5,555,548 ordinary shares of the Company owned by the LGC
Buyers, and (ii) payment by the LGC Buyers in the amount of
US$2,300,000 plus interest at an interest rate of 10% per annum on
the unpaid amount if the principal amount of US$2,300,000 is not
paid by January 14, 2022. All principal and accrued and unpaid
interest shall be due on January 14, 2023. As of the date of this
prospectus, the 5,555,548 shares of ordinary shares owned by the
LGC Buyers have been returned to the Company and the $2.3 million
cash payment has not yet been received from the LGC Buyers. The
Company recognized an estimated loss of approximately $6.1 million
from this transaction, which were reflected in the pro forma
financial information as included in the Company’s form 6-K as
filed with SEC on February 4, 2021. After completion of the
transaction, the Company shall no longer hold any shares of LGC and
LGC shall no longer be subsidiary of ATIF. The Sales and Purchase
Agreement closed on January 29, 2021.
We entered into the Sale Purchase Agreement because we believed
that due to the continued impact of COVID-19 in China, it will take
longer, and additional capital will be required for traditional
entertainment and cinemas businesses like LGC to recover. Further,
in light of the Company moving its headquarter to California and
transitioning to a new business model focusing on business
consulting, asset management, investment holding and media
services, the Company no longer believes that its business has
synergy with LGC’s cinema advertising and cinema operation
business. Our management and LGC’s management also had different
views of LGC’s future business direction.
On February 16, 2021, we established ATIF-1, LP (“ATIF LP”) as a
private equity fund through our indirectly-wholly owned subsidiary,
ATIF-1 GP, LLC (“ATIF GP”), a Delaware limited liability company,
as the general partner. As of July 31, 2022, we own a 76.6% limited
partner interest in ATIF LP. ATIF LP manages, as of July 31, 2022,
approximately $1.3 million assets under management (“AUM”). The
investment strategy of the fund involves directional long and short
investments in equity securities, primarily issued by U.S. large
capitalization companies, and American Depositary Receipts (“ADRs”)
related to Chinese companies of various sizes, including private
companies. The investment manager for the fund is ATIF Inc. Due to
significant volatility in stock market, the private equity fund
lost $1.5 million in fiscal year 2022 as compared to gain $0.2
million in fiscal year 2021. On August 1, 2022, ATIF USA entered
into and closed a Sale and Purchase Agreement with Asia Time (HK)
International Finance Service Limited (the “Buyer”), pursuant to
which ATIF USA sold all of its membership interests in ATIF GP (the
“Agreement”) to the Buyer for cash consideration of US$50,000. Upon
the closing of the Agreement, ATIF GP is no longer our subsidiary
and ATIF USA ceased to be the investment manager of ATIF LP.
On May 31, 2022, we completed the transfer of our equity interest
in ATIF HK and Huaya to Mr. Pishan Chi for $nil consideration. The
transfer of equity interest was to mitigate the potential risks
arising from the PRC government provision of new guidance to and
restrictions on China-based companies raising capital offshore. We
determined that the transfer of our equity interest in ATIF HK and
Huaya did not have a major effect on our operations and financial
results as we did not change our way of running business. We also
determined that the transfer of equity interest does not represent
a strategic shift in our business because there was no change to
our operation of our consulting services. There was no change to
the nature of our business, and did not affect our customers in
North America, which is the major geographic market area of our
business. However, we intend to continue cooperating with Huaya in
connection with the expansion and provision of our business
services in China. Before the disposal of ATIF HK and Huaya,
operating revenue generated through Huaya amounted to $366,508 and
$401,292, and net income (loss) amounted to $(812,434) and $86,758
for the years ended July 31, 2022 and 2021 respectively. The
disposal of Huaya did not cause a material impairment of our
long-lived assets (primarily including fixed assets such as office
furniture and equipment and automobile) because it had no
long-lived assets as of May 31, 2022.
Marketing and Sales
We believe the success of our consulting business requires building
mutually beneficial long-term relationships with relevant and
influential entities, and we have developed our main marketing
channels based on these relationships.
Since our inception, we have cultivated and maintained cooperation
with a number of city and provincial chambers of commerce and
business associations in China, including the Zhejiang Chamber of
Commerce in Shenzhen and Guangdong, Shenzhen Industrial Park
Association, Meixian Chamber of Commerce in Shenzhen, Wenzhou
Chamber of Commerce in Shenyang, Shenzhen Elite Chamber of
Commerce, and the SME Service Platform in Northeast China. There
are no contractual relationships between us and these
organizations. However, these local business organizations have
helped our marketing efforts greatly, due to the fact that:
(1) they have access to the information of local enterprises
and often recommend and connect us with potential clients;
(2) they help us organize going public briefings and
international financial lectures with local enterprises; and
(3) they are able to utilize relationships with local
government to initiate and organize government sponsored financial
forums to promote and introduce our consulting services to the
local enterprises.
We also strive to maintain professional relationships with our
former and prospective clients. Our former clients have benefited
from our services and oftentimes are willing and able to introduce
prospective clients to us. After nearly three years operating as a
consulting service provider specialized in cross-border going
public services, we have developed a database consisting of former
and prospective clients, using each as a resource for business
connections and social relations.
Our employees have been working in various industries for many
years, and accumulated networks of business and social relations
including personal connections, corporate associations, and
governmental affiliations, which are all valuable resources through
which we can potentially obtain new clients.
We are constantly seeking new and effective marketing channels in
order to grow into an international consulting company with clients
and branches throughout Asia. To complement and facilitate our
growth perspectives, in 2018, we launched AT Consulting Center, we
believe, it has the great potential in becoming instrumental in our
marketing efforts for continued growth of our consulting
business.
In addition to our marketing efforts described above, we also
market our consulting services, through:
| |
● |
Social
media, principally WeChat and Weibo; |
| |
● |
Newsletters
to our prospective clients; and |
| |
● |
Business
relationships with well-known corporations and web platforms with
large online traffics that can direct traffic to our website
through links on their websites. |
Competition
We face competition from a number of consulting companies providing
going public consulting services such as Greenpro Capital Corp.,
Forward Capital, and Dragon Victory, who recently entered going
public consulting services in 2018. We believe that our relatively
mature operating history of nearly three years differentiates our
company from other competitors. Our comprehensive one-stop
consulting services, through which we are directly involved in each
of the three pre-defined phases of our clients’ going public
process, are unlike the services provided by many of our
competitors, who often act as mere initial order takers, and then
outsource a majority of services to third-party providers.
Currently, many of the going public consulting providers in China
operate on a relatively small scale, only with a few employees. We
believe that we are currently one of the few consulting companies
capable of providing comprehensive one-stop going public services
to qualified enterprises. However, due to favorable market
conditions, which may have been overheated by various Chinese
government stimulus programs offered recently to encourage and
reward enterprises going public, a number of companies have entered
and are entering the going public consulting business. As such, we
expect competition will become more intense, and it is possible
that we will not be able to maintain the growth rate we have
achieved previously.
Major Customers
The majority of our clients are small to medium-sized enterprises
seeking growth and expansion through going public on recognized
exchanges, and $1.6 million and $0.9 million was generated from our
consulting services for the fiscal years ended July 31, 2022 and
2021, respectively. Since our inception in 2015 through July 31,
2022, most of our former and current clients were based in mainland
China. The number of our new consulting service clients was five
and three for the fiscal years ended July 31, 2022 and 2021,
respectively. Due to the nature of our consulting business, which
requires us to dedicate a large amount of resources to each of our
clients, we were able to generate a relatively large revenue from a
small number of clients. As a result, we had three and three
clients that accounted for more than 10% of our total revenues, for
the fiscal years ended July 31, 2022 and 2021, respectively. As we
continue to expand and grow the number of clients, we expect the
risks arising from customer concentration will be mitigated
accordingly.
Employees
As of July 31, 2022, we had 11 full-time employees, including
1 in China and 10 in America. None of our employees are subject to
collective bargaining agreements governing their employment with
us. We believe our employee relations are good.
Intellectual Property
We have received the approval for the following trademark
registrations:
|
Trademark |
|
Jurisdiction |
|
Category |
|
|
Effective Date |
|
Expiration Date |
|
ATIF |
|
China |
|
|
36 |
|
|
May 7, 2019 |
|
May 6, 2029 |
| ATIF |
|
Hong Kong |
|
|
36 |
|
|
January 31, 2019 |
|
August 28, 2028 |
| 亚洲时代 |
|
China |
|
|
36 |
|
|
May 14, 2017 |
|
May 13, 2027 |
| 亞洲時代 |
|
Hong Kong |
|
|
35;36;41 |
|
|
November 26, 2019 |
|
April 11, 2029 |
| CNNM |
|
Hong Kong |
|
|
35;
38 |
|
|
August 29, 2018 |
|
August 28, 2028 |
|
INTERNATIONAL SCHOOL OF FINANCE |
|
Hong Kong |
|
|
41 |
|
|
August 29, 2018 |
|
August 28, 2028 |
| IPOEX |
|
Hong Kong |
|
|
36 |
|
|
October 27, 2020 |
|
October 26, 2030 |
| IPOEX |
|
European Union |
|
|
36 |
|
|
January 30, 2021 |
|
October 15, 2030 |
| IPOEX |
|
China |
|
|
36 |
|
|
July 28, 2021 |
|
July 27, 2031 |
| IPOEX |
|
Singapore |
|
|
36 |
|
|
October 15, 2020 |
|
October 15, 2030 |
| IPOEX |
|
United Kingdom |
|
|
36 |
|
|
February 19, 2021 |
|
October 19, 2030 |
| IPOEX |
|
Korea |
|
|
36 |
|
|
February 21, 2022 |
|
February 21, 2032 |
We also own five domain names: ipoex.com, atifus.com, atifchina,
chinacnnm.com and dpoex.com.
Below are images of our trademarks:
Government
Regulations
PRC 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 SAIC,
and their respective local offices, and Ministry of
Housing & Urban-Rural Development (the “MHURD”) and their
respective local offices. This section summarizes the principal PRC
regulations applicable to our business.
PRC Laws and Regulations relating to Foreign
Investment
Investment activities in the PRC by foreign investors were
principally governed by the Guidance Catalog of Industries for
Foreign Investment, promulgated and as amended from time to time by
MOFCOM and National Development and Reform Commission (“NDRC”),
which was later divided into two legal documents, including the
Catalog of Industries for Encouraged Foreign Investment, or the
“Encouraged Catalog,” and the Special Administrative Measures for
Access of Foreign Investment (Negative List), or the “Negative
List.” Industries listed in the Negative List are divided into two
categories: restricted and prohibited. Industries not listed in the
Negative List are generally constituted “permitted,” and are open
to foreign investment unless specifically restricted by other PRC
regulations. For restricted industries, some are limited to equity
or contractual joint ventures, while in some cases Chinese partners
are required to hold the majority interests in such joint ventures.
In addition, restricted category projects are subject to
higher-level government approvals. Foreign investors are not
allowed to invest in industries in the prohibited category. The
latest Negative List was released by MOFCOM and NDRC on September
18,2021 and became effective on January 1, 2022. Pursuant to the
current and the updated Negative Lists, management consulting is an
permitted industry for foreign investment access.
PRC Laws and Regulations on Company Establishment
The establishment, operation, and management of companies in the
PRC is governed by the PRC Company Law, or the “Company Law,” as
promulgated by the SCNPC on December 29, 1993, effective on July 1,
1994, and subsequently amended in 1999, 2004, 2005, 2013, and 2018.
According to the Company Law, companies established in the PRC are
either limited liability companies or joint stock limited liability
companies. The Company Law applies to both domestic companies and
foreign-invested companies.
On March 15, 2019, the National People’s Congress approved the
Foreign Investment Law of the PRC, or the “Foreign Investment Law,”
which came into effect on January 1, 2020, repealing simultaneously
the Law of the PRC on Sino-foreign Equity Joint Ventures, the Law
of the PRC on Wholly Foreign-owned Enterprises, and the Law of the
PRC on Sino-foreign Cooperative Joint Ventures. The Foreign
Investment Law adopts the management system of pre-establishment
national treatment and negative list for foreign investment.
Policies in support of enterprises shall apply equally to
foreign-funded enterprises according to laws and regulations.
Foreign investment enterprises shall be guaranteed that they could
equally participate in the setting of standards, and the compulsory
standards formulated by the State shall be equally applied. Fair
competition for foreign investment enterprises to participate in
government procurement activities shall be protected. The Foreign
Investment Law also stipulates the protection on intellectual
property rights and trade secrets. In addition, Regulations for the
Implementation of the Foreign Investment Law of the PRC came into
effect as of January 1, 2020.
Notice on the Implementation of Foreign Investment Law and the
Registration of Foreign-funded Enterprises was issued by the State
Administration for Market Regulation on December 31, 2019.
According to such notice, the State Administration for Market
Regulation conducts business registration, and the applicant shall
apply for the registration of foreign-funded enterprises through
the enterprise registration system. The registration authority
shall conduct formal examination on relevant application materials.
Where a foreign investor or enterprise with foreign investment
invests in a field other than those in the negative list, it shall
register in accordance with the principle of consistency of
domestic and foreign investment.
The Measures for Reporting Foreign Investment Information were
adopted by MOFCOM on December 19, 2019, approved by the State
Administration for Market Regulation, and became effective on
January 1, 2020. According to such measures, when a foreign
investor directly or indirectly conducts investment activities in
China, the foreign investor or foreign-invested enterprise shall
submit investment information to the competent department of
commerce in accordance with the measures.
PRC Laws and Regulations Relating to Management Consulting
Industry
Law of the People’s Republic of China on Promotion of Small and
Medium-sized Enterprises (the “SME Promotion Law”) was promulgated
by the Standing Committee of the National People’s Congress on
June 29, 2002, amended on September 1, 2017, and became
effective on January 1, 2018. According to the SME Promotion
Law, the government encourage all kinds of services organization to
provide services including training and counselling on
entrepreneurship, intellectual property protection, management
consulting, information consulting, credit service, marketing,
development of projects, investment and financing, accounting and
taxation, equity transaction, technology support, talent
introduction, foreign cooperation, exhibition, and legal
consulting.
Pursuant to the Opinions of the State Council on Further Promoting
The Development of Small And Medium-sized Enterprises (the
“Opinions”), which were promulgated by the State Council on
September 19, 2009, the government supports organizations of
management consulting for SMEs and activities of management
consulting to guide SMEs to use external sources to improve their
level on management.
According to the SME Promotion Law and the Opinions, our business
is encouraged by the government and is in compliance with relevant
regulations in PRC. There are no further regulations on management
consulting industry in the PRC presently. However, we cannot assure
that there will not be more regulations on the management
consulting industry to be issued by PRC government in the future
that could affect our business.
Regulation on Intellectual Property Rights
Regulations on trademarks
The Trademark Law of the People’s Republic of China was adopted at
the 24th meeting of the Standing Committee of the Fifth National
People’s Congress on August 23, 1982. Three amendments were
made on February 22, 1993, October 27, 2001, and
August 30, 2013, respectively. The last amendment was
implemented on May 1, 2014. The regulations on the
implementation of the trademark law of the People’s Republic of
China were promulgated by the State Council of the People’s
Republic of China on August 3, 2002, and took effect on
September 15, 2002. It was revised on April 29, 2014 and
April 23, 2019. The PRC Trademark Office under the State
Administration of Market Regulation handles trademark registrations
and grants a term of 10 years to registered trademarks and another
10 years if requested upon expiration of the first or any renewed
10-year term. Trademark license agreements must be filed with the
PRC Trademark Office for record. The PRC Trademark Law has adopted
a “first-to-file” principle with respect to trademark registration.
Where a trademark to be registered is identical or similar to
another trademark which has already been registered or been subject
to a preliminary examination and approval for use on the same kind
of or similar goods or services, the application for registration
of such trademark may be rejected. Any person applying for the
registration of a trademark may not prejudice the existing right
first obtained by others, nor may any person register in advance a
trademark that has already been used by another party and has
already gained a “sufficient degree of reputation” through such
party’s use. After receiving an application, the PRC Trademark
Office will make a public announcement if the relevant trademark
passes the preliminary examination. During the three months after
this public announcement, any person entitled to prior rights and
any interested party may file an objection against the trademark.
The PRC Trademark Office’s decisions on rejection, objection, or
cancellation of an application may be appealed to the PRC Trademark
Review and Adjudication Board, whose decision may be further
appealed through judicial proceedings. If no objection is filed
within three months after the public announcement or if the
objection has been overruled, the PRC Trademark Office will approve
the registration and issue a registration certificate, at which
point the trademark is deemed to be registered and will be
effective for a renewable 10-year period, unless otherwise revoked.
For licensed use of a registered trademark, the licensor shall file
record of the licensing with the PRC Trademark Office, and the
licensing shall be published by the PRC Trademark Office. Failure
of the licensing of a registered trademark shall not be contested
against a good faith third party. For a detailed description of our
trademark registrations, please refer to “—Intellectual
Property.”
Regulations on domain names
In accordance with the Measures for the Administration of Internet
Domain Names, which was promulgated by the Ministry of Industry and
Information Technology (the “MIIT”) on August 24, 2017 and came
into effect on November 1, 2017, the Implementing Rules of China
Internet Network Information Center on Domain Name Registration,
which was promulgated by China Internet Network Information Center
(the “CNNIC”) on May 28, 2012 and came into effect on May 29, 2012,
and the Measures of the China Internet Network Information Center
on Domain Name Dispute Resolution, which was promulgated by CNNIC
on September 1, 2014 and came into effect on the same date, domain
name registrations are handled through domain name service agencies
established under relevant regulations, and an applicant becomes a
domain name holder upon successful registration, and domain name
disputes shall be submitted to an organization authorized by CNNIC
for resolution. Besides, the MIIT is in charge of the
administration of PRC internet domain names. The domain name
registration follows a first-to-file principle. Applicants for
registration of domain names shall provide true, accurate, and
complete information of their identities to domain name
registration service institutions. In accordance with the Notice
from the Ministry of Industry and Information Technology on
Regulating the Use of Domain Names in Internet Information
Services, which was promulgated by the MIIT on November 27, 2017
and came into effect on January 1, 2018, Internet access service
providers shall verify the identity of each Internet information
service provider, and shall not provide services to any Internet
information service provider which fails to provide real identity
information. The applicant will become the holder of such domain
names upon completion of the registration procedure. As of
July 31, 2020, we had completed registration of five domain
names, “ipoex.com,” “chinacnnm.com,” “atifchina.com,” “atifus.com,” and “dpoex.com,” in the PRC and
became the legal holder of such domain names.
Copyrights
In accordance with the Copyright Law of the PRC promulgated by the
SCNPC on September 7, 1990, last amended on Nov 11,2020, and came
into effect on June 1, 2021, Chinese citizens, legal persons, or
other entities own the copyright in their works whether published
or not, including written works, oral works, music, comedy, arts of
talking and singing, dance and acrobatics, work of art and
architecture work, photographic works, cinematographic work and
work created by the method similar to the film production method,
engineering design drawing, product design drawing, map, sketch and
other graphic works and model works, computer software, and other
works specified by laws and administrative regulations. The rights
a copyright owner has include but not limited to the following
rights of the person and property rights: the right of publication,
right of authorship, right of modification, right of integrity,
right of reproduction, distribution right, rental right, right of
network communication, translation right, and right of
compilation.
In accordance with the Regulations on the Protection of Computer
Software promulgated by the State Council on December 20, 2001 and
last amended on January 30, 2013, Chinese citizens, legal persons,
or other entities own the copyright, including the right of
publication, right of authorship, right of modification, right of
reproduction, distribution right, rental right, right of network
communication, translation right, and other rights software
copyright owners shall have in software developed by them,
regardless of whether the software has been published. In
accordance with the Measures for the Registration of Computer
Software Copyright promulgated by the National Copyright
Administration on April 6, 1992 and last amended on February 20,
2002, software copyrights, exclusive licensing contracts for
software copyrights, and software copyright transfer contracts
shall be registered, and the National Copyright Administration
shall be the competent authority for the administration of software
copyright registration and the Copyright Protection Center of China
is designated as a software registration authority. The Copyright
Protection Center of China shall grant a registration certification
to a computer software copyright applicant who complies with
relevant regulations.
Regulations on Patents
Pursuant to the Patent Law of the PRC, or the “Patent Law,”
promulgated by the SCNPC on March 12, 1984, most recently amended
on October 17, 2020, and effective from June 1, 2021, and the
Implementation Rules of the Patent Law of the PRC, promulgated by
the State Council on June 15, 2001 and most recently amended on
January 9, 2010, there are three types of patents in the PRC:
invention patent, utility model patent, and design patent. The
protection period is 20 years for invention patent and 10 years for
utility model patent and 15 years for design patent, commencing
from their respective application dates. Any individual or entity
that utilizes a patent or conducts any other activity in
infringement of a patent without prior authorization of the
patentee shall pay compensation to the patentee and is subject to a
fine imposed by relevant administrative authorities and, if the
infringement constitutes a crime, shall be held criminally liable.
In the event that a patent is owned by two or more co-owners
without an agreement regarding the distribution of revenue
generated from the exploitation of any co-owner of the patent, such
revenue shall be distributed among all the co-owners.
Existing patents can become narrowed, invalid, or unenforceable due
to a variety of grounds, including lack of novelty, creativity, and
deficiencies in patent application. In China, a patent must have
novelty, creativity, and practical applicability. Under the Patent
Law, novelty means that before a patent application is filed, no
identical invention or utility model has been publicly disclosed in
any publication in China or overseas or has been publicly used or
made known to the public by any other means, whether in or outside
of China, nor has any other person filed with the patent authority
an application that describes an identical invention or utility
model and is recorded in patent application documents or patent
documents published after the filing date. Creativity means that,
compared with existing technology, an invention has prominent
substantial features and represents notable progress, and a utility
model has substantial features and represents any progress.
Practical applicability means an invention or utility model can be
manufactured or used and may produce positive results. Patents in
China are filed with the State Intellectual Property Office, or the
“SIPO.” Normally, the SIPO publishes an application for an
invention patent within 18 months after the filing date, which may
be shortened at the request of applicant. The applicant must apply
to the SIPO for a substantive examination within three years from
the date of application.
PRC Laws and Regulations Relating to Merger and
Acquisition
The Regulations on Mergers and Acquisitions of Domestic Companies
by Foreign Investors, or the M&A Rules, adopted by six PRC
regulatory agencies in August 2006 and amended in 2009,
requires a foreign investor to obtain necessary approvals when
engaged in certain forms of acquisition of a domestic enterprise
and further requires an overseas special purpose vehicle formed for
listing purposes through acquisitions of PRC domestic companies and
controlled by PRC companies or individuals to obtain the approval
of the CSRC, prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange. In
September 2006, the CSRC published a notice on its official
website specifying documents and materials required to be submitted
to it by a special purpose vehicle seeking CSRC approval of its
overseas listings. Pursuant to the Manual of Guidance on
Administration for Foreign Investment Access, which was issued and
became effective on December 18, 2008 by MOFCOM, notwithstanding
the fact that (i) the domestic shareholder is connected with the
foreign investor or not, or (ii) the foreign investor is the
existing shareholder or the new investor, the M&A Rules shall
not apply to the transfer of an equity interest in an incorporated
foreign-invested enterprise from the domestic shareholder to the
foreign investor. However, the application of the M&A
Rules remains unclear.
Our PRC counsel, Dentons Law Firm, has advised us based on their
understanding of the current PRC laws, rules, and regulations that
the CSRC’s approval should not be required for the listing and
trading of our ordinary shares on the NASDAQ in the context of our
IPO, given that: (i) we established our PRC subsidiary, Huaya,
by means of direct investment rather than by merger with or
acquisition of PRC domestic companies; and (ii) no explicit
provision in the M&A Rules classifies the respective
contractual arrangements between Huaya, Qianhai, and its
shareholders as a type of acquisition transaction falling under the
M&A Rules.
However, there remains some uncertainty as to how the M&A
Rules will be interpreted or implemented in the context of an
overseas offering and the CSRC’s opinions summarized above are
subject to any new laws, rules, and regulations or detailed
implementations and interpretations in any form relating to the
M&A Rules. We cannot assure you that relevant PRC government
agencies, including the CSRC, would reach the same conclusion as we
do. If the CSRC or any other PRC regulatory agencies subsequently
determines that we need to obtain the CSRC’s approval for our IPO
or if the CSRC or any other PRC government agencies promulgates any
interpretation or implements rules that would require us to
obtain CSRC or other governmental approvals for our IPO, we may
face adverse actions or sanctions by the CSRC or other PRC
regulatory agencies. Sanctions may include fines and penalties on
our operations in the PRC, limitations on our operating privileges
in the PRC, delays in or restrictions on the repatriation of the
proceeds from our IPO into the PRC, restrictions on or prohibition
of the payments or remittance of dividends by our PRC subsidiary,
or other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation,
and prospects, as well as the trading price of our ordinary shares.
In addition, if the CSRC or other PRC regulatory agencies later
promulgate new rules or explanations requiring that we obtain
their approvals for our IPO, we may be unable to obtain a waiver of
such approval requirements, if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative
publicity regarding such approval requirement could have a material
adverse effect on the trading price of ordinary shares.
PRC Laws and Regulations Relating to Foreign
Exchange
General administration of foreign exchange
The principal regulation governing foreign currency exchange in the
PRC is the Administrative Regulations of the PRC on Foreign
Exchange (the “Foreign Exchange Regulations”), which were
promulgated on January 29, 1996, became effective on
April 1, 1996, and were amended on January 14, 1997, and
August 1, 2008. Under these rules, RMB is generally freely
convertible for payments of current account items, such as trade-
and service-related foreign exchange transactions and dividend
payments, but not freely convertible for capital account items,
such as capital transfer, direct investment, investment in
securities, derivative products, or loans unless prior approval and
prior registration by competent authorities for the administration
of foreign exchange is obtained and made. Under the Foreign
Exchange Regulations, foreign-invested enterprises in the PRC may
purchase foreign exchange under the current accounts without the
approval of SAFE to pay dividends by providing certain evidentiary
documents, including board resolutions, tax certificates, or for
trade- and services-related foreign exchange transactions, by
providing commercial documents evidencing such transactions.
Circular No. 75, Circular No. 37, and Circular
No. 13
Circular 37 was released by SAFE on July 4, 2014, and
abolished Circular 75 which had been in effect since
November 1, 2005. Pursuant to Circular 37, a PRC resident
should apply to SAFE for foreign exchange registration of overseas
investments prior to the establishment or control of an offshore
special purpose vehicle, or SPV, using his or her legitimate
domestic or offshore assets or interests. SPVs are offshore
enterprises directly established or indirectly controlled by
domestic residents for the purpose of investment and financing by
utilizing domestic or offshore assets or interests they legally
hold. Following any significant change in a registered offshore
SPV, such as capital increase, reduction, equity transfer or swap,
consolidation or division involving domestic resident individuals,
the domestic individuals shall amend the registration with SAFE.
Where an SPV intends to repatriate funds raised after completion of
offshore financing to the PRC, it shall comply with relevant PRC
regulations on foreign investment and foreign debt management. A
foreign-invested enterprise established through return investment
shall complete relevant foreign exchange registration formalities
in accordance with the prevailing foreign exchange administration
regulations on foreign direct investment and truthfully disclose
information on the actual controller of its shareholders.
If any shareholder who is a PRC resident (as determined by Circular
37) holds any interest in an offshore SPV and fails to fulfil the
required foreign exchange registration with the local SAFE
branches, the PRC subsidiaries of that offshore SPV may be
prohibited from distributing their profits and dividends to their
offshore parent company or from carrying out other subsequent
cross-border foreign exchange activities. The offshore SPV may also
be restricted in its ability to contribute additional capital to
its PRC subsidiaries. Where a domestic resident fails to complete
relevant foreign exchange registration as required, fails to
truthfully disclose information on the actual controller of the
enterprise involved in the return investment or otherwise makes
false statements, the foreign exchange control authority may order
them to take remedial actions, issue a warning, and impose a fine
of less than RMB300,000 (approximately $43,000) on an institution
or less than RMB50,000 (approximately $7,300) on an individual.
Circular 13 was issued by SAFE on February 13, 2015, and
became effective on June 1, 2015. Pursuant to Circular 13, a
domestic resident who makes a capital contribution to an SPV using
his or her legitimate domestic or offshore assets or interests is
no longer required to apply to SAFE for foreign exchange
registration of his or her overseas investments. Instead, he or she
shall register with a bank in the place where the assets or
interests of the domestic enterprise in which he or she has
interests are located if the domestic resident individually seeks
to make a capital contribution to the SPV using his or her
legitimate domestic assets or interests; or he or she shall
register with a local bank at his or her permanent residence if the
domestic resident individually seeks to make a capital contribution
to the SPV using his or her legitimate offshore assets or
interests. The qualified bank will directly examine the
applications and accept registrations under the supervision of
SAFE.
As of the date of this annual report, our shareholders have not
completed registrations in accordance with Circular 37, they are
currently working on their registrations in the local
Administration of Exchange Control. The failure of our shareholders
to comply with the registration procedures may subject each of our
shareholders to warnings and fines. If the registration formalities
cannot be processed retrospectively, then the repatriation of the
financing funds, profits, or any other interests of our
shareholders obtained through special purpose vehicles, for use in
China, would be prohibited. As a result, any cross-border capital
flows between our PRC subsidiary and its offshore parent company,
including dividend distributions and capital contributions, would
be illegal
Circular 19 and Circular 16
Circular 19 was promulgated by SAFE on March 30, 2015, and
became effective on June 1, 2015. According to Circular 19,
foreign exchange capital of foreign-invested enterprises shall be
granted the benefits of Discretional Foreign Exchange Settlement
(“Discretional Foreign Exchange Settlement”). With Discretional
Foreign Exchange Settlement, foreign exchange capital in the
capital account of a foreign-invested enterprise for which the
rights and interests of monetary contribution has been confirmed by
the local foreign exchange bureau, or for which book-entry
registration of monetary contribution has been completed by the
bank, can be settled at the bank based on the actual operational
needs of the foreign-invested enterprise. The allowed Discretional
Foreign Exchange Settlement percentage of the foreign exchange
capital of a foreign-invested enterprise has been temporarily set
to be 100%. The RMB converted from the foreign exchange capital
will be kept in a designated account and if a foreign-invested
enterprise needs to make any further payment from such account, it
will still need to provide supporting documents and to complete the
review process with its bank.
