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. ☐
Part
I
Item
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
Applicable.
Item
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
Item
3. KEY INFORMATION
A.
Reserved
B.
Capitalization and Indebtedness
Not
Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
Applicable.
D.
Risk Factors
Summary
of Risk Factors
Investing
in our Ordinary Shares involves significant risks. You should carefully consider all of the information in this annual report before
making an investment in our Ordinary Shares. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully below in this section
Risks
Relating to Our Business and Industry
Risks
and uncertainties related to our business and industries include, but are not limited to, the following:
| ● | the
operating entities have a limited operating history and are subject to the risks encountered by early-stage companies; |
| ● | the
PRC operating entities may be subject to damages resulting from unauthorized access or hacking and other cyber risks; |
| ● | the
successful operation of the PRC operating entities’ business depends on the performance and reliability of the Internet infrastructure
and fixed telecommunications networks in China; |
| ● | Metalpha
rely on certain related party for products subscription and any shortage or interruption in subscription could slow our growth and reduce
our profitability; |
| ● | It
may be or become illegal to acquire, own, hold, sell or use cryptocurrencies, participate in the blockchain, or transfer or utilize similar
cryptocurrency assets in international markets where we operate due to adverse changes in the regulatory and policy environment in different
jurisdictions; and |
| ● | The
loss or destruction of private keys required to access any digital assets held by us may be irreversible. If we are unable to access
our private keys or if we experience a hack or other data loss relating to our ability to access any digital assets, it could cause regulatory
scrutiny, reputational harm, and other losses. |
Risks
Relating to Doing Business in the PRC
Risks
and uncertainties related to doing business in the PRC include, but are not limited to, the following:
| ● | our
current corporate structure and business operations may be affected by the Foreign Investment Law (see “Risk Factors––Our
current corporate structure and business operations may be affected by the Foreign Investment Law”); |
| ● | changes
in the policies of the PRC government could have a significant impact upon the PRC operating entities’ ability to operate profitably
in the PRC (see “Risk Factors––Risks Relating to Doing Business in the PRC––Changes in the policies of
the PRC government could have a significant impact upon the PRC operating entities’ ability to operate profitably in the PRC”); |
| ● | PRC
laws and regulations governing the PRC operating entities’ current business operations are sometimes vague and uncertain and any
changes in such laws and regulations may impair the PRC operating entities’ ability to operate profitable (see “Risk Factors––
Risks Relating to Doing Business in the PRC––PRC laws and regulations governing the PRC operating entities’ current
business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair the PRC operating entities’
ability to operate profitable”); |
| ● | uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protection available to you and us (see “Risk
Factors–– Risks Relating to Doing Business in the PRC––Uncertainties in the interpretation and enforcement of
PRC laws and regulations could limit the legal protection available to you and us”); |
| ● | given
the Chinese government’s significant oversight and discretion over the conduct of business of the PRC operating entities, the Chinese
government may intervene or influence their operations at any time, which could result in a material change in the PRC operating entities’
operations and/or the value of our Ordinary Shares (see “Risk Factors––Risks Relating to Doing Business in the PRC––Given
the Chinese government’s significant oversight and discretion over the conduct of business of the PRC operating entities, the Chinese
government may intervene or influence their operations at any time, which could result in a material change in the PRC operating entities’
operations and/or the value of our Ordinary Shares”); |
| ● | any
actions by the Chinese government, including any decision to intervene or influence the operations of the PRC subsidiary or the VIE or
to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to
make material changes to the operations of the PRC subsidiary or the VIE, may limit or completely hinder our ability to offer or continue
to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless (see “Risk
Factors––Risks Relating to Doing Business in the PRC––Any actions by the Chinese government, including any decision
to intervene or influence the operations of the PRC subsidiary or the VIE or to exert control over any offering of securities conducted
overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the PRC subsidiary
or the VIE, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value
of such securities to significantly decline or be worthless”); |
| ● | recent
greater oversight by the Cyberspace Administration of China (the “CAC”) over data security, particularly for companies seeking
to list on a foreign exchange, could adversely impact our business and our offering (see “Risk Factors––Risks Relating
to Doing Business in the PRC––Recent greater oversight by the Cyberspace Administration of China (the ‘CAC’)
over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering”); |
| ● | you
may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against
us or our management named in this annual report based on foreign laws. It may also be difficult for you or overseas regulators to conduct
investigations or collect evidence within China (see “Risk Factors––Risks Relating to Doing Business in the PRC––You
may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against
us or our management named in this annual report based on foreign laws. It may also be difficult for you or overseas regulators to conduct
investigations or collect evidence within China”); |
| ● | the
“Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the “Opinions,” recently
issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may
subject us to additional compliance requirement in the future (see “Risk Factors––Risks Relating to Doing Business
in the PRC––The ‘Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,’ or the
‘Opinions,’ recently issued by the General Office of the Central Committee of the Communist Party of China and the General
Office of the State Council may subject us to additional compliance requirement in the future”); |
| ● | regulations
relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies or inject capital into the
PRC subsidiary and could adversely affect our business. PRC regulations relating to offshore investment activities by PRC residents may
limit our PRC subsidiaries’ ability to increase its registered capital or distribute profits to us, or otherwise expose us or our
PRC resident shareholders to liabilities or penalties (see “Risk Factors––Risks Relating to Doing Business in the PRC––Regulations
relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies or inject capital into the
PRC subsidiary and could adversely affect our business. PRC regulations relating to offshore investment activities by PRC residents may
limit our PRC subsidiaries’ ability to increase its registered capital or distribute profits to us, or otherwise expose us or our
PRC resident shareholders to liabilities or penalties”); |
| ● | PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion
may delay or prevent us from using proceeds from our future financing activities to make loans or additional capital contributions to
the PRC operating entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business
(see “Risk Factors––Risks Relating to Doing Business in the PRC––PRC regulation of loans to and direct
investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from
using proceeds from our future financing activities to make loans or additional capital contributions to the PRC operating entities,
which could materially and adversely affect our liquidity and our ability to fund and expand our business”); |
| ● | we
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies
(see “Risk Factors––Risks Relating to Doing Business in the PRC––We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies”); |
| ● | because
our business is conducted in RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion
rates may affect the value of your investments (see “Risk Factors––Risks Relating to Doing Business in the PRC––Because
our business is conducted in RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion
rates may affect the value of your investments”); |
| ● | under
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 (see “Risk Factors––Risks Relating to Doing Business in the PRC––Under
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
PRC operating entities are subject to restrictions on paying dividends or making other payments to our offshore subsidiaries, which may
have a material adverse effect on our ability to conduct our business (see “Risk Factors––Risks Relating to Doing Business
in the PRC––The PRC operating entities are subject to restrictions on paying dividends or making other payments to our offshore
subsidiaries, which may have a material adverse effect on our ability to conduct our business”); |
| ● | there
are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC operating entities, and dividends
payable by the PRC operating entities to our offshore subsidiaries may not qualify to enjoy certain treaty benefits (see “Risk
Factors––Risks Relating to Doing Business in the PRC––There are significant uncertainties under the EIT Law relating
to the withholding tax liabilities of the PRC operating entities, and dividends payable by the PRC operating entities to our offshore
subsidiaries may not qualify to enjoy certain treaty benefits”); |
| ● | the
failure to comply with PRC regulations relating to mergers and acquisitions of domestic projects by offshore special purpose vehicles
may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure (see “Risk
Factors––Risks Relating to Doing Business in the PRC––The failure to comply with PRC regulations relating to
mergers and acquisitions of domestic projects by offshore special purpose vehicles may subject us to severe fines or penalties and create
other regulatory uncertainties regarding our corporate structure”); |
| ● | the
Draft Rules Regarding Overseas Listings were released by the CSRC for public consultation. While such rules have not yet come into effect,
the Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could
significantly limit or completely hinder our ability to continue to offer our shares to investors and could cause the value of our shares
to significantly decline or become worthless (see “Risk Factors––Risks Relating to Doing Business in the PRC––The
Draft Rules Regarding Overseas Listings were released by the CSRC for public consultation. While such rules have not yet come into effect,
the Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could
significantly limit or completely hinder our ability to continue to offer our shares to investors and could cause the value of our shares
to significantly decline or become worthless”); and |
| ● | to
the extent cash or assets of our business, or of our PRC subsidiaries, or the VIE, is in the PRC, such cash or assets may not be available
to fund operations or for other use outside of the PRC, due to interventions in or the imposition of restrictions and limitations by
the PRC government to the transfer of cash or assets (see “Risk Factors––Risks Relating to Doing Business in the PRC––To
the extent cash or assets of our business, or of our PRC subsidiaries, or the VIE, is in the PRC, such cash or assets may not be available
to fund operations or for other use outside of the PRC, due to interventions in or the imposition of restrictions and limitations by
the PRC government to the transfer of cash or assets”). |
Risks
Relating to Our Corporate Structure
Risks
and uncertainties related to our corporate structure include, but are not limited to, the following:
| ● | the
VIE Agreements may not be effective in providing control over Long Yun; |
| ● | if
the PRC government determines that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant
industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations, and our Ordinary Shares may decline in value or become worthless; |
| ● | the
VIE Agreements may result in adverse tax consequences; and |
| ● | the
Long Yun Shareholders have potential conflicts of interest with our Company, which may adversely affect our business and financial condition. |
Risks
Relating to Our Ordinary Shares and the Trading Market
Risks
and uncertainties related to our Ordinary Shares and the trading market include, but are not limited to, the following:
| ● | 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.; |
| ● | recent
joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional
and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially
the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our continued listing or future
offerings of our securities in the U.S.; |
| ● | the
market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance; |
| ● | if
we cannot continue to satisfy listing requirements and other rules of Nasdaq Capital Market, although we exempt from certain corporate
governance standards applicable to U.S. issuers as a Foreign Private Issuer, our securities may be delisted, which could negatively impact
the price of our securities and your ability to sell them; and |
| ● | we
have a substantial number of warrants outstanding. The exercise of our outstanding warrants can have a dilutive effect
on our Ordinary Shares. |
Risks
Relating to Our Business and Industry
The
operating entities have a limited operating history and are subject to the risks encountered by early-stage companies.
The
PRC operating entities have been in business since October 2014 and did not generate any revenue until the fiscal year ended March 31,
2016. They launched their auto-parts service operation in January 2018 and then suspended it in April 2019. They launched their incubation
service operation in September 2015 and then suspended it in March 2019. The PRC operating entities commenced their current supply chain
management platform service in October 2019. Metalpha commenced its current cryptocurrency derivative products services in December 2021.
As
a fairly new operation, the operating entities’ business strategies and model are constantly being tested by the market, and they
endeavor to adjust their allocation of resources among their current two business segments (namely, Metalpha’s cryptocurrency derivative
product services, and the PRC operating entities’ supply chain management platform services) accordingly. As such, their business
may be subject to significant fluctuations in operating results, in terms of amounts of revenue and percentages of total with respect
to the business segments.
Accordingly,
you should consider the operating entities’ prospects in light of the costs, uncertainties, delays, and difficulties frequently
encountered by companies with a limited operating history. In particular, you should consider that there is a significant risk that:
| ● | Metalpha’s
ability to introduce and manage the development of new cryptocurrency derivative product services; |
| ● | the
operating entities may require additional capital to develop and expand their operations, which may not be available to them when they
require it; |
| ● | the
PRC operating entities may not be able to expand supply chain management platform service operation in a manner which will enable them
to generate revenue and meet the requirements of both the auto-parts suppliers and the auto-repair shops that use their supply chain
management platform services; |
| ● | the
operating entities’ marketing and growth strategy may not be successful; and |
| ● | the
operating entities’ business may be subject to significant fluctuations in operating results. |
Our
future growth will depend substantially on the operating entities’ ability to address these and the other risks described in this
annual report. If the operating entities do not successfully address these risks, their, and consequentially, our business would be significantly
harmed.
The
PRC operating entities’ supply chain management platform service is dependent on their business partnership with the limited logistic
partners, auto parts suppliers, and auto repair shops with which they currently work. Any disruptions in the PRC operating entities’
relationship with such partners may have an adverse effect on their profitability and operating results.
The
PRC operating entities’ supply chain management platform service currently relies upon their partnership with limited logistic
partners, auto parts suppliers, and auto repair shops. Although we believe the number of the logistic partners, auto parts suppliers,
and auto repair shops the PRC operating entities work with is steadily increasing, the PRC operating entities could suffer significant
disruption in business in the event of the loss of their business partnership with such partners, suppliers, and shops, which may further
damage the PRC operating entities’ supply chain service network and their reputation. The PRC operating entities plan to further
expand the number of logistic partners, auto parts suppliers, and auto repair shops they work with and establish a platform for their
auto parts suppliers to sell the suppliers’ products online to attract more suppliers and partners. However, there is no guarantee
that such plans will be successful.
We
may need additional capital to fund the operating entities’ future operations and, if it is not available when needed, the operating
entities may need to reduce their planned expansion and marketing efforts, which may reduce their revenue.
We
believe that our existing working capital and cash available from operations will enable us to meet our working capital requirements
for at least the next 12 months. However, if cash from the PRC operating entities’ future operations is insufficient, or if cash
is used for acquisitions or other currently unanticipated purposes, we may need additional capital. In addition, if the operating entities
fail to generate sufficient net revenue from Metalpha’s cryptocurrency derivative product services, and the PRC operating entities’
supply chain management platform services, they may continue to expend significant amounts of capital. As a result, we could be required
to raise additional capital. To the extent that we raise additional capital through the sale of equity or convertible debt securities,
the issuance of such securities could result in dilution of the shares held by existing shareholders. If additional funds are raised
through the issuance of debt or equity securities, such securities may provide the holders certain rights, preferences, and privileges
senior to those of shareholders holding our Ordinary Shares, and the terms of any such debt securities could impose restrictions on the
operating entities’ operations. We cannot assure you that additional capital, if required, will be available on acceptable terms,
or at all. If we are unable to obtain sufficient amounts of additional capital, the operating entities may be required to reduce their
scope of planned product development and marketing efforts, which could harm their, and consequentially, our business, financial condition,
and operating results.
The
PRC operating entities face significant competition in an industry experiencing rapid technological change, and there is a possibility
that their competitors may achieve regulatory approval and develop new online supply chain management platform service before them, which
may harm their financial condition and their ability to successfully market or commercialize any of their services.
The
Chinese supply chain industry is highly competitive and is characterized by rapidly changing technologies, significant competition, and
a strong emphasis on client attraction. Even though the PRC operating entities have found business opportunities in a niche market, they
will very likely face competition with respect to their integrated supply chain management platform services from major supply chain
management service suppliers in China.
The
PRC operating entities’ commercial opportunities could be reduced or eliminated if their competitors develop and commercialize
services that are more effective, more convenient, or less expensive than the supply chain services they currently offer. The PRC operating
entities’ competitors also may obtain regulatory approval for their services more rapidly than the PRC operating entities may obtain
approval for any services that they develop, which could result in the competitors establishing a strong market position before the PRC
operating entities’ new services are able to enter the market. The availability of the competitors’ services could limit
the demand, and the price the PRC operating entities are able to charge, for any services that they currently offer.
The
PRC operating entities 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 a computer system. As with any website, the PRC operating
entities’ websites and online platforms may be subject to hacking, regardless of whether they have in place securities systems
which limit access to their platform. Hacking can result in the loss of or tampering with confidential information, the editing of information
so that it is not in the form maintained by the sponsor, using password information to take funds from the user’s account or to
charge cash advances or purchases to the unknowing user’s account. Both the PRC operating entities and their website or platform
users can suffer significant monetary losses as a result of hacking.
Despite
the PRC operating entities’ disclaimers, which the website or platform users must acknowledge in order to gain access, and their
efforts to protect their platform, injured parties may seek to obtain damages from the PRC operating entities for the loss as a result
of hacking should that occur. Thus, in additional to any financial or reputation losses that the PRC operating entities may sustain,
it is possible that a court or administrative body may hold the PRC operating entities liable for damages sustained by others. Any such
losses could materially impair the PRC operating entities’ financial condition and their ability to conduct business.
The
successful operation of the PRC operating entities’ business depends on the performance and reliability of the Internet infrastructure
and fixed telecommunications networks in China.
The
PRC operating entities’ business depends on the performance and reliability of the Internet infrastructure in China. Almost all
access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory
supervision of the Ministry of Industry and Information Technology (the “MIIT”). In addition, the national networks in China
are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only
channels through which a domestic user can connect to the Internet. Although the PRC government has pledged to increase overall internet
coverage in the PRC and increase Internet infrastructure investment, a more sophisticated Internet infrastructure may not be developed
in China. The PRC operating entities or the users of their platform may not have access to alternative networks in the event of disruptions,
failures, or other problems with China’s Internet infrastructure.
The
PRC operating entities’ success depends substantially on the continued retention of certain key personnel and their ability to
hire and retain qualified personnel in the future to support their growth and execute their business strategy.
If
one or more of the PRC operating entities’ senior executives or other key personnel are unable or unwilling to continue in their
present positions, their business may be disrupted and their financial condition and results of operations may be materially and adversely
affected. While the PRC operating entities depend on the abilities and participation of their current management team generally, they
rely particularly upon Mr. Limin Liu, our chairman and chief executive officer, who is responsible for the development and implementation
of the PRC operating entities’ business plan. The loss of the services of Mr. Limin Liu for any reason could significantly adversely
impact the PRC operating entities’ business and results of operations. Competition for senior management and senior technology
personnel is intense and the pool of qualified candidates is very limited. We cannot assure you that the services of the PRC operating
entities’ senior executives and other key personnel will continue to be available to them, or that the PRC operating entities will
be able to find a suitable replacement if any of them were to leave.
The
PRC operating entities may not be able to adequately protect their intellectual property rights, and their competitors may be able to
offer similar products and services, which would harm their competitive position.
The
PRC operating entities’ success depends in part upon their intellectual property rights. They rely primarily on trademark, copyright,
service mark, and trade secret laws, confidentiality procedures, license agreements, and contractual provisions to establish and protect
their proprietary rights over their products, procedures, and services. Other persons could copy or otherwise obtain and use the PRC
operating entities’ technology without authorization, or develop similar intellectual property independently. The PRC operating
entities may also pursue the registration of their domain names, trademarks, and service marks in other jurisdictions, including the
United States. Although the protection afforded by copyright, trade secret, and trademark law, written agreements, and common law may
provide some advantages, these statutory protections along with non-disclosure agreement with their employees may not be adequate to
enable the PRC operating entities to protect their intellectual property. However, the intellectual property laws in China are not considered
as strong as comparable laws in the United States or the European Union. The enforcement of intellectual property rights in China is
difficult and, if the PRC operating entities seek to commence litigation against any alleged infringer, there is no assurance that they
will prevail. We cannot assure you that the PRC operating entities will be able to protect their proprietary rights. Further, their competitors
may be able to independently develop similar or more advanced technology, duplicate their products and services, or design around any
intellectual property rights the PRC operating entities hold.
The
PRC operating entities’ business, financial condition, and results of operations have been and are likely to continue to be adversely
affected by the COVID-19 pandemic.
The
COVID-19 pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines,
and travel bans, intended to control the spread of the virus. Substantially all of the PRC operating entities’ operations are concentrated
in China. In connection with efforts to contain the spread of COVID-19, the Chinese government took a number of measures, which included
extending the Chinese New Year holiday, quarantining individuals infected with or suspected of having COVID-19, restricting residents
from travel, encouraging employees of enterprises to work remotely from home, and cancelling public activities, among others. Normal
economic life throughout China was sharply curtailed.
Between
January and March 15 of 2020, the PRC operating entities’ staff and employees were instructed to work remotely. As a result, they
were not able to perform business operations on the supply chain management platform effectively during such period, resulting in a substantial
impact upon their business performance.
Consequently,
the COVID-19 pandemic has materially adversely affected the PRC operating entities’ business operations, condition, and operating
results for 2022, including, but not limited to, having a material negative impact on their total revenue and net income. Although the
PRC operating entities were able to resume their normal operation since March 2020, the COVID-19 pandemic materially adversely affected
their business operations and financial results for 2020 and 2021, including material negative impacts on their revenue, slower collection
of accounts receivables, and additional allowance for doubtful accounts. Localities in China have also been employing strict lock-down
policies periodically to manage the recent trend of rapid outbreaks. In December 2021, January 2022, and March 2022, Hangzhou City implemented
travel restrictions that had substantial impact on the PRC operating entities’ operations. In March 2022, logistics and transportation
industry experienced temporary shutdown because of heightened COVID-19 exposure risk, which had negative impact on the PRC operating
entities’ operations. Future development of the COVID-19 pandemic and the consequential local policies may adversely affect the
PRC operating entities result of operations.
The
PRC operating entities face risks related to natural disasters, health epidemics, and other outbreaks, which could significantly disrupt
our operations.
In
addition to COVID-19, the PRC operating entities’ business could be materially and adversely affected by natural disasters, other
health epidemics, or other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war,
riots, terrorist attacks, or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures,
or Internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect
the PRC operating entities’ ability to provide products and services on their platform.
The
PRC operating entities’ business could also be adversely affected by the effects of epidemics. In recent years, there have been
breakouts of epidemics in and outside China, such as Ebola virus disease, H1N1 flu, avian flu and the COVID-19 pandemic. The PRC operating
entities’ business operations could be disrupted if any of their employees is suspected of having the COVID-19 virus, since it
could require their employees to be quarantined and/or their offices to be disinfected. In addition, the PRC operating entities’,
and consequentially, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese
economy in general.
The
PRC operating entities currently do not have any business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies.
Consistent with customary industry practice in China, the PRC operating entities do not maintain business interruption insurance, nor
do they maintain key-man life insurance. The PRC operating entities have determined that the costs of insuring for these risks and the
difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for them to have such insurance.
Any uninsured business disruptions may result in incurring substantial costs and the diversion of resources, which could have an adverse
effect on the PRC operating entities’ results of operations and financial condition.
Increases
in labor costs in the PRC may adversely affect the PRC operating entities’ business and their profitability.
China’s
economy has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are expected
to continue to grow. The average wage level for the PRC operating entities’ employees has also increased in recent years. We expect
that their labor costs, including wages and employee benefits, will continue to increase. Unless the PRC operating entities are able
to pass on these increased labor costs to their customers by increasing prices for their products or services, their profitability and
results of operations may be materially and adversely affected.
In
addition, the PRC operating entities have been subject to stricter regulatory requirements in terms of entering into labor contracts
with their 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 their employees.
Pursuant to the PRC Labor Contract Law, or the “Labor Contract Law,” that became effective in January 2008 and its amendments
that became effective in July 2013 and its implementing rules that became effective in September 2008, 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 the PRC operating entities decide to terminate some of their employees
or otherwise change their employment or labor practices, the Labor Contract Law and its implementation rules may limit their ability
to effect those changes in a desirable or cost-effective manner, which could adversely affect their business and results of operations.
As
the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that the PRC operating
entities’ employment practices do not and will not violate labor-related laws and regulations in China, which may subject the PRC
operating entities to labor disputes or government investigations. If the PRC operating entities are deemed to have violated relevant
labor laws and regulations, they could be required to provide additional compensation to their employees and their business, and, in
such case, our financial condition, and results of operations could be materially and adversely affected.
Metalpha
rely on certain related party for products subscription and any shortage or interruption in subscription could slow our growth and reduce
our profitability.
On December 23, 2021, Metalpha
entered into a product purchase agreement (the “Product Purchase Agreement”) and a trading account management agreement (the
“Trading Account Management Agreement”) with Antalpha, pursuant to which Antalpha purchased from Metalpha various cryptocurrency
derivative products. The underlying assets of the cryptocurrency derivative products included Bitcoin, Ethereum, Binance Coin, Tether,
etc. As of March 31, 2022, the aggregate value of the products Antalpha purchased is $8,735,145. All revenue Metalpha recognized in the
reporting period were generated from the subscription from Antalpha.
Antalpha
is a 49% shareholder of Metalpha, hence a related party of the Company. If Antalpha were to stop or slow down subscriptions to our products
for any reason, our revenue and net income would be materially and adversely affected.
The
business of Metalpha is subject to customer concentration risk.
Metalpha depends on one customer,
Antalpha, to generate all of its revenue. From the commencement of Metalpha’s operations in December 2021 until the date of this
annual report, Metalpha’s sole customer, Antalpha, contributed approximately 100% of Metalpha’s revenue and profit. There
is no assurance that we will be able to maintain or expand our relationships with Antalpha, or that we will be able to continue to serve
them at current levels, or at all. If Antalpha significantly reduces or even ceases its subscription to our products, we are unable to
find alternative customers at comparable levels, or at all, and we may experience a decline in our revenue, which, in turn, would adversely
affect our results of operations. The business and financial condition of Antalpha may deteriorate, which may, in turn, have a material
and adverse effect on our financial condition and results of operations.
It
may be or become illegal to acquire, own, hold, sell or use cryptocurrencies, participate in the blockchain, or transfer or utilize similar
cryptocurrency assets in international markets where we operate due to adverse changes in the regulatory and policy environment in different
jurisdictions.
Our
cryptocurrency business could be significantly affected by, among other things, the regulatory and policy developments in international
markets where we operate, such as Hong Kong, BVI and Panama. Governmental authorities are likely to continue to issue new laws, rules
and regulations governing the blockchain and cryptocurrency industry we operate in and enhance enforcement of existing laws, rules and
regulations.
In
addition, cryptocurrencies may be used by market participants for black market transactions, to conduct fraud, money laundering and terrorism-funding,
tax evasion, economic sanction evasion or other illegal activities. As a result, governments may seek to regulate, restrict, control
or ban the mining, using, holding and transferring of cryptocurrencies. We may not be able to eliminate all instances where other parties
use cryptocurrencies in money laundering or other illegal or improper activities. We cannot assure you that we will successfully detect
and prevent all money laundering or other illegal or improper activities which may adversely affect our reputation, business, financial
condition and results of operations.
Any
failure to obtain or renew any required approvals, licenses, permits or certifications could materially and adversely affect our business
and results of operations.
As
of the date of this annual report, all our cryptocurrency business operates outside of the mainland China. In accordance with the laws
and regulations in the jurisdictions in which we operate, we may be required to maintain various approvals, licenses, permits and certifications
in order to operate our cryptocurrency business. Complying with such laws and regulations may require substantial expense, and any non-compliance
may expose us to liability. In the event of non-compliance, we may have to incur significant expenses and divert substantial management
time to rectify the incidents. In the future, if we fail to obtain all the necessary approvals, licenses, permits and certifications,
we may be subject to fines or the suspension of operations of any business that do not have all the requisite approvals, licenses, permits
and certifications, which could materially and adversely affect our business and results of operations. We may also experience adverse
publicity arising from non-compliance with government regulations, which would negatively impact our reputation.
We
have adopted the development strategy to focus on the expansion of our business products of issuing cryptocurrency derivative products
in international markets. As such, we are subject to regulations applicable to operators of cryptocurrency business and derivative products
business in these jurisdictions. We do not believe we need to obtain relevant governmental approval and license required for issuing
cryptocurrency derivative products to Antalpha in these jurisdictions. However, we cannot assure your that we will be able to obtain,
maintain or renew any required government approval, permit, licenses for our future operations on commercially reasonable terms and in
a timely manner or at all. Failure to maintain or renew these government approvals, permit or licenses for our international operations
may cause us to suspend or terminate our cryptocurrency derivative product operations in such jurisdictions, and may subject us to regulatory
investigations or legal proceedings and fines in these jurisdictions, which could disrupt our international operations and materially
and adversely affect our business, financial condition and results of operations.
More
broadly, we cannot assure you that we will be able to fulfill all the conditions necessary to obtain the required government approvals
in the jurisdictions where we operate, or that relevant government officials in these jurisdictions will always, if ever, exercise their
discretion in our favor, or that we will be able to adapt to any new laws, regulations or policies. There may also be delays on the part
of government authorities in reviewing our applications and granting approvals, whether due to the lack of administrative resources or
the imposition of new rules, regulations, government policies or their implementation, interpretation and enforcement, or for no discernible
reason at all. If we are unable to obtain, or experience material delays in obtaining, necessary government approvals, our operations
may be substantially disrupted, which could materially and adversely affect our business, financial condition and results of operations.
A
particular digital asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty,
and if we are unable to properly characterize a digital asset, we may be subject to regulatory scrutiny, investigations, fines, and other
penalties, which may adversely affect our business, results of operations and/or financial condition.
The
SEC and its staff have taken the position that certain digital assets fall within the definition of a “security” under the
U.S. federal securities laws. The legal test for determining whether any given digital asset is a security is a highly complex, fact-driven
analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation
on the status of any particular digital asset as a security. Additionally, the SEC’s views in this area have evolved over time,
and it is difficult to predict the direction or timing of any continuing evolution. Furthermore, it is also possible that a change in
the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.
Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin or Ethereum,
in their current form, are securities. However, Bitcoin and Ethereum are the only digital assets as to which senior officials at the
SEC have publicly expressed such a view. Such statements are not official policy statements by the SEC and reflect only the speakers’
views, which are not binding on the SEC or any other agency or court, and cannot be generalized to any other digital asset, such as Dogecoin.
With respect to all other digital assets, there is currently no certainty under the applicable legal test that such assets are not securities,
notwithstanding the conclusions we may draw based on our assessment regarding the likelihood that a particular digital asset could be
deemed a “security” under applicable laws. Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology
published a framework for analyzing whether any given digital asset is a security in April 2019, this framework is also not a rule, regulation
or statement of the SEC and is not binding on the SEC.
Several
foreign jurisdictions have taken a broad-based approach to classifying digital assets as “securities,” while other foreign
jurisdictions have adopted a narrower approach. As a result, certain digital assets may be deemed to be a “security” under
the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations,
or directives that affect the characterization of digital assets as “securities.”
The
classification of a digital asset as a security under applicable law has wide-ranging implications for the regulatory obligations that
flow from the offer, sale, trading, and clearing of such assets. For example, a digital asset that is a security in the United States
may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering
that qualifies for an exemption from registration. Persons that effect transactions in digital assets that are securities in the United
States may be subject to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers
and sellers to trade digital assets that are securities in the United States are generally subject to registration as national securities
exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system
(“ATS”), in compliance with rules for ATSs. Persons facilitating clearing and settlement of securities may be subject to
registration with the SEC as a clearing agency. Foreign jurisdictions may have similar licensing, registration, and qualification requirements.
We
have adopted risk-based policies and procedures to analyze whether the digital assets that we hold and sell for our own account could
be deemed to be a “security” under applicable laws. Our policies and procedures do not constitute a legal standard, but rather
represent our management’s assessment, based on advice of our securities counsel, regarding the likelihood that a particular digital
asset could be deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal or
regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a digital asset currently held
by us is a “security” under applicable laws. If the digital assets mined and held by us are deemed as securities, it could
limit distributions, transfers, or other actions involving such digital assets in the global markets.
The
loss or destruction of private keys required to access any digital assets held by us may be irreversible. If we are unable to access
our private keys or if we experience a hack or other data loss relating to our ability to access any digital assets, it could cause regulatory
scrutiny, reputational harm, and other losses.
Cryptocurrencies
are generally controllable only by the possessor of the unique private key relating to the digital wallet in which the digital assets
are held. While blockchain protocols typically require public addresses to be published when used in a transaction, private keys must
be safeguarded and kept private in order to prevent a third party from accessing the digital assets held in such a wallet. We will publish
the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network,
but we will need to safeguard the private keys relating to such digital wallets. We safeguard and keep private the private keys relating
to our digital assets by primarily utilizing enterprise multi-signature storage solution provided by an established third-party digital
asset financial services platform.
To
the extent that any of the private keys relating to our wallets containing digital assets held by us is lost, destroyed, or otherwise
compromised or unavailable, and no backup of the private key is accessible, we will be unable to access digital assets held in the related
wallet. Furthermore, as currently our digital wallet is maintained by a third-party digital asset financial services platform, we cannot
provide assurance that our wallet will not be hacked or compromised, or that any information leakage and data security breach of such
platform will not compromise the security of our digital wallet. Digital assets and blockchain technologies have been, and may in the
future be, subject to security breaches, hacking, or other malicious activities. Any loss of private keys relating to, or hack or other
compromise of, digital wallets used to store our digital assets could subject us to significant financial losses, and we may be unable
to distribute mining rewards to customers of our mining pool services, or adequately compensate our customers for damages caused by such
security breach. As such, any loss of private keys due to a hack, employee or service provider misconduct or error, or other compromise
by third parties could hurt our brand and reputation, result in significant losses, and adversely impact our business, results of operations
and/or financial condition.
Because
cryptocurrencies may be determined to be investment securities, we may inadvertently violate the Investment Company Act of 1940, as amended,
and we may incur substantial losses and become subject to such act as a result.
We
believe that we are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out
as being engaged in those activities. However, under the Investment Company Act of 1940, as amended (the “Investment Company Act”),
a company may be deemed an investment company under section 3(a)(1)(C) thereof if the value of its investment securities is more than
40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis.
The
cryptocurrency we own, acquire may be deemed an investment security by the SEC, although we do not believe any of the cryptocurrencies
we own, acquire are securities.
Current
and future legislation and the SEC rulemaking and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which cryptocurrencies are treated for classification and clearing purposes. The SEC’s July 25, 2017 Report
expressed its view that digital assets may be securities depending on the facts and circumstances. As of the date of this prospectus,
we are not aware of any rules that have been proposed to regulate cryptocurrencies as securities. We cannot be certain as to how future
regulatory developments will impact the treatment of cryptocurrency under the applicable U.S. federal or state laws. Such additional
registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If
we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations.
Any such action may adversely affect an investment in us.
Classification
as an investment company under the Investment Company Act requires registration with the SEC. If an investment company fails to register,
it would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive
and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered
investment company. Furthermore, we would become subject to substantial regulation concerning management, operations, transactions with
affiliated persons and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such
compliance would result in substantial additional expenses, and the failure to complete the required registration would have a materially
adverse impact to conduct our operations.
We
do not maintain insurance for our digital assets, which may expose us and our shareholders to the risk of loss of our digital assets,
and there will be limited rights of legal recourse available to us to recover our losses.
We
do not maintain insurance for the digital assets held by us. Banking institutions will not accept our digital assets, and they are therefore
not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Therefore, we may suffer
loss with respect to our digital assets which is not covered by insurance, and we may not be able to recover any of our carried value
in these digital assets if they are lost or stolen or suffer significant and sustained reduction in conversion spot price. If we are
not otherwise able to recover damages from a malicious actor in connection with these losses, our business, results of operations and
share price may be adversely affected.
Risks
Relating to Doing Business in the PRC
Our
current corporate structure and business operations may be affected by the Foreign Investment Law.
The
Ministry of Commerce of the PRC (“MOFCOM”) and the National Development and Reform Commission, or the “NDRC,”
promulgated the Special Measures for Foreign Investment Access (2021 version), or the “Negative List,” on December 27, 2021,
which became effective on January 1, 2022. Pursuant to the current and the updated Negative Lists, the supply chain management platform
services, in which the PRC operating entities engage, fall within the permitted catalogue.
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC, 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, together with their implementation rules and ancillary
regulations. Pursuant to the Foreign Investment Law, foreign investment refers to any investment activity directly or indirectly carried
out by foreign natural persons, enterprises, or other organizations, including investment in new construction project, establishment
of foreign funded enterprise or increase of investment, merger and acquisition, and investment in any other way stipulated under laws,
administrative regulations, or provisions of the State Council of the PRC (the “State Council”). The Foreign Investment Law
does not explicitly stipulate the contractual arrangements as a form of foreign investment. On December 26, 2019, the State Council promulgated
the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation
Regulations on the Foreign Investment Law still remain silent on whether contractual arrangements should be deemed as a form of foreign
investment. Though these regulations do not explicitly classify contractual arrangements as a form of foreign investment, there is still
uncertainty regarding whether the VIE would be identified as a foreign-invested enterprise in the future. As a result, there is no assurance
that foreign investment via contractual arrangements would not be interpreted as a type of indirect foreign investment activities under
the definition in the future. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations
on Foreign Investment.”
While
the Foreign Investment Law does not define VIE agreements as a form of foreign investment explicitly, we cannot assure you that future
laws and regulations will not provide for VIE agreements as a form of foreign investment. Therefore, there can be no assurance that our
relationship the VIE through the VIE Agreements will not be deemed as foreign investment in the future. If we are deemed to have a non-PRC
entity as a controlling shareholder, the provisions regarding control through contractual arrangements could apply to the VIE Agreements,
and as a result Long Yun could become subject to restrictions on foreign investment, which may materially impact the viability of its
current and future operations. Specifically, we may be required to modify our corporate structure, change the PRC operating entities’
current scope of operations, obtain approvals, or face penalties or other additional requirements, compared to entities which do have
PRC controlling shareholders. Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law
and how it may impact the viability of our current corporate structure, corporate governance, and business operations.
It
is uncertain whether we would be considered as ultimately controlled by Chinese parties. If future revisions or implementation rules
of the Foreign Investment Law mandate further actions, such as the MOFCOM market entry clearance or certain restructuring of our corporate
structure and operations, there may be substantial uncertainties as to whether we can complete these actions in a timely manner, if at
all, and our business and financial condition may be materially and adversely affected.
Furthermore,
two recently published regulations, the Draft Rules Regarding Overseas Listings (see “—The Draft Rules Regarding Overseas
Listings were released by the CSRC for public consultation. While such rules have not yet come into effect, the Chinese government may
exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or
completely hinder our ability to continue to offer our shares to investors and could cause the value of our shares to significantly decline
or become worthless”) and the Filing Measures (defined below) (see “—The failure to comply with PRC regulations relating
to mergers and acquisitions of domestic projects by offshore special purpose vehicles may subject us to severe fines or penalties and
create other regulatory uncertainties regarding our corporate structure.”), which have not yet been formally implemented, have
initially indicated that the Chinese government does not prohibit enterprises from listing abroad through indirect means such as VIE
structures and red chips through these regulations. However, it is indicated that the VIE structures and red chips listings will be subject
to the filing regulations and face stricter control in the future.
In
the event that any possible implementing regulations of the Foreign Investment Law, any other future laws, administrative regulations
or provisions deem the VIE Agreements as a way of foreign investment, or if any of our operations through VIE agreements is classified
in the “restricted” or “prohibited” industry in the future “negative list” under the Foreign Investment
Law, the VIE Agreements may be deemed as invalid and illegal, and we may be required to unwind the VIE Agreements and/or dispose of any
affected business. Also, if future laws, administrative regulations, or provisions mandate further actions to be taken with respect to
the VIE Agreements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Furthermore,
under the Foreign Investment Law, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing
to report investment information in accordance with the requirements.
In
addition, the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within a five-year transition period, which means that we may
be required to adjust the structure and corporate governance of certain of the PRC operating entities in such transition period. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
Changes
in the policies of the PRC government could have a significant impact upon the PRC operating entities’ ability to operate profitably
in the PRC.
Most
of the PRC operating entities’ assets and operations are currently located in China. Accordingly, our business, financial condition,
results of operations, and prospects may be influenced to a significant degree by political, economic, and social conditions in China
through the PRC operating entities generally. The Chinese economy differs from the economies of most developed countries in many respects.
Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, including
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. The Chinese government continues to play a significant
role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over
China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy, and providing preferential treatment to particular industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government, or in the laws
and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely
affect our business and operating results, reduce demand for our services and weaken our competitive position. 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 through
the PRC operating entities may be adversely affected by government control over capital investments or changes in tax regulations. In
addition, in the past the Chinese government has implemented certain measures, including interest rate adjustments, to control the pace
of economic growth. These measures may cause decreased economic activities in China, which may adversely affect the PRC operating entities’
business and operating results.
The
PRC operating entities’ ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government,
including changes in laws, regulations, or their interpretation, particularly those dealing with the Internet, including censorship and
other restriction on material which can be transmitted over the Internet, security, intellectual property, money laundering, taxation,
and other laws that affect the PRC operating entities’ ability to operate their website.
Furthermore,
our Company, the PRC operating entities, and our investors may face uncertainty about future actions by the government of China that
could significantly affect the PRC operating entities’ financial performance and operations, including the enforceability of the
VIE Agreements. As of the date of this annual report, neither our Company nor the VIE has received or was denied permission from Chinese
authorities to list on U.S. exchanges. However, there is no guarantee that our Company or the VIE will receive or not be denied permission
from Chinese authorities to list on U.S. exchanges in the future.
PRC
laws and regulations governing the PRC operating entities’ current business operations are sometimes vague and uncertain and any
changes in such laws and regulations may impair the PRC operating entities’ ability to operate profitable.
There
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to,
the laws and regulations governing the PRC operating entities’ business and the enforcement and performance of the PRC operating
entities’ arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject
to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation
of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and the PRC operating entities’
business may be affected if they rely on laws and regulations which are subsequently adopted or interpreted in a manner different from
their understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also
be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on the
PRC operating entities’ business.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protection available to you and us.
The
PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents.
In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in
general. The legislation over the past three decades has significantly increased the protection afforded to various forms of foreign
or private-sector investment in China. The PRC operating entities are subject to various PRC laws and regulations generally applicable
to companies in China. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, however,
the interpretations of many laws, regulations, and rules are not always uniform and enforcement of these laws, regulations, and rules
involve uncertainties.
From
time to time, we and the PRC operating entities may have to resort to administrative and court proceedings to enforce our legal rights.
Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual
terms, however, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection
we or the PRC operating entities enjoy in the PRC legal system than in more developed legal systems. Furthermore, the PRC legal system
is based in part on government policies and internal rules that may have retroactive effect. As a result, we and the PRC operating entities’
may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainties
over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond
to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue
our operations.
Given
the Chinese government’s significant oversight and discretion over the conduct of business of the PRC operating entities, the Chinese
government may intervene or influence their operations at any time, which could result in a material change in the PRC operating entities’
operations and/or the value of our Ordinary Shares.
The
Chinese government has significant oversight and discretion over the conduct of business of the PRC operating entities and may intervene
or influence their operations at any time as the government deems appropriate to further regulatory, political, and societal goals, which
could result in a material change in the operations of the PRC operating entities and/or the value of our Ordinary Shares.
The
Chinese government has recently published new policies that significantly affected certain industries such as the education and Internet
industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding the PRC operating
entities’ industry that could adversely affect the business, financial condition and results of operations of the PRC operating
entities. Furthermore, if China adopts more stringent standards with respect to certain areas such as environmental protection or corporate
social responsibilities, the PRC operating entities may incur increased compliance costs or become subject to additional restrictions
in their operations. Certain areas of the law, including intellectual property rights and confidentiality protections in China may also
not be as effective as in the United States or other countries. In addition, we cannot predict the effects of future developments in
the PRC legal system on the business operations of the PRC operating entities, including the promulgation of new laws, or changes to
existing laws or the interpretation or enforcement thereof. These uncertainties could limit the legal protections available to us and
our investors, including you.
Any
actions by the Chinese government, including any decision to intervene or influence the operations of the PRC subsidiary or the VIE or
to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to
make material changes to the operations of the PRC subsidiary or the VIE, may limit or completely hinder our ability to offer or continue
to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
In
the meeting of the Political Bureau of the CPC Central Committee held on July 30, 2021, the improvement of the regulatory system for
overseas listing of enterprises was first proposed. Although the detailed implementations are still unclear, the supervision of overseas
listing of Chinese stocks may continue to tighten. The Chinese government has exercised and continues to exercise substantial control
over virtually every sector of the Chinese economy through regulation and state ownership. The ability of our subsidiaries and the VIE
to operate in China may be impaired by changes in its laws and regulations, including those relating to taxation, environmental regulations,
land use rights, foreign investment limitations, and other matters. The central or local governments of China may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure the
PRC operating entities’ compliance with such regulations or interpretations. As such, the PRC operating entities may be subject
to various government and regulatory interference in the provinces in which they operate. They could be subject to regulation by various
political and regulatory entities, including various local and municipal agencies and government sub-divisions. They may incur increased
costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply.
Furthermore,
it is uncertain when and whether we will be required to obtain permission from the PRC government to list on U.S. exchanges in the future,
and even when such permission is obtained, whether it will be denied or rescinded. Although we believe that we and the PRC operating
entities are currently not required to obtain permission from any Chinese authorities and have not received any notice of denial of permission
to list on the U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations
relating to the PRC operating entities’ business or industry, particularly in the event permission to list on U.S. exchanges may
be later required, or withheld or rescinded once given.
Accordingly,
government actions in the future, including any decision to intervene or influence the operations of the PRC operating entities at any
time or to exert control over an offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause
us to make material changes to the operations of the PRC operating entities, may limit or completely hinder our ability to offer or continue
to offer securities to investors, and/or may cause the value of such securities to significantly decline or be worthless.
