Indicate by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
PART
I
CERTAIN
INFORMATION
In
this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company”,
“Color Star” and “Color Star Technology” refer to Color Star Technology Co., Ltd., a company organized in the
Cayman Islands, its predecessor entities and its subsidiaries.
Unless the context indicates otherwise, all references
to “China” and the “PRC” refer to the People’s Republic of China, all references to “Hong Kong”
are to Hong Kong SAR, China, and all references to “U.S. dollars,” “dollars” and “$” are to the legal
currency of the United States.
Unless
indicated otherwise, references to
|
●
|
“China,”
“Chinese” and “PRC,” are references to the People’s Republic of China;
|
|
●
|
“Color
Star,” “Color Star Technology,” “the Company,” “we,”
“us,” or “our,” are references to the combined business of Color
Star Technology Co., Ltd. and our wholly-owned subsidiaries, CACM, Color China, and Modern
Pleasure;
|
|
●
|
“CACM”
refers to CACM Group NY, Inc.
|
|
●
|
“Color
China” refers to Color China Entertainment Limited;
|
|
●
|
“Baytao” refers to Baytao LLC;
|
|
●
|
“Modern Pleasure” refers to Modern Pleasure International Limited.
|
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items,
any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects
or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs,
goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”,
“continue”, “expects”, “anticipates”, “future”, “intends”, “plans”,
“believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking
statements.
These
statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause
our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements
described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking
statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their
likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business. Given these uncertainties, you should not place undue reliance on these forward-looking
statements.
Forward-looking
statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether,
or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the
time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings
“Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere in this report.
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS
|
Not
Applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED
TIMETABLE
|
Not
Applicable.
3.A.
Selected Financial Data
The
following table presents the selected consolidated financial information of our company. The selected consolidated statements of operations
data for the years ended June 30, 2021, 2020 and 2019 and the selected consolidated balance sheets data as of June 30, 2021 and 2020
have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1.
Our audited consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted
in the United States, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future period. You should
read the following selected financial data in conjunction with the consolidated financial statements and related notes and “Item
5. Operating and Financial Review and Prospects” included elsewhere in this report.
The
following table presents our summary consolidated statements of operations data:
|
|
For the Years Ended
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
(6,783,957
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Revenue
|
|
|
4,139,251
|
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
2,644,706
|
|
|
|
-
|
|
|
|
-
|
|
Selling, general and administrative expenses
|
|
|
(5,664,675
|
)
|
|
|
(1,598,984
|
)
|
|
|
(2,065,829
|
)
|
Research and development expenses
|
|
|
(817,794
|
)
|
|
|
(120,000
|
)
|
|
|
-
|
|
Stock compensation expense
|
|
|
(5,717,900
|
)
|
|
|
(3,444,617
|
)
|
|
|
(4,592,200
|
)
|
Impairment loss of long-lived assets
|
|
|
(99,943
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss from operations
|
|
|
(9,655,606
|
)
|
|
|
(5,163,601
|
)
|
|
|
(6,658,029
|
)
|
Other income (expense), net
|
|
|
16,993
|
|
|
|
(5,041
|
)
|
|
|
(1,393
|
)
|
Loss before provision for income taxes
|
|
|
(9,638,613
|
)
|
|
|
(5,168,642
|
)
|
|
|
(6,659,422
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from continuing operations
|
|
|
(9,638,613
|
)
|
|
|
(5,168,642
|
)
|
|
|
(6,659,422
|
)
|
Income (loss) from discontinued operations
|
|
|
1,400,100
|
|
|
|
(6,457,955
|
)
|
|
|
(7,729,108
|
)
|
Net loss
|
|
$
|
(8,238,513
|
)
|
|
$
|
(11,626,597
|
)
|
|
$
|
(14,388,530
|
)
|
The
following table presents our summary consolidated balance sheet data:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash and cash equivalents
|
|
$
|
174,189
|
|
|
$
|
988,696
|
|
Accounts receivable
|
|
|
3,191,711
|
|
|
|
-
|
|
Other receivables
|
|
|
8,900
|
|
|
|
1,002,300
|
|
Prepayments and advances
|
|
|
4,267,827
|
|
|
|
1,170,000
|
|
Total current assets
|
|
|
7,642,627
|
|
|
|
3,160,996
|
|
Prepayments, non-current
|
|
|
52,000,000
|
|
|
|
-
|
|
Property, plant and equipment, net
|
|
|
9,160,214
|
|
|
|
3,958,335
|
|
Intangible assets, net
|
|
|
12,272,326
|
|
|
|
-
|
|
Total assets
|
|
|
81,075,167
|
|
|
|
7,119,331
|
|
Other payables and accrued liabilities
|
|
|
517,134
|
|
|
|
518,122
|
|
Other payables – related party
|
|
|
10,711
|
|
|
|
10,711
|
|
Deferred revenue
|
|
|
3,596,821
|
|
|
|
-
|
|
Total liabilities
|
|
|
4,124,666
|
|
|
|
528,833
|
|
Total shareholders’ equity
|
|
$
|
76,950,501
|
|
|
$
|
6,590,498
|
|
3.B.
Capitalization and Indebtedness
Not
Applicable.
3.C.
Reasons For The Offer And Use Of Proceeds
Not
Applicable.
3.D.
Risk Factors
An
investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described
below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary
shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in
many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently
foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects
could be materially and adversely affected.
Risks
Related to Our Business and Industry
We
have a limited operating history with our current business model, which makes it difficult to predict our prospects and our business
and financial performance.
We
have a short operating history with our current business model focusing on providing online entertainment performances and online music
education services. We transitioned from a concrete business company to our current business model in 2020. Our limited history of operating
under the current business model may not serve as an adequate basis for evaluating our prospect and operating results, including gross
billings, net revenues, cash flows and operating margins. We have encountered, and may continue to encounter in the future, risks, challenges
and uncertainties associated with operating an internet-based education business and online video streaming service industry, such as
building and managing reliable and secure IT systems and infrastructure, addressing regulatory compliance and uncertainty, engaging,
training and retaining high quality employees such as our teaching staff and IT support staff, and improving and expanding our education
content offering. If we do not manage these risks successfully, our operating and financial results may differ materially from our expectations
and our business and financial performance may suffer.
We
may require additional capital, including to fund potential acquisitions and capital expenditures, which may not be available on terms
acceptable to us or at all and which depends on many factors beyond our control.
To
support our growing business, we must have sufficient capital to continue to make significant investments in our platform and product
offerings. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of our common stock, and our existing stockholders may experience dilution. Any debt financing
secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Any refinancing of
our indebtedness could be at significantly higher interest rates, require additional restrictive financial and operational covenants,
or require us to incur significant transaction fees, issue warrants or other equity securities, or issue convertible securities. These
restrictions and covenants may restrict our ability to finance our operations and engage in, expand, or otherwise pursue our business
activities and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control,
and breaches of these covenants and restrictions could result in a default and an acceleration of our obligations under a debt agreement.
If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights
to our technologies or our solutions under development, or grant licenses on terms that are not favorable to us, which could lower the
economic value of those programs to us.
We
evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development
efforts, business plans and operating performance and the condition of the capital markets at the time we seek financing and to an extent,
subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot
be certain that additional financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing
or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to
business challenges could be significantly limited, and our business, financial condition and results of operations could be adversely
affected.
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.
Our
business could be adversely affected by infectious disease outbreaks, such as the COVID-19 pandemic, which has spread rapidly across
the globe, resulting in adverse economic conditions and business disruptions. In reaction to this outbreak, governments worldwide have
imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home
orders, all in an effort to reduce the spread of the virus. 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 the U.S. have been materially affected. New York, where our U.S. operations are based, were affected by COVID-19,
which led to measures taken by the New York government trying to contain the spread of COVID-19, such as reduction on the number of people
in gathering and travel restrictions. Additional travel and other restrictions may be put in place to further control the outbreak in
U.S. Accordingly, our operation and business may 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. For the fiscal year ended
June 30, 2021, our management does not believe the COVID-19 pandemic had materially adversely affected the Company’s financial
condition and operating results because our operations were primarily conducted via online platform and App.
The
extent to which COVID-19 negatively impacts our future business cannot be accurately predicted. We believe that the coronavirus outbreak
and the measures taken to control it may have a negative impact on not only our business, but economic activities globally. These uncertainties
may impede our ability to conduct our daily operations and could materially affect our business, financial condition and results of operations,
and as a result affect our stock price and create more volatility.
If
we are unable to operate the “Color World” platform as planned, our results of operation will be significantly impacted.
We
launched the “Color World” platform on October 15, 2020. The attractiveness of our platform to our prospective “Star
Teachers” and student subscribers depends on our ability to innovate. To remain competitive, we must continue to develop and expand
our platform and education services. We must also continue to enhance and improve our technology infrastructure. These efforts may require
us to develop or license increasingly complex technologies. In addition, new education services and technologies developed and introduced
by competitors could render our education services and technologies obsolete if we are unable to update or modify our own technology.
Developing and integrating new education services and technologies into our existing platform and infrastructure could be expensive and
time-consuming. Furthermore, any new features and functions may not achieve market acceptance. We may not succeed in implementing new
technologies, or may incur substantial costs in doing so. Our platform and education services must achieve high levels of market acceptance
in order for us to recoup our investments. Our platform and education services could fail to attain sufficient market acceptance for
many reasons, including:
|
●
|
we
may fail to predict market demand accurately and to provide education services that meet this demand in a timely fashion;
|
|
●
|
our
marketing efforts may be inefficient and fail to attract the potential users;
|
|
●
|
Star
Teachers that we recruit on our platforms may not like, find useful or agree with any changes;
|
|
●
|
there
may be defects, errors or failures on our platform;
|
|
●
|
there
may be negative publicity about our platforms’ performance or effectiveness; and
|
|
●
|
there
may be competing services or technologies introduced or anticipated to be introduced by our competitors.
|
If
our platform and education services or technologies do not achieve adequate acceptance in the market, our competitive position, results
of operations and financial condition could be materially and adversely affected.
Our
success relies on the continuing efforts of our senior management team and qualified key personnel, and our business may be harmed if
we are unable to retain or motivate them.
Our
business operations depend on the continued services of our senior management team and qualified key personnel, particularly our executive
officers and the senior management of Color China, our wholly owned subsidiary.
Although
we have provided different incentives to our senior management team, we cannot assure you that we can continue to retain their services.
One or more of our key executives may be unable or unwilling to continue in their present positions. Meanwhile, we have also provided
attractive compensation packages to our qualified key personnel. However, we may not be able to hire and retain these personnel at compensation
levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for qualified and
skilled personnel have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest
significant time and resources in training our employees, which increases their value to competitors who may seek to recruit them.
If
we are unable to retain the services of our senior management team or qualified key personnel, we may not be able to find suitable replacements
or may incur significant expenses in finding such replacements, thus our future growth may be constrained, our business may be severely
disrupted and our results of operations and financial condition may be materially and adversely affected. In addition, although we have
entered into confidentiality and non-competition agreements with our senior management team and qualified key personnel, there
is no assurance that any member of our senior management team or any of our qualified key personnel will not join a competitor. In the
event that any dispute arises between us, on one hand, and any of our senior management and qualified key personnel, on the other hand,
we may have to incur substantial costs and expenses in order to enforce such agreements, or we may be unable to enforce them at all.
If
we are unable to recruit “Star Teachers” as planned or if these instructors do not perform according to the agreements we
have with them, the operation of our performance support and music education business will be negatively impacted.
Professional
artists and producers that we have begun recruiting as our Star Teachers help us build and maintain the quality of our education and
services, as well as our brand and reputation. Our ability to continue to attract recruit the instructors with the necessary experience
and qualifications is a key factor in the success of our operations. We seek to continue hiring experienced and successful professionals
in music, film, sports, animation, television, presentations, dance, art and other entertainment industries whom are able to follow our
education service protocols and deliver effective instructions based on the agreements we have with them. The market for the recruitment
of these professionals is competitive, and we must also provide continued training to ensure that our instructors stay abreast of changes
in student demands, teaching methodologies and other necessary changes.
In
order to recruit these industry professionals as instructors on our platform, we must provide candidates with competitive compensation
packages. Although we have not experienced major difficulties in recruiting or training qualified instructors thus far, we cannot guarantee
we will be able to continue to recruit, train and retain a sufficient number of qualified instructors in the future, which may have a
material adverse effect on our business, financial condition and results of operations.
If
we are unable to reach a critical mass of subscribers, our revenues may not be sufficient to cover the costs of our recruitment of Star
Teachers.
We
are obligated to pay each of our Star Teachers on a case-by-case basis depending on the results of our negotiations. Some Star Teachers
will accept fixed payments following a predefined schedule, whereas others may instead request a revenue sharing payment model whereby
we will need to distribute to the Star Teachers a percentage of the net income earned from generated sales, licensing or other revenue
from their courses on our platform, including a pro rata share of our subscription fees, or a hybrid of the two. If we are unable to
generate enough revenue from our subscription fees from our users to cover our Star Teachers’ recruitment costs, our results of
operations and financial condition could be materially and adversely affected.
Our
education service revenue model depends on developing a subscriber base of users. If we fail to reach a critical mass of subscribers,
our net revenues may not be sufficient, and we may not be able to implement our business plan.
We
expect to generate revenue primarily from the fees we collect from our users. It is critical for us to enroll subscribers in a cost-effective
manner. Some of the factors, many of which are largely beyond our control, could prevent us from successfully increasing subscriptions
in a cost-effective manner, or at all. These factors include, among other things, (i) reduced interest in the products and services we
offer; (ii) negative publicity or perceptions regarding us, or electronic education services in general; (iii) the emergence of alternative
technologies not offered by us; (iv) the inability of subscribers to pay the fees; (v) increasing market competition, particularly price
reductions by competitors that we are unable or unwilling to match; and (vi) adverse changes in relevant government policies or general
economic conditions. If one or more of these factors reduce market demand for our services, our subscriber base may not materialize as
anticipated or our costs associated with subscriber acquisition and retention could increase, or both, any of which could materially
affect our ability to grow our gross billings and net revenues. These developments could also harm our brand and reputation, which would
negatively impact our ability to establish or expand our business.
We
expect to rely heavily on information and technology to operate our existing and future education products and services, and any cybersecurity
incident or other disruption to our technology infrastructure could result in the loss of critical confidential information or adversely
impact our reputation, business or results of operations.
Our
ability to attract and retain customers and to compete effectively depends in part upon the satisfactory performance and reliability
of our technology network, including the ability to provide features of services that are important to our customers and to protect our
confidential business information and the information provided by our customers. We also rely on our technology to maintain and
process various operating and financial data that are essential to the day-to-day operation of our business and formulation of our development
strategies. Our business operations and growth prospects depend on our ability to maintain and make timely and cost-effective enhancements
and upgrades to our technology system and to introduce innovative additions that can meet changing operational needs in future. Therefore,
we expect to continue to invest in advanced information technology and any equipment to enhance operational efficiency and reliability
as we grow. Accordingly, any errors, defects, disruptions or other performance problems with our IT infrastructure could damage our reputation,
decrease user satisfaction and retention, adversely impact our ability to attract new users and expand our service and product offerings,
and materially disrupt our operations. If any of these occur, our business operations, reputation and prospects could be harmed.
If
our security measures are breached or fail and result in unauthorized disclosure of data by our employees or our third-party agents,
we could lose existing subscribers, fail to attract new subscribers and be exposed to protracted and costly litigation.
Maintaining
platform security is of critical importance to our subscribers because the platform stores and transmits proprietary and confidential
information, which may include sensitive personally identifiable information that may be subject to stringent legal and regulatory obligations.
As an electronic education service provider, we face an increasing number of threats to our IT infrastructure, including unauthorized
activity and access by our employees or third-party agents, system viruses, worms, malicious code and organized cyber-attacks, which
could breach our security and disrupt our business. We hope to introduce data security and confidentiality protocols into the cooperation
agreements we enter into with third-party sales agents with whom we share prospective subscribers’ contact information. As we expand,
we hope to invest in improving our technology security initiatives, information technology risk management and disaster recovery plans
to prevent unauthorized access of confidential or sensitive personal information by our employees and third-party sales agents in the
process of engaging prospective subscribers.
These
measures, however, may not be as effective as we anticipate. In addition, there is no assurance that our third-party sales agents will
comply with contractual and legal requirements with respect to data privacy when they collect data from our prospective customers. If
our security measures are breached or fail as a result of third-party action, employee error, malfeasance or otherwise, we could be subject
to liability or our business could be interrupted, potentially over an extended period of time. Any or all of these issues could harm
our reputation, adversely affect our ability to attract and enroll prospective subscribers, cause prospective subscribers not to enroll
or stay enrolled, or subject us to third-party lawsuits, regulatory fines or other action or liability. Further, any reputational damage
resulting from breach of our security measures could create distrust of our company by prospective subscribers or investors. We may be
required to expend significant management time and additional resources to protect against the threat of these disruptions and security
breaches or to alleviate problems caused by such disruptions or breaches.
Privacy
concerns could limit our ability to collect and leverage our user data and disclosure of user data could adversely impact our business
and reputation.
In
the ordinary course of our business and in particular in connection with conducting sales and marketing activities with our existing
and prospective subscribers as well as the utilization of our AI-powered platform programs, we collect and utilize data supplied by
our users. We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation
of data utilization practices, including self-regulation or findings under existing laws that limit our ability to collect, transfer
and use data, could have an adverse effect on our business. In addition, if we were to disclose data about our users in a manner
that was objectionable to them, our business reputation could be adversely affected, and we could face potential legal claims that
could impact our operating results. Specifically, the PRC Criminal Law, as amended by its Amendment 7 (effective on February 28,
2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or
otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or
obtaining such information through theft or other illegal ways. On November 7, 2016, the SCNPC issued the Cyber Security Law of the
PRC, or Cyber Security Law, which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not,
without users’ consent, collect their personal information, and may only collect users’ personal information necessary
to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall
comply with provisions regarding the protection of personal information as stipulated under the relevant laws and
regulations.
The
Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides
legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the CAC,
the Ministry of Industry and Information Technology, or MIIT, and the Ministry of Public Security, have been increasingly focused on
regulation in data security and data protection.
The
PRC regulatory requirements regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the CAC,
the Ministry of Public Security and the State Administration for Market Regulation, or the SAMR (formerly known as State Administration
for Industry and Commerce, or the SAIC), have enforced data privacy and protection laws and regulations with varying and evolving standards
and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on June
1, 2020. According to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review
when purchasing network products and services which do or may affect national security.
In
July 2021, the CAC and other related authorities released the draft amendment to the Cybersecurity Review Measures for public comments
through July 25, 2021. The draft amendment proposes the following key changes:
|
●
|
companies
who are engaged in data processing are also subject to the regulatory scope;
|
|
●
|
the
CSRC is included as one of the regulatory authorities for purposes of jointly establishing
the state cybersecurity review working mechanism;
|
|
●
|
the
operators (including both operators of critical information infrastructure and relevant parties
who are engaged in data processing) holding more than one million users/users’ (which
to be further specified) individual information and seeking a listing outside China shall
file for cybersecurity review with the Cybersecurity Review Office; and
|
|
●
|
the
risks of core data, material data or large amounts of personal information being stolen,
leaked, destroyed, damaged, illegally used or transmitted to overseas parties and the risks
of critical information infrastructure, core data, material data or large amounts of personal
information being influenced, controlled or used maliciously shall be collectively taken
into consideration during the cybersecurity review process.
|
If the draft amendment is adopted into law in the
future, we may become subject to enhanced cybersecurity review. Certain internet platforms in China have been reportedly subject to heightened
regulatory scrutiny in relation to cybersecurity matters. As of the date of this report, we have not been informed by any PRC governmental
authority of any requirement that we file for a cybersecurity review. However, if we are deemed to be a critical information infrastructure
operator or a company that is engaged in data processing and holds personal information of more than one million users, we could be subject
to PRC cybersecurity review.
