Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
The number of outstanding shares of each
of the issuer’s classes of capital or common stock as of June 30, 2020 was 11,507,558 ordinary shares, par value $0.001
per share.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large
accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer ☐ Accelerated
filer ☐ Non-accelerated filer ☒ Emerging growth company
☒
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☒
Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this filing:
☒ U.S. GAAP ☐
International Financial Reporting Standards as issued by the International Accounting
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
PART I
CERTAIN INFORMATION
In this annual report on Form 20-F, unless
otherwise indicated, “we,” “us,” “our,” and the “Company” refer to Puhui Wealth
Investment Management 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 “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China, all references
to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States. This
annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the
reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could
be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On September 30, 2020, the cash
buying rate announced by the People’s Bank of China was RMB 6.8101 to $1.00.
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.
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 summary of our consolidated
statement of operations data for the years ended June 30, 2020, 2019 and 2018, and consolidated balance sheets data as of June
30, 2020 and 2019 are derived from our audited consolidated financial statements included elsewhere in this annual report. Our
consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the
United States, or U.S. GAAP.
Our historical results for any period
are not necessarily indicative of results to be expected for any future period. You should read the following summary financial
information in conjunction with the consolidated financial statements and related notes and the information under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.
|
|
For the Years Ended June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Total revenues
|
|
$
|
2,179,480
|
|
|
$
|
3,180,634
|
|
|
$
|
4,139,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(202,637
|
)
|
|
|
(316,718
|
)
|
|
|
(367,548
|
)
|
Selling expenses
|
|
|
(1,517,968
|
)
|
|
|
(2,005,367
|
)
|
|
|
(1,500,572
|
)
|
General and administrative
expenses
|
|
|
(4,977,537
|
)
|
|
|
(3,427,040
|
)
|
|
|
(1,967,294
|
)
|
Total
operating expenses
|
|
|
(6,698,142
|
)
|
|
|
(5,749,125
|
)
|
|
|
(3,835,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses),
net
|
|
|
10,444
|
|
|
|
(142,306
|
)
|
|
|
(29,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(4,508,218
|
)
|
|
|
(2,710,797
|
)
|
|
|
274,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
179,449
|
|
|
|
392,105
|
|
|
|
148,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(4,687,667
|
)
|
|
|
(3,102,902
|
)
|
|
|
125,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable
to non-controlling interest
|
|
|
(641,719
|
)
|
|
|
(645,716
|
)
|
|
|
(349,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income attributable to Puhui Wealth
|
|
$
|
(4,045,948
|
)
|
|
$
|
(2,457,186
|
)
|
|
$
|
475,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,507,558
|
|
|
|
10,793,017
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.05
|
|
The following table presents our summary
consolidated balance sheet data as of June 30, 2020 and 2019.
|
|
As of
June 30,
2020
|
|
|
As of
June 30,
2019
|
|
Current assets
|
|
$
|
5,360,216
|
|
|
$
|
8,716,270
|
|
Other assets
|
|
|
6,686,460
|
|
|
|
5,660,812
|
|
Total assets
|
|
$
|
12,046,676
|
|
|
$
|
14,377,082
|
|
Total liabilities
|
|
|
4,766,336
|
|
|
|
2,569,010
|
|
Total equity
|
|
$
|
7,280,340
|
|
|
$
|
11,808,072
|
|
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
Our limited operating history makes it difficult to evaluate
the prospects of our current business model.
We have a limited operating history. We
commenced our wealth management services to market financial products to high-net-worth individuals and corporate clients in October
2016. In addition, in June 2017, we launched our asset management business. Our historical growth rate may not be indicative of
our future performance, especially if we are unable to develop maintain and further improve our wealth management marketing and
asset management capabilities to achieve our clients’ expectations of investment returns.
Substantially all of our revenue during
the year ended June 30, 2020 was attributable to one-time commissions and recurring service fees generated through our wealth
management product related services. Our revenue decreased during the year ended June 30, 2020, and
there is no assurance that it will grow again. In addition,
as the provision of our asset management and financial product marketing is at an early stage, we cannot assure you that these
businesses will continue to grow or our attempts to further expand our business will be successful.
In addition, the development of our business
will primarily depend on the continued and growing demand for our services and products. Any failure on our part to keep up with
the development of the wealth management service and asset management sectors may materially and adversely affect the growth of
our business.
You should consider our prospects in light
of the risks and uncertainties that fast-growing companies with limited operating histories may encounter.
We have incurred net losses in the past and may incur
net losses in the future.
We incurred a net loss of
approximately $4.7 million during the year ended June 30, 2020. We had accumulated deficits of approximately $13.3 million,
$9.2 million, and $6.8 million as of June 30, 2020, 2019 and 2018, respectively. We cannot assure you that we will be able to
generate net income or will have retained earnings in the future. We anticipate that our operating expenses will increase in
the foreseeable future as we seek to continue to grow our business. These efforts may prove more expensive than we currently
anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. As a result of the
foregoing, our revenue has decreased, we may fail to generate net income or we may incur additional net losses in the future and may
not be able to maintain profitability on an annual basis.
Failure to manage our liquidity
and cash flows may materially and adversely affect our financial conditions and results of operations.
We generated negative cash flow from operating
activities of approximately $1.1 million for the year ended June 30, 2020. Although we have been able to maintain adequate working
capital primarily through cash from operations, capital contribution from shareholders, short term advances from related parties
and proceeds from long term loans, we cannot assure you our business model will allow us to generate positive cash flow, given
our substantial expenses in relation to our revenue at this stage of our development. Our inability to collect our fees from product
providers in a timely manner, our inability to generate profits from our asset management business, our inability to offset our
expenses with adequate revenue and our inability to raise sufficient capital in the future could materially and adversely affect
our cash flow, financial condition and results of operations.
If we are unable to establish and
maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our ordinary shares may decline.
As a public company, we are required to
maintain internal control over financial reporting and to report any material weaknesses in such internal control. We are in the
process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation,
which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will
not be required to attest to the effectiveness of our internal control over financial reporting until our annual report on Form
20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years
following the date of our initial public offering completed in December 2018. If we identify material weaknesses in our internal
control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert
that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable
to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our ordinary shares could be negatively
affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities
and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management
resources.
We have identified a material weakness
in our disclosure controls and procedures. If our remediation of this material weakness is not effective, or if we experience
additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future,
we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect
investor confidence in us and, as a result, the value of our ordinary shares.
Our management has assessed the effectiveness
of our disclosure controls and procedures as of June 30, 2020. Our management believes that, as of June 30, 2020, our disclosure
controls and procedures was not effective based on the fact that we do not have a in house personnel in our accounting department
with sufficient knowledge of the US GAAP and SEC reporting rules. Management anticipates that such disclosure controls and procedures
will not be effective until the above material weaknesses are remediated. If our remediation of this material weakness is not
effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system
of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations,
which may adversely affect investor confidence in us and, as a result, the value of our ordinary shares.
Our business could be materially
harmed by the ongoing coronavirus (COVID-19) pandemic.
In January 2020, a novel
strain of coronavirus, or COVID-19, surfaced and it has spread rapidly to many parts of China and other parts of the world which
has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially
all of the Company’s revenue is concentrated in China. Consequently, the COVID-19 pandemic may materially and adversely
affect the Company’s business operations, financial condition and operating results for 2020 and beyond.
The impacts of COVID-19
on Puhui’s business, financial condition, and results of operations include, but are not limited to, the following:
|
●
|
PHCF temporarily closed its offices and implemented work-from-home policy beginning in February 2020, as required by relevant PRC regulatory authorities. We have reopened our offices in June 2020 as the situation improved in China.
|
|
●
|
Due to the nature
of the Company’s business, the impact of the closure on operational capabilities was not significant, as most of Puhui’s
work force continued working offsite during such closure. However due to regulations about public gatherings, we were not
able to hold meetings and seminars for customers and have reduced the headcount of our sales and marketing departments.
|
|
●
|
Puhui’s customers
could potentially be negatively impacted by the outbreak, which may reduce their budgets for investment in 2020. As a result,
our revenue and profitability have been negatively impacted in the second half of fiscal year 2020 and we expect the result
of operations for the fiscal year 2021 to improve compared to fiscal year 2020, but there is no guarantee that our total revenue
or profitability will grow or remain at a similar level compared to fiscal year 2020.
|
|
●
|
The economy may
worsen if the COVID-19 outbreak continues. Puhui’s product provider may be negatively impacted by the outbreak, however
the Company has not seen any significant disruption of its product supply to date.
|
Because of the uncertainty
surrounding the COVID-19 outbreak, the business disruption and the financial impact related to the outbreak of and response to
the COVID-19 outbreak cannot be reasonably estimated at this time.
We may not be able to effectively
manage our growth or implement our future business strategies, in which case our business and results of operations may be materially
and adversely affected.
Although our revenues declined during
the year ended June 30, 2020, we have experienced growth in our business and expansion in recent years that has placed, and continues
to place, significant strain on our management and resources. Factors relating to our business that may impact our growth and
cause fluctuations include:
|
●
|
a decline or slowdown
of the growth in the value of financial products we market or manage;
|
|
●
|
a reduction of the
value of our invested assets and the investment returns credited to investors, which could reduce revenues from our asset
management business;
|
|
●
|
changes in laws
or regulatory policies that could impact our ability to provide wealth management marketing services and/or asset management
services to our clients;
|
|
●
|
negative publicity
regarding the financial services industry in China;
|
|
●
|
unanticipated delays
of product or service rollouts;
|
|
●
|
unanticipated changes
to economic terms in contracts with our financial product providers, including renegotiations that may not be favorable to
us or our clients;
|
|
●
|
failure to enter
into contracts with new financial product providers and cancellations of existing contracts with financial product providers;
|
|
●
|
increases in the
number of clients who decide to terminate their relationship with us or who ask us to redeem their investment in the products
that we market; and
|
|
●
|
volatility or declines
in the equity, debt, real estate or other markets that reduce the assets under our management and may result in the clients’
withdrawing their investments.
|
We believe that our growth will depend
on our ability to effectively implement our business strategies and address the above listed factors that may affect us.
In order to strengthen our market position
in the third-party wealth management service industry in China, we need to allocate substantial resources to design and develop
high-quality financial products, enhance our ability to source and distribute third-party financial products and continue to grow
our asset management business, all of which require us to further expand, train, manage and motivate our workforce and maintain
our relationships with our clients, third-party issuers and other industry players such as financial institutions and asset management
companies. Our operational expenses may increase due to establishment of additional offices and client centers so as to increase
our market penetration. We anticipate that we will also need to implement a variety of enhanced and upgraded operational and financial
systems, procedures and controls, including the improvement of our accounting and other internal management systems. All of these
endeavors involve risks and will require substantial management efforts, attention and skills, and significant additional expenditure.
We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our
future operations. In addition, we cannot assure you that we will be able to manage our growth or implement our future business
strategies effectively, and failure to do so may materially and adversely affect our business and results of operations.
We may fail to obtain and maintain
licenses and permits necessary to conduct our operations in China, and our business may be materially and adversely affected as
a result of any changes in the laws and regulations governing the financial services industry in China.
The laws and regulations governing the
financial services industry in China are still evolving. Substantial uncertainties exist regarding the regulatory system and the
interpretation and implementation of current and any future PRC laws and regulations applicable to the financial services industry
and companies that operate wealth management or asset management businesses. Depending on the type of products and services being
offered, the business operation may be subject to the supervision and scrutiny by different authorities. To date, the PRC government
has not adopted a unified regulatory framework governing the distribution or management of wealth management products. However,
there are laws and regulations governing certain wealth management products that we distribute or manage, such as private equity
funds, securities investment funds and private placement bonds.
We currently hold licenses to act as fund
managers of private equity products through Qingdao Puhui Zhuoyue Investment Management Co., Ltd. (“Qingdao Puhui”)
and private security products through Shanghai Pucai Investment Management Co., Ltd. (“Shanghai Pucai”). We cannot
assure you that we will be able to maintain our existing licenses, qualifications or permits, renew any of them when their current
term expires or obtain additional licenses necessary for our future business expansion. Any violation of China Securities Regulatory
Commission (“CSRC”) or Asset Management Association of China (“AMAC”) regulation would negatively impact
our registration with AMAC. We cannot assure you that we will be able to maintain our qualification to sell private fund products
or other regulated fund products.
In addition, if future PRC regulations
require that we obtain additional licenses or permits in order to continue to conduct our business operations, there is no guarantee
that we would be able to obtain such licenses or permits in a timely fashion, or at all. If any of these situations occur, our
business, financial condition and prospects would be materially and adversely affected.
We may not be able to continue to
retain or expand our high-net-worth and small and midsize enterprise (“SME”) client base or maintain or increase the
amount of investments made by our clients in the products we distribute.
We target China’s large populations
of high-net-worth individuals and SMEs as our clients. In light of China’s ever-evolving wealth management industry for
high-net-wealth individuals and SMEs we cannot assure you that we will be able to maintain and increase the number of our clients
or that our existing clients will maintain the same level of investment in the wealth management products that we distribute.
As this industry in China is at an early stage of development and highly fragmented and has low barriers to entry, our existing
and future competitors may be better equipped to capture market opportunities and grow their client bases faster than us. In addition,
the evolving regulatory landscape of China’s financial service industry may not affect us and our competitors proportionately
with respect to the ability to maintain or grow our client base. We may lose our position if we fail to maintain or further grow
our client base at the same pace. A decrease in the number of our clients or a decrease in their spending on the products that
we distribute or manage may reduce revenues derived from commissions and recurring service fees and monetization opportunities
for our asset management services. If we fail to continue to meet our clients’ expectations on the returns from the products
we distribute or manage or if they are no longer satisfied with our services, they may leave us for our competitors and our reputation
may be damaged by these clients, affecting our ability to attract new clients, which will in turn adversely affect our financial
condition and operational results.
The funds we manage can be liquidated
before maturity, which has occurred and may occur in the future, which may result in an adverse effect on our business, results
of operations and/or financial condition.
According to the relevant PRC laws and
regulations governing private funds, private funds can be liquidated before the maturity date either as permitted by law or as
contractually agreed to by the fund manager and fund investors. Pursuant to the fund documents signed by fund investors and us,
our funds can be liquidated early by unanimous written consent of all fund investors or consent by two-thirds of the fund investors
at an investors’ meeting. Pucai-Fengsui Wenying No.1 Private Securities Fund (“Pucai”), our securities investment
fund, was liquidated in February 2018 pursuant to unanimous consent of all fund investors and us. Pursuant to the fund documents
of Puhui-Fengsui No. 4 Private Equity Fund and Puhui-Fengsui No.5 Private Equity Fund, we, as fund manager, also have the right
to liquidate the two funds before the maturity date upon the occurrence of certain events as provided in the fund documents.
As such, all of the funds we currently
manage may be liquidated before the maturity date. If the funds are liquidated before the maturity date, the investors may not
be able to achieve the expected investment returns. Such events could cause our clients to lose their trust and confidence in
us, which could result in an adverse effect on our business, results of operations and/or financial condition. In addition, the
early liquidation of private funds may cause us to be unable to receive our performance fees and carried interest as expected.
If we cannot identify or effectively
control the various risks involved in the wealth management products that we distribute or manage, our reputation, client relationships
and overall business operations will be adversely affected.
We distribute a selection of third-party
and self-developed wealth management products and private equity funds, for which we may generate revenue based on one-time commissions
and recurring fees. These products often have complex structures and involve various risks, including default risks, interest
risks, liquidity risks and others. In addition, we are subject to risks arising from any potential misconduct or violation of
law by the product providers. These incidences may negatively impact the performance of the applicable products that we distribute
and adversely affect our reputation. Our success in maintaining our brand image depends, in part, on our ability to effectively
control the risks associated with these products. Our wealth management product advisors not only need to understand the nature
of the products but also need to accurately describe the products to, and evaluate them for, our clients. Although we enforce
and implement strict risk management policies and procedures, they may not be fully effective in mitigating the risk exposure
of our clients in all market environments or against all types of risks.
