No. 200, Erduan, East Xiang Fu Road
No. 200, Erduan, East Xiang Fu Road
(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act.
Securities registered or to be registered
pursuant to Section 12(g) of the Act.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of June 30, 2020, the issuer had 45,188,648 ordinary shares
issued and outstanding.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. ☐ Yes ☒ No
Note – Checking the box above will
not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a)
of the Exchange Act.
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
Except as otherwise indicated by the context and for the purposes
of this report only, references in this report to:
In addition to historical information,
this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. We use words such as “believe,” “expect,” “anticipate,” “project,”
“target,” “plan,” “optimistic,” “intend,” “aim,” “will”
or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future
operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions,
intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect,
could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Potential risks and uncertainties include, among other things, the possibility that we may not be able to maintain or increase
our net revenues and profits due to our failure to anticipate market demand and develop new products, our failure to execute our
business expansion plan, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions, uncertainties
related to China’s legal system and economic, political and social events in China, a general economic downturn, a downturn
in the securities markets, and other risks and uncertainties which are generally set forth under Item 3 “Key information—D.
Risk Factors” and elsewhere in this report.
Readers are urged to carefully review and
consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise
interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects.
The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required
by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or
future events.
PART I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM
3. KEY INFORMATION
|
A.
|
Selected
Financial Data
|
The selected consolidated financial data
present the results for the five fiscal years ended and as of June 30, 2020, 2019, 2018, 2017, and 2016. Our historical results
do not necessarily indicate results expected for any future periods. The selected consolidated financial data below should be read
in conjunction with our consolidated financial statements and notes thereto, “Item 5. Operating and Financial Review and
Prospects” below, and the other information contained in this Form 20-F.
|
|
For the Years Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
865,705
|
|
|
$
|
401,814
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Sales
|
|
$
|
(508,462
|
)
|
|
$
|
(236,661
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross Profit
|
|
$
|
357,243
|
|
|
$
|
165,153
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net (Loss)/Income from Continuing Operations
|
|
$
|
(2,122,427
|
)
|
|
$
|
(932,863
|
)
|
|
$
|
(683,295
|
)
|
|
$
|
(2,200,106
|
)
|
|
$
|
6,856,682
|
|
Net Income/(Loss) from Discontinued Operations
|
|
$
|
-
|
|
|
$
|
28,488,305
|
|
|
$
|
(82,206,040
|
)
|
|
$
|
(26,227,138
|
)
|
|
$
|
(13,612,285
|
)
|
Net Income/(Loss)
|
|
$
|
(2,122,427
|
)
|
|
$
|
27,555,442
|
|
|
$
|
(82,889,335
|
)
|
|
$
|
(28,427,244
|
)
|
|
$
|
(6,755,603
|
)
|
Net Income/(Loss) Attributable to Urban Tea, Inc.’s Shareholders
|
|
$
|
(2,106,600
|
)
|
|
$
|
27,555,442
|
|
|
$
|
(82,889,335
|
)
|
|
$
|
(28,427,244
|
)
|
|
$
|
(6,755,603
|
)
|
Comprehensive Income/(Loss)
|
|
$
|
(2,157,027
|
)
|
|
$
|
27,253,220
|
|
|
$
|
(75,467,243
|
)
|
|
$
|
(30,309,130
|
)
|
|
$
|
(19,018,910
|
)
|
Earnings/(Loss) per share – basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
1.53
|
|
|
$
|
(7.11
|
)
|
|
$
|
(2.87
|
)
|
|
$
|
(1.46
|
)
|
Weighted average shares – basic and diluted
|
|
$
|
33,227,331
|
|
|
$
|
18,055,150
|
|
|
$
|
11,653,729
|
|
|
$
|
9,914,313
|
|
|
$
|
9,323,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (deficiency)
|
|
$
|
9,770,619
|
|
|
$
|
7,603,606
|
|
|
$
|
(69,888,669
|
)
|
|
$
|
(33,639,559
|
)
|
|
$
|
(10,379,902
|
)
|
Total assets
|
|
$
|
22,635,127
|
|
|
$
|
10,846,549
|
|
|
$
|
67,174,949
|
|
|
$
|
135,919,497
|
|
|
$
|
176,144,150
|
|
Total liabilities
|
|
$
|
2,035,931
|
|
|
$
|
1,694,682
|
|
|
$
|
89,982,235
|
|
|
$
|
120,307,846
|
|
|
$
|
132,642,058
|
|
Total Urban Tea, Inc.’s Shareholders’ equity (deficit)
|
|
$
|
14,939,607
|
|
|
$
|
9,151,867
|
|
|
$
|
(22,807,286
|
)
|
|
$
|
15,611,650
|
|
|
$
|
43,502,092
|
|
Noncontrolling interest
|
|
$
|
5,659,589
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
B.
|
Capitalization
and indebtedness.
|
Not applicable.
|
C.
|
Reasons
for the offer and use of proceeds.
|
Not applicable.
You should carefully consider the following
risk factors in addition to the other information included or incorporated by reference in this report, including matters addressed
in the section entitled “Forward-Looking Statements”. We caution you not to place undue reliance on the forward-looking
statements contained in this report, which speak only as of the date hereof.
The risks and uncertainties described below
include all of the material risks applicable to us; however they are not the only risks and uncertainties that we face. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks related to Our Business
We may not be able to successfully implement our growth
strategy on a timely basis or at all, which could harm our results of operations.
Our continued growth depends, in large
part, on our ability to open new stores and to operate those stores successfully.
Our ability to successfully open and operate
new stores depends on many factors, including:
|
●
|
Our ability to increase brand awareness in the PRC and the U.S. and to increase tea consumption in areas where we open stores;
|
|
●
|
the identification and availability of suitable sites for store locations, the availability of which is beyond our control;
|
|
●
|
the negotiation of acceptable lease terms;
|
|
●
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the maintenance of adequate distribution capacity, information systems and other operational system capabilities;
|
|
●
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integrating new managed and JV stores into our existing
stores;
|
|
●
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buying, distribution and other support operations;
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|
●
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the hiring, training and retention of store management and other qualified personnel;
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|
●
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assimilating new store employees into our corporate culture;
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|
●
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the effective sourcing and management of inventory to meet the needs of our stores on a timely basis;
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|
●
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the availability of sufficient levels of cash flow and financing to support our expansion; and
|
|
|
|
|
●
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the short-term and long-term effects of COVID-19 on the food services industry in both the PRC and the U.S.
|
Unavailability of attractive store locations,
delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to
capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of stores in new
market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, some of our new stores may
be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive
conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these
new stores to be less successful than stores in our existing markets. Other new stores may be located in areas where we have existing
stores. Although we have experience in these markets, increasing the number of locations in these markets may result in inadvertent
over-saturation of markets and temporarily or permanently divert customers and sales from our existing stores, thereby adversely
affecting our overall financial performance.
Accordingly, we cannot assure you that
we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will perform
as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth in sales
and profits that we expect, which would likely have an adverse impact on the price of our ordinary shares.
Our business largely depends on a
strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have limited
brand recognition, we may be unable to increase or maintain our level of sales.
We believe that our brand image and brand
awareness has contributed significantly to the success of our business. We also believe that maintaining and enhancing our brand
image, particularly in new markets where we have limited brand recognition, is important to maintaining and expanding our customer
base. Our ability to successfully integrate new stores into their surrounding communities, to expand into new markets or to maintain
the strength and distinctiveness of our brand in our existing markets will be adversely impacted if we fail to connect with our
target customers. Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising,
marketing, store operations, community relations, store graphics and employee training, which could adversely affect our cash flow
and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we fail to maintain high standards
for merchandise quality, if we fail to comply with local laws and regulations or if we experience negative publicity or other negative
events that affect our image and reputation. Some of these risks may be beyond our ability to control, such as the effects of negative
publicity regarding our suppliers. Failure to successfully market and maintain our brand image in new and existing markets could
harm our business, results of operations and financial condition.
Our limited operating experience
and limited brand recognition in other regions may limit our expansion strategy and cause our business and growth to suffer.
Our future growth depends, to a considerable
extent, on our expansion efforts outside of Hunan province and New York City into other regions of the PRC and the U.S. Our current
operations are based largely in the Hunan province and New York City. We have a limited number of customers and limited experience
in operating outside of Hunan and New York City. We also have limited experience with market practices outside of Hunan and New
York City and cannot guarantee that we will be able to penetrate or successfully operate in any market outside of Hunan and New
York City. We may also encounter difficulty expanding in other regions’ markets because of limited brand recognition. In
particular, we have no assurance that our marketing efforts will prove successful outside of the narrow geographic regions in which
they have been used. In addition, because tea consumption is greater in Hunan than some other regions of the PRC on a
per capita basis, we may encounter challenges in those regions in establishing consumer awareness and loyalty or interest in our
products and our brand to a different degree than in Hunan. The expansion into other regions may also present competitive, merchandising,
forecasting and distribution challenges that are different from or more severe than those we currently face. Failure to develop
new markets outside of Hunan and New York City or disappointing growth outside of Hunan and New York City may harm our business
and results of operations.
We face significant competition from
other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect us and our
growth plans.
The Chinese tea market is highly
fragmented. We compete directly with a large number of relatively small independently owned tea retailers and a number
of regional and national tea retailers, as well as retailers of grocery products, including loose-leaf tea and tea bags
and other beverages. We compete with these retailers on the basis of taste, quality and price of product offered, atmosphere, location,
customer service and overall customer experience. We must spend considerable resources to differentiate our customer experience.
Some of our competitors may have greater financial, marketing and operating resources than we do. Therefore, despite our efforts,
our competitors may be more successful than us in attracting customers. In addition, as we continue to drive growth in our category
in Hunan, our success, combined with relatively low barriers to entry, may encourage new competitors to enter the market. As we
continue to expand geographically, we expect to encounter additional regional and local competitors.
We plan to use primarily cash from
our prior offering as well as our operations to finance our growth strategy, and if we are unable to maintain sufficient levels
of cash flow we may not meet our growth expectations.
We intend to finance our growth through
the cash flows generated by our existing stores and the net proceeds from our previous and future financings. Our primary source
of financing for our growth will be cash from our prior offering as well as our operations. However, if our stores are not profitable
or if our store profits decline, we may not have the cash flow necessary in order to pursue or maintain our growth strategy. We
may also be unable to obtain any necessary financing on commercially reasonable terms to pursue or maintain our growth strategy.
If we are unable to pursue or maintain our growth strategy, the market price of our ordinary shares could decline and our results
of operations and profitability could suffer.
The planned addition of a significant
number of new stores each year will require us to continue to expand and improve our operations and could strain our operational,
managerial and administrative resources, which may adversely affect our business.
Our growth strategy calls for the opening
of a significant number of new stores each year and our continued expansion will place increased demands on our operational, managerial,
administrative and other resources, which may be inadequate to support our expansion. Our senior management team may be unable
to effectively address challenges involved with expansion forecasts for years ended on June 30, 2021 and 2022. Managing our growth
effectively will require us to continue to enhance our store management systems, financial and management controls and information
systems and to hire, train and retain regional directors, district managers, store managers and other personnel. Implementing new
systems, controls and procedures and these additions to our infrastructure and any changes to our existing operational, managerial,
administrative and other resources could negatively impact our results of operations and financial condition.
As we expand our store base we may
not experience the same increases in comparable sales or profitability that we have experienced in the past.
We may not be able to maintain the levels
of comparable sales that we have experienced historically. If our future comparable sales decline or fail to meet market expectations,
the price of our ordinary shares could decline. In addition, the aggregate results of operations of our stores have fluctuated
in the past and can be expected to continue to fluctuate in the future. A variety of factors affect comparable sales including
consumer tastes, competition, current economic conditions, pricing, inflation and weather conditions. These factors may cause our
comparable sales results to be materially lower than recent periods and our expectations, which could harm our results of operations
and result in a decline in the price of our ordinary shares.
Any decrease in customer traffic
in the shopping malls or other locations in which our stores are located could cause our sales to be less than expected.
Our stores are located in shopping malls,
other shopping centers and street locations. Sales at these stores are derived, to a significant degree, from the volume of customer
traffic in those locations and in the surrounding area. Our stores benefit from the current popularity of shopping malls and centers
as shopping destinations and their ability to generate customer traffic in the vicinity of our stores. Our sales volume and customer
traffic may be adversely affected by, among other things:
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●
|
economic downturns in the PRC or regionally;
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|
●
|
changes in consumer demographics;
|
|
●
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a decrease in popularity of shopping malls or centers in which a significant number of our stores are located;
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|
●
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the closing of a shopping mall’s or center’s “anchor” store or the stores of other key tenants; or
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|
●
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a deterioration in the financial condition of shopping mall and center operators or developers which could, for example, limit their ability to maintain and improve their facilities.
|
A reduction in customer traffic as a result
of these or any other factors could have a material adverse effect on us.
In addition, severe weather conditions
and other catastrophic occurrences in areas in which we have stores may have a material adverse effect on our results of operations.
Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic and closure of one
or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our financial condition
and results of operations.
If we are unable to attract, train,
assimilate and retain employees that embody our culture, including store personnel, store and district managers and regional directors,
we may not be able to grow or successfully operate our business.
Our success depends in part upon our ability
to attract, train, assimilate and retain a sufficient number of employees, including store managers, district managers and regional
directors, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with
our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service,
as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of tea beverages, light meals,
baked goods, tea accessories and other tea-related merchandise we offer, our ability to open new stores may be impaired,
the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted.
In addition, the rate of employee turnover in the retail industry is typically high and finding qualified candidates to fill positions
may be difficult. Our planned growth will require us to attract, train and assimilate even more personnel. Any failure to meet
our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business
or results of operations. We also rely on temporary or seasonal personnel to staff our stores and distribution centers, especially
during Chinese New Year. We cannot guarantee that we will be able to find adequate temporary or seasonal personnel to staff our
operations when needed, which may strain our existing personnel and negatively impact our operations.
Because our business is highly concentrated
on a single, discretionary product category, which includes tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise, we are vulnerable to changes in consumer preferences and in economic conditions affecting
disposable income that could harm our financial results.
Our business is not diversified and consists
primarily of developing, sourcing, producing, marketing and selling tea beverages, light meals, baked goods and tea-related
gifts and accessories. Consumer preferences often change rapidly and without warning, moving from one trend to another among many
retail concepts. Therefore, our business is substantially dependent on our ability to educate consumers on the many positive attributes
of tea and anticipate shifts in consumer tastes. Any future shifts in consumer preferences away from the consumption
of tea beverages would also have a material adverse effect on our results of operations. In particular, there has been an increasing
focus on health and wellness by consumers, which we believe has increased demand for products, such as our teas, that are perceived
to be healthier than other beverage alternatives. If such consumer preference trends change, or if our teas are not perceived to
be healthier than other beverage alternatives, our financial results could be adversely affected.
Consumer purchases of specialty retail
products, including our products, are historically affected by economic conditions such as changes in employment, salary and wage
levels, the availability of consumer credit, inflation, interest rates, tax rates, fuel prices and the level of consumer confidence
in prevailing and future economic conditions. These discretionary consumer purchases may decline during recessionary periods or
at other times when disposable income is lower. Our financial performance may become susceptible to economic and other conditions
in regions or states where we have a significant number of stores. Our continued success will depend, in part, on our ability to
anticipate, identify and respond quickly to changing consumer preferences and economic conditions.
Our success depends, in part, on
our ability to source, develop and market new varieties of teas and tea blends, tea accessories and other tea-related
merchandise that meet our high standards and customer preferences.
We currently offer approximately 30 varieties
of tea beverages, including 10 to 15 new teas and tea blends each year, and a wide assortment of light meals, baked
goods, tea accessories and other tea-related merchandise. Our success depends in part on our ability to continually innovate,
develop, source and market new varieties of tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise that both meet our standards for quality and appeal to customers’ preferences. Failure to innovate, develop,
source and market new varieties of tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise that consumers want to buy could lead to a decrease in our sales and profitability.
We may experience negative effects
to our brand and reputation from real or perceived quality or safety issues with our tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise, which could have an adverse effect on our operating results.
We believe our customers rely on us to
provide them with high-quality tea beverages, light meals, baked goods, tea accessories and other tea-related merchandise.
Concerns regarding the safety of our tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise or the safety and quality of our supply chain could cause consumers to avoid purchasing certain products from us or
to seek alternative sources of tea, even if the basis for the concern has been addressed or is outside of our control. Adverse
publicity about these concerns, whether or not ultimately based on fact, and whether or not involving tea beverages, light meals,
baked goods, tea accessories and other tea-related merchandise sold at our stores, could discourage consumers from
buying our tea beverages, light meals, baked goods, tea accessories and other tea-related merchandise and have an
adverse effect on our brand, reputation and operating results.
Furthermore, the sale of tea beverages,
light meals, baked goods, tea accessories and other tea-related merchandise entails a risk of product liability
claims and the resulting negative publicity. For example, tea supplied to us may contain contaminants that, if not detected
by us, could result in illness or death upon their consumption. Similarly, light meals, baked goods, tea accessories and other tea-related
merchandise could contain contaminants or contain design or manufacturing defects that could result in illness, injury or death.
We cannot assure you that product liability claims will not be asserted against us or that we will not be obligated to perform
product recalls in the future.
Any loss of confidence on the part of our
customers in the safety and quality of our tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise would be difficult and costly to overcome. Any such adverse effect could be exacerbated by our position in the market
as a purveyor of quality tea beverages, light meals, baked goods, tea accessories and other tea-related merchandise
and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories or other tea-related
merchandise sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.
Use of social media may adversely
impact our reputation or subject us to fines or other penalties.
There has been a substantial increase in
the use of social media platforms and similar devices, including blogs, social media websites, and other forms of Internet-based
communications, which allow individuals access to a broad audience of consumers and other interested persons. As laws and regulations
rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our
direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely affect our reputation
or subject us to fines or other penalties.
Consumers value readily available information
concerning retailers and their goods and services and often act on such information without further investigation and without regard
to its accuracy. Information concerning us may be posted on social media platforms and similar devices by unaffiliated third parties,
whether seeking to pass themselves off as us or not, at any time, which may be adverse to our reputation or business. The harm
may be immediate without affording us an opportunity for redress or correction.
While we do not rely on a limited
number of third-party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient
quantities.
We do not rely on a limited number of vendors
to supply us with our raw materials on a continuous basis. However, our financial performance depends in large part on our ability
to purchase tea in sufficient quantities at competitive prices from vendors. In general, we do not have long-term purchase
contracts or other contractual assurances of continued supply, pricing or exclusive access to products from these vendors.
Any of our suppliers or manufacturers could
discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we currently experience from
our supplier and manufacturer relationships could be adversely affected if they:
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raise the prices they charge us;
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discontinue selling products to us;
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sell similar or identical products to our competitors; or
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enter into arrangements with competitors that could impair our ability to sell our suppliers’ and manufacturers’ products, including by giving our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our access to such arrangements or blends. Events that adversely affect our vendors could impair our ability to obtain inventory in the quantities and at the quality that we desire. Such events include difficulties or problems with our vendors’ businesses, finances, labor relations, ability to import raw materials, costs, production, insurance and reputation, as well as natural disasters or other catastrophic occurrences.
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More generally, if we experience significant
increased demand for our teas, tea accessories and other tea-related merchandise, or need to replace an existing
vendor, there can be no assurance that additional supplies or additional manufacturing capacity will be available when required
on terms that are acceptable to us, or at all, or that any vendor would allocate sufficient capacity to us in order to meet our
requirements, fill our orders in a timely manner or meet our strict quality requirements. In the event we are required to find
new sources of supply, we may encounter delays in production, inconsistencies in quality and added costs as a result of the time
it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Any delays, interruption
or increased costs in the supply of raw materials could have an adverse effect on our ability to meet customer demand for our products
and result in lower sales and profitability both in the short and long term.
A shortage in the supply, a decrease
in the quality or an increase in the price of tea as a result of weather conditions, earthquakes, crop disease, pests
or other natural or manmade causes could impose significant costs and losses on our business.
The supply and price of tea is
subject to fluctuation, depending on demand and other factors outside of our control. The supply, quality and price of our teas
can be affected by multiple factors, including political and economic conditions, civil and labor unrest, adverse weather conditions,
including floods, drought and temperature extremes, earthquakes, tsunamis, and other natural disasters and related occurrences.
In extreme cases, entire tea harvests may be lost or may be negatively impacted in some geographic areas. These factors
can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial
condition.
Tea may be vulnerable to crop disease
and pests, which may vary in severity and effect. The costs to control disease and pest damage vary depending on the severity of
the damage and the extent of the plantings affected. Moreover, there can be no assurance that available technologies to control
such conditions will continue to be effective. These conditions can increase costs and decrease sales, which may have a material
adverse effect on our business, results of operations and financial condition.
Our success depends substantially
upon the continued retention of our senior management.
Our future success is substantially dependent
on the continued service of certain members of our senior management, including Long Yi, our President, Chief Executive Officer,
and Kan Lu, our Chief Financial Officer, Mr. Jun Jiang, our General Manager and David Su, our Vice President in Operation Department
of Hunan MYT. These officers play an integral role in determining our strategic direction and for executing our growth strategy
and are important to our brand, culture and the positive business reputation we enjoy with our customers and vendors. The loss
of the services of any of these executives without qualified replacement could have a material adverse effect on our business and
prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such
departure could be viewed negatively by investors and analysts, which could cause the price of our ordinary shares to decline.
We rely significantly on information
technology systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to operate
our business effectively.
We rely on our information technology systems
to effectively manage our business data, communications, point-of-sale, supply chain, order entry and fulfillment, inventory and
distribution centers and other business processes. The failure of our systems to perform as we anticipate could disrupt our business
and result in transaction errors, processing inefficiencies and the loss of sales, causing our business to suffer. Despite any
precautions we may take, our information technology systems may be vulnerable to damage or interruption from circumstances beyond
our control, including fire, natural disasters, systems failures, power outages, viruses, security breaches, cyber-attacks and
terrorism, including breaches of our transaction processing or other systems that could result in the compromise of confidential
company, customer or employee data. Any such damage or interruption could have a material adverse effect on our business, cause
us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require
us to expend significant time and expense developing, maintaining or upgrading our information technology systems or prevent us
from paying our vendors or employees, receiving payments from our customers or performing other information technology, administrative
or outsourcing services on a timely basis. Furthermore, our ability to conduct our website operations may be affected by changes
in foreign, state, provincial and federal privacy laws and we could incur significant costs in complying with the multitude of
foreign, state, provincial and federal laws regarding the unauthorized disclosure of personal information. Although we carry business
interruption insurance, our coverage may not be sufficient to compensate us for potentially significant losses in connection with
the risks described above.
Our marketing programs, e-commerce
initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes
in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results
of operations.
We collect, maintain and use data, including
personally identifiable information, provided to us through online activities and other customer interactions in our business.
Our current and future marketing programs depend on our ability to collect, maintain and use this information, and our ability
to do so is subject to evolving international and China laws and enforcement trends with respect to the foregoing. We strive to
comply with all applicable laws and other legal obligations relating to privacy, data protection and consumer protection, including
those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with our
significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary
liability.
In addition, as data privacy and marketing
laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy and marketing laws become
more restrictive, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may
decrease, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability
for security breaches may increase.
Data security breaches and attempts
thereof could negatively affect our reputation, credibility and business.
We collect and store personal information
relating to our customers and employees, including their personally identifiable information, and rely on third parties for the
operation of the various social media tools and websites we use as part of our marketing strategy. Consumers are increasingly concerned
over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft
and user privacy. Any perceived, attempted or actual unauthorized disclosure of personally identifiable information regarding our
employees or customers could harm our reputation and credibility, reduce our ability to attract and retain customers and could
result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that any of our third-party
service providers with access to such personally identifiable information will maintain policies and practices regarding data privacy
and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof
which could have a corresponding adverse effect on our business.
Recently, data security breaches suffered
by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign legislative
proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit
card issuers. As a result, we may become subject to more extensive requirements in the future to protect the customer information
that we process in connection with the purchase of our products, resulting in increased compliance costs.
Third-party failure to deliver merchandise
from our distribution centers to our stores could result in lost sales or reduced demand for our teas, tea accessories
and other tea-related merchandise.
We currently partly rely upon third-party
transportation providers for all of our product shipments from our distribution centers to our stores. Our utilization of third-party
delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs,
and employee strikes and inclement weather, which may impact third parties’ abilities to provide delivery services that adequately
meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely affect deliveries,
and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable
as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs
and thereby adversely affect our operating results.
Our business, results of operations
and financial condition may be adversely affected by global public health epidemics, including the strain of coronavirus known
as COVID-19.
In December 2019, a novel strain of coronavirus
causing respiratory illness, or COVID-19, has surfaced in Wuhan, China, spreading at a fast rate in January and February of 2020,
and confirmed cases were also reported in other parts of the world. In reaction to this outbreak, an increasing number of countries
imposed travel suspensions to and from China following the World Health Organization’s “public health emergency of
international concern” (PHEIC) announcement on January 30, 2020. Since this outbreak, business activities in China and many
other countries including U.S. have been disrupted by a series of emergency quarantine measures taken by the government.
As a result, our operations in China and
the U.S. have been materially affected. Our stores in China were temporarily closed until early March and have been gradually opening
since then. As a result, the Company expects a lower amount of revenue and net income from February to April 2020 due to the downtime.