Recent
greater oversight by the Cyberspace Administration of China (the “CAC”) over data security, particularly for companies seeking
to list on a foreign exchange, could adversely impact our business and our offering.
On
November 14, 2021, the CAC published the Draft Regulations on the Network Data Security Administration (Draft for Comments) (the “Security
Administration Draft”), which provides that data processing operators engaging in data processing activities that affect or may
affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According
to the Security Administration Draft, data processing operators who possess personal data of at least one million users or collect data
that affects or may affect national security must be subject to network data security review by the relevant Cyberspace Administration
of the PRC. The deadline for public comments on the Security Administration Draft was December 13, 2021.
On
December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the
“Review Measures”), which became effective on February 15, 2022. The Review Measures provide that, in addition to critical
information infrastructure operators (“CIIOs”) that intend to purchase Internet products and services, net platform operators
engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Review
Office of the PRC. According to the Review Measures, a cybersecurity review assesses potential national security risks that may be brought
about by any procurement, data processing, or overseas listing. The Review Measures require that an online platform operator which possesses
the personal information of at least one million users must apply for a cybersecurity review by the CAC if it intends to be listed in
foreign countries.
As
of the date of this annual report, we have not received any notice from any authorities identifying us or the VIE as CIIOs or requiring
us to go through cybersecurity review or network data security review by the CAC. According to the Review Measures, and if the Security
Administration Draft is enacted as proposed, we believe that the operations of the PRC operating entities and our listing will not be
affected and that we will not be subject to cybersecurity review by the CAC, given that the PRC operating entities possess personal data
of fewer than one million individual clients and do not collect data that affects or may affect national security in their business operations
as of the date of this annual report and do not anticipate that they will be collecting over one million users’ personal information
or data that affects or may affect national security in the near future. There remains uncertainty, however, as to how the Review Measures
and the Security Administration Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC,
may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Review Measures and the Security
Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all
reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot guarantee, however, that we
will not be subject to cybersecurity review and network data security review in the future. During such reviews, we may be required to
suspend our operation or experience other disruptions to our operations. Cybersecurity review and network data security review could
also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially
and adversely affect our business, financial conditions, and results of operations.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against
us or our management named in this annual report based on foreign laws. It may also be difficult for you or overseas regulators to conduct
investigations or collect evidence within China.
We
are a company incorporated under the laws of the Cayman Islands, and we conduct most of our operations in China through the PRC operating
entities, and almost all of our assets are located in China through the PRC operating entities. In addition, all our senior executive
officers and directors reside within China for a significant portion of the time. As a result, it may be difficult for you to effect
service of process upon us or those persons inside mainland China. In addition, there is uncertainty as to whether the courts of the
Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us, or such persons predicated upon the civil liability
provisions of the securities laws of the U.S. or any state.
The
recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize
and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between
China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties
or other forms of written arrangement with the U.S. that provide for the reciprocal recognition and enforcement of foreign judgments.
In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors
and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security, or public
interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the U.S.
It
may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China,
there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside
China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation mechanism
with its counterparts of another country or region to monitor and oversee cross-border securities activities, such regulatory cooperation
with the securities regulatory authorities in the United States may not be efficient in the absence of a practical cooperation mechanism.
Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became effective in March 2020,
no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the territory
of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed to provide documents or materials
related to securities business activities to foreign agencies without prior consent from the securities regulatory authority of the PRC
State Council and the competent departments of the PRC State Council. While detailed interpretation of or implementing rules under
Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or
evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
The
“Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the “Opinions,” recently
issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may
subject us to additional compliance requirement in the future.
Recently,
the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued
the Opinions, 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 supervision on overseas listings by China-based companies. These opinions proposed to take
effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based
overseas-listed companies and the demand for cybersecurity and data privacy protection. The aforementioned policies and any related implementation
rules to be enacted may subject us to additional compliance requirement in the future. As the Opinions were recently issued, official
guidance and interpretation of the Opinions remain unclear in several respects at this time. Therefore, we cannot assure you that we
will remain fully compliant with all new regulatory requirements of the Opinions or any future implementation rules on a timely basis,
or at all.
Regulations
relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies or inject capital into the
PRC subsidiary and could adversely affect our business. PRC regulations relating to offshore investment activities by PRC residents may
limit our PRC subsidiaries’ ability to increase its registered capital or distribute profits to us, or otherwise expose us or our
PRC resident shareholders to liabilities or penalties.
In
July 2014, the State Administration of Foreign Exchange (the “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 the 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. Circular 37 is applicable to our shareholders who are PRC residents and may be
applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Circular on Further Simplifying
and Improving Foreign Exchange Administration Policy on Direct Investment, or “SAFE Circular 13,” effective in June 2015.
Under SAFE Circular 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct
investments, including those required under Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will
directly examine the applications and accept registrations under the supervision of SAFE. 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.
In
addition to Circular 37 and SAFE Circular 13, our ability to conduct foreign exchange activities in China may be subject to the interpretation
and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January
2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules,
any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives
overseas must make the appropriate registrations in accordance with SAFE provisions, the failure of which may subject such PRC individual
to warnings, fines, or other liabilities.
We
cannot assure you that our ultimate shareholders who are PRC residents will complete the required registration with the SAFE in a timely
manner, or at all. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject
us or our PRC resident beneficial owners to fines and legal sanctions, restrict our cross-border investment activities, or limit our
PRC subsidiaries’ ability to distribute dividends to or obtain foreign-exchange-dominated loans from us, or prevent us from being
able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you
could be materially and adversely affected.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion
may delay or prevent us from using proceeds from our future financing activities to make loans or additional capital contributions to
the PRC operating entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any
funds we transfer to WFOE, either as a shareholder loan or as an increase in registered capital through our Hong Kong subsidiary, 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,” in China, capital contributions to WFOE, which is an FIE, are subject to the approval
of or filing with MOFCOM or its local counterparts and registration with a local bank authorized by SAFE. There is, in effect, no statutory
limit on the amount of capital contribution that we can make to WFOE. The reason is that there is no statutory limit on the amount of
registered capital for WFOE, and we are allowed to make capital contributions WFOE by subscribing for their initial registered capital
and increased registered capital, provided that the PRC subsidiary complete the relevant filing and registration procedures.
On
the other hand, any foreign loan provided by us to WFOE is required to be registered with SAFE or its local branches or filed with SAFE
in its information system, and WFOE may not procure foreign loans which exceed the difference between its total investment amount and
registered capital (the “Current Foreign Debt Mechanism”) or, as an alternative, only procure loans subject to the calculation
approach and limitations as provided in the PBOC’s Circular on Matters concerning the Macro-Prudential Management of Full-Covered
Cross-Border Financing, or “PBOC Notice No. 9” (the “PBOC Notice No. 9 Mechanism”), which shall not exceed 200%
of the net asset of the relevant PRC subsidiary. According to PBOC Notice No. 9, after a transition period of one year since its promulgation,
PBOC and SAFE will determine the cross-border financing administration mechanism for the FIEs after evaluating the overall implementation
of PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices,
or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits
will be imposed on us when providing loans to WFOE. Currently, WFOE has the flexibility to choose between the Current Foreign Debt Mechanism
and the PBOC Notice No. 9 Mechanism. However, if a more stringent foreign debt mechanism becomes mandatory, our ability to provide loans
to WFOE may be significantly limited, which may adversely affect our business, financial condition, and results of operations.
If
we seek to make capital contribution into WFOE or provide any loan to WFOE 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 capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and
our ability to fund and expand our business.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
In
February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax
Resident Enterprises, or “SAT Circular 7.” SAT Circular 7 provides comprehensive guidelines relating to indirect transfers
of PRC taxable assets (including equity interests and real properties of a PRC resident enterprise) by a non-resident enterprise. In
addition, in October 2017, SAT issued an Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises,
or “SAT Circular 37,” effective in December 2017, which, among others, amended certain provisions in SAT Circular 7 and further
clarify the tax payable declaration obligation by non-resident enterprise. Indirect transfer of equity interest and/or real properties
in a PRC resident enterprise by their non-PRC holding companies are subject to SAT Circular 7 and SAT Circular 37.
SAT
Circular 7 provides clear criteria for an assessment of reasonable commercial purposes and has introduced safe harbors for internal group
restructurings and the purchase and sale of equity through a public securities market. As stipulated in SAT Circular 7, indirect transfers
of PRC taxable assets are considered as reasonable commercial purposes if the shareholding structure of both transaction parties falls
within the following situations: i) the transferor directly or indirectly owns 80% or above equity interest of the transferee, or vice
versa; ii) the transferor and the transferee are both 80% or above directly or indirectly owned by the same party; iii) the percentages
in bullet points i) and ii) shall be 100% if over 50% the share value of a foreign enterprise is directly or indirectly derived from
PRC real properties. Furthermore, SAT Circular 7 also brings challenges to both foreign transferor and transferee (or other person who
is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers PRC taxable assets indirectly by disposing
of the equity interests of an overseas holding company, which is an indirect transfer, the non-resident enterprise as either transferor
or transferee, or the PRC entity that directly owns the taxable assets, may report such indirect transfer to the relevant tax authority
and the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and
was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such indirect transfer may
be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to
withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the
transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor
fails to pay the taxes.
According
to SAT Circular 37, where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the PRC Enterprise Income
Tax Law (the “EIT Law”), the tax authority may order it to pay the tax due within required time limits, and the non-resident
enterprise shall declare and pay the tax payable within such time limits specified by the tax authority. If the non-resident enterprise,
however, voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall
be deemed that such enterprise has paid the tax in time.
We
face uncertainties as to the reporting and assessment of reasonable commercial purposes and future transactions where PRC taxable assets
are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries, and investments. In the event of being
assessed as having no reasonable commercial purposes in an indirect transfer transaction, we may be subject to filing obligations or
taxed if we are a transferor in such transactions and may be subject to withholding obligations (to be specific, a 10% withholding tax
for the transfer of equity interests) if we are a transferee in such transactions, under SAT Circular 7 and SAT Circular 37. For transfer
of shares by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under the
SAT circulars. As a result, we may be required to expend valuable resources to comply with the SAT circulars or to request the relevant
transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we should not be taxed under these
circulars, which may have a material adverse effect on our financial condition and results of operations.
Because
our business is conducted in RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion
rates may affect the value of your investments.
Our
business is conducted in the PRC, our books and records are maintained in RMB, which is the currently of the PRC, and the financial statements
that we file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between
the RMB and dollar affect the value of our assets and the results of our operations in United States dollars. The value of the RMB against
the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political
and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB
may materially and adversely affect our cash flows, revenue and financial condition.
Very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into more
hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately
hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your
investment.
Under
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.
Under
the EIT Law that became effective in January 2008, an enterprise established outside the PRC with “de facto management bodies”
within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a
uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the EIT Law, a “de facto management
body” is defined as a body that has material and overall management and control over the manufacturing and business operations,
personnel and human resources, finances, and properties of an enterprise. In April 2009, the State Administration of Taxation, or the
“SAT,” issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises
as Resident Enterprises in Accordance with the Actual Standards of Organizational Management, or “SAT Circular 82,” which
was amended in December 2017. SAT Circular 82 specifies that certain offshore incorporated enterprises controlled by PRC enterprises
or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management
personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making
bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more
of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued the Measures for the Administration
of Enterprise Income Tax of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises (for Trial Implementation), or
“SAT Bulletin 45,” which took effect in September 2011 and was amended in April 2015, to provide more guidance on the implementation
of SAT Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident
enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration
on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC
enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth
in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body”
test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC
enterprises, PRC enterprise groups, or by PRC or foreign individuals.
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. Although up to the date of this report,
we have not been notified or informed by the PRC tax authorities that we have been deemed to be a resident enterprise for the purpose
of the EIT Law, we cannot assure you that we will not be deemed to be a resident enterprise in the future.
The
PRC operating entities are subject to restrictions on paying dividends or making other payments to our offshore subsidiaries, which may
have a material adverse effect on our ability to conduct our business.
We
are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from the PRC operating
entities through our offshore subsidiaries to satisfy our liquidity requirements, including the funds necessary to pay dividends and
other cash distributions to our shareholders and service any debt we may incur. If the PRC operating entities incur debt on their own
behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to our
offshore subsidiaries. In addition, the PRC tax authorities may require the PRC operating entities to adjust their taxable income under
the contractual agreements. See “—Risks Relating to Our Corporate Structure—The VIE Agreements may result in adverse
tax consequences.”
Current
PRC regulations permit the PRC operating entities to pay dividends to our offshore subsidiaries only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, the PRC operating entities are required
to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount
set aside reaches 50% of their respective registered capital. The PRC operating entities may also allocate a portion of their respective
after-tax profits based on PRC accounting standards to employee welfare and bonus funds at its discretion. These reserves are not distributable
as cash dividends. These limitation on the ability of the PRC operating entities to pay dividends or make other distributions to our
offshore subsidiaries, and consequently could materially and adversely limit our ability to grow, make investments, or acquisitions that
could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
There
are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC operating entities, and dividends
payable by the PRC operating entities 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 the Arrangement between
Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income (the “Double
Tax Avoidance Arrangement”), a withholding tax rate of 10% may be lowered to 5% if the PRC enterprise is at least 25% held by a
Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined by the relevant PRC
tax authority to have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement and other applicable PRC
laws. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the
“SAT Circular 81,” which became effective on February 20, 2009, 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 Circular on Several Issues regarding the “Beneficial Owner”
in Tax Treaties, which became effective as of April 1, 2018, when determining an applicant’s status as the “beneficial owner”
regarding tax treatments in connection with dividends, interests, or royalties in the tax treaties, several factors will be taken into
account. Such factors include whether the business operated by the applicant constitutes actual business activities, and whether the
counterparty country or region to the tax treaties does not levy any tax, grant tax exemption on relevant incomes, or levy tax at an
extremely low rate. This circular further requires any applicant who intends to be proved of being the “beneficial owner”
to file relevant documents with the relevant tax authorities.
Further, the SAT promulgated
the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits
the “beneficial owner” to individuals, projects, or other organizations normally engaged in substantive operations, and sets
forth certain detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must
obtain a tax resident certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. The PRC
operating entities is wholly-owned by our Hong Kong subsidiary. As the Hong Kong tax authority will issue such a tax resident certificate
on a case-by-case basis, we cannot assure you that our Hong Kong subsidiary 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 our Hong Kong subsidiary will be granted
such a Hong Kong tax resident certificate.
Even after our Hong Kong
subsidiary obtain the Hong Kong tax resident certificate, it is required by applicable tax laws and regulations to file required forms
and materials with relevant PRC tax authorities to prove that it can enjoy 5% lower PRC withholding tax rate. Long Yun HK intends to obtain
the required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance
that the PRC tax authorities will approve the 5% withholding tax rate on dividends received from Long Yun HK.
The failure to comply with PRC regulations
relating to mergers and acquisitions of domestic projects by offshore special purpose vehicles may subject us to severe fines or penalties
and create other regulatory uncertainties regarding our corporate structure.
On August 8, 2006, MOFCOM,
joined by the China Securities Regulatory Commission (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
the Provisions Regarding Mergers and Acquisitions of Domestic Projects by Foreign Investors (the “M&A Rules”), which took
effect as of September 8, 2006, and were amended on June 22, 2009. This regulation, among other things, have certain provisions that require
offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by
PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the
CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official
website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
The application of the M&A
Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding
the scope and applicability of the M&A Rules. Thus, it is possible that the appropriate PRC government agencies, including MOFCOM,
would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies
in connection with WFOE’s control of Long Yun through contractual arrangements. If the CSRC, MOFCOM, or another PRC regulatory agency
determines that government approval was required for the VIE arrangements between WFOE and Long Yun, or if prior CSRC approval for overseas
financings is required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory
agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit
payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition,
results of operations, reputation, and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory
agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure our
current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.
Article 224 of the current
Securities Law stipulates that domestic enterprises that directly or indirectly issue securities abroad or list their securities for trading
abroad shall comply with the relevant regulations of the State Council. Therefore, approval by the CSRC is not currently required. On
December 24, 2021, the CSRC issued a notice for public comment on the Administrative Measures for Overseas Issuance and Listing of Securities
by Domestic Enterprises (Draft for Comments) (the “Filing Measures”), which mentions the regulation of overseas listing of domestic
enterprises and requires filing in accordance with the relevant provisions of the CSRC. The Filing Measures have not yet been formally
implemented, but it has been preliminarily indicated that although the Chinese government does not prohibit enterprises to achieve overseas
listing through indirect means such as VIE structures and red chips, such forms are still subject to regulation by the Chinese government,
and it is likely that we will have to perform filing procedures and report relevant information to the CSRC in the future.
The M&A Rules, along
with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in
connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For
example, Long Yun’s ability to remit its profits to us or to engage in foreign-currency-denominated borrowings, may be conditioned
upon compliance with the SAFE registration requirements by Mr. Limin Liu and Mr. Wei Wang, both shareholders of our Company and Long Yun,
over whom we may have no control.
The Draft Rules Regarding Overseas Listings
were released by the CSRC for public consultation. While such rules have not yet come into effect, the Chinese government may exert more
oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder
our ability to continue to offer our shares to investors and could cause the value of our shares to significantly decline or become worthless.
On December 24, 2021, the
CSRC and relevant departments of the State Council issued the Draft Rules Regarding Overseas Listings, which aim to regulate overseas
securities offerings and listings by China-based companies, for public consultation. The Draft Rules Regarding Overseas Listing aim to
lay out the filing regulation arrangement for both direct and indirect overseas listing and clarify the determination criteria for indirect
overseas listing in overseas markers. Where an enterprise whose principal business activities are conducted in the PRC seeks to issue
and list its shares in the name of an overseas enterprise based on equity, assets, income, or other similar rights and interests of the
relevant PRC domestic enterprise, such activities are deemed an indirect overseas issuance and listing. According to the Draft Rules Regarding
Overseas Listings, among other things, after making initial applications with overseas stock markets for initial public offerings or listings,
or after the completion of issuance of overseas listed securities by the overseas listed issuer, all China-based companies shall file
the required filing materials with the CSRC within three working days. In addition, overseas offerings and listings may be prohibited
for such China-based companies when any of the following applies: (i) if the intended securities offerings and listings are specifically
prohibited by the laws, regulations, or provision of the PRC; (ii) if the intended securities offerings and listings may constitute a
threat to, or endanger national security as reviewed and determined by competent authorities under the State Council in accordance with
laws; (iii) if there are material ownership disputes over applicants’ equity interests, major assets, core technologies, or the
others; (iv) if, in the past three years, applicants’ domestic enterprises, controlling shareholders, or de facto controllers have
committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist
market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion
of major violations; (v) if, in the past three years, any directors, supervisors, or senior executives of applicants have been subject
to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses,
or are under investigation for suspicion of major violations; or (vi) other circumstances as prescribed by the State Council. The Draft
Administrative Provisions further stipulate that a fine between RMB1 million (approximately $157,255) and RMB10 million (approximately
$1,572,550) may be imposed if an applicant fails to fulfill the filing requirements with the CSRC or conducts an overseas offering or
listing in violation of the Draft Rules Regarding Overseas Listings, and in cases of severe violations, a parallel order to suspend relevant
businesses or halt operations for rectification may be issued, and relevant business permits or operational license revoked.
At a question and answer
session conducted by the CSRC on the issuance of the Draft Rules Regarding Overseas Listings, future plans for the overseas listing filing
system was disclosed, including a subsequent filing policy for companies that have completed overseas listings, with a promised transition
period for those companies to adapt. Our PRC counsel, Capital Equity Legal Group, has advised us that the CSRC may promulgate a filing
policy for companies that are already listed in the future. Our Company, as an overseas listed company, may need to complete the relevant
filing procedures within a certain period of time in the future according to the requirements of the CSRC.
As of the date of this annual
report, the Draft Rules Regarding Overseas Listings have been released for public comment only and have not been formally promulgated,
and neither we, our subsidiaries, nor any of the PRC operating entities have been required to complete the filing procedures. However,
uncertainties remain as to its enactment or future interpretations and implementations. Our PRC counsel has advised us that, even if the
final rules are promulgated as proposed in the current Draft Rules Regarding Overseas Listings, none of the situations that would clearly
prohibit overseas offering and listings would apply to us. In addition, according to the CSRC spokesperson stated at the question and
answer session, we would not be subject to the filing requirements as an enterprise already listed overseas unless refinancing activities
occur, as the final rules would be targeting companies that are in the process of overseas listing or will be listed overseas in the future.
Notwithstanding the above, our PRC counsel has further advised us that uncertainties still exist as to whether we, our subsidiaries, or
the PRC operating entities are required to obtain permissions from the Chinese government that is required to approve of our operations
and/or listing. In the event that we, our subsidiaries, or the PRC operating entities are subject to the compliance requirements, we cannot
assure you that any of these entities will be able to receive clearance of such compliance requirements in a timely manner, or at all.
Any failure of our Company, our subsidiaries, or the PRC operating entities to fully comply with new regulatory requirements may subject
us to regulatory actions, such as fines, relevant businesses or operations suspension for rectification, revocation of relevant business
permits or operational license, or other sanctions, which may significantly limit or completely hinder our ability to continue to list
or offer our Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and
adversely affect our financial condition and results of operations and cause our shares to significantly decline in value or become worthless.
To the extent cash or assets of our business,
or of our PRC subsidiaries, or the VIE, is in the PRC, such cash or assets may not be available to fund operations or for other use outside
of the PRC, due to interventions in or the imposition of restrictions and limitations by the PRC government to the transfer of cash or
assets.
The transfer of funds and
assets among the Company, its Hong Kong and PRC subsidiaries, and the VIE is subject to restrictions. The PRC government imposes controls
on the conversion of the RMB into foreign currencies and the remittance of currencies out of the PRC. In addition, the PRC Enterprise
Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by
Chinese companies to non-PRC-resident enterprises, unless reduced under treaties or arrangements between the PRC central government and
the governments of other countries or regions where the non-PRC resident enterprises are tax resident.
As of the date of this annual
report, there are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of
Hong Kong (including funds from Hong Kong to the PRC), except for the transfer of funds involving money laundering and criminal activities.
However, there is no guarantee that the Hong Kong government will not promulgate new laws or regulations that may impose such restrictions
in the future.
As a result of the above,
to the extent cash or assets of our business, or of our PRC subsidiary, or the VIE, is in the PRC (including Hong Kong and Macau), such
funds or assets may not be available to fund operations or for other use outside of the PRC, due to interventions in or the imposition
of restrictions and limitations by the PRC government to the transfer of cash or assets.
Risks Relating to Our Corporate Structure
The VIE Agreements may not be effective
in providing control over Long Yun.
We are a holding
company incorporated in the Cayman Islands. As a holding company with no material operations of our own, a significant portion of
our current revenue and net income is derived from Long Yun and its subsidiaries. For accounting purposes, we control and receive
the economic benefits of the VIE and its subsidiaries through the VIE Agreements by WFOE, which enables us to consolidate the
financial results of the VIE and its subsidiaries in our consolidated financial statements under IFRS. Our Ordinary Shares are shares of the offshore holding company in the Cayman Islands instead of shares of the PRC
operating entities.
The VIE Agreements, however,
may not be as effective in providing us with the necessary control over Long Yun and its operations, which exposes us to the risk of potential
breach of contract by the Long Yun Shareholders. For instance, Long Yun and the Long Yun Shareholders could breach the VIE Agreements
by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our
interests. If we had direct ownership of Long Yun, we would be able to exercise our rights as a shareholder to effect changes in the board
of directors of Long Yun, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and
operational level. Under the VIE Agreements, however, we rely on the performance by Long Yun and the Long Yun Shareholders of their respective
obligations under the contracts. The Long Yun Shareholders may not act in the best interests of our Company or may not perform their obligations
under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the
VIE Agreements with Long Yun. In the event that Long Yun or the Long Yun Shareholders fail to perform their respective obligations under
the VIE Agreements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Even if legal
actions are taken to enforce such arrangements, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments
of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or
any state.
If the PRC government determines that the
VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations
or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish
our interests in those operations, and our Ordinary Shares may decline in value or become worthless.
On March 15, 2019, the National
People’s Congress of the PRC adopted the PRC Foreign Investment Law, which came into force on January 1, 2020. The PRC Foreign Investment
Law defines the “foreign investment” as the investment activities in China conducted directly or indirectly by foreign investors
in the following manners: (i) the foreign investor, by itself or together with other investors establishes a foreign invested enterprises
in China; (ii) the foreign investor acquires shares, equities, asset tranches, or similar rights and interests of enterprises in China;
(iii) the foreign investor, by itself or together with other investors, invests and establishes new projects in China; and (iv) the foreign
investor invests through other approaches as stipulated by laws, administrative regulations or otherwise regulated by the State Council.
The PRC Foreign Investment Law keeps silent on how to define and regulate “variable interest entities,” while adding a catch-all
clause that “other approaches as stipulated by laws, administrative regulations or otherwise regulated by the State Council”
can fall into the concept of “foreign investment,” which leaves uncertainty as to whether the foreign investor’s controlling
PRC onshore variable interest entities via contractual arrangements will be recognized as “foreign investment.”
According to our PRC counsel,
Capital Equity Legal Group, based on its understandings of the relevant PRC laws and regulations, (i) the ownership structures of Long
Yun in China and WFOE, our wholly-owned subsidiary in China, is currently not in violation of applicable PRC laws and regulations currently
in effect; and (ii) each of the VIE Agreements is legal, valid, binding, and enforceable in accordance with its terms and applicable PRC
laws. Our PRC counsel, however, has also advised us that there are substantial uncertainties regarding the interpretation and application
of current or future PRC laws and regulations, and that the VIE Agreements have not been tested in a court of law in China as of the date
of this report. Accordingly, the PRC regulatory authorities may ultimately take a view contrary to the opinion of our PRC counsel. It
is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or, if adopted, what they would provide.
If our corporate structure
and the VIE Agreements are determined to be illegal or invalid by a PRC court, arbitral tribunal, or regulatory authorities, we may lose
control of the VIE and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we
can achieve this without material disruption to our business. Further, if our corporate structure and the VIE Agreements are found to
be in violation of any existing or future PRC laws or regulations, or we or Long Yun fails to obtain or maintain any required permits
or approvals, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of WFOE or Long Yun; |
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discontinuing or restricting the operations of WFOE or Long Yun; |
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imposing conditions or requirements with which we, WFOE, or Long Yun may not be able to comply; |
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requiring us, WFOE, or Long Yun to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Ordinary Shares in the equity of Long Yun; |
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restricting or prohibiting our use of the proceeds from our future offerings to finance our business and operations in China; and |
The imposition of any of these penalties would
result in a material and adverse effect on the PRC operating entities’ ability to conduct their business. In addition, it is unclear
what impact the PRC government actions would have on us and on our ability to consolidate the financial results of Long Yun in our consolidated
financial statements, if the PRC government authorities were to find our legal structure and VIE Agreements to be in violation of PRC
laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of Long
Yun or our right to receive substantially all the economic benefits and residual returns from Long Yun and we are not able to restructure
our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of Long
Yun in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us
in this event, would have a material adverse effect on our financial condition and results of operations and our Ordinary Shares may decline
in value or become worthless.
The VIE Agreements are governed by the laws
of the PRC and we may have difficulty in enforcing any rights we may have under the VIE Agreements.
As the VIE Agreements are
governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance
with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Disputes arising from the VIE Agreements will
be resolved through arbitration in China, although these disputes do not include claims arising under the United States federal securities
law and thus do not prevent you from pursuing claims under the United States federal securities law. The legal environment in the PRC
is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce
the VIE Agreements, through arbitration, litigation, and other legal proceedings remain in China, which could limit our ability to enforce
the VIE Agreements and to consolidate the financial results of Long Yun. Furthermore, these contracts may not be enforceable in China
if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable
for public policy reasons. In the event we are unable to enforce the VIE Agreements, we may not be able to consolidate the financial results
of Long Yun, and our ability to conduct our business may be materially and adversely affected.
We may not be able to consolidate the financial
results of Long Yun or such consolidation could materially and adversely affect our operating results and financial condition.
A significant portion of
our business is conducted through Long Yun, which currently is considered for accounting purposes as a VIE, and we are considered the
primary beneficiary, enabling us to consolidate the financial results of Long Yun in our consolidated financial statements. In the event
that in the future Long Yun would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would
not be able to consolidate line by line its financial results in our consolidated financial statements for PRC purposes. Also, if in the
future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s
financial results in our consolidated financial statements for PRC purposes. If such entity’s financial results were negative, this
could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting
principles, practices, and methods used in preparing financial statements for PRC purposes from the principles, practices, and methods
generally accepted in the United States and in the SEC accounting regulations must be discussed, quantified, and reconciled in financial
statements for the United States and SEC purposes.
The VIE Agreements may result in adverse
tax consequences.
PRC laws and regulations
emphasize the requirement of an arm’s length basis for transfer pricing arrangements between related parties. The laws and regulations
also require enterprises with related party transactions to prepare transfer pricing documentation to demonstrate the basis for determining
pricing, the computation methodology, and detailed explanations. Related party arrangements and transactions may be subject to challenge
or tax inspection by the PRC tax authorizes.
Under a tax inspection, if
our transfer pricing arrangements between WFOE and Long Yun are judged as tax avoidance, or related documentation does not meet the requirements,
WFOE and Long Yun may be subject to material adverse tax consequences, such as transfer pricing adjustment. A transfer pricing adjustment
could result in a reduction, for PRC tax purpose, of adjustments recorded by WFOE, which could adversely affect us by (i) increasing Long
Yun’s tax liabilities without reducing WFOE’s tax liabilities, which could further result in interest being levied to us for
unpaid taxes; or (ii) imposing late payment fees and other penalties on Long Yun for the adjusted but unpaid taxes according to the applicable
regulations. In addition, if WFOE requests the Long Yun Shareholders to transfer their shares in Long Yun at nominal or no value pursuant
to the VIE Agreements, such transfer may be viewed as a gift and subject WFOE to PRC income tax. As a result, our financial position could
be materially and adversely affected if Long Yun’s tax liabilities increase or if it is required to pay late payment fees and other
penalties.
The Long Yun Shareholders have potential
conflicts of interest with our Company, which may adversely affect our business and financial condition.
The Long Yun Shareholders
may have potential conflicts of interest with us. These shareholders may not act in the best interest of our Company or may breach, or
cause Long Yun to breach the VIE Agreements, which would have a material and adverse effect on our ability to consolidate the financial
results of the VIE and its subsidiaries in our consolidated financial statements under IFRS. For example, the shareholders may be
able to cause the VIE Agreements to be performed in a manner adverse to us by, among other things, failing to remit payments due under
the VIE Agreements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders
will act in the best interests of our Company or such conflicts will be resolved in our favor.
Currently, we do not have
any arrangements to address potential conflicts of interest between the Long Yun Shareholders and our Company, except that we could exercise
our purchase option under the Exclusive Option Agreement with these shareholders to request them to transfer all of their equity interests
in Long Yun to a PRC entity or individual designated by us, to the extent permitted by PRC law. If we cannot resolve any conflicts of
interest or disputes between us and those shareholders, we would have to rely on legal proceedings, which may materially disrupt our business.
There is also substantial uncertainty as to the outcome of any such legal proceeding.
We rely on the approvals, certificates,
and business licenses held by Long Yun and any deterioration of the relationship between WFOE and Long Yun could materially and adversely
affect our overall business operations.
Pursuant to the VIE Agreements,
our business in the PRC will be undertaken on the basis of the approvals, certificates, business licenses, and other requisite licenses
held by Long Yun. There is no assurance that Long Yun will be able to renew its licenses or certificates when their terms expire with
substantially similar terms as the ones they currently hold.
Further, our relationship
with Long Yun is governed by the VIE Agreements, which are intended to provide us, through our indirect ownership of WFOE, with the ability
to control and receive the economic benefits of Long Yun’s business operation for accounting purposes, which enables us to consolidate
the financial results of the VIE and its subsidiaries in our consolidated financial statements under IFRS. The VIE Agreements, however,
may not be effective in providing control over the applications for and maintenance of the licenses required for our business operations.
Long Yun could violate the VIE Agreements, go bankrupt, suffer from difficulties in its business, or otherwise become unable to perform
its obligations under the VIE Agreements and, as a result, our operations, reputation, business, and stock price could be severely harmed.
The exercise of our option to purchase part
or all of the shares in Long Yun under the Exclusive Option Agreement might be subject to certain limitations and substantial costs.
Our Exclusive Option Agreement
with Long Yun and the Long Yun Shareholders provides WFOE with the option to purchase up to 100% of the shares in Long Yun. Such transfer
of shares may be subject to approvals from, filings with, or reporting to competent PRC authorities, such as the MOFCOM, the State Administration
for Market Regulation, and/or their local competent branches. In addition, the shares transfer price may be subject to review and tax
adjustment by the relevant tax authorities. The shares transfer price to be received by Long Yun under the VIE Agreements may also be
subject to enterprise income tax, and these amounts could be substantial.
Risks Relating to Our Ordinary Shares and the
Trading Market
If we become directly subject to the scrutiny,
criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate
and resolve the matter which could harm our business operations, stock price and reputation.
U.S. public companies that
have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors,
financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on
financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and
negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has
become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting
internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative
publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations
are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company.
This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven
to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of
our stock.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
We are regulated by the SEC
and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the
SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the
review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to
the review by the CSRC, 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.
Recent joint statement by the SEC and the
PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to
be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not
inspected by the PCAOB. These developments could add uncertainties to our continued listing or future offerings of our securities in the
U.S.
On April 21, 2020, SEC
Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting
the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint
statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher
risks of fraud in emerging markets.
On May 18, 2020, Nasdaq
filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive
Market,” (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market
companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of
the company’s auditors. On October 4, 2021, the SEC approved Nasdaq’s revised proposal for the rule changes.
On May 20, 2020, the
U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled
by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB
inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities
are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign
Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.
On March 24, 2021, the SEC
adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the Holding Foreign
Companies Accountable Act.
On June 22, 2021, the U.S.
Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive
non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to
two.
On September 22, 2021, the
PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act, which provides a framework for the PCAOB to use
when determining, as contemplated under the Holding Foreign Companies Accountable Act, whether the board of directors of a company is
unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position
taken by one or more authorities in that jurisdiction.
On December 2, 2021, the
SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable
Act.
On December 16, 2021, the
PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting
firms headquartered in mainland China and in Hong Kong because of positions taken by PRC and Hong Kong authorities in those jurisdictions.
The lack of access to the
PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China.
As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality
control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and
potential investors to lose confidence in the audit procedures and reported financial information and the quality of the financial statements
of those companies who have China-based auditors.
Our auditor, the independent
registered public accounting firm that issues the audit report contained in this annual report, as an auditor of companies that are traded
publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB
conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in San
Mateo, California, and has been inspected by the PCAOB on a regular basis with the last inspection in October 2019. The PCAOB currently
has access to inspect the working papers of our auditor and our auditor is not subject to the determinations announced by the PCAOB on
December 16, 2021. However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or
regulatory authorities would apply additional and more stringent criteria to us since we are an emerging growth company and the majority
of our operations are conducted in China. Furthermore, the Holding Foreign Companies Accountable Act, which requires that the PCAOB be
permitted to inspect an issuer’s public accounting firm within three years, may result in the delisting of our Company or prohibition
of trading in our Ordinary Shares in the future if the PCAOB is unable to inspect our accounting firm at such future time. The Accelerating
Holding Foreign Companies Accountable Act, if passed by the U.S. House of Representatives and signed into law, would reduce the period
of time for foreign companies to comply with PCAOB audits to two consecutive years instead of three, thus reducing the time period for
triggering the prohibition on trading.
We do not intend to pay dividends for the
foreseeable future.
We currently intend to retain
any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the
foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary
Shares increases.
If securities or industry analysts do not
publish research or reports about our business, or if they 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.
If we fail to implement and maintain an
effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and
investor confidence and the market price of our Ordinary Shares may be materially and adversely affected.
Our independent registered
public accounting firm is currently not required to conduct an audit of our internal control over financial reporting. In the course of
auditing our consolidated financial statements as of March 31, 2022, our management has not received from our independent registered public
accounting firm any report regarding deficiencies in our internal controls over financial reporting. As a small-scale company, we are
in the process of establishing and improving our internal controls. Upon our independent registered public accounting firm’s suggestions,
with the development of our business and the increase of our financial personnel, we will improve our internal control management from
the following aspects: (1) Internal environment: Our internal environment affects the formulation of our business management objectives.
We plan to take the following measures to improve the Company’s governance structure: (a) improve our governance structure, including
the establishment of internal institutions and the allocation of powers and responsibilities, (b) improve our human resources related
policies, and (c) strengthen our corporate culture; (2) Risk assessment: We will prepare specific assessments and strategic plans for
potential risks, including risk tolerance determination, risks identification, and risk analysis and risk response; (3) Control systems:
We plan to establish and improve (a) our authorization and approval control system to provide reasonable assurance that transaction receipts
and expenditures of our Company are being made only in accordance with the authorization of our management and directors, (b) our accounting
control system to maintain our records that, in reasonable detail, to accurately reflect the transactions and dispositions of our assets,
and to permit preparation of consolidated financial statements in accordance with GAAP, (c) our property protection control to provide
reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our Company’s
assets that could have a material effect on the consolidated financial statements (d) our budget control system, (e) operation analysis
and control system, and (f) our major risk early warning and emergency handling mechanism; (4) Information communication: An effective
information communication system, within which our financial status and financial operation can be accurately and effectively disclosed
in the financial report to our management is important for our internal control over financial reporting. We plan to establish an information
communication mechanism to ensure smooth communication between the management and the Company’s external and internal personnel,
including communication with our stakeholders, authorities, auditors, and suppliers; and (5) Internal supervision: we plan to conduct
internal inspections regarding our internal controls, and make timely improvements to internal control deficiencies that we may find during
the inspection.
Our failure to discover and
address any material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with
applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition,
results of operations, and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover,
ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.
We are a public company in
the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that
we include a report from management on our internal control over financial reporting in this annual report on Form 20-F. In addition,
once we cease to be an “emerging growth company” as such term is defined in Jumpstart Our Business Startups Act of 2012 (the
“JOBS Act”), our independent registered public accounting firm may be required attest to and report on the effectiveness of
our internal control over financial reporting, depending on whether we will be an accelerated filer. In addition, as a public company,
our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable
future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting
and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify additional or other
weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our
internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able
to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally
speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our
financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported
financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in
the trading price of our Ordinary Shares. Additionally, ineffective internal control over financial reporting could expose us to increased
risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory
investigations and civil or criminal sanctions.
For more information regarding
our internal controls, please see “Item 15. Controls and Procedures.”
Because we are an “emerging growth
company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence
in us and our Ordinary Shares.
We are an “emerging
growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from disclosure and other requirements
applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company and
a smaller reporting company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not
have access to certain information they may deem important. See “Item 4. Information on the Company—B. Business Overview—Emerging
Growth Company Status.”
We will incur increased costs after we cease
to qualify as an “emerging growth company.”
The Sarbanes-Oxley Act of
2002, as well as rules subsequently implemented by the SEC and the Nasdaq Capital Market, impose various requirements on the corporate
governance practices of public companies. As an “emerging growth company” pursuant to the JOBS Act, we may take advantage
of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. We expect these rules and
regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly.
After we are no longer an “emerging growth company,” we expect to incur significant additional expenses and devote substantial
management effort toward ensuring compliance increased disclosure requirements.
If we cease to qualify as a foreign private
issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers,
and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer,
we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors
and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as
frequently or as promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information
that United States domestic issuers are required to disclose. While we currently qualify as a foreign private issuer, we may cease to
qualify as a foreign private issuer in the future.
As a foreign private issuer, we are permitted
to, and we may rely on exemptions from certain Nasdaq Capital Market corporate governance standards applicable to U.S. issuers. This may
afford less protection to holders of our Ordinary Shares.
As a foreign private issuer,
we are permitted to take advantage of certain provisions in the Nasdaq Capital Market listing rules that allow us to follow Cayman Islands
law for certain governance matters. Certain corporate governance practices in the Cayman Islands may differ significantly from corporate
governance listing standards as, except for general fiduciary duties and duties of care, Cayman Islands law has no corporate governance
regime which prescribes specific corporate governance standards. We may follow Cayman Islands corporate governance practices in lieu of
the corporate governance requirements of the Nasdaq Capital Market in respect of the following. Cayman law does not require that we make
our interim results available to shareholders, although as a Nasdaq listed company, we are required to publicly file interim results for
the first six months of our fiscal year. Furthermore, Nasdaq Listing Rule 5635 generally provides that shareholder approval is required
of U.S. domestic companies listed on the Nasdaq Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20%
or more of the company’s common stock or voting power for less than the greater of market or book value (ii) resulting in a change
of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially
amended or other equity compensation arrangement made or materially amended. However, Nasdaq Listing Rule 5615(a)(3)(A) permits foreign
private issuers to follow their home country practice rather than these shareholder approval requirements, and the Cayman Islands do not
require shareholder approval prior to any of the foregoing types of issuances. The Company has chosen to follow its home country practices
with respect to the requirements set forth under Nasdaq Listing Rules 5635(b), 5635(c), and 5635(d), and therefore is not required to
obtain shareholder approval prior to (1) the issuance of 20% or more of its outstanding ordinary shares, (2) the issuance of securities
pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially
amended, and (3) the issuance of securities when the issuance or potential issuance will result in a change of control of the Company.
Also, Nasdaq Listing Rule 5605(b)(1) requires listed companies to have, among other things, a majority of its board members be independent.
As a foreign private issuer, however, we are permitted to, and we may follow home country practice in lieu of the above requirements,
or we may choose to comply with the above requirement within one year of listing. The corporate governance practice in our home country,
the Cayman Islands, does not require a majority of our board to consist of independent directors. Currently, a majority of our board members
are independent. However, we may consider following home country practice in lieu of the requirements under Nasdaq Listing Rules with
respect to certain corporate governance standards. Since a majority of our board of directors may not consist of independent directors,
fewer board members may be exercising independent judgment and the level of board oversight on the management of our Company may decrease
as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate
governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign
private issuer, are not subject to these requirements. We may consider following home country practice in lieu of the requirements under
Nasdaq listing rules with respect to certain corporate governance standards. Therefore, our shareholders may be afforded less protection
than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers. For more information
regarding our corporate governance, please see “Item 16G. Corporate Governance.”
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:
| ● | actual
or anticipated fluctuations in our revenue and other operating results; |
| ● | the
financial projections we may provide to the public, any changes in these projections or our
failure to meet these projections; |
| ● | actions
of securities analysts who initiate or maintain coverage of us, changes in financial estimates
by any securities analysts who follow our company, or our failure to meet these estimates
or the expectations of investors; |
| ● | announcements
by us or our competitors of significant services or features, technical innovations, acquisitions,
strategic partnerships, joint ventures, or capital commitments; |
| ● | price
and volume fluctuations in the overall stock market, including as a result of trends in the
economy as a whole; |
| ● | lawsuits
threatened or filed against us; and |
| ● | other
events or factors, including those resulting from war or incidents of terrorism, or responses
to these events. |
In addition, the stock markets
have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance
of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If
we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management
from our business, and adversely affect our business.
If we cannot continue to satisfy listing
requirements and other rules of Nasdaq Capital Market, although we exempt from certain corporate governance standards applicable to U.S.
issuers as a Foreign Private Issuer, our securities may be delisted, which could negatively impact the price of our securities and your
ability to sell them.
Our Ordinary Shares are listed
on the Nasdaq Capital Market. We cannot assure you that our Ordinary Shares will continue to be listed on the Nasdaq Capital Market.
In order to maintain our
listing on the Nasdaq Capital Market, we are required to comply with certain rules of Nasdaq Capital Market, including those regarding
minimum shareholder’s equity, minimum share price, and certain corporate governance requirements. We may not be able to continue
to satisfy continuing listing requirements and other applicable rules of the Nasdaq Capital Market. If we are unable to satisfy the Nasdaq
Capital Market criteria for maintaining our listing, our securities could be subject to delisting.
If the Nasdaq Capital Market
subsequently delists our securities from trading, we could face significant consequences, including:
|
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a limited availability for market quotations for our securities; |
|
● |
reduced liquidity with respect to our securities; |
|
● |
a determination that our ordinary share is a “penny stock,” which will require brokers trading in our ordinary shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our ordinary shares; |
|
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limited amount of news and analyst coverage; and |
|
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a decreased ability to issue additional securities or obtain additional financing in the future. |
We have a substantial number of outstanding
warrants. The exercise of our outstanding warrants can have a dilutive effect on our Ordinary Shares.