Furthermore, Circular 19 stipulates that foreign-invested
enterprises shall make bona fide use of their capital for their own
needs within their business scopes. The capital of a
foreign-invested enterprise and the RMB if obtained from foreign
exchange settlement shall not be used for the following
purposes
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directly
or indirectly used for expenses beyond its business scope or
prohibited by relevant laws or regulations; |
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● |
directly
or indirectly used for investment in securities unless otherwise
provided by relevant laws or regulations; |
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● |
directly
or indirectly used for entrusted loan in RMB (unless within its
permitted scope of business), repayment of inter-company loans
(including advances by a third party) or repayment of bank loans in
RMB that have been sub-lent to a third party; and |
| |
● |
directly
or indirectly used for expenses related to the purchase of real
estate that is not for self-use (except for foreign-invested real
estate enterprises). |
Circular 16 was issued by SAFE on June 9, 2016. Pursuant to
Circular 16, enterprises registered in the PRC may also convert
their foreign debts from foreign currency to RMB on a
self-discretionary basis. Circular 16 provides an integrated
standard for conversion of foreign exchange capital items
(including but not limited to foreign currency capital and foreign
debts) on a self-discretionary basis applicable to all enterprises
registered in the PRC. Circular 16 reiterates the principle that an
enterprise’s RMB converted from foreign currency-denominated
capital may not be directly or indirectly used for purposes beyond
its business scope or purposes prohibited by PRC laws or
regulations, and such converted RMB shall not be provided as loans
to non-affiliated entities.
Circulars 16 and 19 address foreign direct investments into the
PRC, and stipulate the procedures applicable to foreign exchange
settlement. As we do not plan to transfer any proceeds raised to
our subsidiaries in the PRC, such proceeds would not be subject to
Circular 19 or Circular 16. However, if and when circumstances
require funds to be transferred to our subsidiaries in the PRC from
our offshore entities, then any such transfer would be subject to
Circulars 16 and 19.
PRC Laws and Regulations Relating to Taxation
Enterprise Income Tax
The EIT Law was promulgated by the Standing Committee of the
National People’s Congress on March 16, 2007, and became
effective on January 1, 2008, and then amended on February 24,
2017 as well as December 29, 2018. The Implementation Rules of
the EIT Law (the “Implementation Rules”) were promulgated by the
State Council on December 6, 2007, and became effective on
January 1, 2008, and was amended on April 23, 2019. According
to the EIT Law and the Implementation Rules, enterprises are
divided into resident enterprises and non-resident enterprises.
Resident enterprises shall pay enterprise income tax on their
incomes obtained in and outside the PRC at the rate of 25%.
Non-resident enterprises setting up institutions in the PRC shall
pay enterprise income tax on the incomes obtained by such
institutions in and outside the PRC at the rate of 25%.
Non-resident enterprises with no institutions in the PRC, and
non-resident enterprises whose incomes having no substantial
connection with their institutions in the PRC, shall pay enterprise
income tax on their incomes obtained in the PRC at a reduced rate
of 10%. An enterprise established outside of the PRC with its “de
facto management bodies” located within the PRC is considered a
“resident enterprise,” meaning that it can be treated in a manner
similar to a PRC domestic enterprise for enterprise income tax
purposes. The Implementing Rules of the EIT Law define a “de facto
management body” as a managing body that in practice exercises
“substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of the
enterprise. It is more likely than not that the Company and its
offshore subsidiary would be treated as a non-resident enterprise
for PRC tax purposes.
The Arrangement between the Mainland China and Hong Kong Special
Administrative Region for the Avoidance of Double Taxation and Tax
Evasion on Income (the “Arrangement”) was promulgated by the State
Administration of Taxation (“SAT”) on August 21, 2006, and
came into effect on December 8, 2006. According to the
Arrangement, a company incorporated in Hong Kong will be subject to
withholding tax at the lower rate of 5% on dividends it receives
from a company incorporated in the PRC if it holds a 25% interest
or more in the PRC company. Pursuant to the Announcement of the
State Administration of Taxation on Issues Relating to “Beneficial
Owner” in Tax Treaties promulgated by SAT on February 3, 2018 and
became effective on April 1, 2018, a beneficial ownership analysis
will be applied in light of the actual circumstances of the
specific cases to determine the status of a beneficial owner under
the relevant tax treaty and whether or not to grant tax treaty
benefits.
Before May 31,2022, Huaya is a resident enterprise and
qualifies as a Small and Low Profit Enterprise and pays EIT tax at
the rate of 10% in PRC. It is more likely than not that we and our
offshore subsidiary would be treated as a non-resident enterprise
for PRC tax purposes.
Value-added Tax
The Provisional Regulations on Value-Added Tax of the PRC (the “VAT
Regulations”) were promulgated by the State Council on
December 13, 1993, and took effect on January 1, 1994,
which were last amended on November 19, 2017. The
Rules for the Implementation of the Provisional Regulations on
Value Added Tax of the PRC (the “Rules”) were promulgated by the
Ministry of Finance (“MOF”) on December 25, 1993, and were
last amended on October 28, 2011. Pursuant to the VAT
Regulations and the Rules, entities or individuals in the PRC
engaged in the sale of goods, the provision of processing, repairs,
and replacement services and the importation of goods are required
to pay VAT, on the value added during the course of the sale of
goods or provision of services. Unless otherwise specified, the
applicable VAT rate is 17% for taxpayers selling goods, labor
services, or tangible movable property leasing services or
importing goods, except otherwise specified; 11% for taxpayers
selling transport services, postal services, basic
telecommunications services, construction services, or real
property leasing services, selling real property, transferring the
land use right, or selling or importing the goods within specified
scope listed, except otherwise specified; 6% for taxpayers selling
services or intangible assets and not falling within the scope as
specified in other items; and 3% for small-scale taxpayers.
The SAT and the MOF jointly promulgated Notice on Implementing the
Pilot Program of Replacing Business Tax with Value-Added Tax in an
All-round Manner (the “Notice”) on March 20, 2019, which
became effective on April 1, 2019. Pursuant to this new circular,
entities and individuals shall pay VAT at a rate of 9 % for
providing transportation, postal services, basic
telecommunications, construction or immovable property leasing
services, selling any immovable property, or transferring the right
to use land; rate of 13% for providing tangible movable property
leasing services; rate of 0% for a cross-border taxable
act within the territory of China and rate of 6% for
conducting any taxable act other than the above-mentioned taxable
acts.
According to the above-regulations, our PRC subsidiary is generally
subject to a 3% VAT rate.
Additional Taxes
Before September 1, 2021, the Provisional Regulations of the
People’s Republic of China on Urban Maintenance and Construction
Tax, or the “Provisional Regulations,” promulgated by the State
Council on February 8, 1985 and revised on January 8, 2011 governs
the payment of urban maintenance and construction tax. According to
the Provisional Regulations, all units and individuals paying
consumption tax, VAT, and business tax are taxpayers of urban
maintenance and construction tax, and shall pay urban maintenance
and construction tax in accordance with the provisions of these
regulations. The Standing Committee of the National People’s
Congress passed the Tax Law of the People’s Republic of China on
Urban Maintenance and Construction on August 11, 2020, which became
effective after September 1, 2021. According to this law, the urban
maintenance and construction tax is based on VAT and consumption
tax actually paid by taxpayers. Therefore, if VAT is exempted,
urban construction tax will also be exempted.
The Interim Provisions on Levying Educational Surcharges, or the
“Interim Provisions,” was issued by the State Council on April 28,
1986 and revised on June 7, 1990, August 20, 2005, and January 8,
2011. According to the Interim Provisions, the educational
surcharges shall be calculated and levied on the basis of the
actual VAT, business tax, and consumption tax paid by various units
and individuals. The education surcharges rate is 3%, which shall
be paid at the same time as the VAT, business tax, and consumption
tax.
The Notice on Expanding the Exemption Scope of Relevant Government
Funds, or “The Notice,” was issued by the MOF and the SAT on
January 29, 2016 and implemented from February 1, 2016. According
to The Notice, with the approval of the State Council, the scope of
exemption from education surcharges, local education surcharges,
and water conservancy construction funds shall be expanded from the
payers whose monthly sales volume or turnover does not exceed
RMB30,000 (quarterly sales or turnover paid on a quarterly basis
shall not exceed RMB90,000) to RMB100,000 (quarterly sales or
turnover paid on a quarterly basis shall not exceed
RMB300,000).
Dividend Withholding Tax
The Enterprise Income Tax Law and the Implementation Rules provides
that since January 1, 2008, an income tax rate of 10% will
normally be applicable to dividends declared to non-PRC resident
investors which do not have an establishment or place of business
in the PRC, or which have such establishment or place of business
but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends
are derived from sources within the PRC.
Pursuant to an Arrangement Between the Mainland of China and the
Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Incomes (“Double Tax Avoidance Arrangement”) and other
applicable PRC laws, if a Hong Kong resident enterprise is
determined by the competent PRC tax authority to have satisfied the
relevant conditions and requirements under such Double Tax
Avoidance Arrangement and other applicable laws, the 10%
withholding tax on the dividends the Hong Kong resident enterprise
receives from a PRC resident enterprise may be reduced to 5%.
However, based on the Circular on Certain Issues with Respect to
the Enforcement of Dividend Provisions in Tax Treaties (the “SAT
Circular 81”) issued on February 20, 2009, by SAT, if the
relevant PRC tax authorities determine, in their discretion, that a
company benefits from such reduced income tax rate due to a
structure or arrangement that is primarily tax-driven, such PRC tax
authorities may adjust the preferential tax treatment. According to
the Circular on Several Questions regarding the “Beneficial Owner”
in Tax Treaties, which was issued on February 3, 2018, by the
SAT and took effect on April 1, 2018, when determining the
applicant’s status of the “beneficial owner” regarding tax
treatments in connection with dividends, interests or royalties in
the tax treaties, several factors, including without limitation,
whether the applicant is obligated to pay more than 50% of his or
her income in 12 months to residents in a third country or region,
whether the business operated by the applicant constitutes the
actual business activities, and whether the counterparty country or
region to the tax treaties does not levy any tax or grant tax
exemption on relevant incomes or levy tax at an extremely low rate,
will be taken into account, and it will be analyzed according to
the actual circumstances of the specific cases. This circular
further provides that applicants who intend to prove his or her
status of the “beneficial owner” shall submit the relevant
documents to the relevant tax bureau according to the Announcement
on Issuing the Measures for the Administration of Non-Resident
Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
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. We also have not filed required forms or
materials with the relevant PRC tax authorities to prove that we
should enjoy the 5% PRC withholding tax rate.
PRC Laws and Regulations Relating to Employment and Social
Welfare
Labor Law of the PRC
Pursuant to the Labor Law of the PRC, which was promulgated by the
Standing Committee of the NPC on July 5, 1994, with an
effective date of January 1, 1995, and was last amended on
December 29, 2018, and the Labor Contract Law of the PRC, which was
promulgated on June 29, 2007, became effective on
January 1, 2008, and was last amended on December 28,
2012, with the amendments coming into effect on July 1, 2013,
enterprises and institutions shall ensure the safety and hygiene of
a workplace, strictly comply with applicable rules and
standards on workplace safety and hygiene in China, and educate
employees on such rules and standards. Furthermore, employers
and employees shall enter into written employment contracts to
establish their employment relationships. Employers are required to
inform their employees about their job responsibilities, working
conditions, occupational hazards, remuneration, and other matters
with which the employees may be concerned. Employers shall pay
remuneration to employees on time and in full accordance with the
commitments set forth in their employment contracts and with the
relevant PRC laws and regulations. Until May 31,2022, before we
transfer all our equity interest in Huaya, Huaya has entered into
written employment contracts with all its employees and performed
its obligations required under the relevant PRC laws and
regulations.
Social Insurance and Housing Fund
As required under the Regulation of Insurance for Labor Injury
implemented on January 1, 2004, and amended in 2010, the
Provisional Measures for Maternity Insurance of Employees of
Corporations implemented on January 1, 1995, the Decisions on the
Establishment of a Unified Program for Pension Insurance of the
State Council issued on July 16, 1997, the Decisions on the
Establishment of the Medical Insurance Program for Urban Workers of
the State Council promulgated on December 14, 1998, the
Unemployment Insurance Measures promulgated on January 22, 1999,
the Interim Regulations Concerning the Collection and Payment of
Social Insurance Premiums implemented on January 22, 1999, and the
Social Insurance Law of the PRC, which was promulgated by the
Standing Committee of the NPC on October 28, 2010, became
effective on July 1, 2011, and last amended on December 29,
2018, employers in the PRC shall provide their employees with
welfare schemes covering basic pension insurance, basic medical
insurance, unemployment insurance, maternity insurance, and
occupational injury insurance. Huaya has deposited the social
insurance fees in full for all the employees in compliance with the
relevant regulations since June 2019 to May 31,2022.
In accordance with the Regulations on Management of Housing
Provident Fund, which were promulgated by the State Council on
April 3, 1999, and last amended on March 24, 2019,
employers must register at the designated administrative centers
and open bank accounts for depositing employees’ housing funds.
Employer and employee are also required to pay and deposit housing
funds, with an amount no less than 5% of the monthly average salary
of the employee in the preceding year in full and on time.
Hong Kong Regulations
We own and operate CNNM, www.chinacnnm.com, a news and
media platform, in Hong Kong. The following is a summary of certain
aspects of major Hong Kong laws and regulations that are or may be
applicable to us.
Regulations on Digital Media Publication, Domain Name
Registration, and Advertising Services
There are no specific legislations governing domain name
registration or digital media publication in Hong Kong. There are
certain ordinances which contain provisions that may be applicable
to digital media publication business and advertising services in
Hong Kong: the Control of Obscene and Indecent Articles Ordinance
(Chapter 390 of the Laws of Hong Kong), the Personal Data (Privacy)
Ordinance (Chapter 486 of the Laws of Hong Kong), the Copyright
Ordinance (Chapter 528 of the Laws of Hong Kong), the Defamation
Ordinance (Chapter 21 of the Laws of Hong Kong), the Undesirable
Medical Advertisements Ordinance (Chapter 231 of the Laws of Hong
Kong), and the Business Registration Ordinance (Chapter 310 of the
Laws of Hong Kong). Contravention of the relevant laws and
regulations may expose us to criminal and civil liabilities
including penalties, fines, damages, and other sanctions. These
ordinances are discussed in further details below.
Control of Obscene and Indecent Articles Ordinance (Chapter
390 of the Laws of Hong Kong) (the “COIAO”)
There are no specific regulations targeting advertising practice or
digital media publication in Hong Kong. However, COIAO is
applicable to digital materials and contents posted on our website,
www.chinacnnm.com.
Section 21 of the COIAO stipulates that any person who
publishes, or possesses for the purpose of publication, any obscene
article commits an offence and is liable to a fine of HK$1,000,000
(approximately US$128,000) and may be subject imprisonment for up
to three years.
Section 22 of the COIAO stipulates that any person who
publishes any indecent material accessible to a juvenile commits an
offence, whether intentionally or unintentionally. Such offences
impose a fine of HK$400,000 (approximately US$51,000) and
imprisonment of 12 months on first conviction. A second or
subsequent conviction will give rise to a fine of HK$800,000
(approximately US$102,000) and imprisonment of up to 12 months.
Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of
Hong Kong) (the “PDPO”)
We, as a data user, need to comply with the PDPO to ensure that
personal data it collects are accurate, securely kept, and used
only for the purpose for which they are collected. For the
avoidance of doubt, ATIF Holdings does not process any personal
data and all processing of data protection is undertaken by ATIF
HK.
The PDPO protects the privacy interests of living individuals in
relation to personal data and regulates the conducts of a data
user, i.e., any person who, either alone or jointly or in common
with other persons, controls the collection, holding, processing,
or use of personal data. Pursuant to section 2 of the PDPO,
personal data means any data (i) relating directly or
indirectly to a living individual; (ii) from which it is
practicable for the identity of the individual to be directly or
indirectly ascertained; and (iii) in a form in which access to
or processing of the data is practicable. In general, the personal
data shall be lawfully and fairly collected and steps should be
taken to ensure that the data collection subject is explicitly and
implicitly informed on or before the data collection.
There are six principles under the PDPO which regulate the purpose
and manner of collection of data, the accuracy and duration of
retention of collected data, the use of personal data, the security
of personal data, and the access to personal data. As we may
collect personal data of users of its website, www.chinacnnm.com, it is subject
to the following principles, which are:
Principle 1 - Data Collection Principle
Personal data must be collected in a lawful and fair way, for the
purpose directly related to a function/activity of the data user.
Data collection subjects must be notified of the purpose of the
collection and the classes of persons to whom the data may be
transferred. Data collection should be necessary, and not excessive
for the purpose of collection.
Principle 2 - Accuracy & Retention Principle
Personal data must be accurate and should not be kept for a period
longer than is necessary to fulfil the purpose for which it is
used.
Principle 3 - Data Use Principle
Personal data must be used for the purpose for which the data is
collected or for a directly related purpose, unless voluntary and
explicit consent of a new purpose is obtained from the data
collection subject.
Principle 4 - Data Security Principle
A data user needs to take practical steps to safeguard personal
data from unauthorized or accidental access, processing, erasure,
loss, or use.
Principle 5 - Openness Principle
A data user must make personal data policies and practices known to
the public regarding the types of personal data it holds and how
the data is used.
Principle 6 - Data Access & Correction
Principle
A data collection subject must be given access to his/her personal
data and allowed to make corrections if it is inaccurate.
Pursuant to the PDPO, if any of the above principles are not
complied with, the Privacy Commissioner for Personal Data (the
“PDPD”) may serve an enforcement notice to direct the data user to
remedy the contravention and/or instigate prosecution actions.
Further, section 50A of the PDPO provides that contravention of an
enforcement notice is an offence which could result in a maximum
fine of HK$50,000 (approximately US$6,400) and imprisonment for two
years. The PDPO also criminalizes misuse or inappropriate use of
personal data in direct marketing activities under Part VI of
the PDPO.
As we may collect and possess private and confidential data of the
users of www.chinacnnm.com, we are
subject to the principles set out in the PDPO regarding the
collection, use, retention, accuracy, and security of and access to
personal data.
Copyright Ordinance (Chapter 528 of the Laws of Hong Kong)
(the “Copyright Ordinance”)
The Copyright Ordinance provides comprehensive protection for
recognized categories of work such as literary, dramatic, musical,
and artistic works, as well as for films, television broadcasts,
and cable diffusion, and works made available to the public on the
internet.
In the course of providing advertising services and digital media
publication, certain copyrights may subsist in the works we create
in relation to its publications, digital media content, and
advertising materials, including artistic works (such as artworks
and photos), films (such as videos), or literary works (such as
text) that qualify for copyright protection without registration.
It is not necessary to register a copyright nor are there other
formalities required to obtain copyright protection for a work in
Hong Kong. There is no official registry in Hong Kong for
registration of copyright works.
The Copyright Ordinance restricts certain acts such as copying
and/or issuing or making available copies to the public of a
copyright work without the authorization from the copyright owner
which, if done, constitutes “primary infringement” of copyright
which does not require knowledge of infringement.
The Copyright Ordinance permits certain acts that can be done in
relation to copyright works without authorization from the
copyright owner, one of which being fair dealing with a copyright
work for the purpose of criticism, review, or reporting current
events if accompanied by a sufficient acknowledgement of such
copyright work and its author.
Under the Copyright Ordinance, a person may incur civil liability
for “secondary infringement” if that person, amongst others,
possesses, sells, distributes, or deals with a copy of a work which
is, and which he knows or has reason to believe to be, an
infringing copy of the work for the purposes of or in the course of
any trade or business without the consent of the copyright owner.
However, the person will only be liable if, at the time he
committed the act, he knew or had reason to believe that he was
dealing with infringing copies of the work.
Defamation Ordinance (Chapter 21 of the Laws of Hong Kong)
(the “DO”)
As our website, www.chinacnnm.com, may contain
information and or/news from other sources and such information
and/or news may not be independently verified by us, such
information may lead to defamatory matters.
Under the DO, any person who maliciously publishes defamatory
matter regarding another person or an organization in writing or by
word of mouth or by conduct may be liable for defamation. In
general, there are two main kinds of defamation, libel and slander.
Libel is the malicious publication of defamatory matter in writing
or in some other permanent form. Slander is the publication of
defamatory matter by word of mouth or in some other transient
(temporary) form.
Section 5 of the DO provides that any person who maliciously
publishes any defamatory libel, knowing the same to be false, shall
be liable to imprisonment for two years, and, in addition, to pay
such fine as the court may award.
There are several defenses available, including but not limited to
(a) unintentional defamation; (b) an offer of amends;
(c) defense of justification, which means the words were true
in substance and in fact; (d) fair comment; and
(e) publication which was privileged as prescribed in the
schedule of the DO.
Undesirable Medical Advertisements Ordinance (Chapter 231 of
the Laws of Hong Kong) (the “UMAO”)
As our website, www.chinacnnm.com, may contain
information and/or advertisements relating to medical aspects, we
may be subject to the provisions under the UMAO. The UMAO aims to
protect public health through prohibiting or restricting
advertisements which may induce the seeking of improper management
of certain health conditions.
As defined in the UMAO, “advertisement” includes any notice,
poster, circular, label, wrapper, or document, and any announcement
made orally or by means of producing or transmitting light or
sound. These include advertisements published in newspapers and
magazines, leaflets, on radio, television, and internet, as well as
on the label of a container or package containing any medicine,
surgical appliance, treatment, or orally consumed product.
Pursuant to the UMAO, no person shall publish, or cause to be
published any advertisements likely to lead to the use of any
medicine, surgical appliance, or treatment for: (a) the
purpose of treating human beings for, or preventing them from
contracting any of the diseases or conditions specified in the UMAO
which include, among others, any disease of the skin, hair, or
scalp except for a purpose specified in the UMAO which, among
others, include prevention of pimples and relief or prevention of
minor skin conditions including dry and chapped skin; or
(b) treating human beings for any purpose specified in the
UMAO which include, among others, the restoration of lost youth and
the correction of deformity or the surgical alteration of a
person’s appearance.
Business Registration Ordinance (Chapter 310 of the Laws of
Hong Kong) (the “BRO”)
The BRO requires every person, whether a company or an individual,
who carries on a business in Hong Kong to apply for business
registration certificate from the Inland Revenue Department within
one month from the date of commencement of the business, and to
display the valid business registration certificate at the place of
business. Any person who fails to apply for business registration
or display a valid business registration certificate at the place
of business shall be guilty of an offence, and shall be liable to a
fine of HK$5,000 (approximately US$640) and to imprisonment for one
year.
Corporate Office
Our
principal executive office and production facility is located in
Lake Forest, California, USA, where we lease approximately 7237
square feet of office space and is located in 25391 Commercentre
Dr. Ste 200, Lake Forest, CA 92630. The telephone number at our
principal executive office is 308-888-8888. We believe
that these existing facilities will be adequate for our current
needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms, if
required.
Other Information
Our Internet address is www.ipoex.com. We make available on our
website our reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (“SEC”). Other than the
information expressly set forth in this annual report, the
information contained, or referred to, on our website is not part
of this annual report. The SEC also maintains a website at
www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers, such as us,
that file electronically with the SEC.
ITEM
1A. RISK FACTORS
An investment in our common stock involves a high degree of risk.
You should carefully consider the summary of risk factors described
below, together with all of the other information included in this
report, before making an investment decision. If any of the
following risks actually occur, our business, financial condition
or results of operations could suffer. In that case, the trading
price of our common stock could decline, and you may lose all or
part of your investment. You also should read the section entitled
“Special Note Regarding Forward Looking Statements” above for a
discussion of what types of statements are forward-looking
statements, as well as the significance of such statements in the
context of this report. The risk factors below do not address all
the risks relating to securities, business and operations, and
financial condition.
Risks Relating to our Business
We have a limited operating history and are subject to the
risks encountered by early-stage companies.
We have only been in business since November 2015. We did not
generate any revenue until the fiscal year ended July 31,
2016. We launched AT Consulting Center, which offers financial and
advisory services to our clients in August 2018 and acquired
CNNM, a media and news platform, in September 2018. As a
start-up company, our business strategies and model are constantly
being tested by the market and operating results, and we pursue to
adjust our allocation of resources 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, 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. These risks and challenges are, among other things:
| |
● |
we
operate in an industry that is or may in the future be subject to
increasing regulation by various governmental agencies in
China; |
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we
may require additional capital to develop and expand our operations
which may not be available to us when we require it; |
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our
marketing and growth strategy may not be successful; |
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● |
our
business may be subject to significant fluctuations in operating
results; and |
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● |
we
may not be able to attract, retain and motivate qualified
professionals. |
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.
We have incurred net losses for the year ended July 31, 2022
and expect losses to continue in the near future.
For the fiscal year ended July 31, 2022, we incurred a loss of
$2,909,584. Our operations have been adversely affected by the
effect of Covid 19. In addition, the PRC has recently issued
statements that may have the effect of slowing down our business
consulting services of assisting PRC companies to go public in the
United States. As a result, until the PRC further clarifies its
views and regulations regarding PRC companies seeking to go public
in the United States, and PRC companies are comfortable with the
business climate and seeking our services, we anticipate that we
continue to experience losses in the future.
We need additional capital.
As at July 31, 2022, we had cash of $1,750,137. We will continue to
incur costs to fund our operations and will need to raise capital
for working capital until our revenues increase. As a result, we
will be required to raise capital for our operations primarily
through equity offerings which may dilute existing shareholders. No
assurance can be given that we will be able to raise capital
through equity offerings which could have a substantial dilutive
effect to existing shareholders.
If we do not continue to satisfy the Nasdaq Capital Market
continued listing requirements, our Ordinary Shares could be
delisted.
The listing of our Ordinary Shares on the Nasdaq Capital Market is
contingent on our compliance with the Nasdaq Capital Market’s
conditions for continued listing. On December 16, 2020, we received
notice from The Nasdaq Stock Market (“Nasdaq”) indicating we were
not in compliance with the minimum bid price requirement of $1.00
per share under the Nasdaq Listing Rules. In addition, on December
17, 2020, we received notice from Nasdaq stating that because we
had not yet filed our Annual Report on Form 20-F for the year ended
July 31, 2020 (the “Form 20-F”) by its due date, we were no longer
in compliance with Listing Rule which requires listed companies to
timely file all required periodic financial reports with the
Securities and Exchange Commission. On December 31, 2020, we filed
our Form 20-F with the SEC and on January 28,2021 Nasdaq provide us
confirmation that our closing bid price traded over $1.00 for ten
consecutive business days. Accordingly, we are now in compliance
with the Nasdaq Listing Rules.
On July 26, 2021, we received another notice from Nasdaq indicating
we that were not in compliance with the minimum bid price
requirement of $1.00 per share under the Nasdaq Listing Rules. The
July 26, 2021 notice indicated that it had 180 calendar days, or
until January 24, 2022, to regain compliance with the Listing
Rules. On August 23, 2021, we effected the Reverse Split in order
to the meet the minimum bid price of $1.00, and on September 14,
2021, we received notice from Nasdaq that we were back in
compliance.
In the future, should we fail to meet the Nasdaq Listing Rules, we
may be subject to delisting by Nasdaq. In the event our Ordinary
Shares are no longer listed for trading on the Nasdaq Capital
Markets, our trading volume and share price may decrease and we may
experience difficulties in raising capital which could materially
affect our operations and financial results. Further, delisting
from the Nasdaq Capital Market could also have other negative
effects, including potential loss of confidence by partners,
lenders, suppliers and employees. Finally, delisting could make it
harder for us to raise capital and sell securities.
We lost our foreign private issuer status, which could result
in significant additional costs and expenses.
The regulatory and compliance costs under U.S. federal securities
laws as a U.S. domestic issuer may be significantly more than the
costs incurred as a foreign private issuer. Because we are no
longer deemed to be a foreign private issuer, we are required to
file periodic and current reports and registration statements on
U.S. domestic issuer forms with the SEC, which are more detailed
and extensive than the forms available to a foreign private issuer.
In addition, we lost the ability to rely upon certain exemptions
from the Nasdaq Capital Market’s corporate governance requirements
that are available to foreign private issuers.
Our historical financial results may not be indicative of our
future performance.
We may not be able to sustain our historical rapid growth and/or
may not be able to grow our business at all. Our net revenue
increased from $3.6 million for the fiscal year ended July 31,
2017 and $5.3 million for the fiscal year ended July 31, 2018.
However, our net revenue decreased to $1.7 million, $0.9 million
and $0.6 million for the fiscal year ended July 31, 2022, 2021
and 2020, respectively. Our net income was $0.6 million for the
fiscal year ended July 31, 2017, $1.9 million for the fiscal
year ended July 31, 2018, and $0.4 million for the fiscal year
ended July 31, 2019, and decreased to a net loss of $17.3
million for the fiscal year ended July 31, 2020, and our net
losses were $3.4 million and $9.0 million for the years ended July
31, 2021 and 2022 respectively. However, our historical growth
rate, limited history of operation, changes to business operations,
among other factors, make it difficult to evaluate our
prospects.
Substantial doubt about our ability to continue as a going
concern.
Because of our losses from operations, working capital deficit, and
our requirement of additional capital to fund our current operating
plan, at July 31, 2022, these factors indicate the existence of an
uncertainty that raises substantial doubt about our ability to
continue as a going concern and is dependent on our ability to
raise addition working capital through debt or equity
financings.
We may incur liability for unpaid taxes, including interest
and penalties.
In the normal course of business, we may be subject to challenges
from various PRC taxing authorities regarding the amounts of taxes
due. The PRC taxing authorities may take the position that we owe
more taxes than we have paid. We recorded tax liabilities of
$Niland $0.1 million as of July 31, 2022 and 2021, respectively,
for the possible underpayment of income and business taxes. It is
possible that our tax for past taxes may be higher than those
amounts if the PRC authorities determine that we are subject to
penalties or that we have not paid the correct amount. Although our
management believes it may be able to negotiate with local PRC
taxing authorities a reduction to any amounts that such authorities
may believe are due and a reduction to any interest or penalties
thereon, we have no guarantee that we will be able to negotiate
such a reduction. To the extent we are able to negotiate such
amounts, national-level taxing authorities may take the position
that localities are without power to reduce such liabilities, and
such PRC taxing authorities may attempt to collect unpaid taxes,
interest and penalties in amounts greatly exceeding management’s
estimates.