In addition, the renovation of our new store in New York City which was expected to open in early 2020 was delayed due to COVID-19
related restrictions in the U.S. Accordingly, our operation and business have been and will continue to be adversely affected as
the results of the wide-spread pandemic. Management may have to adjust or change our business plan in response to the prolonged
pandemic and change of social behavior.
The extent to which COVID-19 negatively
impacts our business is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the measures
taken to control it may have a significant negative impact on not only our business, but economic activities globally. The magnitude
of this negative effect on the continuity of our business operation in China and U.S. remains uncertain. These uncertainties impede
our ability to conduct our daily operations and could materially and adversely affect our business, financial condition and results
of operations, and as a result affect our share price and create more volatility.
Litigation may adversely affect our
business, financial condition, results of operations or liquidity.
Our business is subject to the risk of
litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies
and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome
of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently difficult
to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the
magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain
of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as
a whole or may negatively affect our operating results if changes to our business operation are required. Regardless of the outcome
or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company resources.
There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business,
regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely
affect our business, financial condition, results of operations or liquidity.
Our failure to comply with existing
or new regulations in the PRC, or an adverse action regarding product claims or advertising could have a material adverse effect
on our results of operations and financial condition.
Our business operations, including labeling,
advertising, sourcing, distribution and sale of our products, are subject to regulation by the Food Safety Law and Product Quality
Law of the PRC. From time to time, we may be subject to challenges to our marketing, advertising or product claims in litigation
or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations or withstand such
challenges could result in changes in our supply chain, product labeling, packaging or advertising, loss of market acceptance of
the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines,
monetary settlements or criminal prosecution. Any of these actions could have a material adverse effect on our results of operations
and financial condition.
In addition, consumers who allege that
they were deceived by any statements that were made in advertising or labeling could bring a lawsuit against us under consumer
protection laws. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately
be unsuccessful in our defense. Defending ourselves against such claims, regardless of their merit and ultimate outcome, would
likely result in a significant distraction for management, be lengthy and costly and could adversely affect our results of operations
and financial condition. In addition, the negative publicity surrounding any such claims could harm our reputation and brand image.
We may not be able to protect our
intellectual property adequately, which could harm the value of our brand and adversely affect our business.
We believe that our intellectual property
has substantial value and has contributed significantly to the success of our business. In particular, our trademarks, including
our registered Buoyance Manor, Your Ladyship Tea, and Meet Honey trademarks and the unregistered names of a significant number
of the varieties of tea beverages that we sell, are valuable assets that reinforce the distinctiveness of our brand and our customers’
favorable perception of our stores.
We also strive to protect our intellectual
property rights by relying on PRC laws, as well as contractual restrictions with our employees, contractors (including those who
develop, source, manufacture, store and distribute our tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise), vendors and other third parties. However, we may not enter into confidentiality and/or
invention assignment agreements with every employee, contractor and service provider to protect our proprietary information and
intellectual property ownership rights. Those agreements that we do execute may be breached, resulting in the unauthorized use
or disclosure of our proprietary information. Individuals not subject to invention assignments agreements may make adverse ownership
claims to our current and future intellectual property, and even the existence of executed confidentiality agreements may not deter
independent development of similar intellectual property by others. Unauthorized disclosure of or claims to our intellectual property
or confidential information may adversely affect our business.
From time to time, third parties may our
trade dress and/or sell our products using our name without our consent, and, we believe, may infringe or misappropriate our intellectual
property rights. We will respond to these actions on a case-by-case basis and where appropriate may commence litigation to protect
our intellectual property rights. However, we may not be able to detect unauthorized use of our intellectual property or to take
appropriate steps to enforce, defend and assert our intellectual property in all instances.
Effective trade secret, patent, copyright,
trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration
or prosecution requirements and expenses and the costs of defending our rights. Our trademark rights and related registrations
may be challenged in the future and could be opposed, canceled or narrowed. Our failure to register or protect our trademarks could
prevent us in the future from using our trademarks or challenging third parties who use names and logos similar to our trademarks,
which may in turn cause customer confusion, impede our marketing efforts, negatively affect customers’ perception of our
brand, stores and products, and adversely affect our sales and profitability. Moreover, intellectual property proceedings and infringement
claims brought by or against us could result in substantial costs and a significant distraction for management and have a negative
impact on our business. We cannot assure you that we are not infringing or violating, and have not infringed or violated, any third-party
intellectual property rights, or that we will not be accused of doing so in the future.
In addition, although we have also taken
steps to protect our intellectual property rights in the PRC, other entities may have rights to trademarks that contain portions
of our marks or may have registered similar or competing marks in foreign countries. There may also be other prior registrations
in other foreign countries of which we are not aware. We may need to expend additional resources to defend our trademarks in these
countries, and the inability to defend such trademarks could impair our brand or adversely affect the growth of our business internationally.
We are subject to the risks associated
with leasing substantial amounts of space and are required to make substantial lease payments under our operating leases. Any failure
to make these lease payments when due would likely harm our business, profitability and results of operations.
We do not own any real estate. Instead,
we lease all of our store locations, corporate offices and distribution center. Our store leases typically have three to five-year
terms and generally require us to pay total rent per square foot that is reflective of our small average store square footage and
premium locations. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
As our stores mature and as we expand our store base, our lease expense and our cash outlays for rent under our lease agreements
will increase. Our substantial operating lease obligations could have significant negative consequences, including:
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requiring that an increased portion of our cash from operations and available cash be applied to pay our lease obligations, thus reducing liquidity available for other purposes;
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increasing our vulnerability to adverse general economic and industry conditions;
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limiting our flexibility to plan for or react to changes in our business or in the industry in which we compete; and
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limiting our ability to obtain additional financing.
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We depend on cash flow from operations
and cash from our prior offering to pay our lease expenses, finance our growth capital requirements and fulfill our other cash
needs. If our business does not generate sufficient cash flow from operating activities to fund these requirements or we use up
the proceeds from our prior offering, we may not be able to achieve our growth plans, fund our other liquidity and capital needs
or ultimately service our lease expenses, which would harm our business.
If an existing or future store is not profitable,
and we decide to close it, we may nonetheless remain committed to perform our obligations under the applicable lease including,
among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation
clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, as our leases expire,
we may fail to negotiate renewals on commercially acceptable terms or at all, which could cause us to close stores in desirable
locations. Even if we are able to renew existing leases, the terms of such renewal may not be as attractive as the expiring lease,
which could materially and adversely affect our results of operations. Our inability to enter into new leases or renew existing
leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely
affect us.
Our development
and launch of the Mingyuntang stores will require a significant investment and commitment of resources, is subject to numerous
risks and uncertainties, and ultimately may not prove successful.
We intend to invest
significantly in the development and launch of our Mingyuntang brand tea beverage stores. Such endeavor involves significant risks
and uncertainties, including insufficient revenues to offset liabilities and expenses associated with developing, launching and
growing the new line of business, inadequate return of capital on our investments, not accurately predicting consumer tastes and
the market opportunity for tea stores, inability to respond in a timely manner to consumer desires and demands, and unidentified
issues not discovered in our due diligence and planning. Because the introduction of and investment in a new line of business is
inherently risky, no assurance can be given that the Mingyuntang brand will ultimately be successful or that it will not materially
adversely affect our reputation, financial condition, and operating results.
Continued
innovation and the successful development and timely launch of new products are critical to our financial results and achievement
of our growth strategy.
Achievement of
our growth strategy is dependent, among other things, on our ability to extend the product offerings of our Mingyuntang brand and
introduce innovative new products, including new tea beverages or light foods. Although we devote significant focus to the development
of new products, we may not be successful in developing innovative new products or our new products may not be commercially successful.
Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could
be detrimental to our ability to successfully launch such new products, in addition to potentially harming our reputation and customer
loyalty. Our financial results and our ability to maintain or improve our competitive position will depend on our ability to effectively
gauge the direction of our key marketplaces and successfully identify, develop, manufacture, market and sell new or improved products
in these changing marketplaces.
Due to the seasonality of many
of our products and other factors such as adverse weather conditions, our operating results are subject to fluctuations.
Because of the
seasonality of our business, results for any quarter are not necessarily indicative of the results that maybe achieved for the
full fiscal year. The impact on sales volume and operating results due to the timing and extent of these factors can significantly
impact our business. For these reasons, quarterly operating results should not be relied upon as indications of our future performance.
The sales of our
products are influenced to some extent by weather conditions in the geographies in which we operate. Unusually cold weather
during the winter months or unusually hot weather during the summer months may have a temporary decrease on the demand for some
of our products and contribute to lower sales, which could have an adverse effect on our results of operations for such periods.
Changes in the beverage environment
and retail landscape could impact our financial results.
The beverage environment
is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes
in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is dynamic and
constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional
trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through
e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail
landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Price increases
may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines.
We may be able
to pass some or all ingredient, energy and other input cost increases to customers by increasing the selling prices of our products
or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction
in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset
increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our
sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition.
Our long-term
purchase commitments for certain strategic ingredients critical for the production of our products could impair our ability to
be flexible in our business without penalty.
In order to ensure
a continuous supply of high quality ingredients, some of our future inventory purchase obligations may include long-term purchase
commitments for certain strategic raw materials critical for the manufacture of pods and appliances. The timing of these may not
always coincide with the period in which we need the supplies to fulfill customer demand. This could lead to higher and more variable
inventory levels and/or higher ingredient costs.
Investment in our new line of
business could present risks not originally contemplated.
The Company will
invest in its new tea business line, Mingyuntang. New ventures are inherently risky and may not be successful. In evaluating such
endeavors, we are required to make difficult judgments regarding the value of business strategies, opportunities, technologies
and other assets, and the risks and cost of potential liabilities. Furthermore, these investments involve certain other risks and
uncertainties, including the risks involved with entering new competitive categories or regions, the difficulty in integrating
the new business, and the challenges in achieving strategic objectives and other benefits expected from our investment.
Our failure to accurately forecast
customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.
There is inherent
risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the tea and light foods
component of our business. We will be setting target levels for the production of our beverages and foods in advance of customer
orders based upon our forecasts of customer demand.
If our forecasts exceed demand, we could
experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases,
all of which could impact our financial performance. In addition, we may be contractually bound to minimum purchase commitments
over a period of time which exceed customer demand. Alternatively, if demand exceeds our forecasts significantly beyond our current
production capacity, we may not be able to satisfy customer demand, which could result in a loss of market share if our competitors
are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect
our net revenues and net income.
We may not be able to oversee the
new joint venture efficiently.
We may not be able to oversee our new joint
venture, efficiently, realize anticipated profits or effectively implement our growth and operating strategies. As we begin our
operations in the U.S. through our joint venture, we may encounter unforeseen expenses, difficulties, complications, delays and
other known and unknown factors. We will need to transition from a company with our primary operations in China to a company capable
of supporting operations in both China and the United States. We might not be successful in such a transition. There can be no
guarantee that the addition of the new joint venture will not cause us to incur additional debt and increase our exposure to market
and other risks. Our failure to successfully pursue our strategies or effectively operate the joint venture entity could also have
a material adverse effect on our rate of growth and operating performance.
There may be integration issues between
MYT, T&O Management Group LLC and Guokui Management Inc.
The tea kitchen’s technologies, overall
operation planning, and guidance for the “Your Ladyship Tea” provided by MYT from China will need to be integrated
with T&O Management Group LLC and Guokui Management Inc.’s existing business resources and business culture in New York
so as to achieve our operating strategies. If we are unable to achieve a successful integration with our tea making operation and
New York business demand, we may not be successful in developing and marketing our new services and courses and our operating results
will materially suffer. In addition, if the integrated services and courses we offer do not achieve acceptance by the marketplace,
our operating results will materially suffer.
We may experience negative effects
to our brand and reputation from real or perceived quality or safety issues with our tea, tea accessories, and food and beverages,
which could have an adverse effect on our operating results.
We believe our customers rely on us to
provide them with high-quality teas, food and tea beverages. Concerns regarding the safety of our teas, food, and tea beverages
or the safety and quality of our supply chain could cause consumers to avoid purchasing certain products from us or to seek alternative
sources of tea, food, and tea beverages, even if the basis for the concern has been addressed or is outside of our control. Adverse
publicity about these concerns, whether or not ultimately based on fact, and whether or not involving teas, tea accessories, and
food and beverages sold at our stores, could discourage consumers from buying our teas, food, and tea beverages and have an adverse
effect on our brand, reputation and operating results.
Furthermore, the sale of teas, food, and
tea beverages entail a risk of product liability claims and the resulting negative publicity. For example, tea supplied to
the U.S. stores could contain contaminants that, if not detected by us, could result in illness or death upon their consumption.
Similarly, food and tea beverages could contain contaminants or contain design or manufacturing defects that could result in illness,
injury or death. It is possible that product liability claims will be asserted against us in the future.
We may also be subject to involuntary product
recalls or may voluntarily conduct a product recall. The costs associated with any future product recall could, individually and
in the aggregate, be significant in any given fiscal year. In addition, any product recall, regardless of direct costs of the recall,
may harm consumer perceptions of our teas, tea accessories, and food and beverages and have a negative impact on our future sales
and results of operations.
Any loss of confidence on the part of our
customers in the safety and quality of our teas, tea accessories, and food and beverages would be difficult and costly to overcome.
Any such adverse effect could be exacerbated by our position in the market as a purveyor of quality teas, tea accessories, and
food and beverages and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories, and
food and beverages sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating
results.
Incidents involving food or beverage-borne
illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical
opinions about the health effects of consuming our products, could harm our business
Instances or reports, whether true or not,
of unclean water supply or food-safety issues, such as food or beverage-borne illnesses, tampering, adulteration, contamination
or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the
reputations of companies in the food and tea beverage processing, grocery and quick-service restaurant sectors. Any report linking
us to such instances could severely hurt our sales and could possibly lead to product liability claims, litigation (including class
actions) and/or temporary store closures. Clean water is critical to the preparation of tea beverages, as well as ice for our cold
beverages, and our ability to ensure a clean water and ice supply to our stores can be limited, particularly in some international
locations. We are also continuing to incorporate more products in our food and tea beverage lineup that require freezing or refrigeration,
which increases the risk of food safety related incidents if correct temperatures are not maintained due to mechanical
malfunction or human error.
We also face risk by relying on third-party
food and tea suppliers to provide and transport ingredients and finished products to our stores. We monitor the operations of certain
of these business partners, but the product quality and service they deliver may be diminished by any number of factors beyond
our control and it may be difficult to detect contamination or other defect in these products.
Additionally, we are evolving our product
lineup to include more local or smaller suppliers for some of our products who may not have as rigorous quality and safety systems
and protocols as larger or more national suppliers. In addition, instances of food or beverage-safety issues, even those involving
solely the restaurants or stores of competitors or of suppliers or distributors (regardless of whether we use or have used those
suppliers or distributors), could, by resulting in negative publicity about us or the foodservice industry in general, adversely
affect our sales on a regional or global basis. A decrease in customer traffic as a result of food-safety concerns or
negative publicity, or as a result of a temporary closure of any of our stores, product recalls or food or beverage-safety claims
or litigation, could materially harm our business and results of operations.
Risks Relating to Doing Business in
the PRC
Our PRC subsidiaries, main operations
and assets are located in the PRC. Shareholders may not be accorded the same rights and protection that would be accorded under
the US law. In addition, it would be difficult to enforce a U.S. judgment against our PRC subsidiaries and our officers and directors.
We are a holding company and the majority
of our operations and assets are held in overseas subsidiaries. Our PRC subsidiaries and variable interest entities, Shanghai MYT,
Hunan MYT and 39Pu were established in the PRC, and their main operations and assets are located in the PRC. Our PRC subsidiaries,
main operations and assets are therefore subject to the relevant laws and regulations of the PRC. In addition, a majority of our
officers and directors are non-residents of the United States and substantially all their assets are located outside the United
States. As a result, it could be more difficult for investors to effect service of process in the United States, or to enforce
a judgment obtained in the United States against any of our PRC subsidiaries or any of these persons.
Our business is subject to certain
PRC laws and regulations.
Our business and operations in the PRC
are subject to government rules and regulations, including environmental, working safety, road transportation and health regulations.
Any changes in such government regulations may have a negative impact on our business.
Breaches or non-compliance with these PRC
laws and regulations may result in the suspension, withdrawal or termination of our business licenses or permits, or the imposition
of penalties, by the relevant authorities. Our PRC subsidiaries’ business licenses are also granted for a finite period and
any extension thereof is subject to the approval of the relevant authorities. Any suspension, withdrawal, termination or refusal
to extend our PRC subsidiaries’ business licenses or permits would cause the cessation of production of certain or all of
our products, and this would adversely affect our PRC subsidiaries’ business, financial performance and prospects.
Uncertainty in the PRC legal system
may make it difficult for us to predict the outcome of any disputes that we may be involved in.
The PRC legal system is based on the PRC
Constitution and is made up of written laws, regulations, circulars and directives. The PRC government is still in the process
of developing its legal system, so as to meet the needs of investors and to encourage foreign investment. As the PRC economy is
generally developing at a faster pace than its legal system, some degree of uncertainty exists in connection with whether and how
existing laws and regulations will apply to certain events or circumstances.
Some of the laws and regulations, and the
interpretation, implementation and enforcement thereof, are still subject to policy changes. There is no assurance that the introduction
of new laws, changes to existing laws and the interpretation or application thereof or the delays in obtaining approvals from the
relevant authorities will not have an adverse impact on our PRC subsidiaries’ business, financial performance and prospects.
Further, precedents on the interpretation,
implementation and enforcement of the PRC laws and regulations are limited, and unlike other common law countries such as the United
States, decisions on precedent cases are not binding on lower courts. As such, the outcome of dispute resolutions may not be consistent
or predictable as in the other more developed jurisdictions and it may be difficult to obtain swift or equitable enforcement of
the laws in the PRC, or obtain enforcement of judgment by a court of another jurisdiction.
New rules on mergers and acquisitions
of domestic enterprise by foreign investors.
In particular, on August 8, 2006, Ministry
of Commerce (“MOC”), China Security and Regulatory Commission (“CSRC”), State Administration of Foreign
Exchange (“SAFE”) and State Administration for Industry and Commerce of the PRC (“SAIC”), State Administration
for Taxation (“SAT”) and National Development and Reform Commission (“NDRC”) promulgated the Provisions
on the Mergers and Acquisitions of Domestic Enterprise by Foreign Investors (“M&A Regulations” or “Provision
10”), which came into effect on September 8, 2006 and was revised on June 22, 2009 by MOC. The Provision 10 was supplemented
by the Provisions on indirect issuance of securities overseas by a domestic enterprise or overseas listing of its securities for
trading issued by CSRC on by the Guidelines on Domestic Enterprises indirectly issuing securities overseas or listing and trading
their securities overseas (“CSRC Guidelines”) issued by the CSRC on September 21, 2006.
In the opinion of our PRC Counsel, Landing,
based on its understanding of current PRC laws and regulations, Provision 10 will not forbid Hunan 39 PU Tea Co., Ltd acquisition
by Shanghai Mingyuntang (the “PRC Acquisition”), if both parties follow the current PRC laws and regulations.
However, there is no assurance that the
relevant Chinese government agency, including the CSRC, would reach the same conclusion as our PRC Counsel. If the CSRC or any
other Chinese regulatory bodies subsequently determine that we need to obtain the CSRC approval for our acquisition of PRC subsidiaries,
we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory bodies. This may have a material adverse
impact on our business, financial condition, results of operations, remittance of profits as well as the trading prices of our
shares.
Failure of our PRC resident shareholders
to comply with regulations on foreign exchange registration of overseas investment by PRC residents could cause us to lose our
ability to contribute capital to our PRC subsidiaries and remit profits out of the PRC as dividends.
The Notice on Relevant Issues Concerning
Foreign Exchange Administration for Domestic Residents to Engage in Overseas Financing and Round Trip Investment via Overseas Special
Purpose Vehicles (“Circular 75”), issued by the SAFE and effective on November 1, 2005, regulates the foreign exchange
matters in relation to the use of a “special purpose vehicle” by PRC residents to seek offshore equity financing and
conduct a “round trip investment” in China. Under Circular 75, a “special purpose vehicle” refers to an
offshore entity directly established or indirectly controlled by PRC resident natural or legal persons (“PRC residents”)
for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents in onshore companies,
while “round trip investment” refers to the direct investment in China by such PRC residents through the “special
purpose vehicles,” including, without limitation, establishing foreign-invested enterprises and using such foreign-invested
enterprises to purchase or control onshore assets through contractual arrangements. Circular 75 requires that, before establishing
or controlling a “special purpose vehicle”, PRC residents and PRC entities are required to complete a foreign exchange
registration with the competent local branches of the SAFE for their overseas investments. After the completion of a round-trip
investment or the overseas equity financing, the PRC residents are required to go through foreign exchange registration alteration
formalities of overseas investment in respect of net assets of special purpose vehicles that such PRC residents hold and the variation
thereof.
In addition, an amendment to the registration
is required if there is a material change in the “special purpose vehicle,” such as increase or reduction of share
capital and transfer of shares. Failure to comply with the registration procedures set forth in Circular 75 may result in restrictions
on the foreign exchange activities of the relevant foreign-invested enterprises, including the payment of dividends and other distributions,
such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate and the capital
inflow from the offshore parent, and may also subject the relevant PRC residents to penalties under PRC foreign exchange administration
regulations.
We have requested our current PRC resident
shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the scope
of the Circular 75 and urged PRC residents to register with the local SAFE branch as required under the Circular 75. The failure
of our PRC resident shareholders and/or beneficial owners to timely amend their SAFE registrations pursuant to the Circular 75
or the failure of our future shareholders and/or beneficial owners who are PRC residents to comply with the registration requirement
set forth in the Circular 75 may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions.
Any such failure may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute dividends to us or otherwise adversely affect our business.
The PRC government could restrict access
in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining
sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they come due or may
restrict which limit the payment of dividends from the Company.
Our results and financial conditions
are highly susceptible to changes in the PRC’s political, economic and social conditions as our revenue is currently wholly
derived from our operations in the PRC.
Since 1978, the PRC government has undertaken
various reforms of its economic systems. Such reforms have resulted in economic growth for the PRC in the last three decades. However,
many of the reforms are unprecedented or experimental, and are expected to be refined and modified from time to time. Other political,
economic and social factors may also lead to further readjustment of the reform measures. This refinement and adjustment process
may consequently have a material impact on our operations in the PRC or a material adverse impact on our financial performance.
Our results and financial condition may be adversely affected by changes in the PRC’s political, economic and social conditions
and by changes in policies of the PRC government or changes in laws, regulations or the interpretation or implementation thereof.
Dividends payable to us by our PRC
subsidiaries may be subject to PRC withholding taxes, dividends distributed to our non-PRC investors and gains realized by our
non-PRC shareholders from the transfer of our securities may be subject to PRC withholding taxes under the Enterprise Income Tax
Law.
The Enterprise Income Tax Law (“EIT
Law”) imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident
enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprises without any establishment
or place of business within China or if the received dividends have no connection with such foreign investors’ establishment
or place of business within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China
that provides for a different withholding arrangement. The British Virgin Islands, where we are incorporated, does not have such
tax treaty with China. According to the Arrangement between Mainland of China and the Hong Kong Special Administrative Region on
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income in August 2006, dividends
paid by a foreign invested enterprise, or FIE, to its foreign investors in Hong Kong will be subject to withholding tax at a preferential
rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration
of Taxation further promulgated a circular, or Circular 601, on October 27, 2009, which provides that tax treaty benefits will
be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will
be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. Our
subsidiaries in China are directly invested in and held by a Hong Kong registered entity. If we are regarded as a non-resident
enterprise and our Hong Kong entity regarded as resident enterprise, then our Hong Kong entity may be required to pay a 10% withholding
tax on any dividends payable to it. If our Hong Kong entity is regarded as non-resident enterprises, then our subsidiaries in China
will be required to pay a 5% withholding tax for any dividends payable to our Hong Kong entities provided that specific conditions
are met. However, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to
our Hong Kong subsidiary and if our Hong Kong subsidiary were not considered as “beneficial owner” of any dividends
from our PRC subsidiaries, the dividends payable to our Hong Kong subsidiary would be subject to withholding tax at a rate of 10%.
In either case, the amount of funds available to us, including the payment of dividends to our shareholders, could be materially
reduced. In addition, because there remains uncertainty regarding the concept of “the place of de facto management body,”
if we are regarded as a resident enterprise, under the EIT Law, any dividends to be distributed by us to our non-PRC shareholders
will be subject to PRC withholding tax. We also cannot guarantee that any gains realized by such non-PRC shareholders from the
transfer of our shares will not be subject to PRC withholding tax. If we are required under the EIT Law to withhold PRC income
tax on dividends payable to our non-PRC shareholders or any gains realized by our non-PRC shareholders from transfer of our shares,
their investment in our shares may be materially and adversely affected.
We may be subject to a significant
withholding tax should equity transfers by our non-resident enterprises be determined to have been done without a reasonable business
purpose.
In December 2009, the State Administration
of Tax in China issued a circular on strengthening the management of proceeds from equity transfers by non-resident enterprises
and requires foreign entities to report indirect sales of resident enterprises. If the existence of the overseas intermediary holding
company is disregarded due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding
tax. Due to limited guidance and implementation history of the circular, significant judgment is required in determining the existence
of a reasonable business purpose by considering multiple factors, such as the form and substance of the arrangement, time of establishment
of the foreign entity, relationship between each step of the arrangement, relationship between each component of the arrangement,
implementation of the arrangement and the changes in the financial position of all parties involved in the transaction. Although
we believe that our transactions during all the periods presented would be determined to have reasonable business purposes, should
this not be the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial
position, results of operations and cash flows.