As
there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could
be subject to cybersecurity review, and if so, we may not be able to pass such review in relation to this offering. In addition, we could
become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the
completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines
or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation
of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse
effect on our business, financial condition or results of operations.
On
June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which will take effect in September 2021. The PRC Data Security Law imposes
data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification
and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will
cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered
with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure
for data activities that may affect national security and imposes export restrictions on certain data an information.
As
uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that we will
comply with such regulations in all respects and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory
authorities. We may also become subject to fines and/or other sanctions which may have material adverse effect on our business, operations
and financial condition.
Internationally,
we may become subject to additional and/or more stringent legal obligations concerning our treatment of customer and other personal information,
such as laws regarding data localization and/or restrictions on data export. Failure to comply with these obligations could subject us
to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional
expenses.
We
face regulatory risks and uncertainties with respect to the licensing requirement for the online transmission of internet audio-visual
programs in China.
On
December 20, 2007, the National Radio and Television Administration f/k/a known as the State Administration of Press Publication Radio
Film and Television, or SAPPRFT, and the Ministry of Industry and Information Technology, or the MIIT, jointly promulgated the Administrative
Provisions on Internet Audio Visual Program Services, or the Audio Visual Program Provisions, which became effective on January 31, 2008
and were amended on August 28, 2015. Among other things, the Audio Visual Program Provisions stipulate that no entities or individuals
may provide Internet audio-visual program services without a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT
or completing the relevant filing with SAPPRFT or its local bureaus, and only state-owned or state-controlled entities are eligible to
apply for a License for Online Transmission of Audio Visual Programs. On April 1, 2010, SAPPRFT promulgated the Provisional Implementations
of Tentative Categories of Internet Audio Visual Program Services, or the Categories, which clarified the scope of Internet audio-visual
programs services, which was amended on March 10, 2017. According to the Categories, there are four categories of Internet audio-visual
program services which are further divided into seventeen sub-categories. Sub-category No. 3 to the second category covers the making
and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting such content
to the general public online. Sub-category No. 5 of the first category and sub-category No. 7 of the second category cover the live broadcasting
of important political, martial, economic, social, cultural, sports activities or events or general social or community cultural activities,
sports games and other organized activities. However, there are still significant uncertainties relating to the interpretation and implementation
of the Audio Visual Program Provisions, in particular, the scope of “internet audio-visual programs.” See “Regulations
Relating to Online Transmission of Audio-Visual Programs.”
We
plan to deliver our courses in live streaming format worldwide. Our teachers and students communicate and interact live with each other
via our virtual learning community. The audio and video data will likely be transmitted through the platforms between specific recipients
instantly without any further redaction. We believe the nature of the raw data we transmit will distinguish us from general providers
of internet audio-visual program services, such as the operator of online video websites, and the provision of the Audio-Visual Program
Provisions are not applicable with regard to our offering of the courses. However, we cannot assure you that the competent PRC government
authorities will not ultimately take a view contrary to our opinion. In addition, we also plan to offer video recordings of live streaming
courses and certain other audio-video contents on our electronic platforms to our students as supplementary course materials on our platforms.
If the government authorities determine that our offering of the courses fall within the relevant category of Internet audio-visual program
services under the Categories, we may be required to obtain the License for Online Transmission of Audio Visual Programs.
The
Categories describe “Internet audio-visual program services” in a very broad, vague manner and are unclear as to whether
electronic courses, whether delivered in a live streaming format or through video recordings, fall into the definition of audio-visual
programs. We have made inquiries to the relevant bureaus of SAPPRFT and were informed that online educational content provided through
live streaming or recorded courses does not fall within the scope of internet audio-visual programs, the transmission of which does not
require a License for Online Transmission of Audio-Visual Programs. We cannot assure you that the PRC government will not ultimately
take a view that live streaming or recorded courses or any other content offered on our platforms are subject to the Audio Visual Program
Provisions. We currently do not hold a license for Online Transmission of Audio Visual Programs, and since we are not a state-owned or
state-controlled entity, we are not eligible to apply for such license. If the PRC government determines that our content should be considered
as “internet audio- visual programs” for the purpose of the Audio-Visual Program Provisions, we may be required to obtain
a license for Online Transmission of Audio Visual Programs. We are, however, not eligible apply for such license since we are not a state-owned
or state-controlled entity. If this were to occur, we may be subject to penalties, fines, legal sanctions or an order to suspend the
provision of our live streaming courses. As of the date of this annual report, we have not received any notice of warning or been subject
to penalties or other disciplinary action from the relevant governmental authorities regarding the lack of a License for Online Transmission
of Audio Visual Programs in conducting of our business.
Our
failure to obtain and maintain approvals, licenses or permits in China applicable to our business could have a material adverse impact
on our business, financial conditions and results of operations in the future.
As
we plan to deliver our courses in live streaming format worldwide, including in China, we may be subject to various regulations by a
number of PRC regulatory authorities, such as the SAIC, the Cyberspace Administration of China, the MITT, the National Radio and Television
Administration, and the State Council Information Office, the Ministry of Civil Affairs, and the Ministry of Human Resources and Social
Welfare. We may be required in the future to obtain additional government approvals, licenses and permits in connection with our operations.
By
way of example, depending upon regulatory interpretation, under the current PRC laws and regulations, the provision of our educational
content through our electronic platform may be considered “online publishing” and may require us to obtain an Internet Publishing
License, which we currently do not have.
As
of the date of this report, we have not received any notice of warning or been subject to penalties or other disciplinary action from
the relevant governmental authorities regarding the lack of any the above-mentioned approvals, licenses or permits. However, we
cannot guarantee that the government authorities will not impose any penalties or sanctions on us in the future, which may include warnings,
fines, mandates to remedy any violations, confiscation of the gains derived from the services for which approvals, licenses or permits
are required, and/or an order to cease to provide such services. In addition, we cannot guarantee that the government will not promulgate
new laws and regulations that require additional licenses, permits and/or approvals for the operation of any of our existing or future
business. If we are unable to obtain such licenses, permits, or approvals in a timely fashion, we could be subject to penalties and operational
disruption and our financial condition and results of operations could be adversely affected.
We
face intense competition which could adversely affect our results of operations and market share.
We
operate in a highly competitive and fragmented industry that is sensitive to price, content (i.e., curriculum) and quality of
service. Some of our competitors may have more financial resources, longer operating histories, larger customer bases and greater brand
recognition than we do, or they are controlled or subsidized by foreign governments, which enables them to obtain or raise capital and
enter into strategic relationships more easily. We also compete with leading domestic supplier companies based on a number of factors
including business model, operational capabilities, cost control and service quality, as well as in-house delivery capabilities to serve
their logistics needs and compete with us.
We
are also subject to other risks and uncertainties that affect many other businesses, including but not limited to:
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(1)
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Increasing
costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare
benefits;
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(2)
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The
increasing costs of compliance with federal, state and foreign governmental agency mandates;
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(3)
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Any
impacts on our business resulting from new domestic and international government laws and regulation;
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(4)
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Market
conditions in the childhood education industry or the economy as a whole;
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(5)
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Market
acceptance of our new service and growth initiatives;
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(6)
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Announcements
of the introduction of new products and services by our competitors;
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(7)
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The
impact of technology developments on our operations and on demand for our products and services;
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(8)
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Developments
concerning current or future strategic collaborations; and
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(9)
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Widespread
outbreak of an illness or any other communicable disease, or any other public health crisis such as we are currently experiencing with
the COVID-19 pandemic.
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If
we are unable to respond to these changing market conditions, our business and financial results may be materially affected.
We
may be unable to fund any significant up-front and/or guaranteed payment cash requirements associated with our live music streaming rights,
which could result in the inability to secure and retain such streaming rights and may limit our operating flexibility, which may adversely
affect our business, operating results and financial condition.
In
order to secure event and festival live music streaming rights or hold concerts, we may be required to fund significant up-front and/or
guaranteed payment cash requirements to artists or festival or event promoters prior to the event or festival taking place. If we do
not have sufficient cash on hand or available capacity to advance the necessary cash for any given artist, event or festival, we would
not be able to retain the rights for that artist, festival or event, such counter parties may be able to terminate their content acquisition
agreements with us, and as a result our business, financial condition and results of operations may be adversely affected.
We
may be unsuccessful in developing our original content.
We
plan to continue to produce original classes, covering various areas such as singing and dancing, etc. We believe that a positive reputation
with users concerning our original content is important in attracting and retaining users. To the extent our content is perceived as
low quality, offensive or otherwise not compelling to users, our ability to establish and maintain a positive reputation may be adversely
impacted. If the original content we produce does not attract new users, we may not be able to cover our expenses to produce such programs,
and our business, financial condition and results of operations may be adversely affected.
As
we continue to develop our original content, we will become responsible for higher production costs and other expenses. We may also take
on risks associated with production, such as completion and key talent risk. To the extent we do not accurately anticipate costs or mitigate
risks, or if we become liable for content we acquire, produce, license and/or distribute, our business may suffer. Litigation to defend
these claims could be costly and the expenses and damages arising from any liability or unforeseen production risks could harm our results
of operations. We may not be indemnified against claims or costs of these types and we may not have insurance coverage for these types
of claims.
We
face competition for users’ attention and time.
The
market for entertainment video content is intensively competitive and subject to rapid change. We compete against other entertainment
video providers, such as (i) interactive on-demand audio content and pre-recorded entertainment, (ii) broadcast radio providers, including
terrestrial and Internet radio providers, (iii) cable, satellite and Internet television and movie content providers, (iv) video gaming
providers and (v) other sources of entertainment for our users’ attention and time. These content and service providers pose a
competitive threat to the extent existing or potential users choose to consume their content or use their services rather than our content
or our services. The online marketplace for live music and music-related content may rapidly evolve and provide users with a number of
alternatives or new access models, which could adversely affect our business, financial condition and results of operations.
Our
services and software are highly technical and may contain undetected software bugs or vulnerabilities, which could manifest in ways
that could seriously harm our reputation and our business.
Our
services and software are highly technical and complex. Our services or any other products we may introduce in the future, may contain
undetected software bugs, hardware errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our
products, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled products. We
have a practice of regularly updating our products and some errors in our products may be discovered only after a product has been used
by users, and may in some cases be detected only under certain circumstances or after extended use. Any errors, bugs or other vulnerabilities
discovered in our code or backend after release could damage our reputation, drive away users, allow third parties to manipulate or exploit
our software (including, for example, providing mobile device users a means to suppress advertisements without payment and gain access
to features only available to the ad-supported service), lower revenue and expose us to claims for damages, any of which could seriously
harm our business. Additionally, errors, bugs, or other vulnerabilities may—either directly or if exploited by third parties—affect
our ability to make accurate royalty payments.
We
also could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and
may divert management’s attention and seriously harm our reputation and our business. In addition, if our liability insurance coverage
proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be seriously harmed.
Our
business depends on a strong developing brand, and any failure to create, maintain, protect and enhance our brand would hurt our ability
to attract and/ or expand our base of users.
Maintaining,
protecting and enhancing our brand is critical to expanding our base of users and star teachers, and will depend largely on our ability
to continue to develop and provide an innovative and high-quality experience for our users and to attract more celebrities to work with
us, which we may not do successfully. Our brands may be impaired by a number of other factors, including any failure to keep pace with
technological advances on our platform or with our services, slower load times for our services, a decline in the quality or quantity
of the content available on our services, a failure to protect our intellectual property rights or any alleged violations of law, regulations,
or public policy. If we do not successfully maintain a strong brand, our business could be harmed.
We
are at risk of attempts at unauthorized access to our services, and failure to effectively prevent and remediate such attempts could
have an adverse impact on our business, operating results, and financial condition. Unauthorized access to our services may cause us
to misstate key performance indicators, which once discovered, corrected, and disclosed, could undermine investor confidence in the integrity
of our key performance indicators and could cause our stock price to drop significantly.
We
may be impacted by attempts by third parties to manipulate and exploit our software for the purpose of gaining unauthorized access to
our service. For example, there might be instances of third parties seeking to provide mobile device users a means to suppress advertisements
without payment and gain access to features only available to the ad-supported services. If in the future we fail to successfully detect
and address such issues, it may have artificial effects on our key performance indicators, such as content hours, content hours per MAU
(Monthly Active User), and MAUs, which underlie, among other things, our contractual obligations with advertisers, as well as harm our
relationship with them. This may impact our results of operations, particularly with respect to margins on our ad-supported segment,
by increasing our ad-supported cost of revenue without a corresponding increase to our ad-supported revenue, which could seriously harm
our business. Additionally, unlike our ad-supported users, individuals using unauthorized versions of our application are unlikely to
convert to premium subscribers. Moreover, once we detect and correct such unauthorized access and any key performance indicators it affects,
investor confidence in the integrity of our key performance indicators could be undermined. These could have a material adverse impact
on our business, operating results and financial condition.
If
we are forced to cancel or postpone all or part of a scheduled concert, our business may be adversely impacted, and our reputation may
be harmed.
We
incur a significant amount of up-front costs when we plan and prepare for an online concert. Accordingly, if a planned concert is canceled,
we would lose a substantial amount of sunk costs, fail to generate the anticipated revenue and may be forced to issue refunds for tickets
sold. If we are forced to postpone a concert or event, we would incur substantial additional costs in connection with our having to stage
the event on a new date, may have reduced attendance and revenue and may have to refund money to ticketholders. In addition, any cancellation
or postponement could harm both our reputation and the reputation of the particular concert or event. We could be compelled to cancel
or postpone all or part of an event or concert for many reasons, including such things as low attendance, adverse weather conditions,
technical problems, issues with permitting or government regulation, incidents, injuries or deaths at that event or concert, as well
as extraordinary incidents, such as pandemics, terrorist attacks, mass-casualty incidents and natural disasters or similar events.
A
deterioration in general economic conditions and its impact on consumer and business spending, particularly by customers in our targeted
millennial generation demographic, could adversely affect our revenue and financial results.
Our
business and financial results are influenced significantly by general economic conditions, in particular, those conditions affecting
discretionary consumer spending and corporate spending. During economic slowdowns and recessions, many consumers could reduce their discretionary
spending. An economic downturn can result in reduced ticket revenue and lower customer spending.
We
depend on relationships with key event promoters, sponsor and marketing partners, executives, managers and artists, and adverse changes
in these relationships could adversely affect our business, financial condition and results of operations.
Our
business is particularly dependent upon personal relationships, as promoters and executives within entertainment companies such as ours
leverage their network of relationships with artists, agents, managers and sponsor and marketing partners to secure the rights to the
performers and events that are critical to our success. Due to the importance of those industry contacts, the loss of any of our officers
or other key personnel who have relationships with these artists, agents or managers could adversely affect our venue management and
event promotion businesses. While we have hiring policies and procedures and conduct background checks of our promoters, executives,
managers and artists, they may engage in or may have in the past engaged in conduct we do not endorse or that is otherwise improper,
which may result in reputational harm to us. Also, to the extent artists, agents and managers we have relationships with are replaced
with individuals with whom our officers or other key personnel do not have relationships, our competitive position and financial condition
could be adversely affected.
We
may be accused of infringing upon intellectual property rights of third parties.
From
time to time, we may be in the future subject to legal proceedings and claims in the ordinary course of business, including claims of
alleged infringement and other violations of the trademarks, copyrights, patents and other intellectual property or proprietary rights
of third parties.
We
may not be able to successfully defend against such claims, which may result in a limitation on our ability to use the intellectual property
subject to these claims and also might require us to enter into settlement or license agreements, pay costly damage awards or face an
injunction prohibiting us from using the affected intellectual property in connection with our services. Defending ourselves against
intellectual property claims, whether they are with or without merit or are determined in our favor, results in costly litigation and
may divert the attention of our management and technical personnel from the rest of our business.
In
addition, music, Internet, technology, and media companies are frequently subject to litigation based on allegations of infringement,
misappropriation, or other violations of intellectual property rights. Many companies in these industries, including many of our competitors,
have substantially larger patent and intellectual property portfolios than we do, which could make us a target for litigation as we may
not be able to assert counterclaims against parties that sue us for patent, or other intellectual property infringement. In addition,
various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively
assert claims in order to extract value from technology companies. Further, from time to time we may introduce new products and services,
including in territories where we currently do not have an offering, which could increase our exposure to patent and other intellectual
property claims from competitors and non-practicing entities. It is difficult to predict whether assertions of third-party
intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our
business, operating results, and financial condition. If we are forced to defend against any infringement or misappropriation claims,
whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant
time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay significant
damages, which may be even greater if we are found to have willfully infringed upon a party’s intellectual property; cease exploiting
copyrighted content that we have previously had the ability to exploit; cease using solutions that are alleged to infringe or misappropriate
the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable
royalty or license agreements in order to obtain the right to use necessary technologies, content, or materials; indemnify our partners
and other third parties; and/or take other actions that may have material effects on our business, operating results, and financial condition.
Changes
in how network operators handle and charge for access to data that travel across their networks could adversely impact our business.
We
will rely upon the ability of consumers to access our service through the Internet. Changes in laws or regulations that adversely affect
the growth, popularity or use of the Internet, including laws impacting net neutrality, could decrease the demand for our service and
increase our cost of doing business. To the extent that network operators implement usage-based pricing, including meaningful bandwidth
caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber
acquisition and retention could be negatively impacted.
The
success of our business and operations depends, in part, on the integrity of our systems and infrastructures, as well as affiliate and
third-party computer systems, Wi-Fi and other communication systems. System interruption and the lack of integration and redundancy in
these systems and infrastructures may have an adverse impact on our business, financial condition and results of operations.
System
interruption and the lack of integration and redundancy in the information systems and infrastructures, both of our own systems and other
computer systems and of affiliate and third-party software, Wi-Fi and other communications systems service providers on which we rely,
may adversely affect our ability to operate websites, process and fulfill transactions, respond to user inquiries and generally maintain
cost-efficient operations. Such interruptions could occur by virtue of natural disaster, malicious actions such as hacking or acts of
terrorism or war, or human error. In addition, the loss of some or all of certain key personnel could require us to expend additional
resources to continue to maintain our software and systems and could subject us to systems interruptions.
Although
we maintain up to date information technology systems and network infrastructures for the operation of our businesses, techniques used
to gain unauthorized access to private networks are constantly evolving, and we may be unable to anticipate or prevent unauthorized access
to our systems and data.
Privacy
concerns could limit our ability to leverage our subscriber data and compliance with privacy regulations could result in significant
expense.
In
the ordinary course of business and in particular in connection with merchandising our service to our users, we collect and utilize data
supplied by our users. We may face certain legal obligations regarding the manner in which we treat such information. Other businesses
have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data
collected on the Internet regarding users’ browsing and other habits. Increased regulation of data utilization practices, including
self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business.
As our business evolves and as we expand internationally, we may become subject to additional and/or more stringent legal obligations
concerning our treatment of user information, and to the extent that we need to alter our business model or practices to adapt to these
obligations, we could incur significant expenses.