We face business disruption and related risks resulting from
the recent outbreak of the novel coronavirus 2019 (COVID-19), which
could have a material adverse effect on our business
plan.
Our financial consulting services to small and mid-size enterprises
(“SMEs”) and the businesses of the SMEs could be disrupted and
materially adversely affected by the recent outbreak of COVID-19.
As a result of measures imposed by the China governments in
affected regions, businesses and schools have been suspended due to
quarantines intended to contain this outbreak. The spread of
COVID-19 from China to other countries has resulted in the Director
General of the World Health Organization declaring the outbreak of
COVID-19 as a Public Health Emergency of International Concern
(PHEIC), based on the advice of the Emergency Committee under the
International Health Regulations (2005), and the Centers for
Disease Control and Prevention in the U.S. issued a warning on
February 25, 2020 regarding the likely spread of COVID-19 to
the U.S. Even though the COVID-19 situation is now normalizing
internationally, however, the Chinese government is continuing to
impose strict measures which could negatively affect the Chinese
economy, and has continued to contribute to the on-going slow-down
of the Chinese economy. We are continuing to assess our business
plans and the impact COVID-19 may have on our ability to provide
financial consulting services to SMEs and to the SMEs’ businesses,
but there can be no assurance that this analysis will enable us to
avoid part or all of any impact from the spread of COVID-19 or its
consequences, including downturns in business sentiment generally
or in our sector in particular. In addition, no assurance can be
given that there would not be a future outbreak of COVID-19 which
may result in additional quarantine and other measures taken to try
to prevent the spread of COVID-19, which may materially and
adversely affect our financial condition and results of
operations.
Changes in the U.S. capital markets could make our services
less attractive to our clients and adversely affect our business
and financial condition.
Our consulting services help our clients based in mainland China
become public companies. We are expanding our consulting services
to include Chinese domestic exchanges and the Hong Kong Stock
Exchange, but currently, all of our former and current clients have
chosen to go public in the U.S. We believe this is due to the more
flexible rules provided by the U.S. OTC markets and exchanges
than the Chinese domestic exchanges, as well as the attractive
financing and growth opportunities the U.S. capital market, which
has remained relatively stable comparing to the Chinese capital
market, are perceived to be able to provide to the Chinese
enterprises. As a result, our going public consulting business has
flourished since its inception in 2015. However, changes in the
U.S. capital markets could make our service less desirable to
Chinese enterprises. For example, if the U.S. OTC markets and
exchanges make their rules more stringent to Chinese
enterprises, then fewer Chinese enterprises will be able to use our
consulting services to go public in the U.S., and our business and
financial condition will be adversely affected as a result.
Because we lack a diversified client base, a severe or
prolonged downturn in Chinese economy could materially and
adversely affect our business and our financial
condition.
Our goal is to become an international business serving clients
throughout Asia, but as of the date of this annual report all our
former and current clients are based in mainland China.
Accordingly, we do not have a geographically diversified client
base, and there will be a potentially devastating effect on our
business if the Chinese economy experiences a severe or prolonged
downturn.
Failure to maintain or enhance our brand or image could have
a material and adverse effect on our business and results of
operations.
We believe our “ATIF” brand is associated with a well-recognized,
integrated consulting services company in the market that it
operates, with comprehensive personalized one-stop consulting
services to suit our clients’ needs. Our brand is integral to our
sales and marketing efforts. Our continued success in maintaining
and enhancing our brand and image depends to a large extent on our
ability to satisfy customers’ needs by further developing and
maintaining quality of services across our operations, as well as
our ability to respond to competitive pressures. If we are unable
to satisfy customers’ needs or if our public image or reputation
were otherwise diminished, our business transactions with our
clients may decline, which could in turn adversely affect our
results of operations.
We may not be successful in implementing important new
strategic initiatives, which may have an adverse impact on our
business and financial results.
There is no assurance that we will be able to implement important
strategic initiatives in accordance with our expectations, which
may result in an adverse impact on our business and financial
results. Our new strategic initiatives, AT Consulting Center and
CNNM, which were launched in 2018, and the investment and financing
analysis reporting business, which was launched in July 2019,
are designed to create growth, improve our results of operations
and drive long-term shareholder value. However, our management may
lack required experience, knowledge, insight, or human and capital
resources to carry out the effective implementation to expand into
new spaces outside the financial consulting industry. As such, we
may not be able to realize our expected growth, and our business
and financial results will be adversely impacted.
Increasing competition within our industry could have an
impact on our business prospects.
The financial consulting market is an industry where new
competitors can easily enter into since there are no significant
barriers to entry. Competing companies may have significantly
greater financial and other resources than we do and may offer
services that are more attractive to companies seeking funds;
increased competition would have a negative impact on both our
revenues and our profit margins.
Our results of operations and cash flows may fluctuate due to
the non-recurring nature of our going public consulting services
provided to our clients.
We generated the bulk of our total revenues from going public
consulting services provided to small and medium-sized enterprises
in China. Unlike other service businesses that have the potential
of retaining their clients for long-term and recurring services,
our consulting contractual relationships with our clients usually
last for 12 months; there is no recurring business from our clients
once they become public companies. Therefore, we face the constant
challenge of identifying and recruiting new clients in order to
maintain our operations and cash flows, which are difficult for us
to predict from year to year.
In addition, even though we screen our prospective clients
carefully before entering into service agreements, occasionally we
have to discontinue our consulting services due to a variety of
unforeseeable reasons such as the client’s shortage in funds,
disagreements regarding the going public process, and changes in
the client’s business and expectations, among others. Due to the
fact that our consulting fee is paid on installments, we will not
be able to realize the complete contracted amounts under these
circumstances, without getting into potentially costly
litigations.
Arbitration proceedings, legal proceedings, investigations,
and other claims or disputes are costly to defend and, if
determined adversely to us, could require us to pay fines or
damages, undertake remedial measures, or prevent us from taking
certain actions, any of which could adversely affect our
business.
In the course of our business, we are, and in the future may be, a
party to arbitration proceedings, legal proceedings,
investigations, and other claims or disputes, which have related
and may relate to subjects including commercial transactions,
intellectual property, securities, employee relations, or
compliance with applicable laws and regulations. As discussed
below, we are engaged in a lawsuit relating to certain engagement
agreements we had in connection with our and Leaping Group Co.’s
initial public offering.
On May 14, 2020, Boustead Securities, LLC (“Boustead”) filed its
original complaint in the United States District Court for the
Southern District of New York (CV-03749) against LGC and us. The
case arises from a consulting agreement between us and Boustead,
wherein Boustead claims that it is entitled to fees in connection
with our cancellation of an $1,851,000 outstanding debt owed by LGC
and issuance of 9,940,002 ordinary shares (1,988,000 ordinary
shares retrospectively restated for effect of reverse stock split
on August 30, 2021) to LGC in exchange for a 51.2% interest in LGC.
Boustead claims that we breached that consulting agreement and is
entitled to fees in connection with our acquiring control of LGC.
Boustead’s complaint alleges four causes of action against us
including breach of contract; breach of the implied covenant of
good faith and fair dealing; tortious interference with business
relationships and quantum meruit.
On October 6, 2020, we filed a motion to dismiss Boustead’s
Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and
12(b)(5). On October 9, 2020, the United States District Court for
the Southern District of New York directed Boustead to respond to
the motion or amend its Complaint by November 10, 2020. Boustead
opted to amend its complaint and filed the amended complaint on
November 10, 2020. Boustead’s first amended complaint asserted the
same four causes of action against LGC and us as its original
complaint. We filed another motion to dismiss Boustead’s amended
complaint on December 8, 2020.
On August 25, 2021, the United States District Court for the
Southern District of New York granted ATIF’s motion to dismiss
Boustead’s first amended complaint. In its order and opinion, the
United States District Court for the Southern District of New York
allowed Boustead to move for leave to amend its causes of action
against us as to breach of contract and tortious interference with
business relationships, but not breach of the implied covenant of
good faith and fair dealing and quantum meruit. On November 4,
2021, Boustead filed a motion seeking leave to file a second
amended complaint to amend its cause of action for Breach of
Contract. The Court granted Boustead’s motion for leave and
Boustead filed the second amended complaint on December 28, 2021
alleging only breach of contract and dropping all other causes of
action alleged in the original complaint. On January 18, 2022, the
Company filed a motion to dismiss Boustead’s second amended
complaint. Boustead filed its opposition on February 1, 2022 and
the Company replied on February 8, 2022.
On July 6, 2022, the Court denied our motion to dismiss the second
amended complaint. Thereafter, on August 3, 2022, the Company filed
a motion to compel arbitration of Boustead’s claims in California.
Briefing on the Company’s motion to compel concluded on August 23,
2022. The Court has yet to rule on that motion. Boustead is also
seeking a default judgment against LGC and recently filed an order
to show cause for default judgment against LGC. The Court has not
ruled on Boustead’s request for entry of default judgment against
LGC.
In sum, the Boustead litigation is currently in the pleadings
stage. Our management believes it is premature to assess and
predict the outcome of this pending litigation.
As the operator of a website ipoex.com, 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 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. Despite our disclaimers, 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.
If we fail to hire, train, and retain qualified managerial
and other employees, our business and results of operations could
be materially and adversely affected.
We place substantial reliance on the consulting and financial
service industry experience and knowledge of our senior management
team as well as their relationships with other industry
participants. The loss of the services of one or more members of
our senior management could hinder our ability to effectively
manage our business and implement our growth strategies. Finding
suitable replacements for our current senior management could be
difficult, and competition for such personnel of similar experience
is intense. If we fail to retain our senior management, our
business and results of operations could be materially and
adversely affected.
Our consulting service personnel are critical to maintaining the
quality and consistency of our services, brand, and reputation. It
is important for us to attract qualified managerial and other
employees who have experience in consulting services and are
committed to our service approach. There may be a limited supply of
such qualified individuals. We must hire and train qualified
managerial and other employees on a timely basis to keep pace with
our rapid growth while maintaining consistent quality of services
across our operations. We must also provide continuous training to
our managerial and other employees so that they are equipped with
up-to-date knowledge of various aspects of our operations and can
meet our demand for high-quality services. If we fail to do so, the
quality of our services may decrease, which in turn, may cause a
negative perception of our brand and adversely affect our
business.
Any failure to protect our trademarks and other intellectual
property rights could have a negative impact on our
business.
We believe our trademarks, “亞洲時代” in Hong Kong, “ATIF” in Hong Kong
and China, “亚洲时代” in China, “CNNM” in Hong Kong “INTERNATIONAL
SCHOOL OF FINANCE” in Hong Kong, “IPOEX” in China, the United
Kingdom, the European Union, and Singapore, and is also in the
process of registration with the trademark office of Korea, and
other intellectual property rights are critical to our success. Any
unauthorized use of our trademarks and other intellectual property
rights could harm our competitive advantages and business.
Historically, China has not protected intellectual property rights
to the same extent as the United States, and infringement of
intellectual property rights continues to pose a serious risk of
doing business in China. Monitoring and preventing unauthorized use
are difficult. The measures we take to protect our intellectual
property rights may not be adequate. Furthermore, the application
of laws governing intellectual property rights in China and abroad
is uncertain and evolving, and could involve substantial risks to
us. If we are unable to adequately protect our brand, trademarks
and other intellectual property rights, we may lose these rights
and our business may suffer materially.
As internet domain name rights are not rigorously regulated or
enforced in China, other companies may incorporate in their domain
names elements similar in writing or pronunciation to the “ATIF”,
“CNNM,” and “INTERNATIONAL SCHOOL OF FINANCE,” and “IPOEX”
trademarks or their Chinese equivalents. This may result in
confusion between those companies and our company and may lead to
the dilution of our brand value, which could adversely affect our
business.
Poor performance of our private equity fund would cause a
decline in our revenues, net income and cash flow and could
adversely affect our ability to raise capital for future
funds.
When our private equity fund performs poorly, either by incurring
losses or underperforming benchmarks or our competitors, our
investment record suffers. Poor investment performance by our
private equity fund also adversely affects our incentive income
and, all else being equal, may lead to a decline in our AUM,
resulting in a reduction of our management fees. Moreover, in such
circumstances, we may experience losses on our investments of our
own capital. If a fund performs poorly, we will receive little or
no incentive income with regard to the fund and little income or
possibly losses from our own principal investment in the fund. Poor
performance of our private equity fund could also make it more
difficult for us to raise new capital. Investors in our private
equity fund may decline to invest in future funds we raise, and
investors in our private equity fund may withdraw their investments
in the fund as a result of poor performance. Our investors and
potential investors continually assess our fund’s performance, both
on a standalone basis and relative to market benchmarks, our
competitors, and other investment products, and our ability to
raise capital for existing and future funds and avoid excessive
redemption levels depends on our fund’s performance.
Risks
Relating to Doing Business in China
If we are unable to substantially comply with any PRC rules
and regulations, our financial condition and results of operations
may be materially adversely affected.
Our ability to operate in China may be harmed by changes in its
laws and regulations, including those relating to taxation,
environmental regulations, land use rights, property and other
matters. The central or local governments of these jurisdictions
may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts
on our part to ensure our compliance with such regulations or
interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic
reforms or regional or local variations in the implementation of
economic policies, could have a significant effect on economic
conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in
Chinese properties.
As such, our business operations of and the industries we operate
in may be subject to various government and regulatory interference
in the provinces in which they operate. We could be subject to
regulation by various political and regulatory entities, including
various local and municipal agencies and government sub-divisions.
We may incur increased costs necessary to comply with existing and
newly adopted laws and regulations or penalties for any failure to
comply. In the event that we are not able to substantially comply
with any existing or newly adopted laws and regulations, our
business operations may be materially adversely affected and the
value of our ordinary shares may significantly decrease.
Furthermore, the PRC government authorities may strengthen
oversight and control over offerings that are conducted overseas
and/or foreign investment in China-based issuers like us. Such
actions taken by the PRC government authorities may intervene or
influence our operations at any time, which are beyond our control.
Therefore, any such action may adversely affect our operations and
significantly limit or hinder our ability to offer or continue to
offer securities to you and reduce the value of such
securities.
The PRC’s stock regulators statements regarding PRC companies
seeking listing abroad, such as the United States, may adversely
affect our business.
Recently, the PRC has stated that it plans to propose new rules
that would ban companies with large amounts of sensitive consumer
data from going public in the U.S. which could deter PRC company
tech firms to list abroad. The PRC has primarily focused on firms
in the internet, telecommunications and education industry from
listing abroad due to political or national-security concerns. As a
result of these statements, this position by the PRC could
adversely affect our business consulting services which assist PRC
companies to go public in the United States.
A severe or prolonged downturn in the global or Chinese
economy could materially and adversely affect our business and our
financial condition.
Although the Chinese economy has grown steadily in the past decade,
there is considerable uncertainty over the long-term effects of the
expansionary monetary and fiscal policies adopted by the People’s
Bank of China and financial authorities of some of the world’s
leading economies, including the United States and China. There
have been concerns over unrest and terrorist threats in the Middle
East, Europe, and Africa, which have resulted in volatility in oil
and other markets. There have also been concerns on the
relationship among China and other Asian countries, which may
result in or intensify potential conflicts in relation to
territorial disputes. 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.
The recent state government interference into business
activities on U.S. listed Chinese companies may negatively impact
our existing and future operations in China.
Recently, the Chinese government announced that it would step up
supervision of Chinese companies listed offshore. Under the new
measures, China will improve regulation of cross-border data flows
and security, crack down on illegal activity in the securities
market and punish fraudulent securities issuance, market
manipulation and insider trading, China will also check sources of
funding for securities investment and control leverage ratios. The
Cyberspace Administration of China (“CAC”) has also opened a
cybersecurity probe into several U.S.-listed tech giants focusing
on anti-monopoly, financial technology regulation and more
recently, with the passage of the Data Security Law, how companies
collect, store, process and transfer data.
We are headquartered and have operations in China. We currently do
not, and we do not plan to use variable interest entities to
execute our business plan or to conduct our China-based operations.
However, because we have operations in China, there is always a
risk that the Chinese government may in the future seek to
intervene or influence operations of any company with any level of
operations in China, including its ability to offer securities to
investors, list its securities on a U.S. or other foreign exchange,
conduct its business or accept foreign investment. In light of
China’s recent announcements, there are risks and uncertainties
which we cannot foresee for the time being, and rules and
regulations in China can change quickly with little or no advance
notice. The Chinese government may intervene or influence the
Company’s current and future operations in China at any time, or
may exert more control over offerings conducted overseas and/or
foreign investment in issuers likes ourselves.
If any or all of the foregoing were to occur, this could lead to a
material change in our operations and/or the value of its common
stock and/or significantly limit or completely hinder its ability
to offer or continue to offer securities to investors and cause the
value of such securities to significantly decline or be
worthless.
Increases in labor costs in the PRC may adversely affect our
business and our profitability.
China’s economy has experienced increases in labor costs in recent
years. China’s overall economy and the average wages in China are
expected to continue to grow. The average wage level for our
employees has also increased in recent years. We expect that our
labor costs, including wages and employee benefits, will continue
to increase. Our consulting service is heavy on labor costs, as the
main cost of our business is compensation and benefits for our
professionals. Unless we are able to pass on these increased labor
costs to our customers by increasing prices for our services, our
profitability and results of operations may be materially and
adversely affected.
In addition, we have been subject to stricter regulatory
requirements in terms of entering into labor contracts with our
employees and paying various statutory employee benefits, including
pensions, housing fund, medical insurance, work-related injury
insurance, unemployment insurance and maternity insurance to
designated government agencies for the benefit of our employees.
Pursuant to the PRC Labor Contract Law, or the Labor Contract Law,
that became effective in January 2008, its implementing
rules that became effective in September 2008 and its
amendments that became effective in July 2013, employers are
subject to stricter requirements in terms of signing labor
contracts, minimum wages, paying remuneration, determining the term
of employees’ probation and unilaterally terminating labor
contracts. In the event that we decide to terminate some of our
employees or otherwise change our employment or labor practices,
the Labor Contract Law and its implementing rules may limit
our ability to effect those changes in a desirable or
cost-effective manner, which could adversely affect our business
and results of operations.
As the interpretation and implementation of labor-related laws and
regulations are still evolving, we cannot assure you that our
employment practice does not and will not violate labor-related
laws and regulations in China, which may subject us to labor
disputes or government investigations. If we are deemed to have
violated relevant labor laws and regulations, we could be required
to provide additional compensation to our employees and our
business, financial condition and results of operations could be
materially and adversely affected.
Substantial uncertainties exist with respect to the
interpretation and implementation of any new PRC laws, rules and
regulations relating to foreign investment and how it may impact
the viability of our current corporate structure, corporate
governance and our business operations.
On March 15, 2019, the Standing Committee of National People’s
Congress promulgated the Foreign Investment Law, which came into
effect on January 1, 2020 and replaced the three 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 existing foreign-invested enterprises,
or FIEs, established prior to the effectiveness of the Foreign
Investment Law may keep their corporate forms within five years.
The Foreign Investment Law stipulates that China implements the
management system of pre-establishment national treatment plus a
negative list to foreign investment, and the government generally
will not expropriate foreign investment, except under certain
special circumstances, in which case it will provide fair and
reasonable compensation to foreign investors. Foreign investors are
barred from investing in prohibited industries on the negative list
and must comply with the specified requirements when investing in
restricted industries on such list. On December 26, 2019, the State
Council promulgated the Implementing Regulations of the Foreign
Investment Law, which came into effect on January 1, 2020 and
further requires that FIEs and domestic enterprises be treated
equally with respect to policy making and implementation.
Pursuant to the Foreign Investment Law, “foreign investment” means
any foreign investor’s direct or indirect investment in the PRC,
including: (i) establishing FIEs in the PRC either individually or
jointly with other investors; (ii) obtaining stock shares, stock
equity, property shares, other similar interests in Chinese
domestic enterprises; (iii) investing in new project in the PRC
either individually or jointly with other investors; and (iv)
making investment through other means provided by laws,
administrative regulations or State Council provisions. Although
the Foreign Investment Law does not explicitly classify the
contractual arrangements, as a form of foreign investment, it
contains a catch-all provision under the definition of “foreign
investment,” which includes investments made by foreign investors
in China through other means stipulated by laws or administrative
regulations or other methods prescribed by the State Council
without elaboration on the meaning of “other means.” However, the
Implementing Regulations of the Foreign Investment Law still does
not specify whether foreign investment includes contractual
arrangements.
Changes in China’s economic, political or social conditions
or government policies could have a material adverse effect on our
business and results of operations.
All of our manufacturing operations are located in China.
Accordingly, our business, prospects, financial condition and
results of operations may be influenced to a significant degree by
political, economic and social conditions in China generally and by
continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed
countries in many respects, including the amount of government
involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. Although the Chinese
government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of
productive assets in China is still owned by the government. In
addition, the Chinese government continues to play a significant
role in regulating industry development by imposing industrial
policies and change of enforcement practice of such rules and
policies can change quickly with little advance notice.
While the Chinese economy has experienced significant growth over
the past decades, growth has been uneven, both geographically and
among various sectors of the economy. The Chinese government has
implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the
overall Chinese economy but may have a negative effect on us. For
example, our financial condition and results of operations may be
adversely affected by government control over capital investments
or changes in tax regulations. Since 2012, China’s economic growth
has slowed down. Any prolonged slowdown in the Chinese economy may
reduce the demand for our products and materially and adversely
affect our business and results of operations.
Uncertainties and quick change in the interpretation and
enforcement of Chinese laws and regulations with little advance
notice could result in a material and negative impact our business
operation, decrease the value of our ordinary shares and limit the
legal protections available to us.
The PRC legal system is based on written statutes, and prior court
decisions have limited value as precedents. Since these laws and
regulations are relatively new and the PRC legal system continues
to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties. The enforcement of
laws and that rules and regulations in China can change quickly
with little advance notice and the risk that the Chinese government
may intervene or influence our operations at any time, or may exert
more control over offerings conducted overseas and/or foreign
investment in China- based issuers, could result in a material
change in our operations and/or the value of our ordinary
shares.
We cannot rule out the possibility that the PRC government will
institute a licensing regime or pre-approval requirement covering
our industry at some point in the future. If such a licensing
regime or approval requirement were introduced, we cannot assure
you that we would be able to obtain any newly required license in a
timely manner, or at all, which could materially and adversely
affect our business and impede our ability to continue our
operations.
From time to time, we may have to resort to administrative and
court proceedings to enforce our legal rights. However, since PRC
administrative and court authorities have some discretion in
interpreting and implementing statutory and contractual terms, it
may be difficult to evaluate the outcome of administrative and
court proceedings. Furthermore, the PRC legal system is based in
part on government policies and internal rules (some of which are
not published in a timely manner or at all) that may have
retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until sometime after the
violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual
property) and procedural rights, could materially and adversely
affect our business and impede our ability to continue our
operations.
We are not in compliance with the PRC’s regulations relating
to offshore investment activities by PRC residents, and as a
result, we and our shareholders may be subject to severe penalties
if we are not able to remediate the non-compliance.
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.
We have requested our shareholders who are Chinese residents to
make the necessary applications, filings, and amendments as
required under Circular 37 and other related rules. However, we
cannot provide any assurances that all of our shareholders who are
Chinese residents will comply with our request to make or obtain
any applicable registration. 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 Huaya’s ability to pay dividends or make
distributions to us and on our ability to increase our investment
in Huaya. However, we have transferred all our equity interest in
Huaya on May 31,2022 and since then, we shall not be affected by
the above restrictions.
We are not in compliance with the PRC’s regulations relating
to employees’ housing funds, and as a result, we and our
shareholders may be subject to penalties if we are not able to
remediate the non-compliance.
In accordance with the Regulations on Management of Housing
Provident Fund (the “Regulations of HPF”), which were promulgated
by the PRC State Council on April 3, 1999, and last amended on
March 24, 2002, employers must register at the designated
administrative centers and open bank accounts for employees’
housing funds deposits. Employers and employees are also required
to pay and deposit housing funds, in an amount no less than 5% of
the monthly average salary of each of the employees in the
preceding year in full and on time. Huaya has registered at the
designated administrative centers and opened bank accounts for its
employees’ housing funds deposits. However, Huaya has not deposited
the housing funds for all the employees with an amount no less than
5% of the monthly average salary of the employee in compliance with
the relevant regulations since June 2019 to May 31,2022, which
might subject us to pay and deposit housing funds in full and on
time within the prescribed time limit by relevant authorities. If
we fail to do so, relevant authorities could file applications to
competent courts for compulsory enforcement of payment and deposit.
Since May 31,2022, all our equity interest in Huaya has been
transferred, and we will not be liable to pay and deposit housing
funds for its employees.
Because our business is conducted in RMB and the price of our
Ordinary Shares is quoted in U.S. dollars, changes in currency
conversion rates may affect the value of your
investments.
We
currently cooperate with Huaya to expand our business in the PRC,
our books and records are maintained in RMB, which is the currency
of the PRC, and the financial statements that we file with the SEC
and provide to our shareholders are presented in U.S. dollars.
Changes in the exchange rate between the RMB and U.S. dollar affect
the value of our assets and the results of our operations in U.S.
dollars. The value of the RMB against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things,
changes in the PRC’s political and economic conditions and
perceived changes in the economy of the PRC and the United States.
Any significant revaluation of the RMB may materially and adversely
affect our cash flows, revenue, and financial condition.
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 notice, known as SAT Notice 82, which provides certain
specific criteria for determining whether a PRC-controlled offshore
incorporated enterprise will be regarded as a PRC tax resident by
virtue of having a “de facto management body” 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 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 beneficial owners of the relevant dividends and 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.
Pursuant to the Announcement of the State Administration of
Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties
promulgated by SAT on February 3, 2018 and became effective on
April 1, 2018, certain detailed factors are set forth and a
beneficial ownership analysis will be applied in light of the
actual circumstances of the specific cases in determining the
“beneficial owner” status under the relevant tax treaty and whether
or not to grant tax treaty benefits. 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 annual 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. ATIF 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 ATIF HK.
PRC regulation of loans to and direct investment in PRC
entities by offshore holding companies and governmental control of
currency conversion may delay or prevent us from making loans or
additional capital contributions to our PRC subsidiary, which could
materially and adversely affect our liquidity and our ability to
fund and expand our business.
Any funds we transfer to our PRC subsidiary, either as a
shareholder loan or as an increase in registered capital, are
subject to approval by or registration with relevant governmental
authorities in China. According to the relevant PRC regulations on
foreign-invested enterprises, or FIEs, the combined amount of
offshore capital contributions and loans cannot exceed the FIE’s
approved total investment amount. Any capital contributions to our
PRC subsidiary must be filed with MOFCOM or its local counterparts,
and registered with a local bank authorized by the State
Administration of Foreign Exchange, or SAFE. In addition,
(a) any loan provided by us to WFOE, which is a FIE, cannot
exceed the difference between its total investment amount and
registered capital, and must be registered with SAFE or its local
counterparts, and (b) any loan provided by us to our VIE which
is a domestic PRC entity, over a certain threshold, must be
approved by the relevant government authorities and must be
registered with SAFE or its local counterparts. Given that the
registered capital and total investment amount of WFOE are
currently the same, if we seek to make a capital contribution to
WFOE we must first apply to increase both its registered capital
and total investment amount, while if we seek to provide a loan to
WFOE, we must first increase its total investment amount. Although
we currently do not have any immediate plans to utilize the
proceeds from our initial public offering (“IPO”) to make capital
contribution into WFOE or provide any loan to WFOE or to our VIE,
if we seek to do so in the future, we may not be able to obtain the
required government approvals or complete the required
registrations on a timely basis, if at all. If we fail to receive
such approvals or complete such registrations, our ability to use
the proceeds of our IPO and to capitalize our PRC operations may be
negatively affected, which could adversely affect our liquidity and
our ability to fund and expand our business.
On March 30, 2015, SAFE promulgated the Circular on Reforming
the Management Approach Regarding the Foreign Exchange Capital
Settlement of Foreign-Invested Enterprises, or SAFE Circular 19.
SAFE Circular 19 launched a nationwide reform of the administration
of the settlement of the foreign exchange capitals of FIEs and
allows FIEs to settle their foreign exchange capital at their
discretion, but continues to prohibit FIEs from using the RMB fund
converted from their foreign exchange capitals for expenditure
beyond their business scopes, providing entrusted loans or repaying
loans between non-financial enterprises. Violations of these
Circulars could result in severe monetary or other penalties. SAFE
Circular 19 and relevant foreign exchange regulatory rules may
significantly limit our ability to use RMB converted from the net
proceeds of our IPO to fund the establishment of new entities in
China by our consolidated affiliates, to invest in or acquire any
other PRC companies through our PRC subsidiary or consolidated
affiliates or to establish new consolidated affiliates in the PRC,
which may adversely affect our business, financial condition, and
results of operations.
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 growing our business. If such
allegations are not proven to be groundless, we and our business
operations will be severely affected and you could sustain a
significant decline in the value of our stock.
If the Chinese government were to impose new requirements for
permission or approval from the PRC Authorities including China
Securities Regulatory Commission (“CSRC”) or CAC, or any other
entity that is required to approve this offering, to issue our
ordinary shares to foreign investors or list on a foreign exchange,
such action could significantly limit or completely hinder our
ability to offer or continue to offer securities to investors and
cause the value of such securities to significantly decline or be
worthless.