Uncertainty
in the interpretation of PRC tax regulations may have a negative impact on our business operations, our acquisition or restructuring
strategy or the value of our investment in it.
The SAT released a circular on December
15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which
became effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies
to invest in China. Circular 698 has the effect of taxing foreign companies on gains derived from the indirect sale of a PRC company.
Where a foreign investor indirectly transfers equity interests in a PRC resident enterprise by selling the shares in an offshore
holding company, and the latter is located in a country or jurisdiction that has an effective tax rate less than 12.5% or does
not tax foreign income of its residents, the foreign investor must report this indirect transfer to the tax authority in charge
of that PRC resident enterprise. Using a “substance over form” principle, 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 avoiding PRC
tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at a rate of up to 10.0%.
SAT subsequently released public notices
to clarify issues relating to Circular 698, including the Announcement on Several Issues concerning the EIT on the Indirect Transfers
of Properties by Nonresident Enterprises (《关于非居民企业间接转让财产企业所得税若干问题的公告》)
(the “SAT Notice 7”), which became effective on February 3, 2015. SAT Notice 7 abolished the compulsive reporting obligations
originally set out in Circular 698. Under SAT Notice 7, if a non-resident enterprise transfers its shares in an overseas holding
company, which directly or indirectly owns PRC taxable properties, including shares in a PRC company, via an arrangement without
reasonable commercial purpose, such transfer shall be deemed as indirect transfer of the underlying PRC taxable properties. Accordingly,
the transferee shall be deemed as a withholding agent with the obligation to withhold and remit the EIT to the competent PRC tax
authorities. Factors that may be taken into consideration when determining whether there is a “reasonable commercial purpose”
include, among other factors, the economic essence of the transferred shares, the economic essence of the assets held by the overseas
holding company, the taxability of the transaction in offshore jurisdictions, and economic essence and duration of the offshore
structure. SAT Notice 7 also sets out safe harbors for the “reasonable commercial purpose” test.
On October 17, 2017, the SAT released the
Notice on Several Issues concerning the Withholding and Collection of Income Tax of Non-resident Enterprises from the Source (《关于非居民企业所得税源泉扣缴有关问题的公告》)
(the “SAT Notice 37”). SAT Notice 37 clarifies: (1) matters concerning the withholding and collection of corporate
income tax, and property transfer of non-resident enterprises based on the EIT Law; (2) the currencies required to be used by the
withholding agents (when the payments is made in a currency rather than RMB), as well as the time, venue and business for the performance
of the withholding and collection obligations; and (3) the abolishment of Circular 698.
There is little guidance and practical
experience regarding the application of SAT Notice 7 and SAT Notice 37 and the related SAT notices. Moreover, the relevant authority
has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign
tax jurisdictions. As a result, due to our complex offshore restructuring, we may become at risk of being taxed under SAT Notice
7 and SAT Notice 37 and we may be required to expend valuable resources to comply with SAT Notice 7 and SAT Notice 37 or to establish
that we should not be taxed under SAT Notice 7 and SAT Notice 37, which could have a material adverse effect on our financial condition
and results of operations.
PRC regulation of loans and direct
investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of
any securities to make loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding company, our ability
to make loans or additional capital contributions to our PRC operating subsidiaries is subject to PRC regulations and approvals.
These regulations and approvals may delay or prevent us from using the proceeds we received in the past or will receive in the
future from the offerings of securities to make loans or additional capital contributions to our PRC operating subsidiaries, and
impair our ability to fund and expand our business which may adversely affect our business, financial condition and result of operations.
In 2008, the SAFE promulgated 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, which used to regulate the conversion by foreign-invested enterprises
of foreign currency into Renminbi by restricting the usage of converted Renminbi. On April 8, 2015, the SAFE promulgated the Circular
on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE
Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE Circular 19
launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises
and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit
foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond
their business scopes. On June 15, 2016, the SAFE promulgated the Circular on Reforming and Standardizing the Administrative Provisions
on Capital Account Foreign Exchange, or SAFE Circular 16. SAFE Circular 19 and SAFE Circular 16 continue to prohibit foreign-invested
enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business
scope, investment and financing (except for guarantee products issued by banks), providing loans to non-affiliated enterprises
or constructing or purchasing real estate not for self-use. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability
to transfer to and use in China the net proceeds from this offering, which may adversely affect our business, financial condition
and results of operations.
Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and,
if RMB were to decline in value, reducing our revenues and profits in U.S. dollar terms.
Our reporting currency is the U.S. dollar
and our operations in China use RMB as functional currencies. The majority of our revenues derived and expenses incurred are in
Chinese RMB with a relatively small amount in U.S. dollars. We are subject to the effects of exchange rate fluctuations with respect
to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s
domestic and international economic and political developments, as well as supply and demand in the local market. Starting July
2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB
has fluctuated within a narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese
government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against the
U.S. dollar.
The income statements of our China operations
are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating
expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies,
the translation of RMB denominated transactions results in increased revenues, operating expenses and net income for our non-U.S.
operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our non-U.S. subsidiaries
into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the non-U.S. subsidiaries’
financial statements will similarly be affected.
We have not entered into agreements or
purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness
of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies
were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into
foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of
the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency.
We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory
authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our
future revenues are in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency
exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay
non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our financial condition
and results of operations.
Restrictions on paying dividends
or making other payments to us by our subsidiaries in China.
We are a holding company and do not have
any assets or conduct any business operations in China other than our investments in our subsidiaries in China. As a result, if
our non-China operations require cash from China, we would depend on dividend payments from our subsidiaries in China. We cannot
make any assurance that we can continue to receive payments from our subsidiaries in China. In addition, under Chinese law, our
subsidiaries are only allowed to pay dividends to us out of their distributable earnings, if any, as determined in accordance with
Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at least 10% of their
respective after-tax profit each year, if any, to fund certain mandated reserve funds, unless these reserves have reached 50% of
their registered capital. These reserve funds are not payable or distributable as cash dividends. For Chinese subsidiaries with
after-tax profits for the periods presented, the difference between after-tax profits as calculated under PRC accounting standards
and U.S. GAAP relates primarily to share-based compensation expenses and intangible assets amortization expenses, which are not
pushed down to our subsidiaries under PRC accounting standards. In addition, under the EIT Law and its implementing Rules, dividends
generated from our PRC subsidiaries after January 1, 2008 and payable to their immediate holding company incorporated in Hong Kong
generally will be subject to a withholding tax rate of 10% (unless the PRC tax authorities determine that our Hong Kong subsidiary
is a resident enterprise). If certain conditions and requirements under the Arrangement between the Mainland of China and the Hong
Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income entered into between Hong Kong and the PRC and other related PRC laws and regulations are met, the withholding rate could
be reduced to 5%.
The Chinese government also imposes controls
on the convertibility of RMB into foreign currencies and the remittance of currency out of China in certain cases. We have experienced
and may continue to experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.
If we or any of our subsidiaries are unable to receive substantially all of the economic benefits from our operations through these
contractual or dividend arrangements, we may be unable to effectively finance our operations or pay dividends on our ordinary shares.
PRC laws and regulations establish
more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
A number of PRC laws and regulations, including
the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors adopted by six PRC regulatory agencies
in 2006, or the M&A Rules, the Antimonopoly Law, and the Rules of Ministry of Commerce on Implementation of Security Review
System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry of Commerce in August
2011, or the Security Review Rules, have established procedures and requirements that are expected to make merger and acquisition
activities in China by foreign investors more time consuming and complex. These include requirements in some instances that the
Ministry of Commerce be notified in advance of any change of control transaction in which a foreign investor takes control of a
PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies
established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also
require certain merger and acquisition transactions to be subject to merger control review or security review.
The Security Review Rules were formulated
to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, also known as Circular 6, which was promulgated in 2011. Under these rules, a security
review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns
and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises
have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review, the Ministry of Commerce will look into the substance and actual
impact of the transaction. The Security Review Rules further prohibit foreign investors from bypassing the security review requirement
by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements
or offshore transactions.
There is no requirement for foreign investors
in those mergers and acquisitions transactions already completed prior to the promulgation of Circular 6 to submit such transactions
to the Ministry of Commerce for security review. As we have already obtained the “de facto control” over our affiliated
PRC entities prior to the effectiveness of these rules, we do not believe we are required to submit our existing contractual arrangements
to the Ministry of Commerce for security review.
However, as these rules are relatively
new and there is a lack of clear statutory interpretation on the implementation of the same, there is no assurance that the Ministry
of Commerce will not apply these national security review-related rules to the acquisition of equity interest in our PRC subsidiaries.
If we are found to be in violation of the Security Review Rules and other PRC laws and regulations with respect to the merger and
acquisition activities in China, or fail to obtain any of the required approvals, the relevant regulatory authorities would have
broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking our PRC subsidiaries’
business or operating licenses, requiring us to restructure or unwind the relevant ownership structure or operations. Any of these
actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial
condition and results of operations. Further, if the business of any target company that we plan to acquire falls into the ambit
of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution
or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry.
Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required
approval processes, including approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
The PRC Labor Contract Law and its
implementing rules may adversely affect our business and results of operations.
The PRC Labor Contract Law became effective
and was implemented on January 1, 2008. The PRC Labor Contract Law has reinforced the protection for employees who, under the PRC
Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed
terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the
PRC Labor Contract Law establishes additional restrictions and increases the costs involved with dismissing employees. As the PRC
Labor Contract Law is relatively new, there remains significant uncertainty as to its interpretation and application by the PRC
Government. In the event that we decide to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect
our ability to do so in a timely and cost effective manner, and our results of operations could be adversely affected. In addition,
for employees whose contracts include non-competition terms, the Labor Contract Law requires us to pay monthly compensation after
such employment is terminated, which will increase our operating expenses.
Failure by our PRC shareholders or
beneficial owners to make required foreign exchange filings and registrations may prevent us from distributing dividends and expose
us to liabilities under the PRC laws.
The Circular on Relevant Issues concerning
Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through
Overseas Special Purpose Vehicles (“SAFE Circular No. 37”), which was promulgated by SAFE and became effective on July
14, 2014, requires a PRC individual resident (“PRC Resident”) to register with the local SAFE branch before he or she
contributes assets or equity interests in an overseas special purpose vehicle (“Offshore SPV”) that is directly established
or controlled by the PRC Resident for the purpose of conducting investment or financing. Following the initial registration, the
PRC Resident is also required to register with the local SAFE branch for any major change in respect of the Offshore SPV, including,
among other things, any major change of a PRC Resident shareholder, name or term of operation of the Offshore SPV, or any increase
or reduction of the Offshore SPV’s registered capital, share transfer or swap, merger or division. Failure to comply with
the registration procedures of SAFE Circular No. 37 may result in penalties and sanctions, including the imposition of restrictions
on the ability of the Offshore SPV’s PRC subsidiary to distribute dividends to its overseas parent.
Our existing PRC Resident shareholders
and beneficial owners currently are subject to the registration procedures under SAFE Circular No. 37. However, as SAFE Circular
No. 37 was recently promulgated, it is unclear how this regulation and any future regulation concerning offshore or cross-border
transactions will be interpreted, amended or implemented by the relevant government authorities. It cannot be predicted that how
these regulations will affect our business operations or future strategies. Any failure by our PRC Resident shareholders or beneficial
owners to make the updates with SAFE may subject the relevant PRC Resident shareholders or beneficial owners to penalties, restrict
our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends,
or affect our ownership structure and capital inflow from our offshore subsidiaries. As such, our business, financial condition,
results of operations and liquidity as well as our ability to pay dividends or make other distributions to our shareholders may
be materially and adversely affected.
We may not be able to adequately
protect our intellectual property rights, and any failure to protect our intellectual property rights could adversely affect our
revenues and competitive position.
We believe that trademarks, trade secrets,
patents, copyrights, and other intellectual property we use are important to our business. We rely on a combination of trademark,
copyright, patent and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our brand. We have invested significant resources to develop our
own intellectual property and acquire licenses to use and distribute the intellectual property of others. A failure to maintain
or protect these rights could harm our business. In addition, any unauthorized use of our intellectual property by third parties
may adversely affect our current and future revenues and our reputation.
The validity, enforceability and scope
of protection available under intellectual property laws in the PRC are uncertain and still evolving. Implementation and enforcement
of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual
property rights in the PRC may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized
use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents
issued to us or our other intellectual property or to determine the enforceability, scope and validity of our proprietary rights
or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs
and diversion of resources and management attention.
There are defects in our titles of
or rights to use our properties.
We have not received the record of completion
acceptance from the relevant authority for our facilities used in our production and storage (“Properties”). We do
not have valid title or right to the said Properties. Any dispute or claim in relation to the title to the Properties, including
any litigation involving allegations of illegal or unauthorized use of the Properties, may materially and adversely affect our
operations, financial condition, reputation and future growth. However, we are in the process of applying to the relevant authority
to obtain the completion acceptance for the Properties.
Risks Relating to Our Securities
The market price of our ordinary
shares is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our ordinary shares
and warrants is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the
market price of our ordinary shares to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the same industry as we are;
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customer demand for our products;
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investor perceptions of the chemical industry in general and our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance, interpretation or principles;
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loss of external funding sources;
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failure to maintain compliance with NASDAQ rules;
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sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
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additions or departures of key personnel.
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Securities class action litigation is often
instituted against companies following periods of volatility in their share price. This type of litigation could result in substantial
costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example,
in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share
prices since September 2001. These market fluctuations may adversely affect the price of our ordinary shares, warrants and other
interests in our company at a time when you want to sell your interest in us.
If we fail to comply with the continued
listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares
and make obtaining future debt or equity financing more difficult for us.
On July 10, 2019, the Company received
a notification letter from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“Nasdaq”) notifying
the Company that the minimum bid price per share for its common shares has been below $1.00 for a period of 30 consecutive business
days and the Company therefore no longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) (the
“Deficiency”).
Under the Nasdaq Listing Rules, the Company
had until January 6, 2020 to regain compliance, and may be eligible for an extension of an additional 180 calendar days, provided
that the Company meets the continued listing requirement for market value of publicly held shares and all other initial listing
standards for Nasdaq except for Nasdaq Listing Rule 5550(a)(2), and provide a written notice of its intention to cure this deficiency
during the second compliance period, by effecting a reverse stock split, if necessary.
On December 3, 2019, the Company provided
written notice to Nasdaq requesting for an extension through July 3, 2020 to demonstrate compliance with the Deficiency during
the second compliance period.
On April 20, 2020, the Company received
a notification letter from Nasdaq notifying the Company that Nasdaq has determined to toll the compliance periods for bid price
requirements (the “Price-based Requirements”) through June 30, 2020. Accordingly, since the Company had 79 calendar
days remaining in its bid price compliance period as of April 16, 2020, it will, upon reinstatement of the Price-based Requirements,
still have 79 calendar days from July 1, 2020, or until September 17, 2020, to regain compliance.
On September 11, 2020, the Company received
a written notification from Nasdaq indicating that the Company has regained compliance with the Price-based Requirements based
on the Company’s closing bid price being $1.00 per share or greater for 10 consecutive business days from August 27 to September
10, 2020.
If the Company fails to regain compliance
with the Price-based Requirements or any other listing rules when required in the future, we could be subject to suspension and
delisting proceedings. If our securities lose their status on The NASDAQ Capital Market, our securities would likely trade in the
over-the-counter market. If our securities were to trade on the over-the-counter market, selling our securities could be more difficult
because smaller quantities of securities would likely be bought and sold, transactions could be delayed, and security analysts’
coverage of us may be reduced. In addition, in the event our securities are delisted, broker-dealers have certain regulatory burdens
imposed upon them, which may discourage broker-dealers from effecting transactions in our securities, further limiting the liquidity
of our securities. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities.
Such delisting from The NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our
ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership
dilution to shareholders caused by our issuing equity in financing or other transactions.
While we believe that we currently
have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies
to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
Under the supervision and with the participation
of our management, we have evaluated our internal controls systems in order to allow management to report on the system and process
evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of
Section 404. As a result, we have incurred additional expenses and a diversion of management’s time.
If we fail to maintain effective internal
control over financial reporting in the future, a material misstatement of our financial statements may not be prevented or detected
on a timely basis. In addition, 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. This could in turn result in the loss of investor confidence in the reliability
of our financial statements and negatively impact the trading price of our shares. Furthermore, if we are not able to continue
to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation
by regulatory authorities, such as the SEC or the NASDAQ. Any such action could adversely affect our financial results and the
market price of our ordinary shares and warrants.
As a foreign private issuer, we have
limited reporting requirements under the Securities Exchange Act of 1934, which makes us less transparent than a United States
issuer.
As a foreign private issuer, the rules
and regulations under the Exchange Act provide us with certain exemptions from the reporting obligations of United States issuers.
We are exempt from the rules prescribing the furnishing and content of proxy statements, and our officers, directors and principal
stockholders are exempt from the reporting and short-swing profit recovery provisions. Also, we are not required to publish financial
statements as frequently, as promptly or containing the same information as United States companies. The result is that we will
be less transparent than a U.S. issuer.
As a foreign private issuer, we are
not subject to certain NASDAQ corporate governance rules applicable to public companies organized in the United States.
We rely on a provision in the NASDAQ Stock
Market’s Listed Company Manual that allows us to follow BVI law with regard to certain aspects of corporate governance. This
allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements
applicable to U.S. companies listed on the NASDAQ Stock Market.
For example, we are exempt from regulations
of the NASDAQ Stock Market that require listed companies organized in the United States to:
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have a majority of the board of directors consist of independent directors;
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have an audit committee consisting solely of independent directors;
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have a compensation committee consisting solely of
independent directors;
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obtain shareholder approval for a business combination;
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obtain shareholder approval for the issuance of 20%
or more of our outstanding ordinary shares;
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have a nominating committee consisting solely of independent directors.
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As a foreign private issuer, we are permitted
to follow home country practice in lieu of the above requirements. Accordingly, our shareholders may not have the same protections
afforded to shareholders of companies that are subject to these NASDAQ Stock Market requirements.
We may be classified as a passive
foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income
tax consequences to U.S. Holders.
Based on the market price of our ordinary
shares, the value of our assets, and the composition of our assets and income, we do not believe that we were a passive foreign
investment company (a “PFIC”) for United States federal income tax purposes for our taxable year ended June 30, 2020
and we do not expect to be one for our taxable year ending June 30, 2021 or to become one in the foreseeable future. Nevertheless,
the application of the PFIC rules is subject to ambiguity in several respects and, in addition, we must make a separate determination
each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure you that we will not
be a PFIC for the current or any other taxable year. Moreover, although we do not believe we would be treated as a PFIC, we have
not engaged any U.S. tax advisers to determine our PFIC status. In addition, if you owned our ordinary shares at any time prior
to our acquisition of Elite, you may be considered to own stock of a PFIC by virtue of the fact that we may have been a PFIC during
the period prior to our acquisition of Elite, unless you made certain elections to opt out of PFIC treatment, as described in Item
10. E. – “Taxation – U.S. Federal Income Taxation.”
A non-United States corporation, such as
us, will be classified as a PFIC for United States federal income tax purposes for any taxable year, if either (1) 75% or more
of its gross income for such year consists of certain types of “passive” income, or (2) 50% or more of its average
quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive
income. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination
made on an annual basis, no assurance can be given with respect to our PFIC status for the current or any other taxable year.
If we are characterized as a PFIC for any
year, a U.S. holder may incur significantly increased United States income tax on gain recognized on the sale or other disposition
of our ordinary shares and on the receipt of distributions on our ordinary shares to the extent such gain or distribution is treated
as an “excess distribution” under the United States federal income tax rules.
We have outstanding exercisable securities
that may dilute your holdings.
Our outstanding exercisable securities
may adversely affect the market price of our shares.
As
of the date of this report, we have issued and outstanding securities exercisable into 203,702 ordinary shares (warrants for the
purchase of 203,702 shares). The sale or possibility of sale
of the shares underlying these securities could have an adverse effect on the market price for its securities or its ability to
obtain future financing. If and to the extent these securities are converted or exercised, you may experience dilution to your
holdings.
Risk Relating to British Virgin Islands
Rights of shareholders under British
Virgin Islands law differ from those under United States law, and, accordingly, our shareholders may have fewer protections.
Our corporate affairs are governed by
our Memorandum and Articles of Association, the BVI Business Companies Act, 2004 (as amended, the “BVI Act”) and the
common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority
shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed
by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in
part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has
persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes
or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed
body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially
interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in
protecting their interests through actions against our management, directors or major shareholders than they would as shareholders
of a U.S. company.
The laws of the British Virgin Islands
provide limited protection for minority shareholders, so minority shareholders will have limited or no recourse if they are dissatisfied
with the conduct of our affairs.
Under the laws of the British Virgin Islands,
there is limited statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with
shareholder. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents
of a British Virgin Islands company and are entitled to have the affairs of the company conducted in accordance with the BVI Act
and the memorandum and articles of association of the company. As such, if those who control the company have persistently disregarded
the requirements of the BVI Act or the provisions of the company’s memorandum and articles of association, then the courts
will likely grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which
is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (ii) acts that constitute
fraud on the minority where the wrongdoers control the company; (iii) acts that infringe on the personal rights of the shareholders,
such as the right to vote; and (iv) acts where the company has not complied with provisions requiring approval of a special or
extraordinary majority of shareholders, which are more limited than the rights afforded to minority shareholders under the laws
of many states in the United States.
It may be difficult to enforce judgments
against us or our executive officers and directors in jurisdictions outside the United States.
Under our Memorandum and Articles of Association,
as amended, we may indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited
exceptions. Furthermore, to the extent allowed by law, the rights and obligations among or between us, any of our current or former
directors, officers and employees and any current or former shareholder will be governed exclusively by the laws of the British
Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those rights or obligations do not
relate to or arise out of their capacities as such. Although there is doubt as to whether United States courts would enforce these
provisions in an action brought in the United States under United States securities laws, these provisions could make judgments
obtained outside of the British Virgin Islands more difficult to enforce against our assets in the British Virgin Islands or jurisdictions
that would apply British Virgin Islands law.
British Virgin Islands companies
may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests.
British Virgin Islands companies may not
have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any
such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in
the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized
in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing
has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the United States
based on certain liability provisions of United States securities law or to impose liabilities, in original actions brought in
the British Virgin Islands, based on certain liability provisions of the United States securities laws that are penal in nature.
There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts
of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction
without retrial on the merits. This means that even if shareholders were to sue the Company successfully, they may not be able
to recover anything to make up for the losses suffered.
ITEM
4. INFORMATION ON THE COMPANY
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History
and development of the company.
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We were formed under the name of “CIS
Acquisitions Ltd.” on November 28, 2011, under the laws of the British Virgin Islands. We were formed to acquire, through
a merger, stock exchange, asset acquisition, stock purchase or similar acquisition transaction, one or more operating businesses.
Prior to November 2018, we were solely
a fine and specialty chemical manufacturer, primarily engaged in manufacturing and selling of organic compound including para-chlorotoluene
(“PCT”), ortho-chlorotoluene (“OCT”), PCT/OCT downstream products, and other by-product chemicals and distributing
fine and specialty chemicals to end application markets including automotive, pharmaceutical, agrochemical, dye & pigments,
aerospace, ceramics, coating-printing, clean energy and food additives (the “Chemical Business”). Since November 2018,
we have focused on developing a specialty tea product distribution and retail business through our subsidiary, Shanghai Ming Yun
Tang Tea Limited (“Shanghai MYT”) which controls Hunan Ming Yun Tang Brand Management Co., Ltd. (“Hunan MYT”)
and Hunan 39 PU Tea Co., Ltd. (“39Pu”) via a series of contractual agreements.
As affected by the outbreak of COVID-19,
we closed certain tea shops through the date of this report. Currently the Company has four tea shops based in Hunan Province,
China, among which two are flagship stores and two are general stores. In addition, we opened our first oversea tea shop in August
2020 in Manhattan, New York City, through our joint venture. The Company sells tea products,
beverages and light meals. The tea drinks we are currently offering are developed on various tea base, among which is our characteristic
Anhua dark tea base. These tea-based beverages include fresh milk tea, fruit tea, milk cap tea, etc. The light meals offered include
selections such as salads, sandwiches, pasta, steak, burritos and other healthy options. The pastries we are offering include fresh
baked bread, fresh baked cakes, frosting cakes, etc.
Tea Shop Chain Business
On August 28, 2018, the Company formed
NTH Holdings Limited (“NTH BVI”), a wholly owned subsidiary, in British Virgin Island (“BVI”). NTH BVI
is authorized to issue a maximum of 50,000 shares of one class, at par value of $1.00 per share.
On September 11, 2018, NTH BVI formed a
wholly owned subsidiary, Tea Language Group Limited (“NTH HK”) in Hong Kong. On October 19, 2018, the Company, through
NTH HK, established Shanghai MYT.
The Company entered into certain securities
purchase agreement on September 18, 2018 (the “Private Placement”) with certain non-affiliate “non-U.S. Persons”
as defined in Regulation S of the Securities Act of 1933, as amended, pursuant to which the Company agreed to offer and sell 2,500,000
of its ordinary shares at a per share purchase price of $0.55. Upon the closing of the Private Placement (the “Closing”),
the net proceeds shall be used by the Company to begin its expansion into the tea beverages and light foods business.