In
addition, we cannot fully control the actions of third parties who may have access to the user data we collect and the user data collected
by our third-party vendors. We may be unable to monitor or control such third parties and the third parties having access to our website
in their compliance with the terms of our privacy policies, terms of use, and other applicable contracts, and we may be unable to prevent
unauthorized access to, or use or disclosure of, user information. Any such misuse could hinder or prevent our efforts with respect to
growth opportunities and could expose us to liability or otherwise adversely affect our business. In addition, these third parties may
become the victim of security breaches or have practices that may result in a breach, and we could be responsible for those third-party
acts or failures to act.
Any
failure, or perceived failure, by us or the prior owners of acquired businesses to maintain the privacy of data relating to our users
(including disclosing data in a manner that was objectionable to our users), to comply with our posted privacy policies, our predecessors’
posted policies, laws and regulations, rules of self-regulatory organizations, industry standards and contractual provisions to which
we or they may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others,
all of which could result in litigation and financial losses, and could potentially cause us to lose users, advertisers, revenue and
employees.
We
do not have insurance coverage that is customary and standard for companies of comparable size in comparable industries
As
of the date of this report, we have not obtained sufficient insurance coverage that is customary and standard for companies of comparable
size in comparable industries, such as any liability insurance and insurance for losses and interruptions caused by terrorist attacks,
military conflicts, and wars, which could subject us to significant financial losses. The realization of any of these risks could cause
a material adverse effect on our business, financial condition, results of operations, and cash flows.
Risks
Related to the Ownership of Our ordinary shares
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
November 18, 2019, we received a notification letter from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“Nasdaq”)
notifying us that we are no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the
Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(b)(1) (the “Stockholder Equity Requirement”). The notification
received had no immediate effect on the listing of the Company’s ordinary shares on Nasdaq. Nasdaq has provided us with 45 calendar
days, or until January 2, 2020, to submit a plan to regain compliance with the minimum stockholders’ equity standard. If our plan
to regain compliance is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the notification letter,
or until May 16, 2019, to evidence compliance. On January 2, 2020, we submitted our plan of compliance to Nasdaq.
On
January 24, 2020, we received a notice (the “Notice”) from Nasdaq stating that we were not able to regain compliance with
the Stockholder Equity Requirement or the alternative criteria set forth in Nasdaq Listing Rule 5550(b) and that the Staff had determined
to seek to delist the Company’s securities from Nasdaq unless the Company requests a hearing before the Nasdaq Hearings Panel (the
“Panel”). On January 28, 2020 we requested a hearing before the Panel. Such request will stay any suspension or delisting
action by Nasdaq pending the completion of the hearing process. On January 30, 2020, we received a hearing instruction letter from Nasdaq
stating that the delisting action referenced in the Notice has been stayed, pending a final written decision by the Panel.
On
March 12, 2020, the Company appeared before the Panel to demonstrate its ability to regain compliance with the Stockholder Equity Requirement
and subsequently submitted supplemental information to the Panel on March 23, 2020 pursuant to the Panel’s request. By a letter
dated April 16, 2020, the Company was notified by Nasdaq that the Panel had determined to continue the listing of the Company’s
ordinary shares based upon the Company’s compliance with the Stockholder Equity Requirement. Additionally, the Panel advised in
such letter that is has placed the Company under a Panel Monitor (the “Monitor”) that shall last through April 15, 2021.
Pursuant to that Monitor and as provided in the Nasdaq Rules, if at any time during the monitor period the Company fails to maintain
compliance with any listing standard, Nasdaq will issue a Staff Delisting Determination and the Hearings Department will promptly schedule
a new hearing.
Separately,
on March 5, 2020, we received a notification letter from Nasdaq notifying us that we are no longer in compliance with the minimum bid
price requirement for continued listing on the Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price
Requirement”). The notification received has no immediate effect on the listing of the Company’s ordinary shares on Nasdaq.
Under the Nasdaq Listing Rules, the Company had until September 1, 2020 to regain compliance. If at any time during such 180-day period
the closing bid price of the Company’s ordinary shares is at least $1 for a minimum of 10 consecutive business days, Nasdaq will
provide the Company written confirmation of compliance.
On
August 10, 2020, we received a letter from Nasdaq notifying the Company that it had regained compliance with Nasdaq Listing Rules 5550(a)(2),
as the Company maintained a closing bid price of $1.00 per share or greater for twenty (20) consecutive days from July 13, 2020 through
August 7, 2020. On October 18, 2020, we received a notification letter from Nasdaq notifying us that we are no longer in compliance with
the Bid Price Requirement again and were granted 180 days or until April 13, 2021 to regain compliance.
Nasdaq
Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A)
provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business
days. There can be no assurance that the Company will be able to maintain the compliance with the Nasdaq rules. If we fail to comply
with the Bid Price Requirement 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.
The
price of our ordinary shares historically has been volatile, which may affect the price at which you could sell the ordinary shares.
Our ordinary shares are listed on the Nasdaq Capital Market under the
symbol “CSCW.” The market price for the ordinary shares has varied between a high bid price of $2.67 on March 30, 2021 and
a low bid price of $0.45 on November 11, 2020 in the 12-month period ended on November 1, 2021. This volatility may affect the price at
which you could sell the ordinary shares. The ordinary share price are likely to continue to be volatile and subject to significant price
and volume fluctuations in response to market and other factors, including the following:
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variations
in our revenues, earnings and cash flows;
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announcements
of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
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announcements
of new offerings, solutions and expansions by us or our competitors;
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changes
in financial estimates by securities analysts;
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detrimental
adverse publicity about us, our services or our industry;
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announcements
of new regulations, rules or policies relevant for our business;
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additions
or departures of key personnel;
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release
of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
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potential
litigation or regulatory investigations.
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Any
of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade.
In
the past, shareholders of public companies have often brought securities class action suits against those companies following periods
of instability in the market price of their securities. If we were to be involved in a class action suit, it could divert a significant
amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses
to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our
reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be
required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
We
do not intend to pay dividends on our ordinary shares for the foreseeable future, but if we intend to do so our holding company structure
may limit the payment of dividends to our stockholders.
While
we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends
and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations
in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion
of the dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting
standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to
Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources
of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting
standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any
dividends.
We
may be subject to penny stock regulations and restrictions and you may have difficulty selling our ordinary shares.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our ordinary shares becomes
a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This
rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers
and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in
the secondary market.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market
in penny stock.
There
can be no assurance that our ordinary shares will qualify for exemption from the Penny Stock Rule. In any event, even if our ordinary
shares were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would
be in the public interest.
If
securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations
regarding the ordinary shares, the market price for the ordinary shares and trading volume could decline.
The
trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about our
business. If industry or securities analysts decide to cover us and in the future downgrade our ordinary shares, the market price for
our ordinary shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on
us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ordinary
shares to decline.
Techniques
employed by short sellers may drive down the market price of our ordinary shares.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value
of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects
to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security
to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business
prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short
attacks have, in the past, led to selling of shares in the market.
Public
companies that have substantially all of their operations in the PRC have been the subject of short selling. Much of the scrutiny and
negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial
and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases,
allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations
and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
It
is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether
such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations
and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in
which we can proceed against the relevant short seller by principles of freedom of speech, applicable law or issues of commercial confidentiality.
Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations
are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in our
ordinary shares could be greatly reduced or even rendered worthless.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to U.S. domestic public companies.
Because
we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
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the
rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
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the
sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered
under the Exchange Act;
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the
sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability
for insiders who profit from trades made in a short period of time; and
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the
selective disclosure rules by issuers of material nonpublic information under Regulation FD.
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We
are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish
our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of NASDAQ. Press releases relating
to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file
with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic
issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing
in a U.S. domestic issuer.
Because
we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will
have less protection than you would have if we were a domestic issuer.
Nasdaq
Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private
issuer, however, we are permitted to, and we may, follow home country practice in lieu of the above requirements, or we may choose to
comply with the Nasdaq requirement within one year of listing. The corporate governance practice in our home country, the Cayman Islands,
does not require a majority of our board to consist of independent directors. Since a majority of our board of directors will not consist
of independent directors, fewer board members will be exercising independent judgment and the level of board oversight on the management
of our company may decrease as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation
committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum
of three members. We, as a foreign private issuer, are not subject to these requirements. The Nasdaq listing rules may require shareholder
approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation
plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq Listing
Rules in determining whether shareholder approval is required on such matters and to appoint a nominating and corporate governance committee.
However, we may consider following home country practice in lieu of the requirements under Nasdaq listing rules with respect to certain
corporate governance standards which may afford less protection to investors.
ITEM 4.
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INFORMATION
ON THE COMPANY
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History
and Development of the Company
We
are an entertainment and education company which provides online entertainment performances and online music education services via our
wholly-owned subsidiary, Color China Entertainment Limited (“Color China”), and education service carried out via our wholly-owned
subsidiary CACM Group NY, Inc. (“CACM”).
Color
Star Technology Co., Ltd. (formerly known as Huitao Technology Co., Ltd.) was founded as an unincorporated business on September 1, 2005,
under the name TJS Wood Flooring, Inc., and became a C-corporation in the State of Delaware on February 15, 2007. On April 29, 2008,
we changed our name to China Advanced Construction Materials Group, Inc.
On
August 20, 2018, CACM Group NY, Inc. (“CACM”) was incorporated in the State of New York and is wholly owned by us. The establishment
of CACM was to expand the Company’s business in the U.S. CACM has not commenced operations.
On
December 27, 2018, we consummated a redomicile merger pursuant to which we merged with and into our wholly-owned subsidiary, China Advanced
Construction Materials Group, Inc., a newly formed Cayman Islands company and the surviving entity in the merger, pursuant to the terms
and conditions of an Agreement and Plan of Merger adopted in July 2018. As a result of the reorganization, the Company is now governed
by the laws of the Cayman Islands.
On
July 16, 2019, upon effectiveness of the Company’s amendment and restatement of the Company’s memorandum and articles of
association (“Amended and Restated Memorandum and Articles”)_which was approved by the Company’s shareholders, the
Company’s name was changed from China Advanced Construction Materials Group, Inc. to Huitao Technology Co., Ltd.
On
December 31, 2019, we entered into a share exchange agreement with Sunway Kids International Education Group Ltd. (“Sunway Kids”)
and its shareholders. On February 14, 2020, the Company consummated the acquisition of Sunway Kids whereby we issued 1,989,262 ordinary
shares and $2 million of cash to be paid in exchange for all of the issued and outstanding capital stock of Sunway Kids. The $2 million
cash consideration is payable in five installments over five years according to an earn-out schedule. Sunway Kids thereby became our
wholly-owned subsidiary. Sunway Kids was established on February 29, 2012, under the laws of the British Virgin Islands as an offshore
holding company. On August 23, 2018, Sunway Kids established its wholly-owned subsidiary, Brave Millenium Limited (“Brave Millenium”)
under the laws of Hong Kong. On December 4, 2019, Brave Millenium established Chengdu Hengshanghui Intelligent Technology Co., Ltd. (“Chengdu
Hengshanghui”) in China as a wholly foreign owned limited liability company (the “WFOE”). On December 9, 2019, Chengdu
Hengshanghui entered into a series of variable interest entity agreements with Chengdu Hengshanghui Education Consulting Co., Ltd. (“Hengshanghui
Education”). Through Sunway Kids and its variable interest entity Hengshanghui Education, we were engaged in providing education
and health services to day-care and preschools in China.
On
March 10, 2020, CACM entered into a certain joint venture agreement (the “JV Agreement”) with Baydolphin, Inc., a company
organized under the laws of New York (“Baydolphin”). Pursuant to the JV Agreement, CACM and Baydolphin established a limited
liability company under the laws of New York, Baytao LLC (“Baytao”), which was intended to be the 100% owner of one or more
operating entities in the U.S. to engage in the business of online and offline after-school education.
Prior
to acquisition of Sunway Kids in February 2020, our core business has been the concrete business in China. Our concrete business was
negatively affected by the economic cycle and government policies. The concrete industry was influenced by the decline in the macro economy
in recent years. The entire concrete industry in the PRC’s Beijing area experienced a slowdown in industry production and economic
growth in the last few years as the Beijing government continues to enforce concrete production reformation and tightened environmental
laws from late 2017 to date. The reformation causes great uncertainties for local enterprises in the construction market. Since 2017,
the pressure on small concrete companies has further increased and many have been shut down. Also, the Beijing government ordered the
suspension of construction jobsites during winters to reduce air pollution since 2017. The operations of Xin Ao were also severely affected.
As a result of the Company’s deteriorating cash position, we defaulted on bank loans and experienced a substantial increase in
contingent liabilities. As of December 31, 2019, there was a default on a bank loan of $24,345,129. As of December 31, 2019, Xin Ao was
subject to several civil lawsuits for which the Company estimated that it is more than likely to pay judgments in the amount of approximately
$6.8 million (including interest and penalties of $1.6 million). During the six months ended December 31, 2019 and 2018, there were additional
estimated claims of approximately $0.3 million and $1.1 million, respectively. The Company believed it would be very difficult, if not
impossible, to turn around the concrete business. As such, the Company had decided to dispose of the concrete business after the acquisition
of Sunway Kids.
On
May 6, 2020, the Company completed the disposition (the “Xin Ao Disposition”) of Xin Ao Construction Materials, Inc. (“BVI-ACM”),
after obtaining its shareholders’ approval on April 27, 2020 and satisfaction or waiver of all other closing conditions. Upon the
closing of the Xin Ao Disposition, Mr. Xianfu Han and Mr. Weili He became the sole shareholders of BVI-ACM and assumed all assets and
liabilities of all the subsidiaries and variable interest entities owned or controlled by BVI-ACM. The proceeds of $600,000 from the
Xin Ao Disposition have been used for the Company’s working capital and general corporate purposes.
On
April 27, 2020, upon effectiveness of the Company’s amendment and restatement of its Amended and Restated Memorandum and Articles
(which was approved by the Company’s shareholders), the Company’s name was changed from Huitao Technology Co., Ltd. to Color
Star Technology Co., Ltd.
On
May 7, 2020, we entered into a Share Exchange Agreement (“Exchange Agreement”) with Color China Entertainment Limited (“Color
China”), a Hong Kong limited company, and shareholders of Color China (the “Sellers”), pursuant to which, among other
things and subject to the terms and conditions contained therein, the Company shall acquire all of the outstanding issued shares and
other equity interests in Color China from the Sellers (the “Acquisition”). Pursuant to the Exchange Agreement, in exchange
for all of the outstanding shares of Color China, the Company shall issue 4,633,333 ordinary shares of the Company and pay an aggregate
of $2,000,000 to the sellers. The Company plans to make Color China an emerging online performance and online music education provider
with a significant collection of performance specific assets -- leveraging professional experience of the Company’s new Chief Executive
Officer (“CEO”) who has established good relationships with major record companies, renowned artists and entertainment agencies
around the world. Immediately after the Acquisition, Color Star will own 100% of Color China. On June 3, 2020, the transaction contemplated
by the Exchange Agreement was consummated when the Company issued 4,633,333 ordinary shares of the Company to the Sellers and the Sellers
transferred all of Color China’s issued and outstanding shares to the Company.
On
June 25, 2020, the Company and the former shareholders of Sunway Kids entered into an Amendment No. 2 (“Amendment”) to the
Share Exchange Agreement dated December 31, 2019, as amended. Pursuant to the Amendment, the Company shall not make any Earn-out Payment
to the former shareholders of Sunway Kids since Sunway Kids has been unable to conduct its normal operations due to the COVID-19 pandemic
and management of Sunway Kids believes it will be very difficult to achieve its projected financial results. On the same day, Sunway
Kids and Yanliang Han (the “Purchaser”), an unrelated third party, entered into certain share purchase agreement (the “Disposition
SPA”). Pursuant to the Disposition SPA, the Purchaser agreed to purchase Sunway Kids for cash consideration of $2.4 million consisting
of $400,000 which shall be paid within a month of closing, and $2,000,000 to be paid in monthly installments of $200,000 over 10 months.
Upon the closing of the transaction contemplated by the Disposition SPA on June 25, 2020, the Purchaser became the sole shareholder of
Sunway Kids and as a result, assumed all assets and liabilities of all the subsidiaries and variable interest entities owned or controlled
by Sunway Kids.
Effective
October 1, 2020, the Company changed the ticker symbol of its ordinary shares traded on the Nasdaq Capital Market from “HHT”
to “CSCW”, representing the abbreviation of “Color Star Color World.” This is the new focus of the Company’s
business.
On
June 29, 2021, CACM entered into a share purchase agreement with Baydolphin, Inc. (the “Buyer”). Pursuant to the Agreement,
CACM agreed to sell, and the Buyer agreed to purchase, 80% of the outstanding equity interest of Baytao for a consideration of $100.
Prior to the sale, Baytao LLC had no operation or asset. Upon completion of the sale, Baytao ceases to be a subsidiary of the Company.
Organizational
structure
Below
is the Company’s corporate structure chart as of the date of this report.
Business
Overview
We
are an entertainment and education company providing online entertainment performances and online innovative music education through
our wholly-owned subsidiaries Color China and CACM. We strive to offer students professional artist training platform featured by
exclusive content and live interaction, with the mission of delivering world-class entertainment learning experiences and promoting
entertainment exchange with our strong resources and deep connections in the industry. We launched our online cultural entertainment
platform, Color World, globally on September 10, 2020. The curriculum development created by us includes music, sports, animation,
painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment, sports and culture.
At present, we have signed contracts with well-known international artists and more than 50 celebrity teachers have been retained to
launch online lectures. We believe that we, along with our alliance, have strong industry resources and influence to become a
comprehensive online academy for global “future stars.”
The Color World
platform not only has celebrity lectures, but also celebrity concert videos, celebrity peripheral products, such as celebrity branded
merchandise, and artist interactive communication. We strive to build an all-star cultural and entertainment industry chain.
We are committed to the development of entertainment technology and intelligent technology. We strive to create
a parallel world of entertainment, allowing more people to realize their dreams in the virtual entertainment world. We aim to unite artists
from all over the world to create digital arts (NFT) products and offer fans their idols’ products exclusively available at the
Color World platform. This will also allow copyrights owners and artists from across the globe to receive financial benefits from their
NFT products.
Our
Competition
The
online education market is rapidly expanding and estimated to reach $457.8 billion by 2026. With the acceleration of online
learning due to social distancing, this industry is experiencing huge growth. We operate in a highly competitive and fragmented industry
that is sensitive to price, content (i.e. curriculum) and quality of service. With online learning adoption accelerating and creating
new opportunities, competition is heating up for companies actively competing to capture market share, with the presence of a large number
of service and content providers in the market bringing huge volumes of educational content online.
We
face intense competition in our online business and compete primarily with online education providers and content sharing platforms who
are already established and who are beginning to target entertainment education, with a trend of “fan culture” and “idol
economies” in Asia where talent shows are popular and have launched a large number of amateur stars. We are uniquely positioned,
as a comprehensive online and offline entertainment education services provider with all-star teacher lineup, as well as the strong resources
and wide connections in industry. Below are a few of our closest competitors below and the unique ways we are differentiated in our view.
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MasterClass
is an American online education platform on which students can access tutorials and lectures pre-recorded by experts in various fields.