If we fail to identify and effectively
control the risks associated with the products that we distribute or manage, or fail to disclose such risks to our clients in
a sufficiently clear manner, and as a result our clients suffer financial loss or other damages resulting from their purchase
of the wealth management products following our recommendations, our reputation, client relationship, business and prospects will
be materially and adversely affected. The poor performance of such products and services, whether self-developed or sourced from
third parties, or negative perceptions of the firms offering such products and services, may adversely:
|
●
|
affect
our distribution of such products and reduce our revenue;
|
|
●
|
impact client confidence
in the products we distribute; or
|
|
●
|
impede the launch
of new products or private fund-raising activities in connection with our asset management business.
|
Any harm to our reputation or failure
to further enhance our brand recognition may materially and adversely affect our business, financial condition and results of
operations.
Our reputation and brand recognition is
critical to the success of our business. We believe a well-recognized brand is crucial to increasing our high-net-worth and SME
client base and, in turn, facilitate our effort to monetize our services and enhancing our attractiveness to our clients and product
providers. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly
or impossible to remediate. Regulatory inquiries or investigations, lawsuits and other claims in the ordinary course of our business,
employee misconduct, perceptions of conflicts of interest and rumors, among other things, could substantially damage our reputation,
even if they are baseless or satisfactorily addressed.
Any perception that the quality of our
wealth management product recommendations or the management capabilities of our fund products may not be the same as or better
than that of other wealth management advisory firms or product distributors or other asset management firms can also damage our
reputation. Moreover, any negative media publicity about any of the products that we distributed, the financial services industry
or wealth management service industry in general, or product or service quality problems at other firms in the industry, including
our competitors, may also negatively impact our reputation and brand. Negative perceptions of certain financial products and services,
or the financial industry in general, may increase the number of withdrawals and redemptions or reduce purchases made by our clients,
which would adversely impact our revenues and liquidity position.
If we are unable to maintain a good reputation
or further enhance our brand recognition, our ability to attract and retain clients, wealth management product providers and key
employees could be harmed and, as a result, our business and revenues would be materially and adversely affected.
Our future success depends on our
continued efforts to retain our existing management team and other key management as well as to attract, integrate and retain
highly skilled and qualified personnel, and our business may be disrupted if we lose their services.
Our future success depends heavily on
the continued services of our current executive officers. If any of our executive officers or other key management are unable
or unwilling to stay in their present positions, we may not be able to find suitable replacements, which may disrupt our business
operations. We do not have key personnel insurance in place. If any of our executive officers or other key management joins a
competitor or forms a competing company, we may lose clients, know-how, key professionals and staff members. Each executive officer
has entered into confidentiality and non-competition agreements with us. However, if any dispute arises between our executive
officers and us, we cannot assure you of the extent to which any of these agreements could be enforced in China, where these executive
officers reside, because of the uncertainties of China’s legal system.
We also rely on the skills, experience
and efforts of our experienced service professionals, including our wealth management product advisors, client managers and product
development personnel. Our wealth management product advisors and client managers mainly recommend wealth management products.
Our asset management personnel also design our self-developed products. The investment performance of products distributed or
managed by us and the retention of our clients are dependent upon the strategies carried out and performance by such employees.
The market for these talents is extremely competitive. If we are unable to attract and retain qualified individuals or our recruiting
and retention costs increase significantly, our financial condition and results of operations could be materially and adversely
impacted.
Our acquisition of or investment
in complementary businesses and assets as well as formation of strategic alliances involves significant risk and uncertainty that
may prevent us from achieving our objectives and harm our financial condition and results of operations.
We from time to time consider opportunities
for strategic acquisitions or investments in complementary businesses and assets and strategic alliances. We may not be able to
complete proposed acquisitions. Our future strategic acquisitions and investments could subject us to uncertainties and risks,
including:
|
●
|
costs associated
with, and difficulties in, integrating acquired businesses and managing newly acquired business;
|
|
●
|
potentially significant
goodwill impairment charges;
|
|
●
|
high acquisition
and financing costs;
|
|
●
|
potential ongoing
financial obligations and unforeseen or hidden liabilities;
|
|
●
|
failure to achieve
our intended objectives, benefits or revenue-enhancing opportunities;
|
|
●
|
potential claims
or litigation regarding our board’s exercise of its duty of care and other duties required under applicable law in connection
with any of our significant acquisitions or investments approved by the board; and
|
|
●
|
diversion of our
resources and management attention.
|
Our failure to address these uncertainties
and risks may affect our ability in implementing our acquisition strategies, which may in turn have a material adverse effect
on our liquidity, financial condition and results of operations.
A drop in the investment performance
for products distributed or managed by us, a decline in the value of the assets under our management or any decrease in our other
services could negatively impact our revenues and profitability.
Investment performance is a key competitive
factor for products distributed or managed by us. Strong investment performance helps us to retain and expand our client base
and helps generate new sales of products and services. Strong investment performance is therefore an important element to our
goals of maximizing the value of products and services provided to our clients or the assets under our management. There can be
no assurance as to how future investment performance will compare to our competitors or that historical performance will be indicative
of future returns. Any drop or perceived drop in investment performance as compared to our competitors could cause a decline in
sales of our investment products and services. These impacts may also reduce our aggregate amount of assets under management and
management fees. Poor investment performance could also adversely affect our ability to expand the distribution of third-party
wealth management products and our self-developed products.
In addition, the profitability of our
growing asset management services depends on fees charged based on the value of assets under management. Any impairment on the
value of the assets we manage, whether caused by fluctuations or downturns in the underlying markets or otherwise, will reduce
our revenues generated from asset management business, which in turn may materially and adversely affect our overall financial
performance and results of operations.
If we breach the contractual obligations
under the fund management documents or fiduciary duties we owe to fund counterparties in connection with our asset management
business, our results of operations will be adversely impacted.
Our asset management business is expected
to continue to grow in the future and involves inherent risks. We may be exposed to indemnity or other legal liabilities if we
are deemed to have breached our legal obligations as fund managers under the fund management documents or fund subscription agreements,
and are therefore susceptible to legal disputes and potentially significant damages. In cases where we serve as the general partner
for the funds that are in the form of a limited partnership, we are required to manage the funds for the limited partners or the
investors. We may be removed by the limited partners without cause by their exercising their kick-out rights if they are not satisfied
with our services in the roles of executive partner and fund manager of the funds. If we are deemed to have breached our fiduciary
duty, we may be exposed to risks and losses related to legal disputes. We could also experience losses on our principal for funds
invested by us and the entity as the general partner shall bear unlimited joint and several liabilities for the debts of any fund
managed by it out of all its assets. We cannot assure you that our efforts to further develop the fund management business will
be successful. If our asset management business fails, our future growth may be materially and adversely affected and our reputation
and credibility may be damaged among high-net-worth individuals and SMEs, which in turn may affect our wealth management product
advisory services business.
Our risk management policies and
procedures may not be fully effective in identifying or mitigating risk exposure in all market environments or against all types
of risk, including employee and financial advisor misconduct.
We have devoted significant resources
to developing our risk management policies and procedures and will continue to do so. Nonetheless, our policies and procedures
to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments or
against all types of risk. Many of our risk management policies are based upon observed historical market behavior or statistics
based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations
upon which these methods are based may not be valid. As a result, these methods may not predict future exposures accurately, which
could be significantly greater than what our models indicate. This could cause us to incur investment losses or cause our hedging
and other risk management strategies to be ineffective. Other risk management methods depend upon the evaluation of information
regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us,
which may not always be accurate, complete, up-to-date or properly evaluated.
Moreover, we are subject to the risks of errors and misconduct
by our employees and advisors, which include:
|
●
|
engaging in misrepresentation
or fraudulent activities when marketing or distributing wealth management products to clients;
|
|
●
|
improperly using
or disclosing confidential information of our clients, third-party wealth management product providers or other parties;
|
|
●
|
concealing unauthorized
or unsuccessful activities; or
|
|
●
|
otherwise not complying
with laws and regulations or our internal policies or procedures.
|
Although we have established an internal
compliance system to supervise service quality and regulation compliance, these risks may be difficult to detect in advance and
deter, and could harm our business, results of operations or financial performance.
In addition, although we perform due diligence
on potential clients, we cannot assure you that we will be able to identify all the possible issues based on the information available
to us. If certain investors do not meet the relevant qualification requirements for products we distribute or under applicable
laws, we may also be deemed in default of the obligations required in our contract with the product providers. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures to properly record and verify a large number
of transactions and events, and these policies and procedures may not be fully effective in mitigating our risk exposure in all
market environments or against all types of risk.
Non-compliance on the part of third
parties with which we conduct business could disrupt our business and adversely affect our results of operations.
Our third-party financial product providers
or other business counterparties may be subject to regulatory penalties or punishments because of their regulatory compliance
failures, which may affect our business activities and reputation and in turn, our results of operations. Although we conduct
due diligence on our business counterparties, we cannot be certain whether any such counterparty has infringed or will infringe
any third parties’ legal rights or violate any regulatory requirements. We cannot assure you that these counterparties will
continue to maintain all applicable permits and approvals, and any noncompliance on the part of these counterparties may cause
potential liabilities to us and in turn disrupt our operations.
A portion of our revenue, net income
and cash flow are variable, which may make it difficult for us to achieve steady earnings growth from period to period.
A portion of our revenue, net income and
cash flow are variable. For example, we are entitled to receive performance fees from the funds we manage only upon the maturity
of such funds. Such variability in the timing and amount of performance fees may affect our results of operations and cash flow
during a particular period, which may not be indicative of our performance in a future period. We may not achieve steady growth
in net income and cash flow from period to period. In addition, even if an investment proves to be profitable, it may be a number
of years before any profits can be realized. We cannot predict precisely when, or if, realizations of investments will occur.
A downturn in the equity markets also makes it more difficult to exit investments by selling equity securities. If we were to
have a realization event in a particular period, the event may have a significant impact on our results and cash flow for that
particular period.
Poor performance of the funds that
we manage would cause a decline in our revenue, income and cash flow, and could adversely affect our ability to raise capital
for future investment funds.
In the event that any of the funds that
we manage were to perform poorly, our revenue, income and cash flow could decline. Poor performance of our investment funds could
also make it more difficult for us to raise new capital. Investors might decline to invest in future investment funds we raise.
Investors and potential investors in our funds continually assess the performance of the funds that we manage, and our ability
to raise capital for existing and future investment funds will depend on the continued satisfactory performance of such funds.
Accordingly, poor fund performance may deter future investment in the funds we manage and thereby decrease the capital invested
in such funds and ultimately our management fee income. Alternatively, in the face of poor fund performance, investors could demand
lower fees or fee concessions for existing or future funds which would likewise decrease our revenue.
We rely heavily on our relationships
with financial institutions and corporate partners in China.
Our business is heavily dependent upon
our relationship with a number of financial institutions as well as other financial intermediaries and corporate partners in China.
For the year ended June 30, 2020, YingKe Innovation Asset Management Co., Ltd., Beijing Ruqi Consulting Center and Cynthia Management
Corporation accounted for 40.5%, 18.4% and 13.8% of the Company’s revenues, respectively. Accordingly, any material deterioration
or termination in our relationship with one or more of our institutional or corporate partners could have a material adverse effect
on our business, financial condition and prospects.
Our investment approach may fail.
The success of our investment approach
depends, in part, upon our ability to correctly interpret market data and other information. It also depends on our ability to
conduct or obtain useful investment research and analysis and/or predict market conditions and developments. Failure to do so
could have a material adverse effect on the performance of the funds. Some of our strategies may be new or may be rapidly developing.
This could increase the difficulties that we face in successfully pursuing such strategies on behalf of our funds. As the approach
and strategies that we currently employ may be modified and altered from time to time, it is possible that strategies used in
the future may be different from those currently in use. No assurance can be given that our current and/or future strategies will
be successful under all or any market conditions.
The impairment or negative performance of other financial
services companies could adversely affect us.
We routinely work with counterparties
in the financial services industry, including asset management companies, custodian banks and other institutions, when providing
our services. A decline in the financial condition of one or more financial services institutions may expose us to credit losses
or defaults, limit our access to liquidity or otherwise disrupt the operations of our businesses. While we regularly assess our
exposure to different industries and counterparties, the performance and financial strength of specific institutions are subject
to rapid change, the timing and extent of which cannot be known.
Downgrades in the credit or financial
strength ratings assigned to the counterparties with whom we transact or other adverse reputational impacts to such counterparties
could create the perception that our financial condition will be adversely impacted as a result of potential future defaults by
such counterparties. As a result, our operations and financial performances may be adversely impacted.
Any material decrease in the commission
and fee rates for our services may have an adverse effect on our revenues, cash flow and results of operations.
We derive a significant portion of our
revenues from commissions and recurring fees paid by wealth management product providers when our clients invest in the products
we distribute. The commission and recurring fee rates are set by such product providers or negotiated between such parties and
us, and vary from product to product. Future commission and recurring fee rates may be subject to change based on the prevailing
political, economic, regulatory, taxation and competitive factors that affect product providers. These factors, which are not
within our control, include the capacity of product providers to place new business and realize profits, client demand and preference
for wealth management products, the availability of comparable products from other product providers at a lower cost, the availability
of alternative wealth management products to clients and the tax deductibility of commissions and fees. In addition, the historical
volume of wealth management products that we distributed or managed may have a significant impact on our bargaining power with
third-party wealth management product providers in relation to the commission and fee rates for future products. Because we do
not determine, and cannot predict, the timing or extent of commission and fee rate changes with respect to the wealth management
products, it is difficult for us to assess the effect of any of these changes on our operations. In order to maintain our relationships
with the product providers and to enter into contracts for new products, we may have to accept lower commission rates or other
less favorable terms, which could reduce our revenues. If some of our key wealth management product providers decide not to enter
into new contracts with us, or our relationships with them are otherwise impacted, our business and operating results could be
materially and adversely affected. Furthermore, as we continue to grow our asset management services, we may face similar fee
rates risk in connection with our asset management services.
We face substantial competition
and if we are unable to compete successfully, we could lose our market share and our results of operations and financial condition
may be materially and adversely affected.
The wealth management market in China
is at an early stage of development and is highly fragmented. As the industry develops, we expect to face increased competition.
In distributing wealth management products, we face direct competition primarily from other third-party wealth management service
providers. In addition, there is a risk that we may not successfully identify new product and service opportunities or develop
and introduce these opportunities in a timely and cost-effective manner. New competitors that are better adapted to the wealth
management service industry may emerge, which could cause us to lose market share in key market segments.
Many of our competitors have better brand
recognition, stronger market influence, greater financial and/or marketing resources. For example, many wealth management product
providers are engaged in, or may in the future engage in, the distribution of wealth management products and may benefit from
the integration of wealth management products with their other product offerings.
In addition, we face competition from
other private fund management companies that have emerged or will emerge in the asset management business in China in the foreseeable
future. With an increasing portion of wealth management products being distributed through online or mobile platforms, we expect
to continue to compete with an increasing number of internet finance enterprises.
Any failure to protect our clients’
privacy and confidential information could lead to legal liability, adversely affect our reputation and have a material adverse
effect on our business, financial condition or results of operations.
Our services involve the exchange, storage
and analysis of highly confidential information, including detailed personal and financial information regarding our high-net-worth
and SME clients, through a variety of electronic and non-electronic means, and our reputation and business operations are highly
dependent on our ability to safeguard the confidential personal data and information of our clients. We rely on a network of process
and software controls to protect the confidentiality of data provided to us or stored on our systems.
If we do not maintain adequate internal
controls or fail to implement new or improved controls, this data could be misappropriated or confidentiality could otherwise
be breached. We could be subject to liability if we inappropriately disclose any client’s personal information, or if third
parties are able to illegally gain access to any client’s name, address, portfolio holdings, or other personal and confidential
information. Any such event could subject us to claims for identity theft or other similar fraud claims or claims for other misuses
of personal information, such as unauthorized marketing or unauthorized access to personal information. In addition, such events
would cause our clients to lose their trust and confidence in us, which may result in a material adverse effect on our business,
results of operations and financial condition.
We may not be able to prevent unauthorized
use of our intellectual property, which could reduce demand for the products that we distribute and our services, adversely affect
our revenues and harm our competitive position.