On October 28, 2018, in anticipation of
the Closing, the Company entered into a series of VIE agreements between Shanghai MYT and Hunan MYT (the “VIE Agreements”),
pursuant to which the Company launched a tea shop chain under the brand Mingyuntang (茗韵堂) in China as part
of the Company’s efforts to explore new business lines outside of its former-specialty chemical business. This business is
conducted via the Company’s subsidiary, Shanghai MYT which controls Hunan MYT.
Disposition of Elite
On February 8, 2019, the Company received
the stamped Certificate of Change of Name from the British Virgin Islands Registrar of Corporate Affairs dated February 4, 2019
pursuant to which the Company’s name has been changed to “Urban Tea, Inc.” (the “Name Change”). In
connection with the Name Change, the Company effectuated a change of its ticker symbol from “DELT” to “MYT.”
On February 9, 2019, we entered into that
certain Share Purchase Agreement (“SPA” and the transaction contemplated by the SPA is referred to as the “Disposition”)
with HG Capital Group Limited pursuant to which HG Capital agreed to purchase Elite in exchange for a cash purchase price of $1,750,000
(the “Consideration”). Elite, via its 100% owned subsidiary Delta Advanced Materials Limited, a Hong Kong corporation,
which, in turn, holds all the equity interests in all the operating subsidiaries. The Disposition closed on April 13, 2019, upon
satisfaction of the closing conditions of the SPA, including but not limited to the approval by the Company’s shareholders
of the SPA and the transactions contemplated thereunder and receipt of a fairness opinion opining on the fairness of the Disposition
to the Company’s shareholders from a financial point of view. Our current business solely consists of the specialty tea product
distribution and retail business as outlined above.
On September 13, 2019, the Company received
the stamped Amended and Restated Memorandum and Articles of Association (the “A&R M&A”) from the British Virgin
Islands Registry of Corporate Affairs, dated September 12, 2019. The A&R M&A was approved by the Company’s shareholders
during its 2019 annual meeting of shareholders held on August 29, 2019 for the purpose of removing legacy provisions that have
ceased to apply to the Company and to add appropriate provisions.
2019 Registered Direct Offering
On May 24, 2019, the Company and certain
institutional investors (the “Investors”) entered into a securities purchase agreement (the “May Purchase Agreement”),
pursuant to which the Company agreed to sell to such Investors an aggregate of 2,845,000 Ordinary Shares and warrants to purchase
up to 1,809,420 Ordinary Shares in a registered direct offering, for gross proceeds of approximately $4.6 million (the “May
Offering”). The warrants will be exercisable immediately following the date of issuance for a period of five years at an
initial exercise price of $1.86 per share, subject to adjustments for stock splits, stock dividends and similar events, and has
full ratchet antidilution protection. The purchase price for each Ordinary Share and the corresponding warrant is $1.62. The May
Offering closed on May 29, 2019.
39Pu VIE Agreements
On September 28, 2019, the Company and
Shanghai MYT entered into a Share Purchase Agreement (the “39Pu SPA”) with Hunan 39 PU Tea Co., Ltd. (“39Pu”)
and certain shareholders of 39Pu (the “39Pu Shareholders”). Pursuant to the 39Pu SPA, the Company delivered to the
39Pu Shareholders total consideration of US$7.2 million (“Total Consideration”), of which US$3.00 million was paid
in cash (“Cash Consideration”) and US$4.2 million was paid in ordinary shares, no par value (“Ordinary Shares”),
of the Company, at a price of US$0.30 per share, for a total of 14,000,000 Ordinary Shares (“Share Consideration”),
in exchange for 39Pu and 39Pu Shareholders to enter into VIE Agreements (the “39Pu VIE Agreements”) with Shanghai MYT.
The VIE Agreements are designed to provide Shanghai MYT with the power, rights and obligations equivalent in all material respects
to those it would possess as the majority equity holder of 39Pu, including absolute rights to control the management, operations,
assets, property and revenue of 39Pu. 39Pu has the necessary license to carry out the tea business in China. The transaction contemplated
by the 39Pu SPA closed on October 28, 2019 upon satisfaction of the closing conditions of the 39Pu SPA, including, among other
things, (a) Nasdaq approval of the listing of the Share Consideration, (b) the delivery of the duly executed VIE Agreements, and
(c) the Company’s receipt of a fairness opinion from Viewtrade Securities, Inc., an independent valuation firm engaged by
the Company.
T&O Management Group Joint Venture
On October 29, 2019, the Company entered
into a joint venture agreement (the “JV Agreement”) with T&O Management Group LLC, a New York State corporation
(“OTTA”). Pursuant to the Agreement, the Company and OTTA formed Urban Tea Management Inc. under the laws of the State
of New York (the “Joint Venture”).
Pursuant to the terms of the JV Agreement,
the Joint Venture will be directed, controlled and managed by a management committee (the “Management Committee” or
the “Board”) formed by both OTTA and the Company. The Management Committee consists of five members, among which three
members were assigned by MYT and two members were assigned by OTTA.
The total investment of funds in the Joint
Venture was $300,000, and the first round of investment consisted of $150,000, 70% of which was funded by the Company and the remaining
30% by OTTA.
In connection with the JV Agreement, the
Company and OTTA, being the only two shareholders of the Joint Venture (each, a “Shareholder”, collectively, “Shareholders”),
entered into a shareholder agreement (the “Shareholder Agreement”) on October 29, 2019. Pursuant to the Shareholder
Agreement, the Shareholders elected 5 members to serve on the Management Committee, of whom three were assigned by the Company
and two were assigned by OTTA.
The Joint Venture is authorized to issue
200 shares having no par value. The Company holds 102 shares of the Joint Venture, representing 51% of the ownership, while OTTA
holds 98 shares of the Joint Venture, representing 49% of the ownership. Pursuant to the Shareholder Agreement, the Company is
responsible for providing technology services and the overall operation planning of the Joint Venture in the United States. OTTA
is responsible for applying for the business license, trademark registration, and any other necessary legal documents for the establishment
of Joint Venture.
Recent Developments
2020 Registered Direct Offerings
On June 24, 2020, the Company and certain
institutional investors (the “Purchasers”) entered into certain securities purchase agreement (the “June Purchase
Agreement”), pursuant to which the Company agreed to sell to such Purchasers an aggregate of 9,000,000 Ordinary Shares, at
a price of $0.555 per share in a registered direct offering, for gross proceeds of approximately $5 million (the “June Offering”).
The June Offering closed on June 29, 2020.
On July 30, 2020, the Company and the Purchasers
entered into certain securities purchase agreement (the “July Purchase Agreement”), pursuant to which the Company agreed
to sell to such Purchasers an aggregate of 15,000,000 Ordinary Shares, at a price of $0.40 per share in a registered direct offering,
for gross proceeds of approximately $6 million (the “July Offering”). The July Offering closed on August 3, 2020.
On August 14, 2020, the Company and the
Purchasers entered into certain securities purchase agreement (the “August Purchase Agreement”), pursuant to which
the Company agreed to sell to such Purchasers an aggregate of 18,750,000 Ordinary Shares, at a price of $0.32 per share in a registered
direct offering, for gross proceeds of approximately $6 million (the “August Offering”). The August Offering closed
on August 18, 2020.
Grand Opening of First Overseas Tea
House
On August 1, 2020, the Company, through
its joint venture, opened the first oversea specialty coffee and tea house under a brand name of “MENO” in West Village
near Washington Square Park in Manhattan, New York City.
Entry into a Non-binding Letter of Intent
with Chuangyeying Brand Management Co., Ltd. (“CYY”)
On August 26, 2020, the Company, through
its WFOE, entered into an LOI with CYY, Store Master Food Trading Co., Ltd. (“Store Master”) and the shareholders
of CYY and Store Master.
CYY has franchise permit and owns multiple
registered trademarks in China. It currently manages over 300 tea beverages franchisees. Store Master specializes in supply
chain management, product research and development, and optimizing long-term and stable supply chains. Store Master also owns a
scalable warehouse with an advanced logistics management system. CYY and Store Master are commonly owned by five individuals.
The LOI contemplates that the parties would
enter into certain definitive agreement pursuant to which WFOE will acquire 51% of each of the two companies’ equity
with cash and restricted shares of Urban Tea. If the acquisitions are completed, the collaboration will consolidates the resources
and expertise of WFOE, CYY, and Store Master in brand management, sales networks, and supply chain technologies to better
serve our customers and expand our business.
1 for 10 Reverse Split
On August 19, 2020, the board of directors
of the Company approved a 1 for 10 reverse split of its ordinary shares (the “Reverse Split”). Upon the effectiveness
of the Reverse Split, the Company’s shareholders will receive one new ordinary share of the Company for every ten shares
they hold. The Reverse Split became effective on August 27, 2020.
Entry into a Share Purchase Agreement
with Guokui Management Inc. (“Guokui”)
On September 23, 2020, the Company entered
into a share purchase agreement (the “Agreement”), pursuant to which the Company agreed to pay $400,000 in
cash to acquire 80% of the equity interest in Guokui. Guokui is incorporated under the laws of New York State and has
been operating CROP CIRCLE, a casual street food restaurant in New York City, since August 2020.
Upon closing of the transaction contemplated
by the Agreement, the Company will own the registered trademark of “CROP CIRCLE” in the United States and operate
the restaurant under the brand name of Crop Circle, which features guokui, an oval shaped baked flatbread with various filling
selections, a popular street snack originating from Shaanxi Province of China. CROP CIRCLE also provides other meals combining
classic and modern styles.
Prior to November 2018, we were solely
a fine and specialty chemical manufacturer, primarily engaged in the Chemical Business. We started sales of tea products, beverages
and light meals in retail shop chains through Hunan MYT since November 2018, and we started the sale of dark tea products through
39Pu since October 2019. Both entities are controlled by Shanghai MYT via a series of contractual agreements.
For the years ended June 30, 2020 and June
30, 2019, the Company generated revenues of $448,000 and $401,814 from its sales of tea products, beverages and light meals in
retail shop chains, and generated revenues of $417,705 and $nil from its sales of dark tea products. Because the Company just launched
its new tea business in November 2018, we did not have any operations or generate any revenues for the year ended June 30, 2018.
Products
As of June 30, 2020, we marketed a wide
range of trendy tea drinks, light meals, and pastries targeting China’s new urban generation in Hunan province. Our products
are focused on not only their taste but also their aesthetic presentation and health benefits. Our products are currently being
offered via our flagship and general stores.
The tea drinks we are currently offering
are developed on various tea bases, among which is our featured Anhua dark tea base. These tea-based beverages include fresh milk
tea, fruit tea, milk cap tea, etc. The light meals offered include selections such as salads, sandwiches, pasta, steak, burritos
and other healthy options. The pastries we are offering include fresh baked bread, fresh baked cakes, frosting cakes, etc.
Our goal is to be a leading brand of tea
beverages in each city in which we currently and plan to operate, by selling the finest quality tea beverages and related products,
as well as complementary food offerings, and by providing each customer with a pleasant and comfortable environment.
Through
the Company’s variable interest entity, 39Pu, the Company also engages in the sale of dark tea products through various sales
channels, including sales to wholesale customers, sales through reputable online marketplaces in China such as Tiktok, and sales
through the Company’s retail stores.
Since our expansion into the U.S. in August
2020, we have also begun offering tea and coffee products inspired by the menu of our “Buoyance Manor” stores in China
through MENO, customized to fit the New Yorkers’ palate and aesthetic. Since our acquisition of Guokui Management Inc. and
the CROP CIRCLE restaurant in New York City, we have also begun offering light Chinese meals and snacks through CROP CIRCLE. CROP
CIRCLE’s menu includes items such as dumplings and rice noodle rolls, and features “guokui,” which is a flatbread
baked in a clay oven with various choices of flavorful fillings such as shrimp, beef, pork, chicken, preserved vegetables and brown
sugar, a popular street snack originating from northern China’s Shanxi province.
Revenue Streams
We generate revenue from the following
two sources, (1) sales of tea products, beverages and light meals in its tea shop chains by Hunan MYT, and (2) sales of dark tea
products by 39Pu.
Managed Stores
Currently, all our products are offered
in our managed stores where we lease the properties, hire managers and employees, purchase equipment and operate the stores ourselves.
Due to the effects of the outbreak of COVID-19, the Company has permanently closed eight general stores.
Below is a summary of flagship and general
stores operated by us as of June 30, 2020:
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Number of Stores
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Flagship stores
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|
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2
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General stores
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2
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Total
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4
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In
light of the current effects of the COVID-19 outbreak, we plan to slow down the expansion of the Company’s managed stores.
Instead, the Company plans on focusing on expanding via franchising its brands in both China and the U.S. We expect to gain over
300 new franchisees in the year ending June 30, 2021.
JV Stores
We anticipate to enter into joint venture
agreement with corporate store owners pursuant to which we will contribute our products, brands, our management services etc. in
return for a fixed percentage of the profit generated by such stores. We refer to such stores as JV stores. On May 20, 2020, Hunan
MYT has received the approval from the Commercial Franchise Enterprise Administration to seek franchisees for growth opportunities
throughout China and officially obtained the “Business Franchise Enterprise” license issued by the Hunan Provincial
Department of Commerce. The license enables the Company to grow its business through franchising with its “Buoyance Manor”
brand.
Sales Channels
Generally, in one given city, we plan to
operate one flagship store, which usually covers a floor area of 80-150 square meters (about 860-1,615 square feet), and a number
of general stores, which usually cover a floor area of 60-80 square meters (about 646-860 square feet). The mix of flagship stores
and general stores in a given market varies based on several factors, including our ability to access desirable local retail space,
the complexity, profitability and expected ultimate size of the market for us and our ability to leverage the support infrastructure
within a geographic region.
A flagship store can only be a managed
store while a general store can be either a managed store or JV store.
Flagship Stores
Each of our flagship stores usually covers
a floor area of 80-150 square meters (about 860-1,615 square feet) which offers all kinds of our products including tea drinks,
light meals and pastries.
We plan to promote our brand recognition
in each city by the flagship store in that city. We seek to maintain our flagship stores in strategic locations that support the
brand image, targeting high customer traffic locations including shopping malls, lifestyle centers and outlets. We regularly review
our store portfolio, identifying new store locations and monitoring existing locations for sufficient levels of customer traffic
to maintain high exposure. We actively monitor and manage the performance of our stores and seek to incorporate information learned
through the monitoring process into our analytic process and future site selection and store retention decisions.
General stores
Our general stores mainly offer tea beverages
and light meals only, and cover a smaller floor area of 40-80 square meters (about 430-860 square feet) each. If a general store
desires to expand the product offerings to include pastries, the store must acquire more equipment from us. The decision to offer
baking products varies upon the location of general stores.
Online Delivery
We have also teamed up with China’s
leading online food ordering and delivery platforms—meituan.com (“美团”) and ele.me (“饿了么”)—to
allow consumers to order drinks, light meals, and pastries through the Internet from the closest stores. Consumers, however, can
order only products that are suitable for delivery, such as bread with long expiration periods, light snacks, and certain tea beverages.
Some tea beverages, such as milk foam cap tea, are not offered online due to its unsuitability for delivery. After a customer places
an order with these online platforms, our products will be produced in the stores and delivered by professional deliverymen. The
production and delivery process is typically completed in forty (40) minutes. The online platforms will charge us sixteen percent
(16%) to twenty percent (20%) of the total sales amount.
Since our expansion into the U.S. in August
2020, we have also entered into agreements with the U.S.’s leading online food ordering and delivery platforms, including
GrubHub, UberEats, HungryPanda, ChowBus and YBB.
Suppliers
We work with many suppliers in the sourcing
of raw materials, baking equipment, furniture and decoration, utensils etc. We are not dependent on any particular suppliers.
Branding and Marketing Strategy
As of the year ended June 30, 2020, our
products are offered under two brands, Buoyance Manor (“浮力庄园”) and Your
Ladyship Tea (“小主的茶”). Since the expansion of our operations into the United States
in August 2020, we have also begun offering our products under MENO and CROP CIRCLE as of the date of this report.
We plan to offer snacks and accessories, including peanut nougat gift boxes, cookies, coffee mugs, and tea cups under a
new brand Meet Honey. We have entered into a series of trademark assignment and license agreements with the owners
of these trademarks. For details, please refer to the section of Trademarks, Copyrights, Patents and Domain Names.
Each brand has its own market position.
Buoyance Manor mainly focuses on selling coffee drinks and varieties of bread originating from Europe. Your Ladyship Tea mainly
focuses on selling tea beverages and light meals. Meet Honey will mainly focus on selling snacks and accessories, including peanut
nougat gift boxes, cookies, coffee mugs, and tea cups.
We have implemented the following marketing
strategies to promote our brands: utilizing Baidu Ads, on-site promotion, advertising in shopping malls and commercial complexes,
setting up road advertising flags, and posting adverting posters in elevators and grocery stores. We plan to also advertise in
residential complexes and public transport system, and sponsor sports events.
Competition
In almost all markets in which we operate,
there are numerous competitors in the specialty tea beverage business. We believe that our customers choose among specialty tea
beverage brands primarily on the basis of product quality, service and convenience, as well as price. We also experience competition
from large fast-food restaurants and ready-to-drink tea beverage manufactures. We also compete with restaurants and other specialty
retailers for prime retail locations and qualified personnel to operate both new and existing stores.
As of the date of this report, our major
competitors in the Hunan province are: Maiji (“麦吉”), Luosennina (“罗森尼娜”),
NAYUKI (“奈雪的茶”), and Chayanyuese (“茶颜悦色”), and
our major competitors in New York are: Gong Cha, Debutea, The Alley, Moge Tee and Tiger Sugar.
Trademarks, Copyrights, Patents and
Domain Names
We regard our trademarks, domain names,
know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade
secret law and confidentiality and invention assignment with our employees and others to protect our proprietary rights.
In the PRC, we have entered into trademark
assignment agreements with Jinhou Group (Zhongguo) Limited (“Jinhou”), Hunan 39 Tea Limited (“39 Tea”),
and Shanghai Guoranmei Commerce & Trade Limited, the owners of the registered trademarks Buoyance Manor (“浮力庄园”),
Your Ladyship Tea (“小主的茶”) and Meet Honey, respectively. Pursuant to these trademark assignment
agreements, we have acquired all the rights and interests in each respective trademark. We have submitted these trademark assignment
agreements to the Trademark Office of State Administration for Industry and Commerce for review and registration and have received
all relevant approvals as of the date of this report.
In the U.S., we have submitted our trademarks
MENO and CROP CIRCLE to the United States Patents and Trademark Office on August 31, 2020, and are currently pending examination
and approval.
Our intellectual property includes our
domain name www.h-n-myt.com.
Property, Plant and Equipment
We leased approximately 3,378 square feet
of office space pursuant to a lease agreement, which lasts from June 1, 2019 to July 31, 2022 with an average annual rent approximating
RMB320,000 (approximately US$45,500) at the location of Huakun Times Plaza, Room 1118, Floor 11, No. 200 Erduan, East Xiang Fu
Road, Yuhua District, Changsha, China, as our corporate headquarters.
In addition, we lease spaces from different
real estate entities for our flagship stores and general stores, with average lease term between three and five years.
Research and Development
Tea-based Beverages –
we have developed more than twenty types of tea-based beverages, including fruitcoffee, milk foam cap tea, fresh milk tea, and
fresh fruit tea.
Baking Products – we
have developed more than twenty types of baking products, including danish bread, soft European bread, room-temperature cakes,
frosting cakes, and toasts.
Light Meals – we have
developed more than twenty types of light meal products, including sandwiches, steak, baked cheese rice, salad, burritos, et cetera.
We try to tailor our product offering based
on market demand and reacts to changing customer tastes.
Insurance
As required by laws and regulations in
China, we participate in various employee social security plans that are organized by municipal and provincial governments, including
housing, pension, medical insurance and unemployment insurance programs. The Company is required under Chinese law to make contributions
to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum
amount specified by the local government from time to time. All of our full-time employees are fully covered by those employee
social security plans.
Seasonality
The sale of baking products and light meals
is not subject to seasonal changes, however, the sale of tea-based beverages is. The period from April to October is the top season
for the sale of tea-based beverages, whereas the rest of a year is the off-season. We, however, have developed and begun to offer
hot milk foam tea product offerings to mitigate the impact of seasonal fluctuations in sales.
Employees
We currently have 64 full-time employees.
We have employment contracts with all of our employees in China and the U.S. in accordance with relevant PRC and U.S. laws. There
are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
We have made employee benefit contributions
in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing
fund, work injury insurance and birth insurance. The Company recorded the contribution in the general administration expenses when
incurred.
Management, Culture and Training
We are guided by a philosophy that recognizes
customer service and the importance of delivering optimal performance, allowing us to identify and reward teams that meet our high
performance standards. We use store-level scorecards that report key performance indicators. We provide our store managers with
a number of analytical tools to support our store operations and assist them in attaining optimum store performance. These tools
include key performance indicator reports, coaching logs for one-on-one meetings, weekly one-on-one meetings between our store
managers and district managers and annual evaluations. While our focus is on the overall performance of the team and our stores,
we provide incentives to team members, store managers and district managers.
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Passion for Tea. We seek to recruit, hire, train, retain and promote qualified, knowledgeable and enthusiastic team members who share our passion for tea and strive to deliver an extraordinary retail experience to our customers.
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Extensive Training. We have specific training and certification requirements for all new team members, including undergoing food handlers’ certification and foundational training. This process helps ensure that all team members educate our customers and execute our standards accurately and consistently. As team members progress to the assistant manager and manager levels, they undergo additional weeks of training in sales, operations and management.
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Career Development and Individual Enrichment. We track and reward team member performance, which we believe incentivizes excellence and helps us identify top performers and thus maintain a sufficient talent pool to support our growth. Many of our store managers and district managers are promoted from within our organization. We are guided by a philosophy that recognizes performance, allowing us to identify and reward teams who meet our high performance standards.
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Our core values and distinctive corporate
culture allow us to attract passionate and friendly employees who share a vision of making tea fun and accessible. We have a strong
focus on community engagement, and our culture reflects our belief in doing right by our customers and our communities. We provide
our employees with extensive training, career development, individual enrichment, and empowerment, which we believe is a key contributor
for our success.
Competitive Advantage
We believe the following competitive
strengths have contributed to, or will contribute to, our recent and ongoing growth:
Products Composition –
we provide a wide variety of products, which can satisfy our customers’ need of freshness, healthiness, and trendiness.
Cost Performance – we
offer high-quality foods and beverages with competitive prices in the market.
Expanding Market Share– With
solid market share in the current two second and third tier cities where we operate, we will eventually gain sufficient brand recognition
to expand its business into more second and third tier cities and even first-tier cities.
Public Company – The
fact that we are a public company listed on the Nasdaq Capital Market provides us with an edge over our competitors through enhancing
the consumers’ confidence in us and our products.
Licenses, Permits and Government Regulations
PRC Laws and Regulations Relating
to Our Business
PRC Legal System
The PRC legal system is based on the PRC
Constitution and is made up of written laws, regulations and directives. Decided court cases do not constitute binding precedents.
The National People’s Congress of
the PRC (“NPC”) and the Standing Committee of the NPC are empowered by the PRC Constitution to exercise the legislative
power of the state. The NPC has the power to amend the PRC Constitution and to enact and amend primary laws governing the state
organs and civil and criminal matters. The Standing Committee of the NPC is empowered to interpret, enact and amend laws other
than those required to be enacted by the NPC.
The State Council of the PRC is the highest
organ of state administration and has the power to enact administrative rules and regulations. Ministries and commissions under
the State Council of the PRC are also vested with the power to issue orders, directives and regulations within the jurisdiction
of their respective departments. Administrative rules, regulations, directives and orders promulgated by the State Council and
its ministries and commissions must not be in conflict with the PRC Constitution or the national laws and, in the event that any
conflict arises, the Standing Committee of the NPC has the power to annul such administrative rules, regulations, directives and
orders.
At the regional level, the people’s
congresses of provinces and municipalities and their standing committees may enact local rules and regulations and the people’s
government may promulgate administrative rules and directives applicable to their own administrative area. These local laws and
regulations may not be in conflict with the PRC Constitution, any national laws or any administrative rules and regulations promulgated
by the State Council.
Rules, regulations or directives may be
enacted or issued at the provincial or municipal level or by the State Council of the PRC or its ministries and commissions in
the first instance for experimental purposes. After sufficient experience has been gained, the State Council may submit legislative
proposals to be considered by the NPC or the Standing Committee of the NPC for enactment at the national level.
The power to interpret laws is vested by
the PRC Constitution in the Standing Committee of the NPC. According to the Decision of the Standing Committee of the NPC Regarding
the Strengthening of Interpretation of Laws passed on 10 June 1981, the Supreme People’s Court has the power to give general
interpretation on application of laws in judicial proceedings apart from its power to issue specific interpretation in specific
cases. The State Council and its ministries and commissions are also vested with the power to give interpretation of the rules
and regulations which they promulgated. At the regional level, the power to give interpretation of regional laws is vested in the
regional legislative and administration organs which promulgate such laws. All such interpretations carry legal effect.
Judicial System
The People’s Courts are the judicial
organs of the PRC. Under the PRC Constitution and the Law of Organization of the People’s Courts of the PRC, the People’s
Courts comprise the Supreme People’s Court, the local people’s courts, military courts and other special people’s
courts. The local people’s courts are divided into three levels, namely, the basic people’s courts, intermediate people’s
courts and higher people’s courts. The basic people’s courts are divided into civil, criminal and administrative divisions.