Our PRC counsel, Dentons Law Firm, has advised us based on their
understanding of the current PRC laws, rules, and regulations that
as of the date of this prospectus, we and our PRC subsidiaries, (1)
are not required to obtain permissions from any PRC authorities to
operate or issue our Ordinary Shares to foreign investors, (2) are
not subject to permission requirements from the CSRC, CAC or any
other entity that is required to approve of our PRC subsidiaries’
operations, and (3) have not received or were denied such
permissions by any PRC authorities. Nevertheless, the General
Office of the Central Committee of the Communist Party of China and
the General Office of the State Council jointly issued the
“Opinions on Severely Cracking Down on Illegal Securities
Activities According to Law,” or the Opinions, which were made
available to the public on July 6, 2021. The Opinions emphasized
the need to strengthen the administration over illegal securities
activities, and the need to strengthen the supervision over
overseas listings by Chinese companies. On November 16, 2021,
thirteen departments including Cyberspace Administration of
China,the China Securities Regulatory Commission and the Ministry
of Commerce jointly promulgated the Measures for Cyber Security
Examination, which will be effective on February 15, 2022. The
Measures for Cyber Security Examination include data processing
activities of network platform operators that affect or may affect
national security into cyber security review, and make it clear
that network platform operators with personal information of more
than one million users must apply for cyber security review to the
Cyber security Review Office when they go public abroad. The CSRC
issued “Administrative Provisions of The State Council on Overseas
Issuance and Listing of Securities by Domestic Enterprises (Draft
for Public Comments)” (“Administrative Provisions”) and “Measures
for the Administration of Filing overseas Issuance and Listing of
Securities by Domestic Enterprises (Draft for Public Comments)”
(“Measures”) to solicit public opinions on December 24, 2021. The
Administrative Provisions and Measures stipulate that no matter the
domestic enterprises are directly or indirectly listed (including
variable interest entities structure), the filing with CSRC
management will be uniformly applied. The National Development and
Reform Commission and the Ministry of Commerce issued the Special
Administrative Measures for Foreign Investment Access (Negative
List) (2021 version) (“Negative List”) on December 27, 2021 , which
will come into force on January 1, 2022. Compared to the previous
version, there aren’t any new specific industries added to the
negative list. Given the current PRC regulatory environment, it is
uncertain when and whether we or our PRC subsidiaries, will be
required to obtain permission from the PRC government to list on
U.S. exchanges in the future, and even when such permission is
obtained, whether it will be denied or rescinded.
Further, since these statements and regulatory actions are new, it
is highly uncertain how soon legislative or administrative
regulation making bodies will respond and what existing or new laws
or regulations or detailed implementations and interpretations will
be modified or promulgated, if any, and the potential impact such
modified or new laws and regulations will have on our daily
business operation, the ability to accept foreign investments and
list on an U.S. exchange. If, (i) we inadvertently conclude that
such approvals or permissions are not required, or (ii) applicable
laws, regulations, or interpretations change and we are required to
obtain such approvals and permissions in the future, and we are
unable to obtain such approvals and permissions, Borqs will not be
able to perform R&D and manufacturing in China, our revenues
will be adversely affected and we will have to expand our R&D
activities in India and relocate our manufacturing activities
outside China to India or other Asian countries. Also, if
applicable laws, regulations, or interpretations change, and we are
required to obtain permission or approval from the PRC authority
for the offering of our Ordinary Shares in the U.S. in the future,
and if any of such permission or approval were not received
maintained, or subsequently rescinded, it may significantly limit
or completely hinder our ability to complete this offering or cause
the value of our Ordinary Shares to significantly decline or become
worthless
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 of 1933 (the “Securities Act”) and the Securities
Exchange Act of 1934 (the “Exchange Act”). Our SEC reports and
other disclosures 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 entities 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 Entities by Foreign Investors (the “M&A Rules”), which
took effect as of September 8, 2006, and as amended on
June 22, 2009. The M&A Rules stipulate that foreign
investors shall comply with the M&A Rules when they purchase
equity interests of a domestic company or subscribe the increased
capital of a domestic company, and thus changing the nature of the
domestic company into a foreign-invested enterprise, when the
foreign investors establish a foreign-invested enterprise in the
PRC, purchase the assets of a domestic company and operate the
assets, or when the foreign investors purchase the assets of a
domestic company, establish a foreign-invested enterprise by
injecting such assets, and operate the assets. As for merger and
acquisition of a domestic company with a related party relationship
by a domestic company, enterprise or natural person in the name of
an overseas company legitimately incorporated or controlled by the
domestic company, enterprise of natural person, such merger and
acquisition shall be subject to examination and approval of MOFCOM.
The parties involved shall not use domestic investment by foreign
investment enterprises or other methods to circumvent the
requirement of examination and approval. These regulations, 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
and trading of such special purpose vehicle’s securities on an
overseas stock exchange. 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. If
the CSRC, MOFCOM, or another PRC regulatory agency determines that
government approval was required, 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.
Risks related to a future determination that the Public
Company Accounting Oversight Board (the “PCAOB”) is unable to
inspect or investigate our auditor completely.
The audit report included in this prospectus, and our annual report
on Form 20-F for the year ended July 31, 2021, was issued by ZH
CPA, a U.S.-based accounting firm that is registered with the PCAOB
and can be inspected by the PCAOB. We have no intention of
dismissing ZH CPA in the future or of engaging any auditor not
based in the U.S. and not subject to regular inspection by the
PCAOB. There is no guarantee, however, that any future auditor
engaged by the Company would remain subject to full PCAOB
inspection during the entire term of our engagement. The PCAOB is
currently unable to conduct inspections in China without the
approval of Chinese government authorities. If it is later
determined that the PCAOB is unable to inspect or investigate our
auditor completely, investors may be deprived of the benefits of
such inspection. Any audit reports not issued by auditors that are
completely inspected by the PCAOB, or a lack of PCAOB inspections
of audit work undertaken in China that prevents the PCAOB from
regularly evaluating our auditors’ audits and their quality control
procedures, could result in a lack of assurance that our financial
statements and disclosures are adequate and accurate. In addition,
under the HFCAA, our securities may be prohibited from trading on
the Nasdaq or other U.S. stock exchanges or in the over the counter
trading market in the U.S. if our auditor is not inspected by the
PCAOB for three consecutive years, and this ultimately could result
in our Ordinary Shares being delisted. Furthermore, on June 22,
2021, the U.S. Senate passed the AHFCAA, which, if enacted, would
amend the HFCAA and require the SEC to prohibit an issuer’s
securities from trading on any U.S. stock exchanges or in the over
the counter trading market in the U.S. if its auditor is not
subject to PCAOB inspections for two consecutive years instead of
three.
On December 2, 2021, SEC has announced the adoption of amendments
to finalize rules implementing the submission and disclosure
requirements in the HFCAA. The rules apply to registrants the SEC
identifies as having filed an annual report with an audit report
issued by a registered public accounting firm that is located in a
foreign jurisdiction and that the PCAOB is unable to inspect or
investigate (Commission-Identified Issuers). The final amendments
require Commission-Identified Issuers to submit documentation to
the SEC establishing that, if true, it is not owned or controlled
by a governmental entity in the public accounting firm’s foreign
jurisdiction. The amendments also require that a
Commission-Identified Issuer that is a “foreign issuer,” as defined
in Exchange Act Rule 3b-4, provide certain additional disclosures
in its annual report for itself and any of its consolidated foreign
operating entities. Further, the adopting release provides notice
regarding the procedures the SEC has established to identify
issuers and to impose trading prohibitions on the securities of
certain Commission-Identified Issuers, as required by the HFCAA.
The SEC will identify Commission-Identified Issuers for fiscal
years beginning after Dec. 18, 2020. A Commission-Identified Issuer
will be required to comply with the submission and disclosure
requirements in the annual report for each year in which it was
identified. If a registrant is identified as a
Commission-Identified Issuer based on its annual report for the
fiscal year ended Dec. 31, 2021, the registrant will be required to
comply with the submission or disclosure requirements in its annual
report filing covering the fiscal year ended Dec. 31,
2022.
Risks Relating to the Trading Market
The Warrants we sold in a Private Placement Completed on
November 5, 2020 contain repricing features which may have the
effect of limiting our ordinary share price and make it more
expensive to raise capital in the future.
In a November 5, 2020, private placement, we sold warrants to
purchase 869,565 Ordinary Shares at an exercise price of $4.60 per
Ordinary Share. Each warrant will expire five years from the date
of issuance. The warrant exercise price may be subject to
adjustment in the event that we issue certain securities at prices
below the then exercise price. In connection with our reverse stock
split, the exercise price for these warrants were repriced at $2.74
per ordinary share. Until these warrants all exercised, these
repricing exercise features may have the effect of limiting our
ordinary share price and make it more expensive to raise capital in
the future. As of July 31, 2022, 563,855 warrants have been
exercised for 459,986 Ordinary Shares, among which 389,855 warrants
were exercised at $2.74 per ordinary share for an aggregate total
of $1.1 million, and the remaining 174,000 warrants were cashless
exercises.
Sales of a significant number of our Ordinary Shares in the
public market, or the perception that such sales could occur, could
depress the market price of our Ordinary Shares.
In connection with a private placement of warrants to purchase
869,565 Ordinary Shares that closed on November 5, 2020, we have
filed a registration statement allowing the holders of the warrants
to resale the Ordinary Shares that they may acquire upon the
exercise thereof in the public market. The exercise of the warrants
and subsequent sales of those Ordinary Shares in the public market
could depress the market price of our Ordinary Shares and impair
our ability to raise capital through the sale of additional equity
securities. We cannot predict the effect that future sales of our
Ordinary Shares would have on the market price of our Ordinary
Shares.
Our largest shareholder owns approximately 54.7% of our
Ordinary Shares, which will allow him the ability to elect
directors and approve matters requiring shareholder approval by way
of resolution of members.
Mr. Jun Liu, who is our President, Chief Executive Officer and
Chairman of the Board, is currently the beneficial owner of
5,268,330 ordinary shares (as adjusted to reflect the Reverse
Split), or 54.7% of our current outstanding Ordinary Shares (36.0%
directly held by Tianzhen Investments Limited, an entity 100% owned
by Mr. Liu, and the remaining 19.0% that may be deemed to be
beneficially owned by Mr. Liu through the assignment of a proxy
agreement entered with Eno Group Limited on September 30, 2018
to Tianzhen Investments Limited on February 10, 2021). Mr. Liu has
the power to elect all directors and approve all matters requiring
shareholder approval without the votes of any other shareholder,
significant influence over a decision to enter into any corporate
transaction, and the ability to prevent any transaction that
requires the approval of shareholders, regardless of whether or not
our directors or other shareholders believe that such a transaction
is in our best interests. Such concentration of voting power could
have the effect of delaying, deterring, or preventing a change of
control or other business combination, which could, in turn, have
an adverse effect on the market price of our Ordinary Shares or
prevent our shareholders from realizing a premium over the
then-prevailing market price for their Ordinary Shares.
Since we are deemed a “controlled company” under the Nasdaq
listing rules, we may follow certain exemptions from certain
corporate governance requirements that could adversely affect our
public shareholders.
Our largest shareholder owns more than a majority of the voting
power of our outstanding ordinary shares. Under the Nasdaq listing
rules, a company of which more than 50% of the voting power is held
by an individual, group, or another company is a “controlled
company” and is permitted to phase in its compliance with the
independent committee requirements. Although we do not intend to
rely on the “controlled company” exemptions under the Nasdaq
listing rules even though we are deemed a “controlled
company,” we could elect to rely on these exemptions in the future.
If we were to elect to rely on the “controlled company” exemptions,
a majority of the members of our board of directors might not be
independent directors and our nominating and corporate governance
and compensation committees might not consist entirely of
independent directors. Accordingly, if we rely on the exemptions,
during the period we remain a controlled company and during any
transition period following a time when we are no longer a
controlled company, you would not have the same protections
afforded to shareholders of companies that are subject to all of
the corporate governance requirements of Nasdaq.
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 we fail to maintain an effective system of internal
controls over financial reporting, we may not be able to accurately
report our financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities
laws. The Securities and Exchange Commission, or the SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, or
the Sarbanes-Oxley Act, adopted rules requiring every public
company to include a management report on such company’s internal
controls over financial reporting in its annual report, which
contains management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. As we are an
“emerging growth company,” we are expected to first include a
management report on our internal controls over financial reporting
in our annual report in the second fiscal year end following the
effectiveness of our IPO. As such, these requirements applied to
our annual report on Form 20-F for the fiscal year ending on
July 31, 2021. Our management may conclude that our internal
controls over our financial reporting are not effective. Moreover,
even if our management concludes that our internal controls over
financial reporting are effective, our independent registered
public accounting firm may still decline to attest to our
management’s assessment or may issue a report that is qualified if
it is not satisfied with our internal controls or the level at
which our controls are documented, designed, operated or reviewed,
or if it interprets the relevant requirements differently from us.
Our reporting obligations as a public company will place a
significant strain on our management, operational and financial
resources and systems for the foreseeable future.
Prior to our IPO, we were a private company with limited accounting
personnel and other resources with which to address our internal
controls and procedures. We plan to remedy our material weaknesses
and other control deficiencies in time to meet the deadline imposed
by Section 404 of the Sarbanes-Oxley Act. If we fail to timely
achieve or maintain the adequacy of our internal controls, we may
not be able to conclude that we have effective internal controls
over financial reporting. Moreover, effective internal controls
over financial reporting are necessary for us to produce reliable
financial reports and are important to help prevent fraud. As a
result, our failure to achieve and maintain effective internal
controls over financial reporting could result in the loss of
investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the
trading price of our Ordinary Shares. Furthermore, we anticipate
that we will incur considerable costs and devote significant
management time and efforts and other resources to comply with
Section 404 of the Sarbanes-Oxley Act.
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.
The market price of our Ordinary Shares may be volatile or
may decline regardless of our operating performance.
The market price of our Ordinary Shares may fluctuate significantly
in response to numerous factors, many of which are beyond our
control, including:
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actual
or anticipated fluctuations in our revenue and other operating
results; |
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● |
the
financial projections we may provide to the public, any changes in
these projections or our failure to meet these
projections; |
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actions
of securities analysts who initiate or maintain coverage of us,
changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors; |
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announcements
by us or our competitors of significant products or features,
technical innovations, acquisitions, strategic partnerships, joint
ventures, or capital commitments; |
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● |
price
and volume fluctuations in the overall stock market, including as a
result of trends in the economy as a whole; |
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lawsuits
threatened or filed against us; and |
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other
events or factors, including those resulting from war or incidents
of terrorism, or responses to these events. |
In addition, the stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices
of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies.
In the past, stockholders have filed securities class action
litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of management
from our business, and adversely affect our business.
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. 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. 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.
Because we have ceased to qualify as a foreign private
issuer, we are required to comply fully with the reporting
requirements of the Exchange Act applicable to U.S. domestic
issuers, and we will incur significant additional legal,
accounting, and other expenses that we would not incur as a foreign
private issuer.
Because we are no longer a foreign private issuer, we are no longer
exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and our officers,
directors, and principal shareholders are no longer exempt from the
reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are now
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 now required to disclose
in our periodic reports all of the information that United States
domestic issuers are required to disclose.
If we were deemed an investment company under the Investment
Company Act of 1940, applicable restrictions could make it
impractical for us to continue our business as contemplated and
could have a material adverse effect on our business and the price
of our Ordinary Shares.
We do not believe that we are an “investment company” under the
Investment Company Act of 1940 (the “1940 Act”). Generally, a
person is an “investment company” if it owns investment securities
having a value exceeding 40% of the value of its total assets
(exclusive of U.S. government securities and cash items) on an
unconsolidated basis. We intend to conduct our operations so that
we will not be deemed an investment company. However, if we were to
be deemed an investment company, restrictions imposed by the 1940
Act, including limitations on our capital structure and our ability
to transact with affiliates, could make it impractical for us to
continue our business as contemplated and would have a material
adverse effect on our business and the price of our Ordinary
Shares.
Anti-takeover provisions in our amended and restated
memorandum and articles of association may discourage, delay, or
prevent a change in control.
Some provisions in our amended and restated memorandum and articles
of association, 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 permit our board of directors by resolution to amend certain
provisions of the memorandum and articles of association, including
to create and issue classes of shares with preferred, deferred or
other special rights or restrictions as the board of directors
determine in their discretion, without any further vote or action
by our shareholders. If issued, the rights, preferences,
designations, and limitations of any class of preferred shares
would be set by the board of directors by way of amendments to
relevant provisions of the memorandum and articles of association
and could operate to the disadvantage of the outstanding ordinary
shares the holders of which would not have any pre-emption rights
in respect of such an issue of preferred shares. Such terms could
include, among others, preferences as to dividends and
distributions on liquidation, or could be used to prevent possible
corporate takeovers; and |
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provisions
that restrict the ability of our shareholders holding in aggregate
less than thirty percent (30%) of the outstanding voting shares in
the company to call meetings and to include matters for
consideration at shareholder meetings. |
Because we are a BVI company, 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 BVI and some 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 United States 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 BVI may not permit you to
enforce a judgment against our assets outside of the United States
or the assets of our directors and officers.
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 issued in certificated
form, 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
issued in certificated form 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. A shareholder wishing to transfer
its Ordinary Shares is liable to pay to the Company 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 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.
Certain types of class or derivative actions generally
available under U.S. law may not be available as a result of the
fact that we are incorporated in the BVI. As a result, the rights
of shareholders may be limited.
Whilst statutory provisions do exist in British Virgin Islands law
for derivative actions to be brought in certain circumstances,
these rights may be more limited than the rights afforded to
minority shareholders under the laws of states in the United States
and shareholders of BVI companies may not have standing to initiate
a shareholder derivative action in a court of the United States.
Furthermore, questions of interpretation of our memorandum and
articles of association will be questions of BVI law and determined
by the BVI courts. In any event, the circumstances in which any
such action may be brought, if at all, and the procedures and
defenses that may be available in respect to any such action, may
result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the
United States. Accordingly, shareholders may have fewer
alternatives available to them if they believe that corporate
wrongdoing has occurred. The BVI courts are also unlikely to
recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law
or to impose liabilities against us, in original actions brought in
the BVI, based on certain liability provisions of U.S. securities
laws that are penal in nature.
There is no statutory recognition in the BVI of judgments obtained
in the United States, although the courts of the BVI will in
certain circumstances recognize such a foreign judgment and treat
it as a cause of action in itself which may be sued upon as a debt
at common law so that no retrial of the issues would be necessary
provided that:
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(i) |
the
U.S. court issuing the judgment had jurisdiction in the matter and
the company either submitted to such jurisdiction or was resident
or carrying on business within such jurisdiction and was duly
served with process; is final and for a liquidated sum; |
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(ii) |
the
judgment given by the U.S. court was not in respect of penalties,
taxes, fines or similar fiscal or revenue obligations of the
company; |
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(iii) |
in
obtaining judgment there was no fraud on the part of the person in
whose favor judgment was given or on the part of the
court; |
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(iv) |
recognition
or enforcement of the judgment would not be contrary to public
policy in the BVI; and |
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(v) |
the
proceedings pursuant to which judgment was obtained were not
contrary to natural justice. |
In appropriate circumstances, a BVI Court may give effect in the
British Virgin Islands to other kinds of final foreign judgments
such as declaratory orders, orders for performance of contracts and
injunctions.
Recent statements by the SEC on the PRC’s guidance and
restrictions on China-based companies seeking to raise capital in
the United States may raise scrutiny as to our operations and SEC
disclosures.
In light of the PRC providing new guidance to and restrictions on
China-based companies raising capital offshore, including PRC
government-led cybersecurity reviews, the Chairman of the SEC has
requested his staff to review disclosures from offshore issuers
associated with China-based operating companies in connection with
the filing of registration statements in the United States. In
particular, the SEC Chairman was concerned about an investor’s
understanding of a VIE contract structure. We previously conducted
our going public related consulting service business through
Qianhai utilizing a VIE contract structure which relationship was
terminated in February 2021. In connection with our internal
reorganization in January and February 2021, we terminated the
Qianhai VIE agreements. The termination of the Qianhai VIE
agreements did not discontinue our public listing related
consulting service business, because such consulting service
business has been transferred to Huaya to serve the client located
in China and to ATIF Inc. to serve the clients located within the
United States. Currently, we plan to use Huaya, a wholly owned
subsidiary of ATIF, to continue to provide consulting services to
our clients located in the PRC, and we do not plan to use variable
interest entities to execute our business plan and to conduct our
China-based operations in the near term. However, since we have
business operations in China, there is always a risk that the
Chinese government may in the future seek to intervene or influence
operations of any company with any level of operations in China,
including its ability to offer securities to investors, list its
securities on a U.S. or other foreign exchange, conduct its
business or accept foreign investment. If we conduct business in
the PRC in the future with a PRC entity using a VIE contract
structure, that business structure may subject us to further review
by the SEC.
You may have more difficulty protecting your interests than
you would as a shareholder of a U.S. corporation.
Our corporate affairs are governed by the provisions of our
memorandum and articles of association, as amended and restated
from time to time, the BVI Business Companies Act, 2004 as amended
from time to time (the “BVI Act”) and the common law of the BVI.
The rights of shareholders and the statutory duties and fiduciary
responsibilities of our directors and officers under BVI law may
not be clearly established as they would be under statutes or
judicial precedents in some jurisdictions in the United States, and
some states (such as Delaware) have more fully developed and
judicially interpreted bodies of corporate law.
These rights and responsibilities are governed by our amended and
restated memorandum and articles of association, the BVI Act and
the common law of the BVI. The common law of the BVI is derived in
part from judicial precedent in the BVI as well as from English
common law, which has persuasive, but not binding, authority on a
court in the BVI. In addition, BVI law does not make a distinction
between public and private companies and some of the protections
and safeguards (such as statutory pre-emption rights, save to the
extent expressly provided for in the amended and restated
memorandum and articles of association) that investors may expect
to find in relation to a public company are not provided for under
BVI law.
There may be less publicly available information about us than is
regularly published by or about U.S. issuers. Also, the BVI
regulations governing the securities of BVI companies may not be as
extensive as those in effect in the United States, and the BVI law
and regulations regarding corporate governance matters may not be
as protective of minority shareholders as state corporation laws in
the United States. Therefore, you may have more difficulty
protecting your interests in connection with actions taken by our
directors and officers or our principal shareholders than you would
as a shareholder of a corporation incorporated in the United
States.
The laws of BVI provide limited protections for minority
shareholders, so minority shareholders will not have the same
options as to recourse in comparison to the United States if the
shareholders are dissatisfied with the conduct of our
affairs.
Under the laws of the BVI there is limited statutory protection of
minority shareholders other than the provisions of the BVI Act
dealing with shareholder remedies. The principal protections under
BVI statutory law are derivative actions, actions brought by one or
more shareholders for relief from unfair prejudice, oppression and
unfair discrimination and/or to enforce the BVI Act or the amended
and restated memorandum and articles of association. Shareholders
are entitled to have the affairs of the company conducted in
accordance with the BVI Act and the amended and restated memorandum
and articles of association, and are entitled to payment of the
fair value of their respective shares upon dissenting from certain
enumerated corporate transactions.
The common law of the BVI is derived in part from judicial
precedent in the BVI as well as from English common law, which has
persuasive, but not binding, authority on a court in the BVI. There
are common law rights for the protection of shareholders that may
be invoked, largely dependent on English company law, since the
common law of the BVI is less extensive than that of England. Under
the general rule pursuant to English company law known as the
rule in Foss v. Harbottle, a court will generally refuse to
interfere with the management of a company at the insistence of a
minority of its shareholders who express dissatisfaction with the
conduct of the company’s affairs by the majority or the board of
directors. However, every shareholder is entitled to seek to have
the affairs of the company conducted properly according to law and
the constitutional documents of the company. As such, if those who
control the company have persistently disregarded the requirements
of company law or the provisions of the company’s memorandum and
articles of association, then the courts may grant relief.
Generally, the areas in which the courts will intervene are the
following: (i) a company is acting or proposing to act
illegally or beyond the scope of its authority; (ii) the act
complained of, although not beyond the scope of the authority,
could only be effected if duly authorized by more than the number
of votes which have actually been obtained; (iii) the
individual rights of the plaintiff shareholder have been infringed
or are about to be infringed; or (iv) those who control the
company are perpetrating a “fraud on the minority.”
These rights may be more limited than the rights afforded to
minority shareholders under the laws of states in the United
States.
There are no pre-emptive rights in favor of holders of
ordinary shares so you may not be able to participate in future
equity offerings.
There are no pre-emptive rights applicable under the BVI Act or the
amended and restated memorandum and articles of association in
favor of holders of ordinary shares in respect of further issues of
shares of any class. Consequently, you will not be entitled under
applicable law to participate in any such future offerings of
further ordinary shares or any preferred or other classes of
shares.
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%. |
Passive income generally includes dividends, interest, rents and
royalties (other than rents or royalties derived from the active
conduct of a trade or business), and gains from the disposition of
passive assets.
If we are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. taxpayer
who holds our ordinary shares, the U.S. taxpayer may be subject to
increased U.S. federal income tax liability and may be subject to
additional reporting requirements.
Depending on the amount of assets held for the production of
passive income, it is possible that, for our 2022 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. For purposes of the
PFIC analysis, in general, according to Internal Revenue Code
Section 1297(c), 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 stock by
value.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office and production facility is located
in Lake Forest, California, USA, where we lease approximately 7237
square feet of office space. We lease an aggregate of 7237 square
feet of property from an unrelated third party pursuant to the
terms of a lease agreement. The term of the lease is from June 1,
2021 to May 31, 2027, with monthly rental expenses of $20,000.
In addition, we also lease an office space in Irvine, California,
for approximately 4182 square feet of office space for a term of
three years from March 1, 2021 to February 29, 2024, and with
monthly rental expenses of $20,073. As of August 25, 2022, we have
subleased this office space to an unrelated third party company
from August 25, 2022 to March 1, 2024. Our total rent expense was
approximately $0.5 million and $0.6 million for the years ended
July 31, 2022 and 2021, respectively.
We believe that our current leased property is in good condition
and suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to
time that may harm our business. Except for the litigation
disclosed below, we are not currently a party to any legal or
arbitration proceeding 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.
On May 14, 2020, Boustead filed a lawsuit against the Company and
Leaping Group Co., Ltd. a limited liability organized under the
laws of Cayman Islands (“LGC”) for breaching the underwriting
agreement Boustead had with each of the Company and LGC, in which
Boustead was separately engaged as the exclusive financial advisor
to provide financial advisory services to the Company and LGC.
In April 2020, the Company acquired 51.2% equity interest in LGC
after LGC terminated its efforts to launch an IPO on its own.
Boustead alleged that the acquisition transaction between the
Company and LGC was entered into during the lockup period of the
exclusive agreement between Boustead and LGC, and therefore
deprived Boustead of compensation that Boustead would otherwise
have been entitled to receive under its exclusive agreement with
LGC. Therefore, Boustead is attempting to recover from the Company
an amount equal to a percentage of the value of the transaction it
conducted with LGC.
Boustead’s Complaint alleged four causes of action against the
Company, including breach of contract; breach of the implied
covenant of good faith and fair dealing; tortious interference with
business relationships and quantum meruit.
On October 6, 2020, we filed a motion to dismiss Boustead’s
Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and
12(b)(5). On October 9, 2020, the United States District Court for
the Southern District of New York directed Boustead to respond to
the motion or amend its Complaint by November 10, 2020. Boustead
opted to amend its complaint and filed the amended complaint on
November 10, 2020. Boustead’s first amended complaint asserted the
same four causes of action against LGC and us as its original
complaint. We filed another motion to dismiss Boustead’s amended
complaint on December 8, 2020.
On August 25, 2021, the United States District Court for the
Southern District of New York granted ATIF’s motion to dismiss
Boustead’s first amended complaint. In its order and opinion, the
United States District Court for the Southern District of New York
allowed Boustead to move for leave to amend its causes of action
against us as to breach of contract and tortious interference with
business relationships, but not breach of the implied covenant of
good faith and fair dealing and quantum meruit. On November 4,
2021, Boustead filed a motion seeking leave to file a second
amended complaint to amend its cause of action for Breach of
Contract. The Court granted Boustead’s motion for leave and
Boustead filed the second amended complaint on December 28, 2021
alleging only breach of contract and dropping all other causes of
action alleged in the original complaint. On January 18, 2022, the
Company filed a motion to dismiss Boustead’s second amended
complaint. Boustead filed its opposition on February 1, 2022 and
the Company replied on February 8, 2022.
On July 6, 2022, the Court denied our motion to dismiss the second
amended complaint. Thereafter, on August 3, 2022, the Company filed
a motion to compel arbitration of Boustead’s claims in California.
Briefing on the Company’s motion to compel concluded on August 23,
2022. The Court has yet to rule on that motion. Boustead is also
seeking a default judgment against LGC and recently filed an order
to show cause for default judgment against LGC. The Court has not
ruled on Boustead’s request for entry of default judgment against
LGC.
In sum, the Boustead litigation is currently in the pleadings
stage. Our management believes it is premature to assess and
predict the outcome of this pending litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market for Common Stock
Our Ordinary Shares have been listed on the Nasdaq Capital Market
since May 3, 2019, under the symbol “ATIF.”
Holders of Record of Ordinary Shares
As of October 25, 2022, we had approximately 32 shareholders of
record for our ordinary shares. The foregoing number of
shareholders of record does not include an unknown number of
shareholders who hold their shares in “street name.”
Dividend Policy
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.
Purchases of Equity Securities
Neither we nor any “affiliated purchaser,” as defined in
Rule 10b-18(a)(3) of the Exchange Act, purchased any of
our equity securities during the period covered by this annual
report.
Securities Authorized for Issuance Under Equity Compensation
Plans.
None.
Use
of Proceeds
The following “Use of Proceeds” information relates to the
registration statement on Form F-1, as amended (File Number
333-228750) for our IPO of up to 800,000 ordinary shares (as
adjusted to reflect the Reverse Split), which was declared
effective by the SEC on February 8, 2019, and the registration
statement on Form F-3, as amended (File Number 333-239131) for
the sale of our securities of up to an aggregate initial offering
price not to exceed $50,000,000, which was declared effective by
the SEC on September 21, 2020.
In April 2019, we completed our IPO in which we issued and
sold an aggregate of 414,935 ordinary shares (as adjusted to
reflect the Reverse Split) at a price of $25.00 per ordinary shares
(as adjusted to reflect the Reverse Split) for a total offering
size of approximately $10,373,360. The net proceeds raised from the
IPO were $9,558,243 after deducting underwriting commissions and
the offering expenses payable by us. Boustead Securities, LLC was
the underwriter of our IPO.