We rely primarily on a combination of
copyright, trade secret, trademark and anti-unfair competition laws and contractual rights to establish and protect our intellectual
property rights. We cannot assure you that the steps we have taken or will take in the future to protect our intellectual property
or piracy will prove to be sufficient. For example, although we require our employees, wealth management product providers and
others to enter into confidentiality agreements in order to protect our trade secrets, other proprietary information and, most
importantly, our client information, these agreements might not effectively prevent disclosure of our trade secrets, know-how
or other proprietary information and might not provide an adequate remedy in the event of unauthorized disclosure of such confidential
information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could
not assert any trade secret rights against such parties. Implementation of intellectual property-related laws in China has historically
been lacking, primarily due to ambiguity in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights
and confidentiality protection in China may not be as effective as in the United States or other countries. Current or potential
competitors may use our intellectual property without our authorization in the development of products and services that are substantially
equivalent or superior to ours, which could reduce demand for our solutions and services, adversely affect our revenues and harm
our competitive position. Even if we were to discover evidence of infringement or misappropriation, our recourse against such
competitors may be limited or could require us to pursue litigation, which could involve substantial costs and diversion of management’s
attention from the operation of our business.
We may face intellectual property
infringement claims, which could be time-consuming and costly to defend and may result in the loss of significant rights by us.
Although we have not been subject to any
litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights, we cannot assure
you that such infringement claims will not be asserted against us in the future. Some third parties may own technology patents,
copyrights, trademarks, trade secrets and Internet content, which they may use to assert claims against us. We require our advisors,
managers and relevant staff to follow certain procedures designed to reduce the likelihood that we may use, develop or make available
any content or applications without the proper licenses or necessary third-party consents. However, these procedures may not be
effective in completely preventing the unauthorized posting or use of copyrighted material or the infringement of other rights
of third parties.
Intellectual property litigation is expensive
and time-consuming and could divert resources and management attention from the operation of our business. If there is a successful
claim of infringement, we may be required to alter our services, cease certain activities, pay substantial royalties and damages
to, and/or obtain one or more licenses from third parties. We may not be able to obtain those licenses on commercially acceptable
terms, or at all. Any of those consequences could cause us to lose revenues, impair our client relationships and harm our reputation.
Legal or administrative proceedings
or allegations against us or our management could have a material adverse impact on our reputation, results of operations, financial
condition and liquidity.
We have not been subject to legal or administrative
proceedings or third-party allegations historically which were likely to have had a material adverse effect on our business, financial
condition or results of operations. We have been, and may from time to time in the future become, a party to such proceedings
or claims arising in the ordinary course of our business. Any lawsuit or allegation against us, with or without merit, or any
perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong doing by any key member of
our management team could harm our reputation, distract our management from day-to-day operations and cause us to incur significant
expenses in the defense of such matters. A substantial judgment, award, settlement, fine, or penalty may generate negative publicity
against us and could be materially adverse to our operating results or cash flows for a particular future period, depending on
our results for that period. This risk may be heightened during periods when credit, equity or other financial markets are volatile,
or when clients or investors are experiencing losses.
Our principal shareholder has substantial
influence over our company and his interests may not be aligned with the interests of our other shareholders.
As of the date of this annual report,
Mr. Zhe Ji beneficially owns an aggregate of approximately 43.6% of our issued and outstanding ordinary shares (excluding the
issuance of any shares under our 2018 Equity Incentive Plan). As a result of Mr. Ji substantial shareholding, Mr. Ji has a substantial
influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of
our assets, election of directors and other significant corporate actions. Mr. Ji may take actions that are not in the best interests
of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company,
which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company
and might reduce the price of our ordinary shares. These actions may be taken even if they are opposed by our other shareholders.
We are not an “investment
company” and do not intend to become registered as an “investment company” under the Investment Company Act
of 1940, or the 1940 Act, because our primary business is asset management services.
An entity will generally be deemed an
“investment company” for purposes of the 1940 Act if: (a) it is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting or trading in securities, or (b) absent an applicable
exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets
(exclusive of U.S. government securities and cash items) on an unconsolidated basis. We are engaged primarily in the business
of marketing third party and self-developed financial products and providing asset management services, and not in the business
of investing, reinvesting or trading in securities. We hold ourselves out as an asset management firm and do not propose to engage
primarily in the business of investing, reinvesting or trading in securities. We recently restructured certain of our assets and
currently none of our subsidiaries holds investment securities having a value exceeding 40% of the value of its total assets.
As such, we believe that none of our consolidated and/or unconsolidated entities is an investment company under the Investment
Company Act.
If we were to be deemed an investment
company, as a foreign private issuer, we would not be eligible to register under the 1940 Act, and if a sufficient amount of our
assets are deemed to be “investment securities” within the meaning of the 1940 Act, we would either have to obtain
exemptive relief from the SEC, modify our contractual rights or dispose of investments in order to fall outside the definition
of an investment company. Additionally, we may have to forego potential future acquisitions of interests in companies that may
be deemed to be investment securities within the meaning of the 1940 Act. Failure to avoid being deemed an investment company
under the 1940 Act coupled with our inability as a foreign private issuer to register under the 1940 Act could make us unable
to comply with our reporting obligations as a public company in the United States and lead to our being delisted from Nasdaq Capital
Market (“NASDAQ”), which would have a material adverse effect on the liquidity and value of our ordinary shares.
We have limited insurance coverage.
Insurance companies in China currently
do not offer as extensive an array of insurance products as insurance companies in more developed economies. Other than casualty
insurance on some of our assets, we do not have commercial insurance coverage on our other assets and we do not have insurance
to cover our business or interruption of our business, litigation or product liability. Moreover, the low coverage limits of our
property insurance policies may not be adequate to compensate us for all losses, particularly with respect to any loss of business
and reputation that may occur. We have determined that the costs of insuring for these risks and the difficulties associated with
acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence
of loss or damage to property, litigation or business disruption may result in our incurring substantial costs and the diversion
of resources, which could have an adverse effect on our results of operations and financial condition.
Risks Related to Our Corporate Structure
If the PRC government finds that
the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations
relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future,
we could be subject to severe penalties or be forced to relinquish our interests in those operations.
We are acting as a private fund manager
to high-net-worth individuals and enterprises in China from time to time. While the distribution of private equity funds or securities
investment funds is not explicitly categorized as restricted to foreign investment, a qualification is required for the sales
of private equity funds or securities investment funds by private fund management companies. In practice, such qualification is
generally unavailable to foreign-invested enterprises or their subsidiaries. And although foreign-invested enterprises incorporated
in China are not expressly prohibited from providing private fund management services in China, in practice, when managing the
various funds, we may also need to invest in projects or funds at the same time. Some targeted projects, such as high-end hotel
and office building rental projects are in prohibited or restricted categories for foreign investment. In order to conduct our
sales services in the future, we have entered into contractual arrangements through Qingdao Puhui and Shanghai Pucai which have
such qualifications.
Part of our business includes conducting market surveys, which
is categorized as restricted to foreign investment under the Special Administrative Measures for Foreign Investment Access or the
Negative List. The Measures for the Administration of Foreign-Related Investigation, promulgated by the National Bureau of Statistics
on July 19, 2004, states that foreign-invested entities cannot conduct market survey unless a license has been granted by the relevant
authority. The license application is subject to stringent requirements and is ultimately subject to the discretion of the relevant
authority. Because Rucong is unable to obtain such license, we conduct such activities through Puhui Beijing, which, as a domestic
PRC company, is not required to obtain such license for market survey.
Our contractual arrangements with Puhui
Beijing and its shareholders enable us to (1) have power to direct the activities that most significantly affect the economic
performance of Puhui Beijing; (2) receive substantially 90.2077% of the economic benefits from Puhui Beijing in consideration
for the services provided by Puhui Beijing; and (3) have an exclusive option to purchase most or part of the equity interests
in Puhui Beijing when and to the extent permitted by PRC law, or request any existing shareholder of Puhui Beijing to transfer
any or part of the equity interest in Puhui Beijing to another PRC person or entity designated by Beijing Rucong Enterprise Management
and Advisory Co., Ltd. (“Rucong,” “WFOE” or “PRC subsidiary”) at any time at our discretion.
Because of these contractual arrangements, we are the primary beneficiary of Puhui Beijing and hence treat each of Puhui Beijing
as our variable interest entity (“VIE”), and consolidate Puhui Beijing and its subsidiaries’ results of operations
into ours.
If the PRC government finds that our contractual
arrangements do not comply with its restrictions on foreign investment in the wealth management or asset management business,
or if the PRC government otherwise finds that we, Puhui Beijing or any of its subsidiaries or branches are in violation of PRC
laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities,
including the CSRC, would have broad discretion in dealing with such violations or failures, including, without limitation:
|
●
|
revoking our business
and operating licenses;
|
|
●
|
discontinuing or
restricting our operations;
|
|
●
|
imposing fines or
confiscating any of our income that they deem to have been obtained through illegal operations;
|
|
●
|
imposing conditions
or requirements with which we or our PRC subsidiary and consolidated entities may not be able to comply;
|
|
●
|
requiring us or
our PRC subsidiary and consolidated entities to restructure the relevant ownership structure or operations;
|
|
●
|
restricting or prohibiting
our use of the proceeds from the initial public offering completed in December 2018 or other financing activities of foreign
investors to finance the business and operations of our VIE, Puhui Beijing, and its subsidiaries; or
|
|
●
|
taking other regulatory
or enforcement actions that could be harmful to our business.
|
Any of these actions could cause significant
disruption to our business operations, and may materially and adversely affect our business, financial condition and results of
operations. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate
the financial results of any of our consolidated entities in our consolidated financial statements, if the PRC government authorities
find our legal structure and contractual arrangements to be in violation of PRC laws, rules and regulations. If any of these penalties
results in our inability to direct the activities of Puhui Beijing that most significantly impact its economic performance and/or
our failure to receive the economic benefits from Puhui Beijing, we may not be able to consolidate Puhui Beijing into our consolidated
financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
We rely on contractual arrangements
with our VIE, and its shareholders for a portion of our China operations, which may not be as effective as direct ownership in
providing operational control.
We rely on contractual arrangements with
our VIE, Puhui Beijing, and its Participating Shareholders to operate a portion of our operations in China, including wealth management
advisory service, market survey and the sale of private funds by private fund management companies. These contractual arrangements
may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its Participating
Shareholders could breach their contractual arrangements with us by, among other things, failing to operate our business in an
acceptable manner or taking other actions that are detrimental to our interests. These risks exist throughout the period in which
we operate our businesses through the contractual arrangements with our VIE. If we were the controlling shareholder of the VIE
with direct ownership, we would be able to exercise our rights as shareholders to effect changes to their board of directors,
which in turn could implement changes at the management and operational level. However, under the current contractual arrangements,
as a legal matter, if our VIE or its shareholders fail to perform their obligations under these contractual arrangements, we may
have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies,
which may be time-consuming, unpredictable and expensive. If we are unable to enforce these contractual arrangements, or if we
suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations
could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation.
For fiscal year 2020 and 2019, Puhui Beijing
and its subsidiaries and branches contributed 100% and 100% of our total net revenues. In the event we are unable to enforce the
contractual arrangements, we may not be able to have the power to direct the activities that most significantly affect the economic
performance of Puhui Beijing and its subsidiaries and branches, and our ability to conduct our business may be negatively affected,
and we may not be able to consolidate the financial results of Puhui Beijing and its subsidiaries and branches into our consolidated
financial statements in accordance with U.S. GAAP.
The shareholders of our VIE may
have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor, our business
may be materially and adversely affected.
We have designated individuals who are
PRC nationals to be the shareholders of Puhui Beijing. These individuals may have conflicts of interest with us. Puhui Beijing
is approximately 53.6764 % owned by Mr. Zhe Ji, our chairman of the board of directors and chief executive officer. Conflicts
of interest may arise between the roles of Mr. Zhe Ji as shareholder, director and officer of our company and as shareholder,
director and officer of our VIE. We rely on these individuals to abide by the laws of the Cayman Islands, which provide that directors
and officers owe a fiduciary duty to our company that requires them to act in good faith and in the best interest of our company
and not to use their positions for personal gains. On the other hand, PRC laws also provide that a director or an executive officer
owes a fiduciary duty to the company he or she directs or manages. We cannot assure you that when conflicts arise, shareholders
of our VIE will act in the best interest of our company or that conflicts will be resolved in our favor. These individuals may
breach or cause the VIE to breach the existing contractual arrangements. If we cannot resolve any conflicts of interest or disputes
between us and these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive
to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.
Our ability to enforce the equity
pledge agreements between us and the Participating Shareholders of Puhui Beijing may be subject to limitations based on PRC laws
and regulations.
Pursuant to the equity pledge agreements
relating to Puhui Beijing, Puhui Beijing shareholders pledged their equity interests in Puhui Beijing to Rucong to secure Puhui
Beijing’s performance of the obligations and indebtedness under the Technical Consultation and Service Agreement and the
Business Cooperation Agreement. The equity pledges under these equity pledge agreements have been registered with the relevant
local branch of the State Administration for Industry and Commerce, or the SAIC. Under the PRC Property Law, when an obligor fails
to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledger to obtain the pledged equity
or seek payments from the proceeds of the auction or sell-off of the pledged equity. If Puhui Beijing fails to perform its obligations
secured by the pledges under the equity pledge agreements, one remedy in the event of default under the agreements is to require
the pledger to sell the equity interests in Puhui Beijing, as applicable, in an auction or private sale and remit the proceeds
to our subsidiary in China, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of
the full value of the equity interests in our VIEs. We consider it very unlikely that the public auction process would be undertaken
since, in an event of default, our preferred approach would be to ask our PRC subsidiary that is a party to the exclusive Equity
Option Agreements with the Puhui Beijing Shareholders, to designate another PRC person or entity to acquire the equity interests
in such VIE and replace the existing shareholders pursuant to the exclusive Equity Option Agreements.
In addition, in the registration forms
of the local branch of the SAIC for the pledges over the equity interests under the equity pledge agreements, the amount of registered
equity interests pledged to our PRC subsidiary was stated as the pledger’s portion of the registered capital of the VIE.
The equity pledge agreements with the shareholders of our VIE provide that the pledged equity interest constitute continuing security
for any and all of the indebtedness, obligations and liabilities of our VIE under the relevant contractual arrangements, and therefore
the scope of pledge should not be limited by the amount of the registered capital of the applicable VIE. However, there is no
guarantee that a PRC court will not take the position that the amount listed on the equity pledge registration forms represents
the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed
to be secured in the equity pledge agreements in excess of the amount listed on the equity pledge registration forms could be
determined by the PRC court to be unsecured debt, which takes last priority among creditors and often does not have to be paid
back at all. We do not have agreements that pledge the assets of our VIE and its subsidiaries for the benefit of us or our PRC
subsidiary, although our VIE grant our PRC subsidiary options to purchase the assets of our VIE and their equity interests in
its subsidiaries under the exclusive Equity Option Agreements.
If any of our VIE and its subsidiaries
become the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy their assets, which could
reduce the size of our operations and materially and adversely affect our business.
We do not have priority pledges and liens
against the assets of our VIE. As a contractual and property right matter, this lack of priority pledges and liens has remote
risks. If Puhui Beijing undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all
of its assets and we may not have priority against such third-party creditors on the assets of our VIE. If our VIE liquidate,
we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding
liabilities owed by Puhui Beijing or by Puhui Beijing under the applicable service agreement.
If the shareholders of our VIE were to
attempt to voluntarily liquidate our VIE without obtaining our prior consent, we could effectively prevent such unauthorized voluntary
liquidation by exercising our right to request the shareholders of our VIE to transfer 90.2077% of its equity ownership interests
to a PRC entity or individual designated by us in accordance with the Equity Option Agreements with the shareholders of our VIE.
In addition, under the Equity Pledge Agreement signed by Puhui Beijing and its Participating Shareholders and according to the
PRC Property Law, the shareholders of Puhui Beijing do not have the right to issue dividends to themselves or otherwise distribute
the retained earnings or other assets of Puhui Beijing without our consent. In the event that the shareholders of our VIE initiate
a voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or assets of our
VIE without our prior consent, we may need to resort to legal proceedings to enforce the terms of the contractual arrangements.
Any such litigation may be costly and may divert our management’s time and attention away from the operation of our business,
and the outcome of such litigation will be uncertain.
Our contractual arrangements with our VIE may result
in adverse tax consequences to us.