The intermediate people’s courts have divisions similar to those of the basic people’s courts and, where the circumstances
so warrant, may have other special divisions (such as intellectual property divisions). The judicial functions of people’s
courts at lower levels are subject to supervision of people’s courts at higher levels. The people’s procuratorates
also have the right to exercise legal supervision over the proceedings of people’s courts of the same and lower levels. The
Supreme People’s Court is the highest judicial organ of the PRC. It supervises the administration of justice by the people’s
courts of all levels.
The people’s courts adopt a two-tier
final appeal system. A party may before the taking effect of a judgment or order appeal against the judgment or order of the first
instance of a local people’s court to the people’s court at the next higher level. Judgments or orders of the second
instance of the same level and at the next higher level are final and binding. Judgments or orders of the first instance of the
Supreme People’s Court are also final and binding if no appeals are made before they take effect. If, however, the Supreme
People’s Court or a people’s court at a higher level finds an error in a final and binding judgment which has taken
effect in any people’s court at a lower level, or the presiding judge of a people’s court finds an error in a final
and binding judgment which has taken effect in the court over which he presides, a retrial of the case may be conducted according
to the judicial supervision procedures.
The PRC civil procedures are governed by
the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”) adopted on April 9, 1991
and amended on October 28, 2007 and August 31, 2012. The Civil Procedure Law contains regulations on the institution of a civil
action, the jurisdiction of the people’s courts, the procedures in conducting a civil action, trial procedures and procedures
for the enforcement of a civil judgment or order. All parties to a civil action conducted within the territory of the PRC must
comply with the Civil Procedure Law. A civil case is generally heard by a court located in the defendant’s place of domicile.
The jurisdiction may also be selected by express agreement by the parties to a contract provided that the jurisdiction of the people’s
court selected has some actual connection with the dispute, that is to say, the plaintiff or the defendant is located or domiciled,
or the contract was executed or implemented in the jurisdiction selected, or the subject-matter of the proceedings is located in
the jurisdiction selected. A foreign national or foreign enterprise is accorded the same litigation rights and obligations as a
citizen or legal person of the PRC. If any party to a civil action refuses to comply with a judgment or order made by a people’s
court or an award made by an arbitration body in the PRC, the aggrieved party may apply to the people’s court to enforce
the judgment, order or award. The time limit on the right to apply for such enforcement is two years.
A party seeking to enforce a judgment or
order of a people’s court against a party who or whose property is not within the PRC may apply to a foreign court with jurisdiction
over the case for recognition and enforcement of such judgment or order. A foreign judgment or ruling may also be recognized and
enforced according to PRC enforcement procedures by the people’s courts in accordance with the principle of reciprocity or
if there exists an international or bilateral treaty with or acceded to by the foreign country that provides for such recognition
and enforcement, unless the people’s court considers that the recognition or enforcement of the judgment or ruling will violate
fundamental legal principles of the PRC or its sovereignty, security or social or public interest.
Arbitration and Enforcement of Arbitral Awards
The Arbitration Law of the PRC (the “Arbitration
Law”) was promulgated by the Standing Committee of the NPC on 31 August 1994 and came into effect on 1 September 1995. It
is applicable to, among other matters, trade disputes involving foreign parties where the parties have entered into a written agreement
to refer the matter to arbitration before an arbitration committee constituted in accordance with the Arbitration Law. Under the
Arbitration Law, an arbitration committee may, before the promulgation by the PRC Arbitration Association of arbitration regulations,
formulate interim arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have
by an agreement provided arbitration as a method for dispute resolution, the parties are not permitted to institute legal proceedings
in a people’s court.
Under the Arbitration Law, an arbitral
award is final and binding on the parties and if a party fails to comply with an award, the other party to the award may apply
to the people’s court for enforcement. A people’s court may refuse to enforce an arbitral award made by an arbitration
committee if there were mistakes, an absence of material evidence or irregularities over the arbitration proceedings, or the jurisdiction
or constitution of the arbitration committee.
A party seeking to enforce an arbitral
award of a foreign affairs arbitration body of the PRC against a party who or whose property is not within the PRC may apply to
a foreign court with jurisdiction over the case for enforcement. Similarly, an arbitral award made by a foreign arbitration body
may be recognized and enforced by the PRC courts in accordance with the principles of reciprocity or any international treaty concluded
or acceded to by the PRC.
In respect of contractual and non-contractual
commercial-law-related disputes which are recognized as such for the purposes of the PRC laws, the PRC has acceded to the Convention
on the Recognition and Enforcement of Foreign Arbitral Award (the “New York Convention”) adopted on 10 June 1958 pursuant
to a resolution of the Standing Committee of the NPC passed on 2 December 1986. The New York Convention provides that all arbitral
awards made by a state which is a party to the New York Convention shall be recognized and enforced by other parties to the New
York Convention subject to their right to refuse enforcement under certain circumstances including where the enforcement of the
arbitral award is against the public policy of the state to which the application for enforcement is made. It was declared by the
Standing Committee of the NPC at the time of the accession of the PRC that (1) the PRC would only recognize and enforce foreign
arbitral awards on the principle of reciprocity; and (2) the PRC would only apply the New York Convention in disputes considered
under PRC laws to be arising from contractual and non-contractual mercantile legal relations.
Foreign Exchange Control
Prior to 31 December 1993, enterprises
in the PRC requiring foreign currency were required to obtain approval from the State Planning Committee and the Ministry of Foreign
Trade and Economic Cooperation before it could convert RMB into foreign currency, and such conversion had to be effected at the
official rate prescribed by the State Administration of Foreign Exchange (“SAFE”). RMB reserved by Foreign Investment
Enterprises (“FIEs”) could also be converted into foreign currency at swap centers with the prior examination and verification
by SAFE. The exchange rates used by swap centers were largely determined by the supply of and demand for foreign currencies and
RMB.
On December 28, 1993, the People’s
Bank of China (“PBOC”) announced that the dual exchange rate system for RMB against foreign currencies would be abolished
with effect from January 1, 1994 and be replaced by the unified exchange rate system. Under the new system, the PBOC publishes
the RMB exchange rate against the United States dollar daily. The daily exchange rate is set by reference to the RMB/US$ trading
price on the previous day on the “inter-bank foreign exchange market”.
On April 1, 1996, the Foreign Exchange
Control Regulations of the PRC (as amended on January 14, 1997) came into effect. On 20 June 1996, the Regulations on Sale and
Purchase of and Payment in Foreign Exchange were promulgated by the People’s Bank of China and came into effect on 1 July
1996.
On October 25, 1998, the PBOC and SAFE
issued a Joint Announcement on Abolishment of Foreign Exchange Swap Business which stated that from December 1, 1998, foreign exchange
transactions for FIEs may only be conducted at designated banks.
On August 12, 2007, SAFE promulgated the
Notice on the Retaining of Foreign Exchange Earnings by Domestic Entity, which provides that from August 12, 2007, domestic entity
may retain its recurrent foreign exchange earnings according to their needs for operation.
On August 1, 2008, the revised Foreign
Exchange Control Regulations of the PRC was adopted by the State Council and was promulgated for implementation on August 5, 2008.
In summary, taking into account the promulgation of the recent new regulations and to the extent the existing provisions stipulated
in previous regulations do not contradict these new regulations, the present position under the PRC law relating to foreign exchange
control are as follows:
(a)
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The previous dual exchange rate system for RMB was abolished and a managed floating exchange rate system based largely on supply and demand with reference to a basket of currencies was introduced. The People’s Bank of China, will announce the closing price of foreign currencies against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for trading against the RMB on the following working day.
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(b)
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Foreign exchange earnings of domestic entities may be transferred to China or held abroad according to the regulations stipulated by SAFE.
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(c)
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FIEs may have their own foreign currency accounts and are also permitted to retain their recurrent exchange earnings according to their needs of operation and the sums retained may be deposited into foreign exchange bank accounts maintained with designated banks.
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(d)
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Reservation or sale of capital account foreign exchange earnings to designated banks shall be approved by the foreign exchange control administration unless stated otherwise. Foreign exchange funds from capital account shall only be used according to the purpose approved by the foreign exchange control administration and the relevant competent authorities.
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(e)
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Where a foreign enterprise makes a direct investment or carries out the issuance and/or business of securities or other derivatives within the PRC, or where a domestic entity makes a direct investment or carries out the issuance and/or business of securities or other derivatives outside the PRC, it shall go through the registration procedure according to the relevant regulations stipulated by SAFE. A guarantee or a commercial loan provided to the entity outside the PRC by a domestic entity shall be subject to approval and registration with relevant foreign exchange administration. The utilization of foreign debts by an enterprise shall be in compliance with relevant regulations and has to undergo foreign debt registration with the foreign exchange control administration.
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(f)
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FIEs which require foreign exchange for their ordinary trading activities such as trade services and payment of interest on foreign debts may purchase foreign exchange from designated foreign exchange banks if the application is supported by proper payment notices or supporting documents.
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(g)
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FIEs may require foreign exchange for the payment of dividends that are payable in foreign currencies under applicable regulations, such as distributing profits to their foreign investors. They can withdraw funds from their foreign exchange bank accounts kept with designated foreign exchange banks, subject to the due payment of tax on dividends. Where the amount of the funds in foreign exchange is insufficient, the FIE may, upon the presentation of the resolutions of the directors on the profit distribution plan and other relevant documents, purchase foreign exchange from designated foreign exchange banks.
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(h)
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FIEs may apply to the Bank of China or other designated foreign exchange banks to remit profit out of the PRC to the foreign parties if the requirements provided by the PRC laws, rules and regulations are met.
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The Circular on Relevant Issues concerning
Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through
Overseas Special Purpose Vehicles (“SAFE Circular No. 37”), which was promulgated by SAFE and became effective on July
14, 2014, requires a PRC individual resident (“PRC Resident”) to register with the local SAFE branch before he or she
contributes assets or equity interests in an overseas special purpose vehicle (“Offshore SPV”) that is directly established
or controlled by the PRC Resident for the purpose of conducting investment or financing. Following the initial registration, the
PRC Resident is also required to register with the local SAFE branch for any major change in respect of the Offshore SPV, including,
among other things, any major change of a PRC Resident shareholder, name or term of operation of the Offshore SPV, or any increase
or reduction of the Offshore SPV’s registered capital, share transfer or swap, merger or division. Failure to comply with
the registration procedures of SAFE Circular No. 37 may result in penalties and sanctions, including the imposition of restrictions
on the ability of the Offshore SPV’s PRC subsidiary to distribute dividends to its overseas parent.
In addition, according to the SAFE Circular
No. 37, a PRC Resident that participates in an employee share incentive plan of a non-listed Offshore SPV could, by submitting
required documents, apply for registration with the local SAFE branch before exercising stock options.
Strict supervision and control by foreign
exchange control administration has been imposed upon FIEs established in the manner of acquisitions of the PRC enterprises by
foreign enterprises with PRC residents as shareholders.
Taxation
Income Tax
The New Income Tax Law was promulgated
by NPC on March 16, 2007 and came into effect on January 1, 2008. The Chinese domestic enterprises and FIEs are treated equally
on the income tax rate, and the enterprise income tax rate shall be 25%. In accordance with the New Income Tax Law and its implementing
regulations, the non-resident enterprise which has not set up institutions or establishments in China, or has set up institutions
or establishments but the income has no relationship with such institutions or establishments, it shall pay enterprise income tax
on such income sourced from China, and the income tax rate shall be 20%, subject to reduction as provided by any applicable double
taxation treaty, unless the relevant income is specially exempted from tax under the applicable tax laws, regulations, notices
and decisions which relate to FIEs and their investors.
The enterprises that were approved and
established prior to the promulgation hereof and that, in accordance with the effective tax laws and administrative regulations,
enjoy a special lower tax rate shall, in accordance with the provisions of the State Council, progressively transit to the tax
rate specified herein within 5 years following the implementation hereof. Those enterprises that enjoy a fixed-term tax exemption
or tax reduction shall, in accordance with the provisions of the State Council, continue to enjoy such exemption or reduction after
the implementation hereof until the expiration of the term of such exemption or reduction. However, if an enterprise did not enjoy
such preferential treatment because it has not yet achieved profitability, the term of such preferential treatment shall be calculated
from 1 January 2008 until the expiration of the term of such exemption or reduction.
According to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprise (Circular Guoshuihan [2009] No. 698)
implemented on January 1, 2008, except for the purchase and sale of equity through a public securities market, where a foreign
corporate investor indirectly transfers the equity of a PRC resident enterprise by disposing the equity of an overseas holding
company (the “Indirect Transfer”) located in a tax jurisdiction that (i) has an effective tax rate of less than 12.5%,
or (ii) does not tax its residents on their foreign income, the foreign corporate investor shall report the Indirect Transfer to
the competent PRC tax authority within 30 days from the date when the equity transfer agreement was made. In this case, the PRC
tax authority will examine the true nature of the Indirect Transfer. Should it deem the foreign investor to have made the Indirect
Transfer without reasonable commercial purpose and in order to avoid the PRC tax, the PRC tax authority may disregard the existence
of the overseas holding company that is used for tax planning purpose and re-characterize the Indirect Transfer. As a result, gains
derived from such Indirect Transfer by the foreign investor may be subject to the EIT Law.
Value-Added Tax
Pursuant to the Provisional Regulations
on Value-added Tax of PRC, last amended on November 5, 2008 and took effect from January 1, 2009, and its implementation rules
which were revised on December 15, 2008 and took effect from January 1, 2009, all entities or individuals in PRC engaging in the
sale of goods, the provision of processing services, repairs and replacement services, and the import of goods are required to
pay value-added tax (“VAT”). The amount of VAT payable in the sale or import of goods except as otherwise provided
by paragraph (2) and paragraph (3) of Article 2 of the Provisional Regulations on Value-added Tax of PRC. The tax rate is also
17% for those providing processing services repairs and replacement services.
In November 2011, the Ministry of Finance
(“MOF”) and the State Administration of Tax (“SAT”) promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax (the “Pilot Plan”). Since January 1, 2012, the PRC government has been implementing a pilot
program in certain provinces and municipalities, to levy a 6% VAT on revenue generated from certain kinds of services in lieu of
the 5% business tax. According to the Notice Regarding the Nationwide Implementation of B2V Transformation Pilot Program in respect
of Transportation and Certain Modern Service Industries jointly issued by the MOF and SAT effective from August 1, 2013 (the “B2V
Circular 37”), such policy has been implemented nationwide. In addition, the MOF and SAT released the Notice on Including
Railway Transportation and Postal Services Sectors into the Pilot Scheme on Switching from Business Tax to VAT on December 12,
2013, which further expanded the scope of taxable services for value-added tax and replaced the B2V Circular 37 as of January 1,
2014.
Business Tax
Pursuant to the Interim Regulation of the
People’s Republic of China on Business Tax (“Business Tax Regulation”) last amended on November 10, 2008 and
took effect from 1 January, 2009, business that provide services (including entertainment business), assign intangible assets or
sell immovable property became liable to business tax at a rate ranging from 3% to 20% of the charges of the services provided,
intangible assets assigned or immovable property sold, as the case may be.
Tax on Dividends from PRC Enterprise
with Foreign Investment
According to the New Income Tax Law and
the Implementation Rules, income such as dividends and profits distribution from the PRC derived from a foreign enterprise which
has no establishment in the PRC is subject to a 10% withholding tax, subject to reduction as provided by any applicable double
taxation treaty.
Stamp Duty
Under the PRC Interim Regulations on Stamp
Duty promulgated by the State Council on August 6, 1988 and amended in January 6, 2011, for building property transfer instruments,
including those in respect of property ownership transfer, the duty rate shall be 0.05% of the amount stated therein; for permits
and certificates relating to rights, including real estate title certificates and land use right certificates, stamp duty shall
be levied on an item basis at an annual rate of RMB5 per item.
Urban Maintenance Tax
Under the PRC Interim Regulations on Urban
Maintenance Tax promulgated by the State Council on February 8, 1985 and amended on January 8, 2011, any taxpayer, whether an individual
or otherwise, of product tax, value-added tax or business tax shall be required to pay urban maintenance tax. The tax rate shall
be 7% for a taxpayer whose domicile is in an urban area, 5% for a taxpayer whose domicile is in a county and a town, and 1% for
a taxpayer whose domicile is not in any urban area or county or town.
Education Surcharge
Under the Interim Provisions on Imposition
of Education Surcharge promulgated by the State Council on April 28, 1986 (last amended by the State Council on August 20, 2005),
any taxpayer, whether an individual or otherwise, of product tax, value-added tax or business tax shall pay an education surcharge,
unless such obliged taxpayer is instead required to pay a rural area education surcharge as provided by the Notice of the State
Council on Raising Funds for Schools in Rural Areas. Education surcharge shall be calculated and levied at a rate of 1% on the
actual amount of product tax, value-added tax and business tax paid by the taxpayer.
According to the Circular on Issues Concerning
Policies on Unifying Local Education Surtax promulgated by ministry of finance on November 17, 2010, the rate at which local education
surtax is levied should be 2% of the value-added tax, the business tax or the consumption tax actually paid by entities and individuals
(including foreign-invested enterprises, foreign enterprises and foreign individuals).
Wholly Foreign-Owned Enterprise
WFOE is governed by the Law of the People’s
Republic of China Concerning Enterprises with Sole Foreign Investments, which was promulgated on April 12, 1986 and was subsequently
amended on October 31, 2000, and its Implementation Regulations promulgated on December 12, 1990 and was subsequently amended on
April 12, 2001 (together the “Foreign Enterprises Law”).
Procedures for Establishment of a WFOE
The establishment of a WFOE will have to
be approved by Ministry of Commerce (or its delegated authorities) (the “MOC”). If two or more foreign investors jointly
apply for the establishment of a WFOE, a copy of the contract between the parties must also be submitted to MOC (or its delegated
authorities) for its record. A WFOE must also obtain a business license from the State Administration of Industry and Commerce
(or its delegated authorities) before it can commence business.
Nature
A WFOE is a limited liability company under
the Foreign Enterprise Law. It is a legal entity which may independently assume civil obligations, enjoy civil rights and has the
right to own, use and dispose of property. It is required to have a registered capital contributed by the foreign investor(s).
The liability of the foreign investor(s) is limited to the amount of registered capital contributed. The foreign investor may make
its contributions by installments and the registered capital must be contributed within the period as approved by the MOC (or its
delegated authorities) in accordance with relevant regulations.
Profit Distribution
The Foreign Enterprise Law provides that
after payment of taxes, a WFOE must make contributions to a reserve fund and at least 10% of the after-tax profits must be allocated
to the reserve fund. If the accumulative amount of allocated reserve funds reaches 50% of an enterprise’s registered capital,
the WFOE will not be required to make any additional contribution. The WFOE is prohibited from distributing dividends unless the
losses (if any) of previous years have been made up.
In accordance with the Notice of the Ministry
of Finance on the Issue of Handling Financial Issues by Relevant Enterprises after the Implementation of the Company Law promulgated
by the Ministry of Finance on March 15, 2006 and effective April 1, 2006, from January 1, 2006 on, enterprises established in accordance
with the Company Law shall distribute profits pursuant to Article 167 of the Company Law and shall no longer make contributions
to the reserve fund. After an enterprise ceases to make contributions to the reserve fund, it may continue to make contributions
to the employee bonus and welfare fund as decided by the board of directors if the purpose, use conditions, and procedures thereof
shall be made clear, and such funds shall be manage as debts.
Company Law
The establishment and operation of corporate
entities in China is governed by the PRC Company Law, which was promulgated by the Standing Committee of the NPC on December 29,
1993 and became effective on July 1, 1994 (“1993 PRC Company Law”). It was subsequently amended on December 25, 1999,
August 28, 2004, October 27, 2005 and December 28, 2013.
The PRC Company Law generally governs 2
types of companies — limited liability companies and joint stock limited companies. Both types of companies have the status
of legal persons, and the liability of a company to its debtors is limited to the value of assets owned by the company. Liabilities
of shareholders of a limited liability company are limited to the amount of registered capital they have contributed.
The amendments to the PRC Company Law adopted
in October 2005 seek to reform various aspects of the 1993 PRC Company Law and simplify the establishment and operation of companies
incorporated in China by lowering capitalization requirements, increasing shareholder and creditor protection, improving corporate
governance, and relaxing rules regarding the establishment of subsidiaries. Further, the restriction relating to the total investment
of a company in other entities exceeding 50% of its net assets has been removed, the incorporation of one shareholder limited liability
companies in addition to wholly State-owned enterprises is permitted, and the Chinese Company Law shall apply to foreign invested
limited liability companies. Where laws on foreign investment have other stipulations, such stipulations shall apply.
The amendments to the PRC Company Law adopted
in December 2013 took effect on March 1, 2014. These amendments cover three aspects: (a) replacing the paid-up capital registration
system by subscribed capital registration system; (b) relaxing the requirements for registered capital registration; and (c) streamlining
the registration items and requirements for registration documents.
PRC Laws and Regulations Relating to
Foreign Investment
On October 31, 2007, the National Development
and Reform Commission (“NDRC”) and MOC, jointly promulgated the Catalogue of Industries for Guiding Foreign Investment
(as amended in 2007), which came into effect on December 1, 2007 (the “Catalogue”), as amended on December 24, 2011
and came into effect on January 30, 2012. The Catalogue lists out the industries and economic activities which are encouraged,
restricted or prohibited by the PRC government for foreign investment. The Catalogue does not specify which business activities
are in the permitted category. Instead, if the business activities are not listed in any of the encouraged, restricted or the prohibited
categories, they shall be construed as being in the permitted category. Pursuant to the Catalogue, the wholesale of refined oil
falls under the restricted category. None of our Group’s business activities are listed in the prohibited category.
Labor Law
Pursuant to the Labor Law of the PRC promulgated
by Standing Committee of the NPC on July 5, 1994 and was subsequently amended on August 27, 2009, the Labor Contract Law of the
PRC promulgated by Standing Committee of the NPC on June 29, 2007 and was subsequently amended on December 28, 2012 and the Labour
Contract Law Implementation Rules of the PRC promulgated by the State Council on September 18, 2008, companies must enter into
employment contracts with their employees, based on the principles of equality, consent and agreement through consultation. Companies
must establish and effectively implement system of ensuring occupational safety and health, educating employees on occupational
safety and health, preventing work-related accidents and reducing occupational hazards. Companies must also pay for their employees’
social insurance premium.
Social Insurance Law
Employers in China are required to contribute,
on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance,
basic medical insurance, work-related injury insurance, maternity insurance, and housing provident funds. These payments are made
to local administrative authorities and an employer who fails to contribute may be fined and be ordered to make-up for the missed
contributions. The various laws and regulations that govern the employers’ obligation to contribute to the social security
funds include PRC Social Insurance Law promulgated by the Standing Committee of the NPC on October 28, 2010 and became effective
July 1, 2011; the Interim Regulations on the Collection and Payment of Social Security Funds, which were promulgated by the State
Council and became effective on January 22, 1999; the Interim Measures concerning the Maternity Insurance, which were promulgated
by the Ministry of Labor on December 14, 1994 and became effective on January 1, 1995; the Regulations on Occupational Injury Insurance,
which were promulgated by the State Council on April 27, 2003 and became effective on January 1, 2004 and was amended on December
20, 2010; the Regulations on Management of the Housing Provident Fund, which were promulgated and became effective on April 3,
1999 and was amended on March 24, 2002.
Where the enterprises fail to pay the full
amount of the social insurance premiums, the relevant department aforesaid has the authority to check and decide on the amount
of social insurance premiums that the enterprises should pay as the supplementary payment. If the enterprises does not pay for
the social insurance premiums after the relevant department has charged the full amount of the supplementary payment, the relevant
department is authorized to either inquire about the deposit account of such enterprises, or apply to the related department at
or above the county level for making the decision of the allocation of social insurance premiums. The relevant department can also
inform the bank or other financial institution to execute the allocation by written notice. If the amount of the deposit account
is smaller than the amount of social insurance premiums required to pay by the enterprises, the enterprises may provide a security
and delay the date to pay the social insurance premiums. If the amount of the deposit account is smaller than the amount of the
social insurance premiums needed to pay by the enterprises, and the enterprises fails to provide a security, the relevant department
shall apply to the court for the levying, sealing and auctioning of the property of such enterprises.
If the enterprises do not pay the full
amount of social insurance premiums as scheduled, the social insurance premium collection institution shall order them to make
the payment or make up the difference within a stipulated period and impose a daily fine equivalent to 0.05% of the overdue payment
from the date on which the payment is overdue. If payment is not made within the stipulated period, the relevant administration
department shall impose a fine from one to three times the amount of overdue payment.
Governmental Regulations in Relation
to the Company’s Businesses
Regulations Related to Franchise
The State Council promulgated the Administrative
Regulations on Commercial Franchising, or Franchise Regulations, on February 6, 2007. The Ministry of Commerce (“MOFCOM”)
promulgated the Administrative Measures on Filing of Commercial Franchise, or the Franchise Filling Measures, on April 30, 2007,
as amended on December 12, 2011, as well as the Administrative Measures on Information Disclosure of Commercial Franchise, or Franchise
Information Disclosure Measures, on April 30, 2007, as amended on February 23, 2012.