We incurred approximately $1,440,680 in expenses in connection with
our IPO, which included approximately $720,253 in underwriting
commissions for the IPO and approximately $720,427 in other costs
and expenses. None of the transaction expenses included payments to
directors or officers of our company or their associates, persons
owning more than 10% or more of our equity securities or our
affiliates. None of the net proceeds we received from the IPO were
paid, directly or indirectly, to any of our directors or officers
or their associates, persons owning 10% or more of our equity
securities or our affiliates.
As of July 31, 2022, we have used all of the net proceeds from
our IPO, including (i) $3,155,853 for daily operations,
(ii) $1,452,792 for investment in financial instruments,
(iii) $1,354,579 for acquisition and related fees,
(iv) $994,041 for marketing, (v) $895,651 for outsourced
services, (vi) $746,853 for for purchases of fixed assets,
(vii) $450,000 for securities accounts deposit,
(viii) $316,567 for Online system development and IT
technology supporting expenses, and(ix) $191,908 for IPO
related expenses.
In June 2020, we filed a registration statement on
Form F-3, as amended (File Number 333-239131), to offer
ordinary shares, preferred shares, warrants to purchase ordinary
shares, preferred shares, debt securities, (not to exceed
$10,000,000 in the aggregate), or units consisting of a combination
of any or all of these securities at an aggregate offering price of
up to $50,000,000 We intend to use the net proceeds from such
offerings in the manner as disclosed in our registration statement
on Form F-3, as amended (File Number 333-239131).
In January 2021, we filed a registration statement on Form F-1, as
amended (File Number 333-251924) relating to the resale of an
aggregate of 947,826 ordinary shares (as adjusted for the Reverse
Split) that are issuable upon the exercise of outstanding warrants
by the selling shareholders identified herein. These warrants were
issued in connection with a private placement we completed on
November 5, 2020. We will not receive any of the proceeds from the
sale by the selling shareholders of the ordinary shares. Upon any
exercise of the warrants by payment of cash, however, we will
receive the exercise price of the warrants.
In April 2021, we filed a registration statement on Form F-1 (File
Number 333-255545) to offer ordinary shares and warrants to
purchase ordinary shares not to exceed an aggregate offering price
of up to $15,000.000. We intend to use the net proceeds from such
offerings in the manner as disclosed in our registration statement
on Form F-1 (File Number 333-255545).
On August 12, 2021, our Board of Directors approved a reverse stock
split (the “Reverse Split”) of the Company’s issued and outstanding
ordinary shares, par value $0.001 per share, at a ratio of 5-for-1
so that every five (5) shares of US$0.001 par value in issue on the
date of the Reverse Split was combined into one (1) share of
US$0.005 par value. Shareholders otherwise entitled to receive a
fractional share as a result of the reverse stock split will
receive a whole share in lieu of such factional share, as
relevant. Both immediately before and after completion of the
Reverse Split, the Company is and will be authorized to issue
100,000,000,000 shares of US$0.001 par value each, divided into two
classes. As a result of the Reverse Split, the Company’s issued and
outstanding ordinary shares will be reduced from 45,806,952
ordinary shares of US$0.001 par value to approximately 9,161,390
ordinary shares of US$0.005 par value each. The par value of the
ordinary shares will be $0.001 per share after completion of the
Reverse Split, as the par value of each share was amended back to
US$0.001.
Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration
statement, we issued the securities described below without
registration under the Securities Act. Unless otherwise indicated
below, the securities were issued pursuant to the private placement
exemption provided by Section 4(a)(2) of the Securities Act and
Regulation D promulgated thereunder.
On November 6, 2020, in a private placement, we sold to three
accredited investors 869,565 Ordinary Shares and warrants to
purchase a total of 869,565 Ordinary Shares at an exercise price of
$4.60 per share which are exercisable for five years from the date
of issuance. We also issued to the placement agent warrants to
purchase 78,261 ordinary shares at an exercise price equal to $4.60
and are exercisable 180 days after November 3, 2020.
ITEM 6. [RESERVED]
ITEM
7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto contained in this Annual
Report on Form 10-K. Some of the statements contained in the
following discussion of the Company’s financial condition and
results of operations refer to future expectations or include other
“forward-looking” information. Those statements are subject to
known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those
contemplated, including, but not limited to, those discussed in
Part I, Item 1A of this report under the heading “Risk Factors,”
which are incorporated herein by reference. See “Special Note
regarding Forward-Looking Statements” included in this Report on
Form 10-K for a discussion of factors to be considered when
evaluating forward-looking information detailed below. These
factors could cause our actual results to differ materially from
the forward-looking statements.
Business Overview
We offer financial consulting services to small and medium-sized
enterprise customers in Asia and North America. Our goal is to
become an international financial consulting company with clients
and offices throughout Asia. Since our inception in 2015, the focus
of our consulting business has been providing comprehensive going
public consulting services designed to help SMEs become public
companies on suitable markets and exchanges.
On
January 4, 2021, we established an office in California, USA,
through our wholly owned subsidiary ATIF Inc., a California
corporation, and launched, in addition to our business consulting
services, additional service models consisting of asset management,
investment holding and media services to expand our business with a
flexible business concept to achieve a goal of high growth revenue
and strong profit growth.
Reverse Split
On
August 12, 2021, our Board of Directors approved a reverse stock
split (the “Reverse Split”) of our issued and outstanding ordinary
shares, par value $0.001 per share, at a ratio of 5-for-1 so that
every five (5) shares of US$0.001 par value in issue on the date of
the Reverse Split was combined into one (1) share of US$0.005 par
value. Shareholders otherwise entitled to receive a fractional
share as a result of the reverse stock split will receive a whole
share in lieu of such factional share, as relevant. Both
before and after completion of the Reverse Split, the Company is
and will be authorized to issue 100,000,000,000 ordinary shares of
US$0.001 par value each. As a result of the Reverse Split, the
Company’s issued and outstanding ordinary shares was reduced from
45,806,952 ordinary shares of US$0.001 par value each to
approximately 9,161,390 ordinary shares of par value $0.005 per
share. On August 23, 2021, we amended our Memorandum of Association
and Articles of Association in connection with our five-for-one
reverse stock split to amend the par value back to $0.001 per
ordinary share. Our ordinary shares, as adjusted per the Reverse
Split, began trading on the Nasdaq Capital Market on August 30,
2021.
Recent Updates
On February 16, 2021, ATIF-1, LP (“ATIF LP”) was established as a
private equity fund through our indirectly-wholly owned subsidiary,
ATIF-1 GP, LLC (“ATIF GP”), a Delaware limited liability company,
as the general partner. We own 76.6% limited partner
interest in ATIF, LP. The investment manager for the fund is ATIF
Inc. ATIF LP manages approximately $1.3 million and $4.8 million
assets under management (“AUM”) as of July 31, 2022 and 2021,
respectively. For the year ended July 31, 2022, three limited
partners of ATIF LP withdrew the investment of $3.0 million. In
addition, the Company also paid investment gain of $29,149 to the
limited partner, which was recorded as a reduction of
non-controlling interest. On August 1, 2022, ATIF USA
entered into and closed a Sale and Purchase Agreement (the
“Agreement”) with Asia Time (HK) International Finance Service
Limited (the “Buyer”), pursuant to which the Company sold all of
its equity interest in ATIF GP for cash consideration of US$50,000
(the “Agreement”). The management believed the disposition does not
represent a strategic shift because it is not changing the way it
is running its business. The Company has not shifted the nature of
its operations. The termination is not accounted as discontinued
operations in accordance with ASC 205-20. Upon the closing of the
Agreement, ATIF GP is no longer our subsidiary and ATIF USA ceased
to be the investment manager of ATIF LP.
On May 31, 2022, we completed the transfer of our equity interest
in ATIF HK and Huaya to Mr. Pishan Chi for $nil consideration. The
transfer of equity interest was to mitigate the potential risks
arising from the PRC government provision of new guidance to and
restrictions on China-based companies raising capital offshore. We
determined that the transfer of our equity interest in ATIF HK and
Huaya did not have a major effect on its operations and financial
results as we did not change our way of running business. We also
determined that the transfer of equity interest does not represent
a strategic shift in our business because there was no change to
our operation of our consulting services. There was no change to
the nature of our business, and did not affect our customers in
North America, which is the major geographic market area of our
business. The termination is not accounted as discontinued
operations in accordance with ASC 205-20.
On
February 3, 2021, we closed termination of our variable interest
entity (“VIE”) agreements with Qianhai Asia Times (Shenzhen)
International Financial Services Co., Ltd. (“Qianhai”) and its
shareholders. As of the date of this report, we do not, and do not
plan to use variable interest entities to execute our business plan
or to conduct our China-based operations. Qianhai transferred all
of its China-based business and employees to Huaya before
termination of the VIE agreements. The termination of the VIE
agreements did not cause material impairment of our long-lived
assets (primarily including fixed assets such as office furniture
and equipment and automobile) because all of the fixed assets have
been transferred to our PRC subsidiary Huaya upon termination of
the VIE agreements and there were no assets held for sale or
disposal. The termination of the Qianhai VIE agreements does not
represent a strategic shift that has (or will have) a major effect
on the Company’s operations because our consulting service business
as originally undertook by Qianhai has been transferred to Huaya
and ATIF Inc. to serve the clients located in China and U.S.
respectively. The termination of the VIE agreements did not cause
any regulatory penalties or non-compete agreements. As a result,
management concluded that the termination of the Qianhai VIE
agreements does not deemed to be a discontinued operation of our
consulting service business.
On January 29, 2021, we completed the disposition of 51.2% of the
equity interest of LGC. We sold all of our shares of LGC to Jiang
Bo, Jiang Tao and Wang Di (collectively, the “Buyers”) in exchange
for (i) 1,111,110 of our ordinary shares owned by the Buyers and
(ii) payment by the Buyers in the amount of $2,300,000 plus
interest at an interest rate of 10% per annum on the unpaid amount
if the principal amount of US$2,300,000 is not paid by January 14,
2022. All principal and accrued and unpaid interest shall be due on
January 14, 2023. As of July 31, 2022, the principal and accrued
and unpaid interest amounted to $2,654,767.
As of
July 31, 2022, we have one reporting segment, which is the
provision of financial consulting services.
Our financial consulting services
We
launched our consulting services in 2015. Our aim was to assist
these Chinese enterprises by filling the gaps and forming a bridge
between PRC companies and overseas markets and exchanges. We have a
team of qualified and experienced personnel with legal, regulatory,
and language expertise in several overseas jurisdictions. Our
services are designed to help SMEs in China achieve their goal of
becoming public companies. We create a going public strategy for
each client based on many factors, including our assessment of the
client’s financial and operational situations, market conditions,
and the client’s business and financing requirements. Since our
inception and up to the date of this report, we have successfully
helped three Chinese enterprises to be quoted on the U.S. OTC
markets and are currently assisting our other clients in their
respective going public efforts. All of our current and past
clients have been Chinese companies, and we plan to expand our
operations to other Asian countries, such as Malaysia, Vietnam, and
Singapore in the coming years.
For the year ended July 31, 2022 and 2021, we provided
consulting services to three customers and three customers,
respectively, which primarily engaged the Company to provide
consulting services relating to going public in the US through IPO,
reverse merger and acquisition. The low volume of consulting
services was due to the recent intense tariff issues between the
U.S. and China, which has become more fragile as a result of the
outbreak and spread of COVID-19, plus the tightening of U.S.
legislation and public listing rules to curb some small
Chinese companies to access the U.S. capital markets. As a result,
an increasing number of Chinese companies are putting off or
slowing down their plans for U.S. listings due to these
uncertainties. On May 31, 2022, we completed the transfer of our
equity interest in ATIF HK and Huaya, through which we provided
consulting services to Chinese companies We plan to focus on
providing consulting services to customers based in North America
and other areas and intend to continue cooperating with Huaya in
connection with the expansion and provision of our business
services in China. From April 2022 through the date of this report,
the Company entered into consulting agreements with five customers,
among which four are based in the North America.
Our total revenue generated from consulting services amounted to
$1.6 million and $0.9 million for the years ended July 31,
2022 and 2021, respectively.
Key
Factors that Affect our Business
We
believe the following key factors may affect our consulting
services:
The trade disputes between China and the United States has
negatively impacted our business.
During
the past two years, the U.S. government has, among other actions,
imposed 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 imposing new or higher tariffs
on specified products imported from the United States. The
uncertainties arising from the trade disputes between China and the
United States negatively impacted our potential customers’
confidence to go public through IPOs in the United States in fiscal
year 2020 through 2022. As a result, both the number of our new
going public consulting service customers and our going public
consulting service revenue were kept at low volume in fiscal year
2022 and 2021.
Our business success depends on our ability to acquire customers
effectively.
Our
customer acquisition channels primarily include our sales and
marketing campaigns and existing customer referrals. In order to
acquire customers, we have made significant efforts in building
mutually beneficial long-term relationships with local government,
academic institutions, and local business associations. In
addition, we also market our consulting services through social
media, such as WeChat or Weibo. If any of our current customer
acquisition channels becomes less effective, if we are unable to
continue to use any of these channels or if we are not successful
in using new channels, we may not be able to attract new customers
in a cost-effective manner or convert potential customers into
active customers or even lose our existing customers to our
competitors. To the extent that our current customer acquisition
and retention efforts become less effective, our service revenue
may be significantly impacted, which would have a significant
adverse effect on our revenues, financial condition, and results of
operations.
Our consulting business faces strong market
competition.
We
are currently facing intense market competition. Some of our
current or potential competitors have significantly more financial,
technical, marketing, and other resources than we do and may be
able to devote greater resources to the development, promotion, and
support of their customer acquisition and retention channels. In
light of the low barriers to entry in the financial consulting
industry, we expect more players to enter this market and increase
the level of competition. Our ability to differentiate our services
from other competitors will have significant impact on our business
growth in the future
Changes in PRC regulatory environment may impact our business and
results of operations.
The
regulatory environment for the financial consulting industry in
China is evolving. Recently, many local governments have
established various subsidization schemes and policies to stimulate
and encourage local business enterprises to go public, and this may
stimulate the growth of more financial consulting firms to become
new players given the low barrier of entry into the financial
consulting industry as well. As more players enter into the
competition, PRC governmental authorities may publish and
promulgate various new laws and rules to regulate the
financial consulting marketplace. We have been closely tracking the
development and implementation of new rules and regulations
likely to affect us. We will continue to ensure timely compliance
with any new rules and regulations and believe that such
timely compliance is essential to our growth. To the extent that we
may be required to adapt our operations to new laws and
regulations, our operating costs may increase which will impact our
profitability.
Our business depends on our ability to attract and retain key
personnel.
We
rely heavily on the expertise and leadership of our directors and
officers to maintain our core competence. Under their leadership,
we have been able to achieve rapid expansion and significant growth
since our inception in 2015. As our business scope increases, we
expect to continue to invest significant resources in hiring and
retaining a deep talent pool of financial consultancy
professionals. Our ability to sustain our growth will depend on our
ability to attract qualified personnel and retain our current
staff.
Results of Operations
Comparison of Operation Results for the Years Ended July 31,
2022 and 2021
The
following table summarizes the results of our operations for the
years ended July 31, 2022 and 2021, respectively, and provides
information regarding the dollar and percentage increase or
(decrease) during such periods.
| |
|
For
the years ended |
|
|
Changes |
|
| |
|
July
31,
2022 |
|
|
July
31,
2021 |
|
|
Amount
Increase
(Decrease) |
|
|
Percentage
Increase
(Decrease) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues
– third parties |
|
$ |
905,310 |
|
|
$ |
936,935 |
|
|
$ |
(31,625 |
) |
|
|
(3 |
)% |
| Revenues
– related party |
|
|
762,000 |
|
|
|
- |
|
|
|
762,000 |
|
|
|
100 |
% |
| Revenues |
|
$ |
1,667,310 |
|
|
$ |
936,935 |
|
|
$ |
730,375 |
|
|
|
78 |
% |
| Cost
of revenues |
|
|
(660,000 |
) |
|
|
- |
|
|
|
(660,000 |
) |
|
|
100 |
% |
| Gross
profit |
|
|
1,007,310 |
|
|
|
936,935 |
|
|
|
70,375 |
|
|
|
8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling
expenses |
|
|
569,529 |
|
|
|
439,174 |
|
|
|
130,355 |
|
|
|
30 |
% |
| General
and administrative expenses |
|
|
2,651,361 |
|
|
|
2,919,675 |
|
|
|
(268,314 |
) |
|
|
(9 |
)% |
| Total
operating expenses |
|
|
3,220,890 |
|
|
|
3,358,849 |
|
|
|
(137,959 |
) |
|
|
(4 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss
from operations |
|
|
(2,213,580 |
) |
|
|
(2,421,914 |
) |
|
|
208,334 |
|
|
|
(9 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest
income, net |
|
|
354,832 |
|
|
|
313 |
|
|
|
354,519 |
|
|
|
113,265 |
% |
| Other
expenses, net |
|
|
(123,296 |
) |
|
|
(84,194 |
) |
|
|
(39,102 |
) |
|
|
46 |
% |
| Loss
from investment in trading securities |
|
|
(2,432,107 |
) |
|
|
(258,738 |
) |
|
|
(2,173,369 |
) |
|
|
840 |
% |
| Gain
from disposal of subsidiaries and VIE |
|
|
1,043,052 |
|
|
|
390,183 |
|
|
|
652,869 |
|
|
|
167 |
% |
| Total
other (expense) income, net |
|
|
(1,157,519 |
) |
|
|
47,564 |
|
|
|
(1,205,083 |
) |
|
|
(2,534 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss
before income taxes |
|
|
(3,371,099 |
) |
|
|
(2,374,350 |
) |
|
|
(996,749 |
) |
|
|
(42 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income
tax provision |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0 |
% |
| Net
loss from continuing operations |
|
|
(3,371,099 |
) |
|
|
(2,374,350 |
) |
|
|
(996,749 |
) |
|
|
(42 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
loss from discontinued operations |
|
|
- |
|
|
|
(6,625,898 |
) |
|
|
6,625,898 |
|
|
|
(100 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
loss |
|
$ |
(3,371,099 |
) |
|
$ |
(9,000,248 |
) |
|
$ |
5,629,149 |
|
|
|
(63 |
)% |
Revenues. Our total revenue increased by $0.73 million, or
78%, from $0.9 million in fiscal year 2021, to $1.7 million in
fiscal year 2022, primarily attributable to completion of more
phases of consulting services to customers. Among the revenues of
$1.7 million, $0.8 million was contributed from a related party. In
July 2022, we provided consulting services to one of our related
party’s customers and earned revenues $0.8 million.
For
the year ended July 31, 2022, provision of our going public
consulting services remained stable as compared with that of the
same period of 2021. For the years ended July 31, 2022 and 2021, we
provided going public services to three and three customers. Our
low-volume provision of consulting services was mainly attributable
to tightening of U.S. legislation and public listing rules to
curb some small Chinese companies to access the U.S. capital
markets. Accordingly an increasing number of Chinese companies are
putting off or slowing down their plans for U.S. listings due to
these uncertainties. As a result, our potential customers’
perception and confidence to go public through initial public
offerings (“IPOs”) in the United States has been negatively
impacted.
Given
the uncertainty arising from the tightened U.S. legislation and
public listing rules to curb IPOs by small Chinese companies
to access the United States capital market, we anticipate our
limited revenue growth from our consulting services and our
continuous operating net loss in the near terms. However, we
terminated VIE agreements with Qianhai and its shareholders, and we
transferred equity interest in ATIF HK and Huaya, and we aimed to
provide our consulting services to more customers based in the U.S.
We also plan to hire more specialized and talented employees in
order to provide better services to our customers in the future. We
believe our competitive strengths, including but not limited to,
highly qualified professional service team with extensive
experience in going public and consulting services, recognition and
reputation of our services achieved from our previous success
helping our clients going public, established long-term
professional relationships with a group of well-known third-party
professional providers both domestically and in the U.S., and
established long-term cooperation relationships with local chambers
of commerce and associations, will help us develop more customers
for our consulting services to generate increased revenue in the
long run.
From
April 2022 through the date of this report, we have entered into
consulting service agreement with five customers, among which four
are based in the North America.
Cost of revenues. We incurred cost of revenues of
$0.7 million in the fiscal year 2022 which was mainly incurred for
direct costs including purchase of a shell company on the
over-the-counter (“OTC”) market and consulting expenses for one
customer.
Selling expenses. Selling expenses increased by $0.1
million, or 30%, from $0.4 million in fiscal year 2021 to $0.5
million in fiscal year 2022. Our selling expenses primarily
consisted of outsourced service fees charged by third-party service
providers, business development expenses, potential customer
referral commissions, salary and welfare expenses of our business
development team, and business travel expenses. The decrease in our
selling expenses was primarily due to the following reasons: 1) an
increase of $0.3 million in consulting service fees for two
consultants and marketing services for three consulting firms;
partially offset against 2) a decrease of $0.2 million in expenses
incurred by Qianhai, the VIE agreement with which was terminated in
February 2021.
As a
percentage of sales, our selling expenses were 34% and 47% of our
total revenues for the years ended July 31, 2022 and 2021,
respectively.
General and administrative expenses. Our general and
administrative expenses decreased by $0.3 million, or 9%, from $2.9
million in fiscal year 2021 to $2.6 million in fiscal year 2022.
Our general and administrative expenses primarily consisted of
salary and welfare expenses of management and administrative team,
office expenses, operating lease expenses, and professional fees
such as audit and legal fees. The decrease was mainly due to a
decrease of professional fees of $0.4 million because our auditor
and counselor decreased service fees with termination of Qianhai
VIE Agreement, partially offset against an increase of payroll and
welfare expenses of $0.1 million as we employed increasing
headcount in the USA.
As a
percentage of sales, our general and administrative expenses were
159% and 312% of our total revenues for the years ended
July 31, 2022 and 2021, respectively.
Interest income, net. For the year ended July 31, 2022,
interest income represented 1) the interest income of $0.4 million
from outstanding balance of $2.3 million due from buyers of LGC
arising from the Company’s disposition of 51.2% equity interest in
LGC. The interest rate for outstanding balance was 10% per annum,
and 2) the minimal interest income from bank deposits. For the year
ended July 31, 2021, interest income arose from bank
deposits.
Loss from investment in trading securities. Loss from
investment in trading securities represented fair value changes
from investment in trading securities, which was measured at market
price. For the years ended July 31, 2022 and 2021, we recorded
an investment loss of $2.4 million and $0.3 million,
respectively.
Gain from disposal of subsidiaries and VIE. For the year
ended July 31, 2022, the Company reported a gain of $1.0 million
from disposal of ATIF HK and Huaya. For the year ended July 31,
2021, the Company reported a gain of $0.4 million from termination
of VIE agreement with Qianhai.
Net loss from discontinued operations. In January 2021, we
completed the disposition of 51.2% of the equity interest of LGC.
The results of LGC, as a discontinued operation, for the years
ended July 31, 2021 are reported as components of net loss separate
from the net loss of continuing operations. For details of
composition of net loss from discontinued operations, please see
Note 4 to our Consolidated Financial Statements included with this
annual report.
Income taxes. We are incorporated in the British Virgin
Islands. Under the current laws of the British Virgin Islands, we
are not subject to tax on income or capital gains in the British
Virgin Islands. Additionally, upon payments of dividends to the
shareholders, no British Virgin Islands withholding tax will be
imposed.
ATIF
HK is subject to Hong Kong profits tax at a rate of 16.5%. However,
ATIF HK did not have any assessable profits arising in or derived
from Hong Kong for the fiscal years ended July 31, 2022 and
2021, and accordingly no provision for Hong Kong profits tax had
been made in these periods.
Huaya
was incorporated in the PRC. Under the Income Tax Laws of the PRC,
Huaya is subject to income tax at a rate of 10% under the
preferential tax treatment to Smaller-scale Taxpayers.
ATIF
Inc, ATIF GP, ATIF LP and ATIF BD were incorporated in the U.S and
are subject to federal and state income taxes on its business
operations. The federal tax rate is 21% and state tax rate is
8.84%. We also evaluated the impact from the recent tax reforms in
the United States, including the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) and Health and Economic
Recovery Omnibus Emergency Solutions Act (“HERO Act”), which were
both passed in 2020, No material impact on the ATIF US is expected
based on our analysis. We will continue to monitor the potential
impact going forward.
Income
tax expense was $nil and $nil for the years ended July 31, 2022 and
2021 due to significant net operating loss in fiscal year 2022 and
2021 which resulted in taxable losses.
Net loss. As a result of foregoing, net loss was $3.4
million for the year ended July 31, 2022, a decrease of $5.6
million from net loss of $9.0 million in fiscal year
2021.
Liquidity and Capital Resources
To
date, we have financed our operations primarily through cash flows
from operations, working capital loans from our major shareholders,
proceeds from our initial public offering, and equity financing
through public offerings of our securities. We plan to support our
future operations primarily from cash generated from our operations
and cash on hand.
Liquidity
and Going concern
For
the years ended July 31, 2022 and 2021, the Company reported a net
loss from continuing operations of approximately $3.4 million and
$2.4 million, respectively, and operating cash outflows from
continuing operations of approximately $0.1 million and $2.5
million.
In
assessing the Company’s ability to continue as a going concern, the
Company monitors and analyzes its cash and its ability to generate
sufficient cash flow in the future to support its operating and
capital expenditure commitments.
As of
July 31, 2022, the Company had cash of $1.8 million. On the other
hand, the Company had current liabilities of $2.8 million.
Currently the Company had three service-in-progress agreements, and
expected to generate consulting service fees of $2.5 million for
the next 12 months. The Company also had $2.7 million receivable
from buyers of LGC in connection with the disposal of LGC which
will be due in early 2023. In addition, due to the recent intense
relationship between the U.S. and China, which has become more
fragile as a result of the outbreak and spread of COVID-19, plus
the tightening of U.S. legislation and public listing rules to
curb some small Chinese companies to access the U.S. capital
markets, an increasing number of Chinese companies are putting off
or slowing down their plans for U.S. listings due to these
uncertainties. Furthermore, due to the impact of COVID-19, some of
our existing customers may experience financial distress or
business disruptions, which could lead to potential delay or
default on their payments. Any increased difficulty in collecting
accounts receivable, or early termination of our existing
consulting service agreements due to deterioration in economic
conditions could further negatively impact our cash flows. Given
these factors, our potential customers’ perception and confidence
to go public in the United States has been negatively impacted and
our operating revenue and cash flows may continue to underperform
in the near terms. Although we had cash of $1.8 million as of July
31, 2022, given the above-mentioned uncertainties, the management
believes that the Company will continue as a going concern in
the following 12 months from the date the Company’s 2022
consolidated financial statements are
issued.
We
believe that our existing cash, together with $3.2 million that
currently remains available under our $8.0 million revolving line
of credit with Silicon Valley Bank (“SVB Credit Facility”),
and $4.0 million available under the subordinated line of credit
(“Subordinated LOC”) as of September 12, 2022, will be sufficient
to meet our anticipated capital resources to fund planned
operations for the next twelve (12) months.
Currently,
the Company intends to finance its future working capital
requirements and capital expenditures from cash generated from
operating activities and funds raised from equity financings. In
October 2021, the Company raised proceeds of $1.1 million from
exercise of warrants to purchase 389,855 of its ordinary shares by
warrant holders who subscribed for ordinary shares in the
registered direct offering closed in November 2020.
The
consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the ordinary course of business.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might result
from the outcome of the uncertainties described above.
We
have not declared nor paid any cash dividends to our shareholders.
We do not plan to pay any dividends out of our restricted net
assets as of July 31, 2022.
We
have limited financial obligations denominated in U.S. dollars,
thus the foreign currency restrictions and regulations in the PRC
on the dividends distribution will not have a material impact on
our liquidity, financial condition, and results of
operations.
The
following table sets forth summary of our cash flows for the years
indicated:
| |
|
For the Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Net cash used in by
operating activities |
|
$ |
(146,944 |
) |
|
$ |
(2,667,060 |
) |
| Net cash (used in) provided by
investing activities |
|
|
(1,591,535 |
) |
|
|
861,921 |
|
| Net cash (used in) provided by
financing activities |
|
|
(1,960,946 |
) |
|
|
6,835,000 |
|
| Effect of exchange rate change on
cash |
|
|
(147,178 |
) |
|
|
138,611 |
|
| Net (decrease) increase in cash |
|
|
(3,846,603 |
) |
|
|
5,187,083 |
|
| Cash, beginning
of year |
|
|
5,596,740 |
|
|
|
428,258 |
|
| Cash, end of
year |
|
$ |
1,750,137 |
|
|
$ |
5,596,740 |
|
Operating Activities
Net cash used in operating activities was $0.1 million in fiscal
year ended July 31, 2022. Net cash used in operating
activities was primarily comprised of net loss of $3.4 million,
adjusted for loss of $2.4 million from investment in trading
securities, and net changes in our operating assets and
liabilities, principally comprising of an increase of accounts
receivable of $0.8 million due from a related party, and an
increase of accrued expenses and other current liabilities of $1.8
million as the Company is liable to an investment bank for loss
making during the year ended July 31, 2022.
Net
cash used in operating activities was $2.7 million in fiscal year
ended July 31, 2021, consisting of the net cash used in
operating activities from continuing operations and discontinued
operations of $2.6 million and $0.1 million, respectively. Net cash
used in operating activities from continuing operations was
primarily comprised of net loss from continuing operations of $2.4
million, adjusted for amortization of right-of-use assets of $0.5
million, loss of $0.3 million from investment in trading
securities, and net changes in our operating assets and
liabilities, principally comprising of a decrease of tax payable by
$0.6 million and a decrease of lease liabilities of $0.5 million
due to the termination of our VIE agreements with Qianhai and its
shareholders, leading to the decrease of such accounts.
Investing Activities
Net
cash used in investing activities was $1.6 million in fiscal year
2022, primarily consisting of purchase of investment of $1.4
million in listed equity securities, investment of $0.3 million in
two equity securities, against proceeds of $0.2 million from
disposal of property and equipment.