As a result of our corporate structure
and the contractual arrangements among our PRC subsidiary, our VIE, its Participating Shareholders and us, we are effectively
subject to the PRC value-added tax at rates from 3% to 6% and related surcharges on revenues generated by our subsidiary from
our contractual arrangements with our VIE. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its
annual enterprise income tax return together with a report on transactions with its affiliates or related parties to the relevant
tax authorities. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the
taxable year during which the transactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities
were to determine that the contracts between us and our VIE were not on an arm’s length basis and therefore constitute a
favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that our VIE and any of its subsidiaries
adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by reducing expense
deductions recorded by such VIE and thereby increasing the VIE’s tax liabilities, which could subject the VIE to late payment
fees and other penalties for the underpayment of taxes. Our consolidated net income may be materially and adversely affected if
our VIE’ tax liabilities increase or if either of them becomes subject to late payment fees or other penalties.
Substantial uncertainties exist
on how the Foreign Investment Law may impact the viability of our current corporate structure, corporate governance, business
operations and financial results.
The Ministry of Commerce, or the MOFCOM,
published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming, upon its enactment, to replace the
trio of existing laws regulating foreign investment in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the
Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its
foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic investments.
Among other things, the draft Foreign
Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining
whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides
that an entity established in China but “controlled” by foreign investors will be treated as an FIE, whereas an entity
set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOFCOM, treated as a PRC domestic investor
provided that the entity is “controlled” by PRC entities and/or citizens. In this connection, “control”
is broadly defined in the draft law to cover any of the following summarized categories: (i) holding 50% or more of the voting
rights or similar equity interest of the subject entity; (ii) holding less than 50% of the voting rights or similar equity interest
of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making
bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent
decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the
subject entity’s operations, financial matters or other key aspects of business operations. Once an entity is determined
to be an FIE, and if its investment amount exceeds certain thresholds or if its business operation falls within a “negative
list” to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts
will be required. Otherwise, all foreign investors may make investments on the same terms as Chinese investors without being subject
to additional approval from the government authorities as mandated by the existing foreign investment legal regime.
The “variable interest entity”
structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits
in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law,
a VIE that is controlled via contractual arrangements will also be deemed as an FIE, if it is ultimately “controlled”
by foreign investors. Therefore, for companies with a VIE structure in an industry category that is on the “negative list,”
the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either
PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities,
then the VIE will be treated as an FIE and any operation in the industry category on the “negative list” without market
entry clearance may be found illegal.
In December 2018, the Standing Committee
of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law, aiming to replace
the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft with slight revisions,
or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment Law, foreign investment
shall be subject to the negative list management system. The “negative list”, which is issued or approved by the State
Council, specifies the special management measures for the access of foreign investments in specific areas. If a foreign investor
is found to invest in any prohibited industry in the “negative list”, such foreign investor may be required to, among
other aspects, suspend its investment activities, dispose of its equity interests or assets in the target companies, and forfeit
its income. In addition, if a foreign investor is found to invest in any restricted industry in the “negative list”,
the relevant competent department shall require the foreign investor to take the measures to correct itself. However, the New Draft
Foreign Investment Law does not mention “actual control” as regulated in the previous draft and the position to be
taken with respect to existing or future companies with the “variable interest entity” structure.
On March 15, 2019, the Foreign Investment
Law of the People’s Republic of China, or the Foreign Investment Law, was finally issued and became effective on January
1, 2020. On December 12, 2019, the State Council approved the Regulation on Implementing the Foreign Investment Law, or the Implementation
Regulations, effective from January 1, 2020. On December 26, 2019, the Supreme People’s Court of China issued a judicial
interpretation on the Foreign Investment Law, effective from January 1, 2020, to ensure fair and efficient implementation of the
Foreign Investment Law. The judicial interpretation clarifies the issues regarding the validity of the investment contract violating
the restrictive or prohibitive requirements in the negative list. According to the judicial interpretation, courts in China shall
not, among other things, support contracted parties to claim foreign investment contracts in sectors not on the Special Administrative
Measures for Access of Foreign Investment as void because the contracts have not been approved by or registered with administrative
authorities. However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it is difficult to predict the outcome of a judicial or administrative proceeding, and such unpredictability
towards our contractual rights could adversely affect our business and impede our ability to continue our operations. The Foreign
Investment Law and Implementation Regulations embody an expected PRC regulatory trend to rationalize its foreign investment regulatory
regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
both foreign and domestic investments.
The Foreign Investment Law removes all references to the terms
of “actual control” or “contractual control” as defined in the draft published in 2015 by the MOFCOM. However,
the Foreign Investment Law has a catch-all provision under the definition of “foreign investment” which includes investments
made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by
the State Council. Therefore, it is uncertain whether any interpretation and implementation of the Foreign Investment Law or new
PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide.
If any laws or regulations relating to variable interest entity structures are issued and an updated “negative list”
mandates further actions, such as market entry clearance or certain restructuring of our corporate structure and operations, to
be completed by companies with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete
these actions in a timely manner, or at all, and our business and financial condition may be materially and adversely affected.
Risks Related to Doing Business in China
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of financial services businesses, service providers and financial
products we distribute.
The PRC government extensively regulates
the financial services industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies
in the financial services industry, including wealth management and asset management companies. These financial service-related
laws and regulations are evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain
circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws
and regulations. Issues, risks and uncertainties relating to PRC regulation of the financial services business include, but are
not limited to, the following:
|
●
|
there are uncertainties
related to the regulation of the wealth management and asset management business in China, including evolving licensing practices.
Operations at some of our subsidiaries and consolidated entities may be subject to challenge, or we may fail to obtain permits
or licenses that may be deemed necessary for our operations or we may not be able to obtain or renew certain permits or licenses;
and
|
|
●
|
the evolving PRC
regulatory system for the financial service industry may lead to the establishment of new regulatory agencies. If these new
laws, regulations or policies are promulgated, additional licenses may be required for our operations. If our operations do
not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these
new laws and regulations, we could be subject to penalties.
|
The interpretation and application of
existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the financial services
industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the
businesses and activities of, financial services businesses in China, including our business. There are also risks that we may
be found in violation of existing or future laws and regulations given the uncertainty and complexity of China’s regulation
of financial services business.
Besides, the regulations relating to financial
services or products may change, and as a result we may be required to discontinue the supply of certain wealth management products
that we currently distribute or cease managing certain products in our asset management business.
Adverse changes in the political
and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which
could adversely affect our business.
Substantially all of our assets are located
in China and substantially all of our revenues are derived from our operations there. Accordingly, our business, financial condition,
results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese
economy differs from the economies of most developed countries in many respects, including the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced
significant growth in the past 30 years, the growth has been uneven across different periods, regions and among various economic
sectors of China and the rate of growth has been slowing. We cannot assure you that the Chinese economy will continue to grow,
or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have
a negative effect on our business.
The PRC government also exercises significant
control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policies and providing preferential treatment to particular industries or companies. From late 2003
to mid-2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of China’s
statutory deposit reserve ratio and imposing commercial bank lending guidelines that had the effect of slowing the growth of credit,
which in turn may have slowed the growth of the Chinese economy. In response to the recent global and Chinese economic downturn,
the PRC government has promulgated several measures aimed at expanding credit and stimulating economic growth. Since August 2008,
the People’s Bank of China has decreased the statutory deposit reserve ratio and lowered benchmark interest rates several
times. Beginning in January 2010, however, the People’s Bank of China started to take measures including increasing the
statutory deposit reserve ratio and raised the benchmark interest rates several times in response to rapid growth of credit in
2009 and 2010. Since January 2011, the People’s Bank of China has continually increased the statutory deposit reserve ratio
and raising the benchmark interest rates. The increasing trend eased in December 2011 and the statutory deposit reserve ratio
was reduced twice in February and May 2012. In addition, in July 2013, the People’s Bank of China revoked the restriction
on loan interest rate of financial institutions. It is unclear whether PRC economic policies will be effective in stimulating
growth, and the PRC government may not be effective in achieving stable economic growth in the future. Any slowdown in the economic
growth of China could lead to reduced demand for the products we distribute or manage, which could materially and adversely affect
our business, as well as our financial condition and results of operations.
Uncertainties in the interpretation
and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
The PRC legal system is based on written
statutes and court decisions have limited precedential value. The PRC legal system is evolving rapidly, and the interpretation
of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves
uncertainties.
From time to time, we may have to resort
to administrative and court proceedings to enforce our legal rights. However, since PRC judicial and administrative authorities
have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult
to predict the outcome of a judicial or administrative proceeding than in more developed legal systems. Furthermore, the PRC legal
system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at
all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies
and rules. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could
adversely affect our business and impede our ability to continue our operations.
Adverse economic and market conditions
could negatively impact our business in many ways, including by reducing the value or performance of the investments made by us,
which could materially reduce our revenue and cash flow and adversely affect our financial condition.
We operate and conduct
fund raising activities in China and our business may be materially affected by unfavorable economic or market conditions or events
in China, that are outside of our control, including but not limited to, employment and investor confidence, changes in interest
rates, availability of credit, inflation rates, economic uncertainty, changes in laws, commodity prices, currency exchange rates
and controls and national and international political circumstances (including wars, terrorist acts or security operations). These
factors may affect the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure
to these market conditions and/or other events. For example, the continuously escalating trade war between the U.S. and China
may dampen growth of a wide range of China-based companies and cause impact on operating performance of our investment targets,
and may reduce our investment opportunities.
Economic, political and market conditions,
both in Hong Kong and worldwide, can adversely affect our business, results of operations and financial condition.
Our business is influenced
by a range of factors that are beyond its control and that it has no comparative advantage in forecasting. These include, among
others:
|
●
|
general economic
and business conditions;
|
|
|
|
|
●
|
overall demand for
our products and services; and
|
|
|
|
|
●
|
general legal, regulatory
and political developments.
|
While our operations are
mainly in mainland China, our business may be affected by political developments or events in China. Recently, there is uncertainty
as to the political, economic and social status of Hong Kong. Hong Kong’s evolving relationship with the PRC’s central
government in Beijing has been a source of political unrest that has periodically resulted in large-scale protests, including
those that have arisen since March 2019 in response to an extradition bill proposed by the Hong Kong government. These protests
have created disruptions for businesses operating in Hong Kong and have negatively impacted the overall economy. If the PRC were
to exert its authority to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor
and business confidence in Hong Kong and mainland China could be negatively affected, which in turn could negatively affect markets
and business performance and have an adverse effect on us.
Fluctuations in exchange rates could
have a material adverse effect on our results of operations and the value of your investment.
The value of Renminbi against the U.S.
dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign
exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of
Renminbi to the U.S. dollar, and Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between
July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a
narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is
difficult to predict how market forces or PRC or U.S. government policies may impact the exchange rate between Renminbi and the
U.S. dollar in the future.
To the extent that we need to convert
U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of Renminbi
against the U.S. dollar would have an adverse effect on Renminbi amount we would receive from the conversion. Conversely, if we
decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, strategic
acquisitions or investments or other business purposes, appreciation of the U.S. dollar against Renminbi would have a negative
effect on the U.S. dollar amount available to us.
The reporting currency of our company
is the U.S. dollar. However, the functional currency of our consolidated operating subsidiaries and variable interest entity is
the Renminbi and substantially all of their revenues and expenses are denominated in Renminbi. Fluctuations in exchange rates,
primarily those involving the U.S. dollar, may affect the relative purchasing power of these proceeds. In addition, appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate
will also affect the relative value of earnings from, and the value of any U.S. dollar-denominated investments we make in the
future.
Very limited hedging options are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure
or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability
to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your
investment.
Governmental control of conversion
of Renminbi into foreign currencies may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on
the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in Renminbi. Under our current corporate structure, our company may rely on dividend payments
from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”)
by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies
to us without prior approval from SAFE by complying with certain procedural requirements. But approval from or registration with
appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China
to pay capital expenses such as the repayment of loans denominated in foreign currencies, and we cannot assure you that the required
governmental approval or registration can be obtained or completed in time when such capital needs arise, or at all. The PRC government
may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may
not be able to pay dividends in foreign currencies to our shareholders.
PRC regulation of loans to, and
direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict
or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiary and consolidated entities
or to make additional capital contributions to our PRC subsidiary, which may materially and adversely affect our liquidity and
our ability to fund and expand our business.
We are an offshore holding company conducting
our operations in China through our PRC subsidiary and consolidated entities. In utilizing the proceeds that we received from
our initial public offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding
to our PRC subsidiary only through loans or capital contributions and to our consolidated entities only through loans.
Any loans by us to our PRC subsidiary,
which is treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations.
For example, loans by us to our wholly owned PRC subsidiary to finance their activities cannot exceed statutory limits and must
be registered with the local counterpart of the SAFE. If we decide to finance our wholly owned PRC subsidiary by means of capital
contributions, these capital contributions must be filed with or approved by the MOFCOM or its local counterpart. We may also
extend loans to our consolidated entities, which are treated as PRC domestic companies under PRC law, and loans with a term more
than one year must be approved by the National Development and Reform Commission, or the NDRC, and must also be registered with
the SAFE or its local branches, loans with term less than one year must be approved by the SAFE or its local branches.
On March 30, 2015, the SAFE issued the
Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises,
or SAFE Circular 19, which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises may either
continue to follow the current payment-based foreign currency settlement system or elect to follow the “conversion-at-will”
regime of foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will regime of foreign currency
settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time.
The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested
enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and
provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by
a foreign-invested enterprise of its RMB registered capital converted from foreign currencies. According to SAFE Circular 19,
such Renminbi capital may be used at the discretion of the foreign-invested enterprise and the SAFE will eliminate the prior approval
requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises like
our PRC subsidiary are still not allowed to extend intercompany loans to our PRC consolidated entities. In addition, as Circular
19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this
circular by relevant authorities.
In light of the various requirements imposed
by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 19,
we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government
approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or consolidated entities or with
respect to future capital contributions by us to our PRC subsidiary. Our failure to complete such registrations or obtain such
approvals may negatively affect our ability to use the proceeds we received from our initial public offering and to capitalize
or otherwise fund operations of our PRC operating entity, Puhui Beijing, and any other new subsidiaries we may establish in the
future for business purposes, which could materially and adversely affect our liquidity and our ability to fund and expand our
business.
Our PRC subsidiary and consolidated
entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy
our liquidity requirements.
We are a holding company incorporated
in the Cayman Islands. We rely on dividends from our PRC subsidiary as well as consulting and other fees paid to us by our consolidated
entities for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to
our shareholders, and service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us
only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition,
our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated
losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital.
These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiary and consolidated entities incur debt
on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other
payments to us, which may restrict our ability to satisfy our liquidity requirements.
In addition, the PRC Enterprise Income
Tax Law and its amendment, or the EIT Law, and its implementation rules provide that withholding tax rate of 10% will be applicable
to dividends payable by PRC companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises
are incorporated.
China’s M&A Rules and
certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors, which
could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, or M&A Rules, and other recently adopted regulations and rules concerning mergers
and acquisitions in China established additional procedures and requirements that could make merger and acquisition activities
by foreign investors more time consuming and complex. For example, the M&A Rules require that the MOFCOM be notified in advance
of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important
industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such
transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand.
Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007
and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified
turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the
transaction exceeds RMB10.0 billion (US$1.4 billion) and at least two of these operators each had a turnover of more than RMB400.0
million (US$57.6 million) within China, or (ii) the total turnover within China of all the operators participating in the concentration
exceeded RMB2.0 billion (US$0.3 billion), and at least two of these operators each had a turnover of more than RMB400.0 million
(US$57.6 million) within China) must be cleared by the MOFCOM before they can be completed. In addition, on February 3, 2011,
the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the Circular 6, which officially established a security review system for mergers
and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, the MOFCOM promulgated the Regulations
on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the
MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement the Circular 6. Under Circular 6,
a security review is required for mergers and acquisitions by foreign investors having “national defense and security”
concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises
with “national security” concerns. Under the MOFCOM Security Review Regulations, the MOFCOM will focus on the substance
and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If
the MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial
Panel, an authority established under the Circular 6 led by the NDRC and the MOFCOM under the leadership of the State Council,
to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions
through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There
is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the wealth
management or asset management business requires security review.