Under the above regulations, franchise
operations refer to a license by an enterprise owner of registered trademarks, enterprise logos, patents, proprietary technologies
or other business resources, or franchisor, to another business operator, or franchisee, to use such business resources owned by
the franchisor through a contractual arrangement, where the franchisee operates the business according to a uniform business model
stipulated under the contract and pay the franchisor franchising fees.
When engaging in a franchise operation,
a franchisor and a franchisee shall enter into a written franchise contract containing several key elements such as basic information
of the franchisor and the franchisee, terms and conditions of the franchise operation. A franchisor shall file with MOFCOM or
its local office within 15 days from the date of entering into a franchise contract with a franchisee for the first time, and
shall report to the filing agency on information on franchise contracts executed, revoked, terminated or renewed in the preceding
year before March 31 of each year.
Before obtaining the franchise license
from MOFCOM, the Company may engage in commercial activities with franchising characteristics with its partners by sharing intellectual
property rights such as company trademarks, patents, trade secrets, etc., in accordance with either of the two relevant provisions
of PRC Corporate and Contract Law as described below:
|
1)
|
Signing a Joint Venture Agreement to set up a joint venture company, authorizing the joint venture company to use the Company’s intellectual property rights in exchange for consideration, carrying out brand operation management for the Company’s stores under the name of the joint venture company in accordance with existing management procedures, and colleting management fees.
|
|
2)
|
Signing a Product and Service Cooperation Agreement with business partners to provide products and management services to them in exchange for the collection of product costs and consulting service fees by the Company.
|
Regulations Related to Retail
There are no separate mandatory legal provisions
on the retail business model in the PRC. Companies and individual businesses may engage is the retail business as long as they
have registered with the commerce departments in accordance with the laws such as the Regulation on Individual Industrial and Commercial
Households and Administration of the Registration of Enterprises As Legal Persons, and include “retail” in the business
scope on their business license.
Regulations Related to Food Safety
The Food Safety Law of the People’s
Republic of China, which was effective as from June 2009 and amended by the SCNPC in April 2015 and became effective in October
2015, and the Implementation Regulations of the Food Safety Law of the PRC, which took effect as from July 2009 and were amended
by the State Council in 2016, regulate food safety and set up a system of the supervision, monitoring and evaluation of food safety
and adopt food safety standards. The scope of the Food Safety Law covers food production and processing; food sales and catering
services; production and management of tools and equipment used for food production and management; use of by food additives, food-related
products; storage and transportation of food; safety management of food, food additives, food-related products. The quality and
safety management of primary products originating from agriculture is subject to the provisions of other laws and the Agricultural
Product Quality and Safety Law of the PRC.
Food producers and business operators must
operate legally and are responsible for the safety of their food and beverage business operations. The local government at or above
the county level is responsible for the food safety supervision and administration of the region, and determines the responsibilities
of the food and drug supervision and management departments, the health departments, and other relevant departments at that level.
Food safety standards cover the following:
food, food additives, pathogenic microorganisms in food-absorbing steel pipe products, pesticide residues, veterinary drug residues,
biomycin, heavy metal pollutants and other restriction on human health substances; variety of food additives, scope of use and
dosage; nutrient requirements for primary and secondary foods for infants and other specific populations; requirements for labels,
signs, and instructions related to food safety requirements such as hygiene and nutrition; food production and management, and
hygienic requirements for the process; food inspection methods and procedures related to food safety; other content that needs
to be established as food safety standards.
Food production must meet specific requirements,
such as requirements for its location, health standards, professional and technical personnel, processing, food containers, disinfection,
pollution prevention, safety, etc.
Food operations shall not occur in any
of the following situations: use of non-food raw materials for the production of food, pathogenic microorganisms, pesticide residues,
veterinary drug residues, use of food materials beyond its expiration, violation of inspection and quarantine standards, marketing
false production dates, etc.
The State Council implements a licensing
system for the food production and transaction. To engage in food production, sale or catering services, the business operator
shall obtain a license in accordance with the laws. Agricultural products are exempt from obtaining the license and are instead
verified and licensed on-site by the local government at or above the county level.
According to the Product Quality Law of
the People’s Republic of China, which was effective as from September 1993 and amended by the SCNPC in 2000 and 2009 respectively,
products for sale must satisfy relevant safety standards and sellers shall adopt measures to maintain the quality of products for
sale. Sellers may not sell mix impurities or imitations into products, or substitute fake products for genuine ones, or substitute
defective products for good ones or substitute substandard products for standard ones. For sellers, any violation of state or industrial
standards for health and safety or other requirements may result in civil liabilities and administrative penalties, such as compensation
for damages, fines, confiscation of products illegally sold and the proceeds from such sales and even revoking business license;
in addition, severe violations may subject the responsible individual or enterprise to criminal liabilities.
Save as otherwise disclosed, we are not
subject to any special legislation or regulatory controls in the PRC other than those generally applicable to companies and businesses
in the PRC, which will have a material effect on our business operations. Changes in the PRC governmental rules and regulations
will have a significant impact on our business, and Foreign exchange control and tax policies in the PRC may limit our ability
to utilize our revenue effectively and affect our ability to receive dividends and other payments from our subsidiaries in the
PRC.
Please also refer to the Section “Risk
Factors – Risks Relating to Doing Business in the PRC” of this report for details on the applicable PRC laws and regulations.
Corporate Information
Our principal executive offices are located
at 200 East Xiangfu Road (Huakun Times Plaza), 1118-1125, Yuhua District, Changsha City, Hunan Province, China, where we leased
approximately 3,378 square feet of office space pursuant to a lease agreement, which lasts from June 1, 2019 to July 31, 2022 with
an average annual rent approximating RMB320,000 (approximately US$45,500). We do not own any real property or have any land use
rights.
Our telephone number at that address is
+86-731-8513-3570. Our company website is www.h-n-myt.com
C. Organizational structure
The chart below presents our corporate
structure as of the date of this report.
D. Property, Plants and Equipment
Information regarding our property, plants
and equipment is described “Item 4. B. Business Overview.”
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not required.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains
forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In
particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking
statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,”
“could,” “possibly,” “probably,” anticipates,” “projects,” “expects,”
“may,” “will,” or “should” or other variations or similar words. No assurances can be given
that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s
current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis
should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply
that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
A. Operating Results
As of June 30, 2020, we have two operating
business lines, including the retail business of providing high-quality tea beverages in our tea shop chain business conducted
by Hunan MYT and the dark tea distribution business by 39Pu.
Tea Shop Chain Business
As affected by the outbreak of COVID-19,
we closed certain tea shops through the date of this report. Currently the Company has four tea shops based in Hunan Province,
China, among which two are flagship stores and two are general stores. In addition, we opened our first oversea tea shop in August
2020 in Manhattan, New York City, through our joint venture. The Company sells tea products,
beverages and light meals. The tea drinks we are currently offering are developed on various tea bases, among which is our featured
Anhua dark tea base. These tea-based beverages include fresh milk tea, fruit tea, milk cap tea, etc. The light meals offered include
selections such as salads, sandwiches, pasta, steak, burritos and other healthy options. The pastries we are offering include fresh
baked bread, fresh baked cakes, frosting cakes, etc.
Customers
place orders and pay for tea products, beverages and light meals in the Company’s tea shop chains. Revenues are recognized
at the point of delivery to customers. Customers that purchase prepaid cards are issued additional points for free at the time
of purchase.
We have also teamed up with China’s
leading online food ordering and delivery platforms—meituan.com (“美团”) and ele.me (“饿了么”)—to
allow consumers to order drinks, light meals, and pastries through the Internet from the closest stores. Consumers, however, can
order only products that are suitable for delivery, such as bread with long expiration periods, light snacks, and certain tea beverages.
Some tea beverages, such as milk foam cap tea, are not offered online due to its unsuitability for delivery. After a customer places
an order with these online platforms, our products will be produced in the stores and delivered by professional deliverymen. The
production and delivery process is typically completed in forty (40) minutes.
For the years ended June 30, 2020 and 2019,
the Company earned income from the tea shop chain business of $448,000 and $401,814, respectively.
Branding and Marketing Strategy
Our products are currently offered under
two brands, Buoyance Manor (“浮力庄园”) and Your Ladyship Tea
(“小主的茶”). We plan to offer snacks and accessories, including peanut nougat gift boxes,
cookies, coffee mugs, and tea cups under a new brand Meet Honey. We have entered into a series of trademark assignment
and license agreements with the owners of these trademarks. For details, please refer to the section of Trademarks, Copyrights,
Patents and Domain Names.
Each brand has its own market position.
Buoyance Manor mainly focuses on selling coffee drinks and varieties of bread originating from Europe. Your Ladyship Tea mainly
focuses on selling tea beverages and light meals. Meet Honey will mainly focus on selling snacks and accessories, including peanut
nougat gift boxes, cookies, coffee mugs, and tea cups.
Competition
In almost all markets in which we operate,
there are numerous competitors in the specialty tea beverage business. We believe that our customers choose among specialty tea
beverage brands primarily on the basis of product quality, service and convenience, as well as price. We face competition from
large fast-food restaurants and ready-to-drink tea beverage manufacturers. We also compete with restaurants and other specialty
retailers for prime retail locations and qualified personnel to operate both new and existing stores.
As of now, our major competitors in the
Hunan province are: Maiji (“麦吉”), Luosennina (“罗森尼娜”), NAYUKI
(“奈雪的茶”), and Chayanyuese (“茶颜悦色”).
Dark Tea Distribution Business
In order to diversify the Company’s
business and create synergies between our tea shop chains and dark tea distribution, the
Company’s indirectly wholly-owned subsidiary, Mingyuntang (Shanghai) Tea Co. Ltd. (“Shanghai
MYT”), entered into a series of contractual agreements (the “39Pu VIE Agreements”) with Hunan 39 PU Tea Co.,
Ltd. (“39Pu”) and certain shareholders of 39Pu (“39Pu Shareholders”),
who collectively hold 51% of 39Pu. The 39Pu VIE Agreements are designed to provide Shanghai MYT with the power, rights and
obligations equivalent, in all material respects, to those it would possess as the 51% equity holder of 39Pu, including absolute
control rights and the rights to the management, operations, assets, property and revenue of 39Pu.
The purpose of the 39Pu VIE Agreements is solely to give the Company the exclusive control over 39Pu’s
management. Through 39Pu’s VIE structure, the Company was able to consolidate
operations of 39Pu, effective as of October 2, 2019, and now operates a separate dark
tea distribution business.
39Pu, headquartered in Changsha Province,
China, is a high-end tea enterprise integrating tea distribution, product research and development, and tea cultural heritage projects.
39Pu aims to create a comprehensive tea brand, selling premium tea (primarily Anhua dark tea) and facilitating the dissemination
of tea culture. Currently, 39Pu engages in the sale of dark tea products through various sales channels, including sales to wholesale
customers, sales through reputable online marketplaces in China such as Tiktok, and sales through the Company’s retail stores.
39Pu recognizes revenues when products
are delivered to customers on a gross basis, as the Company is acting as a principal in these transactions. For the years ended
June 2020 and 2019, the Company earned income from the dark tea distribution of $417,705 and $nil, respectively.
Key Factors that Affect Operating Results
We just launched the specialty tea product
distribution and retail business in November 2018 and the dark tea distribution business in October 2019. We believe our future
success depends on our ability to significantly increase revenues as well as maintain profitability from our operations. Our limited
operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in
light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving
industry. These risks and challenges include, among other things,
|
●
|
Our ability to attract and engage customers
|
|
●
|
Our ability to increase product offerings
|
|
●
|
Expansion of our online distribution
|
|
●
|
Effective selling prices of our products
|
|
●
|
Efficient store operations
|
Our business requires a significant amount
of capital, in large part because we plan to continue to open stores and expand our business through joint venture stores and to
additional markets where we currently do not have operations.
Results
of Operations
Year Ended June 30, 2020 as Compared to Year Ended June 30,
2019
|
|
For the Years Ended
June 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
865,705
|
|
|
$
|
401,814
|
|
|
$
|
463,891
|
|
|
|
115
|
%
|
Cost of revenues
|
|
|
(508,462
|
)
|
|
|
(236,661
|
)
|
|
|
(271,801
|
)
|
|
|
115
|
%
|
Gross profit
|
|
|
357,243
|
|
|
|
165,153
|
|
|
|
192,090
|
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(2,813,636
|
)
|
|
|
(2,202,161
|
)
|
|
|
(611,475
|
)
|
|
|
28
|
%
|
Total operating expenses
|
|
|
(2,813,636
|
)
|
|
|
(2,202,161
|
)
|
|
|
(611,475
|
)
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
35,737
|
|
|
|
3,977
|
|
|
|
31,760
|
|
|
|
799
|
%
|
Change in fair value of warrants
|
|
|
282,232
|
|
|
|
1,088,443
|
|
|
|
(806,211
|
)
|
|
|
-74
|
%
|
Equity investment loss
|
|
|
(22,245
|
)
|
|
|
-
|
|
|
|
(22,245
|
)
|
|
|
>100
|
%
|
Other income
|
|
|
38,242
|
|
|
|
11,725
|
|
|
|
26,517
|
|
|
|
226
|
%
|
Total other income, net
|
|
|
333,966
|
|
|
|
1,104,145
|
|
|
|
(770,179
|
)
|
|
|
-70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(2,122,427
|
)
|
|
|
(932,863
|
)
|
|
|
(1,189,564
|
)
|
|
|
128
|
%
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(2,122,427
|
)
|
|
|
(932,863
|
)
|
|
|
(1,189,564
|
)
|
|
|
128
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
-
|
|
|
|
28,488,305
|
|
|
|
(28,488,305
|
)
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,122,427
|
)
|
|
$
|
27,555,442
|
|
|
$
|
(29,677,869
|
)
|
|
|
-108
|
%
|
Revenues
We generate revenue from the following
two sources, including (1) sales of tea products, beverages and light meals in its tea shop chains by Hunan MYT, and (2) sales
of dark tea products by 39Pu. Revenue from sales of dark tea products services are newly incorporated into our operations as a
result of our recent entry into VIE contractual agreements with 39Pu. Total revenue increased by $463,891 or 115%, from $401,814
for the year ended June 30, 2019 to $865,705 for the year ended June 30, 2020.
(1)
|
Revenue from sales of tea products, beverages and light meals in retail shop chains
|
The Company commenced its business of specialty
tea product distribution and retail in November 2018. The Company sold tea beverage drinks, light meals and other tea products
in the retail stores. Customers places orders in the store and revenue is recognized when drinks and meals are delivered to the
customers. For the years ended June 30, 2020 and 2019, the Company generated revenues of $448,000 and $401,814, respectively, from
its eight retail stores, representing an increase of $46,186 or 11%. Though affected by the outbreak of COVID-19, and the Company
closed all its tea shops during February and March 2020, the Company made an increase in revenue. The increase was mainly because
our two flagship stores attracted increasing customers and earned an increase of revenues during the year ended June 30, 2020.
Due to the outbreak of COVID-19, Company permanently closed four general stores from April 2020 through August 2020.
However with the opening our first oversea tea shop in August
2020 in New York City, and the acquisition of CROP CIRCLE in September 2020, we expect that our tea shop chain business will gain
increasing reputation among customers in New York and our revenues from retail shop chains will continue to increase in the future.
(2)
|
Revenue from sales of dark tea products
|
The Company commenced its business of distributing dark tea
in October 2019, when the Company entered into VIE agreements with 39Pu and 39Pu’s shareholders. The Company recognizes revenues
when dark teas are delivered to customers, on a gross basis as the Company is acting as a principal in these transactions.
During the year ended June 30, 2020, the Company recognized
revenues of $417,705 from sales of dark tea products. There was no such revenue in the year ended June 30, 2019.
Cost of revenues
The cost of revenues is comprised of material
costs of tea beverage drinks, light meals, dark tea products and other products. For the year ended June 30, 2020, the Company
incurred cost of $508,462, consisting of cost of tea beverage drinks and light meals of $347,694 and cost of dark tea products
of $160,768. For the year ended June 30, 2019, the Company incurred cost of $236,661, all attributable to cost of tea beverage
drinks and light meals.
General and administrative expenses
General and administrative expenses increased from $2,202,161
for the year ended June 30, 2019, to $2,813,636 for the year ended June 30, 2020, representing an increase of $611,475, or 28%.
General and administrative expenses was mainly comprised of employee salary and welfare expenses, retail store and office rental
expenses, share-based compensation expenses, professional consulting service fees and travel expenses. The increase of general
and administrative expenses was mainly attributable to the operations of both our tea shop chains and dark tea distribution business,
leading to an increase of $453,183 in employee salary and welfare expenses and an increase of $223,815 in retail store and
office rental expenses.
Change in fair value of warrants
Gain
on change in fair value of warrants was $282,232 for the year ended June 30, 2020, as compared with $1,088,443 for
the year ended June 30, 2019. This is recorded as a non-cash gain, which resulted from the change in fair value of warrants issued
connection with registered direct offering closed on May 24, 2019, and the private placement closed on November 21, 2017.
Equity investment loss
During the year ended June 30, 2020, the
Company invested in one join venture, through which the Company opened its first oversea tea shop. The tea shop did not commence
operations until August 2020. In the year ended June 30, 2020, the joint venture reported a net loss of $43,618 from start-up operating
expenses, and the Company recorded an equity investment loss of $22,245.
Net loss from discontinued operations
During the year ended
June 30, 2019 the net income from discontinued operations was comprised of a net loss of $9,357,421 from discontinued operations
of fine chemical business against a gain of $37,845,726 from disposal of the discontinued operations of the fine chemical business.
For details of discontinued operations, please refer to Note 4 of our Consolidated Financial Statements included in this report.
The
Company disposed of fine chemical business in April 2019, leading to net loss of $nil from discontinued operations for the year
ended June 30, 2020.
Net loss
As a result of the foregoing, net loss
for the year ended June 30, 2020 was $2,122,427, representing a change of $29,677,869 from net income of $27,555,442 for the year
ended June 30, 2019.
Year Ended June 30, 2019 as Compared
to Year Ended June 30, 2018
|
|
For the Years Ended
June 30,
|
|
|
Change
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
401,814
|
|
|
$
|
-
|
|
|
|
401,814
|
|
|
|
>100
|
%
|
Cost of revenues
|
|
|
(236,661
|
)
|
|
|
-
|
|
|
|
(236,661
|
)
|
|
|
>100
|
%
|
Gross profit
|
|
|
165,153
|
|
|
|
-
|
|
|
|
165,153
|
|
|
|
>100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(2,202,161
|
)
|
|
|
(889,107
|
)
|
|
|
(1,313,054
|
)
|
|
|
148
|
%
|
Total operating expense
|
|
|
(2,202,161
|
)
|
|
|
(889,107
|
)
|
|
|
(1,313,054
|
)
|
|
|
148
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
3,977
|
|
|
|
27
|
|
|
|
3,950
|
|
|
|
14,630
|
%
|
Change in fair value of warrants
|
|
|
1,088,443
|
|
|
|
205,785
|
|
|
|
882,658
|
|
|
|
429
|
%
|
Other income
|
|
|
11,725
|
|
|
|
-
|
|
|
|
11,725
|
|
|
|
>100
|
%
|
Total other income, net
|
|
|
1,104,145
|
|
|
|
205,812
|
|
|
|
898,333
|
|
|
|
436
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(932,863
|
)
|
|
|
(683,295
|
)
|
|
|
(249,568
|
)
|
|
|
37
|
%
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(932,863
|
)
|
|
|
(683,295
|
)
|
|
|
(249,568
|
)
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
|
28,488,305
|
|
|
|
(82,206,040
|
)
|
|
|
110,694,345
|
|
|
|
-135
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27,555,442
|
|
|
$
|
(82,889,335
|
)
|
|
|
110,444,777
|
|
|
|
-133
|
%
|
Revenues
The Company commenced its new business
of specialty tea product distribution and retail in November 2018. During the year ended June 30, 2019, the Company acquired six
general retail stores and opened two flagship retail stores. The Company sold tea beverage drinks, light meals and other tea products
in the retail stores. Customers places orders in the store and revenue is recognized when drinks and meals are delivered to the
customers. For the year ended June 30, 2019, the Company generated revenues of $401,814 from its existing eight retail stores.
Because we just launched our new business in November 2018,
we did not have any operations or generate any revenues for the year ended June 30, 2018.
Cost of revenues
The cost of revenues is comprised of material
costs of tea beverage drinks, light meals and other products. For the year ended June 30, 2019, the Company incurred cost of revenues
of $236,661, leading to a gross profit margin of 41%.
During the year ended June 30, 2018, cost
of revenues incurred for specialty tea product distribution and retail business was nil.
General and administrative expenses
General and administrative expenses increased from $889,107
for the year ended June 30, 2018, to $2,202,161 for the year ended June 30, 2019, representing an increase of $1,313,054, or 148%.
General and administrative expenses was mainly comprised of employee salary and welfare expenses, retail store and office rental
expenses, share-based compensation expenses, professional consulting service fees and travel expenses. The increase of general
and administrative expenses was mainly attributable to operation of specialty tea product distribution and retail business, including
an increase of $504,807 in employee salary and welfare expenses, an increase of $198,918 in retail store and office rental
expenses, an increase of $576,845 in professional consulting services, including legal service fees and audit-related fees for
the Company’s entry into new VIE agreements with Hunan MYT in November 2018, disposal of Elite and its subsidiaries in April
2019, registered direct offering closed in May 2019, and warrant liability expenses of $246,718 incurred by the placement agent
for the registered direct offering.
Change in fair value of warrants
Gain
on change in fair value of warrants was $1,088,443 for the year ended June 30, 2019, as compared with $205,785
for the year ended June 30, 2018. This is recorded as a non-cash gain, which resulted from the change in fair value of warrants
issued connection with registered direct offering closed on May 24, 2019, and the private placement closed on November 21, 2017.
Net income (loss) from discontinued
operations
During
the year ended June 30, 2019, the net income from discontinued operations was comprised of a net loss of $9,357,421 from discontinued
operations of fine chemical business against a gain of $37,845,726 from disposal of the discontinued operations of fine chemical
business.
For
details of discontinued operations, please refer to Note 4 of our Consolidated Financial Statements included in Form 20-F.
Net income (loss)
As a result of the foregoing, net income
for the year ended June 30, 2019 was $27,555,442 representing a change of $110,444,777 from net loss of $82,889,335 for the year
ended June 30, 2018.
Critical Accounting Policies and Estimates
We
prepare our financial statements in accordance with U.S. GAAP, which requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the balance sheet dates and revenues and expenses during the reporting
periods. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment
of current business and other conditions, our expectations regarding the future based on available information and assumptions
that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent
from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results
could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
The
selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the
sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our
financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in
the preparation of our financial statements. You should read the following description of critical accounting policies, judgments
and estimates in conjunction with our consolidated financial statements and other disclosures included in this Form 6-K.
The consolidated
financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States
(“U.S. GAAP”).
●
|
Principal of consolidation
|
The
consolidated financial statements include the accounts of the Company, its wholly and majority owned subsidiaries, and consolidated
VIEs for which the Company is the primary beneficiary.
All
transactions and balances among the Company, its subsidiaries and consolidated VIEs have been eliminated upon consolidation.
The Company adopted ASC 606, Revenue from
Contracts with Customers (“ASC 606”) beginning on July 1, 2018 using the modified retrospective approach. ASC 606 establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue
to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The Company has assessed the impact of
the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences
that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price,
customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded
that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 606 and
therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
In according with ASC 606, revenues are
recognized when control of the promised services is transferred to customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those services.
During the years ended June 30, 2020 and 2019, the Company generated
revenues primarily from sales of tea products, beverages and light meals in its tea shop chains by Hunan MYT, and from sales of
dark tea products by 39Pu.
Sales of tea products, beverages and
light meals in retail shop chains by Hunan MYT
Customers
place order and pay for tea products, beverage drinks and light meals in the Company’s tea shop chains. Revenues are recognized
at the point of delivery to customers. Customers that purchase prepaid cards are issued additional points for free at the time
of purchase. Cash received from the sales of prepaid vouchers are recognized as unearned income. Consideration collected for prepaid
cards is equally allocated to each point as an element, including the points issued for free, to determine the transaction price
for each point. The allocated transaction price are recognized as revenues upon the redemption of the points for purchases.
Sales of dark tea products by 39Pu
The Company identifies a single performance
obligation from contracts. The Company recognizes revenues on a gross basis as the Company is acting as a principal in these transactions
and is responsible for fulfilling the promise to provide the specified goods, subject to inventory risks and has the discretion
in establishing prices. The transaction fees are fixed. Payments received in advance from customers are recorded as “advance
from customers” in the consolidated balance sheets. Advance from customers is recognized as revenue when the Company delivers
the courses to its customers. Such advance payment received are non-refundable. In cases where fees are collected after the sales,
revenue and accounts receivable are recognized upon delivery of products to the Company.
The Company accounts for income taxes in
accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard, the
recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between
the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently
due plus deferred taxes.
The charge for taxation is based on the
results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the
balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets
and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that
it is probable that taxable income to be utilized with prior net operating loss carried forward. Deferred tax is calculated using
tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged
or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant
taxing authorities.
An uncertain tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as
income tax expense in the period incurred. The Company did not have unrecognized uncertain tax positions or any unrecognized liabilities,
interest or penalties associated with unrecognized tax benefit as of June 30, 2020 and 2019. As of June 30, 2020, income tax returns
for the tax years ended December 31, 2015 to 2019 remain open for statutory examination by PRC tax authorities.