Unlike us who offer students a professional artists training platform featured by exclusive content and live interaction, MasterClass’
classes are typically not interactive, though at least one course included “interactive assignments” where the student acted
with other students, either in person or over Skype. Classes cover topics like writing, sports, and cooking, with 33 artist instructors
focused on entertainment and music teaching. MasterClass’ member subscription fee is $15/month, a little more expensive than us.
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LearnWorlds
is a stand-alone online course platform for instructors to create, sell and promote their online courses. Users will be charged at least
$79 per month to either sell courses or get access to free courses, which means that everyone who is qualified (not just experts and
celebrities) could create and sell their courses on the platform. Users are not offered abundant tools for marketing their courses.
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Vimeo
is an American video hosting, sharing, and services platform headquartered in New York City. Vimeo operates on an ad-free basis, and
instead derives revenue by providing subscription plans for video content producers and offering software as a service (SaaS) with video
creation, editing, and broadcasting tools, enterprise software solutions, as well as the means for video professionals to connect with
clients and other professionals.
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Our
Competitive Strengths
We
differ from various other competitors in our core content of “star online + entertainment teaching.” We are set to break
past the boundaries between celebrity entertainment and online knowledge-sharing, and offers students a professional artists training
platform featured by exclusive content and live interaction by top artists and celebrities globally, as the first online platform to
bring western artists to attract Asian students and meanwhile enabling Asian artists to enter the Western markets. The Company is well
connected with artists from Asian to Western, and is able to group many international superstars into its proprietary platform “Color
World”. As more international stars join in, coupled with our international version App to be launched in the near future, we expect
the Company will continue to expand its subscriber base and gain market share, and bring innovative changes to the current state of music
education and entertainment industry. We believe we are as well positioned in the industry with our all-star instructor lineup, excellent
online learning, as well as the strong resources and extensive connections, which we believe most competitors lack.
Our
Growth Strategy
We
are committed to enhancing profitability and cash flows through the following strategies:
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We are targeting
the enormous online education market, which is experiencing rapid growth, as a result of the COVID-19 pandemic. According
to Reportlinker, the global online education market size is projected to reach 457.8 billion by 2026, growing at a CAGR of 10.03%.
The continued shift of education from in person to virtual is driving higher demand and significant revenue for market vendors in
the industry. We target a large addressable market driven by the rapid expansion of global online education, and the rise of the
“fan economies” in Asia where the younger generation is more willing to attend their idol’s livestream and spend
money on their idols. Meanwhile, the popularity of talent competition shows in Asia has also inspired more ordinary people to enter
the entertainment industry and pursue their dreams of being a star. We as a comprehensive entertainment education services provider,
could address the growing demand from both fans and talents, and provide professional entertainment education to more than 2 billion
people worldwide; and
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We are well
positioned to capture market share with an experienced management team, all-star instructor lineup, and the combination of online
and in-person training. We strive to offer students professional artists training platform featured by exclusive content
and live interaction and are well connected with artists from Asia and U.S., establishing strategic partnerships with top record
companies and entertainment agencies.
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Our Operations
We are growing to become the world’s top
online celebrity entertainment sharing platform. We provide online entertainment performances and online innovative music education through
our wholly-owned subsidiaries Color China and CACM. We strive to offer students professional artist training platform featured by exclusive
content and live interaction, with the mission of delivering world-class entertainment learning experiences and promoting entertainment
exchange with its strong resources and deep connections in industry.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has resulted in quarantines,
travel restrictions, and the temporary closure of stores and facilities throughout the world. New York, where our U.S. operations
are based, was significantly affected by the pandemic, which had led to restrictive measures taken by the New York government to contain
the spread of COVID-19, such as reduction on the number of people in gathering and travel restrictions. For the fiscal year ended June
30, 2021, substantially all of our business was conducted via online platform and App, and substantially all of our revenue was generated
from online operations. As such, our management does not believe the pandemic had material adverse effect on our financial condition
and operating results during the fiscal year.
Online Business
Online Education Academy
The core content of “star online + entertainment
teaching” offers a variety of stars and a relatively rich entertainment teaching experience. By registering online, students can
select their favorite tutors to conduct accurate and efficient learning, and access to exclusive online video classes and tutorials by
top artists globally.
The curriculum development created by us includes
music, sports, animation, painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment,
sports and culture. At present, we have signed contracts with well-known international artists and more than 50 celebrity teachers have
been launched. The Color World platform not only has celebrity lectures, but also celebrity concert videos, celebrity peripheral products,
and artist interactive communication. The platform focuses on the interactive participation of members and fans, making the platform
more entertaining. Fans can interact with their idols, and they can also upload their own works for celebrity tutors and audiences across
the network to watch comments. The celebrity live streaming section, which was launched on October 15, 2020, allows more celebrities
to communicate and interact with our users through the Internet.
The Color World platform generates revenue primarily
through paid membership subscriptions priced at $9.90 per user per month. Members can access most video courses on the platform for
free and will be charged the tuition fee of $30/hour for taking classes of tier 1 artists and $15/hour for learning from Tier 2 artists.
First three months of launch costs only $1.5/hour to attract downloads and there have been over 500,000 registered users as
of the date of this report.
We are well connected with artists from Asia
to the U.S., and have built strategic partnerships with globally renowned record companies and entertainment agencies, such as Universal
Music Group and Sony Music, which enable us to group a number of artists into its Color World platform and secure the rights to the exclusive
streaming of online lessons taught by the star teachers. Currently, we have entered into educational licensing and performance agreements
with approximately over 50 global artists and professionals in industry for their services as instructors on the Color World
platform, and are seeking out and contracting more star teachers in a variety of fields such as music, film, sports, animation, television,
presentations, dance, and art to provide its prospective student subscribers with a large repertoire of first-hand exposure to and lessons
from professionals in their desired fields.
Online Concert
The Company established its own music festival
brand “Color International Music Festival” and its CEO has the experiences of holding more than 100 star concerts with its
partners every year. On September 9, 2020, we broadcasted the Color World Online Concert with ten Eastern and ten Western top artists/celebrities
including Grammy-winning jazz guitarist Larry Carlton, R&B singer-songwriter Ashanti, and “Pop Music Queen” Na Ying from
mainland China to global audiences via its official platform “Color World” and attracted over half a million viewers from
mainland China and all over the world to watch online, reaching over 10 million hits on global social media networks, which we believe
is a milestone to the Company. In fiscal 2021, the Company held an online live concert featuring exclusive performance by Luo Dayou, the “Godfather
of Asian Music.” The performance has been well received by global audiences and highly recognized by the artist himself. On April
23, 2021, the Company also launched an exclusive electronic music concert of the Top 100 DJ, Steve Aoki. This was our first attempt to
provide online electronic music performances globally during the pandemic, and it has received favorable reviews from global music lovers
and electronic music audiences.
Online Store
We plan to add an online store feature to our
Color World App, mainly selling celebrity co-branded peripheral products including clothing, shoes, hats, watches, digital products,
wine, and other categories. While we have not generated revenue from our online store operations, we expect to see an increase in user
activities and future sales as more fans join and use our app.
Offline Business
Music Festival
We may collaborate with multiple well-established
music festival brands to co-organize music festivals with different genres over the next five years in different cities across Asia and
beyond. The management of the Company will closely monitor the development of the COVID-19 pandemic and adjust our plans of co-organizing
the music festivals to protect the safety of our customers and employees and to comply with the applicable laws and regulations.
Our Suppliers and Customers
For the year ended June 30, 2021, we had one
vendor, whose supplies accounted for 89% of the Company’s total purchases.
For the fiscal year ended June 30, 2021, we had
no customers, whose sales accounted for more than 10% of our total sales.
We had no sales during the fiscal year ended
June 30, 2020 from our continuing operations and we had no accounts receivable as of June 30, 2020.
Sales and Marketing
Marketing Channels
We market our course
offerings and enhance brand awareness through various online and mobile channels. We place advertisements and conduct marketing on mainstream
social media platforms. At the same time, we also generate sales leads from word-of-mouth referrals by our students and parents
of students. We believe our high quality course offerings and satisfactory student experience will continue to contribute word-of-mouth referrals.
A unique approach for
the online concert promotions was adopted by the Company where ticket prices were initially set very low with additional opportunities
for purchasers to take part in the distribution of ticket sales in order to receive referral rewards. This indirect ticket sales model,
and a large amount of resulting passive income, promises more diversified marketing strategies for online music.
Research and Development
Technology and
Infrastructure
Technology is the backbone
of our highly scalable business model. Our strong technological capabilities enable us to deliver a superior student experience and improve
operational efficiency. Our technology team, coupled with our proprietary artificial intelligence technology and the growing volume of
data generated from our operations, has continued to identify opportunities for improvements in our technology infrastructure and applications.
Live Broadcasting
Technology
Live broadcasting technology
development has been our main focus since our inception. Currently, our proprietary live broadcasting technology makes it possible for
as many as 200,000 students to join a live broadcasting class simultaneously, without compromising video quality.
Intellectual Property
As of the date of this report, we have two domain
names: www.colorstarinternational.com and www.color-star.cn.
Our Labor Force
As of the date of this report, we employed
55 full-time employees and 2 part-time employees. As required by applicable PRC law, we have entered into employment contracts
with all our officers, managers and employees. We believe that we maintain a satisfactory working relationship with our employees
and we have not experienced any significant labor disputes or any difficulty in recruiting staff.
Regulations
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China.
Regulation Related to Value-added Telecommunications
Services
On September 25,
2000, the State Council issued the PRC Regulations on Telecommunications, or the Telecommunications Regulations, as last amended on February 6,
2016, to regulate telecommunications activities in China. The Telecommunications Regulations divided the telecommunications services
into two categories, namely “infrastructure telecommunications services” and “value-added telecommunications services.”
Pursuant to the Telecommunications Regulations, operators of value-added telecommunications services, or VATS, must first obtain a Value-added
Telecommunications Business Operating License, or VATS License, from the MIIT, or its provincial level counterparts. On July 3,
2017, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses, which set forth more specific
provisions regarding the types of licenses required to operate VATS, the qualifications and procedures for obtaining such licenses and
the administration and supervision of such licenses.
The Amended Classified
Catalog of Telecommunications Services (2015 Version), or the Amended 2016 MIIT Catalog, which took effect on June 6, 2019, defines
information services as “the information services provided for users through public communications networks or internet by means
of information gathering, development, processing and the construction of the information platform.” Moreover, information services
continue to be classified as a category of VATS and are clarified to include information release and delivery services, information search
and query services, information community platform services, information real-time interactive services, and information protection and
processing services under the Amended 2016 MIIT Catalog. The Administrative Measures on Internet Information Services, or ICP Measures,
promulgated by the PRC State Council on September 25, 2000 and most recently amended on January 8, 2011, set forth more specific
rules on the provision of internet information services. According to ICP Measures, any company that engages in the provision of commercial
internet information services shall obtain a sub-category VATS License for Internet Information Services, or ICP License, from the relevant
government authorities before providing any commercial internet information services within the PRC. Pursuant to the above-mentioned
regulations, “commercial internet information services” generally refer to provision of specific information content, online
advertising, web page construction and other online application services through internet for profit making purpose.
In addition to the Telecommunications
Regulations and the other regulations discussed above, the provision of commercial internet information services on mobile internet applications
is regulated by the Administrative Provisions on Mobile Internet Applications Information Services, which was promulgated by Cyberspace
Administration of China, or the CAC, on June 28, 2016 and came into effect on August 1, 2016. The providers of mobile internet
applications are subject to requirements under these provisions, including acquiring the qualifications and complying with other requirements
provided by laws and regulations and being responsible for information security.
Regulation Related to Online Transmission
of Audio-Visual Programs
To regulate the provision
of audio-visual program services to the public via the internet, including through mobile networks, within the territory of the PRC,
the State Administration of Press Publication Radio Film and Television, or the SAPPRFT (currently known as National Radio and Television
Administration), and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual
Program Provisions, on December 20, 2007, which came into effect on January 31, 2008 and was last amended on August 28,
2015. Under the Audio-Visual Program Provisions, “online audio-visual program services” is defined as activities of producing,
redacting and integrating audio-visual programs, providing them to the general public via internet, and providing service for other people
to upload and transmit audio-visual programs, and providers of online audio-visual program services are required to obtain a License
for Online Transmission of Audio-Visual Programs issued by the SAPPRFT, or complete certain registration procedures with the SAPPRFT.
In general, providers of online audio-visual program services must be either state-owned or state-controlled entities, and the business
to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service
determined by the SAPPRFT.
On May 21, 2008,
SAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual
Programs, as amended on August 28, 2015, which sets out detailed provisions concerning the application and approval process regarding
the License for Online Transmission of Audio-Visual Programs. According to the above regulations, providers of internet audio-visual
program services that engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply
for the license so long as those providers did not violate the relevant laws and regulations in the past or their violation of the laws
and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three
months prior to the promulgation of the Audio-Visual Program Provisions.
On March 30, 2009,
SAPPRFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates
the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable,
and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or
other similarly prohibited elements.
On March 10, 2017,
SAPPRFT issued the Provisional Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories,
which revised the previous version issued on March 17, 2010. According to the Categories, there are four categories of internet
audio and video programs services which are further divided into seventeen sub-categories. The third sub-category to the second category
covers the making and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting
such content to the general public online.
On March 16, 2018,
the SAPPRFT promulgated the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Program Services, providing
that the classic literary works, radio, film and television programs, internet original audio-visual programs shall not be re-edited,
re-dubbed, re-subtitled or partly captured and consolidated as a new program without authorizations and providers of internet audio-visual
program services shall strictly manage and supervise such re-edited programs uploaded by the internet users and shall not provide any
transmission channel for those internet audio-visual programs which have political orientation issues, copyright issues or content issues.
Regulation Related to Internet Live Streaming
Services
On September 2,
2016, the SAPPRFT promulgated the Notice on Strengthening the Administration of Live Streaming Services of Internet Audio-Visual Program,
which provides that any entity that intends to engage in live audio-visual broadcasting of major political, military, economic, social,
cultural or sport events or activities, or live audio-visual broadcasting of general social or cultural group activities, general sporting
events or other organizational events, must obtain a License for Online Transmission of Audio-Visual Programs with a permitted operation
scope covering the above business activities. Any entity or individual without qualification is prohibited from broadcasting live audio-visual
programs involving news, variety shows, sports, interviews, commentary or other forms of programs through any online live-streaming platform
or online live broadcasting booth, nor are they permitted to start a live broadcasting channel for any audio-visual programs. In addition,
any entity without such license shall not operate audio-visual live streaming business and the live streaming programs provided by the
qualified company shall not contain any content forbidden by laws and regulations.
On November 4,
2016, the CAC promulgated the Provisions on the Administration of Internet Live Streaming Services, or the Internet Live Streaming Provisions,
effective from December 1, 2016. Under the Internet Live Stream Provisions, “internet live streaming service” is defined
as the activities of continuously releasing real-time information to the public on internet in such forms as videos, audios, images and
texts and the “internet live streaming service provider” is defined thereunder as an operator of the platform providing internet
live streaming platform services. The Internet Live Streaming Provisions provide that internet live streaming service providers shall
examine and verify the identity information of internet live-streaming issuers and file the identity information of the issuers with
local counterparts of the CAC.
On July 12, 2017,
the CAC issued a Notice on Development of the Filing Work for Enterprises Providing Internet Live Streaming Services, which provides
that all the companies providing internet live streaming services shall file with the local authority since July 15, 2017, otherwise
the CAC or its local counterparts may impose administrative sanctions on such companies.
Pursuant to the Circular
on Tightening the Administration of Internet Live-Streaming Services jointly issued by the MIIT, the Ministry of Culture and Tourism,
or the MCOT, and several other government agencies on August 1, 2018, live streaming services providers are required to file with
the local public security authority within 30 days after it commences the service online.
Regulation Related to Production and Distribution
of Radio and Television Programs
On 19 July 2004,
SAPPRFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, or the Radio and TV
Programs Measures, which became effective on 20 August 2004 and were amended on August 28, 2015 and October 31, 2018.
The Radio and TV Programs Measures are applicable for establishing institutions that produce and distribute radio and television programs
or for the production of radio and television programs like programs with a special topic, column programs, variety shows, animated cartoons,
radio plays and television dramas and for activities like transactions and agency transactions of program copyrights. Pursuant to the
Radio and TV Programs Measures, any entity that intends to produce or operate radio or television programs must first obtain the Permit
for Production and Operation of Radio and TV Programs from SAPPRFT or its local branches.
Regulation Related to Internet Culture
Activities
On May 10, 2003,
the Ministry of Culture, or MOC (currently known as the MCOT), promulgated the Interim Administrative Provisions on Internet Culture,
or the Internet Culture Provisions, which became effective on July 1, 2003 and was amended on February 17, 2011 and December 15,
2017. The Internet Culture Provisions require internet information services providers engaging in commercial “internet culture
activities” to obtain an Internet Culture Business Operating License from the MOC. “Internet cultural activity” is
defined under the Internet Culture Provisions as an act of provision of internet cultural products and related services, which includes
(i) the production, duplication, importation, and broadcasting of the internet cultural products; (ii) the online dissemination
whereby cultural products are posted on the internet or transmitted via the internet to end-users, such as computers, fixed-line telephones,
mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition
and competition of the internet cultural products. In addition, “internet cultural products” is defined under the Internet
Culture Provisions as cultural products produced, broadcast and disseminated via the internet, which mainly include internet cultural
products especially produced for the internet, such as online music entertainment, online games, online shows and plays (programs), online
performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music entertainment,
games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicating those to internet
for dissemination.
On May 14, 2019,
the General Office of MOC promulgated the Notice on Adjusting the Scope of Internet Culture Business Operating License and Further Standardize
the Approval Work, which provides that online music, online shows and plays, online performances, online works of art, online cartoons,
displays and games are the activities that fall in the scope of Internet Culture Business Operating License, and further clarifies that
educational live streaming activities are not online performances.
Regulation Related to Online Publishing
On February 4, 2016, the SAPPRFT (currently
reformed into the State Administration of Press and Publication (National Copyright Bureau) under the Propaganda Department of the Central
Committee of the Communist Party of China) and the MIIT jointly issued the Administrative Provisions on Online Publishing Services, or
the Online Publishing Provisions, which came into effect on March 10, 2016. Under the Online Publishing Provisions, any entity providing
online publishing services shall obtain an Online Publishing Services Permit. “Online publishing services” refer to the provision
of online publications to the public through information networks; and “online publications” refer to digital works with
publishing features such as having been edited, produced or processed and are available to the public through information networks, including:
(i) written works, pictures, maps, games, cartoons, audio/video reading materials and other original digital works containing useful
knowledge or ideas in the field of literature, art, science or other fields; (ii) digital works of which the content is identical
to that of any published book, newspaper, periodical, audio/video product, electronic publication or the like; (iii) network literature
databases or other digital works, derived from any of the aforesaid works by selection, arrangement, collection or other means; and (iv) other
types of digital works as may be determined by the SAPPRFT.
As of the date of this annual report, there are
no explicit interpretation from the governmental authorities or prevailing enforcement practice deeming the provision of our educational
content to our students through our online platform as “online publishing” which requires an Online Publishing Service Permit.
Nevertheless, it remains unclear whether the local PRC authorities would adopt a different practice. In addition, it remains uncertain
whether the PRC governmental authorities would issue more explicit interpretation and rules or promulgate new laws and regulations.