Net
cash provided by investing activities was $0.9 million in fiscal
year 2021, primarily consisting of purchase of investment of $0.4
million in listed equity securities, collection of investment
deposit of $1.2 million for life insurance contract, against cash
of $0.1 million provided by discontinued operations.
Financing Activities
Net
cash used in financing activities was $2.0 million in fiscal year
2022, primarily consisting of payment of $3.0 million to three
limited partners of ATIF LP, as withdrawal of investment, partially
offset by proceeds of $1.1 million in relation to exercise of
warrants by investors who subscribed for ordinary shares offered in
registered direct offering which closed in November
2020.
Net
cash provided by financing activities was $6.8 million in fiscal
year 2021, primarily consisting of capital injection of $3.3
million from ATIF LP, and capital of $3.5 million raised in a
registered direct offering in November 2020.
Critical Accounting Estimate
We prepare our audited consolidated financial statements in
accordance with U.S. GAAP, which requires our management to make
estimates that affect the reported amounts of assets, liabilities
and disclosures of contingent assets and liabilities at the balance
sheet dates, as well as the reported amounts of revenues and
expenses during the reporting periods. To the extent that there are
material differences between these estimates and actual results,
our financial condition or results of operations would be affected.
We base our estimates on our own historical experience and other
assumptions that we believe are reasonable after taking account of
our circumstances and expectations for the future based on
available information. We evaluate these estimates on an ongoing
basis.
Our
expectations regarding the future are based on available
information and assumptions that we believe to be reasonable, which
together form our basis for making judgments about matters that are
not readily apparent from other sources. Since the use of estimates
is an integral component of the financial reporting process, our
actual results could differ from those estimates. Some of our
accounting policies require a higher degree of judgment than others
in their application.
We consider an accounting estimate to be critical if: (i) the
accounting estimate requires us to make assumptions about matters
that were highly uncertain at the time the accounting estimate was
made, and (ii) changes in the estimate that are reasonably likely
to occur from period to period or use of different estimates that
we reasonably could have used in the current period, would have a
material impact on our financial condition or results of
operations. When reading our audited consolidated financial
statements, you should consider our selection of critical
accounting policies, the judgment and other uncertainties affecting
the application of such policies and the sensitivity of reported
results to changes in conditions and assumptions.
Valuation allowance for deferred tax assets
We
account for income taxes using the liability method in accordance
with ASC 740, Income Taxes (“ASC 740”). Under this method, deferred
tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect when the
differences are expected to reverse. Changes in deferred tax assets
and liabilities are recorded in earnings. Deferred tax assets are
reduced by a valuation allowance through a charge to income tax
expense when, in the opinion of management, it is
more-likely-than-not that a portion of or all of the deferred tax
assets will not be realized.
We
operate through our subsidiaries. The valuation allowance is
considered on an individual entity basis. As of July 31, 2022 and
2021, valuation allowances on deferred tax assets are provided
because we believe that it is more-likely-than-not that certain of
the subsidiaries will not be able to generate sufficient taxable
income in the near future, to realize the deferred tax assets
carried-forwards.
As of
July 31, 2022 and 2021, the total valuation allowance for deferred
tax assets was $1,668,413 and $997,378, respectively.
Uncertain tax position
In
order to assess uncertain tax positions, we apply a more likely
than not threshold and a two-step approach for the tax position
measurement and financial statement recognition. Under the two-step
approach, the first step is to evaluate the tax position for
recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be
sustained, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized
upon settlement. we recognize interest and penalties, if any, under
accrued expenses and other current liabilities on our consolidated
balance sheet and under other expenses in its consolidated
statement of comprehensive loss. As of July 31, 2022 and 2021, we
did not have any significant unrecognized uncertain tax
positions.
Fair value of trading securities
We
measured our trading securities, which consisted of certain
publicly-listed equity securities through various open market
transactions, at market value. We reported a loss of $2,432,107 and
$258,738 from investment in trading securities for the years ended
July 31, 2022 and 2021.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a smaller reporting company we are not required to provide the
information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin on page F-1
with the index to financial statements followed by the financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer,
we carried out an evaluation of the effectiveness of our disclosure
controls and procedures, which is defined in
Rules 13a-15(e) of the Exchange Act, as of July 31,
2022. Based on that evaluation, our management has concluded that,
as of July 31, 2022, our disclosure controls and procedures
were not effective in ensuring that the information required to be
disclosed by us in the reports that we file and furnish under the
Exchange Act was recorded, processed, summarized, and reported,
within the time periods specified in the SEC’s rules and
forms, and that the information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Our
conclusion is based on the fact that we do not have sufficient
full-time accounting and financial reporting personnel with
appropriate levels of accounting knowledge and experience to
monitor the daily recording of transactions, to address complex
U.S. GAAP accounting issues and the related disclosures under U.S.
GAAP. In addition, there was a lack of sufficient documented
financial closing procedure and a lack of risk assessment in
accordance with COSCO 2013 framework. Our management is currently
in the process of evaluating the steps necessary to remediate the
ineffectiveness, such as (i) hiring more qualified accounting
personnel with relevant U.S. GAAP and SEC reporting experience and
qualifications to strengthen the financial reporting function and
to set up a financial and system control framework, and
(ii) implementing regular and continuous U.S. GAAP accounting
and financial reporting training programs for our accounting and
financial reporting personnel, and (iii) establishing an internal
audit function and standardizing the Company’s semi-annual and
year-end closing and financial reporting processes.
Management’s Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. In assessing our internal control over financial
reporting, prior to the offering in April 2019, we have been a
private company with limited accounting personnel and other
resources to address our internal controls and procedures. Our
independent registered public accounting firm, has not conducted an
audit of our internal control over financial reporting. However, in
connection with the audits of our consolidated financial statements
for the year ended July 31, 2022, we identified four “material
weaknesses” in our internal control over financial reporting.
| |
● |
We
did not have sufficient personnel with appropriate levels of
accounting knowledge and experience to address complex U.S. GAAP
accounting issues and to prepare and review financial statements
and related disclosures under U.S. GAAP. Specifically, our control
did not operate effectively to ensure the appropriate and timely
analysis of and accounting for unusual and non-routine transactions
and certain financial statement accounts; |
| |
● |
We
have not established an internal control department and had a lack
of adequate policies and procedures in internal audit function to
ensure that our policies and procedures have been carried out as
planned; |
| |
● |
We
have not established sufficient risk assessment in accordance with
the requirement of COSCO 2013 Framework; and |
| |
● |
We
did not have sufficient documented financial closing policies and
procedures. |
A material weakness is a deficiency, or a combination of
deficiencies, within the meaning of PCAOB Auditing Standard AS
2201, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or
detected on a timely basis. We have hired additional accounting
staffs and are in the progress of improving our system security
environment and conducting regular backup plan and penetration
testing to ensure the network and information security. In
addition, we plan to address the weaknesses identified above by
implementing the following measures:
Furthermore, we are in the process of implementing a number of
measures to address the first to third material weakness that has
been identified, including:
| |
1) |
hiring
more qualified accounting personnel with relevant U.S. GAAP and SEC
reporting experience and qualifications to strengthen the financial
reporting function and to set up a financial and system control
framework; and |
| |
2) |
implementing
regular and continuous U.S. GAAP accounting and financial reporting
training programs for our accounting and financial reporting
personnel. |
Especially
for the identified material weakness related to internal control,
we will hire experts to improve and test our internal control and
the set up a series of standard and recurring internal audit work
procedures before July 2023. We schedule to will
perform self-assessment of internal control effectiveness on a
continuous basis, which will be led by our accounting and risk
management department within year 2023. We will also hire more
competent personnel and involve professional service companies to
help us implement SOX 404 compliance together with the
establishment of our internal audit function.
However, we cannot assure you that we will remediate our material
weaknesses in a timely manner.
Attestation Report of the Registered Public Accounting
Firm
This annual report on Form 10-K does not include an
attestation report of our registered public accounting firm
regarding the effectiveness of the Company’s internal control over
financial reporting, as such report is not required due to the
Company’s status as a smaller reporting company.
Changes in Internal Control over Financial Reporting
Except as
disclosed above, there have been no changes in our internal
controls over financial reporting that occurred during fiscal
quarter ended July 31, 2022 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTION THAT PREVENTS
INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors,
Executive Officers and Significant Employees
The following table and text set forth the names and ages of our
current directors, executive officers and significant employees as
of the date of this annual report. Our Board of Directors is
comprised of five (5) members.
|
Name |
|
Age |
|
|
Position(s) |
| Jun Liu |
|
|
46 |
|
|
President, Chief Executive
Officer, Chairman and Director |
| Yue Ming |
|
|
35 |
|
|
Chief Financial Officer and
Director |
| Kwong Sang Liu |
|
|
61 |
|
|
Independent Director |
| Yongyuan Chen |
|
|
60 |
|
|
Independent Director |
| Lei Yang |
|
|
42 |
|
|
Independent Director |
Business Experience
Mr. Jun Liu has been our director since June 2019, our
President and Chairman since July 2020 and our Chief Executive
Officer since August 2021, also having previously served as our
Chief Executive Officer from June 2019 to July 2020. Since November
2015, Mr. Liu has served as the President and Director of
Asian Equity Exchange Group Co., Ltd., a subsidiary of a U.S.
public company Asia Equity Exchange Group, Inc. (“AEEX”), a
corporation that develops and manufactures software solutions for
equity market. Mr. Liu served as the Chairman of the Board of
Directors, President, and CEO of AEEX from July 2015 to
September 2017. From December 2000 to December 2001, he served
as the head of marketing for the South China Branch of Alibaba.
Mr. Liu received his Ph.D. in International Finance from
Camden University U.S.A. in 2015 and his bachelor’s degree in
Applied Physics from the Harbin Institute of Technology in 1998.
Mr. Liu has over 20 years of enterprise management experience and
served in management positions at Fortune 500 companies. Mr. Liu is
well qualified to serve on our board of directors based on his
management experience and prior executive experience serving in
public and private companies.
Ms. Yue Ming has been our Chief Financial Officer (“CFO”) and
director since August 2021. She has served as our accountant since
August 1, 2018. Prior to joining the Company, she was employed by
Asia Equity Exchange Group, Inc. and acted as financial manager
from December 1, 2014 to July 31, 2018. Ms. Ming started her
accounting career at Shenzhen Huitian Accounting Firm on July 1,
2009 after she graduated from Central China Normal University where
she majored in international trade. Ms. Ming has more than 10 years
of corporate finance and accounting experience. Based on the above
and Ms. Ming’s experience in finance and accounting, we believe
that Ms. Ming is well qualified to serve on our board of
directors.
Mr. Kwong Sang Liu has served as our independent director
since April 2019. Since May 1997, Mr. Liu has
managed K.S. Liu & Company, CPA Limited, a company he
founded. He is currently a non-executive director in a number of
Hong Kong Stock Exchange listed companies. Mr. Liu graduated
with honors from the Hong Kong Polytechnic University with a
bachelor’s degree in Accountancy in 1997 and obtained a Master of
Business Administration degree from the University of Lincoln,
England in 2002. He is a chartered tax advisor of the Institute of
Chartered Accountants in England and Wales, the Association of
Chartered Certified Accountants, the Institute of Financial
Accountants of the United Kingdom, the Institute of Public
Accountants of Australia, the Institute of Certified Public
Accountants of Hong Kong, the Taxation Institute of Hong Kong, and
the Society of Registered Financial Planners. Mr. Liu has been a
practicing accountant in Hong Kong for over 20 years specializing
in audit, taxation and corporate financial advisory. Based on the
above qualifications and Mr. Liu’s experience in finance and
accountancy, the Company believes Mr. Liu is qualified to be on the
Board.
Mr. Yongyuan Chen has served as our independent director since
April 2019. He is currently the director of China Commercial
Law Co. Australia Pty Limited specializing in foreign investment,
merger, and acquisition and intellectual property laws. He received
a bachelor’s degree in international law from Jilin University of
China in 1986, a Master’s degree in international economic law from
Renmin University of China in 1988, and a Doctor’s degree in law
from the University of Sydney in 2002. He formerly served as legal
counsel of the Ministry of Foreign Economic Relations and Trade,
China National Technology Import and Export Corporation, and chief
of the Policy and Regulation Division of Shenzhen Science and
Technology Bureau. From April 2011, Mr. Chen has worked
as senior partner at Guangdong Huashang Law Firm, Sydney Branch.
Mr. Chen has been a practicing lawyer in China and Australia for
over 20 years. The Board believes that Mr. Chen’s extensive
experience and legal background qualifies him to serve on the
Board.
Ms. Lei Yang has served as our independent director since
August 2021. She received her first master’s degree in Information
Management from Nanjing University in 2004, and her second master’s
degree in Accounting from Bentley University in 2010. Ms. Yang is
certified by the American Institute of Certified Public
Accountants. Ms. Yang has 17 years working experience in several
Fortune 500 companies, engaged in business analysis, internal
audit, and financial management, etc. She received her first
master’s degree in Information Management from Nanjing University
in 2004, and her second master’s degree in Accounting from Bentley
University in 2010. Ms. Yang is an American Institute of Certified
Public Accountants Certified and an economist. Based on the above
qualifications and Ms. Yang’s experience in management, the Board
believes Ms. Yang is well qualified to serve on the Board.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of
our directors or executive officers were involved in any of the
following: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years
prior to that time; (2) any conviction in a criminal proceeding or
being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being subject to any
order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
Family Relationships and Arrangements
None of the directors or executive officers have a family
relationship as defined in Item 401 of Regulation S-K.
Code of Business Conduct
and Ethics for Employees, Executive Officers, and
Directors
We adopted a code of business conduct and ethics (the “Code of
Conduct”) on December 11, 2018, which is applicable to all of our
employees, executive officers and directors. The Code of Conduct is
available at the Investors Relations section of our website at
https://ir.atifchina.com/. Information contained on or accessible
through this website is not a part of this Annual Report, and the
inclusion of such website address in this Annual Report is an
inactive textual reference only. Any amendments to the Code of
Conduct, or any waivers of its requirements, are expected to be
disclosed on its website to the extent required by applicable rules
and exchange requirements.
Delinquent Section 16(a)
Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), requires our executive officers and directors
and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC initial statements of
beneficial ownership, reports of changes in ownership and Annual
Reports concerning their ownership, of Common Stock and other of
our equity securities on Forms 3, 4, and 5, respectively. Executive
officers, directors and greater than 10% stockholders are required
by SEC regulations to furnish us with copies of all Section 16(a)
reports they file. For the fiscal year ended July 31, 2022, our
executive officers and directors and persons who own more than 10%
of a registered class of our equity securities were not subject to
Section 16 of the Exchange Act.
Board Practices
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 resolution of directors or
resolution or shareholders and by filing an amended version of the
articles of association at the BVI Registry of Corporate affairs
approving such change. Unless removed or re-appointed, each
director shall be appointed for a term fixed by the resolution of
members or resolution of directors appointing the director.
Controlled Company
Mr. Jun Liu beneficially owns approximately 54.7% of the aggregate
voting power of our outstanding ordinary shares. As a result, we
are deemed a “controlled company” for the purpose of the Nasdaq
listing rules and are permitted to elect to rely on certain
exemptions from the obligations to comply with certain corporate
governance requirements, including:
| |
● |
the
requirement that our director nominees be selected or recommended
solely by independent directors; and |
| |
● |
the
requirement that we have a nominating and corporate governance
committee and a compensation committee that are composed entirely
of independent directors with a written charter addressing the
purposes and responsibilities of the committees. |
Although we do not intend to rely on the controlled company
exemptions under the Nasdaq listing rules even though we are
deemed a controlled company, we could elect to rely on these
exemptions in the future, and if so, you would not have the same
protection afforded to shareholders of companies that are subject
to all of the corporate governance requirements of Nasdaq.
Board of Directors
Our board of directors consist of five directors as of the date of
this annual report. Our board of directors is responsible for
establishing broad corporate policies and for overseeing our
overall performance. Our board of directors reviews significant
developments affecting us and acts on other matters requiring its
approval.
Duties of Directors
Under British Virgin Islands law, our directors owe fiduciary
duties both at common law and under statute, including a statutory
duty to act honestly, in good faith and with a view to our best
interests. When exercising powers or performing duties as a
director, our directors also have a duty to exercise the care,
diligence and skills that a reasonable director would exercise in
comparable circumstances, taking into account without limitation
the nature of the company, the nature of the decision and the
position of the director and the nature of the responsibilities
undertaken by him. In exercising the powers of a director, the
directors must exercise their powers for a proper purpose and shall
not act or agree to the company acting in a manner that contravenes
our amended and restated memorandum and articles of association or
the BVI Act. In fulfilling their duty of care to us, our directors
must ensure compliance with our amended and restated memorandum and
articles of association. We have the right to seek damages if a
duty owed by our directors is breached.
The functions and powers of our board of directors include, among
others:
| |
● |
appointing
officers and determining the term of office of the
officers; |
| |
● |
authorizing
the payment of donations to religious, charitable, public or other
bodies, clubs, funds, or associations as deemed
advisable; |
| |
● |
exercising
the borrowing powers of the company and mortgaging the property of
the company; |
| |
● |
executing
checks, promissory notes, and other negotiable instruments on
behalf of the company; and |
| |
● |
maintaining
or registering a register of relevant charges of the
company. |
Terms of Directors and Executive Officers
Each of our directors holds office until a successor has been duly
elected and qualified unless the director was appointed by the
board of directors, in which case such director holds office until
the next following annual meeting of shareholders at which time
such director is eligible for reelection. All of our executive
officers are appointed by and serve at the discretion of our board
of directors. Our current directors were re-elected by our
shareholders at our 2022 Annual General Meeting, which was held on
July 25, 2022, until the next shareholders meeting and until their
successors are duly elected and qualified.
Qualification
There is currently no shareholding qualification for directors.
Board Composition, Committees and Independence
Under the rules of NASDAQ, “independent” directors must make up a
majority of a listed company’s Board of Directors. In addition,
applicable NASDAQ rules require that, subject to specified
exceptions, each member of a listed company’s audit and
compensation committees be independent within the meaning of the
applicable NASDAQ rules. Audit committee members must also satisfy
the independence criteria set forth in Rule 10A-3 under the
Exchange Act.
Our Board has undertaken a review of the independence of each
director and considered whether any director has a material
relationship with us that could compromise the director’s ability
to exercise independent judgment in carrying out his or her
responsibilities. As a result of this review, our Board determined
that Messrs. Kwong Sang Liu and Yongyuan Chen, and Ms. Lei Yang are
independent directors as defined in the listing standards of NASDAQ
and SEC rules and regulations. A majority of our directors are
independent, as required under applicable NASDAQ rules. As required
under applicable NASDAQ rules, our independent directors will meet
in regularly scheduled executive sessions at which only independent
directors are present.
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. Copies of the charters for each committee
are available at http://ir.atifchina.com. Each committee’s members
and functions are described below.
Audit Committee. Our audit committee consists of Messrs.
Kwong Sang Liu and Yongyuan Chen, and Ms. Lei Yang. Mr. Kwong Sang
Liu is the chairman of our audit committee. We have determined that
Messrs. Kwong Sang Liu and Yongyuan Chen, and Ms. Lei Yang 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.
Kwong Sang 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 oversees our accounting and financial reporting
processes and the audits of the financial statements of our
company. The audit committee is 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 Messrs. Kwong Sang Liu and Yongyuan Chen, and Ms. Lei Yang. Ms.
Lei Yang is the chairman of our compensation committee. We have
determined that Messrs. Kwong Sang Liu and Yongyuan Chen, and Ms.
Lei Yang 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 assists 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 is 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 currently consists of
Messrs. Kwong Sang Liu and Yongyuan Chen, and Ms. Lei Yang. Mr.
Yongyuan Chen is the chairman of our nominating and corporate
governance committee. Messrs. Kwong Sang Liu and Yongyuan Chen, and
Ms. Lei Yang 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 assists 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 is 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 Qualifications
In accordance with its charter, our nominating and corporate
governance committee develops and recommends to our board of
directors appropriate criteria, including desired qualifications,
expertise, skills and characteristics, for selection of new
directors and periodically reviews the criteria adopted by our
board of directors and, if appropriate, recommends changes to such
criteria.
Board Diversity
Our board of directors desires to seek members from diverse
professional backgrounds who combine a strong professional
reputation and knowledge of our business and industry with a
reputation for integrity. Our board of directors does not have a
formal policy with respect to diversity and inclusion but is in
process of establishing a policy on diversity. Diversity of
experience, expertise and viewpoints is one of many factors the
nominating and corporate governance committee considers when
recommending director nominees to our board of directors. Further,
our board of directors is committed to actively seeking highly
qualified women and individuals from minority groups to include in
the pool from which new candidates are selected. Our board of
directors also seeks members that have experience in positions with
a high degree of responsibility or are, or have been, leaders in
the companies or institutions with which they are, or were,
affiliated, but may seek other members with different backgrounds,
based upon the contributions they can make to our company.
We believe that our current board composition reflects our
commitment to diversity in the areas of gender and professional
background.
Board Diversity Matrix (as of October 25, 2022)
| Total
Number of Directors |
|
|
5 |
|
|
|
|
|
Female |
|
|
|
Male |
|
|
Part I: Gender Identity |
|
|
|
|
|
|
|
|
| Directors |
|
|
2 |
|
|
|
3 |
|
|
Part II: Demographic Background |
|
|
|
|
|
|
|
|
| Asian |
|
|
2 |
|
|
|
3 |
|
Indemnification Agreements
We executed a standard form of indemnification agreement
(“Indemnification Agreement”) with each of our Board members and
executive officers (each, an “Indemnitee”).
Pursuant to and subject to the terms, conditions and limitations
set forth in the Indemnification Agreement, we agreed to indemnify
each Indemnitee, against any and all expenses incurred in
connection with proceedings relating to the Indemnitee’s service as
our officer and or director, or is or was serving at our request as
a director or officer of another corporation, partnership, joint
venture, or other entity or enterprise but only if the Indemnitee
acted in good faith and in a manner he reasonably believed to be in
or not opposed to our best interest, and in the case of a criminal
proceeding, had no reasonable cause to believe that his conduct was
unlawful. In addition, the indemnification provided in the
indemnification agreement is applicable whether or not negligence
or gross negligence of the Indemnitee is alleged or proven.
Additionally, the Indemnification Agreement establishes processes
and procedures for indemnification claims, advancement of expenses
and costs and contribution obligations.
Employees
As of July 31, 2022, we had approximately 11 full-time
employees, including 1 in China and 10 in America. The table below
sets forth the numbers of employees by functions as of
July 31, 2022
|
Function |
|
Number of
Employees |
|
|
% of Total |
|
| Executive Office |
|
|
1 |
|
|
|
9 |
% |
| |
|
|
|
|
|
|
|
|
| Financial Department |
|
|
2 |
|
|
|
18 |
% |
| IPO Department |
|
|
3 |
|
|
|
27 |
% |
| Engineering Department |
|
|
3 |
|
|
|
27 |
% |
| Marketing
Department |
|
|
2 |
|
|
|
18 |
% |
| Total |
|
|
11 |
|
|
|
100 |
% |
There is no labor union. We believe our relations with our
employees are good.
ITEM 11. EXECUTIVE COMPENSATION
Compensation for our Named Executive Officers
The following table sets forth certain information with respect to
compensation for the fiscal years ended July 31, 2022 and July
31, 2021 earned by or paid to our chief executive officer and
principal executive officer, our principal financial officer, and
our other most highly compensated executive officer.
| Name
and Principal Position |
|
Year |
|
|
Salary
($) |
|
|
Bonus
($) |
|
|
Stock
Awards
($) |
|
|
Option
Awards
($) |
|
|
Nonequity
Incentive
Plan
Compensation
($) |
|
|
Nonqualified
Deferred
Compensation
Earnings
($) |
|
|
All
Other
Compensation
($) |
|
|
Total
($) |
|
Jun
Liu*
President and Chairman of ATIF, CEO of ATIF |
|
|
2022 |
|
|
|
240,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,789 |
|
|
|
244,789 |
|
| |
|
|
2021 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,969 |
|
|
|
245,969 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pishan
Chi**
Former CEO of ATIF |
|
|
2022 |
|
|
|
26,132 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,533 |
|
|
|
31,665 |
|
| |
|
|
2021 |
|
|
|
36,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,337 |
|
|
|
40,737 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fang
Cheng ***
Former CFO of ATIF |
|
|
2022 |
|
|
|
12,374 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,374 |
|
| |
|
|
2021 |
|
|
|
32,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yue
Ming ****
CFO of ATIF |
|
|
2022 |
|
|
|
25,200 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,046 |
|
|
|
30,246 |
|
| |
|
|
2021 |
|
|
|
29,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,582 |
|
|
|
34,363 |
|
| * |
Jun
Liu was appointed as our president and chairman of our Board on
July 10, 2020, and appointed as our CEO on August 4,
2021. |
| ** |
Pishan
Chi was appointed as our CEO on July 10, 2020 ceased to be our
CEO on August 4, 2021. |
| *** |
Fang
Cheng ceased to be our CFO on August 4, 2021. |
| **** |
Yue Ming was appointed as our CFO On August 4, 2021.
|
We
are 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. We paid retirement and
similar benefits for our executive officers for the fiscal years
ended July 31, 2021 and 2022.
Benefit Plans
We do not have any profit sharing plan or similar plans for the
benefit of our officers, directors or employees. However, we may
establish such plan in the future.
Equity Compensation Plan Information
We do not have any equity compensation plan or similar plans for
the benefit of our officers, directors or employees. However, we
may establish such plan in the future.
Outstanding Equity Awards as of July 31, 2022
We had no outstanding equity awards as of July 31, 2022.
Nonqualified Deferred Compensation
Our named executive officers did not participate in, nor earn any
benefits under, a nonqualified deferred compensation plan during
the fiscal year ended July 31, 2022.
Employment Agreements and Arrangements
Pursuant to employment agreements, the form of which is filed as
Exhibit 10.3 to our F-1 registration statement filed with the
SEC on December 11, 2018, we agree to employ each of our
executive officers for a specified time period, which will be
renewed upon both parties’ agreement thirty days before the end of
the current employment term, and payment of cash compensation and
benefits became payable when we became a public reporting company
in the US. 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.
Our employment agreement with Fang Cheng, our former CFO, was for a
term of three years beginning on October 1, 2018, and provided
for an annual salary of $27,700, the payment of which commenced
when we became a public reporting company in the US. For the year
ended July 31, 2021, we paid salary and welfare expenses of $32,900
with Fang Cheng. On August 4, 2021, Fang Cheng resigned as our CFO,
her employment agreement was terminated with immediate effect.
Our employment agreement with Jun Liu, our President and Former
CEO, is for a term of three years beginning on June 6, 2019,
and provides for an annual salary of $240,000. On July 10,
2020, we amended our employment agreement with Jun Liu to clarify
that he had ceased to be employed as our CEO and had been appointed
as our president. On August 4, 2021, we amended our employment
agreement with Jun Liu to include his appointment as the chief
executive officer.
Our employment agreement with Pishan Chi, our former CEO, was for a
term of three years beginning on July 10, 2020, and provides
for an annual salary of US$30,700. For the year ended July 31,
2021, we paid salary and welfare expenses of $36,400 with Pishan
Chi. On August 4, 2021, Pishan Chi resigned as our CEO.
Our employment agreement with Yue Ming, our CFO, is for a term of
three years beginning on August 9,2021, and provides for an annual
salary of US$25,200.
Other Benefits
Our
employees are eligible to participate in various employee benefit
plans, including medical, dental, and vision care plans, flexible
spending accounts for health and dependent care, life, accidental
death and dismemberment, disability, and paid time off.
Non-Employee Director Compensation
The following table sets forth information concerning the
compensation of non-employee directors for services rendered for
the year ended July 31, 2022. Jun Liu and Yue Ming are our
executive officers and employees and are not included in the table.
All compensation earned by Mr. Liu and Ms. Ming for services
rendered in their capacity as our executive officers and employees,
is included under the heading in this section titled “Compensation
for our Named Executive Officers.” Mr. Liu and Ms. Ming received no
compensation for their service as a director.
|
Name |
|
Fees
Earned
or Paid
in Cash
($) |
|
|
Stock
Awards
($) |
|
|
Option
Awards
($) |
|
|
All other
compensation
($) |
|
|
Total
($) |
|
| Kwong Sang Liu |
|
|
18,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,000 |
|
| Yongyuan Chen |
|
|
18,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,000 |
|
| Lei Yang |
|
|
14,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,400 |
|
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act. As
an emerging growth company we are exempt from certain requirements
related to executive compensation, including the requirements to
hold a nonbinding advisory vote on executive compensation and to
provide information relating to the ratio of total compensation of
our President and Chief Executive Officer to the median of the
annual total compensation of all of our employees, each as required
by the Investor Protection and Securities Reform Act of 2010, which
is part of the Dodd-Frank Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the
beneficial ownership, within the meaning of Rule 13d-3 under
the Exchange Act, of our Ordinary Shares as of the date of this
annual report.
| |
● |
each
of our directors and executive officers who beneficially own our
Ordinary Shares; and |
| |
● |
each
person known to us to own beneficially more than 5.0% of our
Ordinary Shares. |
Beneficial ownership includes voting or investment power with
respect to the securities. Except as indicated below, and subject
to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
Ordinary Shares shown as beneficially owned by them. Percentage of
beneficial ownership of each listed person is based on 9,627,452
Ordinary Shares outstanding as of October 25, 2022.
Information with respect to beneficial ownership has been furnished
by each director, officer, or beneficial owner of 5% or more of our
Ordinary Shares. Beneficial ownership is determined in accordance
with the rules of the SEC and generally requires that such
person have voting or investment power with respect to securities.