In the future, we may grow our business
by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules
to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from
the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. The M&A Rules require
a foreign investor to obtain the approval from the MOFCOM or its local counterpart only upon (i) its acquisition of a domestic
enterprise’s equity interest; (ii) its subscription of the increased capital of a domestic enterprise; or (iii) establishes
and operates a foreign-invested enterprise with assets acquired from a domestic enterprise. It is unclear whether our business
would be deemed to be in an industry that raises “national defense and security” or “national security”
concerns. However, the MOFCOM or other government agencies may publish explanations in the future determining that our business
is in an industry subject to the security review, in which case our future acquisitions in China, including those by way of entering
into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC
subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s
ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.
The SAFE has promulgated several regulations
that require PRC residents and PRC corporate entities to register with and obtain approval from local branches of the SAFE in
connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC
residents and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations,
PRC residents who make, or have previously made, prior to the implementation of these foreign exchange regulations, direct or
indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is
a direct or indirect shareholder of an offshore company is required to update the previously filed registration with the local
branch of the SAFE, with respect to that offshore company, to reflect any material change involving its round-trip investment,
capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger or division. If any PRC shareholder
fails to make the required registration or update the previously filed registration, the PRC subsidiary of that offshore parent
company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation
to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into
its PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above could
result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We have requested PRC residents holding
direct or indirect interest in our company to our knowledge to make the necessary applications, filings and amendments as required
by these foreign exchange regulations. Such PRC resident shareholders and beneficial owners have completed their initial registrations
in relation to their ownership in our company required by foreign exchange regulations. However, we may not be informed of the
identities of all the PRC residents holding direct or indirect interests in our company, and we cannot provide any assurances
that all of our shareholders and beneficial owners who are PRC residents will make, obtain or update any applicable registrations
or approvals required by these foreign exchange regulations. The failure or inability of our PRC resident shareholders to make
such registration or truthfully disclose actual controllers of the round-trip enterprises may subject PRC residents to fines up
to RMB300,000 in case of domestic institutions or RMB50,000 in case of domestic individuals. If the PRC resident shareholders
do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their
profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company
may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE
registration and amendment requirements described above could result in liability under PRC law for violating applicable foreign
exchange restrictions.
However, as there is uncertainty concerning
the reconciliation of these foreign exchange regulations with other approval requirements, it is unclear how these regulations,
and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy.
For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities,
such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations
and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners
of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely
affect our business and prospects.
Failure to comply with PRC regulations
regarding the registration of outbound direct investment may subject us or our actual controller to fines and legal or administrative
sanctions.
In December 2017, Puhui Beijing invested
in a SSLJ.com Limited’s convertible note in the amount of $1,075,814. Puhui Beijing entrusted Zhe Ji, our Chief Executive
Officer and Chairman, to hold shares on behalf of Puhui Beijing. In accordance with the Regulations of the People’s Republic
of China on Foreign Exchange Control and other relevant regulations promulgated by SAFE, the above deal structure may be considered
as an individual direct foreign investment, and also may be identified as an actual foreign investment of Puhui Beijing in substance
by SAFE.
According to the relevant regulations
made by SAFE, any domestic organization or individual that seeks to make a direct investment overseas or engage in the issuance
or trading of negotiable securities or derivatives overseas shall make the appropriate registrations in accordance with State
Council foreign exchange administrative department provisions. Zhe Ji and Puhui Beijing had not completed the outbound direct
investment registration or complied with other SAFE registration requirements when the investment was completed. Therefore, there
is a possibility that Puhui Beijing and Zhe Ji may be ordered by SAFE to remit the foreign exchange involved back to China within
a specified period of time and impose a fine of up to 30% of the foreign exchange amount for which foreign exchange controls have
been evaded. Where the circumstances of the case are serious, a fine of between 30% and 100% of the foreign exchange for which
foreign exchange controls have been evaded shall be imposed on the organization or individual concerned.
Failure to comply with PRC regulations
regarding the registration of share options held by our employees who are “domestic individuals” may subject such
employee or us to fines and legal or administrative sanctions.
Pursuant to Notices on Issues concerning
the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed
Company issued by the SAFE in February 2012, or the Stock Incentive Plan Rules, “domestic individuals” (both PRC residents
and non-PRC residents who reside in China for a continuous period of not less than one year, excluding the foreign diplomatic
personnel and representatives of international organizations) participating in any stock incentive plan of an overseas listed
company according to its stock incentive plan are required, through qualified PRC agents which could be the PRC subsidiary of
such overseas-listed company, to register with the SAFE and complete certain other procedures related to the stock incentive plan.
We and our employees, who are “domestic
individuals” and will be granted share options, or the PRC optionees, are subject to the Stock Incentive Plan Rules. We
will complete the registration as required under the Stock Incentive Plan Rules and other relevant SAFE registrations and plan
to update the registration on an ongoing basis in the future. If we or our PRC optionees fail to comply with the Individual Foreign
Exchange Rule and the Stock Incentive Plan Rules, we and/or our PRC optionees may be subject to fines and other legal sanctions.
We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and
employees under PRC law. In addition, the General Administration of Taxation has issued a few circulars concerning employee stock
options. Under these circulars, our employees working in China who exercise stock options will be subject to PRC individual income
tax. Our PRC subsidiary has obligations to file documents related to employee stock options with relevant tax authorities and
withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay and we fail
to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities. Furthermore,
there are substantial uncertainties regarding the interpretation and implementation of the Individual Foreign Exchange Rule and
the Stock Incentive Plan Rules.
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
If our PRC subsidiary and consolidated
entities plan to engage in promoting or distributing wealth management plans through the Internet, or allow our clients to purchase
wealth management products on any of our websites, such business is likely to be deemed as a value-added telecommunications service
and call for approvals from relevant authorities. The PRC government extensively regulates the internet industry, including foreign
ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related
laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties.
As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation
of applicable laws and regulations.
The interpretation and application of
existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have
created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and
activities of, internet businesses in China, including our internet-based business. We cannot assure you that we have obtained
all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or
obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates
new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of
any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material adverse effect on our business and results of operations.
The dividends we receive from our
PRC subsidiary may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on
our financial condition and results of operations. In addition, 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.
Pursuant to the EIT Law, dividends generated
after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors are subject to a 10% withholding
tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding arrangement. We are a Cayman Islands holding company and substantially all of our income may come from dividends we
receive, directly or indirectly, from our wholly foreign-owned PRC subsidiary. Since there is currently no such tax treaty between
China and the Cayman Islands, dividends we directly receive from our wholly foreign-owned PRC subsidiary will generally be subject
to a 10% withholding tax.
In addition, under the Arrangement between
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, 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 to 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. Accordingly, HZF (HK) Limited may
be able to enjoy the 5% withholding tax rate for the dividends it receives from Puhui Beijing, if Puhui Beijing satisfies the
conditions prescribed in relevant tax rules and regulations, and obtain the approvals as required. However, if the Hong Kong resident
enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividends
may remain subject to withholding tax at a rate of 10%. If HZF (HK) Limited is considered to be a non-beneficial owner for purposes
of the tax arrangement, any dividends paid to them by our wholly foreign-owned PRC subsidiary directly would not qualify for the
preferential dividend withholding tax rate of 5%, but rather would be subject to a rate of 10%.
Furthermore, under the EIT Law and its
implementation rules, an enterprise established outside of China with “de facto management body” within the PRC is
considered a PRC resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%.
We do not believe that we or any of our respective subsidiaries outside of China would be a PRC resident enterprise as of January
22, 2018. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties
remain with respect to the interpretation of the term “de facto management body”. If the PRC tax authorities determine
that we were a PRC resident enterprise for tax purposes, we would be subject to a 25% enterprise income tax on their global income.
In addition, if we were considered a PRC resident enterprise for tax purposes, we may be required to withhold a 10% withholding
tax from dividends we pay to our shareholders that are non-PRC resident enterprises. Furthermore, non-PRC resident enterprise
shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income
is treated as sourced from within China. It is unclear whether our non-PRC individual shareholders would be subject to any PRC
tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident
enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced
rate is available under an applicable tax treaty. However, it is also unclear whether our non-PRC shareholders would be able to
claim the benefits of any tax treaties between their country of tax residence and China in the event that we are considered as
a PRC resident enterprise.
If we were required under the EIT Law
to withhold such PRC income tax, your investment in our ordinary shares may be materially and adversely affected.
We face uncertainty with respect
to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC
company, or immovable properties located in China owned by a non-PRC company.
We face uncertainties on the reporting
and consequences on private equity financing transactions, private share exchange transactions and private transfer of shares,
including private transfer of public shares, in our company by non-resident investors. On February 3, 2015, the State Taxation
Administration (“SAT”) issued Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Property
Transfers by Non-RPC Resident Enterprises, or SAT Notice No. 7, to supersede the existing tax rules in relation to the tax treatment
of the Indirect Transfer. SAT Notice No. 7 was partly superseded by the Announcement of the State Administration of Taxation on
Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or SAT Announcement 37. SAT Notice No. 7 introduces
a new tax regime and extends the SAT’s tax jurisdiction to capture not only the Indirect Transfer but also transactions
involving indirect transfer of (i) real properties in China and (ii) assets of an “establishment or place” situated
in China, by a non-PRC resident enterprise through a disposition of equity interests in an overseas holding company. SAT Notice
No. 7 also extends the interpretation with respect to the disposition of equity interests in an overseas holding company. In addition,
SAT Notice No. 7 further clarifies how to assess reasonable commercial purposes and introduces safe harbors applicable to internal
group restructurings. However, it also brings challenges to both the foreign transferor and transferee as they are required to
make self-assessment on whether an Indirect Transfer or similar transaction should be subject to PRC tax and whether they should
file or withhold any tax payment accordingly. SAT Announcement 37 also clarifies many other implement matters on Issues Relating
to Withholding at Source of Income Tax of Non-resident Enterprises.
However, as these notices are relatively
new and there is a lack of clear statutory interpretation, we face uncertainties on the reporting and consequences on future private
equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors
that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets
by us, our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our
company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding
obligations if our company and other non-resident enterprises in our group are transferees in such transactions. For the transfer
of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in
the filing under the rules and notices. We may be required to expend costly resources to comply with SAT Notice No. 7, or to establish
a case to be tax exempt under SAT Notice No. 7, which may cause us to incur additional costs and may have a negative impact on
the value of your investment in us.
The PRC tax authorities have discretion
under SAT Notice No. 7 and SAT Announcement 37 to make adjustments to the taxable capital gains based on the difference between
the fair value of the transferred equity interests and the investment cost. We may pursue acquisitions in the future that may
involve complex corporate structures. If we are considered as a non-PRC resident enterprise under the EIT Law and if the PRC tax
authorities make adjustments to the taxable income of the transactions under SAT Notice No. 7 and SAT Announcement 37, our income
tax expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our financial
condition and results of operations.
If the custodians or authorized
users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC law, legal documents for corporate
transactions, including contracts such as consulting service agreements we enter into with wealth management product providers,
which are important to our business, are executed using the chops (a Chinese stamp or seal) or seals of the signing entity, or
with the signature of a legal representative whose designation is registered and filed with the relevant branch of the SAIC.
Although we usually utilize chops to enter
into contracts, the designated legal representatives of each of our PRC subsidiary and consolidated entities have the power to
enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of
our PRC subsidiary and consolidated entities have signed employment undertaking letters with us or our PRC subsidiary and consolidated
entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of our chops
and the chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel
of each of our PRC subsidiary and consolidated entities. Although we monitor such authorized personnel, there is no assurance
such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate
our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience
significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain
control over any of our PRC subsidiary or consolidated entities, we, our PRC subsidiary or consolidated entities would need to
pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek
the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation
of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management
attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are
sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority
of the representative and acts in good faith.
Increases in labor costs and enforcement
of stricter labor laws and regulations in China may adversely affect our business and our profitability.
China’s overall economy and the
average wage in China have increased in recent years and are expected to continue to grow. The average wage level for our employees
has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to pass on these increased labor costs to the product providers or corporate borrowers who pay for our services,
our profitability and results of operations may be materially and adversely affected.
In addition, we have been subject to stricter
regulatory requirements in terms of entering labor contracts with our employees and paying various statutory employee benefits,
including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance
to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract
law, that became effective in January 2008, as amended on December 28, 2012 and effective as of July 1, 2013, and its implementation
rules that became effective in September 2008, employers are subject to stricter requirements in terms of signing labor contracts,
minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts.
In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor
Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner,
which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National
People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July
1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance,
medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately,
pay the social insurance premiums for such employees.
As the interpretation and implementation
of labor-related laws and regulations are still evolving, we cannot assure you that our employment practices do not and will not
violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we
are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our
employees and our business, financial condition and results of operations could be materially and adversely affected.
Risks Related to Our Ordinary Shares
Our ordinary shares may be thinly
traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Our ordinary shares may be “thinly-traded”
on NASDAQ, meaning that the number of persons interested in purchasing our ordinary shares at or near bid prices at any given
time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that
we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that
generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and
might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time
as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our ordinary
shares may not develop or be sustained.
The market price for our ordinary
shares may be volatile.
The market price for our ordinary shares
may be volatile and subject to wide fluctuations due to factors such as:
|
●
|
the perception of
U.S. investors and regulators of U.S. listed Chinese companies;
|
|
●
|
actual or anticipated
fluctuations in our operating results;
|
|
●
|
changes in financial
estimates by securities research analysts;
|
|
●
|
negative publicity,
studies or reports;
|
|
●
|
conditions in the
Chinese wealth management industry;
|
|
●
|
changes in the economic
performance or market valuations of other wealth management companies;
|
|
●
|
announcements by
us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
●
|
addition or departure
of key personnel;
|
|
●
|
fluctuations of
exchange rates between RMB and the U.S. dollar; and
|
|
●
|
general economic
or political conditions in China.
|
In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. These market fluctuations may also materially and adversely affect the market price of our ordinary shares.
Volatility in our ordinary shares
price may subject us to securities litigation.
The market for our ordinary shares may
have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more
volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class
action litigation against a company following periods of volatility in the market price of its securities. We may, in the future,
be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
NASDAQ may delist our securities
from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.
Our ordinary shares are currently listed
on NASDAQ. However, we cannot assure you that our ordinary shares will continue to be listed on NASDAQ in the future. If NASDAQ
delists our ordinary shares from trading on its exchange and we are not able to list our ordinary shares on another national securities
exchange, we expect our ordinary shares could be quoted on an over-the-counter market. If this were to occur, we could face significant
material adverse consequences, including:
|
●
|
a limited availability
of market quotations for our ordinary shares;
|
|
|
|
|
●
|
reduced liquidity
for our ordinary shares;
|
|
|
|
|
●
|
a determination
that our ordinary shares are a “penny stock” which will require brokers trading in the our ordinary shares to
adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market
for our ordinary shares;
|
|
|
|
|
●
|
a limited amount
of news and analyst coverage; and
|
|
|
|
|
●
|
a decreased ability
to issue additional securities or obtain additional financing in the future.
|
In order to raise sufficient funds
to enhance operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders.
If we raise additional funds through the
sale of equity or convertible debt, our current shareholders’ percentage ownership will be reduced. In addition, these transactions
may dilute the value of ordinary shares outstanding. We may have to issue securities that may have rights, preferences and privileges
senior to our ordinary shares. We cannot provide assurance that we will be able to raise additional funds on terms acceptable
to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our
future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial
condition.
We are not likely to pay cash dividends
in the foreseeable future.
We currently intend to retain any future
earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any cash dividends in the
foreseeable future. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends
or other payments from WFOE. WFOE may, from time to time, be subject to restrictions on its ability to make distributions to us,
including restrictions on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.
You may face difficulties in protecting
your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the
United States and it may be difficult for a shareholder to effect service of process or to enforce judgments obtained in the United
States courts.
Our corporate affairs are governed by
our Memorandum and Articles of Association and by the Companies Law (2018 Revision) of the Cayman Islands (the “Companies
Law”) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us,
actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large
extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively
limited judicial precedent in the Cayman Islands as well as from English common law, which are generally of persuasive authority
but are not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of
our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in
the United States. In particular, the Cayman Islands has a different body of securities laws as compared to the United States,
and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate
a shareholder derivative action before the United States federal courts. There is no statutory recognition in the Cayman Islands
of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize
and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Currently, substantially all of our operations
are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our
officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are
located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the
United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands may render you unable to enforce
a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of
the Cayman Islands, see “Enforceability of Civil Liabilities.”