B. Liquidity and Capital Resources
We have financed our operations primarily
through shareholder contributions, cash flow from operations, private placements, and public offerings of securities. As of June
30, 2020 and 2019, we had cash of $5,311,693 and $4,668,745, respectively. In addition, as of June 30, 2020 and 2019, we had short-term
investments of $2,266,069 and $4,078,244 with maturities within twelve months.
During June 2020 through August 2020, the
Company raised gross proceeds aggregating $17 million for registered direct offerings.
On
June 24, 2020, the Company and certain institutional investors entered into a securities
purchase agreement, pursuant to which the Company agreed to sell to such investors an aggregate of 9,000,000 ordinary shares for
gross proceeds of approximately $5.0 million. The offering closed on June 29, 2020.
On July 30, 2020, the Company and certain
institutional investors entered into certain securities purchase agreement, pursuant to which the Company agreed to sell to such
Purchasers an aggregate of 15,000,000 ordinary shares, no par value, at a price of $0.40 per share in a registered direct offering,
for gross proceeds of approximately $6 million (the “July Offering”). The offering
closed on August 3, 2020.
On August 14, 2020, the Company and the
Purchasers entered into certain securities purchase agreement, pursuant to which the Company agreed to sell to such Purchasers
an aggregate of 18,750,000 Ordinary Shares, at a price of $0.32 per share in a registered direct offering, for gross proceeds of
approximately $6 million (the “August Offering”). The offering closed on August
18, 2020.
Statement of Cash Flows
|
|
For the Years Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(1,897,534
|
)
|
|
$
|
(1,057,109
|
)
|
|
$
|
(3,178,300
|
)
|
Net cash used in investing activities
|
|
|
(2,000,967
|
)
|
|
|
(4,437,844
|
)
|
|
|
(1,134,450
|
)
|
Net cash provided by financing activities
|
|
|
4,540,350
|
|
|
|
9,493,641
|
|
|
|
486,919
|
|
Effect of exchange rate changes on cash
|
|
|
1,099
|
|
|
|
(291,223
|
)
|
|
|
4,787,111
|
|
Increase in cash
|
|
$
|
642,948
|
|
|
$
|
3,707,465
|
|
|
$
|
961,280
|
|
Net cash used in operating activities
For the year ended June 30, 2020, net cash
used in operating activities was $1,897,534. This was mainly attributable to our net loss of $2,122,427 from continuing operations,
adjusted by a decrease of $164,510 in other current assets because we closed certain tea shops and collected deposits for lease
of retail stores, and a decrease of $106,667 in other noncurrent assets as a result of amortization of such assets.
For the year ended June 30, 2019, net cash
used in operating activities was $1,057,109. This was mainly attributable to our net loss of $932,863 from continuing operations,
adjusted by an add-back of non-cash charges mainly consisting of gain on change in fair value of warrants of $1,088,443, share-based
compensation expenses of $123,000, and issuance cost of $455,531 in connection with registered direct offering, an increase of
$240,722 in other current assets as a result of payment of deposits for lease of retail stores and offices, netting off against
a cash provided by discontinued operations of $651,061.
For the year ended June 30, 2018, net cash
used in operating activities was $3,178,300. This was mainly attributable to our net loss of $683,295 from continuing operations,
adjusted by an add-back of non-cash charges mainly consisting of gain on change in fair value of warrants of $205,785 and share-based
compensation expenses of $872,000, and a cash used in discontinued operations of $3,161,220.
Net cash used in investing activities
For the fiscal year ended June 30, 2020,
net cash used in investing activities was $2,000,967. This was primarily attributable to payment of cash consideration of $2,369,775
for acquisition of 39Pu, investment of $210,000 in a joint venture, purchase of and payment of deposits for property and equipment
aggregating $492,420, against proceeds of $126,865 from disposal of property and equipment and collection of $944,363 from short-term
investments.
For the year ended June 30, 2019, net cash
used in investing activities was $4,437,844. This was mainly attributable to acquisition of $586,313 for equipment, materials and
store lease term in relation to six retail stores, purchase of $959,994 for property and equipment, investment of $4,104,188 in
financial products which are matured in 12 months, cash used in discontinued operation of $503,850, netting off against proceeds
of $1,750,000 from disposal of Elite.
For the fiscal year ended June 30, 2018,
net cash used in investing activities was $1,134,450. This was primarily attributable to cash used in discontinued operation of
$1,121,306.
Net cash provided by financing activities
For the year ended June 30, 2020, net cash
provided by financing activities was $4,540,350, which was raised in registered direct offering closed on June 29, 2020.
For the year ended June 30, 2019, net cash
provided by financing activities was $9,493,641. This was mainly attributable to proceeds of $5,500,000 raised in private placements,
and $4,118,233 raised in registered direct offering.
For the year ended June 30, 2018, net cash
provided by financing activities was $486,919. This was mainly attributable to proceeds of $1,176,307 raised in private placements,
netting off against $689,388 used in discontinued operations.
C. Research and development, patent
and licenses, etc.
Not applicable.
D. Trend information
Other than as disclosed elsewhere in this
annual report, the Company is not aware of any trends, uncertainties, demands, commitments or events for the year ended June 30,
2020 that are reasonably likely to have a material effect on our total net revenues, income, profitability, liquidity or capital
reserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial
conditions.
E. Off-balance sheet arrangements
We have not entered into any financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development
services with us.
F. Tabular disclosure of contractual
obligations
Commitments and Contingencies
In connection with acquisition of 39Pu,
a contingent cash consideration of $0.6 million and a share consideration of $1.2 million will be delivered to the three shareholders
according to the earn-out payment based on the financial performance of 39Pu in its next fiscal years. Due to the effects of COVID-19,
the financial performance of 39Pu is not expected to meet the earn-out payment conditions and the Company does not expect incurring
the contingent considerations.
Contractual obligations
The following is a schedule, by years,
of maturities of lease liabilities as of June 30, 2020:
Twelve months ended June 30,
|
|
Lease payment
|
|
2021
|
|
$
|
335,861
|
|
2022
|
|
|
181,080
|
|
2023
|
|
|
78,021
|
|
2024
|
|
|
56,279
|
|
2025 and thereafter
|
|
|
13,785
|
|
Total lease payments
|
|
|
665,026
|
|
Less: imputed interest
|
|
|
(39,669
|
)
|
Present value of lease liabilities
|
|
$
|
625,357
|
|
G. Safe Harbor
See “Forward-Looking Statements.”
H. Holding Company Structure
The Company is a holding company with no
material operations of its own. We conduct our operations through our PRC subsidiaries and consolidated VIE. As a result, our ability
to pay dividends depends upon dividends paid by our subsidiaries and consolidated VIE. If our subsidiaries, our consolidated VIE
or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict
their ability to pay dividends to us.
As an offshore holding company, we are
permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund raising activities to our PRC
subsidiaries only through loans or capital contributions, and to our consolidated affiliated entity only through loans, in each
case subject to the satisfaction of the applicable government registration and approval requirements. As a result, there is uncertainty
with respect to our ability to provide prompt financial support to our PRC subsidiaries and our VIE when needed. Notwithstanding
the foregoing, our PRC subsidiaries may use their own retained earnings (rather than Renminbi converted from foreign currency denominated
capital) to provide financial support to our consolidated affiliated entity either through entrustment loans from our PRC subsidiaries
to our VIE or direct loans to such consolidated affiliated entity’s nominee shareholders, which would be contributed to the
consolidated variable entity as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated
financial statements against the consolidated affiliated entity’s share capital.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES
A. Directors and Senior Management
Our directors and executive officers are as follows:
Name
|
|
Age
|
|
Position
|
Long Yi
|
|
44
|
|
Chief Executive Officer and Chairman of the Board
|
Kan Lu
|
|
37
|
|
Chief Financial Officer
|
Jing Yi
|
|
32
|
|
Independent Director (1)(2)(3)
|
Qinbai Zhou
|
|
59
|
|
Independent Director (1)(2)(3)
|
Changguang Wu
|
|
52
|
|
Director
|
Anatoly Danilitskiy
|
|
68
|
|
Independent Director (1)(2)(3)
|
|
(1)
|
Member
of audit committee.
|
|
(2)
|
Member
of compensation committee.
|
|
(3)
|
Member
of governance and nominating committee.
|
Below is a summary of the business experience
of each of our executive officers and directors:
Long Yi has been serving as
Chief Executive Officer and Chairman of the board of directors of the Company (the “Board”) since January 26, 2018.
Mr. Yi served as the Chief Financial Officer and director of Bat Group, Inc. (Nasdaq: GLG) from January 2013 to June 2019. Prior
to joining GLG, Mr. Yi was the senior financial manager in Sutor Technology Group Ltd. (Nasdaq: SUTR) from 2008 to August 2012.
He is a Certified Public Accountant in the State of Illinois. Mr. Yi has a Bachelor’s degree in Accounting from Northeastern
University and a Master’s degree in Accounting and Finance from University of Rotterdam. He also obtained a graduate diploma
in accounting from McGill University.
Kan Lu has been serving as Chief
Financial Officer of the Company since April 1, 2019. Ms. Lu has been serving as a Senior Manager at Ernst & Young from January
2015 to October 2018. From February 2012 to December 2014, Ms. Lu served as an Audit Senior Manager at Marcum Bernstein and Pinchuk
LLP. Ms. Lu served as an Audit Manager at KPMG from January 2007 to January 2012. She is a Certified Public Accountant in China
and a member of the Association of Chartered Certified Accountants. Ms. Lu obtained a Bachelor’s degree in Shanghai University
of Finance and Economy in 2005.
Jing Yi has been serving as a director
of the Company since May 15, 2019. Ms. Yi served as Vice President at Dong Ting Chun Restaurant Management Co., Ltd. from December
2017 to February 2019. Ms. Yi worked at Hunan Jinzhou Law Office and was in charge of the financial management of the law firm
from November 2015 to December 2017. From March 2012 to November 2015, she served as assistant to general secretary at Hunan Xiang
Cuisine Industry Promotion Association. Ms. Yi obtained her master degree of international business law at University of Kent in
England, and her bachelor degree of law in Changsha University of Science and Technology.
Qinbai Zhou has been serving as
a director of the Company since December 18, 2019. Mr. Zhou has served as the Marketing Director of Shennong Dafenghuaqiang Seed
Industry Co., Ltd. since August 2013. From March 2006 to July 2013, Mr. Zhou served as the Sales Manager of Huatai Securities Co.,
Ltd. Mr. Zhou obtained his bachelor’s degree in Economic Law from Hunan University of Technology and Commerce in China.
Changguang Wu has been serving
as a director of the Company since September 19, 2014. Mr. Wu has been with Delta as its Executive Director since 2007 and has
been actively involved in the daily operations of Delta from2007 to 2019. From 1989 to 1992, Mr. Wu was a loan officer of People’s
Bank of Danyang City. From 1992 to 2002, he worked as a chief planner at Danyang City Trust and Investment Co., Ltd. Subsequently,
in August 2002 and August 2003, Mr. Wu co-founded (i) Danyang Beijiate Materials Trading (“Beijiate Materials”) and
(ii) Danyang Beijiate Chemicals Co., Ltd. (“Beijiate Chemicals”) respectively with Mr. Xin Chao, the Company’s
former CEO, where he was mainly responsible for the management of both Beijiate Materials and Beijiate Chemicals. While he was
involved in the management of Beijiate Materials and Beijiate Chemicals, he was also the general manager of Danyang Liansheng Chemicals
Co., Ltd. (“Liansheng Chemicals”). He officially left Liansheng Chemicals and joined the Target Group in November 2007.
Mr. Wu graduated from Banking School of Jiangsu in 1989 with a diploma in Economic Management.
Anatoly Danilitskiy has been
serving as a director of the Company since February 2016. From the date of our formation in November 2011 until September 2014,
Mr. Danilitskiy served as our Chairman and Chief Executive Officer. From 2009 to 2015, Mr. Danilitskiy served as Chairman of the
Board of RETN Group, which is an international network service provider. From 2004 to 2009, Mr. Danilitskiy established and led
National Reserve Corporation, or NRC, to consolidate its strategic non-banking investment assets to become one of Russia’s
largest private holding companies. While at NRC, Mr. Danilitskiy was responsible for a number of key deals in energy (including
but not limited to purchasing certain Gazprom assets), transportation, debt arbitrage and distressed assets. Also from 2004 to
2009, Mr. Danilitskiy served as Chairman of CIS Interfincom AG, a financial and asset management subsidiary of NRC, where he oversaw
all major money market transactions and securities trading. From 1994 to 2004, Mr. Danilitskiy served as First Deputy Chairman
of National Reserve Bank, or NRB, the parent company of NRC and one of Russia’s leading universal commercial banks, where
he was responsible for business development and international affairs. From 2006 to 2009, Mr. Danilitskiy served as a Member of
the Board of Directors and a member of the Remuneration and the Assessment Committee of Aeroflot International Airlines, a Russian
national carrier, where he played a key role in the successful effort to modernize the fleet of aircraft.
There is no family relationship between
any of the persons named above and no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant
to which any person referred to above was selected as a director or member of senior management.
B. Compensation
Director Compensation
The following table represents compensation
earned by our non-executive directors in the fiscal year ended June 30, 2020:
Name
|
|
Fees earned
in cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option
awards
($)
|
|
|
All other
compensation
($)
|
|
|
Total
($)
|
|
Jing Yi (1)
|
|
$
|
7,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,500
|
|
Linchai Zhang (2)
|
|
$
|
4,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,000
|
|
Lizhong Zhang (3)
|
|
$
|
8,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,750
|
|
Yeyun Tan (4)
|
|
$
|
8,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,750
|
|
Changguang Wu (5)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Anatoly Danilitskiy (6)
|
|
$
|
3,556
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,556
|
|
Qinbai Zhou (7) *
|
|
$
|
4,667
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,667
|
|
* Resigned during the fiscal year ended
June 30, 2020
(1)
|
Ms. Jing Yi was appointed as a director of the Company in May 2019 and receives annual compensation of $1,250.
|
(2)
|
Ms. Linchai Zhang was appointed as a director of the Company in June 2018 and receives annual compensation of $8,000. Ms. Zhang resigned on December 18, 2019.
|
(3)
|
Mr. Lizhong Zhang was appointed as a director of the Company in November 2018 and receives annual compensation of $5,833. Mr. Zhang resigned on July 26, 2020.
|
(4)
|
Ms. Yeyun Tan was appointed as a director of the Company in November 2018 and receives annual compensation of $5,833. Ms. Tan resigned on July 15, 2020.
|
(5)
|
Mr. Changguang Wu was appointed as a director of the Company in September 2014 and does not receive annual compensation for the year ended June 30, 2019.
|
(6)
|
Mr. Anatoly Danilitskiy was appointed as a director of the Company in February 2016 and receives annual compensation of $3,556.
|
(7)
|
Mr. Qinbai Zhou was appointed as a director of the Company on December 18, 2019 and receives annual compensation of $8,000
|
Executive Compensation
The following table represents compensation
earned by our executive officers in the fiscal year ended June 30, 2020:
Name and Principal Position
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Yi (1) (CEO)
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Kan Lu (2) (CFO)
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
(1)
|
Mr. Long Yi was appointed as the CEO of the Company in January 2018 and receives annual compensation of $75,000.
|
(2)
|
Ms. Kan Lu was appointed as the CFO of the Company in April 2019 and receives annual compensation of $50,000.
|
Grants of Plan Based Awards
As of this annual report, our CEO, Mr.
Long Yi, was granted of 100,000 restricted ordinary shares of the Company pursuant to the 2018 Equity Incentive Plan, which is
discussed below.
2018 Equity Incentive Plan
On June 19, 2018, the board of directors
of the Company adopted the 2018 Equity Incentive Plan (“2018 Incentive Plan”), covering 1,900,000 ordinary shares,
which represents approximately 7% of the total number of the Company’s current issued and outstanding ordinary shares. The
shareholders approved the 2018 Incentive Plan at the annual meeting of shareholders held on June 29, 2018. Set forth below is a
summary of the plan:
Awards
The 2018 Incentive Plan provides for the
grant of ordinary shares, which involves or might involve the issuance of restricted ordinary shares, unrestricted ordinary shares,
and/or a combination of both, for an aggregate of not more than 1,442,827 ordinary shares. If any award is forfeited, cancelled
or settled in cash, the number of ordinary shares subject thereto will again be available for grant under the 2018 Incentive Plan.
If there is any change in our corporate capitalization, the Compensation Committee of the Board (hereinafter referred to as the
Committee) in its sole discretion may make substitutions or adjustments to the number of shares reserved for issuance under the
2018 Incentive Plan, the number of shares covered by awards then outstanding under the 2018 Incentive Plan, the limitations on
awards under the 2018 Incentive Plan, and such other equitable substitution or adjustments as it may determine appropriate. The
2018 Incentive Plan has a term of ten years and no further awards may be granted under the 2018 Incentive Plan after that date.
Eligibility
The persons who are eligible to receive
grants are employees, directors or consultants of the Company or its affiliates. New directors, employees and consultants of the
Company or its affiliates are eligible to participate in the 2018 Incentive Plan as well. The Committee has the sole and complete
authority to determine who will be granted an award under the 2018 Incentive Plan, however, it may delegate such authority to one
or more officers of the company under the circumstances set forth in the 2018 Incentive Plan.
Administration
The 2018 Incentive Plan is administered
by either the Board, a committee of at least two people designated by the Board or the Committee. Among other things, the Committee
has the authority, in its discretion, subject to the express limits of the 2018 Incentive Plan and its charter, to (i) designate
the employees, directors and consultants to be granted awards, (ii) determine the types of awards to be granted, (iii) determine
the number of ordinary shares or the amount of other consideration subject to each award, (iv) determine the terms and conditions
of awards granted, (v) determine the settlement or exercise of awards, (vi) determine the extent and circumstances surrounding
the delivery of consideration for an award to be made, (vii) interpret, administer, reconcile any inconsistency, correct any defect
or resolve any controversy regarding the 2018 Incentive Plan and related documents, (viii) establish, amend, suspend or waive any
rules or regulations and appoint agents as the Committee deems appropriate for proper administration of the 2018 Incentive Plan,
(ix) accelerate the vesting or lapse of restrictions on the awards and (x) make other determination and take other action that
the Committee deems necessary or desirable to administer the 2018 Incentive Plan.
Additional Terms
Except to the extent otherwise provided
in an award agreement, in the event of a Change in Control (as defined in the 2018 Incentive Plan), all outstanding awards issued
under the 2018 Incentive Plan will become fully vested. In general, in the event of a Change of Control, the Committee may cause
any award either (i) to be canceled in consideration of a payment in cash or other consideration in amount per share equal to the
excess, if any, of the price or implied price per share in the Change of Control over the per share exercise, base or purchase
price of such award, which may be paid immediately or over the vesting schedule of the award; or (ii) to be assumed or a substantially
equivalent award be substituted by the successor corporation or a parent or subsidiary of such successor corporation.
Awards under the 2018 Incentive Plan may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent
or to any Permitted Transferee (as defined in the 2018 Incentive Plan). With respect to international participants who reside or
work outside of the United States, the Committee may in its sole discretion amend the terms of the 2018 Incentive Plan or outstanding
awards to conform with the requirements of local law or to obtain more favorable tax or other treatment for a participant, the
Company or its affiliates.
Amendments
The Board may at any time alter, amend,
suspend, discontinue, or terminate the 2018 Incentive Plan; provided, that no such alteration, amendment, suspension, discontinuation
or termination shall be made without shareholder approval if such approval is necessary to comply with any applicable tax or regulatory
requirement applicable to this plan; and provided further that no alternation, amendment, suspension, discontinuation, or termination
may be effected without the prior written consent a participant if it would adversely affect the rights of the participant with
respect to a previously-awarded award under the 2018 Incentive Plan.
Employment Agreements
Mr. Long Yi entered into an employment
agreement with the Company, dated January 26, 2018, and an amended and restated employment agreement with the Company, dated May
21, 2019, pursuant to which he will serve as the Chief Executive Officer of the Company until the earlier of his resignation or
termination by the Company. In consideration for his employment, the Company pays Mr. Yi an annual salary of US$75,000.
Ms. Kan Lu entered into an employment agreement
with the Company, dated March 28, 2019, pursuant to which she will serve as the Chief Financial Officer of the Company until the
earlier of her resignation or termination by the Company. In consideration for her employment, the Company pays Ms. Lu an annual
salary of US$50,000.
Outstanding Equity Awards at Fiscal
Year-End; Option Exercises and Stock Vested
None.
Pension Benefits
None of the named executives currently
participates in or has account balances in qualified or nonqualified defined benefit plans sponsored by us.
Nonqualified Deferred Compensation
None of the named executives currently
participates in or has account balances in nonqualified defined contribution plans or other deferred compensation plans maintained
by us.
Other than as disclosed above, we have
not entered into any agreements or arrangements with our executive officers or directors, and have not made any agreements to provide
benefits upon termination of employment.
C. Board Practices
Board Committees
Our Board of Directors has established
an audit committee, a compensation committee and a governance and nominating committee.
Audit Committee. Our audit committee
consists of Qinbai Zhou, Jing Yi and Anatoly Danilitskiy. Jing Yi is the Chairwoman of the Audit Committee, and our Board of Directors
believes that Ms. Yi qualifies as an “audit committee financial expert,” as such term is defined in the rules of the
Securities and Exchange Commission. Messrs. Yi, Zhou and Danilitskiy do not have any direct or indirect material relationship with
us other than as a director, and thus are considered independent directors pursuant to SEC and Nasdaq rules.
The Board of Directors has adopted an audit
committee charter, providing for the following responsibilities of the Audit Committee:
|
●
|
appointing and replacing our independent auditors and pre-approving all auditing and permitted non-auditing services to be performed by the independent auditors;
|
|
●
|
reviewing and discussing the annual audited financial statements with management and the independent auditors;
|
|
●
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
●
|
such other matters that are specifically delegated to our audit committee by our Board of Directors from time to time;
|
|
●
|
meeting separately and periodically with management, the internal auditors and the independent auditors; and
|
|
●
|
reporting regularly to the Board of Directors.
|
Compensation Committee. Our compensation
committee consists of Qinbai Zhou, Jing Yi and Anatoly Danilitskiy. Mr. Danilitskiy serves as Chairman of the Compensation Committee.
Messrs. Yi, Zhou and Danilitskiy do not have any direct or indirect material relationship with us other than as a director, and
thus are considered independent directors pursuant to SEC and Nasdaq rules.
Our Board of Directors adopted a compensation committee charter,
providing for the following responsibilities of the Compensation Committee:
|
●
|
reviewing and making recommendations to the board regarding our compensation policies and forms of compensation provided to our directors and officers;
|
|
●
|
reviewing and making recommendations to the board regarding bonuses for our officers and other employees;
|
|
●
|
administering our incentive-compensation plans for our directors and officers;
|
|
●
|
reviewing and assessing the adequacy of the charter annually;
|
|
●
|
administering our share option plans, if they are established in the future, in accordance with the terms thereof; and
|
|
●
|
such other matters that are specifically delegated to the compensation committee by our Board of Directors from time to time.
|
Governance and Nominating Committee.
Our governance and nominating committee consists of Qinbai Zhou, Jing Yi and Anatoly Danilitskiy. The members of the Governance
and Nominating Committee do not have any direct or indirect material relationship with us other than as a director. Mr. Zhou serves
as Chairman of the Governance and Nominating Committee.
Our Board of Directors adopted a governance
and nominating committee charter, providing for the following responsibilities of the Governance and Nominating Committee:
|
●
|
overseeing the process by which individuals may be nominated to our Board of Directors;
|
|
●
|
identifying potential directors and making recommendations as to the size, functions and composition of our Board of Directors and its committees;
|
|
●
|
reviewing candidates proposed by our stockholders;
|
|
●
|
developing the criteria and qualifications for the selection of potential directors; and
|
|
●
|
making recommendations to the Board of Directors on new candidates for board membership.
|
In making nominations, the Governance and
Nominating Committee is required to submit candidates who have the highest personal and professional integrity, who have demonstrated
exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the board, in collectively
serving the long-term interests of the stockholders. In evaluating nominees, the Governance and Nominating Committee is required
to take into consideration the following attributes, which are desirable for a member of the board: leadership, independence, interpersonal
skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.
Code of Ethics
On March 19, 2012, our Board of Directors
adopted a code of ethics that applies to our directors, officers and employees.
Insider Trading Policy
On August 9, 2019, our Board of Directors
adopted an insider trading policy that applies to our directors, officers and employees.
Director Independence
Three of our five directors, Messrs. Jing
Yi, Qinbai Zhou, and Anatoly Danilitskiy qualify as independent directors pursuant to the rules of the Nasdaq Marketplace.
D. Employees
As of June 30, 2020, we have a total of
68 full-time employees located in Hunan Province, the PRC. We do not experience any significant seasonal fluctuations in our number
of employees. The number of temporary employees employed by us during the periods under review was insignificant.
None of our employees are represented by
a union. We believe that our relationship with our employees has historically been good and this is expected to continue.