We have a substantial number
of warrants outstanding.
On October 29, 2021, the
Company issued warrants to Natural Selection Capital Holdings Limited in four equal tranches to purchase an aggregate of 14,000,000 Ordinary
Shares, which became exercisable on the later of (i) the one-year anniversary of the issuance and (ii) the applicable vesting dates, with
exercise prices between $1 and $2.5 per share, and will expire on the 10th anniversary from the date on which they become exercisable.
On November 31, 2021, the
Company issued warrants to Ming Ni to purchase an aggregate of 2,000,000 Ordinary Shares, which became exercisable once issued, and would
expire five years after issuance.
On October 27, 2021, the
Company entered into a Consulting and Warrant Issuance Agreement and agreed to issue warrants to four individuals providing consulting
services to the Company to purchase in aggregate 1,800,000 Ordinary Shares, which will become exercisable once issued.
On May 10, 2022, the Company
entered into an Employee Warrant Issuance Agreement with Yingjun Zhou, and agreed to issue warrants to Yingjun Zhou to purchase an aggregate
of 200,000 Ordinary Shares, which will become exercisable once issued.
On May 26, 2022, the Company
entered into a Consulting and Warrant Issuance, and agreed to issue warrants to three individuals providing consulting services to the
Company to purchase in aggregate 500,000 Ordinary Shares, which will become exercisable once issued.
On June 30, 2022, the Company
entered into a Securities Subscription and Warrant Purchase Agreement and agreed to issue warrants to 11 individuals and one company to
purchase in aggregate 6,600,000 Ordinary Shares, which will become exercisable once vested. The vesting of the warrants is conditioned
upon the attainment of certain performance goals of the Company. As of the date of this annual report, no warrants have vested pursuant to the Securities Subscription and Warrant
Purchase Agreement.
The exercise of our outstanding
warrants and conversion of our outstanding convertible notes can have a dilutive effect on our common stock. The issuance of shares of
Ordinary Shares upon exercise of outstanding warrants and or conversion of outstanding convertible notes could result in substantial dilution
to our shareholders, which may have a negative effect on the price of our Ordinary Shares. For more information regarding our outstanding
warrants, please see “Item 10. Additional Information––C. Material Contracts.”
Anti-takeover provisions in our amended
and restated memorandum and articles of association may discourage, delay or prevent a change in control.
Some provisions of our amended
and restated memorandum and articles of association, which became effective on July 25, 2017, prior to the date of this report, may discourage,
delay or prevent a change in control of our Company or management that shareholders may consider favorable, including, among other things,
the following:
|
● |
provisions that authorize our board of directors to issue shares with preferred, deferred or other special rights or restrictions without any further vote or action by our shareholders; and |
|
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provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings. |
Our board of directors may decline to register
transfers of Ordinary Shares in certain circumstances.
Our board of directors may,
in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien.
Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied
by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show
the right of the transferor to make the transfer; (ii) the instrument of transfer is in respect of only one class of shares; (iii) the
instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders, the number of joint holders
to whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any lien in favor of us; or (vi) a fee
of such maximum sum as Nasdaq Capital Market may determine to be payable, or such lesser sum as our board of directors may from time to
time require, is paid to us in respect thereof.
If our directors refuse to
register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each of the transferor
and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in
such one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board
of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register
closed for more than 30 days in any year.
This, however, is unlikely
to affect market transactions of the Ordinary Shares held by our public shareholders. Since our Ordinary Shares are listed, the legal
title to such Ordinary Shares and the registration details of those Ordinary Shares in the Company’s register of members remain
with the Depository Trust Company. All market transactions with respect to those Ordinary Shares are carried out without the need for
any kind of registration by the directors, as the market transactions are all conducted through the Depository Trust Company systems.
The laws of the Cayman Islands may not provide
our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.
Our corporate affairs are
governed by our amended and restated memorandum and articles of association, by the Companies Law (2021 Revision) of the Cayman Islands,
and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders,
and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of
the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman
Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories
such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme
Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions
of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and
the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes
or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to
the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our
management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United
States.
You may be unable to present proposals before
annual general meetings or extraordinary general meetings not called by shareholders.
Cayman Islands law provides
shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal
before a general meeting. However, these rights may be provided in a company’s articles of association. Our articles of association
allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition
a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least 21 clear
days is required for the convening of our annual general shareholders’ meeting and at least 14 clear days’ notice any other
general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by
proxy, representing not less than one-third in nominal value of the total issued voting shares in our Company.
If we are classified as a passive foreign
investment company (“PFIC”), 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 PFIC, for any taxable year if, for such year, either
|
● |
At least 75% of our gross income for the year is passive income; or |
|
● |
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 which we are currently unable to determine) that is included in the holding period of
a U.S. taxpayer who holds our ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may
be subject to additional reporting requirements.
Depending on the amount of
cash we have raised in our initial public offering, together with any other assets held for the production of passive income, it is possible
that, for our 2023 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We
will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we are treating
Long Yun as being owned by us for United States federal income tax purposes, not only because we control their management decisions, but
also because we are entitled to the economic benefits associated with Long Yun, and as a result, we are treating Long Yun as our wholly-owned
subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own
its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value.
Therefore, the income and assets of Long Yun should be included in the determination of whether or not we are a PFIC in any taxable year.
For a more detailed discussion
of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Item
10. Additional Information—E. Taxation—United States Federal Income Taxation—PFIC.”
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are not an operating company
but a Cayman Islands holding company. A substantial portion of our operations in the PRC are conducted through Long Yun, or the VIE, based
in China, pursuant to VIE Agreements. The VIE structure provides contractual exposure to foreign investment in China-based companies where
Chinese law prohibits direct foreign investment in the PRC operating entities.
We do not have any equity
interests in the VIE, but whose financial results have been consolidated by us for in accordance with IFRS because we are deemed
to have effective control over and to be the primary beneficiary of these companies, for accounting purposes only, via the VIE Agreements.
However, the VIE Agreements have not been tested in a court of law in China as of the date of this annual report. Investors of our Ordinary
Shares do not own any equity interest in the VIE in China, but instead own equity interest in a Cayman Islands holding company. For details
of the VIE Agreements, see “Item 4. Information on the Company––B. Business Overview––The VIE Agreements.”
We are subject to risks associated
with our VIE structure. Investors may never directly hold equity interests in the VIE. If the PRC government finds that the contractual
arrangements which establish the structure of our business operations do not comply with PRC laws and regulations, or if these regulations
or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those
operations, which would result in the VIE being deconsolidated. A substantial portion of our assets, including the necessary licenses
to conduct business are held by the VIE and its subsidiaries. A substantial portion of our revenue is generated by the VIE. The deconsolidation
of the VIE would have a material adverse effect on our operations and substantially diminish the value of our Ordinary Shares. There are
uncertainties about potential future actions by the PRC government that could affect the enforceability of our contractual arrangements
with the VIE and, consequently, significantly affect our financial performance. The value of the Ordinary Shares may significantly decline
or become worthless as a result. For a detailed description of the risks associated with our corporate structure, please refer to risks
disclosed under “Item 3. Key Information––D. Risk Factors––Risks Relating to Our Corporate Structure.”
We face various legal and
operational risks and uncertainties associated with having a substantial portion of our operations in China and with the complex and evolving
PRC laws and regulations, and as a result these risks may result in material changes in the operations of our subsidiaries, the VIE, and
its subsidiaries, significant depreciation or a complete loss of the value of our Ordinary Shares, or a complete hindrance of our ability
to offer, or continue to offer, our securities to investors. For example, we face risks associated with PRC governmental authorities’
significant oversight and discretion over the businesses and financing activities of the VIE, the requirement of regulatory approvals
for offerings and listings conducted overseas and foreign investment in China-based issuers, the use of VIE, the enforcement of anti-monopoly
regime, the regulatory oversight on cybersecurity and data privacy as well as the risk of delisting if the PCAOB is unable to conduct
inspection on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or continue to list
on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of
our Ordinary Shares, significantly limit or completely hinder our ability to offer or continue to offer such securities to investors,
or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China,
see “Item 3. Key Information––D. Risk Factors––Risks Relating to Doing Business in the PRC.”
Recently, the PRC government
adopted a series of regulatory actions and issued statements to regulate business operations in China with little advance notice, including
cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and
expanding the efforts in anti-monopoly enforcement. As of the date of this report, none of our Company, our subsidiaries, nor the VIE
and its subsidiaries have been involved in any investigation or cybersecurity review initiated by any PRC regulatory authority, nor has
any of them received any inquiry, notice, or sanction related to cybersecurity review under the Review Measures. On December 28, 2021,
13 governmental departments of the PRC, including the CAC, issued the Review Measures, which became effective on February 15, 2022. The
Cybersecurity Review Measures (the “Review Measures”) provide that an online platform operator which possesses the personal
information of at least one million users must apply for a cybersecurity review by the CAC if it intends to be listed in foreign countries.
As of the date of this annual report, according to our PRC counsel, Capital Equity Legal Group, our operations in the PRC and our continued
listing are not subject to the review or prior approval of the CAC or the CSRC. Uncertainties still exist, however, due to the possibility
that laws, regulations, or policies in the PRC could change rapidly in the future. In the event that (i) the PRC government expanded the
categories of industries and companies whose foreign securities offerings are subject to review by the CSRC or the CAC and that we are
required to obtain such permissions or approvals; or (ii) we inadvertently concluded that relevant permissions or approvals were not required
or that we did not receive or maintain relevant permissions or approvals required, any action taken by the PRC government could significantly
limit or completely hinder our operating subsidiaries’ operations in the PRC and our ability to offer or continue to offer our Ordinary
Shares to investors and could cause the value of such securities to significantly decline or be worthless. Since these statements and
regulatory actions are newly published, however, official guidance and related implementation rules have not been issued. It is highly
uncertain what the potential impact such modified or new laws and regulations will have on the daily business operations of our subsidiaries
and the VIE and its subsidiaries, our ability to accept foreign investments, and our listing on a U.S. exchange. The Standing Committee
of the National People’s Congress or PRC regulatory authorities may in the future promulgate laws, regulations, or implementing
rules that require us, our subsidiaries, or the VIE and its subsidiaries to obtain regulatory approval from Chinese authorities before
listing in the U.S. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—
Recent greater oversight by the Cyberspace Administration of China (the ‘CAC’) over data security, particularly for companies
seeking to list on a foreign exchange, could adversely impact our business and our offering” and “Item 3. Key Information—D.
Risk Factors— Risks Relating to Doing Business in the PRC — Changes in the policies of the PRC government could have a significant
impact upon the PRC operating entities’ ability to operate profitably in the PRC.”
As a holding company, we
conduct a portion of our operations in China through the VIE in China. In addition, some of our senior executive officers and directors,
namely Limin Liu, Xiaohua Gu, Ming Ni, Bingzhong Wang, Wei Wang, Bin Liu, Jingxin Tian, Kim Fung Lai, and Sen Lin, reside in the PRC
(including Hong Kong and Macau) for a significant portion of the time and are PRC nationals. As a result, it may be difficult to effect
service of process upon those persons. It may be difficult to enforce judgements obtained in U.S. courts based on civil liability provisions
of the U.S. federal securities laws against us and our officers and directors, as none of them currently resides in the U.S. or has substantial
assets in the U.S. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce
judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S.
or any state. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—You may
experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against us or
our management named in this annual report based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations
or collect evidence within China.”
In addition, trading in our
securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect the workpapers
prepared by our auditor, and that as a result an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed
the Accelerating Holding Foreign Companies Accountable Act, which, if passed by the U.S. House of Representatives and signed into law,
would reduce the period of time for foreign companies to comply with PCAOB audits to two consecutive years instead of three, thus reducing
the time period for triggering the prohibition on trading. On December 16, 2021, the PCAOB issued a report on its determination that it
is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because
of positions taken by PRC and Hong Kong authorities in those jurisdictions, and the PCAOB included in the report of its determination
a list of the accounting firms that are headquartered in the PRC or Hong Kong. As of the date of this annual report, this list does not
include our auditor, WWC, P.C.. Our auditor, the independent registered public accounting firm that issues the audit report contained
in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB,
is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable
professional standards. Our auditor is headquartered in San Mateo, California, and has been inspected by the PCAOB on a regular basis
with the last inspection in October 2019. The PCAOB currently has access to inspect the working papers of our auditor and our auditor
is not subject to the determinations announced by the PCAOB on December 16, 2021. However, the recent developments would add uncertainties
to our continued listing and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria
to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel
and training, or sufficiency of resources, geographic reach or experience as related to the audit of our financial statements. Furthermore,
the Holding Foreign Companies Accountable Act, which requires that the PCAOB be permitted to inspect an issuer’s public accounting
firm within three years, may result in the delisting of our Company or prohibition of trading in our Ordinary Shares in the future if
the PCAOB is unable to inspect our accounting firm at such future time. The Accelerating Holding Foreign Companies Accountable Act, if
passed by the U.S. House of Representatives and signed into law, would reduce the period of time for foreign companies to comply with
PCAOB audits to two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading.
Dividend Distribution
For the fiscal years ended March 31, 2022, 2021, and 2020, there were
no dividends distributed between the holding company and its subsidiaries and consolidated VIE or to investors.
Under Cayman Islands law,
a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances
may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business. We intend
to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in
the foreseeable future, or any funds will be transferred from one entity to another on a regular basis. As such, we have not installed
any cash management policies that dictate how funds are transferred among the Company, its subsidiaries, and the consolidated VIE, or
to investors.
If we determine to pay dividends
on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary,
Long Yun HK.
Current PRC regulations permit
our PRC subsidiary, WFOE, to pay dividends to Long Yun HK only out of its accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, each of our operating entities in China is required to set aside at least 10% of its
after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such
entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the
amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used,
among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies,
the reserve funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes
controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience
difficulties in complying with the administrative requirements necessary to obtain and remit foreign currency for the payment of dividends
from our profits, if any. Furthermore, if our operating entities in the PRC incur debt on their own in the future, the instruments governing
the debt may restrict their ability to pay dividends or make other payments. If we or our PRC subsidiary, WFOE, are unable to receive
all of the revenue from our operations, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any,
on our Ordinary Shares will be paid in U.S. dollars. Long Yun HK may be considered a non-resident enterprise for tax purposes, so that
any dividends WFOE pays to Long Yun HK may be regarded as China-sourced income and as a result may be subject to PRC withholding tax
at a rate of up to 10%. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Enterprise
Taxation.”
In order for us to pay dividends
to our shareholders, we will rely on payments made from the PRC operating entities to WFOE, pursuant to VIE Agreements between the applicable
entities, and the distribution of such payments to Long Yun HK as dividends from WFOE. Certain payments from the PRC operating entities
to WFOE are subject to PRC taxes, including business taxes and value-added taxes. In addition, if any of the PRC operating entities incurs
debt on their own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions
to us.
Pursuant to the Arrangement
between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income,
or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no
less than 25% of a PRC project. The 5% withholding tax rate, however, does not automatically apply and certain requirements must be satisfied,
including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong
project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt
of the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the 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 and
enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to any dividends paid by our PRC
subsidiary, WFOE, to its immediate holding company, Long Yun HK. 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 our Hong Kong
subsidiary will be granted such a Hong Kong tax resident certificate. Even after our Hong Kong subsidiary obtain the Hong Kong tax resident
certificate, it is required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities
to prove that it can enjoy 5% lower PRC withholding tax rate. Long Yun HK intends to obtain the required materials and file with the relevant
tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5%
withholding tax rate on dividends received from Long Yun HK. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to Doing Business in the PRC— There are significant uncertainties under the EIT Law relating to the withholding tax liabilities
of the PRC operating entities, and dividends payable by the PRC operating entities to our offshore subsidiaries may not qualify to enjoy
certain treaty benefits.”
Under existing PRC foreign
exchange regulations, payment of current account items, such as profit distributions and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying
with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior
approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures
under PRC foreign exchange regulations, such as the overseas investment registrations by our shareholders or the ultimate shareholders
of our corporate shareholders who are PRC residents. Approval from, or registration with, appropriate government authorities is, however,
required where the RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies
for current account transactions. Current PRC regulations permit our PRC subsidiary to pay dividends to the Company only out of its accumulated
profits, if any, determined in accordance with Chinese accounting standards and regulations. As of the date of this annual report, there
are no restrictions or limitations imposed by the Hong Kong government on the transfer of capital within, into and out of Hong Kong (including
funds from Hong Kong to the PRC), except for transfer of funds involving money laundering and criminal activities. See “Item 3.
Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC— To the extent cash or assets of our business,
or of our PRC subsidiaries, or the VIE, is in the PRC, such cash or assets may not be available to fund operations or for other use outside
of the PRC, due to interventions in or the imposition of restrictions and limitations by the PRC government to the transfer of cash or
assets.”
Recent Regulatory Developments
On July 6, 2021, the relevant
PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law.
These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas
listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems
to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official guidance
and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. See
“Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC— The Draft Rules Regarding
Overseas Listings were released by the CSRC for public consultation. While such rules have not yet come into effect, the Chinese government
may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit
or completely hinder our ability to continue to offer our shares to investors and could cause the value of our shares to significantly
decline or become worthless.” As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions
regarding offshore offering and listing from the CSRC or any other PRC governmental authorities.
The Cybersecurity Review
Measures (the “Review Measures”), which became effective on February 15, 2022, provides that, in addition to critical information
infrastructure operators (“CIIOs”) that intend to purchase Internet products and services, data processing operators engaging
in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity
Review Office of the PRC. According to the Review Measures, a cybersecurity review assesses potential national security risks that may
be brought about by any procurement, data processing, or overseas listing. The Review Measures further requires that CIIOs and data processing
operators that possess personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC
before conducting listings in foreign countries. As of the date of this annual report, we have not received any notice from any authorities
identifying any of our PRC subsidiary or VIEs as a CIIOs or requiring us to go through cybersecurity review or network data security review
by the CAC. We believe our PRC operations will not be subject to cybersecurity review by the CAC for this offering, because our PRC subsidiaries
are not CIIOs or data processing operators with personal information of more than 1 million users. There remains uncertainty, however,
as to how the Review Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt
new laws, regulations, rules, or detailed implementation and interpretation related to the Review Measures. For further details, see “Item
3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—Recent greater oversight by the Cyberspace
Administration of China (“CAC”) over data security, particularly for companies seeking to list on a foreign exchange, could
adversely impact our business.”
On December 24, 2021, the
CSRC released the “Regulations of the State Council on the Administration of the Overseas Issuance and Listing of Securities by Domestic
Enterprises (Draft for Comment)” and “Administrative Measures for the Recordation of Overseas Issuance and Listing of Securities
by Domestic Enterprises (Draft for Comment)” for public opinion, and if they become law, will require Chinese companies applying
to list on overseas exchanges to report and file certain documents with the CSRC within three working days after submitting listing applications
and subsequent amendments. Given the current PRC regulatory environment, it is uncertain whether we, our PRC subsidiary, or the VIE will
be required to obtain approvals from the PRC government to offer securities to foreign investors in the future, and whether we would be
able to obtain such approvals. If we are unable to obtain such approvals if required in the future, or inadvertently conclude that such
approvals are not required then the value of our Ordinary Shares may depreciate significantly or become worthless. See “Item 3.
Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC— Any actions by the Chinese government,
including any decision to intervene or influence the operations of the PRC subsidiary or the VIE or to exert control over any offering
of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations
of the PRC subsidiary or the VIE, may limit or completely hinder our ability to offer or continue to offer securities to investors, and
may cause the value of such securities to significantly decline or be worthless.”
See “Item 3. Key Information—D.
Risk Factors—Risks Relating to Doing Business in the PRC—The Draft Rules Regarding Overseas Listings were released by the
CSRC for public consultation. While such rules have not yet come into effect, the Chinese government may exert more oversight and control
over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder our ability to continue
to offer our shares to investors and could cause the value of our shares to significantly decline or become worthless.” As of the
date of this annual report, we have not received any inquiry, notice, warning, or sanctions regarding offshore offering and listing from
the CSRC or any other PRC governmental authorities.
We have been advised by
our PRC legal counsel that in the event that we conduct a follow-on offering of securities, if the Draft Administrative Provisions
and the Draft Filing Measures are adopted in their current form, we would likely be required to submit filings to the CSRC. We
believe that we are currently not required to obtain any permission or approval from the CSRC and the CAC in the PRC to issue
securities to foreign investors. However, there is no guarantee that this will continue to be the case in the future in relation to
our future offerings or the continued listing of our securities on a U.S. securities exchange, or even in the event such permission
or approval is required and obtained, it will not be subsequently revoked or rescinded. If we do not receive or maintain the
approvals, or we inadvertently conclude that such approvals are not required, or applicable laws, regulations, or interpretations
change such that we are required to obtain approval in the future, we may be subject to an investigation by competent regulators,
fines or penalties, or an order prohibiting us from conducting an offering, and these risks could result in a material adverse
change in our operations and the value of our securities, significantly limit or completely hinder our ability to offer or continue
to offer securities to investors, or cause such securities to significantly decline in value or become worthless
As of the date of this annual
report, we and our PRC subsidiaries and the VIE have received from the PRC authorities all requisite licenses, permissions, or approvals
that are required for conducting our operations in China, such as business licenses, prepaid card issuance license and prepaid card payment
acceptance license. However, it is uncertain whether we, our PRC subsidiaries, or the VIE, will be required to obtain additional approvals,
licenses, or permits in connection with our business operations pursuant to evolving PRC laws and regulations, and whether we would be
able to obtain and renew such approvals on a timely basis or at all. Failing to do so could result in a material change in our operations,
and the value of our Ordinary Shares could depreciate significantly or become worthless. See “Risk Factors––Risks Relating
to Our Business––We rely on the approvals, certificates, and business licenses held by Long Yun and any deterioration of the
relationship between WFOE and Long Yun could materially and adversely affect our overall business operations.”
History and Development
We were incorporated in the
Cayman Islands on June 19, 2015. Our wholly-owned subsidiary, Sweet Lollipop, was incorporated in the British Virgin Islands on May 8,
2014. Long Yun HK was incorporated in Hong Kong on May 2, 2015. WFOE, Sweet Lollipop’s wholly owned subsidiary, was organized pursuant
to PRC laws on February 27, 2017. Long Yun was established on October 9, 2014 in the City of Hangzhou, the PRC, pursuant to PRC laws and
is owned by the Long Yun Shareholders.
On November 3, 2017, WFOE
entered into a Strategic Cooperation Agreement under a joint venture, where it holds 60% of the equity interests in Taikexi.
On March 20, 2018, WFOE
entered into the VIE Agreements with Long Yun and its then owners. For accounting purposes, WFOE controls and receives the economic
benefits of Long Yun’s business operation through the VIE Agreements, which enables Dragon Victory to consolidate the
financial results of Long Yun and its subsidiaries in its consolidated financial statements under IFRS. The VIE Agreements are described
under “—B. Business Overview—The VIE Agreements.”
On August 3, 2018, WFOE entered
into a strategic cooperation agreement with Shenzhen Jintai Tourism Development Co., Ltd. pursuant to which we formed a new joint venture
company on August 3, 2018 under PRC laws, Shenzhen Guanpeng. WFOE holds 51% of the equity interests in Shenzhen Guanpeng.
On May 5, 2019, WFOE participated
in the establishment of Zhejiang Shengyuan Business Consulting Co., Ltd (“Shengyuan”). WFOE held 49% of the equity interests
in Shengyuan. On September 19, 2019, WFOE sold its interest in Shengyuan to a third party. WFOE had not paid up any capital and Shengyuan
had not begun operations; accordingly, no gain or loss was incurred as a result of the transfer of ownership.
On July 7, 2019, Long Yun
incorporated a subsidiary, Dacheng Liantong Zhejiang Information Technology Co., Ltd (“Dacheng Liantong”). Long Yun currently
holds 100% of Dacheng Liantong. Dacheng Liantong is engaged in the business of providing a supply chain management platform for automotive
parts suppliers, automobile repair shops, and logistics companies.
On August 22, 2019, we incorporated
a wholly owned subsidiary, Zhejiang Shengqian Business Consulting Co., Ltd. (“Shengqian”). We dissolved Shengqian on August
19, 2021.
On April 1, 2021, Long Yun
entered into an equity transfer agreement with Mr. Qiang Huang, who owned 100% of the equity interests in Hangzhou Xuzhihang Supply Chain
Management Co., Ltd. (“Xuzhihang”), a limited liability company organized under the laws of the PRC. Xuzhihang provides supply
chain management and other logistics related services. Pursuant to the equity transfer agreement, Mr. Qiang Huang transferred 60% of the
equity interests in Xuzhihang to Long Yun for a consideration of RMB600,000.
On June 28, 2021, we, through
Sweet Lollipop, formed a wholly owned subsidiary, Meta Rich Limited (“Meta Rich”), in the British Virgin Islands.
On July 7, 2021, we, through
Long Yun HK, formed a wholly owned subsidiary, LSQ Capital Limited, in Hong Kong.
On October 29, 2021, Meta
Rich, together with Antalpha Technologies Limited, a British Virgin Islands business company (“Antalpha”), formed Metalpha.
Meta Rich holds 51%, and Antalpha holds 49%, of the equity interests in Metalpha.
On December 29, 2021, the
Company, through Meta Rich, formed a wholly owned subsidiary, Radiant Alpha Limited (“Radiant Alpha”), in the British Virgin
Islands.
On March 18, 2022, the Company, through Long Yun HK, formed a wholly
owned subsidiary, LSQ Investment Limited (“LSQ Investment”), in Hong Kong.
Our principal executive offices
are located at Suite 1508, Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong, China, and our phone number is +852-35652922. We maintain
a corporate website at http://www.dvintinc.com/. The information contained in, or accessible from, our website or any other website
does not constitute a part of this report. We have appointed Cogency Global Inc., with its address at 122 East 42nd Street, 18th Floor,
New York, NY 10168 to serve as our agent to receive service of process.
The SEC maintains a website
at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC using its EDGAR system.
B. Business Overview
The VIE Agreements
On March 20, 2018, WFOE entered
into the VIE Agreements with Long Yun and its shareholders. For accounting purposes, we control and receive the economic benefits of the
VIE and its subsidiaries through the VIE Agreements, which enables us to consolidate the financial results of the VIE and its subsidiaries
in our consolidated financial statements under IFRS.
Each of the VIE Agreements
is described in detail below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive
Business Cooperation Agreement between Long Yun and WFOE, WFOE provides Long Yun with technical support, consulting services, and other
management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in
technology, human resources, and information. Additionally, Long Yun granted an irrevocable and exclusive option to WFOE to purchase from
Long Yun, any or all of Long Yun’s assets at the lowest purchase price permitted under PRC law. Should WFOE exercise such option,
WFOE, Long Yun, and the Long Yun Shareholders will enter into a separate asset transfer or similar agreement. For services rendered to
Long Yun by WFOE under the Exclusive Business Cooperation Agreement, WFOE is entitled to collect a service fee calculated based on the
amount time spent by WFOE to render such services, multiplied by the corresponding billing rate of WFOE, plus a services fee determined
by the board of directors of WFOE based on the value of the services rendered by WFOE and taking into account the actual net income of
Long Yun.
The Exclusive Business Cooperation
Agreement will remain in effect for 10 years unless it is terminated by WFOE with 30-day prior notice. Long Yun does not have the right
to terminate the agreement unilaterally. WFOE may unilaterally extend the term of the Exclusive Business Cooperation Agreement with prior
written notice.
The CEO and president of
WFOE, Mr. Limin Liu, effectively manages Long Yun pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE has absolute
authority relating to the management of Long Yun, including but not limited to decisions with regard to expenses, salary raises and bonuses,
hiring, firing, and other operational functions, through the VIE Agreements. The Exclusive Business Cooperation Agreement does not prohibit
related party transactions, provided, however, that the audit committee of the Company is required to review and approve in advance any
related party transactions, including transactions involving WFOE or Long Yun.
Share Pledge Agreement
Under the Share Pledge Agreement
among the Long Yun Shareholders and WFOE, the Long Yun Shareholders pledged all of their equity interests in Long Yun to WFOE to guarantee
the performance of Long Yun’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the Share Pledge
Agreement, should Long Yun or the Long Yun Shareholders breach their respective contractual obligations under the Exclusive Business Cooperation
Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated
by the pledged equity interests. The Long Yun Shareholders also agreed that upon the occurrence of any event of default, as set forth
in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC law. The Long
Yun Shareholders further agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.
The Share Pledge Agreement
will be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Long Yun. WFOE will cancel
or terminate the Share Pledge Agreement upon Long Yun’s full payment of all fees payable under the Exclusive Business Cooperation
Agreement.
The Share Pledge Agreement
serves several functions: (1) guarantee the performance of Long Yung’s obligations under the Exclusive Business Cooperation Agreement
and (2) ensure the Long Yung Shareholders do not transfer or assign the pledged equity interests, or create or allow any encumbrance that
would prejudice WFOE’s interests without WFOE’s prior written consent. In the event that Long Yun or the Long Yun Shareholders
breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE will be entitled to foreclose
on the Long Yun Shareholders’ equity interests in Long Yun and may (1) exercise its option to purchase or designate third parties
to purchase part or all of their equity interests in Long Yun and in this situation, WFOE may terminate the VIE Agreements after acquisition
of all equity interests in Long Yun or form new VIE structure with the third parties designated by WFOE; or (2) dispose of the pledged
equity interests retain the proceeds from such sale. In the event of such a sale of the pledged equity interests, the VIE structure evidenced
by the VIE Agreements will be terminated.
Exclusive Option Agreement
Under the Exclusive Option
Agreement, the Long Yun Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted
under PRC law, once or at multiple times, at any time, part or all of their equity interests in Long Yun. The option price is equal to
the capital paid in by the Long Yun Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations.
As of the date of this report, if WFOE exercised such option, the aggregate option exercise price that would be paid to the Long Yun Shareholders
would be approximately $1.5 million, which is the aggregate registered capital of Long Yun. The option exercise price may increase in
the event the Long Yun Shareholders make additional capital contributions to Long Yun.
The Exclusive Option Agreement,
together with the Share Pledge Agreement and the Power of Attorney, enable WFOE to, for accounting purposes, control and receive the economic
benefits of Long Yun’s business operation through the VIE Agreements, which enables us to consolidate the financial results of the
VIE and its subsidiaries in our consolidated financial statements under IFRS.
The Exclusive Option Agreement
remains effective for a term of 10 years and may be renewed at WFOE’s election.
Powers of Attorney
Under the Powers of Attorney,
each of the Long Yun Shareholders authorizes WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights
as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s
rights, including voting, that shareholders are entitled to under the laws of China and the articles of association, including but not
limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of
shareholders the legal representative, the executive director, supervisor, the chief executive officer, and other senior management members
of Long Yun.
Although it is not explicitly
stipulated in the Powers of Attorney, the term of the Powers of Attorney shall be the same as the term of that of the Exclusive Option
Agreement.
Each Power of Attorney is
coupled with an interest and shall be irrevocable and continuously valid from the date of execution, so long as the applicable Long Yun
Shareholder is a shareholder of Long Yun.
Risks Associated with Our Corporate
Structure and the VIE Agreements
Because we do not hold equity
interests in the VIE and its subsidiaries, we are subject to risks and uncertainties of the interpretations and applications of PRC laws
and regulations, including but not limited to, regulatory review of overseas listing of PRC companies through special purpose vehicles,
and the validity and enforcement of the VIE Agreements. We are also subject to the risks and uncertainties about any future actions of
the PRC government in this regard that could disallow the VIE structure, which would likely result in a material change in our operations,
and the value of our Ordinary Shares may depreciate significantly or become worthless. The VIE Agreements have not been tested in a court
of law in China as of the date of this annual report.
The VIE Agreements may not
be effective as direct ownership in providing operational control. For instance, Long Yun and the Long Yun Shareholders could breach their
VIE Agreements with WFOE by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that
are detrimental to our interests. The Long Yun Shareholders may not act in the best interests of our Company or may not perform their
obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business
through the VIE Agreements with Long Yun. In the event that Long Yun or the Long Yun Shareholders fail to perform their respective obligations
under the VIE Agreements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. In addition,
even if legal actions are taken to enforce such arrangements, there is uncertainty as to whether the courts of the PRC would recognize
or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of
the United States or any state. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—
The VIE Agreements may not be effective in providing control over Long Yun” and “Item 3. Key Information—D. Risk Factors—Risks
Relating to Our Corporate Structure—The VIE Agreements are governed by the laws of the PRC and we may have difficulty in enforcing
any rights we may have under the VIE Agreements,” and “Item 3. Key Information—D. Risk Factors—Risks Relating
to Our Corporate Structure—If the PRC government determines that the VIE Agreements do not comply with PRC regulatory restrictions
on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, and our Ordinary Shares
may decline in value or become worthless.”
We are subject to certain
legal and operational risks associated with being based in China, which could cause the value of our securities to become worthless. PRC
laws and regulations governing our current business operations are sometimes vague and uncertain, and as a result these risks may result
in material changes in the operations of the VIE and its subsidiaries, significant depreciation of the value of our Ordinary Shares, or
a complete hindrance of our ability to offer, or continue to offer, our securities to investors. Recently, the PRC government adopted
a series of regulatory actions and issued statements to regulate business operations in China with little advance notice, including cracking
down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding
the efforts in anti-monopoly enforcement. As of the date of this annual report, we, our subsidiaries, and the VIE and its subsidiaries
have not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received
any inquiry, notice, or sanction. As confirmed by our PRC counsel, Capital Equity Legal Group, we are not subject to cybersecurity review
with CAC when the Measures for Cybersecurity Censorship became effective on February 15, 2022, since we currently do not have over one
million users’ personal information and do not anticipate that we will be collecting over one million users’ personal information
in the foreseeable future, which we understand might otherwise subject us to the Measures for Cybersecurity Censorship. See “Item
3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—Recent greater oversight by the Cyberspace
Administration of China (the ‘CAC’) over data security, particularly for companies seeking to list on a foreign exchange,
could adversely impact our business and our offering.” According to our PRC counsel, no relevant laws or regulations in the PRC
explicitly require us to seek approval from the CSRC for our overseas listing. As of the date of this annual report, we, our subsidiaries,
and the VIE and its subsidiaries have not received any inquiry, notice, warning, or sanctions regarding our overseas listing from the
CSRC or any other PRC governmental authorities. Since these statements and regulatory actions are newly published, however, official guidance
and related implementation rules have not been issued. It is highly uncertain what the potential impact such modified or new laws and
regulations will have on the daily business operations of our subsidiaries and VIE, our ability to accept foreign investments, and our
listing on a U.S. exchange. The Standing Committee of the National People’s Congress or PRC regulatory authorities may in the future
promulgate laws, regulations, or implementing rules that require us, our subsidiaries, or the VIE to obtain regulatory approval from Chinese
authorities for listing in the U.S. If we do not receive or maintain the approval, or inadvertently conclude that such approval is not
required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in the future, we may
be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting an offering, and
these risks could result in a material adverse change in our operations and the value of our Ordinary Shares, significantly limit or completely
hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or
become worthless.
In addition, our Ordinary
Shares may be prohibited from trading on a national exchange or over-the-counter under the Holding Foreign Companies Accountable Act if
the PCAOB is unable to inspect our auditors for three consecutive years beginning in 2021. Our auditor has been inspected by the PCAOB
on a regular basis with the last inspection on October 2019 and it is not subject to the determinations announced by the PCAOB on December
16, 2021. If trading in our Ordinary Shares is prohibited under the Holding Foreign Companies Accountable Act in the future because the
PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq may determine to delist or prohibit
the trading of our Ordinary Shares. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act,
which, if passed by the U.S. House of Representatives and signed into law, would reduce the period of time for foreign companies to comply
with PCAOB audits to two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—Recent joint statement
by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent
criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors
who are not inspected by the PCAOB. These developments could add uncertainties to our continued listing or future offerings of our securities
in the U.S.”
Overview
We operate through the PRC
operating entities and Metalpha. The PRC operating entities currently have one line of business, namely, supply chain management platform
services. Historically, they also engaged in auto-parts procurement services and incubation services. Metalpha operates the cryptocurrency
derivative product services.
The PRC operating entities
ended the auto-parts procurement services in April 2019, and the following business description regarding such business is historical
information only.
The PRC operating entities
commenced their supply chain management platform services, which were developed and upgraded from their former auto-parts procurement
services, in October 2019 94.31% and 100% of the business revenue generated for the fiscal years ended March 31,
2022 and 2021, respectively, was from the supply chain management platform services.
5.69% of
the business revenue generated for the fiscal years ended March 31, 2022, respectively, was from Metalpha’s cryptocurrency derivative
product services.
Historically, the operating
entities’ revenue was generated from the following sources:
|
● |
consulting fees for incubation services; and |
|
● |
procurement service fees paid for providing sourcing or procurement pursuant to their auto-parts procurement services. |
Currently, the operating
entities’ revenue is generated from the following sources:
|
● |
transaction fees paid to the PRC operating entities for providing supply chain management platform services to auto parts suppliers through their supply chain management platform. The PRC operating entities receive a certain percentage of fees based on the aggregate amounts of purchase payments from their auto parts supplier partners. |
|
|
|
|
● |
Executing
cryptocurrency-related transactions such as issuing derivative products to OTC clients and from its proprietary trading
activities. |
Former Lines of Business
The PRC operating entities
used to offer incubation services pursuant to agreements on an ongoing and as-needed basis. The PRC operating entities offered these services,
commencing from the time when a project first initiates a contribution campaign using their platform to the completion of project prototypes
and/or product/service, and continuing until the project became profitable or no longer required or desired their services. These services
included business and operation advisory services relating to marketing, sales and strategic planning, and guidance and general resources
in ancillary services, such as human resources, legal, accounting, assisting with feasibility studies, and other types of services that
projects need. The PRC operating entities did not intend to substitute for professional service providers, such as business operation
professionals, accountants, or lawyers, and made referrals to third-party providers when needed. Due to market conditions, the PRC operating
entities terminated the incubation services. During the fiscal years ended March 31, 2022, 2021, and 2020, the PRC operating entities did
not generate any revenue through their incubation services.
In January 2018, the PRC
operating entities commenced providing auto-parts related services. Historically, they provided procurement services, in the form of sourcing,
accounts receivable financing, and logistics services to auto-repair shops that had demand for auto-parts from auto-parts suppliers, and
auto-parts suppliers transacting with auto-repair shops. They received a 0.8% procurement fee based upon the total transaction amount
of auto-parts that they procured or sourced for the auto-parts suppliers and the auto-repair shops, in addition to any logistics fees
applicable. The PRC operating entities suspended such services in April 2019 and did not generate any revenue from such services during
the fiscal years ended March 31, 2022, 2021, and 2020.
The Supply Chain Management Platform Services
The PRC operating entities
began to provide supply chain management platform services to several auto parts suppliers and one auto parts logistics company in October
2019. The PRC operating entities aim to address the existing supply chain management issues in the Chinese auto parts industry—namely,
there is no systematic purchase and payment processing platform for auto parts procurement in China. Conventionally, auto repair shops
that purchase from auto parts suppliers have to rely on a series of unregulated and disarranged practices that vary greatly from transaction
to transaction. This has resulted in substantive business problems for both auto parts suppliers and auto repair shops alike, such as
high transaction costs, high liquidity risks, high default risks, inequitable accountability, and many others.
The PRC operating entities
started to build their supply chain management platform in May 2019 with their own research and development team. The Supply Chain Management Platform is an integrated online supply chain processing center that provides
auto parts suppliers, auto repair shops, and logistics companies with transaction data management, shipping and handling information management,
and transaction financing. These services cover the most important aspects of auto parts procurement transactions in China. Auto parts
suppliers can initiate the supply chain management platform services on the PRC operating entities’ platform by first engaging one
of their qualified logistics partners. They then enter into an electronic procurement and shipping contract on the platform by logging
in detailed transaction and shipping information. From there on, the Supply Chain Management Platform consolidates transaction information
and shipping information for auto parts suppliers, the logistic partner, and auto repair shops.
Auto parts logistics companies
in China are small-sized business entities that transport auto parts purchased by auto repair shops to a designated delivery address while
collecting payments from auto repair shops. These logistics companies typically transfer the payment received from auto repair shops to
the relevant auto parts suppliers for their purchases within 15 to 30 days. Such delay in payment may create liquidity issues for auto
parts suppliers, who would prefer to pay a premium for receiving purchase payments within five days. The PRC operating entities created
the Supply Chain Management Platform to address this business need. The PRC operating entities typically advance the aggregate amounts
of purchase payments in full to auto parts suppliers within three days, upon confirmation from the logistics partner that it has collected
purchase payments from auto repair shops. The PRC operating entities charge auto parts suppliers they work with a service fee based on
a certain percentage of the aggregate amounts of purchase payments made by the auto repair shops. The PRC operating entities do not directly
charge auto parts suppliers for the service fee, but rather, when their logistics partner confirms auto repair shops’ receipt of
auto parts and its collection of payments, they advance only a certain percentage of the aggregate amounts of purchase payments to the
auto parts suppliers and keep a certain percentage of the aggregate amounts as service fee. After the logistics partner collects the payment
from the repair shop, it returns 100% of the payment to the PRC operating entities, usually within three days. The PRC operating entities
do not obtain promissory notes or other financial instruments from the logistics partner for the purchase advance; however, they require
the legal representative of such logistics partner to sign an unlimited personal liability agreement for each separate transaction, so
that they can seek repayment from such legal representative through court proceedings in case of a payment default by the logistics partner.
During the fiscal year ended
March 31, 2022, the PRC operating entities offered supply chain management platform services for 43,283
transactions ranging from RMB1,200 to RMB99,975 per transaction, with an average amount of RMB23,681.42.
During the fiscal year ended March 31, 2021, the PRC operating entities offered supply chain management platform services for 17,742 transactions
ranging from RMB130.00 to RMB138,000.00 per transaction, with an average amount of RMB7,778.93. To repay purchase advances made by the
PRC operating entities to auto parts suppliers, the auto repair shop partners pay by electronic transfer. The PRC operating entities have
not experienced any delays or delinquencies from the auto repair shop partners since October 2019. For the fiscal years ended March 31,
2022 and 2021, we generated revenue of $2,032,916 and $225,749, respectively, from the PRC operating entities’
supply chain management platform services business.
The PRC operating entities
have obtained all necessary permits and licenses to conduct their supply chain management platform services business.
Registration Process on the Supply Chain
Management Platform
The logistics partner and
auto part suppliers the PRC operating entities work with go through the following procedures to register their accounts on the Supply
Chain Management Platform and are required to:
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provide required due diligence documents including, but not limited to, business licenses, legal representative’s social identification card, transaction information in the past six months; |
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schedule an onsite inspection of their respective business by the PRC operating entities’ due diligence staff members, |
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review and sign a Software-as-a-Service Agreement, |
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review and sign a Supply Chain Management Platform Service Agreement that governs the responsibilities and cooperative relationship between the supply chain management platform and the applicant, and |
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review and sign an unlimited personal liability agreement that clarify the personal payment responsibility of logistics partner’s legal representative when the logistics partner defaults on its payments. |
As a general rule, the PRC
operating entities do not set limits or restrictions to the aggregate purchase amounts that a customer can engage in the supply chain
management platform. However, they do refrain from providing supply chain management platform services to any auto repair shop who have
records in payment delays or delinquencies.
Upon completing review of
all required items for application, the approval process is complete and a supply chain management platform account is created. At that
point, all transactions and related shipping, handling, and logistics information are recorded in the Supply Chain Management Platform.
The PRC operating entities charge a certain percentage of service fee per auto parts transaction for the supply chain management platform
services payable by the partnered auto parts suppliers.
Beyond the steps described
above, the PRC operating entities do not make any further determination of the eligibility of potential business partners. The PRC operating
entities rely mostly on their business partners’ representation to them and their on-site due diligence procedures. In general,
the due diligence procedures and background checks are very different from those used by banks or other financial institutions, which
typically go to greater length to minimize the risk of default. Even though the PRC operating entities have yet to experience any delay
or defaults in payments, we cannot guarantee that they will continue experience zero or lower default rate than that of financial industry’s
practice.
Risks Associated with Supply Chain Management
Platform Services—Default and Collection
The PRC operating entities
do not obtain security for their advances principally because, even assuming their logistics partner would have potential collateral to
offer as security, the small size of each particular transaction does not justify the time, effort and expense of identifying the collateral
and properly obtaining a security interest in such collateral. As a result, all of their payments made to auto parts suppliers are unsecured.