As a result of all of the above, our shareholders
may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Our Articles of Association provides
to that the courts of the Cayman Islands shall be the sole and exclusive forum for any derivative action or proceeding brought
on behalf of the Company, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the Company
to the Company or the Company’s shareholders, any action asserting a claim against the Company arising pursuant to any provision
of the Companies Law, the Memorandum of Association of the Company or the Articles of Association of the Company, and any action
asserting a claim against the Company in respect of shareholders’ rights as shareholders or distributions of dividends and,
if brought outside of the Cayman Islands, the shareholder bringing the suit will, subject to certain exceptions, be deemed to
have consented to service of process on such stockholder’s counsel, which may have the effect of discouraging lawsuits against
our directors, officers, other employees or stockholders.
Our Articles of Association provides that
the courts of the Cayman Islands shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on
behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the
Company to the Company or the Company’s shareholders, (iii) any action asserting a claim against the Company arising pursuant
to any provision of the Companies Law, the Memorandum of Association of the Company or the Articles of Association of the Company,
and (iv) any action asserting a claim against the Company in respect of shareholders’ rights as shareholders or distributions
of dividends. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that
it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against
us and our directors, officers and employees. Alternatively, a court, including a Cayman Islands court, could find these provisions
of our Articles of Association to be inapplicable or unenforceable in respect of one or more of the specified types of actions
or proceedings, which may require us to incur additional costs associated with resolving such matters in other jurisdictions,
which could adversely affect our business and financial condition.
Section 27 of the Exchange Act creates
exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules
and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or
liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 22
of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty
or liability created by the Securities Act or the rules and regulations thereunder. We note that there is uncertainty as to whether
a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules
and regulations thereunder. This forum selection provision may limit our shareholders' ability to obtain a judicial forum that
they find favorable for disputes with us or our directors, officers or other employees or unitholders.
We are a foreign private issuer
within the meaning of the rules under the Securities Exchange Act of 1934(“Exchange Act”), and as such we are exempt
from certain provisions applicable to United States domestic public companies.
We are a foreign private issuer within
the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable to United States domestic
public companies. For example:
|
●
|
we are not required
to provide as many Exchange Act reports, or as frequently, as a domestic public company;
|
|
●
|
Subject to NASDAQ
rules, for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous
than the rules that apply to domestic public companies;
|
|
●
|
we are not required
to provide the same level of disclosure on certain issues, such as executive compensation;
|
|
●
|
we are exempt from
provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material non-public information;
|
|
●
|
we are not required
to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect
of a security registered under the Exchange Act; and
|
|
●
|
our insiders are
not required to comply with Section 16 of the Exchange Act requiring such insiders to file public reports of their share ownership
and trading activities and establishing insider liability for profits realized from any “short-swing” trading
transaction.
|
We currently intend to file annual reports
on Form 20-F and reports on Form 6-K as a foreign private issuer. Accordingly, our shareholders may not have access to certain
information they may deem important.
We are an “emerging growth
company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements
available to emerging growth companies, this could make it more difficult to compare our performance with other public companies.
We are an “emerging growth company”
within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act exempts emerging growth
companies from being required to comply with new or revised financial accounting standards until private companies (that is, those
that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under
the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a
company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth
companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period,
which means that when a standard is issued or revised and it has different application dates for public or private companies,
we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised
standard. This may make comparison of our financial statements with another public company which is neither an emerging growth
company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because
of the potential differences in accountant standards used.
For as long as we remain an “emerging
growth company” we will elect to take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies that are not “emerging growth companies”, including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding
advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Because
of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders
of more mature companies. If some investors find our ordinary shares less attractive as a result, there may be a less active trading
market for our ordinary shares and our share price may be more volatile.
If we are classified as a passive
foreign investment company, United States taxpayers who own our ordinary shares may have adverse United States federal income
tax consequences.
A non-U.S. corporation such as ourselves
will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year,
either:
|
●
|
at least 75% of
our gross income for the year is passive income; or
|
|
●
|
the average percentage
of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held
for the production of passive income is at least 50%.
|
Passive income generally includes dividends,
interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains
from the disposition of passive assets.
If we are determined to be a PFIC for
any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our ordinary shares,
the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
It is possible that, for current taxable
year or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We will make this determination
following the end of any particular tax year. Although the law in this regard is unclear, we treat our WFOE as being wholly owned
by us for United States federal income tax purposes, not only because we exercise effective control over the operation of the
WFOE but also because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate their operating
results in our consolidated financial statements. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed
to own its pro rata share of the gross income and assets of a corporation in which it is considered to own at least 25% of the
equity by value.
We incur increased costs as a result
of being a public company.
We have incurred significant legal, accounting
and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as
rules subsequently implemented by the SEC and NASDAQ Capital Market, impose various requirements on the corporate governance practices
of public companies. We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth
company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our
initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed
to be a large accelerated filer, which means the market value of our ordinary shares that is held by non-affiliates exceeds $700
million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during
the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements
that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement
under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission
to delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Compliance with these rules and regulations
increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costly. After we
are no longer an “emerging growth company,” or until five years following the completion of our initial public offering,
whichever is earlier, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance
with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have
been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls
and procedures. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur
additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified
persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with
respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional
costs we may incur or the timing of such costs.
ITEM 4.
|
INFORMATION ON THE COMPANY
|
History and Development of the Company
We operate in China through Puhui Beijing,
formed on September 24, 2013 under the PRC laws. We incorporated Puhui Wealth Investment Management Co., Ltd. under the laws of
the Cayman Islands as our offshore holding company on November 30, 2017. Puhui Wealth Investment Management Co., Ltd. owns 100%
of the equity interest in PCZ Limited, a company formed under the laws of the British Virgin Islands on December 6, 2017. Through
PCZ Limited, we indirectly own 100% of the equity interest in HZF (HK) Limited, a Hong Kong company established on December 18,
2017. Rucong, a wholly owned PRC subsidiary of HZF (HK) Limited established on January 30, 2018, entered into a series of agreements
with Puhui Beijing and the majority of Puhui Beijing’s shareholders, through which we effectively control 90.21% of Puhui
Beijing and derive 90.21% of the economic interest from Puhui Beijing. As consideration for entry into such agreements, such shareholders
of Puhui Beijing received an aggregate of 10,000,000 ordinary shares of our company.
On July 8, 2014, Shanghai Pucai was incorporated
under PRC laws as a wholly-owned subsidiary of Puhui Beijing. On October 29, 2015, Qingdao Puhui was incorporated under PRC laws
as a wholly-owned subsidiary of Puhui Beijing. On April 27, 2017, Shanghai Ruyue Enterprise Management Consulting Co., Ltd. (“Shanghai
Ruyue”) was incorporated under PRC laws as a wholly-owned subsidiary of Puhui Beijing.
Until June 2016, Finup Group (previously
known as Puhui Finance Wealth Management Co., Ltd.), or Finup, was Puhui Beijing’s sole shareholder. Finup transferred (i)
62.11% shares of Puhui Beijing pursuant to an equity transfer agreement with, Xizang Rongshun Consulting Partnership Enterprise
(Limited Partnership) (“Xizang Rongshun”), Banyan Capital (Shenzhen) Investment Center (Limited Partnership) (“Banyan”),
Shanghai Fengsui Investment Management Co., Ltd. (“Fengsui”), and Qianyi Investment Management (Shanghai) Co., Ltd.
(“Qianyi”) dated June 28, 2016 and (ii) 37.89% shares of Puhui Beijing pursuant to another equity transfer agreement
with Dongfang Henghui, Fengsui, Xizang Rongshun and Banyan dated October 14, 2016. As a result of the above equity transactions,
Finup transferred 100% of its equity interest in Puhui Beijing. Puhui Beijing started its own business of wealth management advisory.
Puhui Wealth Investment Management Co.,
Ltd. is a Cayman Islands holding company that conducts its business in China through its subsidiary and variable interest entity,
Puhui Beijing. We may rely on dividends from our wholly foreign-owned subsidiary in China for our cash requirements.
We listed our ordinary shares on the Nasdaq
Capital Market under the symbol “PHCF” and completed an initial public offering of 1,507,558 ordinary shares on December
27, 2018 (“IPO”), raising over US$9 million before expenses and underwriting commissions payable by us.
Our principal executive offices are located at Room 801, 802,
8th Floor, W1 Office Building, Oriental Commerce Tower,No.1 Chang An Street, Dong Cheng District, Beijing, PRC 100006. Our telephone
number at this address is (+86) 10 53605158. Our registered office in the Cayman Islands is located at the offices of Sertus Incorporations
(Cayman) Limited, Sertus Chambers, Governors Square, Suite #5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, Grand Cayman, KYI-1104.
Our agent for service of process in Law
Debenture Corporate Services Inc. located at 801 2nd Avenue, Suite 403, New York, NY 10017. Investors should contact us for any
inquiries through the address and telephone number of our principal executive offices.
Organizational Structure Chart
The following diagram illustrates our
corporate structure, including our subsidiaries and consolidated affiliated entities, as of the date of this Report:
(1)
|
Beijing Synergetic
SIFT Asset Management Company Limited is not a party to any of the VIE Agreements.
|
(2)
|
Beijing Ruyue Jiahe
Management Consulting Co., Ltd owns 70% of Beijing Fenghui Management Consulting Co., Ltd. (“Beijing Fenghui”)
and Beijing Lingsheng Chuangyuan Management Consulting Co., Ltd. (“Beijing Lingsheng”).
|
Variable Interest Entity Arrangements
In establishing our business, we have
used a VIE structure. In the PRC, investment activities by foreign investors are principally governed by the Guidance Catalog
of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the MOFCOM and
the PRC National Development and Reform Commission, or NDRC. The Catalog divides industries into three categories: encouraged,
restricted and prohibited. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted
by other PRC regulations. Our company and Rucong are considered as foreign investors or foreign invested enterprises under PRC
law. The provision of market surveys business, which we conduct through our VIE, is within the category under the Catalog in which
foreign investment is currently restricted, which makes a VIE structure necessary. In addition, we currently hold licenses to
act as fund managers of private equity products through our VIE, which may be hard to maintain if we are considered as foreign-invested
enterprises in practice. In addition, we intend to centralize our management and operation in the PRC without being restricted
to conduct certain business activities which are important for our current or future business but are restricted or might be restricted
in the future. As such, we believe the agreements between Rucong and Puhui Beijing are essential for our business operation. These
contractual arrangements with Puhui Beijing and its major shareholders enable us to exercise effective control over Puhui Beijing
and hence consolidate its financial results as our VIE.
In our case, Rucong effectively assumed
management of the business activities of Puhui Beijing through a series of agreements which are referred to as the VIE Agreements.
The VIE Agreements are comprised of a series of agreements, including Equity Pledge Agreements, a Technical Consultation and Service
Agreement, a Business Cooperation Agreement, Equity Option Agreements, and Voting Rights Proxy and Finance Supporting Agreements.
Through the VIE Agreements, Rucong has the right to advise, consult, manage and operate Puhui Beijing for an annual consulting
service fee in the amount of 90.2077% of Puhui Beijing’s net profit (9.7923% of the equity owned by SIFT will not be part
of the VIE structure). Beijing Dongfang Henghui Consulting Center (Limited Partnership), Beijing Dongfang Puzhong Consulting Center
(Limited Partnership), Beijing Huicai Hengyun Consulting Center (Limited Partnership), Xizang Rongshun and Banyan (each a “Beijing
Puhui Shareholder”, collectively, the “Puhui Beijing Shareholders” or “Participating Shareholders”)
have each pledged all of their right, title and equity interests in Puhui Beijing as security for Rucong to collect consulting
services fees provided to Puhui Beijing through the Equity Pledge Agreement. In order to further reinforce Rucong’s rights
to control and operate Puhui Beijing, the Puhui Beijing Shareholders have granted Rucong an exclusive right and option to acquire
all of their equity interests in Puhui Beijing through the Equity Option Agreement.
The VIE Agreements are detailed below as follows:
Technical Consultation and Service
Agreement. Pursuant to the Technical Consultation and Service Agreement between Rucong and Puhui Beijing dated January 30,
2018, Rucong has the exclusive right to provide consultation and services to Puhui Beijing in the area of fund, human, technology
and intellectual property rights. For such services, Puhui Beijing agrees to pay service fees in the amount of 90.2077% of its
net income and also has the obligation to absorb 90.2077% of Puhui Beijing’s losses. Rucong exclusively owns any intellectual
property rights arising from the performance of this Technical Consultation and Service Agreement. The amount of service fees
and payment term can be amended by Rucong and Puhui Beijing’s consultation and the implementation. The term of the Technical
Consultation and Service Agreement is 20 years. Rucong may terminate this agreement at any time by giving 30 days’ written
notice to Puhui Beijing.
Business Cooperation Agreement.
Pursuant to the Business Cooperation Agreement between Rucong and Puhui Beijing dated January 30, 2018, Rucong has the exclusive
right to provide Puhui Beijing with technical support, business support and related consulting services, including but not limited
to technical services, business consultations, equipment or property leasing, marketing consultancy, system integration, product
research and development, and system maintenance. In exchange, Rucong is entitled to a service fee that equals to 90.2077% of
the net income of Puhui Beijing determined by U.S. GAAP, the service fees may be adjusted based on the services rendered by Rucong
in that month and the operational needs of Puhui Beijing. Rucong also exclusively owns any intellectual property rights arising
from the performance of the Business Cooperation Agreement. The Business Cooperation Agreement shall remain effective unless it
is terminated or is compelled to terminate under applicable PRC laws and regulations. Rucong may terminate this Business Cooperation
Agreement at any time by giving 30 days’ prior written notice to Puhui Beijing.
Equity Pledge Agreement. Pursuant
to a series of Equity Pledge Agreements among Rucong, Puhui Beijing and Puhui Beijing Shareholders dated January 30, 2018, Puhui
Beijing Shareholders pledged all of their equity interests in Puhui Beijing to Rucong to guarantee Puhui Beijing’s performance
of relevant obligations and indebtedness under the Technical Consultation and Service Agreement and other control agreements (“Control
Agreement”). In addition, Puhui Beijing Shareholders have completed the registration of the equity pledge under the Equity
Pledge Agreement with the competent local authority. If Puhui Beijing breaches its obligation under the Control Agreement, Rucong,
as pledgee, will be entitled to certain rights, including the right to dispose the pledged equity interests in order to recover
these breached amounts. The Equity Pledge Agreements shall be continuously valid until all of the Puhui Beijing Shareholders are
no longer shareholders of Puhui Beijing or the satisfaction of all its obligations by Puhui Beijing under the Control Agreements.
Equity Option Agreement. Pursuant
to a series of Equity Option Agreements among Rucong, Puhui Beijing and Puhui Beijing Shareholders dated January 30, 2018, Rucong
has the exclusive right to require the Puhui Beijing Shareholders to fulfill and complete all approval and registration procedures
required under PRC laws for Rucong to purchase, or designate one or more persons to purchase, Puhui Beijing Shareholders’
equity interests in Puhui Beijing, once or at multiple times at any time in part or in whole at Rucong’s sole and absolute
discretion. The purchase price shall be the lowest price allowed by PRC laws (currently estimated to be RMB 1.00). The Equity
Option Agreements shall remain effective until all the equity interest owned by each Puhui Beijing Shareholder has been legally
transferred to Rucong or its designee(s).
Voting Rights Proxy and Finance Supporting
Agreement. Pursuant to the Voting Rights Proxy and Finance Supporting Agreements among Rucong, Puhui Beijing and Puhui Beijing
Shareholders dated January 30, 2018, each Puhui Beijing Shareholder irrevocably appointed Rucong or Rucong’s designee to
exercise all his or her rights as Puhui Beijing Shareholders under the Articles of Association of Puhui Beijing, including but
not limited to the power to exercise all shareholders’ voting rights with respect to all matters to be discussed and voted
in the shareholders’ meeting of Puhui Beijing. The term of the Voting Rights Proxy and Finance Supporting Agreements is
20 years.
Capital Expenditures
We incurred capital expenditures of approximately
$288,000, $160,000, and $133,000 for the years ended June 30, 2020, 2019 and 2018, respectively, primarily for the purchase of
equipment and leasehold improvements. In fiscal year 2020, we also paid approximately $3.4 million in connection with our acquisition
prepayment in a Hong Kong based financial services company. We closed the acquisition in December 2020.