Regulation Related to Internet Information
Security and Privacy Protection
The PRC Constitution states that the PRC laws
protect the freedom and privacy of communications of citizens and prohibit infringement of such rights. PRC governmental authorities
have enacted laws and regulations on internet information security and protection of personal information from any abuse or unauthorized
disclosure. The Decisions on Maintaining Internet Security which was enacted by the Standing Committee of the PRC National People’s
Congress, or the SCNPC on December 28, 2000 and amended on August 27, 2009, may subject violators to criminal punishment in
the PRC for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically
disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual
property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other
things, result in a leakage of state secrets or a spread of socially destabilizing content. If an information service provider violates
these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
Pursuant to the Decision on Strengthening the
Protection of Online Information issued by the SCNPC on December 28, 2012, and the Order for the Protection of Telecommunication
and Internet User Personal Information issued by the MIIT on July 16, 2013, any collection and use of user personal information
must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified
purposes, methods and scopes. “Personal information” is defined as information that identifies a citizen, the time or location
for his/her use of telecommunication and internet services or involves privacy of any citizen such as his/her birth date, ID card number,
and address. An internet information service provider must also keep information collected strictly confidential, and is further prohibited
from divulging, tampering or destroying of any such information, or selling or providing such information to other parties. Any violation
of the above decision or order may subject the internet information service provider to warnings, fines, confiscation of illegal gains,
revocation of licenses, cancelation of filings, closedown of websites or even criminal liabilities.
Pursuant to the Notice of the Supreme People’s
Court, the Supreme People’s Procuratorate and the Ministry of Public Security on Legally Punishing Criminal Activities Infringing
upon the Personal Information of Citizens, issued in 2013, and the Interpretation of the Supreme People’s Court and the Supreme
People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the Personal Information
of Citizens, which was issued on May 8, 2017 and took effect on June 1, 2017, the following activities may constitute the crime
of infringing upon a citizen’s personal information:(i) providing a citizen’s personal information to specified persons or
releasing a citizen’s personal information online or through other methods in violation of relevant national provisions; (ii) providing
legitimately collected information relating to a citizen to others without such citizen’s consent (unless the information is processed,
not traceable to a specific person and not recoverable); (iii) collecting a citizen’s personal information in violation of applicable
rules and regulations when performing a duty or providing services; or (iv) collecting a citizen’s personal information by
purchasing, accepting or exchanging such information in violation of applicable rules and regulations.
Pursuant to the Ninth Amendment to the Criminal
Law issued by the SCNPC in August 2015, which became effective in November 2015, any person or entity that fails to fulfill the obligations
related to internet information security administration as required by applicable laws and refuses to rectify upon orders is subject
to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due
to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation,
and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or
(ii) steals or illegally obtain any personal information is subject to criminal penalty in severe situation.
Pursuant to the PRC Cyber Security Law issued
by the SCNPC on November 7, 2016, effective as of June 1, 2017, “personal information” refers to all kinds of information
recorded by electronic or otherwise that can be used to independently identify or be combined with other information to identify individuals’
personal information including but not limited to: individuals’ names, dates of birth, ID numbers, biologically identified personal
information, addresses and telephone numbers, etc. The Cyber Security Law also provides that: (i) to collect and use personal information,
network operators shall follow the principles of legitimacy, rightfulness and necessity, disclose rules of data collection and use, clearly
express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered;
(ii) network operators shall neither gather personal information unrelated to the services they provide, nor gather or use personal
information in violation of the provisions of laws and administrative regulations or the scopes of consent given by the persons whose
data is gathered; and shall dispose of personal information they have saved in accordance with the provisions of laws and administrative
regulations and agreements reached with users; (iii) network operators shall not divulge, tamper with or damage the personal information
they have collected, and shall not provide the personal information to others without the consent of the persons whose data is collected.
However, if the information has been processed and cannot be recovered and thus it is impossible to match such information with specific
persons, such circumstance is an exception.
Pursuant to the Provisions on Internet Security
Supervision and Inspection by Public Security Organs, which was promulgated by the Ministry of Public Security on September 15,
2018 and became effective on November 1, 2018, the public security departments are authorized to carry out internet security supervision
and inspection of the internet service providers from the following aspects, among others: (i) whether the service providers have
completed the recordation formalities for online entities, and filed the basic information on and the changes of the accessing entities
and users; (ii) whether they have established and implemented the cybersecurity management system and protocols, and appointed the
persons responsible for cybersecurity; (iii) whether the technical measures for recording and retaining users’ registration
information and weblog data are in place according to the law; (iv) whether they have taken technical measures to prevent computer
viruses, network attacks and network intrusion; (v) whether they have adopted preventive measures to tackle the information that
is prohibited to be issued or transmitted by the laws and administrative regulations in the public information services; (vi) whether
they provide technical support and assistance as required by laws to public security departments to safeguard national security and prevent
and investigate on terrorist activities and criminal activities; and (vii) whether they have fulfilled the obligations of the grade-based
cybersecurity protection and other obligations prescribed by the laws and administrative regulations. In particular, public security
departments shall also carry out supervision and inspection on whether an internet service provider has taken required measures to manage
information published by users, adopted proper measures to handle the published or transmitted information that is prohibited to be published
or transmitted, and kept the relevant records.
In addition, the Office of the Central Cyberspace
Affairs Commission, the MIIT, the Ministry of Public Security, and the SAMR jointly issued an Announcement of Launching Special Crackdown
Against Illegal Collection and Use of Personal Information by Apps on January 23, 2019 to implement special rectification works
against mobile Apps that collect and use personal information in violation of applicable laws and regulations, where business operators
are prohibited from collecting personal information irrelevant to their services, or forcing users to give authorization in disguised
manner. On November 28, 2019, the National Internet Information Office, the MIIT, the Ministry of Public Security and the SAMR further
jointly issued a notice to classify and identify illegal collection and use of personal information.
On August 22, 2019, the Office of the Central
Cyberspace Affairs Commission issued the Provisions on the Cyber Protection of Children’s Personal Information, which took effect
on October 1, 2019. The Provisions on the Cyber Protection of Children’s Personal Information apply to the collection, storage,
use, transfer and disclosure of the personal information of children under the age of 14 via the internet. The Provisions on the Cyber
Protection of Children’s Personal Information require that network operators shall establish special rules and user agreements
for protection of personal information for children under the age of 14, inform their guardians in a noticeable and clear manner, and
shall obtain the consent of their guardians. When obtaining the consent of their guardians, network operators shall explicitly disclose
several matters, including, without limitation, the purpose, method and scope of collection, storage, use, transfer and disclosure of
such personal information, and methods for correcting and deleting such personal information. Provisions on the Cyber Protection of Children’s
Personal Information also require that when collecting, storing, using, transferring and disclosing such personal information, network
operators shall comply with certain regulatory requirements, including, without limitation, that network operators shall designate specific
personnel to take charge of the protection of such personal information and shall strictly grant information access authorization for
their staff to such personal information under the principle of minimal authorization.
On July 10, 2021, the Office of the Central Cyberspace
Affairs Commission and the Office of Cybersecurity Review under the Cyberspace Administration of China promulgated the Review Measures
Draft to solicit public opinion and comments. The Review Measures Draft provides that data processors who engage in data processing activities
that affect or may affect national security, are included in the scope of cybersecurity review. The deadline for public comments to the
Review Measures Draft was July 25, 2021. The Review Measures Draft further requires that critical information infrastructure operators
and services and data processing operators that possess personal data of at least one (1) million users must apply for a review by the
Cybersecurity Review Office of PRC, if they plan to conduct listings in foreign countries. As of the date of this report, we have not
received any notice from any authorities requiring us to undertake a cybersecurity review by the CAC. Further, we have not been subject
to any penalties, fines, suspensions, investigations from any competent authorities for violation of the regulations or policies that
have been issued by the CAC to date. If the Review Measures Draft is enacted as proposed, we believe we may not be subject to the cybersecurity
review by the CAC for this offering, given that: (i) we presently maintain fewer than one (1) million individual clients in our business
operations, as of the date of this report; and (ii) data processed in our business is less likely to have a bearing on national security,
thus it may not be classified as core or important data by the authorities. However, there remains uncertainty as to how the Review Measures
Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations,
rules, or detailed implementation and interpretation related to the Review Measures Draft. If any such new laws, regulations, rules, or
implementation and interpretation come into effect, we will take all reasonable measures and actions to comply. We cannot assure you that
PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we can fully or timely comply
with such laws should they be deemed applicable to our operations. There is no certainty as to how such review or prescribed actions would
impact our operations and we cannot guarantee that any clearance can be obtained or any actions that may be required can be taken in a
timely manner, or at all. As the Review Measures Draft has not taken effect as of the date of this report and there are no detailed rules
or official interpretation being introduced yet, the definition of “operators listing in a foreign country with more than one (1)
million users’ personal information data” remains unclear as of the date of this report. It is possible that CAC may require
us to file the cybersecurity review. The cybersecurity review procedure usually takes 55-70 business days, and sometimes even longer in
special situations, to complete.
Property, Plants and Equipment
Our U.S. executive offices are located at 800
3rd Ave, Suite 2800, New York NY 10022, where we lease premises of a share office, with a lease term of one year from July 1, 2021 to
June 30, 2022. We leased offices in Shenzhen, China, in August 2020, with an aggregate of approximately 2,153 square feet,
to support our daily operations, with a lease term of two years until August 2022. The Company cancelled the lease in November 2020.
We lease all of our offices from independent third parties.
Legal Proceedings
From time to time, the Company may become a party
to various legal actions. These claims and proceedings listed below relate to or arise from, commercial disputes, labor contract complaints
and sales contract complaints in connection with the Company’s former officers, Mr. Xianfu Han, and Mr. Weili He, and former Variable
Interest Entity, Beijing XinAo Concrete Group (“Xin Ao”). Mr. Han and Mr. He resigned on March 28, 2019. In addition, on May
6, 2020, the Company completed the disposition of Xin Ao and consequently, Mr. Han and Mr. He assumed all of the assets and liabilities
of Xin Ao. As a result, the Company believes that it currently does not face any material pending legal proceedings.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not Applicable
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
|
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our consolidated financial statements that appear in
this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements
that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report,
particularly in “Risk Factors.” All amounts in included in the fiscal years ended June 30, 2021, 2020 and 2019 (“Annual
Financial Statements”) are derived from our audited consolidated financial statements included elsewhere in this annual report.
These Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.
5A. Operating Results
Overview
Summary of Business
We are an entertainment and education company
providing online innovative music education through our wholly-owned subsidiary, Color China. We strive to offer students professional
artist training platform featured by exclusive content and live interaction, with the mission of delivering world-class entertainment
learning experiences and promoting global entertainment exchange with our strong resources and deep connections in the industry. We launched
our online platform Color World App on September 10, 2020. The curriculum development created by us includes music, sports, animation,
painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment, sports and culture. At
present, we have signed contracts with well-known international artists and more than 50 celebrity teachers have been retained to launch
online lectures. The Color World App not only has celebrity lectures, but also celebrity concert videos, celebrity peripheral products,
such as celebrity branded merchandise, and artist interactive communication. With the Chinese version and the English version, the Color
World App has attracted worldwide users. We strive to build an all-star cultural and entertainment industry chain.
The management believes that we, along with our
alliance, have strong industry resources and influence to become a comprehensive online academy for global “future stars”.
Management’s Plan for the Business
We believe that the online entertainment and
music education platform built by Color China will bring innovative changes to the current state of music education and entertainment
industry, with the goal to eliminate the boundaries of nationality, region, and cultural differences in the entertainment and music areas.
Through the Internet, Color China can provide professional entertainment and music education globally. We aim to recruit an All-Star
Crew to be coaches on the Color Star program, including top-notch professional vocalists, producers, musicians and more.
The ongoing COVID-19 pandemic has claimed hundreds
of thousands of lives and caused massive global health and economic crisis, while also causing large-scale social and behavioral changes
in societies. Online entertainment and education are experiencing enormous growth which we believe will last long after the pandemic.
We believe that these market conditions have created tremendous opportunities for our business plans, and therefore we expect to focus
on the expansion of Color China’s business in light of their great potential for revenue generation and profitability.
Principal Factors Affecting Our Financial
Performance
We believe that the following factors will continue to affect our
financial performance:
|
●
|
Experienced Management. Management’s technical
knowledge and business relationships give us the ability to collaborate with major record companies, entertainment agencies and teaching
experts, which provides us with leverage to expand our recognition, promote our products and attract more students rapidly. If there
were to be any significant turnover in our senior management, it could deplete the expertise and knowledge held by our existing senior
management team.
|
|
●
|
Innovation Efforts. We strive to produce the most
innovative advanced products to the users of our platforms. We entered into technical service contracts with platform developers
and program licensees to further improve our products and to better user experience. If our research and development efforts were
not sufficient to adapt to the change in technology in the industries, our products might not compete effectively.
|
Results of Operations
The tables in the following discussion summarize
our consolidated statements of operations for the periods indicated.
For the Years Ended June 30, 2021 vs. June
30, 2020
|
|
For the Years ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Change
|
|
Revenue
|
|
$
|
6,783,957
|
|
|
$
|
-
|
|
|
$
|
6,783,957
|
|
|
|
100
|
%
|
Cost of revenue
|
|
|
4,139,251
|
|
|
|
-
|
|
|
$
|
4,139,251
|
|
|
|
100
|
%
|
Gross profit
|
|
|
2,644,706
|
|
|
|
-
|
|
|
$
|
2,644,706
|
|
|
|
100
|
%
|
Selling, general and administrative expenses
|
|
|
(5,664,675
|
)
|
|
|
(1,598,984
|
)
|
|
$
|
4,065,691
|
|
|
|
254
|
%
|
Research and development expenses
|
|
|
(817,794
|
)
|
|
|
(120,000
|
)
|
|
$
|
697,794
|
|
|
|
582
|
%
|
Stock compensation expense
|
|
|
(5,717,900
|
)
|
|
|
(3,444,617
|
)
|
|
$
|
2,273,283
|
|
|
|
66
|
%
|
Impairment loss of long-lived assets
|
|
|
(99,943
|
)
|
|
|
-
|
|
|
$
|
99,943
|
|
|
|
100
|
%
|
Loss from operations
|
|
|
(9,655,606
|
)
|
|
|
(5,163,601
|
)
|
|
$
|
4,492,005
|
|
|
|
87
|
%
|
Total other income (expense), net
|
|
|
16,993
|
|
|
|
(5,041
|
)
|
|
$
|
22,034
|
|
|
|
437
|
%
|
Loss before provision for income taxes
|
|
|
(9,638,613
|
)
|
|
|
(5,168,642
|
)
|
|
$
|
4,469,971
|
|
|
|
86
|
%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Net loss from continuing operations
|
|
|
(9,638,613
|
)
|
|
|
(5,168,642
|
)
|
|
$
|
4,469,971
|
|
|
|
86
|
%
|
Income (loss) from discontinued operations
|
|
|
1,400,100
|
|
|
|
(6,457,955
|
)
|
|
$
|
7,858,055
|
|
|
|
122
|
%
|
Net loss
|
|
$
|
(8,238,513
|
)
|
|
$
|
(11,626,597
|
)
|
|
$
|
(3,388,084
|
)
|
|
|
(29
|
)%
|
|
|
For the Years ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Revenue
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Change
|
|
Online music education academy subscription
|
|
$
|
4,453,957
|
|
|
$
|
-
|
|
|
$
|
4,453,957
|
|
|
|
100
|
%
|
Online concert subscription
|
|
|
2,330,000
|
|
|
|
-
|
|
|
$
|
2,330,000
|
|
|
|
100
|
%
|
Total Revenue
|
|
$
|
6,783,957
|
|
|
$
|
-
|
|
|
$
|
6,783,957
|
|
|
|
100
|
%
|
Revenue. We generated approximately
$4.5 million online music education academy subscription revenue from our Color World App. Our Color World App officially went live in
January 2021 and over 300,000 paid subscribers joined our App from January to June 2021. Our App membership subscription fees will provide
our members unlimited access for 1 year to our App except for on-demand contents with additional charge. We also had two on-demand contents
going live in January 2021, with over 1.5 million subscribers who also paid for these two on-demand contents from January to June 2021.
In addition, we generated approximately $2.3 million subscription revenue from the online concert we held on September 10, 2020. Our sale
of online concert via subscription fee is accounted for as a single performance obligation which is satisfied at a point in time on the
day of the event. The online concert subscription revenue we recognized is net of App payment collections agent service fee.
|
|
For the Years ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Cost of Revenue
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Change
|
|
Online music education academy
|
|
$
|
2,202,731
|
|
|
$
|
-
|
|
|
$
|
2,202,731
|
|
|
|
100
|
%
|
Online concert
|
|
|
1,936,520
|
|
|
|
-
|
|
|
$
|
1,936,520
|
|
|
|
100
|
%
|
Total Cost of Revenue
|
|
$
|
4,139,251
|
|
|
$
|
-
|
|
|
$
|
4,139,251
|
|
|
|
100
|
%
|
Cost of Revenue. Our online music
education academy cost of revenue of approximately $2.2 million was mainly attributable to the amortization of copyrights of the total
payments we made to purchase the online courses that were produced by our paid artists. We amortized the copyrights with limited useful
life over their estimated expected useful life using the straight-line method and amortizes the copyrights with unlimited useful life
over 5 years, which is the estimated useful life that we expected it will contribute to our App before we are required to renew the contents
of such copyrights. Our online concert cost of revenue of approximately $1.9 million was the total payments we made to our partners of
the online concert we held on September 10, 2020. The partners include artists, artist agents and online concert producers.
Gross Profit. We had a gross profit
of approximately $2.3 million for the online education academy App during the year ended June 30, 2021. We had a gross profit of approximately
$0.4 million for the online concert business during the year ended June 30, 2021.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses mainly consist of advertising and marketing costs, office rent and expenses, depreciation
expense, costs associated with staff and support personnel who manage our business activities, and professional fees paid to third parties.
We incurred selling, general and administrative expenses of approximately $5.7 million for the year ended June 30, 2021 as compared to
approximately $1.6 million for the year ended June 30, 2020, an increase of approximately $4.1 million. The increase was primarily due
to approximately $1.3 million increase in salary expenses as we hired more employees for our online concert and online education academy
business, approximately $1.5 million increase in depreciation expense for our concert and music production equipment, and approximately
$0.6 million increase in professional fees such as legal fee, audits fee and consulting services, approximately $0.3 million of advertising
expenses on our events and APP products, approximately $0.1 million increase in service fees from our collection agents of our Color World
subscription fees and approximately $0.2 million increase in travel and other miscellaneous selling, general and administrative expenses.
Research and Development Expenses. Research
and development expenses consist of costs associated with development of our online platforms. We spent approximately $0.5 million on
developing and maintaining our online education academy App – Color World internally, incurred approximately $0.3 million amortization
expense of the online courses patent prior to our Color World App going live in January 2021, and spent $48,000 on developing the online
after-school tutoring program of Baytao during the year ended June 30, 2021, as compared to $120,000 on developing the online after-school
tutoring program of Baytao in the same period of 2020. We discontinued the online after-school tutoring program as we shifted our focus
to our online education academy business and sold our 80% equity interest of Baytao in June 2021.