This means that, absent court or other legal action compelling the logistics partner to repay the PRC operating entities, they rely principally
on the willingness and ability of their logistic partner to send them the payment it collected from the auto repair shops.
The PRC operating entities
have not experienced any delay or default in payment in the short period of time since they started the supply chain management platform
services business in October 2019. In case of a default, they will first engage in industrial collection practices that include attempts
to contact the logistics partner and obtain payment, and attempts to contact the logistics partner’s legal representative to satisfy
the owed amount. The costs involved in these initial collection efforts are minimal as they only involve some employee time. If initial
collection efforts prove to be futile, they would then proceed through litigation and court procedures, for which the default logistics
partner would pay for all legal costs the PRC operating entities would incur in the process according to the laws of the PRC. According
to the signed unlimited personal liability agreement, the legal representative or the controller of the logistics company would be liable
for the default amount, and his or her personal assets such as bank deposits, real assets, or personal properties would be used to pay
off the amount owed to the PRC operating entities.
Marketing
With respect to the supply
chain management platform service, the PRC operating entities’ marketing efforts focus on establishing working relationships through
frequent on-site visits with local logistic companies, who have close business relationship with local auto-parts suppliers and repair
shops. Such personal marketing method involves minimal expenses, and they did not engage in any marketing activities with third-parties
or incur any marketing expenses with respect to the supply chain management platform services. As of the date of this annual report, the
PRC operating entities have served a total of 6 auto-parts suppliers as clients, whose business coverages include
over 1,000 auto-repair shops located in most cities in Zhejiang Province.
Competition
The PRC operating entities
have temporarily suspended their incubation services on October 1, 2019 and they have not generated any revenue from such business since
then. They expect to resume this segment of business when market conditions improve. We believe that the PRC operating entities are one
of the few platforms in the PRC market that provides high-quality incubation services to entrepreneurs, although we are aware that there
are a number of incubation facilities, including those with which the PRC operating entities have a formal or informal relationship.
By providing these value-added services, we believe that projects on the PRC operating entities’ platform could have a better chance
of success in both product development and completing a fundraising campaign. We believe that the PRC operating entities are the leading
company for incubation projects, facing only moderate level of competition in PRC.
The Chinese auto parts procurement
industry has a large yet fragmented market. The Chinese auto parts procurement industry does not have a standard model of auto parts procurement,
handling, delivery and transactions, resulting a highly fragmented, decentralized, and inefficient market. With breakthroughs in computer
technology, the PRC operating entities are able to integrate all essential aspects of auto parts procurement procedures and consolidate
information as well as economic resources. The end product, Supply Chain Management Platform, is a one of its kind supply chain management
platform in the industry. Even though the PRC operating entities have found business opportunities in a niche market, they will very likely
face competition with respect to their integrated supply chain management platform services from major auto parts suppliers in China in
their effort to further reduce operation costs and improve their cash flows. Some of the PRC operating entities’ major competitions
in supply chain management platform service are as follows:
Business Category |
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Name of the Competitor |
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The Core Business |
Traditional Auto-Parts Supplier and Manufacturer |
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Jingu Co., Ltd. (Auto Parts Business Trade Name: Automobile Superman) |
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Supply Chain B to B and B to C Services |
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E-Commerce and Retail Company |
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Alibaba Group Holding Limited (Auto Parts Business Trade Name: New Carzone) |
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Supply Chain B to B and B to C Services. |
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E-Commerce and Retail Company |
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JD.com, Inc. |
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Supply Chain B to B and B to C Services. |
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Online Auto Parts Trading Platform |
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Guangzhou Baturu Information Technology Co., Ltd. |
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Supply Chain B to B Services. |
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Online Auto Parts Trading Platform |
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Kaisi Times Technology (Shenzhen) Co., Ltd. |
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Supply Chain B to B and B to C Services. |
Strategy
The current business strategies
of supply chain management platform are to: (1) expand their partnership with local and regional logistic companies while attracting business
cooperation opportunities with major auto parts suppliers. The PRC operating entities’ supply chain management platform services
depend on highly qualified and well-connected logistic partners and auto parts suppliers, through which they will further engage in auto
parts procurement and transactions of different sizes at local and national scales. Currently, the PRC operating entities work with four
logistic partners and 6 auto parts suppliers. The PRC operating entities plan to expand their marketing efforts and reach more logistic
partners and auto parts suppliers in Hangzhou, Zhejiang Province and beyond, attracting auto repair shops and fulfilling their procurement
needs through the PRC operating entities’ connection with logistic partners and auto parts suppliers via their platform.
PRC Regulations
This section summarizes the principal regulations in relevant jurisdictions
related to the PRC operating entities’ business.
Regulation on Supply Chain Management Platform
Services
The operation of our supply
chain management platform services includes operations related to commercial internet information services via the Internet. Certain categories
of practices related to the Internet, such as telecommunications, Internet information services, international connections to computer
information networks, information security and censorship, are covered extensively by a number of existing laws and regulations issued
by various PRC governmental authorities, including:
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the MOFCOM; |
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China’s National Bureau of Administration for Commerce and Industries; and |
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the MIIT. |
The State Council issued
the Administrative Measures on Internet Information Services, effective in September 2000, and amended in January 2011. Pursuant to these
measures, “internet information services” refer to provision of internet information to online users, and are divided into
“commercial internet information services” and “non-commercial internet information services.” A commercial internet
information services operator must register for an ICP License, approved by relevant government authorities, before engaging in any commercial
internet information services related operations in China. The ICP License has a term of five years and can be renewed within 90 days
before expiration.
The PRC operating entities
have obtained their ICP License in August, 2019.
The online payment processing
is an integral part of the PRC operating entities’ platform service. They use Allin Pay. Allin Pay helps the PRC operating entities
handle the payment flows on their platform. Allin Pay is subject to numerous regulations relating to such matters as privacy, receipt
and transmission of payments and money laundering.
Regulations on PRC Employment
The principle regulations
that govern employment and labor matters in the PRC include: (i) Labor Law of the PRC, which was promulgated on July 5, 1994, and became
effective on January 1, 1995 and last amended on December 29, 2018; (ii) the Labor Contract Law of the PRC which was promulgated on June
29, 2007 and last amended on December 28, 2012, and (iii) the Implementing Regulations of the Labor Contract Law of the PRC which was
promulgated by the State Council on September 18, 2008;
According to the regulations
above, labor relationships between employers and employees must be executed in written form, and wages shall not be lower than local standards
on minimum wages and shall be paid to employees timely. In addition, all employers are required to establish a system for labor safety
and sanitation, strictly comply with state rules and standards and provide employees with workplace safety training. Violations of the
PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative penalties. For serious violations,
criminal liability may arise.
Regulations on PRC Social Welfare
Employers in PRC are required
by PRC laws and regulations to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance,
work-related injury insurance, medical insurance and housing funds. According to the Social Insurance Law of the PRC promulgated on October
28, 2010, and became effective on July 1, 2011 and last amended on December 29, 2018, together with other relevant laws and regulations,
any employer shall register with the local social insurance agency within 30 days after its establishment and shall register for the employee
with the local social insurance agency within 30 days after the date of hiring. An employer shall declare and make social insurance contributions
in full and on time. The occupational injury insurance and maternity insurance shall be only paid by employers while the contributions
of basic pension insurance, medical insurance and unemployment insurance shall be paid by both employers and employees. Any employer that
fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline. If the employer
still fails to rectify the noncompliance within the stipulated deadline, it may be subject to a fine ranging from one to three times the
amount overdue.
According to the Regulations
on Administration of Housing Fund promulgated on April 3, 1999, and last amended on March 24, 2019, an enterprise that fails to make housing
fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise,
a petition may be made to a local court for enforcement.
Provisions on Foreign Investment
All limited liability companies
and joint stock limited companies incorporated and operating in the PRC are governed by the Company Law of the People’s Republic
of China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s Congress
on December 28, 2013 and came into effect on March 1, 2014. In the latest amendment, paid-in capital registration, minimum requirement
of registered capital and timing requirement of capital contribution were abolished. Foreign invested projects must also comply with the
Company Law, with exceptions as specified in foreign investment laws.
With respect to the establishment
and operation of wholly foreign-owned projects, the MOFCOM and the NDRC promulgated the Catalogue of Industries for Guiding Foreign
Investment, or the Catalogue, as amended on September 30, 2019, which came into effect on September 30, 2019. The Catalogue serves
as the main basis for management and guidance for the MOFCOM to manage and supervise foreign investments. The Catalogue divides industries
for foreign investment into three categories: encouraged, restricted and prohibited. Those industries not set out in the Catalogue shall
be classified as industries permitted for foreign investment. According to the Catalogue, the supply chain management platform services
are not prohibited.
On September 3, 2016, the
Standing Committee of the National People’s Congress promulgated the Decision of the Standing Committee of the National People’s
Congress on Amending Four Laws Including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (the “Decision”),
which provides record-filing in lieu of administrative approval for the establishments and alterations of foreign invested enterprises
(the “FIEs”) not subject to special administrative measures. On October 8, 2016, the MOFCOM issued the Interim Measures for
Record-filing for the Establishment and Alteration of Foreign-invested Enterprises (the “Interim Measure”), and the MOFCOM
and the NDRC jointly issued a statement (the “Joint Statement”), clarifying that the special administrative measures in this
case are implemented by referencing the Catalogue. To be specific, the special administrative measures to be implemented are the restricted
and prohibited industry categories as well as encouraged industry categories having shareholding and executive management requirements
prescribed in the Catalogue. Since then, FIE establishments and alterations that are not subject to special administrative measures have
been changed from a pre-approval system to a more standardized and convenient filing process.
Foreign Ownership Restrictions
Foreign direct investment
in telecommunications companies in China is regulated by the Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises, or the FITE Regulations, which limit foreign ownership of companies that provide value-added telecommunications services,
including Internet content provision, to 50% of the outstanding equity.
On July 13, 2006, the MIIT
issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunication Services, or the MIIT Circular
2006. The MIIT Circular 2006 requires that (i) foreign investors can only operate a telecommunications business in China by establishing
a telecommunications enterprise with a valid telecommunications business operation license; (ii) domestic ICP license holders are prohibited
from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any
resource, sites or facilities to foreign investors to facilitate the illegal operation of telecommunications business in China; (iii)
ICP license holders (including their shareholders) must directly own the domain names and registered trademarks they use in their daily
operations; (iv) each ICP license holder must have the necessary facilities for its approved business operations and to maintain such
facilities in the regions covered by its license and (v) all value-added telecommunication service providers must improve the network
and information security, draft relevant information safety administration regulations and set up networks and information safety emergency
plans. The provincial communications administration bureaus in charge of telecommunications services are required to ensure that existing
ICP license holders would conduct a self-assessment of their compliance with the Notice and to submit status reports to the MIIT before
November 1, 2006, and may revoke the operating licenses of those who fail to comply with the above requirements and fail to rectify such
non-compliance within the limited period set by provincial communications administration bureaus. Due to the lack of further necessary
interpretation from the regulator, it remains unclear what impact the Notice will have on us or the other Chinese Internet companies that
have adopted the same or similar corporate and contractual structures.
In order to comply with such
foreign ownership restrictions, we operate a part of our business in China through Long Yun. We operate our remaining business in China
through Taikexi, in which our wholly owned subsidiary WFOE owns 60% of equity interest.
Information Security
Internet content in China
is regulated and restricted from a state security standpoint. The National People’s Congress, China’s national legislative
body, has enacted a law that may subject to criminal punishment in China any effort to: (i) gain improper entry into a computer or system
of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information
or (v) infringe intellectual property rights.
The Ministry of Public Security
has promulgated measures that prohibit using the Internet in ways which, among other things, result in a leakage of state secrets or a
spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we
may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government
may revoke its ICP license and shut down its websites.
PRC Regulation of Intellectual Property
Rights
The State Council and the
NCAC have promulgated various rules and regulations and rules relating to protection of software in China. Under these rules and regulations,
software owners, licensees and transferees may register their rights in software with Copy Protection Center of China or its local branches
and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees
and transferees are encouraged to go through the registration process and registered software rights may be entitled to better protections.
The PRC Trademark Law, adopted
in 1982 and revised in 2001 and 2013, respectively, with its implementation rules adopted in 2002 and revised in 2014, protects registered
trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.
Privacy Protection
In recent years, PRC government
authorities have enacted laws and regulations on the use of Internet to protect personal information from any unauthorized disclosure.
The Administrative Measures on Internet Information Services prohibit ICP service operators, like our platform, from insulting or slandering
a third party or infringing upon the lawful rights and interests of a third party. Additionally, under the Several Provisions on Regulating
the Market Order of Internet Information Services, issued by the MIIT in 2011, an ICP service operator may not collect any user personal
information or provide any such information to third parties without the consent of a user. An ICP service operator must expressly inform
the users of the method, content and purpose of the collection and processing of such user personal information and may only such information
necessary for the provision of its services. An ICP service operator is also required to properly store users’ personal information,
and in case of any leak or potential leak of users’ personal information, the ICP service operator must take immediate remedial
measures and, in extraordinary circumstances, report immediately to the telecommunications regulatory authority. In addition, pursuant
to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National People’s
Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT
in July 2013, any collection and use of users’ personal information are subject to the consent of the users, abide by the principles
of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also maintain
such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or
selling or proving such information to other parties. Any violation of the above decision or order may subject the ICP service operator
to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal
liabilities. The PRC operating entities require their users to accept a user agreement whereby they agree to provide certain personal
information to the PRC operating entities, and have established information security systems to protect users’ privacy.
Regulations of Foreign Exchange
Under the PRC Foreign Exchange
Administration Regulations promulgated on January 29, 1996 and amended on August 5, 2008 and various regulations issued by the SAFE and
other relevant PRC government authorities, Renminbi is convertible into other currencies for current account items, including the distribution
of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct
equity investments, loans, repatriation of investment, and investments in securities abroad, unless prior approval is obtained from the
SAFE and prior registration with SAFE is made.
SAFE promulgated the Notice
of the SAFE on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign invested Enterprises, or the SAFE Circular
19, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE further promulgated the Notice of the
SAFE on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or the SAFE Circular 16, effective
on June 9, 2016, which among other things, amend certain provisions of Circular 19. According to SAFE Circular 19 and SAFE Circular 16,
the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company
is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than
affiliates unless otherwise permitted under its business scope. Violations of SAFE Circular 19 or SAFE Circular 16 could result in administrative
penalties.
From 2012, SAFE has promulgated
various circulars to substantially amend and simplify the current foreign exchange procedure. According to these circulars, the opening
of various special purpose foreign exchange accounts, the reinvestment of Renminbi proceeds by foreign investors in the PRC and remittance
of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval
or verification of SAFE. In addition, domestic companies are allowed to provide loans not only to their offshore subsidiaries, but also
to their offshore parents and affiliates. SAFE also promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the
administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration
and banks shall process foreign exchange business relating to the direct investment in the PRC based on registration information provided
by SAFE and its branches. In February 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Foreign Exchange Management
Policies for Direct Investment, or the SAFE Circular 13, which delegates the power to enforce the foreign exchange registration in connection
with inbound and outbound direct investments under relevant SAFE rules from local branches of SAFE to banks, thereby further simplifying
the foreign exchange registration procedures for inbound and outbound direct investments.
On January 26, 2017, SAFE
issued the Notice on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control, or the SAFE Circular
3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore
entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution,
the original version of tax filing records and audited financial statement; and (ii) domestic entities shall hold income to account for
previous years’ losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed
explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts, and other proof when completing
the registration procedures in connection with an outbound investment.
Regulations on Dividend Distribution
The principal laws and regulations
govern the distribution of dividends of foreign-invested enterprises in the PRC include the Company Law of the PRC, as amended in 2004,
2005 and 2013, the Wholly Foreign-owned Enterprise Law promulgated in 1986 and amended in 2000 and 2016 and its implementation regulations
promulgated in 1990 and subsequently amended in 2001 and 2014. Under these laws and regulations, wholly foreign-owned enterprises in the
PRC may pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations.
Wholly foreign-owned companies are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund
certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies
may, at their discretion, allocate a portion of their after-tax profits based on China accounting standards to staff welfare and bonus
funds. These reserves are not distributable as cash dividends.
The Cryptocurrency Derivative Products Services
Metalpha commenced its current
cryptocurrency derivative products services in December›2021. Metalpha makes markets in cryptocurrency-related products, including
over-the-counter (OTC) derivative instruments and structured products. Metalpha also works with clients to create specially-tailored instruments
to enable sophisticated investors to establish or liquidate investment positions or undertake hedging strategies. Metalpha generates revenue
from executing cryptocurrency-related transactions and from its proprietary trading activities.
On December 23, 2021, Metalpha
entered into a Product Purchase Agreement and a Trading Account Management Agreement with Antalpha, pursuant to which Antalpha purchased
from Metalpha various cryptocurrency derivative products. The underlying assets of the cryptocurrency derivative products included Bitcoin,
Ethereum, Binance Coin, Tether, etc.
Fair value gain of approximately
US$122,711 (2021: Nil) from remeasurement of digital assets at March 31, 2022, to the extent it is not offset by remeasurement of digital
asset payables to customers at the same date, is presented as part of the “fair value change of proprietary trading digital assets”
in the consolidated statements of profit or loss and other comprehensive income. Net fair value gain of approximately US$124,611 (2021:
Nil) from remeasurement of digital assets at March 31, 2022, to the extent it is offset by remeasurement of digital asset payables to
customers at the same date.
Marketing
The company has not conducted
any extensive marketing for cryptocurrency-related businesses, and has only conducted trial lines of Internet advertising. The related
business is still in the early stage of development, and we will market it within the scope of legal requirements once the business model
and compliance structure are in place.
Strategy
The operating entities’
business strategies for their current two business segments (namely, cryptocurrency derivative product services by Metalpha and supply
chain management platform services by the PRC operating entities) are constantly being tested by the market.
The current business strategies
of cryptocurrency derivative product services are: (1) keeping up with the rapid development of the digital currency industry and the web3
industry; (2) setting large institutions and high net worth individuals in the cryptocurrency world as the main target customers.
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(1). |
Keeping up with the rapid development of the digital
currency industry and the web3 industry. The cryptocurrency industry and the web3 industry have seen a huge growth in the last
3 years. Over the years, cryptocurrencies have been increasingly recognized by the traditional financial industry, and traditional
internet companies like Facebook have also invested a great deal of attention in web3. We believe that this wave of development
will not stop for the next decades, and that there are more opportunities for new business development in this industry. At the same
time, we have formed a team of elites from traditional financial companies and traditional Internet companies, so we can use our
technical advantages and experience in the traditional industry to develop business in some less mature areas of the cryptocurrency
industry, which will give us more relative competitive advantages. |
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(2). |
Setting large institutions and high net worth individuals
in the cryptocurrency world as the main target customers. Unlike other cryptocurrency businesses that consider end retail individual
clients as their primary customer base, from the beginning, we have determined that the best customers for our products are large
institutional and high net worth clients in the cryptocurrency world. First, institutional clients value the fixed return and risk
hedging attributes that our products offer, and our trading and product design capabilities are more likely to be appreciated; second,
prioritizing high net worth clients is a proven path in the traditional financial structured products industry; Lastly, our firm
is in its infancy and our staff is still expanding, so we can serve a limited number of institutional clients more effectively with
our corporate staff. |
Oversea Regulations
This section summarizes the
principal regulations in relevant jurisdictions related to the Metalpha’ business.
Regulation on Cryptocurrency Related Services
in the British Virgin Islands
The British Virgin Islands
adopts the Financial Action Task Force’s (“FATF”) definition of virtual asset, which is a digital representation of
value that can be digitally traded or transferred and can be used for payment or investment purpose, but does not include digital representations
of fiat currencies.
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(1) |
Existing Financial Service Legislation in the British Virgin Islands |
The British Virgin Islands
has not developed a specific regulatory framework for virtual assets (“VA”). The British Virgin Islands Financial Service
Commission (“FSC”), which is the main regulator for virtual assets, published the Guidance on Regulation of Virtual Assets
on July 10, 2020 (the “Guidance”), in accordance with which licensing, authorization or approval for virtual assets shall
be considered under existing financial service legislation. Under the existing financial service legislation, virtual asset products may
be captured from regulatory perspective in one of two ways:
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Regulated Activities – At Initial Issue Investments |
The FSC has confirmed that
virtual assets and virtual assets-related products used as a means of payment for goods and services which provide the purchaser with
an ability to only purchase goods and services would not be captured by financial service legislation. However, where a virtual asset
product or service provides a benefit or right beyond a medium of exchange, it may be captured under the Securities and Investment Business
Act of the British Virgin Islands (as amended) (the “SIBA”).
The SIBA provides that no
person shall carry on “investment business” of any kind in or from within the British Virgin Islands unless licensed or authorised
by the FSC to carry on such investment business unless otherwise excluded under Schedule 2. In case that the virtual asset related products
constitute, including but not limited to, the mutual fund, shares or interests in an entity, debentures, instruments giving entitlement
to shares, interests or debentures, certificates representing investments, options, futures, contracts for differences, long-term insurance
contracts, and rights and interests in investments, the initial issuance of the same is likely to subject to the SIBA and, therefore,
licence, authorisation and approval is required.
|
● |
Regulated Activities – After Issuance |
After issuance, activities
involving virtual assets and virtual asset-related products that may be considered regulated activity and therefore require licensing
in accordance with the following legislations:
When a virtual asset product
fits the definition of an investment, persons carrying on an investment business activity will require a licence. The following two conditions
must be satisfied to determine whether a licence is required (1) whether the product satisfies the definition of an “investment”
as outlined above under “Regulated Activities – At Initial Issue Investments” above; and (2) provided the definition
of “investment” is met, an assessment is required to determine whether the investment activity is captured and not excluded
pursuant to the SIBA.
|
● |
Financial and Money Service Act (as amended) (“FMSA”) |
The FMSA provides that licensing,
registration and supervision of persons carrying on financing business and “money” services business in or from within the
British Virgin Islands. “Money” is defined in the Regulatory Code (as amended) of the British Virgin Islands as including
notes and coins; postal orders; cheques of any kind, including travellers’ cheques; bankers’ drafts and other payable orders;
and money deposited in an account; in each case, in any currency. “Coin” is defined in the Interpretation Act (as amended)
of the British Virgin Islands to mean any coin that is legally current in the British Virgin Islands. Given the definitions outlined above,
the transmission of virtual assets or virtual asset related products would not require a money services business licence. However, considering
the impending launch of the Sandbox (as defined below), the views and guidance of the FSC should first be secured before proceeding with
the activity in or from within the British Virgin Islands.
|
(2) |
Financial Services (Regulatory Sandbox) Regulations(as amended) of the British Virgin Islands |
Notwithstanding the existing
financial service legislation, the FSC also introduces the Financial Services (Regulatory Sandbox) Regulations(as amended) (the “Sandbox
Regulations”) in the British Virgin Islands to launch a regulatory sandbox designated to support and facilitate innovation in the
financial technology sector and allow businesses to trail new products and services which amount to “innovative FinTech” (the
“Sandbox”), for a limited period, without the need to apply for a licence to conduct financial service business in the British
Virgin Islands. Pursuant to the Sandbox Regulations, “innovative FinTech” is defined as the “development or implementation
of a new system, mechanism, idea, method, or other arrangement through the use of technology to create, enhance or promote a product or
service with respect to the conduct or provision of a financial services business”. The Sandbox is open to a (i) BVI business company;
(ii) a foreign company; (iii) a limited partnership; (iv) a micro business company; (v) the licensee; and (vi) any other person that the
FSC wishes to consider for participating in the Sandbox. In approving an applicant as a Sandbox participant, the FSC must be satisfied
that:
|
● |
it has received all requisite information and documents from the applicant |
|
● |
the applicant is fit and proper |
|
● |
the granting of approval is not against the public interest |
The maximum period permitted
under the Sandbox Regulations is 18 months; although, an application to extend this by up to 6 months may be submitted to the FSC (by
no later than 30 days before the end of the period). At the end of a Sandbox participant’s period, the participant may elect to
either apply to become a fully licensed entity under applicable BVI regulatory legislation, or cease its Sandbox operations. The FSC may
revoke a Sandbox participant’s approval to participate in the Sandbox in certain circumstances as specified in the Sandbox Regulations.
|
(3) |
The ML/TF/PF (defined below) Regime in the British Virgin Islands |
The British Virgin Islands,
as an international finance centre, remains committed to the global fight against money laundering (“ML”), terrorist financing
(“TF”) and proliferation financing (“PF”) by ensuring that it is in compliance with FATF’s International
Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation (the “FATF Recommendations”). Under
the ML/TF/PF regime in the British Virgin Islands, in conducting “relevant business”, a relevant person shall comply with
certain obligations, including but not limited to maintaining identification procedures, record keeping procedures, internal reporting
procedures and internal control and communication procedures, and taking appropriate measures to make employees aware of the legislations
and providing training for employees, before forming a business relationship or carrying out a one-off transaction with or for another
person. The virtual assets provider service is not within the scope of “relevant business” for the time being.
However, in response to FATF’s
Recommendation 16 prescribing that originating virtual asset service providers must obtain, and hold required accurate originator information
along with the required beneficiary information on virtual asset transfers, the FSC has solicited public consultations on the amendments
to the Anti-money Laundering Regulations and Anti-money Laundering and Terrorist Financing Code of Practice (the “AML Consultation
Papers”) since July 2022. The AML Consultation Papers contain provisions pertaining to the identification, verification, production,
record keeping and other relevant obligations relating to the business of carrying on or providing virtual asset service within the meaning
of the Virtual Assets Service Providers Act (as amended) of the British Virgin Islands, when a transaction involves virtual assets valued
at $1,000 or more.
Regulation on Cryptocurrency Related Services
in Hong Kong
Currently, there is no specific
legislative framework in Hong Kong which regulates VA and therefore no single regulatory body governs such VAs. However, a number of financial
regulators have issued guidance relating to VAs, including the Securities and Futures Commission (the “SFC”) and the Hong
Kong Monetary Authority (the “HKMA”).
|
(1) |
Securities and Futures Commission |
Entities conducting activities
relating to VAs where the relevant VA fits the definition of “securities” or “futures contracts” under the Securities
and Futures Ordinance (Cap. 571) of Hong Kong (the “SFO”) are subject to the offering or marketing restrictions, licensing
and registration requirements therein and must comply with the anti-money laundering (“AML”) and counter-terrorist financing
(“CTF”) requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance of Hong Kong (Cap. 615) (the
“AMLO”). The vast majority of VAs (such as Bitcoin) do not fit the definition of “securities” or “futures
contracts”, but the SFC has imposed specific regulatory requirements on VA portfolio managers and distributors of VAs.
On 1 November 2018, the SFC
published a Statement on Regulatory Framework for Virtual Assets Portfolio Managers, Fund Distributors and Trading Platform Operators
(the “Regulatory Framework Statement”). The Regulatory Framework Statement brings portfolio manager and distributors of funds
dealing with VAs under the SFC’s regulation and seeks to imposes further regulatory requirements on such licensed corporations that
the SFC currently regulates.
On 4 October 2019, the SFC
published a Proforma Terms and Conditions for Licensed Corporations which Manager Portfolios that Invest in Virtual Assets (the “Terms
and Conditions”). The Terms and Conditions apply to licensed corporations which manage or plan to manage funds (or portfolio of
funds) with a stated investment objective to invest in VAs or an intention to invest 10% or more of the gross asset value of the fund
in VAs. The Terms and Conditions plans to subject the VA fund managers to the same regulatory requirements irrespective of whether the
VAs under their management constitute “securities” or “futures contract” and sets forth principles that are based
on existing requirements under the rules and guidelines published by the SFC but are adapted to address the particular risks related to
VAs, including restrictions on distribution of any VA fund, custody of assets and disclosure or reporting requirements.
On 28 January 2022, the SFC
and the HKMA issued a Joint Circular on Intermediaries’ Virtual Asset-Related Activities (the “Joint Circular”). The
Joint Circular replaces the Regulatory Framework Statement on distribution of VA funds. The Joint Circular applies to intermediaries that
wish to engage in the distribution of VA-related products and the provision of VA dealing and advisory services. The Joint Circular sets
out new requirements (such as additional investor protection measures) and reminds intermediaries of the existing requirements that apply
to the relevant activities:
|
● |
Distribution of VA-related products - intermediaries distributing VA-related products considered to be complex products should comply with the SFC’s requirements governing the sale of complex products, including ensuring the suitability of VA-related products. Intermediaries should also observe additional investor protection measures on the distribution of VA-related products, including selling restrictions and VA knowledge test. Intermediaries are further expected to comply with additional regulatory requirements when distributing VA-related products, including requirements related to selling restrictions, suitability obligations, VA-related derivative product, financial accommodation, information to clients and warning statements. |
|
● |
Provision of VA dealing services – intermediaries should only partner with SFC-licensed VA trading platforms for the provision of VA dealing services and should only provide such services to professional investors. Intermediaries are expected to comply with all regulatory requirements imposed by the SFC and the HKMA when providing dealing services and should only provide such services to existing clients to which they provide services in Type 1 (dealing in securities) regulated activities. |
|
● |
Provision of VA advisory services – intermediaries are expected to comply with all regulatory requirements imposed by the SFC and the HKMA when providing advisory services and should only provide such services to existing clients to which they provide services in Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities. |
|
(2) |
Hong Kong Monetary Authority |
On 12 January 2022, the HKMA
released a Discussion Paper on Crypto-Assets and Stablecoins (the “Discussion Paper”). The Discussion Paper proposes to bring
activities related to payment-related stablecoins into the licensing regime under the Payment Systems and Stored Valued Facilities Ordinance
(Cap.584) of Hong Kong. The new licensing regime will adopt a risk-based and proportionate approach and will focus on payment-related
stablecoins at the initial state and will require an HKMA licence for carrying out stablecoin-related activities in Hong Kong and actively
marketing of such activities to the public in Hong Kong. The HKMA intends to introduce the new regime no later than year 2023 or 2024.
On 28 January 2022, the HKMA
published a Circular on Regulatory Approaches to Authorised Institutions’ Interface with Virtual Assets and Virtual Asset Service
Providers (the “HKMA Circular”). The HKMA Circular requires an authorised institution to:
|
● |
ensure any VA-related activities that it intends to engage in will not breach any applicable laws and regulations in Hong Kong or any other relevant jurisdictions; |
|
● |
undertake risk assessments to identify and understand the associated risks, including to prudential supervision risks, AML/CTF and financial crime risk and investor protection risks involved in the authorised institutions’ conducting VA-related activities; and |
|
● |
discuss with the HKMA and other applicable regulators and obtain the HKMA’s feedback on the adequacy of their risk-management controls before launching relevant products or services. |
|
(3) |
New Licensing Regime for Virtual Asset Exchanges |
Following a consultation
process which started in November 2020, the Hong Kong government introduced the Anti-Money Laundering and Counter-Terrorist Financing
(Amendment) Bill 2022 (the “AMLO Amendment”) on 6 July 2022. The AMLO Amendment introduces changes to the AMLO, including
the introduction of a licensing regime for virtual asset service providers (“VASP”) and imposing statutory AML/CTF obligations
on VASPs in Hong Kong.
Under the new licensing regime
introduced by the AMLO Amendment, any person carrying on a business of providing VA services in Hong Kong, or holding themselves out as
doing so, will need to be licensed as a VASP by the SFC. It will also be an offence for a person to actively market any VA service it
provides outside Hong Kong to the public in Hong Kong without a VASP licence.
The AMLO Amendment defines
VA as a digital representation of value that:
|
● |
is expressed as a unit of account or a store of economic value; |
|
● |
functions (or is intended to function) as a medium of exchange accepted by the public as payment for goods or services or for the discharge of debt, or for investment purposes; or |
|
● |
provides rights, eligibility or access to vote on the management, administration or governance of the affairs in connection with any cryptiographically secured digital representation of value; and |
|
● |
can be transferred, stored or traded electronically. |
The AMLO Amendment defines
VA services as only including the operation of an VA exchange, which is defined as the provision of services through means of electronic
facility:
|
● |
offers to sell or purchase VAs are regularly made or accepted in a way that forms or results in binding transaction; or |
|
● |
persons are regularly introduced, identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of VAs in a way that forms or results in a binding transaction; and |
|
● |
where client money or client VA comes into direct or indirect possession of the person providing such service. |
The definition of VA service
may be expanded by the Secretary for Financial Services and the Treasury through notice published in the Gazette.
It is intended that the provisions
in relation to VA licensing regime under the AMLO Amendment will be effective from 1 March 2023. All VA exchanges that were in operation
before 1 March 2023 will be given a transitional period of nine months until 30 November 2023 to make an application to the SFC for a
VASP licence, or a clearance period of 12 months until 28 February 2024 to relocate their businesses away from Hong Kong. Overseas VA
exchanges will be prohibited from actively marketing their services in Hong Kong when the new regime takes effect.
The SFC is the key regulator
under the VA licensing regime and will be responsible for assessing licensing applications and supervising licensed VASPs. Applicants
for VASP licence must satisfy certain requirements, including corporate structure and location, financial resources, fit and proper and
premises approval. Once licensed, a VASP will subject to certain AML/CTF requirements and other ongoing obligations for investor protection
purposes. The SFC will release more rules and guidelines before the commencement of the licensing regime, which will add to the licensed
VASP’s compliance requirements.
Regulations relating to Labor and
Social Welfare of Hong Kong
Our employees in Hong Kong are subject to the
Hong Kong Employment Ordinance (the “EO”). The EO is the main employment legislation in Hong Kong, providing for certain minimum
benefits and protections, including:
|
● |
paid maternity leave; and |
|
● |
compensation payments in certain cases of severance, unfair dismissal or termination after long service. |
Subject to limited exceptions,
the EO applies to all employees working in Hong Kong, regardless of their nationality. Other mandatory laws that are likely to apply to
the employment relationship with our Hong Kong employees include the following:
|
● |
The Personal Data (Privacy) Ordinance. This ordinance regulates an employer’s collection or surveillance, use and disclosure of an employee’s personal data (including personal data contained in e-mails and phone calls). |
|
● |
Mandatory Provident Fund Schemes Ordinance. Subject to limited exceptions, this ordinance requires employers in Hong Kong to enroll employees in a Mandatory Provident Fund Scheme, to which the employer and employee must make certain contributions. Foreign nationals are exempt if they are posted in Hong Kong to work for a period not exceeding 13 months or belong to a retirement scheme outside of Hong Kong. In certain cases, a Hong Kong national working outside of Hong Kong may still be subject to this ordinance if the employment has sufficient connection with Hong Kong. |
|
● |
Occupational Safety and Health Ordinance. This ordinance imposes a duty on all employers, as far as is reasonably practical, to ensure the safety and health in the workplace of its employees. The Occupational Safety and Health Ordinance covers most industrial and non-industrial workplaces in Hong Kong. |
|
● |
Employees’ Compensation Ordinance. If an employee suffers injury arising out of and in the course of employment in Hong Kong (or overseas, if the travel is authorized by the employer), the employer is usually liable to compensate the employee under the Employees’ Compensation Ordinance. Eligible family members of an employee killed in an accident at work may also be entitled to compensation. If an employer carries on business in Hong Kong, its employees are protected under the ordinance. All employers are required to maintain valid employees’ compensation insurance policies to cover their liabilities under the ordinance and at common law. |
|
● |
Sex Discrimination Ordinance, Disability Discrimination Ordinance, Family Status Discrimination Ordinance and Race Discrimination Ordinance. All four of these ordinances legislate against various forms of discrimination. |
|
● |
Labour Tribunal Ordinance. This ordinance empowers the Labour Tribunal to hear and resolve disputes relating to employment contracts as well as alleged breaches of the Employment Ordinance. It potentially covers disputes involving foreign nationals or Hong Kong residents working abroad. |
Seasonality
Currently, the operating
entities’ business operations do not experience any seasonality.
Employees
As of March 31, 2022, we
had an aggregate of 49 employees, of which 4 are employees of Long Yun, 9 are employees of Liantong, 3 are employees of LSQ, 4 are employees
of Long Yun International Limited, and 29 are employees of Xuzhihang. As of March 31, 2021
and 2020, we had an aggregate of 43 and 21 employees, respectively. All of them are full-time employees.
The following table sets
forth a breakdown of our employees by function as of March 31, 2022:
| |
As of March 31,
2022 | |
Functions: | |
Number | | |
% of
Total | |
Management | |
| 6 | | |
| 12.24 | % |
Sales | |
| 5 | | |
| 10.21 | % |
Technical support | |
| 4 | | |
| 8.16 | % |
Operations | |
| 29 | | |
| 59.18 | % |
General and administrative | |
| 5 | | |
| 10.21 | % |
Total | |
| 49 | | |
| 100.0 | |
None of our employees are
represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
As required by PRC laws and regulations, we participate in various employee social security plans for our employees that are administered
by local governments, including housing, pension, medical insurance and unemployment insurance. We compensate our employees with basic
salaries.
Intellectual Property
Intellectual property is
an essential aspect of the PRC operating entities’ platform operation. They rely on a combination of copyright, trade secret, and
other rights, as well as confidentiality procedures and contractual provisions to protect their technology, processes, and other intellectual
property. The PRC operating entities own and operate, through Taikexi, the intellectual property underlying their auto-parts service operation.
As of March 31, 2021, the
PRC operating entities held 20 registered trademarks in the PRC, and had 23 domain names relating to their business, including our corporate
website, www.dvintinc.com, their crowdfunding operation, website www.5etou.cn, and www.taxiqi.com for displaying their business and operation
information, with the Internet Corporation for Assigned Names and Numbers and China Internet Network Information Center. The current
ICP license for the PRC operating entities’ crowdfunding operation is in effect, although they suspend the crowdfunding operation.
The PRC operating entities are not required to acquire an ICP license for their www.taxiqi.com website because Taikexi does not provide
services through this website, and the website is used for information distribution and display only.
Emerging Growth Company Status
As a company with less than
$1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the JOBS Act.
An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable
to public companies. In particular, as an emerging growth company, we:
|
● |
may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations; |
|
● |
are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”; |
|
● |
are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002; |
|
● |
are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency,” and “say-on-golden-parachute” votes); |
|
● |
are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure; |
|
● |
are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and |
|
● |
will not be required to conduct an evaluation of our internal control over financial reporting for two years. |
We have taken advantage of
all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial
accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods makes it difficult to compare our financial
statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under
§107 of the JOBS Act.
Under the JOBS Act, we may
take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common
equity pursuant to a registration statement declared effective under the Securities Act, or such earlier time that we no longer meet the
definition of an emerging growth company.
We will remain an emerging
growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion;
(ii) the last day of the fiscal year during which the fifth anniversary of the date of our initial public offering occurs; (iii) the
date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur
if the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of the last business
day of our most recently completed second fiscal quarter; or (iv) the date on which we have issued more than $1.00 billion in non-convertible debt
securities during any three-year period.
Foreign Private Issuer Status
We are a foreign private
issuer within the meaning of the rules under the Exchange Act. As such, even after we no longer qualify as an emerging growth company,
as long as we qualify as a foreign private issuer under the Exchange Act we are exempt from certain provisions of the Exchange Act that
are applicable to U.S. domestic public companies. For example:
|
● |
we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company; |
|
● |
for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies; |
|
● |
we are not required to provide the same level of disclosure on certain issues, such as executive compensation; |
|
● |
we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; |
|
● |
we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and |
|
● |
we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction. |
Tax
Long Yun, as a PRC entity,
is subject to state and local enterprise income tax (“EIT”) according to applicable PRC tax rules and regulations. Taikexi,
as a PRC entity, is subject to state and local EIT according to applicable PRC tax rules and regulations. They are currently subject to
the authority of Hangzhou Shangcheng Tax Bureau of Zhejiang Province.
PRC enterprises are required
to file provisional EIT returns with the local tax authorities within 15 days of the end of each quarter based on actual quarterly profits.
Enterprises that have difficulty in paying quarterly tax based on actual quarterly profits may make payments based on the quarterly average
taxable income in the preceding calendar year, or by any other methods approved by the relevant tax authorities. Long Yun and Taikexi
have filed all quarterly EIT returns based on actual quarterly profits since their inception.
Final settlement of tax liability
must be made within five months of the end of each calendar year in China, the EIT tax year end is December 31 and all enterprises are
required to file their income tax return within five months after December 31. All EIT returns shall be based on Chinese GAAP. The accrued
tax payables in the EIT return may be different from the annual audited financial statement, since Long Yun and Taikexi’s financial
statements are prepared based on IFRS and use March 31 as fiscal year end, while the annual EIT return were for tax year ended December
31, 2022, 2021 and 2020, which were timely filed, and were based on China GAAP.
C. Organizational Structure
The following diagram illustrates
our corporate structure, including our significant subsidiaries, the VIE, and subsidiaries of the VIE, as of the date of this annual report:
| (1) | Hongyu
Zhang, one of our former Directors, is the 100% owner of Hong Limited that holds 1,745,594 Ordinary Shares |
| (2) | Represents
warrants held as of the date of this annual report by Ming Ni to purchase an aggregate of 2,000,000 ordinary shares of the Company and
400000 ordinary shares the company issued in the private placement executed in June 30, 2022. |
| (3) | Antalpha
holds the remaining equity interests in Metalpha. |
| (4) | Mr.
Mangyue Sun and Mr. Wenbin Liu holds the remaining equity interests in Taikexi. |
| (5) | Yu
Tao and Yutian Dai holds the remaining equity interests in Hangzhou Chechehui Auto Parts Co., Ltd. |
| (6) | Mr.
Chao Yang holds the remaining equity interests in Xuzhihang |
Investors are purchasing
their interest in the holding company in the Cayman Islands, Dragon Victory. The operations are conducted in our subsidiaries in the PRC
and the VIE and its subsidiaries.
D. Property, Plants and Equipment
The address of our principal
executive office is Suite 1508, Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong, China, where we lease office space of approximately
1,202 square feet, pursuant to a lease agreement with a third party, for the period from September 1, 2021 to August 31, 2024. The monthly
rent is HKD63,706 and the monthly service charge is HKD12,260.40.
We lease premises at Room
1803, Yintai International Building, Kejiguan Road, Binjiang District, Hangzhou, Zhejiang Province, China, of 288.8 square meters, pursuant
to a lease agreement by and between Long Yun and an individual landlord, the lease expires on June 25, 2024. The annual rent is approximately
RMB 266,558($42,048.49) and RMB 279,885.9 ($44,150.92) for each of the 12 months beginning on
July, 2022 to June 25, 2024, respectively. Long Yun may terminate the lease with two months’ prior notice.
We lease premises at Room
1805, Yintai International Building, Kejiguan Road, Binjiang District, Hangzhou, Zhejiang Province, China, of 145.39 square meters, pursuant
to a lease agreement by and between Dacheng Liantong and an individual landlord, for the period of May 15, 2021 to July 3, 2022. The annual
rent is approximately RMB 159,202 ($25,113.5) annually. The lease was not renewed after termination.
We lease premises at Siyanjing
49, Hangzhou, Zhejiang Province, China, of 260 square meters, pursuant to a lease agreement by and between Dacheng Liantong and an individual
landlord, for the period of May 30, 2021 to May 30, 2027. The annual rent is approximately RMB 330,000 ($52,056.22)
annually. Dacheng Liantong may terminate the lease with three months’ prior notice.
Item 4.A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
The following discussion
of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements
and their related notes included in this annual report. This report contains forward-looking statements. In evaluating our business, you
should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this
annual report. We caution you that our business and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
Key Line Items Affecting Our Results of Operations
Revenue
The following table sets
forth revenue generated from each revenue source, both in absolute amount and as a percentage of total revenue for the years indicated:
| |
For the Years Ended | |
| |
March 31, 2022 | | |
March 31, 2021 | | |
March 31, 2020 | |
Revenue | |
| | |
| | |
| |
- Supply chain management platform service fee | |
| 2,032,916 | | |
| 225,749 | | |
| 11,252 | |
- Fair value change of proprietary trading digital assets | |
| 122,711 | | |
| - | | |
| - | |
Total revenue | |
| 2,155,627 | | |
| 225,749 | | |
| 11,252 | |
Operating Cost and Expenses
Operating Expenses | |
| | |
| | |
| |
Professional fees | |
| 816,406 | | |
| 168,862 | | |
| 457,764 | |
Wages and benefits | |
| 876,512 | | |
| 438,259 | | |
| 576,995 | |
Travel expenses | |
| 52,520 | | |
| 23,539 | | |
| 51,727 | |
Depreciation of property, plant and equipment | |
| 64,977 | | |
| 76,509 | | |
| 86,406 | |
Depreciation of right of use assets | |
| 90,327 | | |
| 52,745 | | |
| 36,465 | |
Business taxes and surcharges | |
| — | | |
| 13,400 | | |
| 3,956 | |
Meals and entertainment | |
| 13,299 | | |
| 9,964 | | |
| 34,312 | |
Share-based compensation | |
| 1,468,800 | | |
| — | | |
| — | |
Office expenses | |
| 120,854 | | |
| — | | |
| — | |
Insurance costs | |
| 260,213 | | |
| — | | |
| — | |
Provision for doubtful debt | |
| — | | |
| — | | |
| 880,795 | |
Loss on termination of lease | |
| — | | |
| 10,952 | | |
| — | |
Other | |
| 54,622 | | |
| 15,148 | | |
| 1,822 | |
Advertising-Marketing and promotional expenditures | |
| 4,476,056 | | |
| 3,343,935 | | |
| — | |
Total | |
| 8,294,586 | | |
| 4,153,313 | | |
| 2,130,242 | |
Results of Operations
The following table sets
forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a percentage of our
total operating revenue for the years presented. This information should be read together with our consolidated financial statements and
related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our
future trends.