In computing the number of Ordinary Shares beneficially owned by a
person listed below and the percentage ownership of such person,
Ordinary Shares underlying options, warrants, or convertible
securities held by each such person that are exercisable or
convertible within 60 days of the date of this annual report are
deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise
indicated in the footnotes to this table, or as required by
applicable community property laws, all persons listed have sole
voting and investment power for all Ordinary Shares shown as
beneficially owned by them.
| |
|
Ordinary Shares
Beneficially Owned |
|
| |
|
Number |
|
|
Percent |
|
| Directors
and Executive Officers(1): |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Jun
Liu(2) |
|
|
5,268,330 |
|
|
|
54.7 |
% |
| Yue Ming |
|
|
0 |
|
|
|
* |
% |
| Kwong Sang Liu |
|
|
0 |
|
|
|
* |
% |
| Yongyuan Chen |
|
|
0 |
|
|
|
* |
% |
| Lei Yang |
|
|
0 |
|
|
|
* |
% |
| All directors and executive officers
as a group (five persons): |
|
|
5,268,330 |
|
|
|
54.7 |
% |
| |
|
|
|
|
|
|
|
|
| 5% Shareholders: |
|
|
|
|
|
|
|
|
| Tianzhen Investments Limited |
|
|
3,440,860 |
|
|
|
35.7 |
% |
| Eno Group Limited |
|
|
1,820,000 |
|
|
|
18.9 |
% |
| (1) |
Unless
otherwise indicated, the business address of each of the
individuals is 25391 Commercentre Dr., Ste 200, Lake Forest,
CA. |
| (2) |
Jun
Liu, our President, Chief Executive Officer and Chairman, may be
deemed to beneficially own 5,268,330 ordinary shares (as adjusted
to reflect the Reverse Split), which consists of (i) 3,440,860
ordinary shares, or approximately 35.7%, through his 100% ownership
of Tianzhen Investments Limited, (ii) 1,820,000 ordinary shares, or
approximately 18.9%, which are held indirectly through a voting
rights proxy agreement with Eno Group Limited, which was assigned
to Tianzhen Investments Limited. And (iii) 7,470 ordinary shares
directly held by Mr. Liu. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Transaction with related parties
The following includes a summary of certain relationships and
transactions, including transactions since August 1, 2020 to July
31, 2022 and any currently proposed transactions, to which we were
or are to be a participant, in which (1) the amount involved
exceeded or will exceed the lesser of (i) $120,000 or (ii) one
percent (1%) of the average of our total assets for the last two
completed fiscal years, and (2) any of our directors, executive
officers or holders of more than five percent (5%) of our capital
stock, or any affiliate or member of the immediate family of the
foregoing persons, had or will have a direct or indirect material
interest other than compensation and other arrangements that are
described under the section titled “Executive Compensation.”
In May 2022, we were engaged by Huaya, which is owned by Mr Pishan
Chi, our employee and former CEO, to provide consulting services,
which amounted to revenues of $762,000 from Huaya. During the year
ended July 31, 2021, we had no transactions with related
parties.
As of July 31, 2022 and 2021, we had account receivable of
$762,000 and $nil due from related parties.
Related Person Transactions Policy
We plan to adopt a new written related person transactions policy
that sets forth our policies and procedures regarding the
identification, review, consideration, and oversight of “related
person transactions.” For purposes of policy only, a “related
person transaction” is a transaction, arrangement, or relationship
(or any series of similar transactions, arrangements or
relationships) in which we or any of our subsidiaries are
participants involving an amount, as long as we are a SEC smaller
reporting company, that exceeds the lesser of (a) $120,000 or (b)
1% of the average of our total assets for the last two completed
fiscal years, in which any “related person” has a material
interest.
Transactions involving compensation for services provided to us as
an employee, consultant or director will not be considered related
person transactions under this policy. A related person is any
executive officer, director, nominee to become a director or a
holder of more than 5% of any class of our voting securities
(including our common stock), including any of their immediate
family members and affiliates, including entities owned or
controlled by such persons.
Under the policy, the related person in question or, in the case of
transactions with a holder of more than 5% of any class of our
voting securities, an officer with knowledge of a proposed
transaction, must present information regarding the proposed
related person transaction to our audit committee (or, where review
by our audit committee would be inappropriate, to another
independent body of our board of directors) for review. To identify
related person transactions in advance, we will rely on information
supplied by our executive officers, directors and certain
significant shareholders. In considering related person
transactions, our audit committee will take into account the
relevant available facts and circumstances, which may include, but
are not limited to:
|
● |
the
risks, costs, and benefits to us; |
|
● |
the
impact on a director’s independence in the event the related person
is a director, immediate family member of a director or an entity
with which a director is affiliated; |
|
● |
the
terms of the transaction; |
|
● |
the
availability of other sources for comparable services or
products; |
|
● |
the
terms available to or from, as the case may be, unrelated third
parties; and |
|
● |
our
audit committee will approve only those transactions that it
determines are fair and in our best interests. |
Director Independence
A majority of our Board of Directors are independent directors, see
the discussion above under the section “Item 10. Directors,
Executive Officers and Corporate Governance–Board Composition,
Committees and Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Auditor
For the years ended July 31, 2022 and 2021, the Company’s
independent public accounting firm was ZH CPA, LLC (“ZH CPA”).
Fees Paid to Principal Independent Registered Public Accounting
Firm
The aggregate fees billed by our Independent Registered Public
Accounting Firm, for the years ended July 31, 2022 and 2021 are as
follows:
| |
|
For the Fiscal Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Audit Fees(1) |
|
$ |
125,000 |
|
|
$ |
165,000 |
|
| Audit-Related Fees(2) |
|
|
40,000 |
|
|
|
- |
|
| Tax Fees(3) |
|
|
- |
|
|
|
- |
|
| All Other
Fees(4) |
|
|
- |
|
|
|
- |
|
| Total |
|
$ |
165,000 |
|
|
$ |
165,000 |
|
|
(1) |
Audit fees represent fees for
professional services provided in connection with the audit of our
annual financial statements and the review of our quarterly
financial statements and those services normally provided in
connection with statutory or regulatory filings or engagements
including comfort letters, consents and other services related to
SEC matters. This information is presented as of the latest
practicable date for this annual report. |
|
(2) |
Audit-related fees represent fees
for assurance and related services that are reasonably related to
the performance of the audit or review of our financial statements
and not reported above under “Audit Fees.” |
|
(3) |
ZH CPA did not provide us with tax
compliance, tax advice or tax planning services. |
|
(4) |
All other fees include fees billed
by our independent auditors for products or services other than as
described in the immediately preceding three categories. No such
fees were incurred during the fiscal years ended July 31, 2022 and
2021. |
The aggregate fees billed by Friedman LLP (“Friedman”), our former
Independent Registered Public Accounting Firm, for the years ended
July 31, 2022 and 2021 are as follows:
| |
|
For the Fiscal Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Audit Fees(1) |
|
$ |
- |
|
|
$ |
- |
|
| Audit-Related Fees(2) |
|
|
35,000 |
|
|
|
- |
|
| Tax Fees(3) |
|
|
- |
|
|
|
- |
|
| All Other
Fees(4) |
|
|
- |
|
|
|
- |
|
| Total |
|
$ |
35,000 |
|
|
$ |
- |
|
|
(1) |
Audit fees represent fees for
professional services provided in connection with the audit of our
annual financial statements and the review of our quarterly
financial statements and those services normally provided in
connection with statutory or regulatory filings or engagements
including comfort letters, consents and other services related to
SEC matters. This information is presented as of the latest
practicable date for this annual report. |
|
(2) |
Audit-related fees represent fees
for assurance and related services that are reasonably related to
the performance of the audit or review of our financial statements
and not reported above under “Audit Fees.” |
|
(3) |
Friedman did not provide us with
tax compliance, tax advice or tax planning services. |
|
(4) |
All other fees include fees billed
by our independent auditors for products or services other than as
described in the immediately preceding three categories. No such
fees were incurred during the fiscal years ended July 31, 2022 and
2021. |
Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Registered Public Accounting
Firm
The policy of our audit committee is to pre-approve all audit and
non-audit services provided by ZH CPA, LLC, our independent
registered public accounting firm, including audit services,
audit-related services, tax services and other services as
described above.
Our independent registered public accounting firm and management
are required to periodically report to the audit committee
regarding the extent of services provided by our independent
registered public accounting firm in accordance with this
preapproval, and the fees for the services performed to date.
All of the services relating to the fees described in the table
above were approved by our audit committee.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial
Statements
The following financial statements of the Company, and report of ZH
CPA, LLC, independent registered public accounting firm, are
included in this report:
(2) Financial Statement
Schedules
All schedules have been omitted because the required information is
included in the financial statements or notes thereto or because
they are not required.
(3)
Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in
subparagraph (b) below.
(b) The following exhibits are filed as part of this Annual
Report.
|
Exhibit
No. |
|
Description |
| 3.1 |
|
Form of Amended and Restated Memorandum and Articles of Association
of the Registrant (incorporated herein by reference to Exhibit 3.1
to the registration statement on Form F-1 (File No. 333-228750), as
amended, initially filed with the Securities and Exchange
Commission on December 11, 2018) |
| 3.2 |
|
Amendment No. 1 to Memorandum and Articles of Association of the
Registrant (incorporated herein by reference to Exhibit 1.2 to Form
6-K filed with the Securities and Exchange Commission on September
8, 2021) |
| 3.3 |
|
Amendment No. 2 to Memorandum and Articles of Association of the
Registrant (incorporated herein by reference to Exhibit 1.3 to Form
6-K filed with the Securities and Exchange Commission on September
8, 2021) |
| 4(vi)* |
|
Description
of registrant’s securities |
| 4.1 |
|
Registrant’s Specimen Certificate for Ordinary Shares (incorporated
herein by reference to Exhibit 4.1 to the registration statement on
Form F-1 (File No. 333-228750), as amended, initially filed with
the Securities and Exchange Commission on December 11,
2018) |
| 4.2 |
|
Form of Warrant (incorporated herein by reference to Exhibit 4.1 to
Form 6-K filed with the Securities and Exchange Commission on
November 4, 2020) |
| 4.3 |
|
Form of Placement Agent Warrant (incorporated herein by reference
to Exhibit 4.2 to Form 6-K filed with the Securities and Exchange
Commission on November 4, 2020) |
| 4.4 |
|
Form of Warrant (incorporated herein by reference to Exhibit 4.18
to Form F-1 filed with the Securities and Exchange Commission on
April 27, 2021) |
| 4.5 |
|
Form of Placement Agent Warrant (incorporated herein by reference
to Exhibit 4.19 to Form F-1 filed with the Securities and Exchange
Commission on April 27, 2021) |
| 10.1 |
|
Agreement of Website (CNNM) Transfer dated September 20, 2018,
between ATIF HK and Shenzhen Shangyuan Electronic Commerce Ltd.
(incorporated herein by reference to Exhibit 10.1 to the
registration statement on Form F-1 (File No. 333-228750), as
amended, initially filed with the Securities and Exchange
Commission on December 11, 2018) |
| 10.2# |
|
Form of Employment Agreement by and between executive officers and
the Registrant (incorporated herein by reference to Exhibit 10.3 to
the registration statement on Form F-1 (File No. 333-228750), as
amended, initially filed with the Securities and Exchange
Commission on December 11, 2018) |
| 10.3# |
|
Form of Indemnification Agreement between directors and the
Registrant (incorporated herein by reference to Exhibit 10.4 to the
registration statement on Form F-1 (File No. 333-228750), as
amended, initially filed with the Securities and Exchange
Commission on December 11, 2018) |
| 10.4 |
|
Form of Securities Purchase Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 6-K filed with the Securities and
Exchange Commission on November 4, 2020) |
| 10.5 |
|
Sale and Purchase Agreement regarding issued shares of Leaping
Group Co., Ltd. (incorporated herein by reference to Exhibit 99.1
to Form 6-K filed with the Securities and Exchange Commission on
January 19, 2021) |
| 10.6 |
|
Form of Securities Purchase Agreement (incorporated herein by
reference to Exhibit 4.17 to Form F-1 filed with the Securities and
Exchange Commission on April 27, 2021) |
| 10.7 |
|
Consulting Agreement entered into between ATIF Holdings Limited and
Massimo Motor Sports, LLC dated August 10, 2022 (incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed with the
Securities and Exchange Commission on August 18,
2022) |
| 10.8* |
|
Share Transfer Agreement
dated May 20, 2022 between ATIF Holdings Inc. and Pishan
Chi
|
| 10.9* |
|
Sale and Purchase
Agreement dated August 1, 2022 between ATIF Inc. and Asia Time (HK)
International Finance Service Limited
|
| 14.1 |
|
Code of Business Conduct and Ethics of the Registrant (incorporated
herein by reference to Exhibit 99.1 to the registration
statement on Form F-1 (File No. 333-228750), as amended,
initially filed with the Securities and Exchange Commission on
December 11, 2018) |
| 21.1* |
|
List of subsidiaries of the Registrant |
| 23.1* |
|
Consent of Dentons (Guangzhou)
LLP |
| 31.1* |
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| 31.2* |
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| 32.1* |
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| 32.2* |
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| 101.
INS* |
|
Inline XBRL
Instance Document |
| 101.
SCH* |
|
Inline XBRL
Taxonomy Extension Schema Document |
| 101.
CAL* |
|
Inline XBRL
Taxonomy Calculation Linkbase Document |
| 101.
DEF* |
|
Inline XBRL
Taxonomy Extension Definition Linkbase Document |
| 101.
LAB* |
|
Inline XBRL
Taxonomy Extension Label Linkbase Document |
| 101.
PRE* |
|
Inline
XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 |
|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained
in Exhibit 101) |
| * |
Filed
herewith |
| |
|
| # |
Indicates
management contract or compensatory plan or
arrangement. |
ITEM 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| Date:
November 2, 2022 |
ATIF
Holdings Limited |
| |
|
| |
By: |
/s/ Jun
Liu |
| |
Name: |
Jun
Liu |
| |
Title: |
Chief Executive Officer
(Principal Executive Officer)
|
| |
|
|
| |
By: |
/s/ Yue Ming |
| |
Name: |
Yue
Ming |
| |
Title: |
Chief Financial Officer
(Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature |
|
Title |
|
Date |
| |
|
|
|
|
| /s/
Jun Liu |
|
Chief Executive Officer and Chairman
of the Board |
|
November
2, 2022 |
| Jun
Liu |
|
(Principal
Executive Officer) |
|
|
| |
|
|
|
|
| /s/ Yue Ming |
|
Chief
Financial Officer and Director |
|
November
2, 2022 |
| Yue
Ming |
|
(Principal
Financial and Accounting Officer) |
|
|
| |
|
|
|
|
| /s/ Kwong Sang Liu
|
|
Director |
|
November
2, 2022 |
| Kwong
Sang Liu |
|
|
|
|
| |
|
|
|
|
| /s/ Yongyuan Chen |
|
Director |
|
November
2, 2022 |
| Yongyuan
Chen |
|
|
|
|
| |
|
|
|
|
| /s/ Lei
Yang |
|
Director |
|
November
2, 2022 |
| Lei
Yang |
|
|
|
|
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ATIF Holdings
Limited
Opinion on the Financial Statements
We have audited the accompanying balance sheets of ATIF Holdings
Limited and its subsidiaries (“the Company”) as of July 31, 2022
and 2021, and the related statements of income(loss), comprehensive
income(loss), stockholders’ equity, and cash flows for each of the
years in the two-year period ended July 31, 2022, and the related
notes (collectively referred to as the financial statements). In
our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of July
31, 2022 and 2021, and the results of its operations and its cash
flows for each of the years in the two- year period ended July 31,
2022, in conformity with accounting principles generally accepted
in the United States of America.
The Company’s ability to Continue as a Going Concern
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has incurred significant losses and
negative cash flows from operating activities. These conditions
raise substantial doubt about its ability to continue as a going
concern. Management’s evaluation of the events and conditions and
plans regarding these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ ZH CPA, LLC
We have served as the Company’s auditor since 2021.
Denver, Colorado
November 2, 2022
1600 Broadway, Suite 1600, Denver, CO,
80202, USA. Phone: 1.303.386.7224 Fax: 1.303.386.7101 Email:
admin@zhcpa.us
ATIF
HOLDINGS LIMITED
CONSOLIDATED
BALANCE SHEETS
| |
|
As of July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| ASSETS |
|
|
|
|
|
|
| CURRENT ASSETS |
|
|
|
|
|
|
| Cash
and cash equivalents |
|
$ |
1,750,137 |
|
|
$ |
5,596,740 |
|
| Accounts
receivable – a related party |
|
|
762,000 |
|
|
|
-
|
|
| Deposits |
|
|
141,000 |
|
|
|
234,580 |
|
| Investment in
trading securities |
|
|
33,346 |
|
|
|
1,027,509 |
|
| Due from buyers of
Leaping Group Corporation (“LGC”) (Note 4) |
|
|
2,654,767 |
|
|
|
2,300,000 |
|
|
Prepaid expenses and other current assets |
|
|
651,210 |
|
|
|
688,451 |
|
| Total current
assets |
|
|
5,992,460 |
|
|
|
9,847,280 |
|
| |
|
|
|
|
|
|
|
|
| Long-term
investment |
|
|
335,000 |
|
|
|
-
|
|
| Property and
equipment, net |
|
|
272,700 |
|
|
|
572,027 |
|
| Intangible assets,
net |
|
|
153,331 |
|
|
|
233,331 |
|
|
Right-of- use assets, net |
|
|
1,383,464 |
|
|
|
745,125 |
|
| TOTAL
ASSETS |
|
$ |
8,136,955 |
|
|
$ |
11,397,763 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
| CURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
| Accounts
payable |
|
$ |
482 |
|
|
$ |
482 |
|
| Deferred
revenue |
|
|
90,785 |
|
|
|
370,948 |
|
| Taxes payable |
|
|
-
|
|
|
|
58,017 |
|
| Accrued expenses
and other current liabilities |
|
|
2,274,771 |
|
|
|
514,863 |
|
|
Operating lease liabilities, current |
|
|
433,061 |
|
|
|
382,298 |
|
| Total current
liabilities |
|
|
2,799,099 |
|
|
|
1,326,608 |
|
| |
|
|
|
|
|
|
|
|
| Operating lease
liabilities, noncurrent |
|
|
985,249 |
|
|
|
387,307 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL
LIABILITIES |
|
|
3,784,348 |
|
|
|
1,713,915 |
|
| |
|
|
|
|
|
|
|
|
| Commitments |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| EQUITY |
|
|
|
|
|
|
|
|
| Ordinary
shares, $0.001 par value, 100,000,000,000 shares authorized,
9,627,452 shares and 9,161,390 shares issued and outstanding as of
July 31, 2022 and 2021, respectively * |
|
|
9,627 |
|
|
|
9,161 |
|
| Additional paid-in
capital |
|
|
29,496,350 |
|
|
|
31,428,619 |
|
| Statutory
reserve |
|
|
355,912 |
|
|
|
355,912 |
|
| Accumulated
deficit |
|
|
(24,965,827 |
) |
|
|
(22,055,433 |
) |
|
Accumulated other comprehensive loss |
|
|
(174,410 |
) |
|
|
(175,220 |
) |
| Total
ATIF Holdings Limited Stockholders’ equity |
|
|
4,721,652 |
|
|
|
9,563,039 |
|
| |
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(369,045 |
) |
|
|
120,809 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL
LIABILITIES AND EQUITY |
|
$ |
8,136,955 |
|
|
$ |
11,397,763 |
|
|
* |
Retrospectively
restated due to five for one reverse stock split, see Note
16. |
The
accompanying notes are an integral part of these consolidated
financial statements.
ATIF
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| |
|
For the Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
Revenues – third parties |
|
$ |
905,310 |
|
|
$ |
936,935 |
|
|
Revenues – a related party |
|
|
762,000 |
|
|
|
- |
|
|
Revenues |
|
|
1,667,310 |
|
|
|
936,935 |
|
| Cost
of revenues |
|
|
(660,000 |
) |
|
|
- |
|
|
Gross profit |
|
|
1,007,310 |
|
|
|
936,935 |
|
| |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
| Selling
expenses |
|
|
569,529 |
|
|
|
439,174 |
|
| General
and administrative expenses |
|
|
2,651,361 |
|
|
|
2,919,675 |
|
|
Provision for doubtful accounts |
|
|
-
|
|
|
|
- |
|
|
Impairment of long-lived assets |
|
|
-
|
|
|
|
- |
|
|
Total operating expenses |
|
|
3,220,890 |
|
|
|
3,358,849 |
|
| |
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,213,580 |
) |
|
|
(2,421,914 |
) |
| |
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
354,832 |
|
|
|
313 |
|
| Other
(expenses) income, net |
|
|
(123,296 |
) |
|
|
(84,194 |
) |
| (Loss)
gain from investment in trading securities |
|
|
(2,432,107 |
) |
|
|
(258,738 |
) |
|
Gain from disposal of subsidiaries and VIE |
|
|
1,043,052 |
|
|
|
390,183 |
|
|
Total other (expense) income, net |
|
|
(1,157,519 |
) |
|
|
47,564 |
|
| |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(3,371,099 |
) |
|
|
(2,374,350 |
) |
| |
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
-
|
|
|
|
-
|
|
|
Net loss from continuing operations |
|
|
(3,371,099 |
) |
|
|
(2,374,350 |
) |
| |
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
- |
|
|
|
(6,625,898 |
) |
| |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(3,371,099 |
) |
|
|
(9,000,248 |
) |
| |
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interests |
|
|
460,705 |
|
|
|
436,474 |
|
| |
|
|
|
|
|
|
|
|
|
Net loss attributable to ATIF Holdings Limited |
|
|
(2,910,394 |
) |
|
|
(8,563,774 |
) |
| |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Total foreign currency translation adjustment |
|
|
810 |
|
|
|
(283,677 |
) |
|
Comprehensive loss |
|
|
(3,370,289 |
) |
|
|
(9,283,925 |
) |
|
Less: comprehensive loss attributable to non-controlling
interests |
|
|
460,705 |
|
|
|
295,985 |
|
|
Comprehensive loss attributable to ATIF Holdings Limited |
|
$ |
(2,909,584 |
) |
|
$ |
(8,987,940 |
) |
| |
|
|
|
|
|
|
|
|
|
Loss Per share – basic and diluted
|
|
$ |
(0.31 |
) |
|
$ |
(0.90 |
) |
|
Loss Per share from continuing operations – basic and diluted
|
|
$ |
(0.31 |
) |
|
$ |
(0.26 |
) |
|
Loss Per share from
discontinued operations – basic and diluted
|
|
$ |
-
|
|
|
$ |
(0.64 |
) |
| Weighted
Average Shares Outstanding* |
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,511,045 |
|
|
|
9,483,010 |
|
|
* |
Retrospectively
restated due to five for one reverse stock split, see Note
16. |
The
accompanying notes are an integral part of these consolidated
financial statements.
ATIF
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
FOR
THE YEARS ENDED JULY 31, 2022 AND 2021
| |
|
Ordinary
Share |
|
|
Additional
Paid in |
|
|
Statutory |
|
|
Accumulated |
|
|
Accumulated
Other
Comprehensive |
|
|
Noncontrolling |
|
|
|
|
| |
|
Shares* |
|
|
Amount |
|
|
Capital |
|
|
Reserves |
|
|
deficit |
|
|
Loss |
|
|
interests |
|
|
Total |
|
|
Balance
at July 31, 2020 |
|
|
9,402,935 |
|
|
$ |
9,402 |
|
|
$ |
30,593,370 |
|
|
$ |
355,912 |
|
|
$ |
(13,491,659 |
) |
|
$ |
(63,766 |
) |
|
$ |
17,214,483 |
|
|
$ |
34,617,742 |
|
|
Cancellation
of ordinary shares in connection with disposal of LGC |
|
|
(1,111,110 |
) |
|
|
(1,111 |
) |
|
|
(5,998,881 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,999,992 |
) |
|
Issuance
of ordinary shares pursuant to registered direct
offering |
|
|
869,565 |
|
|
|
870 |
|
|
|
2,790,087 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,790,957 |
|
|
Issuance
of warrants pursuant to registered direct offering |
|
|
- |
|
|
|
- |
|
|
|
744,043 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
744,043 |
|
|
Injection
from shareholders |
|
|
- |
|
|
|
- |
|
|
|
3,300,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,300,000 |
|
| Disposal
of LGC |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(105,257 |
) |
|
|
(16,516,711 |
) |
|
|
(16,621,968 |
) |
| Disposal
of Qianhai |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
136,991 |
|
|
|
- |
|
|
|
136,991 |
|
|
Net
loss for the year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,563,774 |
) |
|
|
- |
|
|
|
(436,474 |
) |
|
|
(9,000,248 |
) |
|
Foreign
currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(143,188 |
) |
|
|
(140,489 |
) |
|
|
(283,677 |
) |
|
Balance
at July 31, 2021 |
|
|
9,161,390 |
|
|
$ |
9,161 |
|
|
$ |
31,428,619 |
|
|
$ |
355,912 |
|
|
$ |
(22,055,433 |
) |
|
$ |
(175,220 |
) |
|
$ |
120,809 |
|
|
$ |
9,683,848 |
|
| Issuance
of ordinary shares pursuant to exercise of warrants |
|
|
459,986 |
|
|
|
460 |
|
|
|
1,067,737 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,068,197 |
|
| Issuance
of ordinary shares as fractional shares of reverse stock
split* |
|
|
6,076 |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Withdrawal
of investment by a limited partner of ATIF LP (Note 1) |
|
|
- |
|
|
|
- |
|
|
|
(3,000,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,000,000 |
) |
|
Appropriation
of investment gain to the limited partner of ATIF LP (Note
1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(29,149 |
) |
|
|
(29,149 |
) |
|
Net
loss for the year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,910,394 |
) |
|
|
- |
|
|
|
(460,705 |
) |
|
|
(3,371,099 |
) |
|
Foreign
currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
810 |
|
|
|
- |
|
|
|
810 |
|
|
Balance
at July 31, 2022 |
|
|
9,627,452 |
|
|
$ |
9,627 |
|
|
$ |
29,496,350 |
|
|
$ |
355,912 |
|
|
$ |
(24,965,827 |
) |
|
$ |
(174,410 |
) |
|
$ |
(369,045 |
) |
|
$ |
4,352,607 |
|
|
|
* |
Retrospectively
restated due to five for one reverse stock split, see Note
16. |
The
accompanying notes are an integral part of these consolidated
financial statements.
ATIF
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
For the Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Cash flows from operating
activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,371,099 |
) |
|
|
(9,000,248 |
) |
|
Less: net loss from discontinued operations |
|
|
-
|
|
|
|
6,625,898 |
|
| Net
loss from continuing operations |
|
|
(3,371,099 |
) |
|
|
(2,374,350 |
) |
|
Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
158,605 |
|
|
|
208,956 |
|
|
Amortization of right-of-use assets |
|
|
424,400 |
|
|
|
513,082 |
|
| Loss from
disposal of property and equipment |
|
|
39,313 |
|
|
|
-
|
|
| Loss
(Gain) from investment in trading securities |
|
|
2,432,107 |
|
|
|
258,738 |
|
| Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts
receivable – a related party |
|
|
(762,000 |
) |
|
|
-
|
|
| Due
from buyers of Leaping Group Corporation |
|
|
(354,767 |
) |
|
|
-
|
|
| Deposits |
|
|
93,668 |
|
|
|
133,848 |
|
| Prepaid
expenses and other current assets |
|
|
37,241 |
|
|
|
11,922 |
|
| Deferred
revenue |
|
|
(244,675 |
) |
|
|
(178,885 |
) |
| Taxes
payable |
|
|
(55,809 |
) |
|
|
(643,789 |
) |
| Accrued
expenses and other liabilities |
|
|
1,870,108 |
|
|
|
28,412 |
|
|
Lease liabilities |
|
|
(414,036 |
) |
|
|
(505,372 |
) |
|
Net cash used in operating activities from continuing
operations |
|
|
(146,944 |
) |
|
|
(2,547,438 |
) |
|
Net cash used in operating activities from discontinued
operations |
|
|
-
|
|
|
|
(119,612 |
) |
|
Net cash used in operating activities |
|
|
(146,944 |
) |
|
|
(2,667,050 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Purchase
of property and equipment |
|
|
(101,950 |
) |
|
|
(106,505 |
) |
| Proceeds
from disposal of property and equipment |
|
|
283,359 |
|
|
|
-
|
|
| Payment
for investment in trading securities |
|
|
(1,437,944 |
) |
|
|
(367,571 |
) |
|
Investment in an equity investee |
|
|
(335,000 |
) |
|
|
-
|
|
|
Collection of investment deposit for life insurance contract |
|
|
-
|
|
|
|
1,217,456 |
|
|
Net cash (used in) provided by investing activities from continuing
operations |
|
|
(1,591,535 |
) |
|
|
743,380 |
|
|
Net cash provided by investing activities from discontinued
operations |
|
|
-
|
|
|
|
118,541 |
|
|
Net cash (used in) provided by investing activities |
|
|
(1,591,535 |
) |
|
|
861,921 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Capital
contribution |
|
|
-
|
|
|
|
3,300,000 |
|
|
Withdrawal of capital contribution limited partners of ATIF LP |
|
|
(3,000,000 |
) |
|
|
-
|
|
| Payment
of investment gains to the limited partner of ATIF LP |
|
|
(29,149 |
) |
|
|
-
|
|
| Proceeds
from issuance of ordinary shares pursuant to a registered direct
offering, net of issuance cost |
|
|
-
|
|
|
|
3,535,000 |
|
| Proceeds from
exercise of warrants |
|
|
1,068,203 |
|
|
|
-
|
|
| Proceeds
from related party borrowings |
|
|
-
|
|
|
|
-
|
|
|
Repayment of related party borrowings |
|
|
-
|
|
|
|
-
|
|
|
Net cash (used in) provided by financing activities from continuing
operations |
|
|
(1,960,946 |
) |
|
|
6,835,000 |
|
|
Net cash used in financing activities from discontinued
operations |
|
|
-
|
|
|
|
-
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,960,946 |
) |
|
|
6,835,000 |
|
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(147,178 |
) |
|
|
138,611 |
|
|
Net (decrease) increase in cash from continuing operations |
|
|
(3,846,603 |
) |
|
|
5,187,083 |
|
|
Net increase (decrease) in cash from discontinued
operations |
|
|
-
|
|
|
|
(18,601 |
) |
|
Cash from continuing operations, beginning of year |
|
|
5,596,740 |
|
|
|
409,657 |
|
|
Cash from discontinued operations, beginning of year |
|
|
-
|
|
|
|
18,601 |
|
|
Cash, end of year |
|
$ |
1,750,137 |
|
|
$ |
5,596,740 |
|
|
Less: Cash from discontinued operations, end of year |
|
|
-
|
|
|
|
-
|
|
|
Cash from continuing operations, end of year |
|
$ |
1,750,137 |
|
|
$ |
5,596,740 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for interest expenses |
|
$ |
-
|
|
|
$ |
-
|
|
|
Cash paid for income tax |
|
$ |
-
|
|
|
$ |
-
|
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of Non-cash investing and financing
activities of continuing operations |
|
|
|
|
|
|
|
|
|
Collection of ordinary shares in connection with disposal of
LGC |
|
$ |
-
|
|
|
$ |
5,999,992 |
|
|
Receivable in connection with disposal of LGC |
|
$ |
-
|
|
|
$ |
2,300,000 |
|
|
Right-of-use assets obtained in exchange for operating lease
obligations |
|
$ |
-
|
|
|
$ |
807,531 |
|
|
Supplemental disclosure of Non-cash investing and financing
activities of discontinued operations |
|
|
|
|
|
|
|
|
|
Common shares issued for acquisition of LGC |
|
$ |
-
|
|
|
$ |
-
|
|
|
Debt conversion for acquisition of LGC |
|
$ |
-
|
|
|
$ |
-
|
|
|
Net assets acquired from LGC |
|
$ |
-
|
|
|
$ |
-
|
|
|
Net liabilities derecognized for termination of VIE |
|
$ |
-
|
|
|
$ |
(405,823 |
) |
|
Right-of-use assets obtained in exchange for operating lease
obligations |
|
$ |
1,062,391 |
|
|
$ |
-
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
ATIF
Holdings Limited (“ATIF” or the “Company”), formerly known as
Eternal Fairy International Limited and Asia Times Holdings
Limited, was incorporated under the laws of the British Virgin
Islands (“BVI”) on January 5, 2015, as a holding company to
develop business opportunities in the People’s Republic of China
(the “PRC” or “China”). The Company adopted its current name on
March 7, 2019.