Stock Compensation Expenses. Stock
compensation expenses were approximately $5.7 million for the year ended June 30, 2021 as compared to approximately $3.4 million for
the year ended June 30, 2020. The increase was mainly due to approximately $1.1 million expenses on the 1,590,000 ordinary shares issued
to thirteen employees under the 2019 Employee Incentive Plan, approximately $1.8 million expenses on the 2,160,000 ordinary shares issued
to thirteen employees under the 2019 Employee Incentive Plan, approximately $1.1 million expenses on the 1,380,000 ordinary shares issued
to nine employees under the 2019 Employee Incentive Plan, and approximately $0.5 million expenses higher of its stock based compensation
expenses on vested service from our CEO, CFO and CAO (former CEO) offset by $2.3 million lower amortization expenses of other consulting
services during the six months ended December 31, 2020.
Impairment loss of Long-lived Assets.
We incurred an impairment loss of long-live assets of approximately $0.1 million for the year ended June 30, 2021. The impairment loss
of approximately $0.1 million was recognized as we did not properly safeguarded our production equipment and we were not able to locate
our equipment on our annual assets count and resulted in a loss of approximately $0.1 million of equipment.
Loss from Operations. We incurred
a loss from operations of approximately $9.7 million and approximately $5.2 million for the years ended June 30, 2021 and 2020, respectively.
The increase of approximately $4.5 million was primarily due to the reasons previously discussed.
Total Other Income (Expense), Net. Our
total other income (expense), net, consists of other income, interest income and finance expense. We had total other income (expense),
net, of $31,083 and $0 during the year ended June 30, 2021 and 2020, respectively. The change was mainly due to a debt settled with a
vendor resulting in a gain of approximately $25,000 and governmental subsidy of approximately $7,200. The change was also due to the fact
that we had more bank services charges during the year ended June 30, 2021, as compared to the prior fiscal year as we had more bank payment
services transactions under Color China.
Provision for Income Taxes. We
did not incur income tax expense for the years ended June 30, 2021 and 2020 as we had operating losses.
Loss from Continuing Operations.
Our loss from continuing operations increased by approximately $4.4 million, or 86%, to loss from continuing operations of approximately
$9.6 million for the year ended June 30, 2021 from a loss from continuing operations of approximately $5.2 million for the year ended
June 30, 2020. Such change was the result of the combination of the changes discussed above.
Loss from Discontinued Operations. Our
income from discontinued operations was approximately $1.4 million for the year ended June 30, 2021, which mainly generated from the proceeds
of the sale on Sunway Kids. Our loss from discontinued operations was approximately $6.5 million for the year ended June 30, 2020, predominantly
due to approximately $12.2 million loss from our discontinued operations of Xin Ao, a variable interest entity of BVI-ACM, which we disposed
BVI-ACM in May 2020. The loss was also attributable to the loss from the sale of Sunway Kids, which we acquired in February 2020. However,
due to the outbreak of COVID-19 in 2020, we were unable to start Sunway Kids’ business and therefore decided to sell Sunway Kids
at a loss of approximately $0.8 million to minimize any further losses. These losses were offset by the gain on sale of discontinued operations
of approximately $6.6 million as we sold BVI-ACM with significant net deficit to our prior shareholders for cash consideration of $600,000.
Net Loss. We incurred a net loss
of approximately $8.2 million for the year ended June 30, 2021, as compared to a net loss of approximately $11.6 million for the year
ended June 30, 2020. This change was the result of the combination of the changes as discussed above.
For the Years Ended June 30, 2020 vs. June
30, 2019
|
|
For the Years ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Selling, general and administrative expenses
|
|
$
|
(1,598,984
|
)
|
|
$
|
(2,065,829
|
)
|
|
$
|
(466,845
|
)
|
|
|
(23
|
)%
|
Research and development expenses
|
|
|
(120,000
|
)
|
|
|
-
|
|
|
|
120,000
|
|
|
|
100
|
%
|
Stock compensation expense
|
|
|
(3,444,617
|
)
|
|
|
(4,592,200
|
)
|
|
|
(1,147,583
|
)
|
|
|
(25
|
)%
|
Loss from operations
|
|
|
(5,163,601
|
)
|
|
|
(6,658,029
|
)
|
|
|
(1,494,428
|
)
|
|
|
(22
|
)%
|
Total other expense, net
|
|
|
(5,041
|
)
|
|
|
(1,393
|
)
|
|
|
3,648
|
|
|
|
262
|
%
|
Loss before provision for income taxes
|
|
|
(5,168,642
|
)
|
|
|
(6,659,422
|
)
|
|
|
(1,490,780
|
)
|
|
|
(22
|
)%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Net loss from continuing operations
|
|
|
(5,168,642
|
)
|
|
|
(6,659,422
|
)
|
|
|
(1,490,780
|
)
|
|
|
(22
|
)%
|
Loss from discontinued operations
|
|
|
(6,457,955
|
)
|
|
|
(7,729,108
|
)
|
|
|
(1,271,153
|
)
|
|
|
(16
|
)%
|
Net loss
|
|
$
|
(11,626,597
|
)
|
|
$
|
(14,388,530
|
)
|
|
$
|
(2,761,933
|
)
|
|
|
(19
|
)%
|
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist of advertising and marketing costs, office rent and expenses, costs associated
with staff and support personnel who manage our business activities, and professional fees paid to third parties. We incurred selling,
general and administrative expenses of approximately $1.6 million for the year ended June 30, 2020 as compared to approximately $2.1
million for the year ended June 30, 2019, a decrease of approximately $0.5 million. The decrease was primarily due to approximately $0.3
million decrease in salary expenses, approximately $0.1 million decrease in audit fees and approximately $0.2 million decrease in repair
costs and consulting services. The decrease was offset by approximately $0.1 million increase in legal fees as we performed various acquisitions
and disposals during the year ended June 30, 2020.
Research and Development Expenses.
Research and development expenses consist of costs associated with development of our online platforms. We spent approximately $0.1
million on the online after-school tutoring program of Baytao during the year ended June 30, 2020.
Stock Compensation Expenses. Stock
compensation expenses were approximately $3.4 million for the year ended June 30, 2020 as compared to approximately $4.6 million for
the year ended June 30, 2019. The decrease was mainly due to lower amortization expenses in 2020 as a result a decline in deferred stock
compensation.
Loss from Operations. We incurred
a loss from operations of approximately $5.2 million and approximately $6.7 million for the years ended June 30, 2020 and 2019, respectively.
The decrease of approximately $1.5 million was primarily due to the reasons previously discussed.
Total Other Expense, Net. Our total
other expense, net consists of interest income and finance expense. We had total other expense, net of $5,041 and $1,393 during the years
ended June 30, 2020 and 2019, respectively. The increase was mainly due to that we had more bank services charges in the year ended June
30, 2020 as compared to the same period in 2019.
Provision for Income Taxes. We
did not incur income tax expense for the years ended June 30, 2020 and 2019 as we had operating losses.
Loss from Continuing Operations.
Our loss from continuing operations decreased by approximately $1.5 million, or 22%, to loss from continuing operations of approximately
$5.2 million for the year ended June 30, 2020 from a loss from continuing operations of approximately $6.7 million for the year ended
June 30, 2019. Such change was the result of the combination of the changes discussed above.
Loss from Discontinued Operations.
Our loss from discontinued operations decreased by approximately $1.3 million, or 16%, to a loss of approximately $6.4 million for
the year ended June 30, 2020, from a loss of approximately $7.7 million for the year ended June 30, 2019. The decrease in loss from discontinued
operations was predominantly due to gain on sale of discontinued operations of approximately $6.6 million as we sold BVI-ACM with significant
net deficit to our prior shareholders for cash consideration of $600,000. The closing of the disposition was completed on May 6, 2020.
The decrease was mainly offset by increased loss from discontinued operations as Xin Ao, a variable interest entity of BVI-ACM, which
considered as a major part of discontinued operations generated less revenues and more bad debt expenses during the outbreak of COVID-19
in 2020. In addition, the decrease of net loss from discontinue operations also was offset by the loss on sale of Sunway Kids. We acquired
Sunway Kids in February 2020. However, due to the outbreak of COVID-19 in 2020, the Company was unable to start Sunway Kids’ business
and therefore decided to sell Sunway Kids at a loss of approximately $0.8 million to minimize any further losses.
Net Loss. We incurred a net loss
of approximately $11.6 million for the year ended June 30, 2020, as compared to a net loss of approximately $14.4 million for the year
ended June 30, 2019. This change was the result of the combination of the changes as discussed above.
5.B. Liquidity and Capital Resources
As of June 30, 2021, we had cash and cash equivalents
of approximately $0.2 million, which was held by our consolidated entities in the U.S. and Hong Kong.
In assessing our liquidity, we monitor and analyze
our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements,
operating expenses and capital expenditure obligations.
We engage in online entertainment performance
and online music education services. Our business is capital intensive, and equity financing has been utilized to finance our working
capital requirements and capital expenditures. Our working capital was approximately $3.5 million as of June 30, 2021 as compared to approximately
$2.6 million as of June 30, 2020.
In addition, due to the nature of online entertainment
performance and online education industries, we collect payments in advance so we should have minimal liquidity risk. We also completed
a few rounds of equity financing, and received net proceeds of approximately $62.3 million from sales of our ordinary shares and approximately
$5.2 million from exercise of warrants during the year ended June 30, 2021. Subsequent to June 30, 2021, we completed one round of equity
financing, and received gross proceeds of $21.5 million from sales of our ordinary shares and warrants to purchase ordinary share.
Based on the above considerations, management
is of the opinion that we have sufficient funds to meet our working capital requirements for the next twelve months from the date of
this report.
The following table provides summary information
about our net cash flow for financial statement periods presented in this report:
|
|
For the Years Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities from continuing operations
|
|
$
|
(2,803,980
|
)
|
|
$
|
(2,738,989
|
)
|
|
$
|
(1,002,383
|
)
|
Net cash provided by (used in) operating activities from discontinued operations
|
|
|
-
|
|
|
|
203,854
|
|
|
|
(73,759
|
)
|
Net cash used in investing activities from continuing operations
|
|
|
(66,923,243
|
)
|
|
|
(1,394,728
|
)
|
|
|
-
|
|
Net cash provided by (used in) investing activities from discontinued operations
|
|
|
1,400,100
|
|
|
|
-
|
|
|
|
(135,705
|
)
|
Net cash provided by financing activities from continuing operations
|
|
|
67,512,616
|
|
|
|
4,802,901
|
|
|
|
950,000
|
|
Net cash used in financing activities from discontinued operations
|
|
|
-
|
|
|
|
(7,294
|
)
|
|
|
(427,333
|
)
|
Effect of exchange rate change in cash, cash equivalents and restricted cash
|
|
|
-
|
|
|
|
(1,943
|
)
|
|
|
(62,025
|
)
|
Net change in cash and cash equivalents
|
|
$
|
(814,507
|
)
|
|
$
|
863,801
|
|
|
$
|
(751,205
|
)
|
Principal demands for liquidity are for working
capital and general corporate purposes.
Operating Activities
Net cash used in operating activities totaled
approximately $2.8 million for the year ended June 30, 2021, which was mainly due to a net loss of approximately $9.6 million and non-cash
adjustments to reconcile the net loss to net cash provided by operating activities of approximately $5.7 million of stock compensation
expense, approximately $1.5 million of depreciation expense, approximately $2.2 million of amortization expense and approximately $0.1
million on impairment loss of long-lived assets. Net cash from changes in operating assets and liabilities resulted in a net cash outflow,
which mainly included cash outflow for increase of accounts receivable of approximately $3.2 million for the Color World App subscription
fees due from App payment collections agent, increase of prepayment of $3.2 million as we prepaid service fees for online concert performance
and online artists agents. The net cash outflow was offset by the increase of other payables and accrued liabilities of approximately
$0.2 million and the increase of deferred revenues of approximately $3.6 million.
Net cash used in operating activities from continuing
operations totaled approximately $2.7 million for the year ended June 30, 2020, which was attributable to a net loss of approximately
$5.2 million and adjustments to reconcile the net loss to net cash provided by operating activities of approximately $3.4 million of
stock compensation expense. Net cash from changes in operating assets and liabilities resulted in a net cash outflow, which mainly included
cash inflow for increase of prepayment of $1.1 million as we prepaid service fees for online concert performance, program license fees
and vehicle purchase. Net cash outflow was primarily offset by the increase of other payables and accrued liabilities of approximately
$0.1 million.
Net cash used in operating activities from continuing
operations totaled approximately $1.0 for the year ended June 30, 2019, which was attributable to a net loss of approximately $6.7 million
and adjustments to reconcile the net loss to net cash provided by operating activities of approximately $4.6 million of stock compensation
expense. Net cash from changes in operating assets and liabilities resulted in a net cash inflow, which mainly included cash inflow for
the increase of other payables and accrued liabilities of approximately $0.5 million and the increase of other payables – related
parties of approximately $0.5 million.
Investing Activities
Net cash used in investing activities was approximately
$66.9 million for the year ended June 30, 2021, which was primarily attributable to the prepayment of $52.0 million to a software development
vendor of developing augmented reality functions in our Color World App, the purchase of equipment of approximately $2.0 million and
purchase of intangible assets of approximately $12.9 million.
Net cash used in investing activities from continuing
operations was approximately $1.4 million for the year ended June 30, 2020, which was primarily attributable to the purchase of equipment
of $2.0 million. Net cash used in investing activities from continuing operations was offset by $0.6 million proceeds received from sales
of discontinued operations.
We did not have any cash investing activities
from continuing operations during the year ended June 30, 2019.
Financing Activities
Net cash provided by financing activities totaled
approximately $67.5 million for the year ended June 30, 2021, which was due to the sale of ordinary shares of approximately $62.3 million
and the proceeds from the exercise of warrants from the warrants holders of approximately $5.2 million.
Net cash provided by financing activities from
continuing operations totaled approximately $4.8 million for the year ended June 30, 2020, which was due to the sale of ordinary shares
of $4.5 million and the borrowings from shareholders of $0.3 million to pay for certain operating expenses.
Net cash provided by financing activities from
continuing operations totaled approximately $1.0 million for the year ended June 30, 2019, which was due to the sale of ordinary shares.
5.C. Research and Development, Patents and
Licenses, etc.
Research and Development
During the year ended June 30, 2021, we spent
approximately $0.8 million, among which, approximately $0.5 million on developing and maintaining our online education academy App –
Color World internally and approximately $0.3 million amortization expense of the online courses patent prior to our Color World App
go live in January 2021. During the year ended June 30, 2020, approximately $0.1 million on developing the online after-school tutoring
program of Baytao. We decided to focus on our entertainment and education business and disposed Baytao in June 2021. During the year
ended June 30, 2019, we did not incur any research and development expenses from our continuing operations.
Patents and Licenses, etc.
As of June 30, 2021, we held approximately
$12.8 million of copyrights, net of accumulated amortization. As of June 30, 2021 and 2020, we prepaid $2,615,527 and $20,000,
respectively, for program license fees.
5.D. Trend Information
Other than as disclosed elsewhere in this annual
report and below, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a
material effect on our revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause
reported financial information not necessarily to be indicative of future operating results or financial condition.
5.E. Off-Balance Sheet Arrangements
Other than as disclosed elsewhere in this annual
report, 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 its shares and classified as shareholder’s equity or that
are not reflected in its 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 that engages in leasing,
hedging or research and development services with us.
5.F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations as of June
30, 2021:
|
|
Payments due by period
|
|
Contractual obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3 years
|
|
|
3 – 5 years
|
|
|
More than
5 years
|
|
Operating lease obligations
|
|
$
|
39,600
|
|
|
$
|
39,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
39,600
|
|
|
$
|
39,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
6.A. Directors, Executive Officers and Key Employees
The following table sets forth information regarding our executive
officers and directors as of the date of this report.
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Basil Wilson
|
|
45
|
|
Chief Executive Officer, Chairman of the Board
|
Lili Jiang
|
|
30
|
|
Chief Financial Officer
|
Biao Lu
|
|
46
|
|
Chief Artistic Officer
|
Jehan Zeb Khan
|
|
34
|
|
Director
|
Yingxian (Elaine) Xiang
|
|
47
|
|
Independent Director
|
Hung-Jen Kuo
|
|
48
|
|
Independent Director
|
Long Yi
|
|
44
|
|
Independent Director
|
Biography
Basil Wilson
Mr. Wilson has served as our CEO and Chairman since June 2021. Mr.
Wilson served as CEO of Century Dragon Entertainment Development Co., Ltd. from 2016 to March 2021. He was in charge of the technical
development of entertainment technology, including the production of 3D virtual human concert, AI scene technology development, and AR
entertainment artificial intelligence development, etc. Mr. Wilson has more than 20 years of experience in the entertainment technology
industry since 1997. Mr. Wilson graduated with an MBA degree from Tsinghua University in China and was appointed as a think tank professor
by the School of Culture and Entertainment Business.
Lili Jiang
Ms. Jiang has been serving as the Chief Financial
Officer and Director of the Company since March 28, 2019. She had served as the Manager of the Overseas Medical Business Department of
Aolan Health Management Co., Ltd (“Aolan”) from May 2016 to March 28, 2019. Prior to joining Aolan, Ms. Jiang was the Business
Executive Assistant at the Australian Embassy in China from July 2011 to April 2016. She is a Certified Public Accountant in Australia.
Ms. Jiang has a Bachelor’s degree in Accounting and Finance from Sydney Technical University in Australia, and a Master’s
degree in Economics in Finance from University of New South Wales in Sydney, Australia.
Biao (Luke) Lu
Mr. Lu has served as the Chief Artistic Officer
of the Company since June 2021 and had been the CEO of the Company from June 2020 to June 2021. Mr. Lu joined the Company on July 17,
2020. He is an experienced veteran in the entertainment industry in China. He acted as a producer and a screenwriter for multiple Chinese
films and TV series, including “Ocean Paradise,” “Happy Bureau,” “Stalker,” “I want to be Rich,”
“Transformation Group,” “Lifetime with You,” etc. Mr. Lu also directed Guilty, his first film, in 2017. He has
served as the Chief Executive Officer of Hong Kong War Tiger Pictures since 2017. From 2005 to 2017, Mr. Lu served as the Chief Executive
Officer of Dong Xing Time International Culture. Mr. Lu is a certified artists’ agent in China. He received his bachelor’s
degree from the Department of Music at Anhui Normal University, and studied Broadcasting & Television Editing and Directing at the
Communication University of China.
Jehan Zeb Khan
Khan has served as our director since May 2021.
Mr. Khan joined Color China Entertainment Co., Ltd., a wholly-owned subsidiary of the Company, as the CEO in 2021, in charge of the development
of Internet intelligent applications, the development and update of AI and AR technologies, and celebrity artist docking. Mr. Khan has
many years of experience in the Internet industry and has strong working capabilities for company management and business development.
Mr. Khan graduated from the University of the Punjab BS Computer Science in Pakistan in 2000. After graduation, he started his own business
and established a “New Network” personal studio, aiming to solve Internet problems for small and medium-sized enterprises,
including the development of applications, the production of company webpages, etc. and to companies develop artificial intelligence
software, including automatic trajectory search. He received his Bachelor’s degree in Computer Science from the University of the
Punjab in 2010.
Yingxian (Elaine) Xiang
Ms. Xiang became our Board member on September
21, 2020. She is an accomplished business leader with over twenty years of experience in E-business development, strategic marketing,
product and project management with various companies, and with a recent focus on offline and online education. She cofounded Skytree
Education Association in 2017 and has been serving as the president since then. From 2012 to 2016, Ms. Fang was the cofounder and CEO
of DreamBox Education & Technology Corp., one of the most recognizable brands in international education in Shenzhen, China. From
2008 to 2010, Ms. Fang was Director of Strategic Marketing at Official Payments. Ms. Fang’s earlier experience includes her serving
as Vice President in E-Business at CitiGroup from 2004 to 2008 and as a senior consultant at Blue Martini Solutions Inc. from 2001 to
2004. Ms. Fang received her Bachelor of Economics, International Business Administration with a second major of Chemical Engineering
from East China University of Science and Technology. She also received her MBA (Master of International Business) from University of
South Carolina.