For the year ended March 31, 2022
For the year ended March 31, 2022
| |
Metalpha | | |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Revenue | |
| 122,711 | | |
| - | | |
| 2,032,916 | | |
| - | | |
| 2,155,627 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| (75,785 | ) | |
| (2,835,845 | ) | |
| (2,292,667 | ) | |
| (3,425,111 | ) | |
| (8,629,408 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| 1,930 | | |
| (1,945,939 | ) | |
| 1,393 | | |
| (6,003,575 | ) | |
| (7,946,191 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Profit/(loss) before tax | |
| 48,856 | | |
| (4,781,784 | ) | |
| 76,464 | | |
| (9,763,508 | ) | |
| (14,419,972 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Taxes | |
| (8,061 | ) | |
| - | | |
| - | | |
| - | | |
| (8,061 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| 40,795 | | |
| (4,781,784 | ) | |
| 76,464 | | |
| (9,763,508 | ) | |
| (14,428,033 | ) |
Financial position
As of March 31, 2022
| |
Metalpha | | |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Current assets | |
| 8,438,027 | | |
| 4,644,940 | | |
| 5,409,384 | | |
| 5,133,929 | | |
| 23,626,280 | |
Non-current assets | |
| - | | |
| 35,874 | | |
| 213,844 | | |
| 462,741 | | |
| 712,459 | |
Total assets | |
| 8,438,027 | | |
| 4,680,814 | | |
| 5,623,228 | | |
| 5,596,670 | | |
| 24,338,739 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (6,434,996 | ) | |
| (557,619 | ) | |
| (464,803 | ) | |
| (2,574,109 | ) | |
| (10,031,527 | ) |
Non-current liabilities | |
| - | | |
| - | | |
| (105,540 | ) | |
| - | | |
| (105,540 | ) |
Total liabilities | |
| (6,434,996 | ) | |
| (557,619 | ) | |
| (570,343 | ) | |
| (2,574,109 | ) | |
| (10,137,067 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net assets | |
| 2,003,031 | | |
| 4,123,195 | | |
| 5,052,885 | | |
| 3,022,561 | | |
| 14,201,672 | |
The following provides the results of
operations and the financial position of the Company’s operating segments as of and during the year ended March 31, 2021. The Longyun
operating segment reflects the Company’s crowdfunding and incubation business. The Dacheng Liantong operating segment reflects the
Company’s business of platform services.
Results of operations
For the year ended March 31, 2021
(Restated)
| |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Revenue | |
| - | | |
| 225,749 | | |
| - | | |
| 225,749 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| (3,026,631 | ) | |
| (389,672 | ) | |
| (737,010 | ) | |
| (4,153,313 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| 343,839 | | |
| 15,403 | | |
| (1,642,397 | ) | |
| (1,283,155 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss before tax | |
| (2,682,792 | ) | |
| (148,520 | ) | |
| (2,379,407 | ) | |
| (5,210,719 | ) |
| |
| | | |
| | | |
| | | |
| | |
Taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (2,682,792 | ) | |
| (148,520 | ) | |
| (2,379,407 | ) | |
| (5,210,719 | ) |
Financial position
As of March 31, 2021 (Restated)
| |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Current assets | |
| 8,248,675 | | |
| 1,973,297 | | |
| 5,306,793 | | |
| 15,528,765 | |
Non-current assets | |
| 62,287 | | |
| 1,283 | | |
| 37,665 | | |
| 101,235 | |
Total assets | |
| 8,310,962 | | |
| 1,974,580 | | |
| 5,344,458 | | |
| 15,630,000 | |
| |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (4,549,369 | ) | |
| (2,289,621 | ) | |
| (230,192 | ) | |
| (7,069,182 | ) |
Non-current liabilities | |
| (9,837 | ) | |
| - | | |
| - | | |
| (9,837 | ) |
Total liabilities | |
| (4,559,206 | ) | |
| (2,289,621 | ) | |
| (230,192 | ) | |
| (7,079,019 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net assets/(liabilities) | |
| 3,751,756 | | |
| (315,041 | ) | |
| 5,114,266 | | |
| 8,550,981 | |
Results of Operations for the Years ended
March 31, 2022, and 2021:
For the year ended March
31, 2022, we generated total revenue of $2,155,627, 94.31% of which originated from our supply chain management platform
service business. For the year ended March 31, 2021, we generated total revenue of $225,749, 100% of which originated from our supply
chain management platform services business. We did not generate any revenue from our incubation, auto-parts platform procurement business,
or listing service during the fiscal years ended March 31, 2022 and 2021.
Selling, General, and Administrative Expenses
Selling, general, and administrative
expenses consist primarily of professional fees (including consulting, audit and legal fees) and data service fees for our corporate and
technical staff and the personnel supporting our corporate and technical staff, wages and salaries, impairment loss, travel expenses,
rent expenses, business taxes and surcharges, and advertising expenses.
Our selling, general and
administrative expenses were $8,294,586 for the year ended March 31, 2022, representing $4,141,273, or 99.71% increase from $4,153,313
for the year ended March 31, 2021. The increase was due to IT fees and promotion expenses.
Other Income and Expenses
The Company’s other
expenses was $7,946,191 for the year ended March 31, 2022, representing an increase of $6,663,036, or 519.27%, from $1,283,155 for the
year ended March 31, 2021. The increase was due to the interest expense generated from convertible debentures and warrant related costs.
Net Loss
For the year ended March
31, 2022, the Company’s business operations resulted in a net loss before tax of $14,419,972, which represents a $9,209,253, or
176.73% increase from a net loss of $5,210,719 for the year ended March 31, 2021. The increase in net loss was mainly due to the increase
of selling, general and administrative expenses and the interest expense generated from convertible debentures together with warrant related
costs.
Results of Operations for the years ended
March 31, 2021, 2020:
For the year ended March
31, 2021, we generated total revenue of $225,749, 100% of which originated from our Supply Chain Management Platform Services business.
For the year ended March 31, 2020, we generated total revenue of $11,252, 100% of which originated from our supply chain management platform
service business. We did not generate any revenue from our crowdfunding, incubation, auto-parts platform procurement business, or listing
service during the fiscal years ended March 31, 2021 and March 31, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses (SG&A) consist primarily of professional fees (including consulting, audit and legal fees) and data service fees for our
corporate and technical staff and the personnel supporting our corporate and technical staff, wages and salaries, impairment loss, travel
expenses, rent expenses, business taxes and surcharges, and advertising expenses.
Our selling, general and
administrative expenses were $4,153,313 for the year ended March 31, 2021, representing $2,023,071, or 94.97% increase from $2,130,242 for
the year ended March 31, 2020. The increase was due to IT fees and promotion expenses.
Other Income and Expenses
The Company’s
other expenses was $1,283,155 for the year ended March 31, 2021, representing a decrease of $1,943,052, or 294.45%, from other
income of $659,897 for the year ended March 31, 2020. The decrease was due to the interest expense generated from convertible
debentures.
Net Loss
For the year ended March
31, 2021, the Company’s business operations resulted in a net loss of 5,210,719, which represents a $3,724,213, or
250.53%, increase from a net loss of $1,486,506 for the year ended March 31, 2020. The increase in net loss was mainly due
to the increase of selling, general and administrative expenses and the interest expense generated from convertible debentures.
B. Liquidity and Capital Resources
The following table sets
forth a summary of our cash flows for the periods presented:
| |
For the Year Ended March 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
Net cash (used in)/provided by operating activities | |
| (4,859,157 | ) | |
| (3,102,525 | ) | |
| (1,442,779 | ) |
Net cash provided by/(used in) investing activities | |
| 422,886 | | |
| 1,292,890 | | |
| 739,297 | |
Net cash provided by financing activities | |
| 8,984,175 | | |
| 3,025,391 | | |
| 258,258 | |
Effect of exchange rate changes on cash and cash equivalents | |
| (243,451 | ) | |
| (249,144 | ) | |
| 422,550 | |
Net (decrease)/increase in cash and cash equivalents and restricted cash | |
| 4,547,904 | | |
| 1,215,756 | | |
| (445,224 | ) |
Cash and cash equivalents and restricted cash at beginning of the year | |
| 982,538 | | |
| 15,926 | | |
| 38,600 | |
Cash and cash equivalents and restricted cash at end of the year | |
| 5,286,991 | | |
| 982,538 | | |
| 15,926 | |
Cash and cash equivalents.
Our cash and cash equivalents consist of cash, bank deposits, and other currency of value. As of March 31, 2022, 2021, and 2020, our cash
and cash equivalents were $5,286,991 and $982,538, and $15,926, respectively. Our other receivables and prepayments as of March 31, 2022, 2021 and
2020 was $517,359, $5,512,848 and $762,396, respectively.
A majority of our future
revenue is likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted
into foreign exchange for current account items, including profit distributions, interest payments and trade and service-related foreign
exchange transactions.
We expect that substantially
all of our future revenue will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign
currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, WFOE is allowed to
pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval
from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may
at its discretion restrict access to foreign currencies for current account transactions in the future. We believe that our current available
cash and cash equivalents will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course
of business for the next twelve months.
Operating Activities
Net cash used in operating
activities for the fiscal year ended March 31, 2022 was $4,859,157, representing a increase of $1,756,632 or 56.62%, from net cash used
in operating activities in the amount of $3,102,525 for the fiscal year ended March 31, 2021. Net loss for the fiscal year ended March
31, 2022 was $14,428,033, representing an increase of $9,217,314, or 176.89%, from a net loss of $5,210,719 for the fiscal year ended
March 31, 2021. Changes in various asset and liability account balances throughout the fiscal year ended March 31, 2021 also contributed
to the net change in cash used in operating activities. Among such changes, the increase in the ending balances of other receivable and
prepayment balances from March 31, 2021 to March 31, 2022, as shown on the consolidated statement of financial position contributed to
an increase to net cash in the amount of $(288,996) for the fiscal year ended March 31, 2022, as compared to an increase to net cash in
the amount of $720,508 for the fiscal year ended March 31, 2021. The Company also had a net increase in accounts and other payables. The
increase in accounts and other payables led to an increase of net cash flow provided by operating activities in the amount of $449,171,
or 1,479%, from net cash used in the amount of $30,358 for the fiscal year ended March 31, 2021.
Net cash used in operating
activities for the fiscal year ended March 31, 2021 was $3,102,525, representing a increase of $1,659,746 or 115.04%, from net cash used
in operating activities in the amount of $1,442,779 for the fiscal year ended March 31, 2020. Net loss for the fiscal year ended March
31, 2021 was $5,210,719, representing an increase of $3,751,626 or 257.12%, from a net loss of $1,459,093 for the fiscal year ended March
31, 2020. Changes in various asset and liability account balances throughout the fiscal year ended March 31, 2021 also contributed to
the net change in cash used in operating activities. Among such changes, the increase in the ending balances of other receivable and prepayment
balances from March 31, 2020 to March 31, 2021, as shown on the consolidated statement of financial position contributed to an increase
in net cash in the amount of $720,508 for the fiscal year ended March 31, 2021, as compared to a decrease to net cash in the amount of
$121,463 for the fiscal year ended March 31, 2020. In addition, the increases in the ending balances of accounts and other payable balance
from March 31, 2020 to March 31, 2021, as shown on the consolidated statement of financial position contributed to an increase in net
cash in the amount of $30,358 for the fiscal year ended March 31, 2021, as compared to an decreases of net cash in the amount of $163,172
for the fiscal year ended March 31, 2020.
Investing Activities
Net cash provided by investing
activities for the fiscal year ended March 31, 2022 was $422,886, primarily resulted from the acquisitions of investments with $92,458
and purchase of equipment and improvements with $288,329.
Net cash provided by investing
activities for the fiscal year ended March 31, 2021 was $1,292,890, primarily resulted from disposal/(acquisitions) of investments.
Net cash provided by investing
activities for the fiscal year ended March 31, 2020 was $739,297, primarily resulted from disposal/(acquisitions) of investments.
Financing Activities
Net cash provided by financing
activities for the fiscal year ended March 31, 2022 was $8,984,175, primarily resulting from the contributed capital paid up in various
newly incorporated subsidiaries and advances from shares issued on private placement with amount of $4,011,473, despite of repayment of
convertible notes with $5,419,972.
Net cash provided by financing
activities for the fiscal year ended March 31, 2021 was $3,025,391, primarily resulting from proceeds from issuance of ordinary shares
and proceeds from issuance of convertible notes.
Net cash provided by financing
activities for the fiscal year ended March 31, 2020 was $258,258, primarily resulting from the contributed capital paid up in various
newly incorporated subsidiaries and advances from related parties.
Capital Expenditures
Our capital expenditure was
$0, $0, and $0 for the fiscal years ended March 31, 2022, 2021, and 2020. We intend to fund our future capital expenditures with our
existing cash balance and cash flow from operating activities. We will continue to make capital expenditures to meet the expected growth
of our business.
Operating Lease Commitments for Office Facility
As of March 31, 2022,
the Company had leased office premises. The future aggregate minimum contractual undiscounted cash outflows under operating leases
are as follows:
| |
Payment Due by Period | |
| |
As of March 31, 2022 | |
| |
$ | |
Operating Lease Obligations | |
| |
Within one year (including one year) | |
| 120,592 | |
More than One year | |
| 274,952 | |
Total | |
| 395,544 | |
For the years ended March 31, 2022, 2021 and 2020, the Company incurred
lease payments under leases of $109,219, $69,609 and $75,930, respectively. The substantial movement in rental expenses was due to our
Company’s decision to change its operating venues and the locations of its office.
In January 2019, the Company
entered into a two-year lease agreement that expired on January 31, 2021 for office space in Hangzhou, China. In June 2020, the Company
terminated this two-year lease agreement.
In June 2020, the Company
entered into a lease agreement for office space in Hangzhou, China for a duration of two years. In May 2021, the Company entered into
a lease agreement with the same landlord for a different unit in the building that expired on July 3, 2022.
In May 2021, the Company
entered into a lease agreement for office space at a different location in Hangzhou, China for a duration of six years.
In July 2021, the Company
entered into a lease agreement for office space in Hong Kong, China for a duration of three years.
Leases Commitments
For the years ended March
31, 2022, 2021, and 2020, the Company incurred interest expenses under capital leases of $0, $9,452, and $0, respectively.
Capital Commitments
There were no capital commitments
for the fiscal year ended March 31, 2022.
C. Research and Development, Patents and Licenses,
etc.
See “Item 4. Information
on the Company—B. Business Overview—Intellectual Property.”
D. Trend Information
Factors Affecting Our Results of Operations
COVID-19 Pandemic
The COVID-19 pandemic and
the ensuing governmental measures designed to contain the spread of the virus, including travel restrictions, widespread mandatory quarantines,
and suspension of business activities within China, have significantly affected business and manufacturing activities within China. Accordingly,
the PRC operating entities’ business, results of operations and financial condition were adversely affected.
More specifically, the COVID-19
pandemic has negatively impacted the PRC operating entities’ businesses in the following ways:
|
● |
The PRC operating entities’
incubation service depends on a wide array of offline in person activities, such as business meetings, new project seminars, and
information trainings. The PRC operating entities have experienced substantial diminutions in these activities due to the COVID-19
pandemic and ensuing lockdowns, because the business partners in incubation projects worked remotely between January 2020 and May
2020 and the PRC operating entities could not organize large-scale offline activities during 2020. Due to the unfavorable market
conditions, the PRC operating entities temporarily suspended their incubation services since October 2019. Accordingly, we did not
generate any revenue from the PRC operating entities’ incubation services during the fiscal years ended March 31, 2021 or March
31, 2020; and |
|
|
|
|
● |
Between January and March
15 of 2020, the PRC operating entities’ staff and employees were instructed to work remotely. As a result, the PRC operating
entities were not able to perform business operations on the supply chain management platform effectively during the period, resulting
in a substantial impact upon our business performance. |
As of the date of this annual
report, Chinese industries have gradually resumed businesses, as government officials have started to ease the restrictive measures since
April 2020. Although the PRC operating entities were able to resume their normal operation since March 2020, the COVID-19 pandemic
materially adversely affected their business operations and financial results for 2020 and 2021. Since March 2022, localities in China
are employing strict lock-down policies to manage the recent trend of rapid outbreaks.
The extent to which the COVID-19
pandemic impacts our results of operations in 2022 will depend on the future developments of the pandemic, including the global severity
of, and actions taken to contain, the pandemic, which are highly uncertain and unpredictable. As of the date of this annual report, the
PRC operating entities have not resumed their incubation services. We believe the PRC operating entities supply chain management platform
services were not adversely impacted by the current COVID-19 situation. Revenue from the PRC operating entities supply chain management
platform services during fiscal year ended March 31, 2021 increased by RMB1,447,374.69 ($214,497), or 1,858.22%, compared to 2020, and
increased by 1,807,167 or 800.52% during fiscal year ended March 31, 2022, compared to 2021.
Economic and Political Risks
Our operations are mainly
conducted through the PRC operating entities in the PRC. Accordingly, our business, financial conditions, and results are influenced by
political, economic, and legal environment of the PRC.
Our results may be affected
by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations,
industry production regulations and guidance, anti-inflationary measures, currency conversions, remittances abroad, and rates and methods
of taxation, among other things.
E. Critical Accounting Estimates
Critical Accounting Policies, Estimates and
Judgments
The consolidated financial
statements of the Company have been prepared in accordance with IFRS. This basis of accounting involves the application of accrual
accounting and consequently, revenue and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s
consolidated financial statements are expressed in U.S. Dollars.
The accompanying consolidated
financial statements include the accounts of the Company and its significant subsidiaries on a consolidated basis. The Company also includes
subsidiaries over which a direct or indirect legal or effective control exists and for which the Company is deemed to direct the significant
activities and has the obligation to absorb the losses or benefits of the entities. All intercompany accounts, balances and transactions
with consolidated entities have been eliminated.
The preparation of
financial statements in conformity with IFRS requires that management make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The accounting standard for
fair value establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under the provisions of the
pronouncement, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement date.
IFRS 13 establishes a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. The hierarchy is described below:
|
Level 1: |
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
|
Level 2: |
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
|
Level 3: |
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
The Company’s current
financial assets and liabilities approximate fair value due to their short-term nature and include cash accounts. The Company’s
borrowings approximate fair value as the rates of interest are similar to what they would receive from other financial institutions.
The following table summarizes
our Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value
hierarchy:
(i) Disclosures of level in fair
value hierarchy:
| |
Fair value measurements using | | |
| |
Description | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
As of March 31, 2022 | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Recurring fair value measurements: | |
| | |
| | |
| | |
| |
Digital assets | |
| - | | |
| 8,438,027 | | |
| - | | |
| 8,438,027 | |
| |
| | | |
| | | |
| | | |
| | |
Digital assets payables | |
| - | | |
| - | | |
| 6,200,109 | | |
| 6,200,109 | |
Share purchase warrants | |
| - | | |
| - | | |
| 6,063,086 | | |
| 6,063,086 | |
(ii) Reconciliation of liabilities
measured at fair value based on level 3:
| |
Digital assets payables | |
| |
US$ | |
As of April 1, 2021 | |
| - | |
Acquired during the year | |
| 8,735,145 | |
Settlement by digital assets, for the year | |
| (2,533,106 | ) |
Fair value gains recognized in profit or loss | |
| (1,930 | ) |
As of March 31, 2022 | |
| 6,200,109 | |
| |
Share purchase warrants | |
| |
US$ | |
As of April 1, 2021 | |
| - | |
Issued | |
| 6,063,086 | |
As of March 31, 2022 | |
| 6,063,086 | |
(iii) Disclosures of valuation process
used by the Company and valuation techniques and inputs used in fair value measurements at March 31, 2022 and 2021:
The directors of the Company are responsible
for the fair value measurements of assets and liabilities required for financial reporting purposes, including level 3 fair value measurements.
For level 3 fair value measurements,
the Company will normally engage external valuation experts with the recognised professional qualifications and recent experience to perform
the valuations.
The Company’s
digital assets payables and share purchase warrants are revalued at of March 31, 2022 by independent professional qualified
valuer, who has the recent experience in the categories of digital assets payables being valued.
Level 2 fair value measurements
|
|
|
|
Significant unobservable input |
|
Effect on fair |
|
|
|
|
As of
March 31, |
|
As of
March 31, |
|
value
for increase of |
Description |
|
Valuation techniques and key inputs |
|
2022 |
|
2021 |
|
inputs |
Digital assets |
|
The digital asset is quoted in unit of BTC. Price of the digital assets at level 2 fair value is referenced to quoted price of BTC. |
|
Quoted price of BTC |
|
- |
|
Increase proportionately |
The details on property and
equipment consist of the following:
| |
March 31, 2022 | | |
March 31, 2021 | |
Computer and equipment | |
$ | 244,904 | | |
$ | 198,637 | |
Automobiles | |
| 364,767 | | |
| 99,939 | |
| |
| 609,671 | | |
| 298,576 | |
less: Accumulated depreciation | |
| (311,697 | ) | |
| (250,284 | ) |
Total, net | |
$ | 297,974 | | |
$ | 48,292 | |
Revenue Recognition
The underlying principle of IFRS 15 is to recognize revenue to depict
the transfer of goods or services to customers at the amount expected to be collected. IFRS 15 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with
a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating
the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Our Company has applied the five-step model to recognize revenue when we are probable that we will collect the consideration we are entitled
to in exchange for the services we transfer to our clients. Our Company has concluded that the new guidance did not require any significant
change to its revenue recognition processes.
Currently, we derive revenue
principally from one main business:
|
● |
Transaction fee paid to us for providing supply chain management platform services to auto parts suppliers through our supply chain management platform. We receive fees based on a certain percentage of the aggregate amounts of purchase payments from our auto parts supplier partners. |
Supply Chain Management Platform Services
Fee
The PRC operating entities
generate fees through their supply chain management platform services. They charge a certain percentage of service fees based on the aggregate
amounts of purchase payments to their partnered auto parts suppliers. The PRC operating entities recognize such revenue when the procured
auto parts are transferred to and accepted by the auto repair shops as the logistic company’s performance obligation is completed.
Fair value gain from
trading of digital assets
Metalpha commenced its current
cryptocurrency derivative products services in December 2021. Metalpha makes markets in cryptocurrency-related products, including over-the-counter
(OTC) derivative instruments and structured products. Metalpha also works with clients to create specially-tailored instruments to enable
sophisticated investors to establish or liquidate investment positions or undertake hedging strategies. Metalpha generates revenue from
executing cryptocurrency-related transactions and from its proprietary trading activities. As of the date of this annual report, The revenue from
trading of digital assets is $122,711.
Investments
Cost Method Investments
Direct and or indirect investments
in business entities in which our Company does not have a controlling financial interest and has no ability to exercise significant influence
over operating and financial policies (generally 0 to 20 percent ownership), are accounted for by the cost method.
Equity Method Investments
Direct and or indirect investments
in business entities in which our Company does not have a controlling financial interest, and yet over whose operating and financial policies
our Company has the ability to exercise significant influence (generally 20 to 50 percent ownership), are accounted for by the
equity method.
Held-to-Maturity Investments
Our Company invested in certain
held-to-maturity debt instruments. These investments were not impaired, and were recorded at their carrying values based on their amortized
cost, which approximated their fair market value. Our Company has not recognized any unrecognized gain or losses in the other comprehensive
income. There were no derivative instruments that were used to hedge these investments.
These investments derived
interests in the amount of $208,326, $413,691 and $667,898 for the years ended March 31, 2022, 2021, and 2020 respectively. The interests
were recognized to our Company’s results of operations when they were earned. These investments were not collateralized with underlying
assets by their issuers.
These investments are recorded
as short-term investments as they had maturities with one year or less.
Business Tax and Value Added Tax (“VAT”)
The PRC government implemented
a VAT reform pilot program, which replaced the business tax with VAT. Since May 2016, the changes from business tax to VAT have been expanded
to all other service sectors which used to be subject to business tax. The VAT rate applicable to subsidiaries and consolidated VIE of
the Company is 6%. The Company accrues VAT payable when revenue is recognized.
Comprehensive Income
The Company follows IAS 1, “Presentation of Financial Statements,”
which requires the reporting of comprehensive income in addition to net income. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that historically has not been recognized in the calculation of net income. Comprehensive
income generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or
distributions to shareholders.
Foreign Currency Translation
Our subsidiaries and VIE
maintain their books and records in RMB. Our reporting currency is USD. In general, for consolidation purposes, we translate assets and
liabilities into USD using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated
at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial statements are recorded
as accumulated other comprehensive income. The foreign currency translation from RMB to USD could materially affect our financial condition
and results of operations due to the fluctuation of exchange rate. The exchange rates in effect is shown below:
| |
March 31, | | |
March 31, | | |
March 31, | |
| |
2022 | | |
2021 | | |
2020 | |
1 US$ = RMB | |
| | |
| | |
| |
Period/year end RMB:US$ exchange rate | |
| 6.3363 | | |
| 6.5536 | | |
| 7.08760 | |
Period/annual average RMB:US$ exchange rate | |
| 6.4180 | | |
| 6.7772 | | |
| 6.97980 | |
Period/year end HKD:US$ exchange rate | |
| 7.8325 | | |
| 7.7742 | | |
| 7.77050 | |
Period/annual average HKD:US$ exchange rate | |
| 7.7844 | | |
| 7.7524 | | |
| 7.75880 | |
We did not have any foreign
currency investments hedged by currency borrowings or other hedging instruments in fiscal year ended March 31, 2022, 2021 and 2020.
Deconsolidation
The Company is incorporated
in the Cayman Islands and considered as a foreign entity under PRC laws. Due to the restrictions on foreign investment and ownership on
the business related to Internet content provision, telecom value-added services, financial services and others, the Company conducts
its business through various contractual arrangements with its VIE that are generally owned and controlled by certain management members
or founders of the Company. The VIE holds the licenses and approvals that are essential for its business operations in the PRC and the
Company has entered into various agreements with the VIE and its equity holders such that the Company has the right to benefit from the
VIE’s licenses and approvals and generally has control of the VIE. In the Company’s opinion, the current ownership structure
and the contractual arrangements with the VIE and their equity holders as well as the operations of the VIE are in substantial compliance
with all existing PRC laws, rules and regulations. However, there may be changes and other developments in PRC laws, rules and regulations.
Accordingly, the Company gives no assurance that PRC government authorities will not take a view in the future that is contrary to the
opinion of the Company. If the current ownership structure of the Company and its contractual arrangements with the VIE and its equity
holders were found to be in violation of any existing or future PRC laws or regulations, the Company’s ability to conduct its business
could be impacted and the Company may be required to restructure its ownership structure and operations in the PRC to comply with the
changes in the PRC laws which may result in deconsolidation of the VIE.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued
ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.”
This ASU amends several aspects of the measurement of credit losses on certain financial instruments, including replacing the existing
incurred credit loss model and other models with the Current Expected Credit Losses (CECL) model and amending certain aspects of accounting
for purchased financial assets with deterioration in credit quality since origination. The Company adopted this guidance effective April
1, 2020, prospectively, and the adoption of this standard did not have a material impact to the Consolidated Financial Statements.
In December 2019, the FASB
issued Accounting Standard Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for fiscal years
beginning after December 15, 2020, including applicable interim periods.
The Company adopted this
guidance effective April 1, 2020 and the adoption of this standard did not have a material impact to the Consolidated Financial Statements.
In March 2020, the FASB issued
ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
(“ASU 2020-04”). The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract
modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank
Offered Rate and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied
prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company
is currently evaluating the impact the adoption of ASU 2020-04 will have on its consolidated financial statements.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below is information
concerning our directors, executive officers and other key employees.
Name |
|
Age |
|
Position(s) |
Limin Liu |
|
51 |
|
Chief Executive Officer, Chairman of the Board of Directors, and Director |
Xiaohua Gu |
|
49 |
|
Chief Financial Officer |
Ming Ni |
|
39 |
|
Chief Operating Officer and Director |
Bingzhong Wang |
|
39 |
|
President and Director |
Wei Wang |
|
51 |
|
Director |
Bin Liu |
|
48 |
|
Independent Director |
Jingxin Tian |
|
42 |
|
Independent Director |
Kim Fung Lai |
|
55 |
|
Independent Director |
Sen Lin |
|
46 |
|
Independent Director |
Kiyohiro Kawayanagi |
|
53 |
|
Independent Director |
The following is a brief
biography of each of our executive officers and directors:
Mr. Limin Liu has
served as our CEO, Chairman of the Board of Directors, and director since August 21, 2019. From July 2014 to June 2019, Mr. Liu served
as the Global Lead of Department of Financial Service Industry of Huawei Technologies Co., Ltd. From 2006 to 2014, Mr. Liu served as the
vice president for sales and technology of Beijing Futong Dongfang Technology Co., Ltd. From 1994 to 2006, Mr. Liu worked at IBM China
subsequently as an engineer, business representative, and director of sales. Mr. Liu graduated from Zhejiang University in 1993 with a
major in motor control.
Mr. Xiaohua Gu has
been our CFO since August 1, 2016. Mr. Gu is well suited for this position with more than 10 years of experience in financial auditing
and accounting. Mr. Gu has been the CFO of Long Yun since October 2015. From July 2006 to February 2010, Mr. Gu was the Hangzhou branch
manager of the KPMG Consulting (China) CO., Ltd. From March 2010 to February 2012, Mr. Gu was the partner of RichLink International Investment
Co., Ltd. From March 2012 to present, Mr. Gu has been a Director of China Education Group, Associate Director of HEP CPA Shanghai Branch
and a Director of Hailiang Education Group Inc. Mr. Gu holds a Master’s Degree in Newcastle University and a Master’s Degree
in Finance in Leeds Metropolitan University.
Mr. Ming Ni as served
as our COO and director since December 9, 2021. Mr. Ni has been a private investor since September 2020. From October 2018 to August 2020,
Mr. Ni served as the vice president of 36Kr Group, a technology, media, and telecom company focusing on media and technology reports.
From January 2016 to September 2018, Mr. Ni served as an executive director of Huarong International Financial Holdings, an investment
company focusing on direct investment and asset management. Mr. Ni obtained his bachelor’s degree in Physics from Nanjing University
in 2005, a master’s degree in Actuary and Investment Science from The Hong Kong Polytechnic University in 2008, and a master’s
degree in Financial Mathematics and Statistics from The Hong Kong University of Science and Technology in 2010.
Mr. Bingzhong Wang has
served as our director since December 9, 2021. Mr. Wang has extensive experience in financial investment and corporation management. He
currently serves as a director at multiple companies including LSQ Investment Management Limited, Metalpha, and Natural Selection Capital
Holdings Limited. From July 2017 to October 2020, Mr. Wang has served as the chief executive officer and an executive director at Loto
Interactive Limited, a Hong Kong listed company mainly engaged in the provision of data analysis and storage services. Mr. Wang has served
as an independent director at Peking University Resources (Holdings) Co., Ltd., a Hong Kong-based investment holding company principally
engaged in sales of information products and real property-related businesses, since December 2021. Mr. Wang received his bachelor’s
degree in Computer Science from Nanjing University in 2005 and his MBA degree from Hong Kong University of Science and Technology in 2013.
Mr. Wei Wang has served
as our director since August 21, 2019. Mr. Wang has served as the general manager of Zhejiang Getai Curtain Wall Decoration Engineering
Co., Ltd. since January 2014. From February 1991 to December 2013, Mr. Wang worked in the Fire Department of Hangzhou City. Mr. Wang received
a bachelor’s degree in business management from Party School of the Central Committee of C.P.C. in 2000.
Mr. Bin Liu has served
as our director since September 4, 2019. Mr. Liu has over 20 years of experience in accounting, finance, and capital markets. Mr. Liu
has been a deputy manager of Beijing Houyi Capital Management Co., Ltd., a private equity fund headquartered in Beijing, since July 2019.
From September 2017 to June 2019, Mr. Liu served as deputy manager at Jianwen Financial Holding Co., Ltd. From February 2003 to August
2017, Mr. Liu worked as an official at Shanghai Securities Regulatory Bureau. From January 2002 to February 2003, Mr. Liu served as financial
manager at Winsan (Shanghai) Industrial Corporation Ltd. From July 1996 to December 2001, Mr. Liu served as a partner and manager at Beijing
Zhongtian Huazheng Accounting Firm. Mr. Liu received his bachelor’s degree in finance from Liaoning University in 1996. Mr. Liu
also holds two master’s degree: a degree in banking from Chinese Academy of Social Sciences in 1999 and another degree in law from
Fudan University in 2010.
Ms. Jingxin Tian has
served as our director since June 3, 2019. Ms. Tian has been a partner of Jingsh Law Firm, a law firm headquartered in Beijing with more
than 40 branch offices in China, since 2016, and serves as the director of construction biddings department of the firm. Ms. Tian has
over 13 years of experience as a litigation and transaction lawyer, especially in areas including legal risk management and dispute resolution.
Ms. Tian also serves as member of mergers, acquisitions, reorganizations, and financially-distressed assets committee of Beijing Lawyers
Association, member of Chinese Society of International Law, and arbitrator of Hainan International Arbitration Court of China. Ms. Tian
received a bachelor’s degree in law from Capital University of Economics and Business in China, and a master degree in civil and
business law from University of Chinese Academy of Sciences.
Mr. Kim Fung Lai has
served as our director since December 9, 2021. Mr. Lai has been in the financial investment industry since 1996. Mr. Lai has served as
an independent director at Goldstone Investment Group Limited, a Hong Kong listed investment holding company, since September 2020. He
has also been an independent director since 2019 at AVIC International Capital (Hong Kong), an investment management institution. From
July 2017 to August 2020, Mr. Lai served as the chief executive officer and an executive director at DTXS Silk Road Investment Holdings
Company Limited, a Hong Kong listed investment company specializing in the finance, culture, and tourism industries. In addition, Mr.
Lai served in multiple management positions at Hong Kong China Tourism Group (“HKCTG”) from 1998 to July 2017. As one of the
founders of Hong Kong China Tourism Financial Investment Holdings Co., Ltd., a wholly-owned subsidiary of HKCTG, he served as the executive
director and a deputy general manager from 2012 to 2017. Mr. Lai also served as a Deputy General Manager of the finance department at
HKCTG in charge of capital operation and treasury management from 2007 to 2012. In addition, he was the vice president of China Travel
Service Investment Co., Ltd from 2002 to 2005. Mr. Lai is a founding director of China Mergers & Acquisitions Association (Hong Kong)
and serves as Chair of the Industrial Development Committee at the Hong Kong Society of Artificial Intelligence and Robotics. He is also
a senior member of both the Chartered Institute of Bankers and the Hong Kong Institute of Bankers. Mr. Lai received his MBA degree from
the University of Exeter in 1996 and his master’s degree in Advanced Accounting from the City University of Hong Kong in 2000.
Mr. Sen Lin has served
as our director since December 9, 2021. Mr. Lin has over 18 years of experience in accounting and auditing. Since March 2021, Mr. Lin
has served as the chief financial officer at Shenzhen Thunderstone Technology Co., Ltd., a company focusing on the research and development,
production, and sales of electronic cigarettes. He has been an independent non-executive director since July 2017 at Loto Interactive
Limited, a Hong Kong listed company mainly engaged in the provision of data analysis and storage services. From October 2020 to February
2021, Mr. Lin served as a partner at ONEWO Space-Tech Service Co., Ltd., a real property service provider. From June 2017 to April 2019,
Mr. Lin served as the chief financial officer of 7Road Holdings Limited, a China-based investment holding company focusing on the development
and operation of online games. From November 2006 to January 2017, he also served as the chief financial officer of Palm Commerce Information
Technology (China) Co., Ltd., a company focusing on the development and operation of lottery software. From February 2001 to November
2006, Mr. Lin served as a manager of PricewaterhouseCoopers, and he became a certified public accountant in China in 2010. Mr. Lin received
his bachelor’s degree in international business administration from Central University of Finance and Economics in 1998 and an EMBA
degree from China Europe International Business School in 2011.
Mr. Kiyohiro Kawayanagi
has served as our director since May 6, 2022. Mr. Kawayanagi has served as the Chief Executive Officer and Chairman of the board of directors
of Pomelo Acquisition Corporation Limited, a blank check company incorporated as a Cayman Islands exempted company, since May 2021. Mr.
Kawayanagi has been a founding partner of Bit World Japan Investment Limited, a Japanese investment firm, focusing on telecommunications,
media, and technology areas, since its inception in March 2018. Prior to that, from March 2016 to March 2018, Mr. Kawayanagi served as
a Managing Director for Zhongzhi Industry Investment Co., Ltd., a Beijing-based Chinese Private Equity Fund, and a Partner at Shanghai
Honghao Investment Consulting Co., Ltd., an integrated consulting company, from December 2014 to February 2016. He also served as a Managing
Director at Shanghai Fuson Hi-Tech (Group) Co., Ltd., a Shanghai-based Chinese investment firm, from April 2013 to November 2014. Mr.
Kawayanagi served as the Assistant Director for DAIWA Securities Co., Ltd., the second largest investment bank in Japan, from June 2004
to April 2013, and served as an Associate Manager for NIKKO Securities Co., Ltd., the third largest investment bank in Japan, from April
1994 to December 1999. Mr. Kawayanagi received an MBA from the University of Arizona in 2004, and his bachelor’s degree in law from
Waseda University in Japan in March 1994. Mr. Kawayanagi became a member of the Securities Analysts Association of Japan in October 1998.
Board Diversity
The table below provides
certain information regarding the diversity of our board of directors as of the date of this annual report.
Board Diversity Matrix |
Country of Principal Executive Offices: |
Hong Kong |
Foreign Private Issuer |
Yes |
Disclosure Prohibited under Home Country Law |
No |
Total Number of Directors |
9 |
|
Female |
Male |
Non-
Binary |
Did Not
Disclose
Gender |
Part I: Gender Identity |
|
Directors |
1 |
8 |
|
|
Part II: Demographic Background |
|
Underrepresented Individual in Home Country Jurisdiction |
0 |
LGBTQ+ |
0 |
Did Not Disclose Demographic Background |
0 |
Family Relationships
There is no family relationship
among any of our directors or executive officers.
B. Compensation of Directors and Executive
Officers
For the year ended March
31, 2022, we paid an aggregate amount of RMB2,177,059 (approximately US$343,423) in cash as compensation
to our directors and executive officers.
Our PRC subsidiaries 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. Our PRC subsidiaries paid retirement
and similar benefits for our officers and directors in the year ended March 31, 2022.
On June 30, 2022, the Company
implemented its 2022 Performance Incentive Plan (the “Plan”) to foster the success of the Company and to increase shareholder
value by providing an additional means, through the grant of awards to attract, motivate, retain and reward selected employees and other
eligible persons, and to enhance the alignment of the interests of such selected participants with the interests of the Company’s
shareholders. The Plan and a form of Share Unit Award Agreement have been approved by the Board of Directors of the Company for use in
connection with the grant of share units of the Company to be issued under the Plan. Under the Plan, an aggregate of 3,300,000 Ordinary
Shares are reserved for issuance for purposes of the Plan, subject to adjustments as contemplated by the Plan. No Ordinary Shares have
been issued under the Plan as of the date of this annual report. The Company has elected to follow home country practice instead of Nasdaq
Listing Rule 5635(c).
C. 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 the shareholders in a general meeting. Unless removed or re-appointed, each director shall be appointed for a term expiring at the
next-following annual general meeting, if any is held. At any annual general meeting held, our directors will be elected by a majority
vote of shareholders eligible to vote at that meeting. At each annual general meeting, each director so elected shall hold office for
a one-year term and until the election of their respective successors in office or removed.
Board of Directors
Our board of directors currently
consists of nine directors, including five independent directors. A director is not required to hold any shares in our Company to qualify
to serve as a director. Subject to any separate requirement for Audit Committee’s (as defined in our articles of association) approval
under applicable law or the listing rules of Nasdaq Capital Market, a director may vote with respect to any contract, transaction or arrangement
in which he or she is materially interested provided the nature of the interest is disclosed prior to its consideration and as long as
he has not been disqualified by the chairman of the relevant board meeting. All of the directors will serve until and will stand for re-election
on the date of the next annual general meeting, unless resigned or otherwise removed prior to such date.
Committees of the Board of Directors
We have established three
committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee.
We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee.
Our audit committee consists
of Mr. Bin Liu, Mr. Sen Lin, Mr. Kiyohiro Kawayanagi, and Ms. Jingxin Tian. Mr. Sen Lin is the chairman of our audit committee. We have
determined that Mr. Bin Liu, Mr. Sen Lin, Mr. Kiyohiro Kawayanagi, and Ms. Jingxin Tian satisfy the “independence” requirements
of Section 5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange Act. Our board also has determined that
Mr. Bin Liu qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses financial sophistication
within the meaning of the Nasdaq Listing Rules. The audit committee 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 Mr. Bin Liu, Mr. Kiyohiro Kawayanagi, Mr. Kim Fung Lai, and Ms. Jingxin Tian. Ms. Tian is the chairperson of our compensation
committee. We have determined that Mr. Bin Liu, Mr. Kiyohiro Kawayanagi, Mr. Kim Fung Lai, and Ms. Jingxin Tian satisfy the “independence”
requirements of Section 5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange Act. The 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 consists of Mr. Bin Liu, Mr. Sen Lin, Mr. Kim Fung Lai, and Ms. Jingxin Tian. Ms. Tian is the chairperson of our
nominating and corporate governance committee. We have determined that Mr. Bin Liu, Mr. Sen Lin, Mr. Kim Fung Lai, and Ms. Jingxin Tian
satisfy the “independence” requirements of Section 5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities
Exchange Act. The nominating and corporate governance committee 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 Independence
Our board of directors reviewed
the materiality of any relationship that each of our proposed directors has with us, either directly or indirectly. Based on this review,
it is determined that Bin Liu, Sen Lin, Kim Fung Lai, Kiyohiro Kawayanagi, and Jingxin Tian satisfy the “independence”
requirements of Section 5605(a)(2) of the Nasdaq Listing Rules.
Terms of Directors and Officers
Our officers are elected
by and serve at the discretion of the board of directors and the shareholders voting by ordinary resolution.
Employment Agreements
We have entered into employment
agreements with each of our executive officers, where each is employed for a specified time period, which will be automatically extended
for successive one-year terms unless either party gives the other party a three-month prior written notice to terminate the employment
prior to the expiration of such one-year term or unless terminated earlier pursuant to the terms of such employment agreements. 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 three-month prior written notice
to the Company or by payment of three months’ salary in lieu of notice. Each executive officer has agreed to hold, both during and
after the employment agreement expires, in strict confidence and not to use or disclose to any person, corporation or other entity without
written consent, any confidential information.
D. Employees
See “Item 4. Information
on the Company—B. Business Overview—Employees.”
E. Share Ownership
The following table sets
forth information with respect to the beneficial ownership of our ordinary shares as of August 2, 2022 by:
|
● |
each of our directors and executive officers; and |
|
|
|
|
● |
each person known to us to beneficially own more than 5% of our ordinary shares. |
The calculations in the table
below are based on there being 26,898,371 ordinary shares outstanding as of the date of this annual report.
Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise
of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation
of the percentage ownership of any other person.