We expect that our capital expenditures
in fiscal year 2020 will be incurred primarily in connection with leasehold improvements, office equipment and the remaining balance
on our acquisition.
Business Overview
We are a third-party wealth management
service provider focusing on marketing financial products to, and managing funds for, individuals and corporate clients in the
PRC. Our main operating activities are carried out through our VIE, Puhui Beijing, and its subsidiaries.
From its inception in 2013 to October
2016, Puhui Beijing was the investment advisory subsidiary of Finup, which is primarily engaged in internet financial services,
including peer-to-peer, or P2P, lending business in China. Puhui Beijing marketed Finup’s products primarily to retail investors
with low transaction amounts, ranging from approximately $150 to approximately $10,000. Puhui Beijing charged Finup one-time commissions
equal to a percentage of loan proceeds invested by its clients at the time of loan issuance. The commissions Puhui Beijing received
from Finup, and one of its former shareholders, Shanghai Fengsui, accounted for substantially all of Puhui Beijing’s revenues
prior to October 2016.
Due to new regulations promulgated by
the China Banking Regulatory Commission in December 2015, which placed certain limitations on the P2P lending industry in China,
we anticipated that our commissions from Finup would substantially decrease starting in 2016. Our management team decided to change
our business focus from marketing P2P loans to retail customers to marketing financial products developed by financial institutions
to high net worth and corporate clients.
From June 2016 to October 2016, Finup
underwent a reorganization, pursuant to which Finup entered into various equity transfer agreements with the shareholders of Puhui
Beijing pursuant to which such shareholders acquired all of Finup’s interests in Puhui Beijing. Consequently, following
the registration of Puhui Beijing’s shareholders with the SAIC on November 16, 2016, Finup’s ownership of Puhui Beijing
terminated. One of Puhui Beijing’s five shareholders, Shanghai Fengsui, subsequently sold its ownership to Puhui Beijing’s
majority shareholder, Beijing Dongfang Henghui, an affiliate of Mr. Zhe Ji, our Chief Executive Officer and Chairman.
In anticipation of higher growth of investable
assets among potential high-net-worth clients in China, starting in fiscal year 2017, we also started marketing financial products
to high-net-worth individuals with investable assets of between RMB 3 million and RMB 15 million (approximately US$0.44 million
to $2.21 million) and small and medium enterprises with investable assets of RMB 5 million to RMB 20 million (approximately US$0.73
million to $2.93 million). As of June 30, 2018, we have facilitated the sale of financial products from 20 financial institutions
to our clients. These products include primarily private equity fund products, securities investment fund products and private
placement bond products. We charge financial institutions one-time commissions, calculated as a percentage of the value of the
financial products purchased by our clients from such institutions. In addition, during the life cycle of certain of the security
investment funds, private equity funds and fixed income products sold by such institutions to our clients, we charge such institutions
recurring service fees for our ongoing services, such as investment relationship maintenance and coordination and product reports
distribution. In December 2017, Puhui Beijing was issued a convertible note in the principal amount of $1,075,814 (approximately
$963,034 of the funds were contributed by investors for this investment) by SSLJ.com Limited, a home improvement service and product
providers in China. The note is automatically convertible into the ordinary shares of SSLJ.com Limited upon its successful listing
on NASDAQ. SSLJ.com Limited’s shares commenced trading on NASDAQ on February 5, 2018. We received 213,642 shares of ordinary
shares of SSLJ.com Limited at a conversion rate of $5.00 per share on February 8, 2018. The shares are being held under the name
of our Chief Executive Officer pending completion of the registration. Due to the subsequent declining stock price, we recorded
an impairment of $778,638 against the investment cost as of June 30, 2018, among which $78,984 was recorded as an impairment loss,
representing our share of the investment loss, and $700,773 was recorded against customer deposits, with a $1,119 exchange rate
difference.
Starting in June 2017, we launched our asset management business,
acting as manager or general partner of funds in which our clients invest. Our subsidiaries, Qingdao Puhui and Shanghai Pucai,
serve as the investment advisor of their respective funds. As of June 30, 2020 we served as manager or general partner of five
funds with an aggregate of over RMB153.2 million (approximately US$21.6 million) under management. Three of these funds are in
the form of a limited partnership in which we serve as general partner and investors as limited partners. With respect to three
of the funds we manage, we charge investors subscription fees, as well as performance fees and recurring management fees in exchange
for our managing such funds as general partner or manager. We do not charge such fees to the three funds in the form of limited
partnership. Subscription fees are computed as a percentage of the capital contributions made to the funds. Recurring management
fees are paid to us on a quarterly basis. Performance fees and carried interest are required to be paid to us upon maturity of
such funds. We do not charge separate advisory fees for our services. Our funds are set to mature within three to five years of
formation with the exception of Pucai, which invested in publicly traded securities in China. Pucai was liquidated in February
2018 with the consent of all the investors and the fund manager. 100% of the funds were returned to the investors.
Below is a table describing the six operating
funds for which we currently serve or has served as manager or general partner.
Name
of the Fund
|
|
Type of fund
|
|
Role
|
|
Structure
|
|
Maturity
|
Puhui-Fengsui No.4 Private Equity Fund
|
|
Private equity fund
|
|
Qingdao Puhui as Manager
|
|
Contractual Fund
|
|
5/23/2022
|
Puhui-Fengsui No.5 Private Equity Fund
|
|
Private equity fund
|
|
Qingdao Puhui as Manager
|
|
Contractual Fund
|
|
9/4/2021
|
Beijing Ruying Consulting Center (LP)
|
|
Private equity fund
|
|
Qingdao Puhui as Manager & GP
|
|
Limited partnership
|
|
5/7/2022
|
Xinyu JiJi Investment Center (LP)
|
|
Private equity fund
|
|
Qingdao Puhui as Manager & GP
|
|
Limited partnership
|
|
5/23/2022
|
Xinyu YuanYuan Investment Center (LP)
|
|
Private equity fund
|
|
Qingdao Puhui as Manager & GP
|
|
Limited partnership
|
|
2/27/2025
|
On December 3, 2019, Puhui Cayman acquired
100% of the shares of Granville Financial Services Company Limited for HK$29,390,000, approximately $3.8 million. The purpose
of the acquisition of Granville is to expand the Company’s operation outside Mainland China and take advantage of financial
qualifications and licenses to broaden the Company’s existing product portfolio.
As of June 30, 2020, the company paid
approximately $3.4 million and approximately $0.4 million in acquisition payable is due to pay within one year after the acquisition.
Our Competitive Strengths
We believe the following competitive strengths
have contributed to, and will contribute to, our recent and ongoing growth:
Extensive and Targeted Coverage of China’s High-Net-Worth
Population
We specifically serve two types of clients with particular
amount of investable assets:
|
●
|
high-net-worth individuals who have investable
assets of RMB3 million to 15 million (approximately US$0.4 million to $2.2 million); and
|
|
●
|
SMEs with investable assets of RMB5 million
5 to 20 million (approximately US$0.7 million to $2.9 million).
|
We craft our business and expansion strategies
carefully and target only these clients because we believe a higher growth rate could be achieved in this sector. We have established
an extensive coverage network consisting of over 40 sales people and three offices strategically located in Shanghai and Beijing,
the most affluent cities in China. Our plan is to extend the geographic reach of our network to target China’s most economically
developed regions where the high-net-worth population is concentrated. We intend to conduct extensive due diligence and market
research before entering into new markets in order to enable us to establish new client centers.
Carefully Selected Products
We carefully select and introduce wealth
management products catering to the needs of high-net-worth individuals and SMEs. Our product portfolio consists of various products
with different levels of risk. For example, we market certain bond products designed to achieve financial security and capital
preservation for our clients that are risk averse and certain high yield equity products to clients that are less risk averse.
Loyal Client Base
We believe that we have a reputable brand
image in the markets in which we operate. As a growing independent wealth management service provider, we maintain a sizable client
base, consisting of 1,106 clients as of June 30, 2020, 495 of which have purchased products that we market more than once. We
expect our growing loyal client base to continue to grow, as we attempt to capitalize on the opportunities generated by the rapid
growth of China’s high-net-worth population.
Experienced Management Team
We have a highly experienced management
team. Our founder, Mr. Zhe Ji, worked at leading banks in China, including Bank of China, ABN AMRO and Hang Seng Bank, for nine
years. In addition, through his experience at Credit Ease Wealth, he had extensive experience working with prestigious private
equity funds in China. The experience of working with these private equity funds enables the Company to source products providers
and develop its own products more efficiently. Mr. Ji has deep understanding and know-how of the financial industry, as well as
insight to wealth management and private funds. We believe that our management team’s insightful industry knowledge and
vision, and strong execution capabilities significantly contribute to our strong growth.
Our Strategies
We aspire to become a trusted wealth management
brand among China’s high-net-worth population and SMEs. To achieve this goal, we intend to leverage on our existing strengths
and pursue the following strategies:
Further Enhance Our Brand Recognition
among High-Net-Worth Population and SMEs in China
We believe that brand recognition is critical
for the further growth of our business. To enhance our brand recognition, we plan to continue to focus on client satisfaction
through rigorous product research and selection and continuous efforts on investor education. We also intend to continue systematic
marketing activities including industry conferences, investment seminars and workshops.
Further grow our client base and increase our market penetration
We intend to increase our market penetration
through strategically adding wealth management professionals and client managers in Beijing, Shanghai and Qingdao where we have
an established presence, and expanding our reach into other affluent cities in China, including Wuhan, Changdu and Suzhou.
We believe our client-oriented and personalized
services are critical to maintaining the loyalty of our existing clients and attract more high-net-worth individuals to become
our clients. To support our business growth, we plan to further expand our team of wealth management product advisors and client
managers. We intend to enhance our clients’ satisfaction through advancing our comprehensive wealth management education
programs, which we believe will further increase the level of professionalism and product knowledge of our team of wealth management
product advisors and client managers, enhance their risk analysis and financial planning capabilities, which in turn may further
differentiate our client services from our competitors. We also intend to strengthen our relationships with all clients by providing
them with investment education and other services so that we can reach a broader range of the investor community, where many are
high-net-worth individuals.
Broaden Our Individual and Corporate Client Base
While we expect that marketing financial
products to high-net-worth individual clients will remain our core business, we intend to leverage our existing individual client
base to further develop our corporate client base. We intend to attract these potential clients by marketing financial products
which address the financial needs of SMEs. We also intend to collaborate with local commercial banks and branches of state-owned
commercial banks which engage in the business of distributing wealth management products to their private banking clients but
tend to rely on third parties due to lack of in-house product and risk management expertise.
Continue Product Innovation to Enhance Our Value Proposition
to Clients
We intend to continue growing our asset
management business while continuing to market the financial products of third party institutions to our clients. Guided by this
principle, we intend to further enhance our asset management business to provide unique and personalized products that suit the
needs of our clients. We plan to continue to invest resources to develop additional fund products that enable our clients to diversify
their investments among our different funds. We also intend to continue to participate in the marketing of wealth management products
offered by other financial product providers.
Enhance Our IT Infrastructure and Proprietary Database
We currently do not rely on IT infrastructure
to sell our products. However, IT infrastructure is an important component of our business operations, which supports our client
relationship management and product research and development. We plan to continue to invest in our IT infrastructure by adding
new features and functionalities and by improving existing software and IT modules. We expect that our improved IT infrastructure
and more advanced platform will enable us to scale up our business and maintain consistent service quality as we further expand
our coverage network and client base.
Pursue strategic investments and acquisition opportunities
To provide our clients with more in-depth
wealth management services and comprehensive asset allocation services, we may selectively invest in or acquire companies that
are complementary to our business, including opportunities that can further grow our current businesses and drive our long-term
growth.
Our Challenges
Our ability to achieve our goal and execute
our strategies is subject to risks and uncertainties, including those relating to:
|
●
|
manage our growth
or implement our business strategies sustainably;
|
|
●
|
further development
of the laws and regulations governing the wealth management services industry in China;
|
|
●
|
attract and retain
qualified wealth management product advisors and product development personnel and maintain a healthy employee turnover rate;
|
|
●
|
maintain and further
grow our active high-net-worth and SME client base or maintain or increase the amount of investment made by our clients in
the products we distribute;
|
|
●
|
fail to identify
or fully appreciate various risks involved in the wealth management products we distribute; and
|
|
●
|
fail to protect
our reputation and enhance our brand recognition.
|
Our Clients
We define our addressable high-net-worth
markets as two categories of clients: (i) high-net-worth individuals who have investable assets of RMB3 million to 15 million
(approximately US$0.4 million to $2.2 million) and (ii) SMEs with investable assets of RMB5 million to 20 million (approximately
US$0.7 million to $3.0 million). Our primary business is introducing wealth management products to high-net-worth individual and
corporate clients, which contributed approximately 100%, 91%, 100% of our revenues for the year ended June 30, 2020, 2019 and
2018.
Our client base has been expanding rapidly.
We had 1,106 clients as of June 30, 2020, of which 495 were repeating clients who have invested with us in more than one product.
We mainly target the following high-net-worth
individuals as potential clients: (i) business owners, (ii) professionals and (iii) executives and other affluent individuals.
By providing customized, value-added wealth management services to our individual clients on a no-charge basis, we seek to build
a loyal client base with long-term relationships.
We conduct a thorough client registration
and due diligence process to ensure that our customers are accredited investors under PRC regulations. Clients submit a registration
form, including a questionnaire requesting all relevant information relating to the potential client’s net assets, income
and prior investment experience. We also review evidence provided by clients to further support their qualifications.
SMEs, from our perspective, are entities
with investable assets of RMB5 million to 20 million (US$0.73 million to 2.93 million). As SMEs in China have an increasing need
to manage their cash assets, they become increasingly interested in wealth management services. We employ a client due diligence
and registration process for our enterprise clients, which is similar to that for our individual clients. The number of our enterprise
clients increased from 6 to 9 from June 30, 2019 to June 30, 2020. Our corporate clients purchased RMB 37 million (US$5.3 million)
worth of wealth management products through us as of June 30, 2020, accounting for 3.2% of the aggregate value of wealth management
products that we distributed.
Risk Control Procedures
We believe that our expertise in investment
and fund management is crucial to our success as a value-added service provider and is one of our key competitive advantages.
We draw on in-house expertise and have formed an investment committee which is comprised of our president, chief financial officer,
chief legal officer, head of risk control department and product development department (the “Investment Committee”).
All of these individuals are highly qualified in their professional areas, including legal, accounting, finance and risk control.
Each product candidate or potential target project is evaluated and reviewed, and must be approved, by our investment committee.
Investment Process
Our process for evaluating and completing
a new private equity investment opportunity has many different and structured steps, which normally includes sourcing, initial
screening, memo signing, due diligence, decision making, definitive agreement signing, post-investment management and investment
exits. The process may vary by different project due to specifics of the target company or the transaction process.
The diagram below shows our standard investment review procedure:
Sourcing
and Initial Screening
|
|
|
|
The
research department conducts industry research and prepares reports.
|
|
The
investment department conducts initial screening based upon industry research report provided by research department.
|
|
|
|
|
|
|
Memo
Signing
|
|
|
|
The investment department
submits investment proposals to the Investment Committee for approval.
|
|
The investment department
signs the preliminary investment memorandum or term sheet
|
|
|
|
|
|
|
Due
Diligence
|
|
|
|
The investment department,
legal department and accounting department conduct due diligence.
|
|
The risk control
department evaluates the risk of the investment opportunity based upon the due diligence reports provided by investment department,
legal department and account department.
|
|
|
|
|
|
|
Decision
Making
|
|
|
|
The Investment Committee
makes investment decision based upon due diligence reports and risk control reports.
|
|
The Investment Committee
decides on the investment strategy and sets up the fund upon approval of the deal.
|
Fund
Formation, Registration and Operation
|
|
|
|
|
|
|
|
The investment department,
legal department and accounting department work out the transaction structure.
|
|
The business department
starts fund raising.
|
|
The accounting department
opens fund raising account and escrow account.
|
|
The legal department
files product registration with the government and prepares relevant legal documents.
|
Post-Investment
Management and Exits
|
|
|
|
We collaborate with
the target company management in identifying and executing financial, operating, and strategic priorities, and provide enterprise
in these tasks that the management team may not have.
|
|
We decide upon different
exit strategies, for example, a strategic sale, an initial public offering, or a secondary buyout.
|
Product Selection Process
With respect to the marketing of financial
products of third-party institutions, we apply risk control procedures, headed by our Investment Committee, along the same lines
as our wealth management procedures. Each product candidate is evaluated and reviewed, and must be approved, by our Investment
Committee.