Hung-Jen Kuo
Mr. Kuo was appointed as our Board member on
August 12, 2020. He has nearly more than 25 years of experience in the global securities fund investment & business management industry.
He is currently the Executive President CEO of Fosun Capital. Before joining Fosun Group, he was the head general manager and director
of the China Securities Services Division of Deutsche Bank, China. Mr. Kuo previously served as the chief investment expert of Noah Group,
the managing director of Gopher Assets Management. and the general manager of Gopher Public Fund. At the end of 2010, Mr. Kuo represented
American Russell Investments and to participate in establishing Ping An Russell (Shanghai) Investment Management Company, one of the
first private equity fund management companies in China. Mr. Kuo successfully introduced Russell’s investment MOM model to China,
led investment research team building and business development, and issued China’s first MOM product. Mr. Kuo joined Russell Investment’s
global Seattle headquarters in 2001, holding important various positions covering on in core departments such as investment management,
research, and operations. In 1996, Mr. Kuo joined Aurora Group in Taipei as the assistant to CEO covering on business strategies and
IPO project and jointly managing Russell’s investment global assets. Mr. Kuo holds a master’s degree in finance from the
University of Colorado and a bachelor’s degree in business administration from Sun Yat-sen University in Taiwan.
Long Yi
Mr. Yi has been a member of the Board since March
31, 2021. He has served as Chief Executive Officer and Chairman of the board of directors of Urban Tea, Inc. (Nasdaq: MYT) since January
26, 2018. Mr. Yi served as Chief Financial Officer and a board member of Bat Group, Inc. (Nasdaq: GLG) from January 2013 and June 2015,
respectively, to June 2019. Mr. Yi was the senior financial manager in Sutor Technology Group Ltd. (Nasdaq: SUTR) from 2008 to 2012.
Mr. Yi is a Certified Public Accountant in the State of Illinois. Mr. Yi received his Bachelor’s degree in Accounting from Northeastern
University in September 1998 and a Master’s degree in Accounting and Finance from University of Rotterdam in June 2004. Mr. Yi
also obtained a graduate diploma in accounting from McGill University in August 2006.
6.B. Compensation
The following table sets forth information concerning
all cash and non-cash compensation awarded to, earned by or paid to our principal executive officer and our other most highly paid executive
officer (the “named executive officers”) for services rendered in all capacities during the noted periods. No other executive
officers received total annual salary and bonus compensation in excess of $100,000 during the fiscal years ended June 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Deferred
|
|
|
All
|
|
|
|
|
Name and
|
|
Year
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Other
|
|
|
|
|
Principal
|
|
Ended
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Position
|
|
June 30
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Basil Wilson,
|
|
2021
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,000
|
|
Chairman and CEO (1)
|
|
2020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lili Jiang,
|
|
2021
|
|
|
|
180,000
|
|
|
|
-
|
|
|
|
308,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
488,400
|
|
CFO (2)
|
|
2020
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
308,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yang (Sean) Liu,
|
|
2021
|
|
|
|
40,000
|
|
|
|
|
|
|
|
294,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334,750
|
|
VP of Technology (3)
|
|
2020
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
329,550
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biao Lu,
|
|
2021
|
|
|
|
198,000
|
|
|
|
-
|
|
|
|
509,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
707,917
|
|
Chief Artistic Officer (4)
|
|
2020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Mr. Wilson became our Co-Chief Executive Officer on May 27, 2021, with
a monthly compensation of $15,000, from May 27, 2021 to June 15, 2021. Mr. Wilson was appointed as the Chairman of the Board and the
Chief Executive Officer of the Company on June 16, 2021, with a monthly compensation of $15,000 and 300,000 ordinary shares of the Company
per year, vested quarterly, effective June 16, 2021.
|
|
|
(2)
|
Ms. Jiang became our Chief Financial Officer and Director on March
28, 2019. She was entitled to an annual compensation of 120,000 ordinary shares of the Company. On May 8, 2020, the Board amended
the CFO compensation to be $120,000 per year plus 120,000 ordinary shares effective April 1, 2020. Ms. Jiang resigned as an Director
on May 11, 2021.
|
|
|
(3)
|
Mr. Liu became our Chief Executive Officer and Chairman on March 28,
2019. He was entitled to an annual compensation of 120,000 ordinary shares of the Company and annual salary of $120,000 beginning
on April 1, 2020. On May 5, 2020, the Board amended the CEO compensation to be $120,000 per year plus 300,000 ordinary shares effective
April 1, 2020. Mr. Liu resigned from his positions as CEO and Chairman on July 17, 2020. On the same date, Mr. Liu was
appointed as our Vice President of Technology.
|
|
|
(4)
|
Mr. Lu became our Chief Executive Officer and Chairman on July 17,
2020. He was entitled to an annual compensation of 300,000 ordinary shares of the Company and a monthly salary of $6,000. Mr. Lu’s
monthly salary was increased to $10,000 for the period of August 1, 2020 to September 30, 2020 and was then increased to $20,000,
effective October 1, 2020. Mr. Lu resigned as a CEO and the Chairman of the Board of Directors, and was appointed as the Chief Artistic
Officer on June 16, 2021. His current compensation is $10,000 per month with annual compensation of 100,000 ordinary shares vested
quarterly.
|
The executive directors did not to receive any
compensation for serving on the Board. The following table represents compensation earned by our non-executive directors in fiscal
year ended June 30, 2021.
|
|
Fees
Earned or
Paid in
Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-equity incentive plan
compensation
|
|
|
Nonqualified deferred
compensation earnings
|
|
|
All other
compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Wei Pei (1)
|
|
|
4,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
Xiaoyuan Zhang (2)
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
Wei Fang (3)
|
|
|
8,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,300
|
|
Hung-Jen Kuo (4)
|
|
|
32,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,200
|
|
Yingxian (Elaine) Xiang (5)
|
|
|
28,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,200
|
|
Long Yi (6)
|
|
|
9,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,000
|
|
(1)
|
On March 21, 2017, we entered
into a director agreement with Mr. Wei Pei, pursuant to which he was entitled to receive annual compensation of $25,000. Mr. Pei’s
salary was increased to $36,000 per annum effective May 8, 2020. Mr. Pei resigned as a director of the Company on August 12, 2020.
|
(2)
|
On July 19, 2019, we entered
into a director agreement with Ms. Xiaoyuan Zhang, pursuant to which she was entitled to receive annual compensation of $10,000. Ms.
Zhang’s salary was increased to $36,000 per annum effective May 8, 2020. Ms. Zhang resigned as an independent director of the Company
on March 29, 2021.
|
(3)
|
On April 7, 2020, Mr. Fang
was appointed as a director of the Company. He was entitled to receive annual compensation of $36,000. Mr. Fang resigned as a director
of the Company on September 21, 2020.
|
(4)
|
On August 12, 2020, we entered
into a director agreement with Mr. Hung-Jen Kuo, pursuant to which he shall receive annual compensation of $36,000.
|
(5)
|
On September 21, 2020, we entered
into a director agreement with Ms. Xiang, pursuant to which she is entitled to receive annual compensation of $36,000.
|
(6)
|
On March 31, 2021, we entered
into a director agreement with Mr. Yi, pursuant to which he receives monthly compensation of $3,000.
|
6.C. Board Practices
Terms of Directors and Officers
Our officers are elected by and serve at the
discretion of the Board and the shareholders voting by ordinary resolution. Our directors are not subject to a set term of office and
hold office until the next general meeting called for the election of directors and until their successor is duly elected or such time
as they die, resign or are removed from office by a shareholders’ ordinary resolution or the unanimous written resolution of all
shareholders A director will be removed from office automatically if, among other things, the director becomes bankrupt or makes any
arrangement or composition with his creditors generally or is found to be or becomes of unsound mind.
Audit Committee
Long Yi, Hung-Jen Kuo and Yingxian Xiang are
members of our Audit Committee, and Long Yi serves as the chairman. All members of our Audit Committee satisfy the independence standards
promulgated by the SEC and by Nasdaq as such standards apply specifically to members of audit committees.
Our Audit Committee performs several functions,
including:
|
●
|
selecting our independent auditors and pre-approving all
auditing and non-auditing services permitted to be performed by our independent auditors;
|
|
●
|
reviewing with our independent auditors any audit problems
or difficulties and management’s response;
|
|
●
|
reviewing and approving all proposed related-party transactions,
as defined in Item 404 of Regulation S- K under the Securities Act of 1933, as amended;
|
|
●
|
discussing the annual audited financial statements with
management and our independent auditors;
|
|
●
|
reviewing major issues as to the adequacy of our internal
controls and any special audit steps adopted in light of significant internal control deficiencies;
|
|
●
|
annually reviewing and reassessing the adequacy of our
audit committee charter;
|
|
●
|
meeting separately and periodically with management and
our independent auditors;
|
|
●
|
reporting to the Board; and
|
|
●
|
such other matters that are specifically delegated to our
audit committee by the Board from time to time.
|
Compensation Committee
Long Yi, Hung-Jen Kuo and Yingxian Xiang are
members of our Compensation Committee, and Yingxian Xiang serves as the chairwoman. All members of our Compensation Committee are qualified
as independent under the current definition promulgated by Nasdaq. The Compensation Committee is responsible for, among other things:
|
●
|
reviewing and approving the total compensation package
for our senior executives; and
|
|
●
|
reviewing periodically, and approving, any long-term incentive
compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
Corporate Governance and Nominating Committee
Long Yi, Hung-Jen Kuo and Yingxian Xiang are
members of our Nominating and Corporate Governance Committee, and Hung-Jen Kuo is the chairman. All members of our Nominating and Corporate
Governance Committee are qualified as independent under the current definition promulgated by Nasdaq. The Nominating and Corporate Governance
Committee is responsible for, among other things:
|
●
|
identify qualified individuals to become Board members,
consistent with criteria approved by the Board, and to recommend that the Board select, the director nominees for the next annual
meeting of shareholders;
|
|
●
|
develop and recommend to the Board a set of corporate governance
guidelines applicable to the Company; and
|
|
●
|
to oversee the evaluation of the Board and management.
|
6.D. Employees
See the section entitled “Employees”
in Item 4 above.
6.E. Share Ownership
The following table sets forth information with
respect to the beneficial ownership of our ordinary shares as of October 27, 2021 for:
|
●
|
each beneficial owner of 5% or more of our outstanding
ordinary shares;
|
|
|
|
|
●
|
each of our directors and executive officers; and
|
|
|
|
|
●
|
all of our directors and executive officers as a group.
|
Beneficial ownership is determined in accordance
with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting
power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of options that are
immediately exercisable or exercisable within 60 days of the date hereof.
Except as otherwise indicated, all of the shares
reflected in the table are ordinary shares and all persons listed below have sole voting and investment power with respect to the shares
beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial
ownership for any other purpose.
Except as otherwise indicated in the table below,
addresses of our directors, executive officers and named beneficial owners are in care of Color Star Technology Co., Ltd., 800 3rd Ave,
Suite 2800, New York NY 10022.
|
|
Ordinary Shares
Beneficially Owned
|
|
|
|
|
Name of Beneficial Owners
|
|
Number
|
|
|
%(1)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Basil Wilson
|
|
300,000
|
|
|
*
|
|
Biao Lu
|
|
|
300,000
|
|
|
|
*
|
|
Lili Jiang
|
|
|
360,000
|
|
|
|
*
|
|
Long Yi
|
|
|
30,000
|
|
|
|
*
|
|
Jehan Zeb Khan
|
|
|
-
|
|
|
|
|
|
Yingxian Xiang
|
|
|
30,000
|
|
|
|
*
|
|
Hung-Jen Kuo
|
|
|
-
|
|
|
|
-
|
|
All directors and officers as a group (seven individuals)
|
|
|
1,020,000
|
|
|
|
*
|
|
5% shareholders:
|
|
|
|
|
|
|
|
|
Hou Sing International Business Limited
|
|
|
7,995,395
|
|
|
|
5.47
|
%
|
(1)
|
Applicable percentage of ownership
is based on 146,036,552 ordinary shares outstanding as of October 27, 2021, for each shareholder.
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
7.A. Major Shareholders
See Item 6.E., “Share Ownership,”
for a description of our major shareholders.
7.B. Related Party Transactions
Except as discussed below, since the beginning
of fiscal year 2019, there have not been any transactions, nor is there any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect
material interest (other than compensation described under “Executive Compensation”).
On March 31, 2020, the Company, BVI-ACM, a wholly
owned subsidiary of the Company, and Mr. Xianfu Han and Mr. Weili He (the “Purchasers”), two former officers (CEO and CFO)
and collectively held less than 5% ordinary shares of the Company currently, entered into a share purchase agreement (the “Disposition
SPA”). Pursuant to the Disposition SPA, the Purchasers agreed to purchase BVI-ACM in exchange for cash consideration of $600,000.
The closing of the Disposition was completed on May 6, 2020. After disposal of BVI-ACM, the Company had no continuing involvement or
commitments with BVI-ACM.
Prepayment – related party
Mr. Xianfu Han, and Mr. Weili He are holding
positions as president and director of Ningbo Lianlv Investment Ltd., respectively. This company owns 99% of the shares of Beijing Lianlv
Technical Group Ltd. (“Beijing Lianlv”), the Company’s supplier. As of June 30, 2019, the Company’s prepayment
– related party of discontinued operations amounted to $456,399 for Beijing Lianlv, before any allowance, for inventory purchases.
Other receivables – related party
This balance represents litigation against Xin
Ao who entered into a capital lease agreement on behalf of Beijing Lianlv, an entity whose shareholders are Mr. Han and Mr. He. The balance
was indemnified by Mr. Han and Mr. He in November 2019. As of June 30, 2019, other receivable – related party of discontinued operations
from Beijing Lianlv was $165,075.
Borrowings from related party
During the year ended June 30, 2020, Hou Sing,
the Company’s shareholder, lent the Company $300,000 to pay for the Company’s certain operating expenses. In December 2019,
the Company issued ordinary shares to Hou Sing to repay the debt the Company owes to him (See Notes to consolidated financial statements
- Note 14).
Loans payable – employees
On January 15, 2020, Hou Sing, the Company’s
shareholder, entered into certain loan assignment agreements with Na Wang and Wei Zhang in the aggregate amount of RMB 29,429,627 (approximately
$4.3 million) (the “Debt”) and delivered the full payment to the two employees. On the same day, the board of directors of
the Company approved the conversion of the Debt as well as the conversion of debt in the aggregate amount of $218,519 that the Company
owed to Wei Zhang, at a per share conversion price of $1.54. On March 6, 2020, upon Nasdaq’s approval, the Company issued 2,911,000
ordinary shares of the Company to Hou Sing and Wei Zhang in exchange for the debt.
Other payables – related party
The balances represent the salary payables to
Weili He, the Company’s former Chief Financial Officer (“CFO”) who held less than 5% of the Company ordinary shares
currently.
Other payables – related party consisted
of the following:
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June 30,
2021
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June 30,
2020
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Weili He
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$
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10,711
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$
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10,711
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7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
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FINANCIAL INFORMATION
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Consolidated Statements and Other Financial Information
The financial statements required by this item
may be found at the end of this Annual Report on 20-F, beginning on page F-1.
Legal Proceedings
See “Item 4. Information on the Company
— B. Business Overview — Legal Proceedings.”
Dividends
We have never declared or paid any dividend on
our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future. We currently intend to retain
all future earnings to finance our operations and to expand our business.
No Significant Changes
Except as disclosed elsewhere in this annual
report, no other significant changes to our financial condition have occurred since the date of the annual financial statements
contained herein.
ITEM 9.
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THE OFFER AND LISTING
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9.A. Offer and Listing Details
Our ordinary shares are listed for trading on
the NASDAQ Capital Market under the symbol “CSCW.” The shares began trading on February 25, 2013 on the NASDAQ Capital Market.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ordinary shares are currently traded on the
NASDAQ Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10.
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ADDITIONAL INFORMATION
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10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands exempted company with
limited liability and our affairs are governed by our Amended and Restated Memorandum and Articles, the Companies Law, the common law
of the Cayman Islands, our corporate governance documents and rules and regulations of the stock exchange on which are shares are traded.
As of the date hereof, the authorized share capital
of the Company is US$200,000 divided into 200,000,000 ordinary shares of a par value of US$0.001 each. The increase of the authorized
share capital was approved by the Extraordinary General Meeting of Shareholders held on November 18, 2020. As of October 27, 2021, 146,036,552
Ordinary Shares are issued and outstanding. All of our issued and outstanding Ordinary Shares are fully paid.
Ordinary Shares
The following are summaries of material provisions
of our Amended and Restated Memorandum and Articles, corporate governance policies and the Companies Law insofar as they relate to the
material terms of our Ordinary Shares.
Objects of Our Company
Under our Amended and Restated Memorandum and
Articles, the objects of our Company are unrestricted and we have the full power and authority to carry out any object not prohibited
by the law of the Cayman Islands.
Share Capital
The holders of our Ordinary Shares are entitled
to one vote for each such share held and shall be entitled to notice of any shareholders’ meeting, and, subject to the terms of
Amended and Restated Memorandum and Articles, to vote thereat.
Dividends
The holders of our Ordinary Shares are entitled
to such dividends as may be declared by our Board of Directors subject to the Companies Law and to our Amended and Restated Memorandum
and Articles.
Voting Rights
In respect of all matters subject to a shareholders’
vote, each Ordinary Share is entitled to one vote. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded
by the chairman or persons holding certain amounts of shares as set forth in the Amended and Restated Memorandum and Articles. Actions
that may be taken at a general meeting also may be taken by a unanimous resolution of the shareholders in writing.
No business shall be transacted at any general
meeting unless a quorum of members is present at the time when the meeting proceeds to business; two members present in person or by
proxy shall be a quorum provided always that if the Company has one member of record the quorum shall be that one member present in person
or by proxy. An ordinary resolution to be passed at a general meeting requires the affirmative vote of a simple majority of the votes
cast.
A special resolution of members is required to
change the name of the Company, approve a merger, wind up the Company, amend the Amended and Restated Memorandum and Articles and reduce
the share capital.
Transfer of Ordinary Shares
Subject to the restrictions set out below, any
of our shareholders may transfer all or any of his, its or her Ordinary Shares by an instrument of transfer in the usual or common form
or any other form approved by our Board of Directors or in a form prescribed by the stock exchange on which our shares are then listed.
Our Board of Directors may, in its sole discretion,
decline to register any transfer of Ordinary Shares whether or not it is fully paid up to the total consideration paid for such shares.
Our directors may also decline to register any transfer of Ordinary Shares if (a) the instrument of transfer is not accompanied by the
certificate covering the shares to which it relates or any other evidence as our Board of Directors may reasonably require to prove the
title of the transferor to, or his/her right to transfer the shares; or (b) the instrument of transfer is in respect of more than one
class of shares.
If our directors refuse to register a transfer,
they shall, within two months after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal.