Name of Beneficial Owners | |
Ordinary
Share
Number | | |
Percentage of
Total
Ordinary
Shares | | |
Percentage of
Aggregate
Voting
Power* | |
Directors and Executive Officers†: | |
| | |
| | |
| |
Limin Liu (1) | |
| | | |
| | | |
| | |
Chief Executive Officer and Chairman | |
| 1,048,120 | | |
| 3.8 | | |
| 3.8 | |
Xiaohua Gu (4) | |
| | | |
| | | |
| | |
Chief Financial Officer | |
| 50,000 | | |
| 1.9 | | |
| 1.9 | |
Ming Ni (2) | |
| | | |
| | | |
| | |
Chief Operating Officer and Director | |
| 2,400,000 | | |
| 8.3 | | |
| 8.3 | |
Bingzhong | |
| | | |
| | | |
| | |
Wang President and Director | |
| 600,000 | | |
| 2.2 | | |
| 2.2 | |
Wei Wang (3) | |
| | | |
| | | |
| | |
Director | |
| 800,000 | | |
| 2.9 | | |
| 2.9 | |
Bin Liu | |
| | | |
| | | |
| | |
Director | |
| 0 | | |
| 0 | | |
| 0 | |
Jingxin Tian | |
| | | |
| | | |
| | |
Director | |
| 0 | | |
| 0 | | |
| 0 | |
Kim Fung Lai | |
| | | |
| | | |
| | |
Director | |
| 0 | | |
| 0 | | |
| 0 | |
Sen Lin | |
| | | |
| | | |
| | |
Director | |
| 0 | | |
| 0 | | |
| 0 | |
Kiyohiro Kawayanagi | |
| | | |
| | | |
| | |
Director | |
| 0 | | |
| 0 | | |
| 0 | |
All directors and executive officers as a group (10 individuals) | |
| 4,898,120 | | |
| 16.8 | | |
| 16.8 | |
5% Shareholders: | |
| | | |
| | | |
| | |
LSQ Investment Fund SPC-Disruptive Opportunity Fund II SP
3-212 Governors Square, 23 Lime Tree Bay Avenue,
PO Box 30746, Seven Mile Beach,
Grand Cayman, Cayman Islands | |
| 4,100,000 | | |
| 15.2 | | |
| 15.2 | |
Hong Limited (5)
Start Chambers, Wickham’s Cay II,
P.O. Box 2221, Road Town,
Tortola, British Virgin Islands (3) | |
| 1,745,594 | | |
| 6.5 | | |
| 6.5 | |
(1) |
|
Includes 140,000 ordinary shares awarded to Limin Liu as Share Units under the 2020 Incentive Plan, 30% vested and 70% to be vested within 60 days from the date of this annual report; Includes an aggregate of 120,000 ordinary shares the company issued in the private placement executed on June 30, 2022. |
|
|
|
(2) |
Represents warrants held as of the date of this annual report by Ming Ni to purchase an aggregate of 2,000,000 ordinary shares of the Company and 400,000 ordinary shares the company issued in the private placement executed on June 30, 2022. |
|
|
(3) |
Wei Wang, one of our current Directors, is the 100% owner of White Knight Limited that holds 800,000 Ordinary Shares. |
|
|
(4) |
Represents 50,000 ordinary shares awarded to Xiaohua Gu as Share Units under the 2020 Incentive Plan, to be vested within 60 days from the date of this annual report. |
|
|
(5) |
Hongyu Zhang, one of our former Directors, is the 100% owner of Hong Limited that holds 1,745,594 Ordinary Shares. The share number described here is according to the most recent Schedule 13D Amendment to General Statement of Acquisition of Beneficial Ownership filed by Hong Limited on April 14, 2021. |
|
|
* |
For each person included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person by the voting power of all of our Ordinary Shares as a single class. |
† |
Unless otherwise indicated, the address of our directors and executive officers is Suite 1508, Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong, China. |
As of the date of this annual report on
Form 20-F, none of our existing shareholders have different voting rights from other shareholders as of the date of this annual report
on Form 20-F. We are currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
A. Major Shareholders
Please refer to “Item
6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Related parties’ relationships are as
follows:
Name |
|
Relationship |
Mr.
Hongyu Zhang |
|
Shareholder;
director of various subsidiaries |
HangZhou
TianQi Network Technology Co. Ltd. |
|
Common
control by legal representative and shareholder of Taikexi, Mr. Mangyue Sun |
Hangzhou
Qianlu Information Technology Co. Ltd. |
|
Common
control by Mr. Hongyu Zhang as of March 31, 2021 and April 1, 2020 |
Hangzhou
Yuao Investment Management Partnership |
|
Common
control by legal representative of Guanpeng |
Hangzhou
Yuao Venture Capital Co., Ltd |
|
Common
control by legal representative of Guanpeng |
Mr.
Limin Liu |
|
Chief
Executive Officer |
Guo
Ronghong Business Factoring Shenzhen Co., Ltd. |
|
Common
control by Mr. Hongyu Zhang as of March 31, 2021 |
Zhejiang
Getai Curtain Wall Decoration Engineering Co., Ltd. |
|
Common
control by Mr. Wei Wang |
Mangyue
Sun |
|
Legal
representative and shareholder of Taikexi |
Fang
Qin |
|
Spouse
of Mangyue Sun |
Antalpha
Technologies Limited |
|
Non-controlling
shareholder of a subsidiary of the Company |
Loan receivables – related parties consisted
of the following:
| |
As of March 31, 2022 | | |
As of March 31, 2021 | | |
As of April 1, 2020 | |
| |
US$ | | |
US$ | | |
US$ | |
Hangzhou Yuao Investment Management Partnership | |
| - | | |
| - | | |
| 1,328,613 | |
Hangzhou Yuao Venture Capital Co., Ltd | |
| 2,245,200 | | |
| 2,273,636 | | |
| 2,050,093 | |
Guo Ronghong Business Factoring Shenzhen Co., Ltd | |
| - | | |
| 1,845,428 | | |
| - | |
Total | |
| 2,245,200 | | |
| 4,119,064 | | |
| 3,378,706 | |
The Company currently subscribes to certain wealth management product
from Hangzhou Yuao, which is a related party to the Company. The maturity date for such investment is less than one year.
Other related parties’ payables consisted of the following:
| |
March 31,
2022 | | |
March 31,
2021 | | |
April
1,
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
Mr. Hongyu Zhang | |
| - | | |
| - | | |
| 8,100 | |
HangZhou TianQi Network Technology Co. Ltd. | |
| 46,696 | | |
| 45,169 | | |
| 41,766 | |
Hangzhou Qianlu Information Technology Co. Ltd. | |
| 27,568 | | |
| 25,247 | | |
| 353,824 | |
Mr. Limin Liu | |
| - | | |
| 610,352 | | |
| - | |
Zhejiang Getai Curtain Wall Decoration Engineering Co., Ltd. | |
| 205,070 | | |
| - | | |
| - | |
Mangyue Sun | |
| 23,662 | | |
| - | | |
| - | |
Fang Qin | |
| 47,324 | | |
| - | | |
| - | |
Hangzhou Yuao Investment Management Partnership | |
| - | | |
| 7,603 | | |
| - | |
Total | |
| 350,320 | | |
| 688,371 | | |
| 403,690 | |
Outstanding payables to Mr.
Hongyu Zhang, Hangzhou Qianlu Information Technology Co. Ltd., and Mr. Limin Liu consist of working capital advances and borrowings. These
amounts are due on demand and non-interest bearing.
Outstanding payable to HangZhou
TianQi Network Technology Co. Ltd., consist of rent owed which is non-interest bearing and due on demand.
Related party transactions with Antalpha:
On December 23, 2021, Metalpha
entered into a Product Purchase Agreement and a Trading Account Management Agreement with Antalpha, pursuant to which Antalpha purchased
from Metalpha various cryptocurrency derivative products. For details, see “Item 4. Information on the Company—B. Business
Overview—The Cryptocurrency Derivative Products Services.”
As of March 31, 2022, the aggregate value of derivative products entered
with Antalpha is US$8,735,145 while the derivative products expired to Antalpha is US$2,533,106.
As of August 14, 2022,The aggregate value of the products entered with
Antalpha is approximately US$137.08 million.
Employment Agreements
See “Item 6. Directors,
Senior Management and Employees—C. Board Practices—Employment Agreements.”
The VIE Agreements
See “Item 4. Information
on the Company—B. Business Overview—The VIE Agreements.”
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial
Information
See “Item 18. Financial
Statements,” which contains our financial statements prepared in accordance with IFRS.
Legal Proceedings
We are not currently a party
to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to
have a material adverse effect on our business, operating results, cash flows or financial condition.
Dividend Policy
We intend to keep any future
earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future.
Under Cayman Islands law,
a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances
may a dividend be paid if this would result in the Company being unable to pay its debts due in the ordinary course of business.
If we determine to pay dividends
on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our BVI subsidiary, Sweet
Lollipop.
Current PRC regulations permit
our indirect PRC subsidiaries to pay dividends to Sweet Lollipop only out of their accumulated profits, if any, determined in accordance
with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10%
of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each
of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although
the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be
used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective
companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes
controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience
difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from
our profits, if any. Furthermore, if our subsidiaries and VIE in the PRC incur debt on their own in the future, the instruments governing
the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the
revenue from our operations through the current VIE Agreements, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on
our Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we
pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate
of up to 10.0%. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Enterprise Taxation.”
In order for us to pay dividends
to our shareholders, we will rely on payments made from Long Yun to WFOE, pursuant to the VIE Agreements, and the distribution of such
payments to Long Yun HK, to Sweet Lollipop, and to our Company as dividends. According to the PRC EIT Law, such payments from subsidiaries
to parent companies in China are subject to the PRC enterprise income tax at a rate of 25%. In addition, if Long Yun or our PRC subsidiary
incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other
distributions to us.
Under existing PRC foreign
exchange regulations, payments of current account items, including profit distributions, interest payments, and trade and service-related
foreign exchange transactions, can be made in foreign currencies, without prior approval of SAFE, by complying with certain procedural
requirements. Specifically, without prior approval of SAFE, cash generated from the operations in PRC may be used to pay dividends to
our Company. As of the date of this prospectus, WFOE has conducted the foreign exchange registration related to our Company under the
existing PRC foreign exchange regulations, which enables WFOE to legally distribute its earnings to our Company.
Our Company’s ability
to settle amounts owed under the VIE Agreements relies upon payments made from the VIE to WFOE in accordance with the VIE Agreements.
For services rendered to the VIE by WFOE under the Exclusive Business Cooperation Agreement, WFOE is entitled to collect a service fee
from the VIE. Pursuant to the Exclusive Option Agreement, WFOE may at any time and under any circumstances purchase all or part of the
equity interests in the VIE when and to the extent permitted by PRC laws. For restrictions and limitations on our ability to settle amounts
owed under the VIE Agreements, please see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—
The VIE Agreements may not be effective in providing control over Long Yun” and “— If the PRC government determines
that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations
or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish
our interests in those operations, and our Ordinary Shares may decline in value or become worthless.”
B. Significant Changes
Except as disclosed elsewhere
in this annual report on Form 20-F, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offering and Listing Details
Our Ordinary Shares are listed
on the Nasdaq Capital Market under the symbol “LYL.” Our Ordinary Shares began trading on October 20, 2017.
B. Plan of Distribution
Not applicable.
C. Markets
Our Ordinary Shares, have
been listed on the Nasdaq Capital Market since October 20, 2017 under the symbol “LYL.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are an exempted company
with limited liability, incorporated under the laws of the Cayman Islands, and our affairs are governed by our Amended and Restated Memorandum
and Articles of Association, as amended and restated from time to time, and the Companies Act (Revised) of the Cayman Islands, which we
refer to as the Companies Act below, and the common law of the Cayman Islands.
We incorporate by reference
into this annual report our amended and restated memorandum and articles of association filed as Exhibits 3.1 and 3.2 to our F-1/A (file
No. 333-214932) filed with the SEC on July 19, 2017.
C. Material Contracts
August 2021 Securities Purchase Agreement
On August 9, 2021, the Company
entered into a Securities Purchase Agreement (the “August 2021 SPA”) with LSQ Investment Fund SPC-Disruptive Opportunity Fund
II SP, a Cayman Islands Segregated Portfolio Company (“LSQ”), and certain other purchasers (the “Purchasers”)
listed in Schedule A to the August 2021 SPA. In November 2021, the Company issued 4,100,000 Ordinary Shares to LSQ for an aggregate purchase
price of $4,100,000 pursuant to the August 2021 SPA and in reliance on Rule 902 of Regulation S promulgated under the Securities Act.
On March 3, 2022, the Company,
LSQ and the Purchasers entered into Amendment No.1 to Securities Purchase Agreement to extend the closing deadline applicable to the Purchasers.
Pursuant to the Amendment to the August 2021 SPA, the closing applicable to the Purchasers will occur no later than 12 months following
the effective date of the Registration Statements (as defined in the August 2021 SPA) covering the resale of all of the Purchaser’s
Subscribed Shares (as defined in the August 2021 SPA).
August 2021 Consulting Agreement
On August 6, 2021, the Company
entered into a Consulting and Warrant Issuance Agreement (the “August 2021 Consulting Agreement”) with Natural Selection Capital
Holdings Limited, a Cayman company of which Mr. Bingzhong Wang is the sole shareholder, and Mr. Ming Ni. Pursuant to the August 2021 Consulting
Agreement, Natural Selection Capital Holdings Limited and Mr. Ni agreed to provide certain services to the Company in connection with
the development and ultimate transformation of the business of the Company into a blockchain-related business, and the Company agreed
to, among other things, issue warrants to Natural Selection Capital Holdings Limited in four equal tranches to purchase an aggregate of
14,000,000 Ordinary Shares (the “Consulting Company Warrants”). The Consulting Company Warrants will become exercisable on
the later of (i) the one-year anniversary of the issuance and (ii) the applicable vesting dates, with exercise prices between $1 and $2.5
per share, and will expire on the 10th anniversary from the date on which they become exercisable. The Company issued the warrants to
Natural Selection Capital Holdings Limited on October 29, 2021.
The Company agreed to, among
other things, issue warrants to Mr. Ni to purchase an aggregate of 2,000,000 Ordinary Shares (the “Ni Warrants”, together
with the Consulting Company Warrants, the “August Consulting Warrants”). The Ni Warrants would become exercisable once issued,
with an exercise price that is the lower of (i) $1.5 per share and (ii) 88% of the lowest daily volume-weighted average price of the ordinary
shares for the 10-trading-day period immediately prior to the exercise of the August Consulting Warrants, and would expire five years
after issuance. On November 30, 2021, the Issuer issued the Ni Warrants to Mr. Ni.
On August 6, 2021, the Company
entered into a Registration Rights Agreement (the “2021 Registration Rights Agreement”) with LSQ, the Purchasers, Natural
Selection Capital Holdings Limited, and Mr. Ni Ming.
On March 3, 2022, the Company,
LSQ, the Purchasers, Natural Selection Capital Holdings Limited, and Mr. Ni, entered into Amendment No.1 to 2021 Registration Rights Agreement
(the “Amendment to 2021 RRA”) to extend the Effectiveness Deadline and the Filing Deadline (as defined in the 2021 Registration
Rights Agreement). Pursuant to the Amendment to 2021 RRA, the Effectiveness Deadline for the 2nd Closing Registration Statement (as defined
in the 2021 Registration Rights Agreement) will be no later than the calendar day that is no later than 16 months from the date of the
2021 Registration Rights Agreement.
October 2021 Consulting Agreement
On October 27, 2021, the
Company entered into a Consulting and Warrant Issuance Agreement (the “October 2021 Consulting Agreement”) with Xianqun Hu,
Ying Cai, Jiarui Li, and Ailing Zhang (collectively, the “Consultants” and each a “Consultant”). Pursuant to the
October 2021 Consulting Agreement, the Consultants agreed to provide certain services to the Company in connection with the business operation
of a joint venture company which will be formed by the Company and an industry leader (the “Joint Venture”, Metalpha). The
services to be provided by the Consultants, include, among other things, the following: (i) establishing a proprietary system for cryptocurrency
derivatives trading; (ii) designing different structure products for use in trading with counterparties; (iii) optimizing internal pricing
and dynamic hedging models; (iv) ongoing monitoring and improving of the proprietary system to maximize the return of invested capital
and grow the size of proprietary assets; (v) assisting in the hiring process and establishment of a team for the development of the Joint
Venture; and (vi) providing industry expertise to help shape the Joint Venture’s long-term strategy.
Pursuant to the October 2021
Consulting Agreement, the Company agreed to issue (i) warrants to Xianqun Hu to purchase an aggregate of 900,000 Ordinary Shares (the
“Hu Warrants”), (ii) warrants to Ying Cai to purchase an aggregate of 300,000 Ordinary Shares (the “Cai Warrants”),
(iii) warrants to Jiarui Li to purchase an aggregate of 300,000 Ordinary Shares (the “Li Warrants”), and (iv) warrants to
Ailing Zhang to purchase an aggregate of 300,000 Ordinary Shares (the “Zhang Warrants,” together with the Hu Warrants, the
Cai Warrants, and the Li Warrants, the “October 2021 Consulting Warrants”).
The October 2021 Consulting
Warrants will become exercisable once issued, with an exercise price that is the lower of (i) $1.5 per share and (ii) 88% of the lowest
daily volume-weighted average price of the Ordinary Shares for the 10-trading-day period immediately prior to the exercise of the October
Consulting Warrants, and will expire five years after issuance.
In connection with the August
2021 SPA, the August 2021 Consulting Agreement, and the October 2021 Consulting Agreement, the Company filed a registration statements
on Form F-3 dated December 27, 2021, to register the Ordinary Shares to be issued pursuant to the August 2021 SPA and the Ordinary Shares
issuable upon exercise of the August Consulting Warrants and October Consulting Warrants for resale.
Employee Warrant Issuance Agreements
On May 10, 2022, the Company
entered into an Employee Warrant Issuance Agreement with Yingjun Zhou, to further incentivize the Employee’s services to be rendered
under and pursuant to an employment contract, dated March 2, 2022, between LSQ Capital Limited, a subsidiary of the Company, and Yingjun
Zhou (the “Employment Contract”).
Pursuant to the Employee
Warrant Issuance Agreement, the Company agreed to issue warrants to Yingjun Zhou to purchase an aggregate of 200,000 Ordinary Shares of
the Company (the “Employee Warrants”).
The Employee Warrants will
become exercisable once issued, with an exercise price that is the lower of (i) $1.5 per share and (ii) 88% of the lowest daily volume-weighted
average price of the Ordinary Shares for the 10-trading-day period immediately prior to the exercise of the Employee Warrants, and will
expire five years after issuance.
In addition, the Company
also agreed that, as soon as practicable, and in no event later than 60 days after the execution of the Employee Warrants pursuant to
the Employee Warrant Issuance Agreement, the Company shall file with the SEC (at the Company’s sole cost and expense) a registration
statement, which shall be on Form F-3, if eligible, registering the resale of the Ordinary Shares issuable upon exercise of the Employee
Warrants.
May 2022 Consulting Agreement
On May 26, 2022, the Company
entered into a Consulting and Warrant Issuance Agreement (the “May 2022 Consulting Agreement”) with Jing Hu, Sek Yee Khor,
and Jiaping Sun (collectively, the “2022 Consultants”, and each, a “2022 Consultant”). Pursuant to the May 2022
Consulting Agreement, the 2022 Consultants agreed to provide certain services to the Company in connection with the business operation
of a joint venture company formed by the Company and Antalpha The services to be provided by the 2022 Consultants, include, among other
things, the following: (1) establishing a proprietary system for cryptocurrency derivatives trading; (2) designing different structure
products for use in trading with counterparties; (3) optimizing internal pricing and dynamic hedging models; (4) ongoing monitoring and
improving of the proprietary system to maximize the return of invested capital and grow the size of proprietary assets; (5) assisting
in the hiring process and establishment of a team for the development of the Metalpha; and (6) providing industry expertise to help shape
the Metalpha’s long-term strategy.
Pursuant to the May 2022
Consulting Agreement, the Company agreed to issue (i) warrants to Jing Hu to purchase an aggregate of 200,000 Ordinary Shares (the “Hu
Warrants”), (ii) warrants to Sek Yee Khor to purchase an aggregate of 200,000 Ordinary Shares (the “Khor Warrants”),
and (iii) warrants to Jiaping Sun to purchase an aggregate of 100,000 Ordinary Shares (the “Sun Warrants”; the Sun Warrants,
together with the Hu Warrants and the Khor Warrants, the “2022 Consulting Warrants”).
The 2022 Consulting Warrants
will become exercisable once issued, with an exercise price that is the lower of (i) $1.5 per share and (ii) 88% of the lowest daily volume-weighted
average price of the Ordinary Shares for the 10-trading-day period immediately prior to the exercise of the 2022 Consulting Warrants,
and will expire five years after issuance.
In addition, the Company
also agreed that, as soon as practicable, and in no event later than 60 days after the execution of the 2022 Consulting Warrants pursuant
to the Consulting Agreement, the Company shall file with the “SEC (at the Company’s sole cost and expense) a registration
statement, which shall be on Form F-3, if eligible, registering the resale of the Ordinary Shares issuable upon exercise of the 2022
Consulting Warrants.
We have not entered into
any material contracts other than in the ordinary course of business and other than those described in this section and in “Item
4. Information on the Company” or elsewhere in this annual report..
D. Exchange Controls
See “Item 4. Information
on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange” and “Item 4. Information
on the Company—B. Business Overview—Regulations—Regulations on Dividend Distribution.”
E. Taxation
The following summary of
the Cayman Islands, PRC, and U.S. federal income tax considerations of an investment in the Ordinary Shares is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal
with all possible tax considerations relating to an investment in the Ordinary Shares, such as the tax considerations under U.S. state
and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the
United States.
The 2017 Tax Act signed on
December 22, 2017, may have changed the tax consequences to U.S. shareholders that own, or are considered to own, as a result of the attribution
rules, 10% or more of the voting power or value of the stock of a non-U.S. corporation (a “10% U.S. shareholder”) under the
U.S. Federal income tax law applicable to owners of U.S. controlled foreign corporations (“CFCs”). We do not believe any of
our shareholders, or of our subsidiaries, were CFCs, and the 2017 Tax Act had no impact for the years ended March 31, 2022, 2021, and
2020. We are an exempted company incorporated in the Cayman Islands and conduct our primary business operations through the PRC operating
entities in the PRC.
Cayman Islands Taxation
The Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature
of inheritance tax or estate duty. There are no other taxes likely to be material to us or holders of our Ordinary Shares levied by the
government of the Cayman Islands, except for stamp duties which may be applicable on instruments executed in, or after execution brought
within the jurisdiction of the Cayman Islands. The Cayman Islands are not party to any double tax treaties that are applicable to any
payments made to or by our Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and
capital in respect of Ordinary Shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the
payment of a dividend or capital to any holder of Ordinary Shares, nor will gains derived from the disposal of Ordinary Shares be subject
to Cayman Islands income or corporation tax.
People’s Republic of China Enterprise
Taxation
The following brief description
of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends,
if any, we are ultimately able to pay to our shareholders. See “Item 8. Financial Information—A. Consolidated Statements
and Other Financial Information—Dividend Policy.”
According to the EIT Law,
which was promulgated by the Standing Committee of the National People’s Congress on March 16, 2007, became effective on January 1,
2008, and was then amended on February 24, 2017 and December 29, 2018, and the Implementation Rules of the EIT Law, which
were promulgated by the State Council on December 6, 2007, and became effective on January 1, 2008, and emended on April 23,
2019, enterprises are divided into resident enterprises and non-resident enterprises. Resident enterprises 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 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 with income having no substantial connection with their institutions in the PRC, pay enterprise
income tax on their income obtained in the PRC at a reduced rate of 10%.
We are a holding company
incorporated in the Cayman Islands and we gain substantial income by way of dividends paid to us from the PRC operating entities. The
EIT Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary
to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential tax rate or a
tax exemption.
Thus, the dividends, if and
when payable by the PRC operating entities to its offshore parent entities, would be subject to a 10% withholding tax. A lower tax rate
will be applied if such foreign non-resident enterprise investor’s jurisdiction of incorporation has signed a tax treaty or arrangement
for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income with China. There is such a
tax arrangement between the PRC and Hong Kong. Thus, the dividends, if and when payable by WFOE, the PRC operating entities to the offshore
parent entity located in Hong Kong, would be subject to a 5% withholding tax rather than the statutory rate of 10%, provided that the
offshore entities located in Hong Kong meet the requirements stipulated by relevant PRC tax regulations. Furthermore, pursuant to the
applicable circular and interpretations of the EIT Law, dividends from earnings created prior to 2008 but distributed after 2008 are not
subject to withholding income tax. Our effective income tax rate was 5%, 5%, and 5%,
for the years ended March 31, 2022, 2021, and 2020, respectively. As a result, $8,061, $0,
and $27,413 income tax were accrued for the years ended March 31, 2022, 2021, and 2020, respectively. Deferred tax
adjustments of $0, $0, and $0 were recognized for the years ended March 31,
2022, 2021 and 2020 respectively.
Under the EIT Law, an enterprise
established outside of China with a “de facto management body” within China is considered a “resident enterprise,”
which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation
rules of the EIT Law define “de facto management body” as a managing body that actually, comprehensively manage and control
the production and operation, staff, accounting, property and other aspects of an enterprise, the only official guidance for this definition
currently available is set forth in SAT Notice 82, which provides guidance on the determination of the tax residence status of a Chinese-controlled
offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that
has a PRC enterprise or enterprise group as its primary controlling shareholder. Although we do not have a PRC enterprise or enterprise
group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning
of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in SAT Notice 82 to
evaluate the tax residence status of the Company and its subsidiaries organized outside the PRC.
According to SAT Notice 82,
a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management
body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are
met: (i) the places where senior management and senior management departments that are responsible for daily production, operation
and management of the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions
(such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal and
salary and wages) are decided or need to be decided by organizations or persons located within the territory of China; (iii) main
property, accounting books, corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise
are located or preserved within the territory of China; and (iv) one half (or more) of the directors or senior management staff having
the right to vote habitually reside within the territory of China.
We believe that we do not
meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records
of Dragon Victory International Limited, including the resolutions and meeting minutes of our board of directors and the resolutions and
meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding
companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities.
Accordingly, we believe that we and our offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax
purposes if the criteria for “de facto management body” as set forth in SAT Notice 82 were deemed applicable to us. However,
as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect
to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor
our tax status.
The implementation rules of
the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized
from transferring equity interests of enterprises domiciled in the PRC, then such dividends or gains are treated as China-sourced income.
It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the
enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we
pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the transfer of
our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10%. We believe
that it is more likely than not that we and our offshore subsidiaries would be treated as a non-resident enterprise for PRC tax purposes
because they do not meet some of the conditions out lined in SAT Notice 82. In addition, we are not aware of any offshore holding companies
with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities as
of the date of the annual report. Therefore, we believe that it is possible but highly unlikely that the income received by our overseas
shareholders will be regarded as China-sourced income.
See “Item 3. Key
Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—Under 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.”
Our Company pays an EIT rate
of 25% for WFOE. The EIT is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
If the PRC tax authorities determine that WFOE is a PRC resident enterprise for enterprise income tax purposes, we may be required to
withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident
enterprise shareholders may be subject to a 10% PRC withholding tax on gains realized on the sale or other disposition of our Ordinary
Shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject
to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident
enterprise. If any PRC tax were to apply to dividends or gains realized by non-PRC individuals, it would generally apply at a rate of
20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether our non-PRC shareholders 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. There is no guidance from the PRC government to indicate whether or not any tax treaties between the PRC
and other countries would apply in circumstances where a non-PRC company was deemed to be a PRC tax resident, and thus there is no basis
for expecting how tax treaty between the PRC and other countries may impact non-resident enterprises.
Value-added Tax
The Provisional Regulations
of the PRC on Value-added Tax were promulgated by the State Council on December 13, 1993 and came into effect on January 1, 1994, which
were subsequently amended on November 10, 2008 and came into effect on January 1, 2009, and most recently amended on November 19, 2017.
The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) was promulgated
by the MOF on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, VAT Law. On November
19, 2017, the State Council promulgated the Decisions on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending
the Provisional Regulations of the PRC on Value-added Tax, or the Order 691. According to the VAT Law and the Order 691, all enterprises
and individuals engaged in the sale of goods, the provision of processing, repair and replacement services, sales of services, intangible
assets, real property and the importation of goods within the territory of the PRC are the taxpayers of VAT. The VAT tax rates generally
applicable are simplified as 13%, 9%, 6% and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%.
Dividend Withholding Tax
The EIT Law 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 the 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 SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretions,
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 twelve 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.
United States Federal Income Tax Considerations
The following does not address
the tax consequences to any particular investor or to persons in special tax situations such as:
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | persons that elect to mark their securities to market; |
| ● | U.S. expatriates or former long-term residents of the U.S.; |
| ● | governments or agencies or instrumentalities thereof; |
| ● | persons liable for alternative minimum tax; |
| ● | persons holding our Ordinary Shares as part of a straddle,
hedging, conversion or integrated transaction; |
| ● | persons that actually or constructively own 10% or more of
our voting power or value (including by reason of owning our Ordinary Shares); |
| ● | persons who acquired our Ordinary Shares pursuant to the
exercise of any employee share option or otherwise as compensation; |
| ● | persons holding our Ordinary Shares through partnerships
or other pass-through entities; |
| ● | beneficiaries of a trust holding our Ordinary Shares; or |
| ● | persons
holding our Ordinary Shares through a trust. |
The discussion set forth
below is addressed only to U.S. Holders (defined below) that own our Ordinary Shares. Prospective purchasers are urged to consult their
own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state,
local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares.
Material Tax Consequences Applicable to
U.S. Holders of Our Ordinary Shares
The following sets forth
the material U.S. federal income tax consequences related to the ownership and disposition of our Ordinary Shares. It is directed to U.S.
Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date
of this annual report, all of which are subject to change. This description does not deal with all possible tax consequences relating
to ownership and disposition of our Ordinary Shares or U.S. tax laws, other than the U.S. federal income tax laws, such as the tax consequences
under non-U.S. tax laws, state, local and other tax laws.
The following brief description
applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar as their functional
currency. This brief description is based on the federal income tax laws of the United States in effect as of the date of this annual
report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial
and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which
change could apply retroactively and could affect the tax consequences described below.
The brief description below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of Ordinary
Share and you are, for U.S. federal income tax purposes,
|
● |
an individual who is a citizen or resident of the United States; |
|
● |
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
|
● |
an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
|
● |
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (or other
entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our Ordinary Shares, the tax treatment
of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners
of a partnership holding our Ordinary Shares are urged to consult their tax advisors regarding an investment in our Ordinary Shares.
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the PFIC (defined
below) rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount
of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but
only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate
U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend
income, provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are
eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information
program, (2) we are not a PFIC (defined below) for either our taxable year in which the dividend is paid or the preceding taxable year,
and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and the Cayman Islands,
clause (1) above can be satisfied only if the Ordinary Shares are readily tradable on an established securities market in the United States.
Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on
an established securities market in the United States if they are listed on the Nasdaq Capital Market. You are urged to consult your tax
advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares, including the effects of
any change in law after the date of this annual report.
Dividends will constitute
foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed
above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to
the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose,
dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the
case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount
of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles),
it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution
exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal
income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign
investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of
a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder,
who has held the Ordinary Shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of capital
losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or
loss for foreign tax credit limitation purposes which will generally limit the availability of foreign tax credits.
PFIC
A non-U.S. corporation is
considered a PFIC, as defined in Section 1297(a) of the U.S. Internal Revenue Code, for any taxable year if either:
| ● | at least 75% of its gross income for such taxable year
is passive income; or |
| ● | at least 50% of the value of its assets (based
on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income (the “asset test”). |
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. We will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining
the value and composition of our assets for purposes of the PFIC asset test, the value of our assets must be determined based on the market
value of our Ordinary Shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value
of all of our assets on any particular quarterly testing date for purposes of the asset test.
Based on our operations and
the composition of our assets, we do not believe we were a PFIC for our most recent taxable year, and we do not expect to be treated as
a PFIC under the current PFIC rules. However, we must make a separate determination each year as to whether we are a PFIC, and there can
be no assurance with respect to our status as a PFIC for our current taxable year or any future taxable year. It is possible that, for
our current taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held for the production of passive
income. We will make this determination following the end of any particular tax year. The VIE Agreements are designed to provide WFOE
with the power, rights, and obligations to Mingda Tianjin as set forth under the VIE Agreements. We have evaluated the guidance in Financial
Accounting Standards Board Accounting Standards Codification 810 and determined that we are regarded as the primary beneficiary of the
VIE for accounting purposes, as a result of our direct ownership in WFOE and the provisions of the VIE Agreements. If we are not treated
as owning Mingda Tianjin for United States federal income tax purposes, we would likely be treated as a PFIC. In addition, because the
value of our assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares and because
cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the
market price of our Ordinary Shares. Accordingly, fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC.
In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets
will be affected by how, and how quickly, we spend the cash we raised in our initial public offering. We are under no obligation to take
steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our assets will depend
upon material facts (including the market price of our Ordinary Shares from time to time) that may not be within our control. If we are
a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which
you hold Ordinary Shares. However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election
as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described
below) with respect to the Ordinary Shares.
If we are a PFIC for your
taxable year(s) during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares,
unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are
greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your
holding period for the Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated
ratably over your holding period for the Ordinary Shares; |
| ● | the amount allocated to your current taxable year,
and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be
treated as ordinary income, and |
| ● | the amount allocated to each of your other taxable year(s) will
be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will
be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts
allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating
losses for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even
if you hold the Ordinary Shares as capital assets.
A U.S. Holder of “marketable
stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed
above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) Ordinary Shares and for
which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair
market value of the Ordinary Shares as of the close of such taxable year over your adjusted basis in such Ordinary Shares, which
excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted
basis of the Ordinary Shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable
only to the extent of any net mark-to-market gains on the Ordinary Shares included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Ordinary Shares,
are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale or disposition of the Ordinary
Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary
Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market
election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except
that the lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends and
Other Distributions on our Ordinary Shares” generally would not apply.
The mark-to-market election
is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days
during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury
regulations), including the Nasdaq Capital Market. If the Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you
are a holder of Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder
of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment
discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross
income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year.
However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding
its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the
information that would enable you to make a qualified electing fund election. If you hold Ordinary Shares in any taxable year in
which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain
annual information regarding such Ordinary Shares, including regarding distributions received on the Ordinary Shares and any gain realized
on the disposition of the Ordinary Shares.
If you do not make a timely
“mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold our Ordinary
Shares, then such Ordinary Shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in
a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election”
creates a deemed sale of such Ordinary Shares at their fair market value on the last day of the last year in which we are treated
as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the
gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the fair
market value of the Ordinary Shares on the last day of the last year in which we are treated as a PFIC) and holding period (which
new holding period will begin the day after such last day) in your Ordinary Shares for tax purposes.
IRC Section 1014(a) provides
for a step-up in basis to the fair market value for our Ordinary Shares when inherited from a decedent that was previously a holder of
our Ordinary Shares. However, if we are determined to be a PFIC and a decedent that was a U.S. Holder did not make either a timely qualified
electing fund election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our Ordinary Shares,
or a mark-to-market election and ownership of those Ordinary Shares are inherited, a special provision in IRC Section 1291(e) provides
that the new U.S. Holder’s basis should be reduced by an amount equal to the Section 1014 basis minus the decedent’s adjusted
basis just before death. As such if we are determined to be a PFIC at any time prior to a decedent’s passing, the PFIC rules will
cause any new U.S. Holder that inherits our Ordinary Shares from a U.S. Holder to not get a step-up in basis under Section 1014 and instead
will receive a carryover basis in those Ordinary Shares.
You are urged to consult
your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed
above.
Information Reporting and Backup Withholding
Dividend payments with respect
to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting
to the U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the US Internal Revenue Code with at a
current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification
number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding.
U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service
Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not
an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may
obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding),
and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives
to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our Ordinary Shares, subject to
certain exceptions (including an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in
which they hold Ordinary Shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic
reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other
information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the
public reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site
at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic
filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing,
among other things, the furnishing and content of proxy statements to shareholders, and our executive officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In accordance with Rule 5250(d)
of the Nasdaq Listing Rules, we will post this annual report on Form 20-F on our website www.dvintinc.com. In addition, we will provide
hardcopies of our annual report free of charge to upon request.
I. Subsidiary Information
For a listing of our subsidiaries,
see “Item 4. Information on the Company—C. Organizational Structure.”
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
You should read the following
information in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 3. Key Information—D.
Risk Factors,” and our consolidated financial statements, including the related notes thereto, which are included elsewhere in this
annual report on Form 20-F. The following discussion about our financial risk management activities includes “forward-looking statements”
that involve risks and uncertainties. Actual results could differ materially from those projected in these forward-looking statements.
Foreign Exchange Risk
Our PRC subsidiaries and
the VIE maintain their books and records in RMB. Our reporting currency is U.S. dollars. In general, for consolidation purposes, we translate
assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of
income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial
statements are recorded as accumulated other comprehensive income. The foreign currency translation from RMB to U.S. dollars could materially
affect our financial condition and results of operations due to the fluctuation of exchange rate. The exchange rates in effect is shown
below:
| |
March 31, | | |
March 31, | | |
March 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Period/year end RMB:US$ exchange rate | |
| 6.3393 | | |
| 6.5536 | | |
| 7.08760 | |
Period/annual average RMB:US$ exchange rate | |
| 6.4180 | | |
| 6.7772 | | |
| 6.97980 | |
Period/year end HKD:US$ exchange rate | |
| 7.8325 | | |
| 7.7742 | | |
| 7.77050 | |
Period/annual average HKD:US$ exchange rate | |
| 7.7844 | | |
| 7.7524 | | |
| 7.75880 | |
The Renminbi’s exchange
rate with the U.S. dollar is affected by, among other things, changes in China’s political and economic conditions and China’s
foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to
the U.S. dollar. Under such policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain
foreign currencies. Later on, the People’s Bank of China has decided to further implement the reform of the RMB exchange regime
and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a significant appreciation of the Renminbi
against the U.S. dollar since 2005 though there have been periods when the U.S. dollar has appreciated against the Renminbi as well. There
remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further
and more significant adjustment of the Renminbi against the U.S. dollar.
To the extent that we need
to convert U.S. dollars we receive from financing activities into the Renminbi for our operations or other uses within the PRC, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. On the
other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial
results, the value of your investment in our Company and the dividends we may pay in the future, if any, all of which may have a material
adverse effect on the prices of our ordinary shares
In addition, very limited
hedging options are available in China to reduce our exposure to exchange rate fluctuations. We did not have any foreign currency investments
hedged by currency borrowings or other hedging instruments in the fiscal years ended March 31, 2021, 2020, and 2019. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign currency.
Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash. As of March 31, 2022, most of the Company’s cash was on deposit at financial
institutions in RMB, where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover
bank deposits in the event of bank failure. While management believes that these financial institutions are of high credit quality, it
also continually monitors their credit worthiness.
Interest Rate Risk
We have not used derivative
financial instruments to hedge interest risk. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed,
nor do we anticipate being exposed to material risks due to changes in market interest rates. However, our future interest income may
fall short of expectations due to changes in market interest rates.
Inflation Risk
In recent years, inflation
has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the consumer price
index in China increased by 0.9%, 2.5% and 2.9% in 2021 and 2020, and 2019 respectively. Although we have not in the past been materially
affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation
in China. If inflation rises, it may materially and adversely affect our business.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
The accompanying notes form an integral part of
these consolidated financial statements.
Non-cash investing and financing activities for
the years ended March 31, 2022 and 2021, as disclosed in the notes, are:
(i) Capitalized US$427,672 (2021: US$72,326) in Right of use
assets and US$427,672 (2021: US$72,326) in lease liabilities (note 5).
The accompanying notes form an integral part of
these financial statements.
Dragon Victory International Limited
(“Dragon Victory”) was formed in the Cayman Islands on July 19, 2015. Dragon Victory’s wholly-owned subsidiary, Sweet
Lollipop Co., Ltd. (“Sweet Lollipop”) was formed in the British Virgin Islands on May 8, 2014. Long Yun International Holdings
Limited (“Long Yun HK”), which is a wholly-owned subsidiary of Sweet Lollipop, was formed in Hong Kong on May 2, 2015. HangZhouYuyao
Network Technology Co., Ltd (“WFOE I”), our wholly foreign-owned entity, was organized pursuant to PRC laws on May 30, 2016.
HangZhouLongyun Network Technology Co.,
Ltd (“HangZhouLongyun”, or the “VIE”) was established on October 9, 2014 in HangZhou, the PRC, pursuant to PRC
laws, which is owned by Mr. Yu Han holding 85% equity ownership interest and Koulin Han holding 15% equity ownership interest.
HangZhouLongyun’s operation includes
offering reward-based crowdfunding opportunities in the PRC to entrepreneurs and funding sources primarily through an internet-based platform,
offering business incubation services to the ventures utilizing its platform for their projects, and offering to act as a finder to also
assist these companies to obtain loans or additional equity financing, and introduce them to potential business partners, find merger
candidates or other strategic relationships, or assist with feasibility studies.
On August 19, 2016, WFOE I and Mr. Yu
Han and Ms. Koulin Han, the owners of HangZhouLongyun, entered into a series of agreements known as variable interest agreements (the
“Original VIE Agreements”), pursuant to which HangZhouLongyun became WFOE I’s contractually controlled affiliate. The
purpose and effect of the Original VIE Agreements are to provide WFOE I (our indirect wholly-owned subsidiary) with all management control
and net profits earned by HangZhouLongyun.
On November 3, 2017, Dragon Victory entered
into a Strategic Cooperation Agreement (the “Agreement”) under a joint venture, where Dragon Victory through its subsidiaries
will own 60% of Hangzhou TaikexiDacheng Automotive Technology Service Co., Ltd (“Taikexi”) and upgrade the current platform
to set-up a business ecosystem to offer online auto-insurance and to provide a full range of off-line auto parts and advisory services
to consumers.
Effective March 20, 2018, WFOE I, HangZhouLongyun,
and HangZhouLongyun’s owners executed a Termination Agreement to terminate each of the Original VIE Agreements dated August 19,
2016. As a result of entering into such Termination Agreements, WFOE I was no longer the sole equity holder of HangZhouLongyun and had
no control rights and no rights to the assets, property and revenue of HangZhouLongyun. The Company has dissolved WFOE I.
On March 20, 2018, Hangzhou Dacheng Investment
Management Co., Ltd. (“WFOE II”), a newly formed wholly owned subsidiary of the Company, entered into a series of contractual
arrangements (the “New VIE Agreements,” and together with the Original VIE Agreements, the “VIE Agreements”) with
HangZhouLongyun and its owners. The New VIE Agreements are designed to provide WFOE II (which replaced WFOE I) with the power, rights
and obligations equivalent in all respects to those it would possess as the sole equity holder of HangZhouLongyun, including absolute
control rights and the rights to the assets, property and revenue of HangZhouLongyun. There was no change to Long Yun’s capital
structure.
The Company decided to replace WFOE I
with WFOE II in order to take full advantage of certain preferential tax treatments and subsidies granted by the local government of Shangcheng
District of Hangzhou, Zhejiang province, where WFOE II was incorporated.
On August 3, 2018, WFOE II established
Shenzhen Guanpeng International Technology Co., Ltd (“Guanpeng”). WFOE II holds a 51% interest in Guanpeng.
On May 5, 2019, WFOE II participated
in the establishment of Zhejiang Shengyuan Business Consulting Co., Ltd (“Shengyuan”). WFOE II held a 49% interest in Shengyuan.
On September 19, 2019, the Company sold its interest in Shengyuan to a third party. The Company had not paid up any capital and Shengyuan
had not begun operations; accordingly, no gain or loss was incurred as a result of the transfer of ownership.
On July 7, 2019, HanzhouLongyun incorporated
a subsidiary, DachengLiantong Zhejiang Information Technology Co., Ltd (“DachengLiantong”). Hangzhou Longyun currently holds
80% of interest in DachengLiantong. DachengLiantong is engaged in the business of providing a supply chain management platform for automotive
parts suppliers, automobile repair shops, and logistics companies.
On August 22, 2019, the Company incorporated
a wholly owned subsidiary, Zhejiang Shengqian Business Consulting Co., Ltd. (“Shengqian”). Shengqian has not commenced operations.
On April 1, 2021, the Company, through
Long Yun, entered into an equity transfer agreement with Mr. Qiang Huang, who owned 100% of the equity interests in Hangzhou Xuzhihang
Supply Chain Management Co., Ltd. (“Xuzhihang”), a limited liability company organized under the laws of the PRC. Xuzhihang
provides supply chain management and other logistics related services. Pursuant to an equity transfer agreement, Mr. Qiang Huang transferred
60% of the equity interests in Xuzhihang to Long Yun for a consideration of RMB600,000.