ATIF
owns 100% equity interest of ATIF Limited (“ATIF HK”), formerly
known as China Elite International Holdings Limited and Asia Times
International Finance Limited, a limited liability company
established in Hong Kong on January 6, 2015, and adopted its
current name on March 7, 2019. ATIF HK acquired a financial
and news media platform www.chinacnnm.com in
September 2018.
On
May 20, 2015, ATIF HK incorporated Huaya Consultant (Shenzhen)
Co., Ltd. (“Huaya”) as a Wholly Foreign Owned Enterprise
(“WFOE”) in China. On September 5, 2018, Huaya entered into a
series of contractual arrangements with the owners of Qianhai Asia
Era (Shenzhen) International Financial Service Co., Ltd.
(“Qianhai”), a company incorporated on November 3, 2015, under
the laws of China with a registered capital of RMB5 million
(approximately $0.75 million), which had been fully funded in
December 2017. Qianhai is primarily engaged in providing
business advisory and financial consulting services to small and
medium-sized enterprise customers in the PRC.
Qianhai
originally owned a 100% controlled subsidiary Qianhai Asia Era
(Shenzhen) International Fund Management Co., Ltd. (“Asia Era
Fund”), which had limited operation since its inception on
December 11, 2015. In connection with the reorganization of
the legal structure for the initial public offering (“IPO”) of the
Company, Asia Era Fund was spun off in two steps in August 2018
through September 2018.
On
January 21, 2021, the Company incorporated ATIF-1 GP, LLC (“ATIF
GP”) under the laws of Delaware of the United States. ATIF GP is a
wholly owned subsidiary of the Company, and focuses on fund
management business.
On
February 16, 2021, ATIF-1, LP (“ATIF LP”) was established as a
private equity fund through our indirectly-wholly owned subsidiary,
ATIF-1 GP, LLC (“ATIF GP”), a Delaware limited liability company,
as the general partner. As of July 31, 2022, the Company owns 76.6%
limited partner interest in ATIF, LP. The investment manager
for the fund is ATIF Inc. ATIF LP manages approximately $1.3
million and $4.8 million assets under management (“AUM”) as of
July 31, 2022 and 2021, respectively. For the year ended July 31,
2022, three limited partners of ATIF LP withdrew the investment of
$3.0 million. In addition, the Company also paid investment gain of
$29,149 to the limited partner, which was recorded as a reduction
of non-controlling interest.
On
December 22, 2021, ATIF Inc. incorporated ATIF BD LLC (“ATIF BD”)
under the laws of California of the United States. On April 25,
2022, the Company incorporated ATIF Investment Limited (“ATIF
Investment”) under the laws of BVI.
Disposal
of ATIF HK and Huaya
On
May 20, 2022, the Company entered into a share transfer agreement
with Mr. Pishan Chi, pursuant to which the Company transferred all
of its equity interest in ATIF HK and its wholly owned subsidiary,
Huaya to Mr. Chi at $nil consideration. Mr. Chi
was the Company’s former Chief Executive Officer for the period
from July 10, 2020 through August 4, 2021. The transfer of equity
interest was closed on May 31, 2022.
The
transfer of equity interest in ATIF HK and Huaya was for the
purpose of mitigation of restrictions on China-based companies
raising capital offshore by the PRC government. Upon the transfer
of ATIF HK and Huaya, the Company would continue its effort to
provide financial consulting services to clients from North America
and other areas. The management believed the disposition does not
represent a strategic shift because it is not changing the way it
is running its business. The Company has not shifted the nature of
its operations, not is it exiting the North America market, which
is the Company’s major geographic market area. The termination is
not accounted as discontinued operations in accordance with ASC
205-20 (see Note 6).
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
(continued)
Termination
of VIE agreements with Qianai
On
February 3, 2021, the Company closed termination of its variable
interest entity (“VIE”) agreements with Qianhai Asia Times
(Shenzhen) International Financial Services Co., Ltd. (“Qianhai”).
Upon the termination, Qianhai transferred all of its business and
employees to Huaya, a wholly owned subsidiary of the Company. The
termination of the Qianhai VIE agreements did not contain any
penalties or non-compete agreements.
Qianhai
transferred all of its China-based business and employees to Huaya
before termination of the VIE agreements. The termination of the
VIE agreements did not discontinue our consulting service business
because such services has been transferred to Huaya and ATIF Inc.
to serve the clients located in China and the United States,
respectively. The termination also did not cause material
impairment of our long-lived assets (primarily including fixed
assets such as office furniture and equipment and automobile)
because all of the fixed assets have been transferred to our PRC
subsidiary Huaya upon termination of the VIE agreements. The
management believed the termination of Qianhai VIE agreements does
not represent a strategic shift that has (or will have) a major
effect on the Company’s operations and financial results. The
termination is not accounted as discontinued operations in
accordance with ASC 205-20 (see Note 5).
Acquisition
of Leaping Group Co., Ltd. (“LGC”)
On April 22, 2020, the Company completed an acquisition of
51.2% of the equity interest of Leaping Group Co., Ltd.
(“LGC”) from its original shareholders for a total consideration of
approximately $22.92 million, including cash consideration of $1.85
million and issuance of 9,940,002 shares (1,988,000 ordinary
shares retrospectively restated for accounting purposes for effect
of reverse stock split on August 30, 2021) of ATIF’s common stock
with fair value of approximately $21.07 million (see Note 4). LGC,
through its subsidiaries and similar VIE contractual agreements,
controls Leaping Media Group Co., Ltd. (“LMG”), an operating
entity located in Shenyang, China. LMG, along with its operating
subsidiaries, is engaged in the multi-channel advertising business,
event planning and execution business, film production business and
movie theater operating business (collectively “media business”) in
China. LMG used to be one of the Company’s clients that sought
business advisory services. Upon closing of the acquisition, ATIF
owns 51.2% equity interest of LGC and hereby consolidates
operations of LGC.
Disposition
of LGC
On January 29, 2021, the Company completed a disposition of 51.2%
of the equity interest of LGC. The Company sold all of its shares
of LGC to Jiang Bo, Jiang Tao and Wang Di (collectively, the
“Buyers”) in exchange for (i) 5,555,548 ordinary shares (1,111,110
ordinary shares retrospectively restated for accounting purposes
for effect of reverse stock split on August 30, 2021) of the
Company owned by the Buyers and (ii) payment by the Buyers in the
amount of $2,300,000 plus interest at an interest rate of 10% per
annum on the unpaid amount if the principal amount of US$2,300,000
is not paid by January 14, 2022. All principal and accrued and
unpaid interest shall be due on January 14, 2023. As of July 31,
2022, the principal and accrued and unpaid interest amounted to
$2,654,767.
In
accordance with ASC 205-20, Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity, a disposal of
a component of an entity or a group of components of an entity is
required to be reported as discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect
on an entity’s operations and financial results when the components
of an entity meets the criteria in paragraph 205-20-45-1E to be
classified as held for sale. The disposition of LGC met the
criteria in paragraph 205-20-45-1E and was reported as a
discontinued operation (Note 4).
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – LIQUIDITY and GOING CONCERN
For
the years ended July 31, 2022 and 2021, the Company reported a net
loss from continuing operations of approximately $3.4 million and
$2.4 million, respectively, and operating cash outflows from
continuing operations of approximately $0.1 million and $2.5
million.
In
assessing the Company’s ability to continue as a going concern, the
Company monitors and analyzes its cash and its ability to generate
sufficient cash flow in the future to support its operating and
capital expenditure commitments.
As of
July 31, 2022, the Company had cash of $1.8 million. On the other
hand, the Company had current liabilities of $2.8 million.
Currently the Company had three service-in-progress agreements, and
expected to collect consulting service fees of $2.5 million for the
next 12 months. The Company also had $2.7 million receivable from
buyers of LGC in connection with the disposal of LGC which will be
due in early 2023. In addition, due to the recent intense
relationship between the U.S. and China, which has become more
fragile as a result of the outbreak and spread of COVID-19, plus
the tightening of U.S. legislation and public listing rules to
curb some small Chinese companies to access the U.S. capital
markets, an increasing number of Chinese companies are putting off
or slowing down their plans for U.S. listings due to these
uncertainties. Furthermore, due to the impact of COVID-19, some of
our existing customers may experience financial distress or
business disruptions, which could lead to potential delay or
default on their payments. Any increased difficulty in collecting
accounts receivable, or early termination of our existing
consulting service agreements due to deterioration in economic
conditions could further negatively impact our cash flows. Given
these factors, our potential customers’ perception and confidence
to go public in the United States has been negatively impacted and
our operating revenue and cash flows may continue to underperform
in the near terms. Although we had cash of $1.8 million as of July
31, 2022, given the above mentioned uncertainties, the management
believes that the Company will continue as a going concern in
the following 12 months from the date the Company’s 2022
consolidated financial statements are issued.
We
believe that our existing cash, together with $3.2 million that
currently remains available under our $8.0 million revolving line
of credit with Silicon Valley Bank (“SVB Credit Facility”),
and $4.0 million available under the subordinated line of credit
(“Subordinated LOC”) as of September 12, 2022, will be sufficient
to meet our anticipated capital resources to fund planned
operations for the next twelve (12) months.
Currently,
the Company intends to finance its future working capital
requirements and capital expenditures from cash generated from
operating activities and funds raised from equity financings. In
October 2021, the Company raised proceeds of $1.1 million from
exercise of warrants to purchase 389,855 of its ordinary shares by
warrant holders who subscribed for ordinary shares in the
registered direct offering closed in November 2020.
The
accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the
ordinary course of business. The financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of
the uncertainties described above.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and pursuant to the
rules and regulations of the Securities Exchange Commission
(“SEC”). The consolidated financial statements of the Company
include the accounts of the Company and its subsidiaries. The
consolidated financial statements of the Company also include the
accounts of ATIF LP, for which the Company is an investment manager
and has primary beneficiary over the ATIF LP. All intercompany
balances and transactions have been eliminated upon
consolidation.
As of
July 31, 2022, the Company’s consolidated financial statements
reflect the operating results of the following entities:
|
Name
of Entity |
|
|
Date
of
Incorporation |
|
|
Place
of
Incorporation |
|
|
%
of
Ownership |
|
|
Principal
Activities |
|
|
Parent
company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATIF
Holdings Limited (“ATIF”) |
|
|
January 5,
2015 |
|
|
British
Virgin Islands |
|
|
Parent |
|
|
Investment
holding |
|
|
Wholly
owned subsidiaries of ATIF |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATIF
Inc. (“ATIF USA”) |
|
|
October
26, 2020 |
|
|
USA |
|
|
100% |
|
|
Consultancy
and information technology support |
|
|
ATIF
Investment LLC (“ATIF Investment”) |
|
|
April
25, 2022 |
|
|
BVI |
|
|
100% |
|
|
Consultancy
and information technology support |
|
|
ATIF
BD LLC (“ATIF BD”) |
|
|
December
22, 2021 |
|
|
USA |
|
|
100% |
|
|
Consultancy
and information technology support |
|
|
ATIF-1
GP, LLC (“ATIF GP”) |
|
|
January
21, 2021 |
|
|
USA |
|
|
100% |
|
|
Fund
management |
|
|
ATIF-1
LP, LLC (“ATIF LP”) |
|
|
February
16, 2021 |
|
|
USA |
|
|
76.6% |
|
|
Investment |
|
The VIE contractual arrangements
Foreign
investments in domestic Chinese companies that engage in private
equity investment business and media business are both restricted
in China under current PRC laws and regulations. Before the
termination of the Qianhai VIE agreements on February 3, 2021 (see
Note 5) and disposition of LGC on January 31, 2021 (see Note 4),
the Company was still operating under the VIE structure and the
Company’s main operating entities Qianhai and LMG are controlled
through contractual arrangements in lieu of direct equity ownership
by the Company or any of its subsidiaries.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Basis
of Presentation and Principles of Consolidation
(continued)
Risks associated with the VIE structure
The
Company believes that the contractual arrangements with its VIEs
and respective shareholders are in compliance with PRC laws and
regulations and are legally enforceable. However, uncertainties in
the PRC legal system could limit the Company’s ability to enforce
the contractual arrangements. If the legal structure and
contractual arrangements were found to be in violation of PRC laws
and regulations, the PRC government could:
|
|
● |
revoke
the business and operating licenses of the Company’s PRC subsidiary
and VIEs; |
| |
|
|
| |
● |
discontinue
or restrict the operations of any related-party transactions
between the Company’s PRC subsidiary and VIEs; |
| |
|
|
| |
● |
limit
the Company’s business expansion in China by way of entering into
contractual arrangements; |
| |
|
|
| |
● |
impose
fines or other requirements with which the Company’s PRC subsidiary
and VIEs may not be able to comply; |
| |
|
|
| |
● |
require
the Company or the Company’s PRC subsidiary and VIEs to restructure
the relevant ownership structure or operations; or |
| |
|
|
| |
● |
restrict
or prohibit the Company’s use of the proceeds from the IPO to
finance the Company’s business and operations in China. |
The
Company’s ability to conduct its consulting services business may
be negatively affected if the PRC government were to carry out of
any of the aforementioned actions. As a result, the Company may not
be able to consolidate its VIEs in its consolidated financial
statements as it may lose the ability to exert effective control
over the VIEs and its respective shareholders and it may lose the
ability to receive economic benefits from its VIEs. The Company,
however, does not believe such actions would result in the
liquidation or dissolution of the Company, its PRC subsidiary, or
its VIEs.
The
Company has not provided any financial support to the VIEs for
the years ended July 31, 2021.
Because
the Company terminated Qianhai VIE agreements on February 3, 2021
(see Note 5) and disposed of LGC on January 31, 2021
(Note 4), the Company had no balances of VIEs included in the
accompanying consolidated financial statements as of July 31, 2022
and 2021.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Basis
of Presentation and Principles of Consolidation
(continued)
The
follow table summarized operating results of the VIEs for the
period from August 1, 2021 through VIE termination date.
| |
|
For the
period from
August 1,
2020
through
February 3, 2021 |
|
|
For the
period from
August 1,
2020
through
January 31, 2021 |
|
|
|
|
| |
|
Qianhai VIE |
|
|
LMG VIE |
|
|
Total |
|
|
Operating revenue |
|
$ |
380,954 |
|
|
$ |
2,117,551 |
|
|
$ |
2,498,505 |
|
|
Income (loss) from operations |
|
$ |
(60,242 |
) |
|
$ |
(1,154,067 |
) |
|
$ |
(1,214,309 |
) |
|
Income (loss) before income taxes |
|
$ |
(63,765 |
) |
|
$ |
(1,166,287 |
) |
|
$ |
(1,230,052 |
) |
|
Net income (loss) |
|
$ |
(63,765 |
) |
|
$ |
(1,142,160 |
) |
|
$ |
(1,205,925 |
) |
The
follow table summarized cash flow information of the VIEs for the
period from August 1, 2021 through VIE termination date.
| |
|
For the
period from
August 1,
2020
through
February 3, 2021 |
|
|
For the
period from
August 1,
2020
through
January 31, 2021 |
|
|
|
|
| |
|
Qianhai VIE |
|
|
LMG VIE |
|
|
Total |
|
|
Net cash provided by (used in) operating activities |
|
$ |
(286,657 |
) |
|
$ |
(119,612 |
) |
|
$ |
(406,269 |
) |
|
Net cash provided by (used in) investing activities |
|
$ |
-
|
|
|
$ |
118,541 |
|
|
$ |
118,541 |
|
|
Net cash provided by (used in) financing activities |
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Noncontrolling
Interests
As of July 31, 2022 and 2021, the non-controlling interest
represent minority shareholders’ 76.6% and 68.8% ownership interest
in ATIF LP, over which the Company had 23.4% and 31.2% ownership
interest and acted as an investment manager through ATIF GP, its
wholly owned subsidiary. The Company had non-controlling interest
of $(369,045) and $120,809 as of July 31, 2022 and 2021.
Use
of Estimates
In
preparing the consolidated financial statements in conformity with
U.S. GAAP, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. These estimates are based on information as
of the date of the consolidated financial statements. Significant
estimates required to be made by management include, but are not
limited to, the valuation of accounts receivable, useful lives of
property and equipment and intangible assets, the recoverability of
long-lived assets, revenue recognition, provision necessary for
contingent liabilities and realization of deferred tax assets.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
includes cash on hand and demand deposits in accounts maintained
with commercial banks. The Company considers all highly liquid
investment instruments with an original maturity of three months or
less from the date of purchase to be cash equivalents. The Company
maintains most of its bank accounts in the PRC.
Accounts
Receivable, net
Accounts
receivable are presented net of allowance for doubtful accounts.
The Company usually determines the adequacy of reserves for
doubtful accounts based on individual account analysis and
historical collection trends. The Company establishes a provision
for doubtful receivables when there is objective evidence that the
Company may not be able to collect amounts due. The allowance is
based on management’s best estimates of specific losses on
individual exposures, as well as a provision on historical trends
of collections. The provision is recorded against accounts
receivables balances, with a corresponding charge recorded in the
consolidated statements of operations and comprehensive loss.
Delinquent account balances are written off against the allowance
for doubtful accounts after management has determined that the
likelihood of collection is not probable. As of July 31, 2022 and
2021, the Company had no allowance against doubtful accounts
receivable.
Investment
in Trading Securities
Equity
securities not accounted for using the equity method are carried at
fair value with changes in fair value recorded in the consolidated
statements of operations and comprehensive loss, according to ASC
321 “Investments — Equity Securities”. During the years ended July
31, 2022 and 2021, the Company purchased certain publicly-listed
equity securities through various open market transactions and
accounted for such investments as “investment in trading
securities” and subsequently measure the investments at fair value.
The Company made a loss of $2,432,107 and $258,738 from investment
in trading securities for the years ended July 31, 2022 and
2021.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Property
and Equipment, net
Property
and equipment are stated at cost. The straight-line depreciation
method is used to compute depreciation over the estimated useful
lives of the assets, as follows:
| |
|
Useful life |
| Furniture, fixtures and
equipment |
|
3-5 years |
| Transportation vehicles |
|
5 years |
Expenditures
for maintenance and repairs, which do not materially extend the
useful lives of the assets, are charged to expense as incurred.
Expenditures for major renewals and betterments which substantially
extend the useful life of assets are capitalized. The cost and
related accumulated depreciation of assets retired or sold are
removed from the respective accounts, and any gain or loss is
recognized in the consolidated statements of operations and
comprehensive loss as other income or expenses.
Long-term
investments
In
accordance with ASC 321-10 “Investments – Equity Securities”, the
Company elects to record equity investments in a privately held
company, over which the Company did not have control or exercise
significant influence, using the measurement alternative at cost,
less impairment, with subsequent adjustments for observable price
changes resulting from orderly transactions for identical or
similar investments of the same issuer.
Equity
investment in a privately held company accounted for using the
measurement alternative is subject to periodic impairment reviews.
The Company’s impairment analysis considers both qualitative and
quantitative factors that may have a significant effect on the fair
value of these equity securities, including consideration of the
impact of the COVID-19 pandemic.
As of
July 31, 2022 and 2021, the Company did not record impairment loss
against the long-term investments.
Impairment
of Long-lived Assets
Long-lived
assets, including plant and equipment and intangible with finite
lives are reviewed for impairment whenever events or changes in
circumstances (such as a significant adverse change to market
conditions that will impact the future use of the assets) indicate
that the carrying value of an asset may not be recoverable. The
Company assesses the recoverability of the assets based on the
undiscounted future cash flows the assets are expected to generate
and recognize an impairment loss when estimated undiscounted future
cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset, if any, are less
than the carrying value of the asset. If an impairment is
identified, the Company would reduce the carrying amount of the
asset to its estimated fair value based on a discounted cash flows
approach or, when available and appropriate, to comparable market
values.
For
the years ended July 31, 2022 and 2021, the Company did not
record impairment against long-lived assets from its continuing
operations, respectively.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Fair
Value of Financial Instruments
ASC
825-10 requires certain disclosures regarding the fair value of
financial instruments. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. A three-level fair value hierarchy prioritizes
the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the
use of unobservable inputs. The three levels of inputs used to
measure fair value are as follows:
|
|
● |
Level
1 – inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets. |
|
|
|
|
|
|
● |
Level
2 – inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, quoted market
prices for identical or similar assets in markets that are not
active, inputs other than quoted prices that are observable and
inputs derived from or corroborated by observable market
data. |
|
|
|
|
|
|
● |
Level
3 – inputs to the valuation methodology are
unobservable. |
Fair
value of investment in trading securities are based on quoted
prices in active markets. The carrying amounts of the Company’s
other financial instruments including cash and cash equivalents,
deposits, due from buyers of LGC and other current assets, accounts
payable, and accrued expenses and other current liabilities
approximate their fair values because of the short-term nature of
these assets and liabilities. For lease liabilities, fair value
approximates their carrying value at the year-end as the interest
rates used to discount the host contracts approximate market
rates.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606 Revenue from
Contracts with Customers (“ASC 606”).
To
determine revenue recognition for contracts with customers, the
Company performs the following five steps: (i) identify the
contract with the customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction
price, including variable consideration to the extent that it is
probable that a significant future reversal will not occur,
(iv) allocate the transaction price to the respective
performance obligations in the contract, and (v) recognize
revenue when (or as) the Company satisfies the performance
obligation.
The
Company recognizes revenue when it transfers its goods and services
to customers in an amount that reflects the consideration to which
the Company expects to be entitled in such exchange.
The
Company currently generates its revenue from the following main
sources:
|
|
(1) |
Revenue
from customer’s initial registration fee |
In
order to engage with the Company for various consulting services, a
new customer is required to pay an initial non-refundable
registration fee to the Company and the Company will then post the
customer’s information and profiles on its website, at which point,
the Company’s performance obligations are satisfied and such
registration fee is recognized as revenue. The Company does not
charge additional customer profile maintenance fee after the
initial posting is completed as limited effort is required for the
Company to maintain such information on an on-going basis. No
revenues were generated from customer’s initial registration for
the years ended July 31, 2022 and 2021.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition (continued)
|
|
(2) |
Revenue
from consulting services |
The
Company provides various consulting services to its members,
especially to those who have the intention to be publicly listed in
the stock exchanges in the United States and other countries. The
Company categorizes its consulting services into three
Phases:
Phase
I consulting services primarily include due diligence review,
market research and feasibility study, business plan drafting,
accounting record review, and business analysis and
recommendations. Management estimates that Phase I normally takes
about three months to complete based on its past
experience.
Phase
II consulting services primarily include reorganization,
pre-listing education and tutoring, talent search, legal and audit
firm recommendation and coordination, VIE contracts and other
public-listing related documents review, merger and acquisition
planning, investor referral and pre-listing equity financing source
identification and recommendations, and independent directors and
audit committee candidate’s recommendation. Management estimates
that Phase II normally takes about eight months to complete based
on its past experience.
Phase
III consulting services primarily include shell company
identification and recommendation for customers expecting to become
publicly listed through reverse merger transaction; assistance in
preparation of customers’ public filings for IPO or reverse merger
transactions; and assistance in answering comments and questions
received from regulatory agencies. Management believes it is very
difficult to estimate the timing of this phase of service as the
completion of Phase III services is not within the Company’s
control.
Each
phase of consulting services is stand-alone and fees associated
with each phase are clearly identified in service agreements.
Revenue from providing Phase I and Phase II consulting services to
customers is recognized ratably over the estimated completion
period of each phase as the Company’s performance obligations
related to these services are carried out over the whole duration
of each Phase. Revenue from providing Phase III consulting services
to customers is recognized upon completion of the reverse merger
transaction or IPO transaction when the Company’s promised services
are rendered and the Company’s performance obligations are
satisfied. Revenue that has been billed and not yet recognized is
reflected as deferred revenue on the balance sheet.
Depending
on the complexity of the underlying service arrangement and related
terms and conditions, significant judgments, assumptions, and
estimates may be required to determine when substantial delivery of
contract elements has occurred, whether any significant ongoing
obligations exist subsequent to contract execution, whether amounts
due are collectible and the appropriate period or periods in which,
or during which, the completion of the earnings process occurs.
Depending on the magnitude of specific revenue arrangements,
adjustment may be made to the judgments, assumptions, and estimates
regarding contracts executed in any specific period.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition (continued)
Revenue from LGC
Before
the disposal of 51.2% equity interest in LGC, the Company generated
revenue from Multi-Channel advertising, Event planning and
execution, Movie Theater Operating and others. The revenues from
these revenue streams were classified as a component of “net loss
from discontinued operations” upon the close of the disposition.
See Note 4.
|
|
(1) |
Multi-Channel
advertising |
The
Company’s multi-channel advertising services include pre-movie
advertisements display, elevator and supermarket advertising, and
brand promotion. Most of the Company’s client contracts are
individually negotiated and, accordingly, the service period and
prices vary significantly. Service periods typically range from one
day to one year.
The
Company provides advertising services over the contract period.
Revenues from advertising services are recognized on straight-line
basis over the contract period, which approximates the pattern of
when the underlying services are performed. Prepayments for
advertising services are deferred and recognized as revenue when
the advertising services are rendered and the Company’s performance
obligations are satisfied.
The
Company also provides advertising services through its regional
distributors. Pursuant to advertising services distribution
agreements, the Company grants the regional distributors the
exclusive rights to provide local pre-movie advertising. The
advertising services distribution agreements with these regional
distributors typically have terms ranging from 11 to 24 months
without automatic renewal provisions. Under the advertising
services distribution agreements, the Company has the right to set
the minimum local pre-movie advertisement prices in the movie
theaters, regulate the content and quality of local pre-movie
advertisements according to related laws and movie theater rules,
and examine the source of local pre-movie advertisements and refuse
to display advertisements from any competitors. The receipt of
distribution fee is initially recorded as deferred revenue and is
recognized as revenue ratably as services are rendered and the
Company’s performance obligations are satisfied.
|
|
(2) |
Event
planning and execution |
The
Company’s event planning and execution business includes planning
and arrangement of events, and production of related advertising
materials. From the preparation of the events to executing it
typically takes no more than one week. Revenue is realized when the
service is performed in accordance with the client arrangement and
upon the completion of the earnings process.
|
|
(3) |
Movie
Theater Operating |
The
Company’s movie theater operating revenues are generated primarily
from box office admissions and theater food and beverage sales.
Revenues of this business line are recognized when admissions and
food and beverage sales are rendered at the theaters and are
reported net of sales tax. The Company defers 100% of the revenue
associated with the sales of gift cards and packaged tickets until
such time as the items are redeemed.
ATIF
HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition (continued)
For
the years ended July 31, 2022 and 2021, the disaggregation of
revenues from continuing operations and discontinued operations was
as below:
| |
|
For the Years Ended
July 31, |
|
| |
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
Consulting service revenue from continuing operations* |
|
$ |
1,626,102 |
|
|
$ |
936,935 |
|
|
Other service revenues |
|
|
41,208 |
|
|
|
-
|
|
|
Revenues from continuing operations |
|
$ |
1,667,310 |
|
|
$ |
936,935 |
|
|
Revenue from discontinued operations (multi-channel advertising,
event planning and execution and movie theater operation business
under LGC) |
|
$ |
-
|
|
|
$ |
2,117,551 |
|
|
* |
The
revenues generated by Qianhai, ATIF HK and Huaya were included in
consulting service revenue from continuing operations, because the
termination of Qianhai VIE agreement and share transfer of ATIF HK
and Huaya were not accounted as discontinued operations in
accordance with ASC 205-20 (see Note 5 and Note 6). |
Income
Taxes
The
Company accounts for income taxes under ASC 740. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period including the enactment date. Valuation
allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
An
uncertain tax position is recognized only if it is “more likely
than not” that the tax position would be sustained in a tax
examination. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely than
not” test, no tax benefit is recorded. Penalties and interest
incurred related to underpayment of income tax are classified as
income tax expense in the period incurred. The Company did not have
unrecognized uncertain tax positions or any unrecognized
liabilities, interest or penalties associated with unrecognized tax
benefit as of July 31, 2022. As of July 31, 2022, all of the
Company’s income tax returns for the tax years ended
December 31, 2017 through December 31, 2021 remain open
for statutory examination by relevant tax authorities.