The registration of transfers may be suspended
and the register closed at such times and for such periods as our Board of Directors may from time to time determine, provided, however,
that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Winding-Up/Liquidation
On a return of capital on winding up or otherwise
(other than on conversion, redemption or purchase of shares), a liquidator may be appointed to determine how to distribute the assets
among the holders of the Ordinary Shares. If our assets available for distribution are insufficient to repay all of the paid-up capital,
the assets will be distributed so that the losses are borne by our shareholders proportionately; a similar basis will be employed if the
assets are more than sufficient to repay the whole of the capital at the commencement of the winding up.
Calls on Ordinary Shares and Forfeiture
of Ordinary Shares
Our Board of Directors may from time to time make
calls upon shareholders for any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior
to the specified time and place of payment. The shares that have been called upon and remain unpaid on the specified time are subject
to forfeiture.
Redemption of Shares
We may issue shares on terms that are subject
to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our Board of Directors.
Inspection of Books and Records
Directors shall from time to time determine whether
and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any
of them shall be open to the inspection of members not being Directors and no member (not being a Director) shall have any right of inspecting
any account or book or document of the Company except as conferred by Companies Law or authorized by the Directors or by the Company in
a general meeting. However, the Directors shall from time to time cause to be prepared and to be laid before the Company in a general
meeting, profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by Companies
Law. (See “Where You Can Find More Information”)
Issuance of Additional Shares
Our Amended and Restated Memorandum and Articles
authorize our Board of Directors to issue additional Ordinary Shares from time to time as our Board of Directors shall determine, to the
extent there are available authorized but unissued shares.
Our Amended and Restated Memorandum and Articles
also authorizes our Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject
to compliance with the variation of rights of shares provision in the Amended and Restated Memorandum and Articles, with respect to any
series of preferred shares, the terms and rights of that series, including:
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the designation of the series;
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the number of shares of the series;
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the dividend rights, dividend rates, conversion rights, voting rights; and
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the rights and terms of redemption and liquidation preferences.
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Our Board of Directors may, issue preferred shares
without action by our shareholders to the extent there are authorized but unissued shares available.
Anti-Takeover Provisions
Some provisions of our Amended and Restated Memorandum
and Articles may discourage, delay or prevent a change of control of our Company or management that shareholders may consider favorable,
including provisions that:
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authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders (subject to variation of rights of shares provisions in our Amended and Restated Memorandum and Articles); and
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limit the ability of shareholders to requisition and convene general meetings of shareholders. Our Amended and Restated Memorandum and Articles allow our shareholders holding shares representing in aggregate not less than twenty percent of our paid up share capital (as to the total consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting.
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However, under Cayman Islands law, our directors
may only exercise the rights and powers granted to them under our Amended and Restated Memorandum and Articles for a proper purpose and
for what they believe in good faith to be in the best interests of our Company.
General Meetings of Shareholders and Shareholder Proposals
Our shareholders’ general meetings may be
held in such place within or outside the Cayman Islands as our Board of Directors considers appropriate.
As a Cayman Islands exempted company, we are not
obliged by the Companies Law to call shareholders’ annual general meetings. The directors may, whenever they think fit, convene
an extraordinary general meeting.
Shareholders’ general meetings and any other
general meetings of our shareholders may be convened by a majority of our Board of Directors. Our Board of Directors shall give not less
than seven days’ written notice of a shareholders’ meeting to those persons whose names appear as members in our register
of members on the date the notice is given (or on any other date determined by our directors to be the record date for such meeting) and
who are entitled to vote at the meeting.
Cayman Islands law provides shareholders with
only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general
meeting. However, these rights may be provided in a company’s articles of association. Our Amended and Restated Memorandum and Articles
allow our shareholders holding shares representing in aggregate not less than ten percent of our paid up share capital (as to the total
consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors
are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; otherwise, our Amended and Restated
Memorandum and Articles do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary
general meetings not called by such shareholders.
Exempted Company
We are an exempted company with limited liability
under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. A Cayman Islands
exempted company:
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is a company that conducts its business mainly outside of the Cayman Islands;
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is exempted from certain requirements of the Companies Law, including the filing an annual return of its shareholders with the Registrar of Companies or the Immigration Board;
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does not have to make its register of members open for inspection;
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does not have to hold an annual general meeting;
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may issue negotiable or bearer shares or shares with no par value (subject to the provisions of the Companies Law);
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may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); and
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may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands.
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“Limited liability” means that the
liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances,
such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which
a court may be prepared to pierce or lift the corporate veil).
Register of Members
Under Cayman Islands law, we must keep a register
of members and there should be entered therein:
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the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;
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the date on which the name of any person was entered on the register as a member; and
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the date on which any person ceased to be a member.
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Under Cayman Islands law, the register of members
of our Company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on
the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of Cayman Islands
law to have legal title to the shares as set against its name in the register of members. Once our register of members has been updated,
the shareholders recorded in the register of members are deemed to have legal title to the shares set against their name.
If the name of any person is incorrectly entered
in, or omitted from, our register of members, or if there is any default or unnecessary delay in entering on the register the fact of
any person having ceased to be a member of our Company, the person or member aggrieved (or any member of our Company or our Company itself)
may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application
or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Indemnification of Directors and Executive
Officers and Limitation of Liability
Cayman Islands law does not limit the extent to
which a company’s Amended and Restated Memorandum and Articles of association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our Amended and Restated Memorandum and Articles require us to indemnify
our officers and directors for actions, proceedings, claims, losses, damages, costs, liabilities and expenses (“Indemnified Losses”)
incurred in their capacities as such unless such Indemnified Losses arise from dishonesty of such directors or officers. This standard
of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have
been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.
Material Differences between U.S. Corporate
Law and Cayman Islands Corporate Law
The Companies Law is modeled after that of English
law but does not follow many recent English law statutory enactments. In addition, the Companies Law differs from laws applicable to United
States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the
Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements. A
merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the
directors of each constituent company and authorization by (a) a special resolution of the shareholders and (b) such other authorization,
if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman Islands parent company
and its Cayman Islands subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman Islands
subsidiary if a copy of the plan of merger is given to every member of that Cayman Islands subsidiary to be merged unless that member
agrees otherwise. For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote
are owned by the parent company.
The consent of each holder of a fixed or floating
security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder
of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The
exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the
merger or consolidation is void or unlawful.
In addition, there are statutory provisions that
facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each
class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value
of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting,
or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand
Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought
not to be approved, the court can be expected to approve the arrangement if it determines that:
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the statutory provisions as to the required majority vote have been met;
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the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;
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the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
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When a takeover offer is made and accepted by
holders of 90.0% of the shares within four months, the offeror may, within a two-month period commencing on the expiration of such four
month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made
to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there
is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved,
the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting
shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In
principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder.
However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions
to the foregoing principle, including when:
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a company acts or proposes to act illegally or ultra vires;
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the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and
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those who control the company are perpetrating a “fraud on the minority.”
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Indemnification of Directors and Executive
Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s Amended and
Restated Memorandum and Articles of association may provide for indemnification of officers and directors, except to the extent any such
provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud
or the consequences of committing a crime. Our current Amended and Restated Memorandum and Articles of association permit indemnification
of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise
from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware
General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and
executive officers that provide such persons with additional indemnification beyond that provided in our current Amended and Restated
Memorandum and Articles of association.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have
been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.
Directors’ Fiduciary Duties. Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has
two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that
an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose
to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that
a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position
for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation
and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the
shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence
of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must
prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director
of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he or she
owes the following duties to the company — a duty to act bona fide in the best interests of the company, a duty not to make a profit
based on his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in
a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director
of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not
exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her
knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required
skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under
the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to
its certificate of incorporation. Cayman Islands law and our current articles of association provide that shareholders may approve corporate
matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such
matter at a general meeting without a meeting being held.
Shareholder Proposals. Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided
it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other
person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law does not provide shareholders
any right to put proposals before a meeting or requisition a general meeting. However, these rights may be provided in articles of association.
Our current articles of association allow our shareholders holding not less than one-third of all voting power of our share capital in
issue to requisition a shareholder’s meeting. Other than this right to requisition a shareholders’ meeting, our current articles
of association do not provide our shareholders other right to put proposal before a meeting. As a Cayman Islands exempted company, we
are not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting. Under the
Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate
of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on
a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation
to cumulative voting under the laws of the Cayman Islands but our current articles of association do not provide for cumulative voting.
As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under
the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval
of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our current
articles of association, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Transactions with Interested Shareholders. The
Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation
has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging
in certain business combinations with an “interested shareholder” for three years following the date that such person becomes
an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s
outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered
bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to
the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination
or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware
corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute.
As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although
Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions
must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include
in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman
Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members
or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order
winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under
the Companies Law and our current articles of association, our company may be dissolved, liquidated or wound up by a special resolution
of our shareholders.
Variation of Rights of Shares. Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our current articles of
association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the
written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by not
less than three-fourths of such holders of the shares of that class as may be present at a general meeting of the holders of the shares
of that class.
Amendment of Governing Documents. Under
the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our
current Amended and Restated Memorandum and Articles of association may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders. There
are no limitations imposed by our Amended and Restated Memorandum and Articles of association on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our current Amended and Restated
Memorandum and Articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
10.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 this annual report.
10.D. Exchange Controls
Cayman Islands
There are currently no exchange control regulations
in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily
through the following rules and regulations:
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Foreign Currency Administration Rules of 1996, as amended; and
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Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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Renminbi is not a freely convertible currency
at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine current-account foreign exchange
transactions, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debts. Conversion
of Renminbi for most capital-account items, such as direct investments, investments in PRC securities markets and repatriation of investments,
however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned administrative
rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks in China with
authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of valid commercial
documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities and
derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to limitations
and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
10.E. Taxation
The following summary of the material Cayman Islands,
PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect
as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be, nor should
it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also does not deal with
all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local, non-U.S.,
non-PRC, and non-Cayman Islands tax laws. Investors should consult their own tax advisors with respect to the tax consequences of the
acquisition, ownership and disposition of our ordinary shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on
individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax
or estate duty. There are no other taxes levied by the Government of the Cayman Islands that are likely to be material to holders of ordinary
shares or ordinary shares. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the EIT Law, an enterprise established outside
the PRC with a “de facto management body” within the PRC is considered a PRC resident enterprise for PRC enterprise income
tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income as well as tax reporting obligations.
Under the Implementation Rules, a “de facto management body” is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In
addition, SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated enterprises controlled by PRC enterprises
or PRC enterprise groups will be classified as PRC resident enterprises if all of the following conditions are met: (a) senior management
personnel and core management departments in charge of the daily operations of the enterprises have their presence mainly in the PRC;
(b) their financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) major
assets, accounting books and company seals of the enterprises, and minutes and files of their board’s and shareholders’ meetings
are located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior management personnel with voting rights
habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45, which took effect in September 2011, to provide
more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details of determination
on PRC resident enterprise status and administration on post-determination matters. If the PRC tax authorities determine that Color Star
Technology Co., Ltd. is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. For example, Color China may be subject to enterprise income tax at a rate of 25% with respect to its worldwide taxable
income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect to gains
derived by our non-PRC enterprise shareholders from transferring our shares or ordinary shares and potentially a 20% of withholding tax
would be imposed on dividends we pay to our non-PRC individual shareholders and with respect to gains derived by our non-PRC individual
shareholders from transferring our shares or ordinary shares.
It is unclear whether, if we are considered a
PRC resident enterprise, holders of our shares or ordinary shares would be able to claim the benefit of income tax treaties or agreements
entered into between China and other countries or areas. See “Risk Factors — Risk Factors Relating to Doing Business in China
—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable
tax consequences to us and our non-PRC shareholders”.
The SAT issued SAT Circular 59 together with the
Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT Circular 59 and SAT Circular 698 became effective retroactively
as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over
the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise. Under SAT Circular
698, where a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the
equity interests of an overseas holding company, and the overseas holding company is located in a tax jurisdiction that: (1) has an effective
tax rate of less than 12.5% or (2) does not impose tax on foreign income of its residents, the non-PRC resident enterprise, being the
transferor, must report to the relevant tax authority of the PRC resident enterprise this Indirect Transfer. 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 reducing, avoiding or deferring PRC tax. As a result, gains derived from such
Indirect Transfer may be subject to PRC tax at a rate of up to 10%. Although it appears that SAT Circular 698 was not intended to apply
to share transfers of publicly traded companies, there is uncertainty as to the application of SAT Circular 698 and we and our non-PRC
resident investors may be at risk of being required to file a return and being taxed under SAT Circular 698 and we may be required to
expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698.
Pursuant to the Arrangement between the Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Tax Arrangement,
where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at least 25% of a PRC enterprise,
the withholding tax rate in respect of the payment of dividends by such PRC enterprise to such Hong Kong resident enterprise is reduced
to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Pursuant to the Notice of the State Administration
of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a resident enterprise
of the counter-party to such Tax Arrangement should meet the following conditions, among others, in order to enjoy the reduced withholding
tax under the Tax Arrangement: (i) it must directly own the required percentage of equity interests and voting rights in such PRC resident
enterprise; and (ii) it should directly own such percentage in the PRC resident enterprise anytime in the 12 months prior to receiving
the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial
Implementation), or the Administrative Measures, which became effective in October 2009, requires that the non-resident enterprises must
obtain the approval from the relevant tax authority in order to enjoy the reduced withholding tax rate under the tax treaties. There are
also other conditions for enjoying such reduced withholding tax rate according to other relevant tax rules and regulations. According
to Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying
a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
United States Federal Income Taxation
The following is a discussion of United States
federal income tax considerations relating to the acquisition, ownership, and disposition of our ordinary shares by a U.S. Holder, as
defined below, that acquires our ordinary shares and holds our ordinary shares as “capital assets” (generally, property held
for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon
existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect.
No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax
consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion
does not address all aspects of United States federal income taxation that may be important to particular investors in light of their
individual circumstances, including investors subject to special tax rules (such as, for example, certain financial institutions, insurance
companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market
treatment, partnerships and their partners, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders,
investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ordinary shares
as part of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors that have a functional currency
other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition,
this discussion does not address any tax laws other than the United States federal income tax laws, including any state, local, alternative
minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged to consult its tax advisor
regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ordinary
shares.
General
For purposes of this discussion, a “U.S.
Holder” is a beneficial owner of our ordinary shares that is, for United States federal income tax purposes, (i) an individual who
is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii)
an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or
(iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be
treated as a United States person under the Code.
If a partnership (or other entity treated as a
partnership for United States federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment of a partner
in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership
holding our ordinary shares are urged to consult their tax advisors regarding an investment in our ordinary shares.
The discussion set forth below is addressed only
to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult their own tax advisors about the application
of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences
to them of the purchase, ownership and disposition of our ordinary shares.
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the passive foreign investment company
rules discussed below, the gross amount of distributions made by us to you with respect to the ordinary shares (including the amount of
any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but
only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including
individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that
(1) the ordinary shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits
of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a
passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable
year, and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and the Cayman
Islands, clause (1) above can be satisfied only if the ordinary shares are readily tradable on an established securities market in the
United States. Under U.S. Internal Revenue Service authority, ordinary shares are considered for purpose of clause (1) above to be readily
tradable on an established securities market in the United States if they are listed on Nasdaq. You are urged to consult your tax advisors
regarding the availability of the lower rate for dividends paid with respect to our ordinary shares, including the effects of any change
in law after the date of this report.
To the extent that the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated
first as a tax-free return of your tax basis in your ordinary shares, and to the extent the amount of the distribution exceeds your tax
basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise
be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company
rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to
the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the ordinary shares.
The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held
the ordinary shares for more than one year, you may be eligible for reduced tax rates on any such capital gains. The deductibility of
capital losses is subject to limitations.
Passive Foreign Investment Company
A non-U.S. corporation is considered a PFIC for
any taxable year if either:
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at least 75% of its gross income for such taxable year is passive income; or
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).
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Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition
of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income
of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition
of our assets for purposes of the PFIC asset test, (1) the cash we hold will generally be considered to be held for the production of
passive income and (2) the value of our assets must be determined based on the market value of our ordinary shares from time to time,
which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised
in any offering) on any particular quarterly testing date for purposes of the asset test.
We must make a separate determination each year
as to whether we are a PFIC. Depending on the amount of cash we hold, together with any other assets held for the production of passive
income, it is possible that, for our 2018 taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held
for the production of passive income. We will make this determination following the end of any particular tax year. Although the law in
this regard is unclear, we treat our consolidated affiliated entities, as being owned by us for United States federal income tax purposes,
not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all
of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. In particular,
because the value of our assets for purposes of the asset test will generally be determined based on the market price of our ordinary
shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend
in large part on the market price of our ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market price
of the ordinary shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several
respects. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination
of the value of our assets will depend upon material facts (including the market price of our ordinary shares from time to time that may
not be within our control. If we are a PFIC for any year during which you hold ordinary shares, we will continue to be treated as a PFIC
for all succeeding years during which you hold ordinary shares. However, if we cease to be a PFIC and you did not previously make a timely
“mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging
election” (as described below) with respect to the ordinary shares.
If we are a PFIC for your taxable year(s) during
which you hold ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that you
receive and any gain you realize from a sale or other disposition (including a pledge) of the ordinary shares, unless you make a “mark-to-market”
election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions
you received during the shorter of the three preceding taxable years or your holding period for the ordinary shares will be treated as
an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the ordinary shares;
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the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
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the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The tax liability for amounts allocated to years
prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital, even if you hold the ordinary shares
as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you
make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ordinary shares and for which we are determined
to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the ordinary
shares as of the close of such taxable year over your adjusted basis in such ordinary shares, which excess will be treated as ordinary
income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the ordinary shares over
their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market
gains on the ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election,
as well as gain on the actual sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to any loss realized on the actual sale or disposition of the ordinary shares, to the extent that the amount of such loss
does not exceed the net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary shares will be adjusted
to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by
corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified
dividend income discussed above under “— Taxation of Dividends and Other Distributions on our ordinary shares” generally
would not apply.
The mark-to-market election is available only
for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including Nasdaq. If the ordinary shares are regularly traded on Nasdaq and if you are a holder of ordinary shares, the mark-to-market
election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC
may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above.
A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable
year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing
fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as
required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable
you to make a qualified electing fund election. If you hold ordinary shares in any taxable year in which we are a PFIC, you will be required
to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such ordinary shares,
including regarding distributions received on the ordinary shares and any gain realized on the disposition of the ordinary shares.
If you do not make a timely “mark-to-market”
election (as described above), and if we were a PFIC at any time during the period you hold our ordinary shares, then such ordinary shares
will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless you make a “purging
election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such ordinary shares at
their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election
will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result
of the purging election, you will have a new basis (equal to the fair market value of the ordinary shares on the last day of the last
year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your ordinary
shares for tax purposes.
You are urged to consult your tax advisors regarding
the application of the PFIC rules to your investment in our ordinary shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our ordinary
shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder
who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form
W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must
provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the
application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information. We do not intend to withhold taxes for individual shareholders. However, transactions effected
through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding), and such brokers or
intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment
Act of 2010, certain U.S. Holders are required to report information relating to our ordinary shares, subject to certain exceptions (including
an exception for ordinary shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue
Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ordinary shares.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC.
The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov
and such information can also be inspected and copies ordered at the public reference facilities maintained by the SEC at the following
location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the World Wide Web at http://www.China-ACM.com. However, information
contained on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.