On June 28, 2021, the Company, through
Sweet Lollipop, formed a wholly owned subsidiary, Meta Rich Limited (“Meta Rich”), in the British Virgin Islands.
On July 7, 2021, the Company, through Long Yun, formed a wholly owned
subsidiary, LSQ Capital Limited (“LSQ Capital”), in Hong Kong.
On October 29, 2021, the Company, through
Meta Rich, formed a 51% owned subsidiary, Metalpha Limited (“Metalpha”), in the British Virgin Islands.
On December 29, 2021, the Company, through
Meta Rich, formed a wholly owned subsidiary, Radiant Alpha Limited (“Radiant Alpha”), in the British Virgin Islands.
On March 18, 2022, the Company, through
Long Yun, formed a wholly owned subsidiary, LSQ Investment Limited (“LSQ Investment”), in Hong Kong.
On March 30, 2022, Dacheng Liantong acquired 60% of equity interest
of Hangzhou Xu Zhihang Supply Chain Management Ltd (“Hangzhou Xu Zhihang”) from two independent individuals. After completion
of transaction, Hangzhou Xu Zhihang became a 60%-owned subsidiary of the group.
Dragon Victory, Sweet Lollipop,
Long Yun HK, WFOE II, Taikexi, Guanpeng, Shengqian, Hangzhou Longyun, DachengLiantong, LSQ Capital, Meta Rich, Metalpha, Radiant Alpha, LSQ Investment and Hangzhou Xu Zhihang are collectively referred to as the
“Company”.
The financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”).
These are the Company’s first combined
and consolidated financial statements under IFRS. The preparation of these consolidated financial statements resulted in changes to the
accounting policies as compared with the most recent annual financial statements prepared under United States Generally Accepted Accounting
Principles (“U.S. GAAP”). The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements. They also have been applied in preparing an opening IFRS statement of financial position as at
April 1, 2020 for the purposes of the transition to IFRS, as required by IFRS 1 “First-Time Adoption of International Financial
Reporting Standards” (“IFRS 1”). The impact of the transition from U.S. GAAP to IFRS is explained in Note 26.
The financial statements were approved
for issuance by the Company’s Board of Directors on August 16, 2022.
The accompanying consolidated financial
statements include the accounts of the Company and its significant subsidiaries on a consolidated basis. The Company also includes subsidiaries
over which a direct or indirect legal or effective control exists and for which the Company is deemed to direct the significant activities
and has the obligation to absorb the losses or benefits of the entities. All intercompany accounts, balances and transactions with consolidated
entities have been eliminated.
The acquisitions were accounted under
U.S. GAAP as a business combination under common control with Dragon Victory being the acquirer and Sweet Lollipop and Long Yun HK being
the acquirees because all entities were controlled directly or indirectly by the same majority shareholder Mr. Yu Han. The consolidation
has been presented at historical costs and on a retroactive basis to reflect the capital structure of Sweet Lollipop and Long Yun HK as
a recapitalization.
The business combination transaction
of Sweet Lollipop was completed and effective on June 26, 2015 and Sweet Lollipop became a 100% owned subsidiary of Dragon Victory.
The business combination transaction
of Long Yun HK was completed and effective on August 10, 2015 and Long Yun HK became a 100% owned subsidiary of Sweet Lollipop.
VIE Agreements between WFOE I and HangZhouLongyun
and its shareholders (subsequently between WFOE II and HangZhouLongyun)
The Company evaluates the need to consolidate
its VIE, in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support.
The transactions contemplated by the
Original VIE agreements consummated on August 19, 2016, and subsequent terminated were replaced by the New VIE Agreements consummated
on March 20, 2018 to take full advantage of certain preferential tax treatments and subsidies granted by the local government of Shangcheng
District of Hangzhou, Zhejiang province, where WFOE II was incorporated. WFOE I and WFOE II shall be collectively referred to as the “WFOEs.”
The purpose and design of the VIE Agreements
between the WFOEs and HangZhouLongyun, was to consolidate Hangzhou Longyun under the Company by way of common control. ASC 810-10-25-38F
states that a reporting entity’s involvement in the design of a VIE may indicate that the reporting entity had the opportunity and
the incentive to establish arrangements that result in the reporting entity being the variable interest holder with the power to direct
the activities that most significantly impact the VIE’s economic performance. As both the Company and HangZhouLongyun are commonly
control by Mr. Yu Han and Ms. Koulin Han, both immediately before and after the acquisition, this transaction was accounted for as a merger
under common control, using merger accounting as if the merger had been consummated at the beginning of the earliest period presented,
and no gain or loss was recognized. All the assets and liabilities of HangZhouLongyun are carried using their original basis. Hence, HangZhouLongyun
was consolidated under the Company since its inception due to the purpose and design of the establishment of the VIE Agreements.
The purpose of the VIE Agreements is
solely to give the WFOEs the exclusive control over HangZhouLongyun’s management and operations. While there is no restriction for
HangZhouLongyun, our VIE entity, to pay the WFOEs, our wholly owned subsidiary, there are certain restrictions for the WFOEs to make payments
to the holding companies due to certain regulations imposed by the Chinese government on out-going foreign currency wire transfers. Additionally,
there could be potential tax implications when moving the cash flows up to the Company. Therefore, the Company intends to retain any earnings
within HangZhouLongyun, and the retained cash flows would be utilized in expanding the Company’s business.
Pursuant to the Exclusive Business Cooperation
Agreement between HangZhouLongyun and the WFOEs, the WFOEs provide HangZhouLongyun with technical support, consulting services and other
management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in
technology, human resources, and information. Additionally, HangZhouLongyun grants an irrevocable and exclusive option to the WFOEs to
purchase from HangZhouLongyun, any or all of its assets, to the extent permitted under the PRC laws. The WFOEs own all intellectual property
rights that are developed during the course of the agreement. For services rendered to HangZhouLongyun by the WFOEs under the Exclusive
Business Cooperation Agreement, the service fee HangZhouLongyun is obligated to pay is calculated based on the time of services rendered
multiplied by the corresponding rate, which is approximately equal to the net income of HangZhouLongyun.
The Exclusive Business Cooperation Agreement
will remain in effect for ten years until it is terminated by the WFOEs with 30-day prior notice. HangZhouLongyun does not have the right
to terminate the agreement unilaterally.
Under the Share Pledge Agreement between
the shareholders of HangZhouLongyun and the WFOEs, the various shareholders of HangZhouLongyun pledged all of their equity interests in
HangZhouLongyun to the WFOEs to guarantee the performance of HangZhouLongyun’s obligations under the Business Cooperation Agreement.
Under the terms of the Share Pledge Agreement, in the event that HangZhouLongyun or its shareholders breach their respective contractual
obligations under the Exclusive Business Cooperation Agreement, the WFOEs, as pledgee, will be entitled to certain rights, including,
but not limited to, the right to collect dividends generated by the pledged equity interests. The shareholders of HangZhouLongyun also
agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, the WFOEs are entitled to dispose of
the pledged equity interest in accordance with applicable PRC laws. The shareholders of HangZhouLongyun further agree not to dispose of
the pledged equity interests or take any actions that would prejudice the WFOEs’ interest.
Under the Exclusive Option Agreement,
the shareholders of HangZhouLongyun irrevocably granted the WFOEs (or their designee) an exclusive option to purchase, to the extent permitted
under PRC law, all of the equity interests in HangZhouLongyun. The option price is equal to the capital paid in by the HangZhouLongyun
shareholders. The agreement remains effective for a term of ten years and may be renewed at the WFOEs’ election.
Under the Power of Attorney, the shareholders
of HangZhouLongyun authorize the WFOEs to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders,
including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including
voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale
or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal
representative, the executive director, supervisor, the chief executive officer and other senior management members of HangZhouLongyun.
Under these contractual arrangements
with the VIE, the Company has the power to direct activities of the VIE and can have assets transferred out of the VIE under its control.
Therefore, the Company considers that there is no asset in any of the consolidated VIE that can be used only to settle obligations of
the VIE, except for registered capital and PRC statutory reserves. As the consolidated VIE is incorporated as limited liability companies
under the PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of the liabilities of
the consolidated VIE. The Company’s management has determined that via the VIE Agreements, it is the primary beneficiary of Hangzhou
Longyun.
The Company’s total assets and
liabilities presented in the consolidated financial statements represent substantially portion of the total assets and liabilities of
the VIE because the other entities in the consolidation are non-operating holding entities with significantly less assets and liabilities.
The following financial statement amounts
and balances of the VIE, were included in the accompanying consolidated financial statements as of March 31, 2022 and 2021, and for the
years ended March 31, 2022, 2021 and 2020, respectively:
Business combinations are accounted
for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the
acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree
and the equity interests issued by the Group in exchange for control of the acquiree. For each business combination, the Group elects
whether to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate
share of net assets in the event of liquidation at fair value or at the proportionate share of the acquiree’s identifiable net assets.
All other components of non-controlling interests are measured at fair value. Acquisition-related costs are expensed as incurred.
The Group determines
that it has acquired a business when the acquired set of activities and assets include an input and a substantive process that together
significantly contribute to the ability to create outputs.
When the Group
acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
Goodwill is initially
measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests
and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and
liabilities assumed.
After initial
recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently
if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test
of goodwill as at March 31. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition
date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from
the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups
of units.
Where goodwill
has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed
of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain
or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the relative value of the operation disposed
of and the portion of the cash-generating unit retained.
Refer to Note 21 to financial statements for
the details the acquisition of a subsidiary in March 2022.
The financial statements have been
prepared under the historical cost convention, except for digital assets and digital assets payables which are measured at fair
value through profit or loss as described in the accounting policies below.
These financial statements are presented
in United States dollars (US$), which is the Company’s functional currency.
The preparation of the financial statements
requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and
in any future periods affected.
Information about estimation uncertainties
that have a significant risk of resulting in a material adjustment within the next financial year are included the following:
IFRS do not specifically address accounting
for digital assets. Accordingly, for the preparation of the Group’s consolidated financial statements, management needs to apply
judgement in determining appropriate accounting policies based on the existing accounting framework and the facts and circumstances of
the Group’s digital assets business.
The Group’s digital assets portfolio
mainly comprises cryptocurrencies. According to the business model of the Group’s activities and the characteristics of each of
the relevant digital assets, the Group’s digital assets are accounted for as inventories measured at fair value less costs to sell
on the consolidated statement of financial position while the respective digital assets obtained (under “digital assets payables”) from a non-controlling
shareholders are measure at fair value through profit or loss.
Furthermore, in determining fair values,
management needs to apply judgement to identify the relevant available markets, and to consider accessibility to and activity within those
markets in order to identify the principal digital asset markets for the Group.
The loss allowances
for other receivables and loans receivables are based on assumptions about risk of default and expected loss rates. The Group uses judgement
in making these assumptions and selecting the inputs to the impairment calculation, based on the Group’s past history, existing
market conditions as well as forward looking estimates at the end of each reporting period. Refer to Note 22(a) for more details.
The estimation of share-based
payments (including warrants and stock options) requires the selection of an appropriate valuation model and consideration as to the
inputs necessary for the valuation model chosen. The model used by the Company is the Black-Scholes valuation model at the date of
the grant. The Company makes estimates as to the volatility, the expected life, dividend yield and the time of exercise, as
applicable. The expected volatility is based on the average volatility of share prices of similar companies over the period of the
expected life of the applicable warrants and stock options. The expected life is based on historical data. These estimates may not
necessarily be indicative of future actual patterns. Refer to Note 11 for more details on the valuation model and relevant significant inputs.
The accounting policies set out below
have been applied consistently by the Company to the periods presented in these financial statements.
Subsidiaries are entities controlled
by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included
in the consolidated financial statements from the date that control commences until the date that control ceases.
The accounting policies of subsidiaries
have been changed when necessary to align them with the policies adopted by the Company. Losses applicable to the NCI in a subsidiary
are allocated to the NCI even if doing so causes the NCI to have a deficit balance.
Transactions in foreign currencies
are translated to the functional currency of the Company at exchange rates at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the end of the reporting period are translated to the functional currency at the exchange rate on
that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at
the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated
at the exchange rate at the end of the year.
Non-monetary assets and liabilities
denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the
date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated
using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognised in profit or
loss.
The Company classifies its
financial assets in the following measurement categories:
The classification depends on the entity’s business
model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair
value, gains and losses will be recorded in profit or loss.
The Company reclassifies debt investments when and only
when its business model for managing those assets changes.
Regular way purchases and sales of
financial assets are recognised on trade-date, the date on which the Company commits to purchase or sell the asset. Financial assets are
derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has
transferred substantially all the risks and rewards of ownership.
At initial recognition, the Company
measures a financial asset at its fair value plus, in the case of a financial not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value
through profit or loss are expensed in profit or loss.
Subsequent measurement of debt instruments
depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. The Company classifies
its debt instruments into amortised cost and fair value through profit or loss categories.
Assets that are held for collection
of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Any
gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) net, together with
foreign exchange gains and losses. Impairment losses (if any) are presented as separate line item in the consolidated statements of comprehensive
income.
Assets that do not meet the criteria
for amortised cost are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured
at fair value through profit or loss is recognised in profit or loss, net in the period in which it arises.
The Company assesses on a forward-looking
basis the expected credit losses associated with its debt instruments carried at amortised cost. The impairment methodology applied depends
on whether there has been a significant increase in credit risk.
For other receivables and loan
receivables, general approach is applied. See Note 22(a) for further details.
The Company classifies its financial
liabilities in the following measurement categories:
For liabilities measured at fair value, gains and losses
will be recorded in profit or loss.
At initial recognition, the Company
shall measure a financial liability at its fair value plus or minus, in the case of a liability not at fair value through profit or loss,
transaction costs that are directly attributable to the acquisition or issue of the financial liability.
Subsequently, all financial liabilities will be measured
at amortised cost, except for financial liabilities at fair value through profit or loss, including derivatives, which shall be subsequently
measured at fair value.
In addition, the Company may, at initial
recognition, irrevocably designate a financial liability as measured at fair value through profit or loss.
Financial assets and financial liabilities
are off-set and the net amount presented in the statement of financial position when, and only when, the Company currently has a legally
enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability
simultaneously.
The Company recognizes loss allowances
for ECLs on financial assets measured at amortized cost.
The Company applies the general approach
to provide for ECLs on all other financial instruments. Under the general approach, the loss allowance is measured at an amount equal
to 12-month ECLs at initial recognition.
At each reporting date, the Company
assesses whether the credit risk of a financial instrument has increased significantly since initial recognition. When credit risk has
increased significantly since initial recognition, loss allowance is measured at an amount equal to lifetime ECLs.
When determining whether the credit
risk of financial assets have increased significantly since initial recognition and when estimating ECLs, the Company considers reasonable
and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative
information and analysis, based on the Company’s historical experience and informed credit assessment that includes forward-looking
information.
The Company decided to assess the Expected
Credit Loss (‘ECL’) of the financial asset at amortized cost based on the discounted product of exposure at default (‘EAD’),
probability of default (‘PD’) and loss given default (‘LGD’) as defined below:
The ECL is computed by multiplying
EAD, PD, LGD for each category. The PD and LGD are developed by utilizing historical default studies and publicly available data.
At each reporting date, the Company
assesses whether financial assets carried at amortized cost are credit-impaired. A financial asset is ‘credit-impaired’ when
one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is
credit-impaired includes the following observable data:
Loss allowances for financial assets
measured at amortized cost are deducted from the gross carrying amount of these assets.
The gross carrying amount of a financial
asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. This is generally the
case when the Company determines that the debtor does not have assets or sources of income that could generate sufficient cash flows to
repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities
in order to comply with the Company’s procedures for recovery of amounts due.
The carrying amounts of the Company’s
non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication
exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or
its related cash-generating unit (CGU) exceeds its estimated recoverable amount.
The recoverable amount of an asset
or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are
Companyed together into the smallest Company of assets that generates cash inflows from continuing use that are largely independent of
the cash inflows of other assets or CGUs. Impairment losses are recognised in profit or loss.
Impairment losses recognised in prior
periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is
reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to
the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised.
For the purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions,
other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts
of cash and which are subject to an insignificant risk of changes in value.
The Company operates a share-based payment
scheme (in the form of warrant shares) for the purpose of providing incentives and rewards to eligible participants who contribute to
the success of the Group’s operations. Under such schemes, consultants providing similar services with employee and services providers
of the Group may receive equity instruments as remuneration for their services rendered (“equity-settled transactions”).
The fair value of the share purchase
warrants granted to consultants providing similar services in exchange for the grant of the warrants is recognised as an expense with
a corresponding increase in share-based warrants reserve. The total amount to be expensed is determined by reference to the fair value
of the share purchase warrants granted. The total expense is recognised over the vesting period, which is the period over which all the
specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of warrants
that are expected to vest based on the non-market vesting and service conditions. It recognises the impact of the revision to original
estimates, if any, in profit or loss, with a corresponding adjustment to equity.
The warrant reserve presents the proceeds
from issuance of warrants, net of issue costs. Warrant reserve is non-distributable and will be transferred to share premium account upon
exercise of warrants.
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
Amount subscribed for common
stock in excess of nominal value.
The Company generates platform fees
through its supply chain management platform service. The transaction price is determined based on a percentage of the aggregate amounts
of purchase payments to our partnered auto parts suppliers. The Company recognizes revenue when the procured auto parts have been transferred
to and accepted by the customers as the Company’s performance obligation is completed at a point in time.
The Company participated in proprietary
trading and earned revenues, at a point in time, when executing buy and sell orders on various exchanges.
Short-term employee benefits are expensed
as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or
constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Obligations for contributions to defined
contribution plans are expensed as the related service is provided. Prepaid contributions are recognized as an asset to the extent that
a cash refund or a reduction in future payments is available.
Selling and promotion expenses
comprise of marketing and promotional expenditures.
General and administrative costs mainly
comprise of legal fees, professional fees, consultancy fees, staff costs and depreciation and amortization.
Finance costs comprise amortization of debt issuance cost and interest of lease liabilities.
Interest income is presented as finance
income where it is earned from financial assets that are held for cash management purposes.
Interest income is calculated by applying
the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired.
For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction
of the loss allowance).
Tax expense comprises current and deferred
tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or
items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable
or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date.
Deferred tax is recognised in respect
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities
in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating
to investments in subsidiaries to the extent that the Company is able to control the timing of the reversal of the temporary difference
and it is probable that they will not reverse in the foreseeable future.
The measurement of deferred taxes reflects
the tax consequences that would follow the manner in which the Company expects, at the end of the reporting period, to recover or settle
the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities
are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the
same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets
on a net basis or their tax assets and liabilities will be realised simultaneously.
A deferred tax asset is recognised
for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits
will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realised.
In determining the amount of current
and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be
due. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities;
such changes to tax liabilities will impact tax expense in the period that such a determination is made.
Property, plant and equipment are stated
at cost less accumulated depreciation and any accumulated impairment losses, if any. The cost of an item of property, plant and equipment
comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended
use.
Subsequent costs are included in the
asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of any component
accounted for a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the
financial period in which they are incurred.
Depreciation is calculated using the straight-line method
to allocate their cost, net of their residual values, over their estimated useful lives at the following useful life:
Depreciation methods, useful lives
and residual values are reviewed at the end of each reporting period and adjusted if appropriate.
An item of property, plant and equipment
including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from
its use or disposal. Any gain or loss on disposal or retirement recognised in the statement of profit or loss in the year the asset is
derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset
Digital assets are held mainly for the purposes of trading in the ordinary
course of the Company’s digital assets business.
Digital assets held in the counterparty’s
digital asset wallets primarily comprise digital assets that are prefunded by and traded with, but not yet withdrawn by counterparties
(or “customers”) under Digital Asset Trading Agreements (“DATA”).
Digital assets obtained from counterparties
are recorded as digital assets of the Company (see below for the measurement) which can be used in the Company’s ordinary business,
with a corresponding liability recorded due to the counterparties (under “Digital assets payables” measured at fair value through
profit or loss in current liabilities). Upon maturity of the financing arrangements, the Company transfers the digital
assets at a rate stipulated in the DATA to the counterparty’s wallet and the related digital assets and liability due to the
counterparty is derecognised. Digital assets payables are classified as current liabilities unless the Company has an unconditional right
to defer settlement of the liability for at least 12 months after the reporting period.
The Company’s digital asset portfolio mainly comprises cryptocurrencies
and since the Company actively trades cryptocurrencies, purchasing them with a view to their resale in the near future, and generating
a profit from fluctuations in the price, the Company applies the guidance in IAS 2 for commodity broker-traders and measures the digital
assets at fair value less costs to sell. The Company considers there are no significant “costs to sell” digital assets and
hence measurement of digital assets is based on their fair values with changes in fair values recognised in profit or loss in the period
of the changes.
See Note 22(d) for estimation of fair
value in respect of the digital assets and digital assets payables.
Digital assets payables comprise the
digital assets obtained from non-controlling shareholder under DATA as mentioned per above.
Digital assets obtained from counterparties
are initially recognised at fair value, net of transaction costs incurred and are subsequently measured at fair value, which align with
the fact that digital asset inventories are non-financial assets measured at fair value less costs to sell.
Digital assets payables are removed from
the consolidated statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The
difference between the carrying amount of the liability that has been extinguished or transferred to another party and the consideration
paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.
Digital assets payables are classified
as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after
the reporting period.
The component parts of the convertible
bonds issued by the Company are classified separately as financial liabilities and equity in accordance with the substance of the contractual
arrangements and the definitions of a financial liability and an equity instrument. Conversion option that will be settled by the exchange
of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instruments is an equity instrument.
Convertible notes are initially recognised
at fair value (net of transaction costs) and subsequently carried at amortised cost. Any difference between the proceeds (net of transaction
costs) and any redemption value is recognised in profit or loss over the period of the convertible notes using the effective interest
method.
The fair value of the liability portion
of a convertible bond is determined using a market interest rate for an equivalent non- convertible bond. This amount is recorded as a
liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated
to the conversion option. This is recognised and included in shareholders’ equity, net of income tax effects. In addition,
the conversion option classified as equity will remain in equity until the conversion option is exercised, in which case, the balance
recognised in equity will be transferred to share capital and additional paid-in capital. When the conversion option remains unexercised
at the expiry date, the balance recognised in equity will be transferred to retained profits. No gain or loss is recognised in profit
or loss upon conversion or expiration of the option.
The Company has identified three operating
segments.
The assessment of reportable segments
is based upon having similar economic characteristics and if the operating segments are similar in the following respects:
Reportable segments are distinguished
due to their differences in their operations and economics. They are managed separately because they require different business, technological,
and marketing strategies.
The Company’s CEO is considered
to be the Company’s Chief Operating Decision Maker (“CODM”). The CODM reviews non-financial information, for purposes
of allocating resources. Based on the internal financial information provided to the CODM, the Company has determined that the identified
operating segment as one reportable segment.
The CODM evaluates the assets and liabilities
despite disaggregated financial information being available, the accounting policies used in the determination of the segment amounts
are the same as those used in the preparation of the Company’s financial statements.
At inception of a contract, the Company
assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for consideration.
At commencement or on modification
of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the
basis of its relative stand-alone prices. However, for the leases of property the Company has elected not to separate non-lease components
and account for the lease and non-lease components as a single lease component.
The Company recognizes a right-of-use
asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the
initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct
costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on
which it is located, less any lease incentives received.
The right-of-use asset is subsequently
depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership
of the underlying asset to the Company by the end of the lease term or the cost of the right-of-use asset reflects that the Company will
exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which
is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment
losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured
at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in
the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its
incremental borrowing rate as the discount rate.
The Company determines its incremental
borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms
of the lease and type of the asset leased.
Lease payments included in
the measurement of the lease liability comprise the following:
The lease liability is measured at
amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change
in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value
guarantee, if the Company changes its assessment of whether it will exercise a purchase, extension or termination option or if there is
a revised in-substance fixed lease payment.
When the lease liability is remeasured
in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if
the carrying amount of the right-of-use asset has been reduced to zero.
The Company presents right-of-use assets
that do not meet the definition of investment property in ‘property, plant and equipment’.
The Company has elected not to recognize
right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Company recognizes the lease payments
associated with these leases as an expense on a straight-line basis over the lease term.
The Company presents basic and diluted
earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to
ordinary shareholders of the Company by the weighted-average number of ordinary shares outstanding during the year, adjusted for own shares
held. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted-average
number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which
comprise share options granted to employees and share purchase warrants granted to consultants. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because
the inclusion of the potential common shares would have an anti-dilutive effect.
A related party
is a person or entity that is related to the Company.
(A) A person or
a close member of that person’s family is related to the Company if that person:
(B) An entity is
related to the Company if any of the following conditions applies:
Provisions are recognised when the
Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required
to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar
obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a
whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations
may be small.
Provisions are measured at the present
value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of
money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense
A number of new standards, interpretations
and amendments to standards are effective for annual periods beginning after April 1, 2021 and earlier application is permitted; however,
the Company has not early adopted the new or amended standards and interpretations in preparing these financial statements.
The following new
and amended standards are not expected to have a significant impact on the Company’s consolidated financial statements:
| ● | Disclosure of
Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2). |
| ● | Definition of
Accounting Estimates (Amendments to IAS 8). |
The new and amended accounting Standards
and Interpretations listed above are not mandatory for the year ended March 31, 2022 reporting periods and have not been early adopted
by the Group. These are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable
future transactions.
| 4 | Property,
plant and equipment |
| |
Computer and equipment | | |
Auotomobiles | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | |
Cost | |
| | |
| | |
| |
As of April 1, 2020 | |
| 198,309 | | |
| 150,411 | | |
| 348,720 | |
Additions | |
| 238 | | |
| - | | |
| 238 | |
Disposals | |
| - | | |
| (87,066 | ) | |
| (87,066 | ) |
Exchange realignment | |
| 90 | | |
| 36,594 | | |
| 36,684 | |
As of March 31, 2021 | |
| 198,637 | | |
| 99,939 | | |
| 298,576 | |
Additions | |
| 34,517 | | |
| 253,812 | | |
| 288,329 | |
Acquisition of a subsidiary | |
| 5,035 | | |
| 7,637 | | |
| 12,672 | |
Exchange realignment | |
| 6,715 | | |
| 3,379 | | |
| 10,094 | |
As of March 31, 2022 | |
| 244,904 | | |
| 364,767 | | |
| 609,671 | |
Accumulated depreciation | |
| | | |
| | | |
| | |
As of April 1, 2020 | |
| 154,430 | | |
| 59,684 | | |
| 214,114 | |
Depreciation for the year | |
| 23,342 | | |
| 53,167 | | |
| 76,509 | |
Disposals | |
| - | | |
| (69,267 | ) | |
| (69,267 | ) |
Exchange realignment | |
| 20,865 | | |
| 8,063 | | |
| 28,928 | |
As of March 31, 2021 | |
| 198,637 | | |
| 51,647 | | |
| 250,284 | |
Depreciation for the year | |
| 22,336 | | |
| 42,641 | | |
| 64,977 | |
Exchange realignment | |
| (2,829 | ) | |
| (735 | ) | |
| (3,564 | ) |
As of March 31, 2022 | |
| 218,144 | | |
| 93,553 | | |
| 311,697 | |
Carrying amounts | |
| | | |
| | | |
| | |
As of March 31, 2022 | |
| 26,760 | | |
| 271,214 | | |
| 297,974 | |
As of March 31, 2021 | |
| - | | |
| 48,292 | | |
| 48,292 | |
| 5 | Right-of-use
assets and lease liabilities |
The Company has entered into leases of buildings, which are
used for the Company’s operations. Leases of buildings have lease terms of between one and six years.
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
|
|
|
|
(Restated) | |
Land and buildings | |
| | |
| |
Cost: | |
| | |
| |
At beginning of year | |
| 74,794 | | |
| 135,282 | |
Addition during the year | |
| 427,672 | | |
| 72,326 | |
Disposals during the year | |
| - | | |
| (141,478 | ) |
Exchange realignment | |
| 3,028 | | |
| 8,664 | |
At end of year | |
| 505,494 | | |
| 74,794 | |
| |
| | | |
| | |
Accumulated depreciation: | |
| | | |
| | |
At beginning of year | |
| 28,496 | | |
| 74,338 | |
Depreciation for the year | |
| 90,327 | | |
| 52,745 | |
Disposals during the year | |
| - | | |
| (102,893 | ) |
Exchange realignment | |
| 1,627 | | |
| 4,306 | |
At end of year | |
| 120,450 | | |
| 28,496 | |
| |
| | | |
| | |
Net carrying amount: | |
| 385,044 | | |
| 46,298 | |
Lease terms are negotiated on an individual
basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants and the leased assets
may not be used as security for borrowing purposes.
Set out below are the carrying amounts of lease liabilities
and the movements during the years:
| |
2022
US$ | | |
2021 US$ | |
| |
| | |
(Restated) | |
At beginning of year | |
| 38,153 | | |
| 63,526 | |
Additions to lease liabilities | |
| 427,672 | | |
| 72,326 | |
Interest charged | |
| 11,550 | | |
| 6,127 | |
Payment made | |
| (109,219 | ) | |
| (69,609 | ) |
Disposals | |
| - | | |
| (40,559 | ) |
Exchange realignment | |
| 591 | | |
| 6,342 | |
At end of year | |
| 368,747 | | |
| 38,153 | |
Presentation
on:
Consolidated
Statement of Financial Position:
| |
2022 US$ | | |
2021 US$ | |
Current | |
| 263,207 | | |
| 28,316 | |
Non-current | |
| 105,540 | | |
| 9,837 | |
Total | |
| 368,747 | | |
| 38,153 | |
The maturity analysis of lease liabilities
is disclosed in Note 22(e) to the financial statements.
The effective interest rate applied
to the lease liabilities recognized in the statement of financial position range from 4.75% to 4.90% per annum.
The net carrying amount of goodwill is analysed as follows:
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Cost: | |
| | |
| |
As at the beginning of the reporting period | |
| - | | |
| - | |
Arising from acquisition of subsidiary during the year | |
| 78,958 | | |
| - | |
As at the end of the reporting period | |
| 78,958 | | |
| - | |
| |
| | | |
| | |
Accumulated impairment: | |
| | | |
| | |
As at the beginning of the reporting period | |
| - | | |
| - | |
Impairment | |
| (78,958 | ) | |
| - | |
As at the end of the reporting period | |
| (78,958 | ) | |
| -- | |
| |
| | | |
| | |
Net carrying amount: | |
| | | |
| | |
As at the end of the reporting period | |
| - | | |
| - | |
| 7 | Other
receivables and prepayments |
Other receivables and prepayments consist
of the following:
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Advance to service providers | |
| 47,613 | | |
| 8,005 | |
Deposits for leases due within one operating period | |
| - | | |
| 534 | |
The buyer of convertible notes | |
| - | | |
| 5,419,972 | |
Prepaid tax | |
| 69,321 | | |
| 61,211 | |
Prepaid insurance | |
| 262,682 | | |
| - | |
Others | |
| 205,517 | | |
| 88,684 | |
| |
| 585,133 | | |
| 5,578,406 | |
Allowance for doubtful accounts | |
| (67,774 | ) | |
| (65,558 | ) |
| |
| 517,359 | | |
| 5,512,848 | |
Movements of allowance for doubtful
accounts as followings:
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
As of April 1 | |
| 65,558 | | |
| 62,577 | |
Exchange realignments | |
| 2,216 | | |
| 2,981 | |
As of March 31 | |
| 67,774 | | |
| 65,558 | |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Loans to third parties (Note (a)) | |
| 7,138,703 | | |
| 4,914,315 | |
Loans to related parties (Note (b)) | |
| 2,245,200 | | |
| 4,119,064 | |
| |
| 9,383,903 | | |
| 9,033,379 | |
Notes:
| (a) | The advances granted to independent third parties are unsecured (2021: unsecured), except for US$2,070,421 (2021: US$4,914,315) bearing a fixed interest rate at 5% (2021: 5%), the remaining loans being interest free (2021: Nil), and repayable within 12 months (2021: 12 months) from the year end date as of March 31, 2022. |
| (b) | The advances granted to related parties are unsecured (2021: unsecured), except for US$2,245,200 (2021: US$ 2,273,636) bearing a fixed interest rate at 5% (2021: 5%), no remaining loans bearing interest (2021: remaining loans bearing a fixed interest rate at 5.5%), and repayable within 12 months (2021: 12 months) from the year end date as of March 31, 2022. |
For impairment assessment, see Note 22(a) to this financial statements.
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Digital assets held on exchange institutions | |
| 8,438,027 | | |
| - | |
The digital assets held on third
party exchange institutions are measured at fair value. They represented balance of digital assets attributable to the Company held in
shared wallets of the third party exchanges.
The balance is measured at fair value
through profit or loss.
Fair value gain of
approximately US$122,711 (2021: Nil) from remeasurement of digital assets at March 31, 2022, to the extent it is not offset by
remeasurement of digital asset payables to customers at the same date, is presented as part of the “fair value change of
proprietary trading digital assets” in the consolidated statements of profit or loss and other
comprehensive income.
| 10 | Cash
and cash equivalents |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Bank balances | |
| 5,286,991 | | |
| 982,538 | |
The cash and cash equivalents of US$369,035
(2021: US$861,779) are located in Mainland China. RMB is not a freely convertible currency and the remittance of funds out of Mainland
China is subject to exchange restrictions imposed by the PRC government.
(i) Share capital and additional paid-in capital
The addition of share capital and additional
paid-in capital represented the conversion of convertible notes (Note 14) into 5,155,305 (2021: 1,841,673) ordinary shares for the year
ended March 31, 2022.
(ii) Share purchase warrants
A continuity schedule of outstanding
share purchase warrants and fair value charged to profit or loss are as follows:
| |
Number Outstanding | | |
Weighted Average Exercise Price | | |
Fair value
charged to
profit or
loss | |
| |
| | |
US$ | | |
US$ | |
Balance – March 31, 2021 (Restated) | |
| - | | |
| - | | |
| - | |
Issued | |
| 17,800,000 | | |
| 1.79 | | |
| 6,063,086 | |
| |
| | | |
| | | |
| | |
Balance – March 31, 2022 | |
| 17,800,000 | | |
| 1.79 | | |
| 6,063,086 | |
On October 27, 2021, the Company issued
1,800,000 share purchase warrants to consultants and it are exercisable at the lower of (i) $1.50 per share or (ii) 88% of the lowest
daily volume-weighted average price, for a period of five years.
On October 29, 2021, the Company issue
warrants to Natural Selection Capital Holdings Limited (the “Consulting Company”)
to purchase an aggregate of 14,000,000 Ordinary Shares, par value US$0.0001 per share of the Company with each such warrant expiring on
the tenth anniversary from the date on which the Consulting Company warrants become exercisable, which exercisable date shall be the later
of: (i) the one year anniversary date of the issuance of such Consulting Company warrants (such one-year period following the date of
the issuance of such Consulting Company warrants,, and (ii) the applicable vesting date. The warrants are described below:
| (i) | 3,500,000 share purchase warrants exercisable at $1.00 per share, |
|
(iii) |
3,500,000 share purchase warrants exercisable at $1.50 per share, and |
|
(iv) |
7,000,000 share purchase warrants exercisable at $2.50 per share. |
On November 30, 2021, the Company issued
2,000,000 share purchase warrants to Mr. Ming Ni and it are exercisable at the lower of (i) $1.50 per share or (ii) 88% of the lowest
daily volume-weighted average price, for a period of five years.
The Company used the following assumptions
in calculating the fair value of the warrants for the period ended:
| |
March 31, 2022 | |
| |
| | |
Risk-free interest rate | |
| 1.14-1.15 | |
Expected life of warrants | |
| 5-10 | |
Volatility | |
| 80.59%-82.59% | |
Weighted average fair value per warrant (US$) | |
| 0.71-1.29 | |
At March 31, 2022, the Company
had share purchase warrants outstanding as follows:
|
|
Warrants Outstanding |
|
Fair value at issue date |
|
Fair value charged for current year |
|
|
Exercise Price |
|
|
Weighted Average Remaining Life |
Expiry Date |
|
|
|
US$ |
|
US$ |
|
|
US$ |
|
|
(years) |
October 29, 2022 |
|
|
3,500,000 |
|
4,515,601 |
|
1,373,012 |
|
|
|
1 |
|
|
Less than a year |
October 29, 2022 |
|
|
3,500,000 |
|
4,229,191 |
|
850,093 |
|
|
|
1.5 |
|
|
Less than a year |
October 29, 2022 |
|
|
7,000,000 |
|
7,500,124 |
|
1,068,911 |
|
|
|
2.5 |
|
|
Less than a year |
October 27, 2026 |
|
|
1,800,000 |
|
1,353,304 |
|
1,353,304 |
|
|
|
1.5 |
|
|
4 |
October 29, 2026 |
|
|
2,000,000 |
|
1,417,766 |
|
1,417,766 |
|
|
|
1.5 |
|
|
4 |
|
|
|
17,800,000 |
|
19,015,986 |
|
6,063,086 |
|
|
|
|
|
|
|
(iii) Non-controlling interests
| |
Taikexi | | |
Shenzhen Guanpeng | | |
Dacheng Liantong | | |
Hangzhou Xu Zhihang | | |
Metalpha | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | |
As of April 1, 2020 (Restated) | |
| (505,566 | ) | |
| (31,664 | ) | |
| (10,547 | ) | |
| - | | |
| - | | |
| (547,777 | ) |
Net loss | |
| (20,361 | ) | |
| (13,844 | ) | |
| (29,704 | ) | |
| - | | |
| - | | |
| (63,909 | ) |
As of March 31, 2021 (Restated) | |
| (525,927 | ) | |
| (45,508 | ) | |
| (40,251 | ) | |
| - | | |
| - | | |
| (611,686 | ) |
Net (loss) profit | |
| (4,837 | ) | |
| (3,547 | ) | |
| - | | |
| - | | |
| 19,990 | | |
| 11,606 | |
Contribution from non-controlling shareholder in a subsidiary | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,960,000 | | |
| 1,960,000 | |
Acquisition of a subsidiary | |
| - | | |
| - | | |
| - | | |
| 10,459 | | |
| - | | |
| 10,459 | |
Changes in non-controlling interest due to changes in ownership of partially owned subsidiary | |
| - | | |
| - | | |
| 40,251 | | |
| - | | |
| - | | |
| 40,251 | |
As of March 31, 2022 | |
| (530,764 | ) | |
| (49,055 | ) | |
| - | | |
| 10,459 | | |
| 1,979,990 | | |
| 1,410,630 | |
(iv) Statutory reserves
As stipulated by the relevant laws
and regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required to maintain
a statutory surplus reserve which is non-distributable. Appropriations to such reserve are made out of net profit after tax of the statutory
financial statements of the PRC subsidiaries at the amounts determined by their respective boards of directors annually up to 50% of authorized
capital, but must not be less than 10% of the net profit after tax.
The statutory
surplus reserve is non-distributable other than upon liquidation.
(v) Accumulated deficit
The accumulated
deficit comprises the cumulative net gains and losses recognized in the Group’s statement of profit or loss.
(vi) Accumulated other comprehensive
income
Accumulated other comprehensive income
represents the foreign currency translation difference arising from the translation of the financial statements of companies within the
Group from their functional currency to the Group’s presentation currency.
| 12 | Accounts
and other payables |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Accounts payables | |
| 6,862 | | |
| 22,144 | |
Other payables and accrued charges | |
| 1,152,662 | | |
| 334,996 | |
Amount due to related parties | |
| 350,320 | | |
| 688,371 | |
| |
| | | |
| | |
Total | |
| 1,509,844 | | |
| 1,045,511 | |
Other payables are non-interest-bearing
and are expected to be settled within one year.
The amount due to related parties are
unsecured, interest-free and repayable on demand.
| 13 | Digital assets payables |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
| |
| | |
(Restated) | |
Digital assets payables to a non-controlling shareholder | |
| 6,200,109 | | |
| - | |
As at March 31, 2022, the amount represented
the digital assets obtained from a non-controlling shareholder amounted to approximately US$6,200,109. These payables were unsecured,
interest-free, and repayable by agreed amount of digital assets as stipulated in the DATA in 12 months from the year end date.
The digital assets payables are measured
at fair value through profit or loss and refer to Note 22(d) to the financial statement for the details of fair value analysis.
The conversion option of the convertible
bonds is accounted for as equity instrument and is determined after deducting the fair value of the liability component from the total
fair value amount of the convertible bonds at the date of issuance. The residual amount represents the value of the conversion option,
which is credited directly to equity as convertible bonds reserve of the Company.
The liability component of the convertible
bonds is carried as a current or non-current liability, as appropriate, on the amortised cost basis until extinguished on conversion
or redemption.
In June 2021, the holder of the convertible
note early redeemed the convertible note in full with issue of 5,155,305 (2021: 1,841,673) ordinary shares.
On March 31, 2021, the Company issued
$6,000,000 of convertible promissory notes (“convertible note #6”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $5,940,000, and the issuance of 120,000 ordinary shares as a commitment
fee. The Convertible Note has an annual interest rate of 5% and a term of 12 months from the date of closing, and is convertible into
our Ordinary Shares at the lower of (a) $2.75 per share or (b) 88.0% of the lowest daily VWAP (dollar volume-weighted average price of
our Ordinary Shares on the NASDAQ Capital Market (as reported by Bloomberg) during the 10 trading days prior to the conversion date (collectively,
the “Conversion Price”), but not lower than $1.08 per share (the “Floor Price”). If the daily VWAP is less than
$1.08 for a period of 10 consecutive trading days (each such occurrence, a “Triggering Event”), the Company will make consecutive
monthly amortization payments in cash or Ordinary Shares during the term of the Convertible Note beginning on the 10th calendar day after
the date of the Triggering Event and continuing on the same calendar day of each successive calendar month until the Convertible Note
is fully repaid (each, a “Redemption Date”) or a Triggering Event ceases. The Company has the right, but not the obligation,
to redeem early a portion or all amounts outstanding under the Convertible Note, provided that (i) the trading price of Ordinary Shares
is less than the fixed conversion price ($2.75) and (ii) the Company provides the holder of the Convertible Note with at least 10 business
days’ prior written notice.
On February 4, 2021, the Company issued
$1,000,000 of convertible promissory notes (“convertible note #5”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $970,000. The Convertible Note has an annual interest rate of 5% and a
term of 12 months from the date of closing, and is convertible into our Ordinary Shares at the lower of (a) $2.69 per share or (b) 88.0%
of the lowest daily VWAP during the 10 trading days prior to the conversion date, but not lower than $0.50 per share (the “Floor
Price”). If the daily VWAP is less than $0.50 for a period of 10 consecutive trading days, the Company will make consecutive monthly
amortization payments in cash or Ordinary Shares during the term of the Convertible Note beginning on the 10th calendar day after the
date of the Triggering Event and continuing on the same calendar day of each successive calendar month until the Convertible Note is
fully repaid (each, a “Redemption Date”) or a Triggering Event ceases. The Company has the right, but not the obligation,
to redeem early a portion or all amounts outstanding under the Convertible Note, provided that (i) the trading price of Ordinary Shares
is less than the fixed conversion price ($2.69) and (ii) the Company provides the holder of the Convertible Note with at least 10 business
days’ prior written notice. On February 23, 2021, the Company issued to YA 453,459 Ordinary Shares after the receipt of a conversion
notice dated February 19, 2021 for the conversion of the outstanding and unpaid debenture and accrued interest in the amount of $1,002,191.78
at a conversion price of $2.2101.
On January 14, 2021, the Company issued
$1,000,000 of convertible promissory notes (“convertible note #4”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $970,000, and (ii) the issuance of 50,000 ordinary shares as a commitment
fee. The Convertible Note has an annual interest rate of 5% and a term of 12 months from the date of closing, and is convertible into
our Ordinary Shares at the lower of (a) $2.69 per share or (b) 88.0% of the lowest daily VWAP during the 10 trading days prior to the
conversion date, but not lower than $0.50 per share (the “Floor Price”). If the daily VWAP is less than $0.50 for a period
of 10 consecutive trading days, the Company will make consecutive monthly amortization payments in cash or Ordinary Shares during the
term of the Convertible Note beginning on the 10th calendar day after the date of the Triggering Event and continuing on the same calendar
day of each successive calendar month until the Convertible Note is fully repaid (each, a “Redemption Date”) or a Triggering
Event ceases. The Company has the right, but not the obligation, to redeem early a portion or all amounts outstanding under the Convertible
Note, provided that (i) the trading price of Ordinary Shares is less than the fixed conversion price ($2.69) and (ii) the Company provides
the holder of the Convertible Note with at least 10 business days’ prior written notice. On February 18, 2021, the Company issued
to YA 508,738 Ordinary Shares after the receipt of a conversion notice dated February 16, 2021 for the conversion of the outstanding
and unpaid debenture and accrued interest in the amount of $1,004,657,53 at a conversion price of $1.9748.