The functional distribution of our full-time
employees as of June 30, 2020 is as follows:
Function
|
|
Number
|
|
Management
|
|
|
7
|
|
Sales and marketing
|
|
|
7
|
|
Research and Development
|
|
|
2
|
|
Finance and administration
|
|
|
13
|
|
Operation and logistics
|
|
|
9
|
|
Retail stores
|
|
|
30
|
|
|
|
|
|
|
Total
|
|
|
68
|
|
E. Share Ownership
The following table sets forth information
regarding the beneficial ownership of our ordinary shares as of October 29, 2020:
|
●
|
each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares;
|
|
●
|
each of our executive officers and directors; and
|
|
●
|
all our executive officers and directors as a group.
|
The beneficial ownership of ordinary shares
is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises
sole or shared voting or investment power. For purposes of the table below, we deem shares subject to options, warrants or other
exercisable or convertible securities that are exercisable or convertible currently or within 60 days of October 29, 2020, to
be outstanding and to be beneficially owned by the person holding the options, warrants or other currently exercisable or convertible
securities for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the
purpose of computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with respect to their shares, except to the extent authority is shared
by spouses under community property laws.
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Amount of
|
|
|
Outstanding
|
|
|
|
Beneficial
|
|
|
Ordinary
|
|
Name and Address of Beneficial Owner(1)
|
|
Ownership
|
|
|
Shares(2)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Long Yi, CEO and Chairman
|
|
|
5,000
|
|
|
|
*
|
|
Kan Lu, CFO
|
|
|
-
|
|
|
|
-
|
|
Jing Yi, Director
|
|
|
-
|
|
|
|
-
|
|
Qinbai Zhou, Director
|
|
|
-
|
|
|
|
-
|
|
Changguang Wu, Director
|
|
|
-
|
|
|
|
-
|
|
Anatoly Danilitskiy, Director
|
|
|
-
|
|
|
|
-
|
|
All directors and executive officers as a group (eight individuals)
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Five Percent Holders:
|
|
|
|
|
|
|
|
|
* - Less than 1%
|
(1)
|
Unless
otherwise noted, the business address for each of our beneficial owners is c/o Urban Tea, Inc., Huakun Times Plaza, Room 1118,
Floor 11, No. 200 Erduan, East Xiang Fu Road, Yuhua District, Changsha, China.
|
|
(2)
|
The
percentage of shares beneficially owned is based on 7,949,200 ordinary shares outstanding as of October 29, 2020.
|
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
As of June 30, 2020, the Company had balance of $1,127 due from
two related parties which were indirectly controlled Mr. Guo’an Hu, one of the shareholders of 39Pu. The balance was generated
from sales of dark tea products. As of June 30, 2019, the Company had no balances due from or due to related parties.
During the year ended June 30, 2020, the
Company sold dark tea products of $33,497 to two related parties. During the years ended June 30, 2019 and 2018, the Company did
not incur significant related party transactions.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other
Financial Information
Financial Statements
We have appended consolidated financial
statements filed as part of this report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party to any material
legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings
arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome,
is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Dividends
We have not paid dividends on our ordinary
shares and do not anticipate paying such dividends in the foreseeable future.
B. Significant Changes
None.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ordinary shares are currently trading
under the ticker symbol “MYT.” The shares began trading on June 1, 2015 on the NASDAQ Capital Market.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are currently traded
on the NASDAQ Capital Market
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
The following represents a summary of
certain key provisions of our memorandum and articles of association and the BVI Business Companies Act 2004 of the British Virgin
Islands, which we refer to as the Act below.
Summary
Registered Office. Under our
Amended and Restated Memorandum of Association, the address of our registered office is Clarence Thomas Building, P.O. Box 4649,
Road Town, Tortola, British Virgin Islands.
Capacity and Powers. Under Clause
4(1) of our Amended and Restated Memorandum of Association, we have the capacity to carry on or undertake any business or activity,
do any act or enter into any transaction.
Directors. Under Article 23
of our Articles of Association, no contract or transaction between us and one or more of our Directors (an “Interested Director”)
or officers, or between us and any of their affiliates (an “Interested Transaction”), will be void or voidable solely
for this reason, or solely because the director or officer is present at or participates in the meeting of our board or committee
which authorizes the contract or transaction, or solely because any such director’s or officer’s votes are counted
for such purpose, if:
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(a)
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The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the our Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
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(b)
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The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to our shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of our shareholders; or
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(c)
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The contract or transaction is fair as to us as of the time it is authorized, approved or ratified, by the board, a committee or the Shareholders.
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A majority of independent directors must
vote in favor of any Interested Transaction and determine that the terms of the Interested Transaction are no less favorable to
us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
Our board shall review and approve all
payments made to the founders, officers, directors, special advisors, consultants and their respective affiliates and any Interested
Director shall abstain from such review and approval.
Rights, Preferences and Restrictions Attaching
to Our Ordinary Shares. We are authorized to issue an unlimited number of shares divided into the following classes of shares:
(i) an unlimited number of ordinary shares with no par value; and (ii) 5,000,000 preferred shares, par value $0.0001 per share.
As of October 29, 2020, 7,949,200 ordinary shares were outstanding. Each share, regardless if it is part of a class of ordinary
shares, has the right to one vote at a meeting of shareholders or on any resolution of shareholders, the right to an equal share
in any dividend paid by us, and the right to an equal share in the distribution of surplus assets. We may by a resolution of the
Board of Directors redeem our shares for such consideration as the Board of Directors determines.
Alteration of Rights. The rights
attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series),
whether or not the Company is being wound-up, may be varied with the consent in writing of all the holders of the issued shares
of that class or series or with the sanction of a resolution passed by a majority of the votes cast at a separate meeting of the
holders of the shares of the class or series.
Meetings. A meeting of Members may
be called by not less than ten (10) clear days’ Notice, but a meeting of Members may be called by shorter notice if Members
holding a 50 per cent majority of the total voting rights on all the matters to be considered at the meeting have waived notice
of the meeting and, for this purpose, the presence of a Member shall be deemed to constitute a waiver on his part. The notice shall
specify the time and place of the meeting and the general nature of the business. The accidental omission to give Notice of a meeting
or (in cases where instruments of proxy are sent out with the Notice) to send such instrument of proxy to, or the non-receipt of
such Notice or such instrument of proxy by, any person entitled to receive such Notice shall not invalidate any resolution passed
or the proceedings at that meeting.
Limitations on the Right to Own Securities.
There are no limitations on the rights to own our securities, or limitations on the rights of non-resident or foreign shareholders
to hold or exercise voting rights on our securities, contained in our Amended and Restated Memorandum and Articles of Association
(or under British Virgin Islands law).
C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,”
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this
annual report on Form 20-F.
D. Exchange Controls
BVI Exchange Controls
There are no material exchange controls
restrictions on payment of dividends, interest or other payments to the holders of our ordinary shares or on the conduct of our
operations in the BVI. There are no material BVI laws that impose any material exchange controls on us or that affect the payment
of dividends, interest or other payments to nonresident holders of our ordinary shares. BVI law and our memorandum and articles
of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote our ordinary
shares.
PRC Exchange Controls
Under the Foreign Currency Administration
Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities,
RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as
trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion
of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.
Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate
foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must
convert all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special
purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose
of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established
or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with
the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment
or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material
change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result
in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends
and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange
administration regulations.
On August 29, 2008, SAFE promulgated Notice
142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted
RMB may be used. Notice 142 requires that RMB funds converted from the foreign currency capital of a foreign-funded enterprise
may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for
equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its supervision over
the flow and use of RMB funds converted from the foreign currency capital of a foreign-funded enterprise. The use of such RMB capital
may not be changed without SAFE’s approval, and may not, in any case, be used to repay or prepay RMB loans if such loans
are outstanding. Violations of Notice 142 will result in severe penalties, such as heavy fines as set out in the relevant foreign
exchange control regulations.
E. Taxation
British Virgin Islands Taxation
Under the law of the British Virgin Islands
as currently in effect, a holder of our shares who is not a resident of the British Virgin Islands is not liable for British Virgin
Islands income tax on dividends paid with respect to our shares, and all holders of our securities are not liable to the British
Virgin Islands for income tax on gains realized on the sale or disposal of such securities. The British Virgin Islands does not
impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains, gift or inheritance
taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act. In addition, securities
of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention
currently in effect between the United States and the British Virgin Islands, although a Tax Information Exchange Agreement is
in force.
PRC Taxation
Under the PRC Enterprise Income Tax Law,
or the EIT Law, and its implementation rules that became effective on January 1, 2008, a non-resident enterprise is generally
subject to PRC enterprise income tax with respect to PRC-sourced income. A circular issued by the State Administration of Taxation
on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified
as a “resident enterprise” with its “de facto management body” located within China if the following requirements
are satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly
in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies
in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’
meetings are located or kept in the PRC; and (iv) at least half of the enterprise’s directors with voting right or senior
management reside in the PRC. In addition, the State Administration of Taxation issued a bulletin on August 3, 2011, effective
as of September 1, 2011, to provide more guidance on the implementation of the above circular. The bulletin clarified certain
matters relating to resident status determination, post-determination administration and competent tax authorities. It also specifies
that when provided with a copy of a PRC tax resident determination certificate from a resident PRC-controlled offshore incorporated
enterprise, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest and royalties to the PRC-controlled
offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by
PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification
made in the bulletin may reflect the State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures
should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. If we are deemed to be
a PRC resident enterprise, dividends distributed to our non-PRC enterprise shareholders by us, or the gain our non-PRC enterprise
shareholders may realize from the transfer of our ordinary shares, may be treated as PRC-sourced income and therefore be subject
to a 10% PRC withholding tax pursuant to the EIT Law.
U.S. Federal Income Taxation
General
The following are the material U.S. federal
income tax consequences to an investor of the acquisition, ownership and disposition of our securities.
The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to a beneficial owner of our securities that is treated for U.S.
federal income tax purposes as:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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If a beneficial owner of our securities
is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income
tax purposes, such an owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences
of the acquisition, ownership and disposition of our securities applicable specifically to Non-U.S. Holders are described below
under the heading “Non-U.S. Holders.”
This discussion is based on the Internal
Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder,
published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder of our securities based on such holder’s individual
circumstances. In particular, this discussion considers only holders that own and hold our securities as capital assets within
the meaning of Section 1221 of the Code, and does not address the alternative minimum tax. In addition, this discussion does not
address the U.S. federal income tax consequences to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents of the United States;
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persons that actually or constructively own 5% or more of our public shares;
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persons that acquired our securities pursuant to the exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
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persons that hold our securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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controlled foreign corporations; or passive foreign investment companies.
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This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our securities. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our securities through such entities. If a
partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our securities,
the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the
activities of the partnership. This discussion also assumes that any distributions made (or deemed made) by us on our securities
and any consideration received (or deemed received) by a holder in consideration for the sale or other disposition of our securities
will be in U.S. dollars.
We have not sought, and will not seek a
ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there
can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the
accuracy of the statements in this discussion.
THIS DISCUSSION OF THE MATERIAL U.S. FEDERAL
INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES IS NOT TAX ADVICE. EACH HOLDER OF OUR SECURITIES
IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP
AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS
U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions
Subject to the passive foreign investment
company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on our shares. A cash distribution on such shares generally will be treated as a dividend
for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under
U.S. federal income tax principles). Such dividend generally will not be eligible for the dividends-received deduction generally
allowed to domestic corporations in respect of dividends received from other domestic corporations. The portion of such distribution,
if any, in excess of such earnings and profits generally will constitute a return of capital that will be applied against and reduce
(but not below zero) the U.S. Holder’s adjusted tax basis in such shares. Any remaining excess will be treated as gain from
the sale or other taxable disposition of such shares and will be treated as described under “— Taxation on
the Disposition of Securities” below.
With respect to non-corporate U.S. Holders,
dividends on our shares may be subject to U.S. federal income tax at the lower applicable long-term capital gains tax rate (see
“— Taxation on the Disposition of Securities ” below) provided that (1) such shares are readily
tradable on an established securities market in the United States, (2) we are not a PFIC, as discussed below, for either the taxable
year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under published
IRS authority, our shares are considered for purposes of clause (1) above to be readily tradable on an established securities market
in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market. Although
our ordinary shares and warrants are currently listed and traded on the NASDAQ Capital Market, we cannot guarantee that our securities
will continue to be listed on the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability
of the lower rate for any cash dividends paid with respect to our securities.
Possible Constructive Distributions
with Respect to Redeemable Warrants
The terms of each redeemable warrant provide
for an adjustment to the number of ordinary shares for which the redeemable warrant may be exercised in certain events. An adjustment
that has the effect of preventing dilution generally is not taxable. However, the U.S. Holders of the redeemable warrants would
be treated as receiving a constructive distribution from us if, for example, the adjustment increases the redeemable warrant holders’
proportionate interest in our assets or earnings and profits (e.g., through an increase in the number of ordinary shares that would
be obtained upon exercise) as a result of a distribution of cash to the holders of our shares, which is taxable to the U.S. Holders
of such shares as described under “Taxation of Cash Distributions” above. Such constructive distribution would be subject
to tax as described under that section in the same manner as if the U.S. Holders of the redeemable warrants received a cash distribution
from us equal to the fair market value of such increased interest.
Taxation on the Disposition of Securities
Upon a sale or other taxable disposition
of our securities (which, in general, would include a distribution in connection with our liquidation or a redemption of redeemable
warrants), and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the securities. See “—
Exercise or Lapse of Redeemable Warrants” below for a discussion regarding a U.S. Holder’s basis in the ordinary share
acquired pursuant to the exercise of a warrant.
The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
reduced rates of tax. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period
for the securities exceeds one year. The deductibility of capital losses is subject to various limitations.
Additional Taxes
U.S. Holders that are individuals, estates
or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, our securities, subject
to certain limitations and exceptions. Under recently issued regulations, in the absence of a special election, such unearned income
generally would not include income inclusions under the qualified electing fund, or QEF rules discussed below under “— Passive
Foreign Investment Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should
consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our securities.
Exercise or Lapse of Redeemable Warrants
Subject to the PFIC rules discussed below,
a U.S. Holder generally will not recognize gain or loss upon the acquisition of ordinary shares on the exercise of redeemable warrants
for cash. Ordinary shares acquired pursuant to the exercise of redeemable warrants for cash will have a tax basis equal to the
U.S. Holder’s tax basis in the redeemable warrants, increased by the amount paid to exercise the redeemable warrants. The
holding period of such ordinary shares should begin on the day after the date of exercise of the redeemable warrants. If redeemable
warrants are allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s adjusted
tax basis in the redeemable warrants.
The tax consequences of a cashless exercise
of redeemable warrants are not clear under current tax law. A cashless exercise may be tax-free, either because it is not a realization
event (i.e., not a transaction in which gain or loss is realized) or because the transaction is treated as a recapitalization for
U.S. federal income tax purposes. In either tax-free situation, a U.S. Holder’s tax basis in the ordinary shares received
would equal the U.S. Holder’s basis in the redeemable warrants. If the cashless exercise were treated as not being a realization
event, the U.S. Holder’s holding period in the ordinary shares could be treated as commencing on the date following the date
of exercise of the redeemable warrants. If the cashless exercise were treated as a recapitalization, the holding period of the
ordinary shares received would include the holding period of the redeemable warrants.
It is also possible that a cashless exercise
could be treated as a taxable exchange in which gain or loss is recognized. In such event, a U.S. Holder could be deemed to have
surrendered a number of redeemable warrants with a fair market value equal to the exercise price for the number of redeemable warrants
deemed exercised. For this purpose, the number of redeemable warrants deemed exercised would be equal to the number of ordinary
shares issued pursuant to the cashless exercise of the redeemable warrants. In this situation, the U.S. Holder would recognize
capital gain or loss in an amount equal to the difference between the fair market value of the redeemable warrants deemed surrendered
to pay the exercise price and the U.S. Holder’s tax basis in such redeemable warrants deemed surrendered. Such gain or loss
would be long-term or short-term depending on the U.S. Holder’s holding period in the redeemable warrants. In this case,
a U.S. Holder’s tax basis in the ordinary shares received would equal the sum of the fair market value of the redeemable
warrants deemed surrendered to pay the exercise price and the U.S. Holder’s tax basis in the redeemable warrants deemed exercised,
and a U.S. Holder’s holding period for the ordinary shares should commence on the date following the date of exercise of
the redeemable warrants. There also may be alternative characterizations of any such taxable exchange that would result in similar
tax consequences, except that a U.S. Holder’s gain or loss would be short-term.
Due to the absence of authority on the
U.S. federal income tax treatment of a cashless exercise of redeemable warrants it is unclear which, if any, of the alternative
tax consequences and holding periods described above would be adopted by the IRS or a court of law. Accordingly, U.S. Holders should
consult their tax advisors regarding the tax consequences of a cashless exercise of redeemable warrants.
Passive Foreign Investment Company
Rules
A foreign (i.e., non-U.S.) corporation
will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of
the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively,
a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined
based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation
in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income.
Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from
the active conduct of a trade or business) and gains from the disposition of passive assets.
Based on the composition of our assets
and the nature of the Company’s income and subsidiaries’ income for our taxable year ended June 30, 2015, we do not
expect to be treated as a PFIC for such year and we do not expect to be one for our taxable year ending June 30, 2016 or become
one in the foreseeable future. Nevertheless, the application of the PFIC rules is subject to ambiguity in several respects and,
in addition, we must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year).
Accordingly, we cannot assure you that we will not be a PFIC for the current or any other taxable year. Moreover, although we do
not believe we would be treated as a PFIC, we have not engaged any U.S. tax advisers to determine our PFIC status. In addition,
if a U.S. Holder owned our ordinary shares at any time prior to our acquisition of Elite, such U.S. Holder may be considered to
own stock of a PFIC by virtue of the fact that we may have been a PFIC during the period prior to our acquisition of Elite, unless
such U.S. Holder made either a valid and timely QEF election or a valid and timely mark-to-market election, in each case as described
below.
If we are determined to be a PFIC for any
taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our shares or redeemable warrants
and, in the case of our shares, the U.S. Holder did not make either a timely qualified electing fund (“QEF”) election
for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) such shares, a QEF election along with
a purging election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules
for regular U.S. federal income tax purposes with respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of its shares or redeemable warrants; and
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any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the shares or warrants during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the shares or warrants).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares or redeemable warrants;
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the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.
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In general, if we are determined to be
a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our shares by making a timely QEF election
(or a QEF election along with a purging election, as described below). Pursuant to the QEF election, a U.S. Holder will be required
to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as
ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which
or with which our taxable year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed
income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
A U.S. Holder may not make a QEF election
with respect to its redeemable warrants. As a result, if a U.S. Holder sells or otherwise disposes of a redeemable warrant (other
than upon exercise of the redeemable warrant), any gain recognized generally will be subject to the special tax and interest charge
rules treating the gain as an excess distribution, as described above, if we were a PFIC at any time during the period the U.S.
Holder held the redeemable warrants. If a U.S. Holder that exercises such redeemable warrants properly makes a QEF election with
respect to the newly acquired ordinary shares (or has previously made a QEF election with respect to our shares), the QEF election
will apply to the newly acquired ordinary shares, but the adverse tax consequences relating to PFIC shares, adjusted to take into
account the current income inclusions resulting from the QEF election, will continue to apply with respect to such newly acquired
ordinary shares (which generally will be deemed to have a holding period for purposes of the PFIC rules that includes the period
the U.S. Holder held the redeemable warrants), unless the U.S. Holder makes a purging election with respect to such shares. The
purging election creates a deemed sale of such shares at their fair market value. 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, the U.S. Holder will increase the adjusted tax basis in its ordinary shares acquired upon the exercise
of the redeemable warrants by the gain recognized and will also have a new holding period in such ordinary shares for purposes
of the PFIC rules.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund),
including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that
we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election
with respect to our shares and the special tax and interest charge rules do not apply to such shares (because of a timely QEF election
for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares or a QEF election, along
with a purge of the PFIC taint pursuant to a purging election, as described above), any gain recognized on the sale or other taxable
disposition of our shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above,
for regular U.S. federal income tax purposes, U.S. Holders of a QEF are currently taxed on their pro rata shares of the QEF’s
earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were
previously included in income generally should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S.
Holder’s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but
not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property
the U.S. Holder is treated under the applicable attribution rules as owning shares in a QEF.
Although a determination as to our PFIC
status will be made annually, the initial determination that we are a PFIC generally will apply for subsequent years to a U.S.
Holder who held shares or redeemable warrants while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent
years, unless such U.S. Holder made a purging election as described below. A U.S. Holder who makes the QEF election discussed above
for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) our shares, however, will not be subject
to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not be
subject to the QEF inclusion regime with respect to such shares for any of our taxable years that end within or with a taxable
year of the U.S. Holder and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our
taxable years in which we are a PFIC and during which the U.S. Holder holds (or is deemed to hold) our shares, the PFIC rules discussed
above will continue to apply to such shares unless the holder files on a timely filed U.S. income tax return (including extensions)
a QEF election and a purging election to recognize under the rules of Section 1291 of the Code any gain that the U.S. Holder would
otherwise recognize if the U.S. Holder had sold our shares for their fair market value on the “qualification date.”
The qualification date is the first day of our tax year in which we qualify as a QEF with respect to such U.S. Holder. The purging
election can only be made if such U.S. Holder held our ordinary shares on the qualification date. 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, the U.S. Holder will increase the adjusted tax basis in its ordinary shares by the
amount of the gain recognized and will also have a new holding period in the shares for purposes of the PFIC rules.
If a U.S. Holder did not make a timely
“mark-to-market” election (as described above), and if we were a PFIC at any time during the period such U.S.
Holder held our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to such
U.S. Holder even if we cease to be a PFIC in a future year, unless such U.S. Holder makes 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, such U.S. Holder will have a new tax 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 tax holding period (which new holding period will begin the day
after such last day) in such ordinary shares.
As an alternative to the QEF election,
if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder
may make a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market
election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our shares and for
which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to
its shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market
value of its shares at the end of its taxable year over the adjusted tax basis in its shares. The U.S. Holder also will be allowed
to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its shares over the fair market value of
its shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of
the mark-to-market election). The U.S. Holder’s adjusted tax basis in its shares will be adjusted to reflect any such income
or loss amounts, and any further gain recognized on a sale or other taxable disposition of the shares will be treated as ordinary
income. Currently, a mark-to-market election may not be made with respect to our redeemable warrants.
The mark-to-market election is available
only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
including the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure
that the market price represents a legitimate and sound fair market value. Although our ordinary shares are listed and traded on
the NASDAQ Capital Market, we cannot guarantee that our shares will continue to be listed and traded on the NASDAQ Capital Market.
U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election
in respect to our shares under their particular circumstances.
If we are a PFIC and, at any time, have
a foreign subsidiary that is classified as a PFIC, a U.S. Holder generally would be deemed to own a portion of the shares of such
lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution
from, or dispose of all or part of our interest in, or the U.S. Holder otherwise were deemed to have disposed of an interest in,
the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days
after the request the information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC.
However, there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC, and we do not plan
to make annual determinations or otherwise notify U.S. Holders of the PFIC status of any such lower-tier PFIC. There also is no
assurance that we will be able to cause the lower-tier PFIC to provide the required information. U.S. Holders are urged to consult
their own tax advisors regarding the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF election
or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other
information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our shares and redeemable warrants should consult their own tax advisors concerning the application of the PFIC
rules to our shares and redeemable warrants under their particular circumstances.
Non-U.S. Holders
Dividends (including constructive dividends)
paid or deemed paid to a Non-U.S. Holder in respect to our securities generally will not be subject to U.S. federal income tax,
unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United
States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such
holder maintains or maintained in the United States).
In addition, a Non-U.S. Holder generally
will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our securities
unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an
applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is
subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates applicable
to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may
also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
The U.S. federal income tax treatment of
a Non-U.S. Holder’s exercise of redeemable warrants, or the lapse of redeemable warrants held by a Non-U.S. Holder, generally
will correspond to the U.S. federal income tax treatment of the exercise or lapse of redeemable warrants by a U.S. Holder, as described
under “ U.S. Holders — Exercise or Lapse of Redeemable Warrants ” above.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes should apply to distributions made on our securities within the United States to a U.S. Holder (other
than an exempt recipient) and to the proceeds from sales and other dispositions of our securities by a U.S. Holder (other than
an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office)
outside the United States will be subject to information reporting in limited circumstances. In addition, certain information concerning
a U.S. Holder’s adjusted tax basis in its securities and adjustments to that tax basis and whether any gain or loss with
respect to such securities is long-term or short-term also may be required to be reported to the IRS, and certain holders may be
required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our securities.
Moreover, backup withholding of U.S. federal
income tax at a rate of 28% generally will apply to dividends paid on our securities to a U.S. Holder (other than an exempt recipient)
and the proceeds from sales and other dispositions of shares or warrants by a U.S. Holder (other than an exempt recipient), in
each case who
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances, fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption. Backup withholding is not an
additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information
is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding
and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have filed this report on Form 20-F
with the SEC under the Exchange Act. Statements made in this report as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to this report, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements
of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information
filed by us with the SEC, including this report, may be inspected and copied at the public reference room of the SEC at 100 F Street,
N.E., Washington D.C. 20549. You can also obtain copies of this report by mail from the Public Reference Section of the SEC, 100
F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s
Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We deposit surplus funds with Chinese banks
earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry
fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently
do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions
in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S.
dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially
all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations
may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S.
dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets
and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average
exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in
determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation
(depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $1.140 million based
on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of June 30, 2018. As of June 30,
2018, our accumulated other comprehensive income was $3.28 million. We have not entered into any hedging transactions in an effort
to reduce our exposure to foreign exchange risk.
The value of RMB against the U.S. dollar
and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July
2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such as increases
in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES
Not applicable.