On December 22, 2020, the Company issued
$500,000 of convertible promissory notes (“convertible note #3”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $485,000. The Convertible Note has an annual interest rate of 5% and a
term of 12 months from the date of closing, and is convertible into our Ordinary Shares at the lower of (a) $2.69 per share or (b) 88.0%
of the lowest daily VWAP during the 10 trading days prior to the conversion date, but not lower than $0.50 per share (the “Floor
Price”). If the daily VWAP is less than $0.50 for a period of 10 consecutive trading days, the Company will make consecutive monthly
amortization payments in cash or Ordinary Shares during the term of the Convertible Note beginning on the 10th calendar day after the
date of the Triggering Event and continuing on the same calendar day of each successive calendar month until the Convertible Note is
fully repaid (each, a “Redemption Date”) or a Triggering Event ceases. The Company has the right, but not the obligation,
to redeem early a portion or all amounts outstanding under the Convertible Note, provided that (i) the trading price of Ordinary Shares
is less than the fixed conversion price ($2.69) and (ii) the Company provides the holder of the Convertible Note with at least 10 business
days’ prior written notice. On January 21, 2021, the Company issued to YA 115,890 Ordinary Shares after the receipt of a conversion
notice dated January 19, 2021 for the conversion of the outstanding and unpaid debenture and accrued interest in the amount of $201,986.30
at a conversion price of $1.7429. On February 5, 2021, the Company issued to YA 152,247 Ordinary Shares after the receipt of a conversion
notice dated February 4, 2021 for the conversion of the outstanding and unpaid debenture and accrued interest in the amount of $300,657.53
at a conversion price of $1.9748.
On December 11, 2020, the Company issued
$500,000 of convertible promissory notes (“convertible note #2”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $485,000. The Convertible Note has an annual interest rate of 5% and a
term of 12 months from the date of closing, and is convertible into our Ordinary Shares at the lower of (a) $2.69 per share or (b) 88.0%
of the lowest daily VWAP during the 10 trading days prior to the conversion date, but not lower than $0.50 per share (the “Floor
Price”). If the daily VWAP is less than $0.50 for a period of 10 consecutive trading days, the Company will make consecutive monthly
amortization payments in cash or Ordinary Shares during the term of the Convertible Note beginning on the 10th calendar day after the
date of the Triggering Event and continuing on the same calendar day of each successive calendar month until the Convertible Note is
fully repaid (each, a “Redemption Date”) or a Triggering Event ceases. The Company has the right, but not the obligation,
to redeem early a portion or all amounts outstanding under the Convertible Note, provided that (i) the trading price of Ordinary Shares
is less than the fixed conversion price ($2.69) and (ii) the Company provides the holder of the Convertible Note with at least 10 business
days’ prior written notice. On February 9, 2021, the Company issued to YA 255,236 Ordinary Shares after the receipt of a conversion
notice dated February 7, 2021 for the conversion of the outstanding and unpaid debenture and accrued interest in the amount of $504,041.10
at a conversion price of $1.9748.
On November 20, 2020, the Company issued
$500,000 of convertible promissory notes (“convertible note #1”), which shall be convertible into ordinary shares of the
Company, par value $0.0001 per share, for a purchase price of $485,000. The Convertible Note has an annual interest rate of 5% and a
term of 12 months from the date of closing, and is convertible into our Ordinary Shares at the lower of (a) $2.69 per share or (b) 88.0%
of the lowest daily VWAP during the 10 trading days prior to the conversion date, but not lower than $0.50 per share (the “Floor
Price”). If the daily VWAP is less than $0.50 for a period of 10 consecutive trading days, the Company will make consecutive monthly
amortization payments in cash or Ordinary Shares during the term of the Convertible Note beginning on the 10th calendar day after the
date of the Triggering Event and continuing on the same calendar day of each successive calendar month until the Convertible Note is
fully repaid (each, a “Redemption Date”) or a Triggering Event ceases. The Company has the right, but not the obligation,
to redeem early a portion or all amounts outstanding under the Convertible Note, provided that (i) the trading price of Ordinary Shares
is less than the fixed conversion price ($2.69) and (ii) the Company provides the holder of the Convertible Note with at least 10 business
days’ prior written notice. On February 16, 2021, the Company issued to YA 256,103 Ordinary Shares after the receipt of a conversion
notice dated February 11, 2021 for the conversion of the outstanding and unpaid debenture and accrued interest in the amount of $505,753.42
at a conversion price of $1.9748.
The embedded conversion feature of the above 6 promissory notes was required recognition within equity on the commitment date. As such,
the Company recorded $5,155,305 and $1,841,673 within additional paid-in-capital on the consolidated statement of financial position as
of March 31, 2022 and 2021, respectively. The debt discount will be amortized as interest expense over the term of the convertible debt. During the years ended
March 31, 2022 and 2021, the Company recognized $1,939,490 and $1,606,888, respectively, of interest expense related to the amortization
of debt discount and issuance costs prior to capitalization of interest.
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Supply chain management platform service fee | |
| 2,032,916 | | |
| 225,749 | | |
| 11,252 | |
Fair value change of proprietary trading digital assets | |
| 122,711 | | |
| — | | |
| — | |
Total revenue | |
| 2,155,627 | | |
| 225,749 | | |
| 11,252 | |
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Cost for supply chain management platform service | |
| 334,822 | | |
| — | | |
| — | |
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Marketing and promotional expenditures | |
| 4,476,056 | | |
| 3,343,935 | | |
| — | |
| 18 | General
and administrative |
The following items have been included
in arriving at general and administrative:
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
(Restated) |
|
|
(Restated) |
|
Professional fees |
|
|
816,406 |
|
|
|
168,862 |
|
|
|
457,764 |
|
Wages and benefits |
|
|
876,512 |
|
|
|
438,259 |
|
|
|
576,995 |
|
Travel expenses |
|
|
52,520 |
|
|
|
23,539 |
|
|
|
51,727 |
|
Depreciation of property, plant and equipment |
|
|
64,977 |
|
|
|
76,509 |
|
|
|
86,406 |
|
Depreciation of right of use assets |
|
|
90,327 |
|
|
|
52,745 |
|
|
|
36,465 |
|
Business taxes and surcharges |
|
|
— |
|
|
|
13,400 |
|
|
|
3,956 |
|
Meals and entertainment |
|
|
13,299 |
|
|
|
9,964 |
|
|
|
34,312 |
|
Share-based compensation |
|
|
1,468,800 |
|
|
|
— |
|
|
|
— |
|
Office expenses |
|
|
120,854 |
|
|
|
— |
|
|
|
— |
|
Insurance costs |
|
|
260,213 |
|
|
|
— |
|
|
|
— |
|
Provision for doubtful debt |
|
|
— |
|
|
|
— |
|
|
|
880,795 |
|
Loss on termination of lease |
|
|
— |
|
|
|
10,952 |
|
|
|
— |
|
Other |
|
|
54,622 |
|
|
|
15,148 |
|
|
|
1,822 |
|
|
|
|
3,818,530 |
|
|
|
809,378 |
|
|
|
2,130,242 |
|
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Interest income | |
| 208,326 | | |
| 413,691 | | |
| 667,898 | |
Finance income | |
| 208,326 | | |
| 413,691 | | |
| 667,898 | |
| |
| | | |
| | | |
| | |
Interest expense | |
| (1,955,969 | ) | |
| (1,606,887 | ) | |
| (3 | ) |
Lease expense | |
| (11,550 | ) | |
| (6,127 | ) | |
| (2,622 | ) |
Finance cost | |
| (1,967,519 | ) | |
| (1,613,014 | ) | |
| (2,625 | ) |
Net finance cost | |
| (1,759,193 | ) | |
| (1,199,323 | ) | |
| 665,273 | |
The Company is formed in Cayman Islands
and is not subject to tax on its income or capital gains. In addition, upon payments of dividends by the Company to its shareholders,
no Cayman Islands withholding tax is imposed.
The Company’s subsidiary formed
in British Virgin Island is not subject to tax on its income or capital gains. In addition, upon payments of dividends by the Company
to its shareholders, no British Virgin Island withholding tax is imposed.
The Company’s subsidiary formed
in Hong Kong is subject to the profits tax rate at 16.5% for income generated and operation in the special administrative region.
The Company’s subsidiaries incorporated
in the PRC are subject to profits tax rate at 25% for income generated and operation in the country.
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
(Restated) |
|
|
(Restated) |
|
Tax recognised in profit or loss |
|
|
|
|
|
|
|
|
|
Current tax expense |
|
|
|
|
|
|
|
|
|
Current year |
|
|
8,061 |
|
|
|
— |
|
|
|
27,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of effective tax rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
|
(8,356,886 |
) |
|
|
(5,210,719 |
) |
|
|
(1,459,093 |
) |
Tax calculated at domestic tax rates applicable to profits in PRC (2022, 2021, and 2020: 25%) |
|
|
(2,089,222 |
) |
|
|
(1,302,680 |
) |
|
|
(364,773 |
) |
Effect of tax rates in foreign jurisdiction |
|
|
1,208,859 |
|
|
|
577,052 |
|
|
|
99,425 |
|
Tax effect of tax loss not recognized |
|
|
888,424 |
|
|
|
725,628 |
|
|
|
292,761 |
|
Income tax expense |
|
|
8,061 |
|
|
|
— |
|
|
|
27,413 |
|
The full realization of the tax benefit
associated with the carry forward depends predominantly upon the Company’s ability to generate taxable income during the carry
forward period.
The Company’s subsidiaries incorporated
in the PRC has unused net operating losses available for carry forward to future years for PRC income tax reporting purposes up to five
years. No deferred tax asset has been recognized in respect of these tax losses due to the unpredictability of future profit streams.
Acquisition of Hangzhou Xu Zhihang
On March 30, 2022, Dacheng Liantong, a variable interest entity and deemed subsidiary of the Company
entered into an equity transfer agreement with two independent parties (“the seller”), being the shareholders
of Hangzhou Xu Zhihang, to acquire 60% of equity interest in Hangzhou
Xu Zhihang from the seller at a cash consideration of RMB600,000 (approximately US$94,647). After completion of transaction, Hangzhou
Xu Zhihang became a 60%-owned subsidiary of the group.
The consideration transferred together with the
fair value of each class of recognised assets and liabilities of the acquirees at the date of acquisition and the resulting goodwill are
set out below.
| |
US$ | |
| |
| |
Total purchase price (60% of equity interest) | |
$ | 94,647 | |
| |
| | |
Cash and Bank Balances | |
| 2,189 | |
Trade and other receivables | |
| 156,006 | |
Property and equipment, net | |
| 12,672 | |
Total identifiable assets | |
| 170,867 | |
| |
| | |
Total liabilities assumed | |
| (144,719 | ) |
Non-controlling interest identified | |
| 10,459 | |
Goodwill | |
| 78,958 | |
The fair value of assets acquired and liabilities assumed approximately
the gross contractual amounts.
An analysis of the cash flows in respect of the acquisition is as follows:
| |
US$ | |
| |
| |
Purchase consideration | |
$ | (94,647 | ) |
| |
| | |
Cash and Bank Balances | |
| 2,189 | |
| |
| | |
Net cash outflow | |
| (92,458 | ) |
| 22 | Financial
risk management |
Exposure to credit risk, foreign currency
risks, price risk, fair value and liquidity arises in the normal course of the Company’s business. The Company has formal risk management
policies and guidelines that set out its overall business strategies, its tolerance of risk and general risk management philosophy and
has established processes to monitor and control its exposure to such risks in a timely manner. The Company reviews its risk management
processes regularly to ensure the Company’s policy guidelines are adhered to.
The Group’s maximum exposure
to credit risk in the event that counterparties fail to perform their obligations in relation to each class of recognized financial assets
is the carrying amounts of those assets as stated in the consolidated statement of financial position. The Group’s credit risk is
primarily attributable to its loan receivables, deposits and other receivables, and cash and cash equivalents. In order to minimize credit
risk, the directors of the Group have delegated a team to be responsible for the determination of credit limits, credit approvals and
other monitoring procedures. In addition, the directors of the Group review the recoverable amount of each individual debt regularly to
ensure that adequate impairment losses are recognized for irrecoverable debts. The credit risk on cash and cash equivalents are limited
because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. In this regard, the directors
of the Group consider that the Group’s credit risk is significantly reduced.
The Group has no significant concentration
of credit risk, with exposure spread over a number of counterparties.
The Group considers whether there
has been a significant increase in credit risk of financial assets on an ongoing basis throughout each reporting period by comparing the
risk of a default occurring as at the reporting date with the risk of default as at the date of initial recognition. It considers available
reasonable and supportive forwarding-looking information. Especially the following information is used:
| ● | actual or expected significant adverse changes in business, financial
or economic conditions that are expected to cause a significant change to the counterparties’ ability to meet its obligations; |
| ● | actual or expected significant changes in the operating results of
the counterparties; |
| ● | significant changes in the expected performance and behaviour of the
counterparties, including changes in the payment status of counterparties. |
A significant increase in credit risk
is presumed if a debtor is more than 30 days past due in making a contractual payment. A default on a financial asset is when the counterparty
fails to make contractual payments within 90 days of when they fall due.
Financial assets are written off when there is no reasonable expectation
of recovery, such as a customer failing to engage in a repayment plan with the Group. The Group normally categorises a loan or receivable
for write off when a debtor fails to make contractual payments greater than 365 days past due. Where loans or receivables have been written
off, the Group, if practicable and economical, continues to engage in enforcement activity to attempt to recover the receivable due.
The Group uses two categories for
non-trade receivables which reflect their credit risk and how the loan loss provision is determined for each of the categories. In calculating
the expected credit loss rates, the Group considers historical loss rates for each category and adjusts for forward looking data.
Category |
|
Definition |
|
Loss provision |
|
|
|
|
|
Performing |
|
Low risk of default and strong capacity to pay |
|
12 month expected losses |
|
|
|
|
|
Non-performing |
|
Significant increase in credit risk |
|
Lifetime expected losses |
General approach
ECLs are recognised in two stages. For
credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit
losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which
there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected
over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses
whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the
Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring
on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available
without undue cost or effort, including historical and forward-looking information.
The Group considers a financial asset
in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to
be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts
in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable
expectation of recovering the contractual cash flows.
Financial assets at amortised cost are
subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs.
Stage 1 – Financial instruments for which credit risk
has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month
ECLs
Stage 2 – Financial instruments for which credit risk
has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance
is measured at an amount equal to lifetime ECLs
Stage 3 – Financial assets that
are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance
is measured at an amount equal to lifetime ECLs
The directors of the Group concluded
that the expected credit losses as of March 31, 2022 and 2021 on loans receivable are insignificant.
The Company has minimal exposure to
foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in the functional currencies
of the Company entities.
As Hong Kong dollar is pegged to United
States dollar, the Company considers the risk of movements in exchange rates between Hong Kong dollars and United States dollars to be
insignificant.
The Company currently does not have
a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. The Company will monitor its foreign
currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.
Exposure
Digital assets that the Company deals with in its trading activities
are digital assets such as Bitcoin (“BTC”) and Ethereum (“ETH”) which can be traded in a number of public exchanges.
Company’s exposure to price risk arises from digital assets and
digital assets payables which are both measured on fair value basis (Note 9 and Note 13). In particular, the Company’s operating
result may depend upon the market price of BTC and ETH, as well as other digital assets. Digital asset prices have fluctuated significantly
from time to time. There is no assurance that digital asset prices will reflect historical trends.
The price risk of digital assets arising
from trading of digital assets business is partially offset by remeasurement of digital assets payables representing the obligations to
deliver digital assets held by the Company in the customers’ accounts to the customers under the respective trading and lending
arrangements with the Company.
Sensitivity
The Company’s held cryptocurrencies
amounting to US$8,438,027 (2021: Nil) as at 31 March 2022, mainly in the form of BTC and ETH.
The volatility and unpredictability of the price of cryptocurrencies relative to fiat currencies could cause impact to the Company’s
performance.
At March 31, 2022, if the prices of
digital assets held by the Company had increased/decreased by 7% (2021: Nil) (being a reasonably expected change determined based on average
monthly price movements and the Company’s balances in different types of digital assets) in the principal markets with other variables
held constant, the loss before income tax arising from changes in fair values of the assets and liabilities listed in the table below
would have been higher or lower by US$93,705 for the year.
Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair
value of an asset or a liability, the Company takes into account the characteristics of the asset or liability which market participants
would take into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes
in these financial statements is determined on such a basis.
In addition, for financial reporting
purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements
are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that the entity can access at the measurement date;
Level 2 inputs are inputs, other than
quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs
for the asset or liability.
The Company’s policy is to recognize
transfers into and transfers out of any of the three levels as of the date of the event or change in circumstances that caused the transfer.
(i) Disclosures of level in fair value hierarchy:
| |
Fair value measurements using | | |
| |
Description | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
As of March 31, 2022 | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Recurring fair value measurements: | |
| | |
| | |
| | |
| |
Digital assets | |
| - | | |
| 8,438,027 | | |
| - | | |
| 8,438,027 | |
| |
| | | |
| | | |
| | | |
| | |
Digital assets payables | |
| - | | |
| - | | |
| 6,200,109 | | |
| 6,200,109 | |
Share purchase warrants | |
| - | | |
| - | | |
| 6,063,086 | | |
| 6,063,086 | |
(ii) Reconciliation of liabilities measured at fair value based on level 3:
| |
Digital assets payables | |
| |
US$ | |
As of April 1, 2021 | |
| - | |
Acquired during the year | |
| 8,735,145 | |
Settlement by digital assets, for the year | |
| (2,533,106 | ) |
Fair value gains recognized in profit or loss | |
| (1,930 | ) |
As of March 31, 2022 | |
| 6,200,109 | |
| |
Share purchase warrants | |
| |
US$ | |
As of April 1, 2021 | |
| - | |
Issued | |
| 6,063,086 | |
As of March 31, 2022 | |
| 6,063,086 | |
(iii) Disclosures of valuation process used by the Company and valuation techniques and inputs used in fair value measurements at March 31, 2022 and 2021:
The directors of the Company are responsible
for the fair value measurements of assets and liabilities required for financial reporting purposes, including level 3 fair value measurements.
For
level 3 fair value measurements, the Company will normally engage external valuation experts with the recognised professional qualifications
and recent experience to perform the valuations.
The
Company’s digital assets payables and share purchase warrants are revalued at of March 31, 2022 by independent professional
qualified valuer, who has the recent experience in the categories of digital assets payables being valued.
Level 2 fair value measurements
|
|
|
|
Significant unobservable input |
|
Effect on fair |
|
|
|
|
As of
March 31, |
|
As of
March 31, |
|
value
for increase of |
Description |
|
Valuation techniques and key inputs |
|
2022 |
|
2021 |
|
inputs |
Digital assets |
|
The digital asset is quoted in unit of BTC. Price of the digital assets at level 2 fair value is referenced to quoted price of BTC. |
|
Quoted price of BTC |
|
- |
|
Increase proportionately |
Key
unobservable inputs used in level 3 fair value measurements are mainly:
|
|
|
|
Significant |
|
Range |
|
Effect
on fair
value |
|
|
Valuation |
|
unobservable |
|
As
of March 31, |
|
for
increase of |
Description |
|
techniques |
|
inputs |
|
2022 |
|
2021 |
|
inputs |
|
|
|
|
|
|
|
|
|
|
|
Digital assets payables |
|
Binomial Option Pricing Model |
|
Discount rate |
|
-0.40% to 4.26% |
|
- |
|
Decrease |
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Pricing Model |
|
Expected volatility |
|
37.56% |
|
- |
|
Increase |
Please
refer to note 11 (ii) for the key unobservable
inputs used in valuation of share purchase warrants.
There
were no transfers between levels 2 and 3 for recurring fair value measurements during the year ended March 31, 2022 (2021:
Nil).
During the year ended March 31, 2022,
there were no changes in the valuation techniques used (2021: Nil).
The directors of the Company consider
that the carrying amounts of Company’s financial assets and financial liabilities approximate their respective fair values due
to the relatively short-term maturity of these financial instruments.
The fair values of the Company’s
lease liabilities are determined by using the discounted cash flows method using discount rate that reflects the issuer’s borrowing
rate as at the end of the reporting period. The own non-performance risk as at March 31, 2022 and 2021 was assessed to be insignificant.
The fair values of other classes of
financial assets and liabilities (except for convertible notes which is disclosed in note 14 to the financial statements) are disclosed
in the respective notes to financial statements.
(e) Liquidity
risk
Liquidity risk is the risk that the
Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash
or another financial asset.
The Company monitors its liquidity
risk and maintains a level of cash and bank balances deemed adequate by management to finance the Company’s operations and to mitigate
the effects of fluctuations in cash flows.
The following are the contractual undiscounted
cash outflows of non-derivative financial liabilities:
| |
Within 1 year | | |
Over 1
year | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | |
2022 | |
| | |
| | |
| |
Non-derivative financial liabilities | |
| | |
| | |
| |
Other payables* | |
| 1,471,844 | | |
| - | | |
| 1,471,844 | |
Lease liabilities | |
| 120,592 | | |
| 274,952 | | |
| 395,544 | |
| |
| 1,592,436 | | |
| 274,952 | | |
| 1,867,388 | |
| |
| | | |
| | | |
| | |
2021 | |
| | | |
| | | |
| | |
Non-derivative financial liabilities | |
| | | |
| | | |
| | |
Other payables* | |
| 1,005,511 | | |
| - | | |
| 1,005,511 | |
Lease liabilities | |
| 39,652 | | |
| - | | |
| 39,652 | |
| |
| 1,045,163 | | |
| - | | |
| 1,045,163 | |
(f)
Capital management
The Company’s
primary objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order to
provide returns for shareholders and benefits for other stakeholders and to maintain or adjust the capital structure to reduce the cost
of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders,
return capital to shareholders and issue new shares. The Company’s overall strategy remains unchanged from prior year.
Consistent with others in the industry,
the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total liabilities divided by total assets. The
gearing ratio as at March 31, 2022 was 42% (2021: 45%).
The business plans of the Group mainly
depend on maintaining sufficient funding to meet its expenditure requirements. The Group currently relies on funding from a variety of
sources including equity financing.
In response to the above, the Group
regularly reviews its major funding positions to ensure that it has adequate financial resources in meeting its financial obligations
and relevant regulatory requirements of the group entities and seek to diversify its funding sources as appropriate
Operating segments are identified on
the basis of internal reports about components of the Group that are regularly reviewed by the CODM (“Chief Operating Decision Maker”)
for the purpose of resource allocation and performance assessment.
Segment results, assets and liabilities
include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
The following provides the results
of operations and the financial position of the Company’s operating segments as of and during the year ended March 31, 2022. The
Longyun operating segment reflects the Company’s crowdfunding and incubation business. The Dacheng Liantong operating segment reflects
the Company’s business of platform services. The Metalpha operating segment reflects the Company’s business of proprietary
trading of digital assets.
Results of Operations
For the year ended March 31, 2022
| |
Metalpha | | |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Revenue | |
| 122,711 | | |
| - | | |
| 2,032,916 | | |
| - | | |
| 2,155,627 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| (75,785 | ) | |
| (2,835,845 | ) | |
| (2,292,667 | ) | |
| (3,425,111 | ) | |
| (8,629,408 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| 1,930 | | |
| (1,945,939 | ) | |
| 1,393 | | |
| (6,003,575 | ) | |
| (7,946,191 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Profit/(loss) before tax | |
| 48,856 | | |
| (4,781,784 | ) | |
| 76,464 | | |
| (9,763,508 | ) | |
| (14,419,972 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Taxes | |
| (8,061 | ) | |
| - | | |
| - | | |
| - | | |
| (8,061 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| 40,795 | | |
| (4,781,784 | ) | |
| 76,464 | | |
| (9,763,508 | ) | |
| (14,428,033 | ) |
Financial position
As of March 31, 2022
| |
Metalpha | | |
Longyun | | |
Dacheng
Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Current assets | |
| 8,438,027 | | |
| 4,644,940 | | |
| 5,409,384 | | |
| 5,133,929 | | |
| 23,626,280 | |
Non-current assets | |
| - | | |
| 35,874 | | |
| 213,844 | | |
| 462,741 | | |
| 712,459 | |
Total assets | |
| 8,438,027 | | |
| 4,680,814 | | |
| 5,623,228 | | |
| 5,596,670 | | |
| 24,338,739 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (6,434,996 | ) | |
| (557,619 | ) | |
| (464,803 | ) | |
| (2,574,109 | ) | |
| (10,031,527 | ) |
Non-current liabilities | |
| - | | |
| - | | |
| (105,540 | ) | |
| - | | |
| (105,540 | ) |
Total liabilities | |
| (6,434,996 | ) | |
| (557,619 | ) | |
| (570,343 | ) | |
| (2,574,109 | ) | |
| (10,137,067 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net assets | |
| 2,003,031 | | |
| 4,123,195 | | |
| 5,052,885 | | |
| 3,022,561 | | |
| 14,201,672 | |
The following provides the results of operations
and the financial position of the Company’s operating segments as of and during the year ended March 31, 2021. The Longyun operating
segment reflects the Company’s crowdfunding and incubation business. The Dacheng Liantong operating segment reflects the Company’s
business of platform services.
Results of operations
For the year ended March 31, 2021
(Restated)
| |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Revenue | |
| - | | |
| 225,749 | | |
| - | | |
| 225,749 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| (3,026,631 | ) | |
| (389,672 | ) | |
| (737,010 | ) | |
| (4,153,313 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| 343,839 | | |
| 15,403 | | |
| (1,642,397 | ) | |
| (1,283,155 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss before tax | |
| (2,682,792 | ) | |
| (148,520 | ) | |
| (2,379,407 | ) | |
| (5,210,719 | ) |
| |
| | | |
| | | |
| | | |
| | |
Taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (2,682,792 | ) | |
| (148,520 | ) | |
| (2,379,407 | ) | |
| (5,210,719 | ) |
Financial position
As of March 31, 2021 (Restated)
| |
Longyun | | |
Dacheng Liantong | | |
Other | | |
Total | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
Current assets | |
| 8,248,675 | | |
| 1,973,297 | | |
| 5,306,793 | | |
| 15,528,765 | |
Non-current assets | |
| 62,287 | | |
| 1,283 | | |
| 37,665 | | |
| 101,235 | |
Total assets | |
| 8,310,962 | | |
| 1,974,580 | | |
| 5,344,458 | | |
| 15,630,000 | |
| |
| | | |
| | | |
| | | |
| | |
Current liabilities | |
| (4,549,369 | ) | |
| (2,289,621 | ) | |
| (230,192 | ) | |
| (7,069,182 | ) |
Non-current liabilities | |
| (9,837 | ) | |
| - | | |
| - | | |
| (9,837 | ) |
Total liabilities | |
| (4,559,206 | ) | |
| (2,289,621 | ) | |
| (230,192 | ) | |
| (7,079,019 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net assets/(liabilities) | |
| 3,751,756 | | |
| (315,041 | ) | |
| 5,114,266 | | |
| 8,550,981 | |
Geographical information
Revenue
| |
2022 | | |
2021 | | |
2020 | |
| |
| US$ | | |
| US$ | | |
| US$ | |
Others | |
| 122,711 | | |
| — | | |
| — | |
PRC | |
| 2,032,916 | | |
| 225,749 | | |
| 11,252 | |
| |
| 2,155,627 | | |
| 225,749 | | |
| 11,252 | |
The revenue information of continuing
operations above is based on the location of the customers’ country of incorporation.
Non-current assets
All non-current assets of the Group above are based in PRC.
Major customers
As of March 31, 2022 and 2021, there
was no concentration in the Company’s gross accounts receivables. For the year ended March 31, 2022 and 2021, there was no concentration
in the Company’s revenues.
|
24 |
Loss per share attributable to equity holders of the Company |
The basic loss per share is calculated
as the loss for the year attributable to equity holders of the Company divided by the weighted average number of ordinary shares of the
Company in issue during the year.
The diluted loss per share is calculated
as the loss for the year attributable to equity holders of the Company divided by the weighted average number of ordinary shares used
in the calculation which is the weighted average number of ordinary shares in issue plus the number of shares held under the share purchase
warrants (2021: Nil).
The Company had no potentially dilutive
ordinary shares in issue during the year.
| |
For the year ended March 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
(Restated) | | |
(Restated) | |
Basic Loss Per Share Numerator | |
| | |
| | |
| |
| |
| | |
| | |
| |
Loss for the year attributable to owners of the Company | |
$ | (14,419,972 | ) | |
$ | (5,146,810 | ) | |
$ | (1,419,299 | ) |
| |
| | | |
| | | |
| | |
Diluted Loss Per Share Numerator | |
| | | |
| | | |
| | |
Loss for the year attributable to owners of the Company | |
$ | (14,419,972 | ) | |
$ | (5,146,810 | ) | |
$ | (1,419,299 | ) |
| |
| | | |
| | | |
| | |
Basic Loss Per Share Denominator | |
| | | |
| | | |
| | |
Original shares: | |
| 11,650,205 | | |
| 11,421,393 | | |
| 11,421,393 | |
Additions from actual events: | |
| | | |
| | | |
| | |
- Issuance of common stock, weighted | |
| 6,649,104 | | |
| 228,812 | | |
| - | |
Basic weighted average shares outstanding | |
| 18,299,309 | | |
| 11,650,205 | | |
| 11,421,393 | |
| |
| | | |
| | | |
| | |
Diluted Loss Per Share Denominator | |
| | | |
| | | |
| | |
Diluted Weighted Average Shares Outstanding: | |
| 18,299,309 | | |
| 11,650,205 | | |
| 11,421,393 | |
| |
| | | |
| | | |
| | |
Loss Per Share | |
| | | |
| | | |
| | |
- Basic and diluted | |
$ | (0.79 | ) | |
$ | (0.44 | ) | |
$ | (0.12 | ) |
Weighted Average Shares Outstanding | |
| | | |
| | | |
| | |
- Basic and diluted | |
| 18,299,309 | | |
| 11,650,205 | | |
| 11,421,393 | |
For the years ended March 31, 2022, the Group had 14,300,000 share purchase warrants outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted loss per share in the year presented, as their effects would have been anti-dilutive.
The accounting policies set out in
Note 2 have been consistently applied in preparing the consolidated financial statements as at March 31, 2021 and for the year ended
March 31, 2021 and in the preparation of an opening IFRS statement of financial position at April 1, 2020 (“Transition Date”).
In preparing its opening and comparative
IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance
with U.S. GAAP (“U.S. GAAP”). Explanations of how the transition from U.S. GAAP to IFRS has affected the Company’s
equity and its comprehensive income (loss) are set out in the following reconciliations and the notes that accompany them.
The changes made to the consolidated
statements of income (loss), comprehensive income (loss) and the consolidated statements of financial position have resulted in reclassification
of various amounts on the statements of cash flows, however as there have been no changes to the net cash flows, no reconciliations have
been prepared.
Pursuant to IFRS 1, the Company has
applied IFRS on a retrospective basis, subject to the following relevant mandatory exceptions and voluntary exemptions to retrospective
application of IFRS.
The Company has applied the following
mandatory exceptions in its first IFRS financial statements:
Estimates
In accordance with IFRS 1, an entity’s
estimates under IFRS at the date of transition to IFRS must be consistent with estimates made for the same date under previous GAAP unless
there is objective evidence that those estimates were made in error. The Company’s IFRS estimates as at the Transition Date are
consistent with its U.S. GAAP estimates as at that date.
In accordance with IFRS 1, the Company
has applied the following voluntary exemptions in the conversion from U.S. GAAP to IFRS:
Business combinations
IFRS 1 indicates that a first-time
adopter may elect not to apply IFRS 3 Business Combinations retrospectively to business combinations that occurred before the date of
transition to IFRS. The Company has elected to apply IFRS 3 to only those business combinations that occurred on or after the Transition
Date and such business combinations have not been restated. As a result of this election, no adjustments were required to the Company’s
consolidated statement of financial position as at the Transition Date.
The Company has not elected to adopt
the remaining voluntary exemptions under IFRS 1 or has determined that they do not apply to the Company.
In addition, the Company adopted IFRS
9 effective April 1, 2020.
Reconciliation of equity as of April
1, 2020, the date of transition to IFRS
Accounts under GAAP | |
GAAP | | |
Reclassifications | | |
Differences in recognition and measurement | | |
IFRS | | |
Notes | | |
Accounts under IFRS |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Current assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
Current assets |
Short-term investments | |
| 5,587,984 | | |
| (5,587,984 | ) | |
| | | |
| | | |
| | | |
|
Short-term investments – related party | |
| 3,378,706 | | |
| (3,378,706 | ) | |
| | | |
| | | |
| | | |
|
| |
| | | |
| 8,966,690 | | |
| | | |
| 8,966,690 | | |
| | | |
Loan receivables |
Non-current assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
Non-current assets |
Right of use assets | |
| 63,343 | | |
| | | |
| (2,399 | ) | |
| 60,944 | | |
| | | |
Right of use assets |
Current liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
Current liabilities |
Accounts payable | |
| 14,337 | | |
| (14,337 | ) | |
| | | |
| | | |
| | | |
|
Accrued liabilities and other current liabilities | |
| 313,363 | | |
| (313,363 | ) | |
| | | |
| | | |
| | | |
|
Related party payable | |
| 403,690 | | |
| (403,690 | ) | |
| | | |
| | | |
| | | |
|
| |
| | | |
| 731,390 | | |
| | | |
| 731,390 | | |
| | | |
Accounts and other payables |
Right of use liabilities | |
| 63,343 | | |
| | | |
| 183 | | |
| 63,526 | | |
| | | |
Lease liabilities |
Stockholders’ Equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
Stockholders’ Equity |
Accumulated Deficit | |
| (753,022 | ) | |
| | | |
| (2,582 | ) | |
| (755,604 | ) | |
| | | |
Accumulated Deficit |
Reconciliation of equity as of March
31, 2021
Accounts under GAAP |
|
GAAP |
|
|
Reclassifications |
|
|
Differences in
recognition
and
measurement |
|
|
IFRS |
|
|
Accounts under IFRS |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
Short-term investments |
|
|
5,073,548 |
|
|
|
(5,073,548 |
) |
|
|
|
|
|
|
|
|
|
|
Short-term investments – related party |
|
|
3,959,831 |
|
|
|
(3,959,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,033,379 |
|
|
|
|
|
|
|
9,033,379 |
|
|
Loan receivables |
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
Right of use assets |
|
|
49,104 |
|
|
|
|
|
|
|
(2,806 |
) |
|
|
46,298 |
|
|
Right of use assets |
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
Accounts payable |
|
|
22,144 |
|
|
|
(22,144 |
) |
|
|
|
|
|
|
|
|
|
|
Accrued liabilities and other current liabilities |
|
|
334,996 |
|
|
|
(334,996 |
) |
|
|
|
|
|
|
|
|
|
|
Related party payable |
|
|
688,371 |
|
|
|
(688,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,045,511 |
|
|
|
|
|
|
|
1,045,511 |
|
|
Accounts and other payables |
Right of use liabilities |
|
|
29,739 |
|
|
|
|
|
|
|
(1,423 |
) |
|
|
28,316 |
|
|
Lease liabilities |
Right of use liabilities – non-current portion |
|
|
9,913 |
|
|
|
|
|
|
|
(76 |
) |
|
|
9,837 |
|
|
Lease liabilities – non-current portion |
Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity |
Accumulated Deficit |
|
|
(5,901,107 |
) |
|
|
|
|
|
|
(1,307 |
) |
|
|
(5,902,414 |
) |
|
Accumulated Deficit |
Reconciliation of comprehensive loss
for the year ended March 31, 2020
| |
March 31, 2020 | | |
Differences in recognition and measurement | | |
IFRS | | |
Accounts under IFRS |
Selling, general and administrative | |
| 2,130,282 | | |
| (40 | ) | |
| 2,130,242 | | |
General and administrative |
| |
| | | |
| | | |
| | | |
|
Interest expense | |
| 3 | | |
| 2,622 | | |
| 2,625 | | |
Finance costs |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
Other comprehensive income (loss): |
Foreign currency translation income (loss) | |
| (482,466 | ) | |
| - | | |
| (482,466 | ) | |
Foreign currency translation income (loss) |
Reconciliation of comprehensive loss
for the year ended March 31, 2021
|
|
March 31, 2021 |
|
|
Reclassification |
|
|
Differences in recognition and measurement |
|
|
IFRS |
|
|
Accounts under IFRS |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
Selling, general and administrative |
|
|
4,160,716 |
|
|
|
(4,160,716 |
) |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
3,343,935 |
|
|
|
|
|
|
|
3,343,935 |
|
|
Selling and promotion |
|
|
|
|
|
|
|
816,781 |
|
|
|
(7,403 |
) |
|
|
809,378 |
|
|
General and administrative |
Interest expense |
|
|
1,606,887 |
|
|
|
|
|
|
|
6,127 |
|
|
|
1,613,014 |
|
|
Finance costs |
Notes to the reconciliations
Leases
Under U.S. GAAP, the Company adopted
ASC 842, Leases, using the modified retrospective transition approach, which applies the provisions of the new guidance at the effective
date without adjusting the comparative periods presented. Under IFRS, the Company is required to recognize ROU assets and lease liabilities
as at its Transition Date.
|
26 |
Related party balances and transactions |
Related parties’ relationships as follows:
Name |
|
Relationship |
Mr. Hongyu Zhang |
|
Shareholder; director of various subsidiaries |
HangZhou TianQi Network Technology Co. Ltd. |
|
Common control by legal representative and shareholder of Taikexi, Mr. Mangyue Sun |
Hangzhou Qianlu Information Technology Co. Ltd. |
|
Common control by Mr. Hongyu Zhang as of March 31, 2021 and April 1, 2020 |
Hangzhou Yuao Investment Management Partnership |
|
Common control by legal representative of Guanpeng |
Hangzhou Yuao Venture Capital Co., Ltd |
|
Common control by legal representative of Guanpeng |
Mr. Limin Liu |
|
Chief Executive Officer |
Guo Ronghong Business Factoring Shenzhen Co., Ltd. |
|
Common control by Mr. Hongyu Zhang as of March 31, 2021 |
Zhejiang Getai Curtain Wall Decoration Engineering Co., Ltd. |
|
Common control by Mr. Wei Wang |
Mangyue Sun |
|
Legal representative and shareholder of Taikexi |
Fang Qin |
|
Spouse of Mangyue Sun |
Antalpha Technologies Limited |
|
Non-controlling shareholder of a subsidiary of the Company |
Loan receivables – related parties consisted of the following:
| |
As of
March 31,
2022 | | |
As of
March 31,
2021 | | |
As of
April 1,
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Hangzhou Yuao Investment Management Partnership | |
| - | | |
| - | | |
| 1,328,613 | |
Hangzhou Yuao Venture Capital Co., Ltd | |
| 2,245,200 | | |
| 2,273,636 | | |
| 2,050,093 | |
Guo Ronghong Business Factoring Shenzhen Co., Ltd | |
| - | | |
| 1,845,428 | | |
| - | |
Total | |
| 2,245,200 | | |
| 4,119,064 | | |
| 3,378,706 | |
Other related parties’ payables consisted of the following:
| |
March 31, 2022 | | |
March 31, 2021 | | |
April 1, 2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Mr. Hongyu Zhang | |
| - | | |
| - | | |
| 8,100 | |
HangZhou TianQi Network Technology Co. Ltd. | |
| 46,696 | | |
| 45,169 | | |
| 41,766 | |
Hangzhou Qianlu Information Technology Co. Ltd. | |
| - | | |
| 25,247 | | |
| 353,824 | |
Mr. Limin Liu | |
| - | | |
| 610,352 | | |
| - | |
Zhejiang Getai Curtain Wall Decoration Engineering Co., Ltd. | |
| 205,070 | | |
| - | | |
| - | |
Mangyue Sun | |
| 23,662 | | |
| - | | |
| - | |
Fang Qin | |
| 47,324 | | |
| - | | |
| - | |
Hangzhou Yuao Investment Management Partnership | |
| - | | |
| 7,603 | | |
| - | |
Total | |
| 350,320 | | |
| 688,371 | | |
| 403,690 | |
Outstanding payables to Mr. Hongyu
Zhang, Hangzhou Qianlu Information Techonology Co. Ltd., Mr. Limin Liu, Zhejiang Getai Curtain Wall Decoration Engineering Co., Ltd.,
Mangyue Sun, and Fang Qin consist of working capital advances and borrowings.
Outstanding payable to HangZhou TianQi
Network Technology Co. Ltd. consists of rent owed.
All amounts are due on demand, non-interest
bearing and unsecured.
Related parties’ transactions are consisted of the following:
| |
For the year ended March 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
US$ | | |
US$ | | |
US$ | |
| |
| | |
(Restated) | | |
(Restated) | |
Interest income derived from: | |
| | |
| | |
| |
Hangzhou Yuao Investment Management Partnership | |
| - | | |
| 30,527 | | |
| 103,919 | |
Hangzhou Yuao Venture Capital Co., Ltd | |
| 80,294 | | |
| 97,945 | | |
| 77,745 | |
Guo Ronghong Business Factoring Shenzhen Co., Ltd | |
| - | | |
| 15,374 | | |
| - | |
Hangzhou Qianlu Information Technology Co. Ltd. | |
| - | | |
| 3,586 | | |
| - | |
| |
| 80,294 | | |
| 147,432 | | |
| 181,664 | |
Derivative products entered with Antalpha Technologies Limited | |
| 8,735,145 | | |
| - | | |
| - | |
Derivative products expired to Antalpha Technologies Limited | |
| 2,533,106 | | |
| - | | |
| - | |
Subsequent to the end of the reporting
period, the price of bitcoin and other cryptocurrencies experienced a significant downturn. Pursuant to IAS 2, the Company anticipates
a fair value loss may be recorded on its cryptocurrencies held according to the decrease in the market price of cryptocurrencies since April 2022.
On May 10, 2022, the Company granted
200,000 and 500,000 share purchase warrants to an employee of the Company and consultants, respectively. The share purchase warrants are
exercisable at the lower of (i) $1.50 per share or (ii) 88% of the lowest daily volume-weighted average price, for a period of five years.
On June 30, 2022, the Company implemented
its 2022 Performance Incentive Plan (the “Plan”).
The Plan and a form of Share Unit Award Agreement (the “Award Agreement”) have been approved by the Board of Directors of
the Company for use in connection with the grant of share units of the Company to be issued under the Plan. Under the Plan, an aggregate
of 3,300,000 ordinary shares of US$0.0001 par value each the ordinary shares of the Company are reserved for issuance for purposes of
the Plan, subject to adjustments as contemplated by the Plan. No ordinary shares have been issued under the Plan as of the date of this
financial statements.
On June 30, 2022, the Company entered
into a private placement agreement with certain investors, including directors and senior members of management of the Company. Pursuant
to the private placement agreement, each purchaser agrees to subscribe for and purchase, and the Company agrees to issue and sell, number
of ordinary shares of the Company of par value US$0.0001 per share and certain warrants, to purchase an aggregate number of ordinary shares
that equals twice the number of the subscription shares. The aggregate purchase price payable by all of the purchasers will be no more
than US$3,300,000. The subscription warrants are exercisable after vesting, in whole or in part, by the purchaser within a period of five
years. The vesting of the warrants will be conditioned on the attainment of the performance goals of the Company. As of the filing of
this financial statements, no subscription warrants have vested.
As of August 14, 2022, The aggregate notional amount of derivative products of Metalpha Limited issued is approximately US$198.30 million.
The aggregate value of the products issued to Antalpha Technologies Limited is approximately US$137.08 million.
F-47
International Financial Reporting Standards
0.12
0.44
0.79
The advances granted to related parties are unsecured (2021: unsecured), except for US$2,245,200 (2021: US$ 2,273,636) bearing a fixed interest rate at 5% (2021: 5%), no remaining loans bearing interest (2021: remaining loans bearing a fixed interest rate at 5.5%), and repayable within 12 months (2021: 12 months) from the year end date as of March 31, 2022.
The advances granted to independent third parties are unsecured (2021: unsecured), except for US$2,070,421 (2021: US$4,914,315) bearing a fixed interest rate at 5% (2021: 5%), the remaining loans being interest free (2021: Nil), and repayable within 12 months (2021: 12 months) from the year end date as of March 31, 2022.
excludes provisions
0.12
0.44
0.79
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