The diagram below shows our standard product selection procedure:
Our Product Portfolio
The financial products that we market
to our clients currently consist of 25 financial products, of which 4 are self-developed and 21 were are issued by third-party
institutions. All products are designed or selected to cater to the needs of high-net-worth individuals and SMEs.
We market the following categories of
products supplied by third party product providers, based on the underlying assets class:
|
●
|
private equity funds
products, the underlying assets of which are portfolios of equity investment in private companies;
|
|
●
|
securities investment
fund products, the underlying assets of which are publicly traded stocks;
|
|
●
|
private placement
bonds, consisting primarily of collateralized fixed income products providing investors with fixed rate returns;
|
|
●
|
entities that invest
in U.S. publicly listed companies; and
|
|
●
|
other products,
including trust plans and asset management plans.
|
Since October 2016, we have marketed over
RMB 1,170,000,000 (approximately US$165.40 million) worth of wealth management products to our clients in aggregate. For the fiscal
year ended June 30, 2020, YingKe Innovation Asset Management Co., Ltd., Beijing Ruqi Consulting Center and Cynthia Management
Corporation accounted for 40.5%, 18.4% and 13.8% of the Company’s revenues, respectively.
Product Innovation and Development
We have established a team of financial
engineers focused on product development, a majority of whom have experience in financial engineering or financial quantitative
work experience. As of the date of this annual report, we have eight financial engineers on our product development team. All
of these employees have prior working experience in product development in other private equity firms.
Our Coverage Network
As of June 30, 2020, our coverage network consisted of approximately
34 relationship managers and seven offices, three of which are located in Beijing, including our headquarters, one in Shanghai,
Shuzhou, Qingdao and Hong Kong. Our strategy is to open additional branch offices at locations with concentrated high-net-worth
populations and active private sectors. Each of our offices is equipped with meeting rooms and other standard facilities, and staffed
with relationship managers dedicated to serving high-net-worth individual clients. We also staff each of our offices with relationship
managers focused on serving corporate clients located in the relevant city or its vicinities.
We have relied on, and expect to continue
to rely on, organic growth in the expansion of our coverage network. We place a significant emphasis on recruiting, training and
motivating our relationship managers. The number of our relationship managers has increased significantly as a result of the growth
of our business and expansion of our coverage network.
We seek to recruit relationship managers
who are approachable and knowledgeable. We mainly target three categories of candidates: (i) financial professionals with entrepreneurship,
management experience and marketing abilities; (ii) non-financial professionals with extensive experience in other industries,
who have exhibited entrepreneurship, client service experiences and active social connections; and (iii) graduates of top universities
with solid academic backgrounds and strong desire to learn.
We provide training programs to our relationship
managers, including new hire training, mentor programs and regular training sessions designed for different positions. In these
training programs, the relationship managers receive training in investment knowledge and marketing skills from our in-house training
specialists and senior management members. In addition, we provide our relationship managers with product-specific training upon
the launch of any new products to ensure their adequate disclosure and compliance in marketing new products.
Our relationship managers are compensated
by a combination of base salary and performance-based commissions. A relationship manager’s performance is determined not
only by the total value of wealth management products he or she distributes and the number of clients he or she covers, but also
by complying with internal guidelines and meeting client satisfaction metrics. The compensation of our individual relationship
managers is not tied to any specific wealth management products distributed by him or her.
Our Relationships with Product Providers
We have established business relationships
with reputable third-party financial institutions in China in connection with our marketing of such institutions’ financial
products. Such financial institutions are the issuers of financial products, with which our clients enter into contractual arrangements
to purchase products. The product providers we deal with encompass a variety of financial institutions, including primarily trust
companies, commercial banks and private equity firms. In addition, we enter into co-marketing agreements with other brokers like
our company that are engaged in the business of selling the financial products of third-party providers.
Under fixed income products, trust companies
typically use the entrusted funds to provide debt financing to corporate borrowers and distribute interest income and principal
payment to the plan subscribers according to pre-determined schedules. In the case of securities investment fund products, the
fund manager will engage investment fund managers as their advisors and use the entrusted funds to purchase publicly traded stocks
or other securities recommended by their advisors.
Arrangements with Financial Institutions
Our marketing of financial products is
typically governed by agreements entered into with the product providers. Such agreements generally expire upon the expiration
of the underlying wealth management products. Such agreements are generally non-exclusive, which means that the issuers may retain
other brokers to market the same financial products that we market. Under these agreements, we typically undertake to provide
the counterparty with services relating to our clients’ purchase of the relevant products. Such services typically include
providing our clients with information on the relevant products, evaluating the financial condition and risk profiles of those
clients who desire to purchase the relevant products, assessing their qualification for the purchase, educating them on the documentation
involved in the purchase as well as furnishing other assistance to facilitate their transactions with the product providers. Under
such agreements with respect to private equity fund products and certain securities investment fund products, we also undertake
to assist the product providers to maintain investor relationships by providing our clients who have purchased the relevant products
with various post-purchase services.
We do not handle our clients’ funds
or payment or otherwise process transactions between our clients and product providers. When our clients decide to purchase a
product, we notify the relevant product provider and our client completes the transaction with, and makes payment to, the product
provider directly.
For all wealth management products, we
are entitled to receive one-time commissions, calculated as a percentage of the total value of products purchased by our clients,
from the counterparties under the relevant service agreements. We also receive recurring services fees in addition to one-time
commissions for the products distributed by us where we are engaged by the product providers to provide recurring services to
our clients who have purchased the relevant products. In the case of private equity fund products, we receive recurring service
fees over their life cycle, calculated as a percentage of the total value of investments in the underlying funds distributed by
us to our clients. For securities investment funds, our recurring service fees are typically calculated as a percentage of the
net asset value of the portfolio underlying the products purchased by our clients at the time of calculation, which is generally
done on a daily basis.
Such agreements include standard confidentiality
provisions prohibiting unauthorized disclosure of our clients’ information as well as stand-still provisions prohibiting
the counterparties from contacting our clients to offer any services without our prior consent.
Marketing and Brand Promotion
Word-of-mouth is the primary marketing
tool we use to market our business. We intend to continue to focus on referrals as the primary avenue of new client development
by further improving client satisfaction. We also intend to enhance our brand recognition and attract potential high-net-worth
clients and corporate clients through a variety of marketing methods. We organize events, such as investor seminars and workshops,
where we present our market outlook and product choices, industry conferences, and other investor education and social events.
Competition
While the wealth management services industry
in China is growing rapidly, it is still at an early stage of development and is highly fragmented. We operate in an increasingly
competitive environment and compete for clients on the basis of various factors, including fund management, product choice, reputation
and brand recognition. Our principal competitors include:
|
●
|
Management institutions
of privately-raised investment funds. As of June 30, 2020, there were more than 24,000 management institutions of privately-raised
investment funds registered with Asset Management Association of China, for a total of RMB 13.4 trillion assets under management.
We believe that we can compete effectively due to our loyal client base and trusted investment expertise.
|
|
●
|
Third-party wealth
management service providers. Our direct competition comes from other third-party wealth management service
providers, many of which are relatively well developed. We believe that we can compete effectively due to our market niche,
the quality of our client-oriented and customized services, our product sourcing and development capabilities and our strict
risk management systems, in light of the great potential of the wealth management services market. We believe that due to
our relative smaller size, we offer more personalized client service than some of our larger competitors.
|
|
●
|
Commercial banks. Many
commercial banks rely on their own wealth management arms and sales forces to distribute their products. We believe that we
compete effectively with commercial banks due to a number of factors, including our independence, which positions us as a
centralized wealth management product aggregator to provide and recommend suitable wealth management product advice and product
combinations that suit our clients’ financial objectives.
|
|
●
|
Asset management
service providers. A number of mutual fund management companies, trust companies and securities companies have
emerged in the asset management business in China in recent years. We believe that we compete effectively due to the quality
of our services, our fund sourcing capabilities from third parties and our in-depth experience in industries such as real
estate development.
|
Employees
As of September 30, 2020, we had 73 full-time
employees. None of our employees are represented by unions. We believe we maintain good relationships with our employees. The
table below sets forth the breakdown of our employees by function as of September 30, 2020.
Function
|
|
Number of Employees
|
|
|
% of Total
|
|
Management and administrative
|
|
|
20
|
|
|
|
27
|
%
|
Operations
|
|
|
3
|
|
|
|
4
|
%
|
Product development
|
|
|
6
|
|
|
|
8
|
%
|
Sales and marketing
|
|
|
34
|
|
|
|
47
|
%
|
Finance and legal
|
|
|
10
|
|
|
|
14
|
%
|
Total
|
|
|
73
|
|
|
|
100
|
%
|
We reduced the number of our employees
to 73 people. The reduction was mainly in our sales and marketing department due to the impact of COVID-19 we were not able
to conduct as many sales meetings as before the pandemic. As our business continues to recover from the pandemic, we will hire
more employees for our sales and marketing department.
As required by PRC regulations, we participate
in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan,
a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan,
and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages
of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from
time to time. As of the date of this report, we have made adequate employee benefit payments. However, if we were found by the
relevant authorities that we failed to make adequate payment, we may be required to make up the contributions for these plans
as well as to pay late fees and fines.
We enter into standard labor and confidentiality
agreements with our employees. We believe that we maintain a good working relationship with our employees, and we have not experienced
any major labor disputes.
Intellectual Property
We regard our trademarks, service marks,
domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely
on trademark and trade secret protection laws in the PRC, as well as confidentiality procedures and contractual provisions with
our employees, service providers, suppliers, third-party merchants and others to protect our proprietary rights. As of the date
of this annual report, we owned 17 registered trademarks and 2 registered domain names.
Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our
technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our
technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result
in substantial costs and diversion of our resources.
In addition, third parties may initiate
litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual
property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology
or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover, even if we are able
to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.
Insurance
We participate in government sponsored
social security programs including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical
insurance and housing insurance. We do not maintain business interruption insurance or key-man life insurance. We consider our
insurance coverage to be in line with that of other wealth management companies of similar size in China. We consider our insurance
coverage to be sufficient for our business operations in China.
Legal Proceedings
We are currently not a party to any material
legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings
arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome,
is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Regulations
This section sets forth the relevant rules
and regulations that affect our business activities in China.
Regulations on Asset Management Plans
According to the CSRC, qualified fund
management companies and securities companies may be entrusted by clients to engage in asset management business.
Asset Management Plans by Fund Management
Companies. On September 26, 2012, the CSRC promulgated the Pilot Measures for Asset Management Services Provided by Fund
Management Companies for Specific Clients, or the Pilot Measures, which came into effect on November 1, 2012. These Pilot Measures
apply to activities whereby a fund management company raises funds from specific clients or acts as the asset manager for specific
clients upon their property entrustment, with a custodian institution acting as the asset custodian, and makes investments with
the entrusted assets. According to the Pilot Measures, the assets under an asset management plan may be used for the following
investments: (i) cash, bank deposits, stocks, bonds, securities investment funds, central bank bills, non-financial enterprises’
debt financing instruments, asset-backed securities, commodity futures and other financial derivatives; (ii) equity interests,
creditor’s rights and other property rights not transferred through a stock exchange; and (iii) other assets approved by
the CSRC. A specific asset management plan with investment in any assets specified in subparagraphs (ii) or (iii) above is defined
as a special asset management plan. In addition, a fund management company shall conduct special asset management plan business
only through its subsidiary but not by itself. An asset manager can provide the client-specific asset management plans to a single
client or to multiple clients. As for asset management plans for multiple clients, the investment amount of each entrusting client
shall be no less than RMB1.0 million (US$0.2 million), and the number of the clients whose investment is less than RMB3.0 million
(US$0.5 million) is limited to 200, while the number of the clients whose investment is more than RMB3.0 million (US$0.5 million)
is not limited. In addition, the initial total assets entrusted by the clients under an asset management plan for multiple clients
shall be no less than RMB30.0 million (US$4.9 million) and no more than RMB5.0 billion (US$0.8 billion), unless otherwise provided
by the CSRC. An asset manager may sell its asset management plans on its own or through an agency qualified to sell funds. Asset
management plans are among the third-party products that we introduce to our clients. Our clients purchase the asset management
plans directly from the funds management companies based on our advice. As we are solely a service provider to third-party product
providers and our revenues are generated from commissions and recurring fees that we charge the funds management companies for
our services, we do not own or hold title to the asset management plans. We do not directly sell the asset management plans to
our client or process the transactions for our clients. We also do not sign the sales contracts or enter into any written documents
with our clients. Therefore, we believe that we are not engaged in the direct sale of the asset management plans sponsored by
fund management companies. However, due to the lack of clear and consistent regulatory framework for the sale of asset management
plans, we cannot assure you that the relevant PRC government authority, including the CSRC, will agree with our interpretation
of sales of asset management plans under the relevant rules. If they have different interpretation of the relevant rules and as
a result the provisions of consulting services or similar services with respect to sale of asset management plans are deemed as
sale of asset management plans and we do not hold the license, the CSRC or other government authorities in China may prohibit
fund management companies from engaging companies like us for such services. In such circumstances, we may have to change our
business model with respect to asset management plans or cease to provide services relating to asset management plans, and as
a result, our business, results of operations and prospects would be adversely affected. See “Risk Factors — Risks
Related to Our Business and Industry” - We may fail to obtain and maintain licenses and permits necessary to conduct our
operations in China, and our business may be materially and adversely affected as a result of any changes in the laws and regulations
governing the financial services in China.
Asset Management Plans by Securities
Companies. On October 18, 2012, the CSRC promulgated Administrative Measures for Client Asset Management Business of Securities
Companies, or the Administrative Measures, and also two detailed rules to implement the Administrative Measures, i.e. the Implementation
Rules of Collective Asset Management Plans of Securities Companies, or the Collective Plan Rules, and the Implementation Rules
of Designed Asset Management Plans of Securities Companies, which became effective on the same date. On June 26, 2013, the CSRC
promulgated the amendment to the Administrative Measures and the Collective Plan Rules, which came into effect on the same date.
According to the Administrative Measures and the Collective Plan Rules, securities companies that obtain the required qualification
may engage in collective asset management business for multiple clients. Collective asset management plans may invest in (i) stocks,
bonds, stock index futures, commodity futures and other products tradable on stock and futures exchanges; (ii) central bank bills,
short-term financing bills, mid-term notes and other products tradable on interbank market, (iii) securities investment funds,
designed asset management plans of securities companies, wealth management plans of commercial banks, collective fund trust plans
and other financial products approved by the competent regulators; and (iv) other investment products approved by CSRC. A collective
asset management plan shall meet the following requirements: (i) the total amount of raised funds shall initially be no less than
RMB30.0 million (US$4.9 million) and not exceed RMB5.0 billion (US$0.8 billion), (ii) the investment amount of each qualified
investor shall not be less than RMB1.0 million (US$0.2 million), and (iii) the total number of qualified investors shall be no
less than 2 and not exceed 200. A qualified investor is defined as an entity or individual that is capable of appropriately identifying
risks and bearing the risks of the collective asset management plan, and that satisfies any of the following conditions: (i) the
total personal or household financial assets shall be no less than RMB1.0 million (US$0.2 million), applicable if the qualified
investor is a natural person, or (ii) the net assets shall be no less than RMB10.0 million (US$1.6 million), applicable if the
qualified investor is a company, enterprise or institution. A securities company shall put the assets within a collective asset
management plan under the custody of an asset custodian with fund custody business qualification. A securities company may either
promote collective asset management plans by itself or through other securities companies, commercial banks or other institutions
recognized by the CSRC. We distribute asset management plans for securities companies and fund management companies and those
companies are required to obtain a license to sell asset management plans. Although we believe such license is not required for
our distribution and sourcing of these asset management plans as we do not directly sell asset management plans to and do not
enter into the agreements with our clients who invest in these asset management plans, due to the lack of a unified regulatory
framework governing the distribution or management of wealth management products thus far, we cannot assure you that the relevant
PRC government will agree with our interpretation of the relevant rules governing asset management plans. Also see “Risk
Factors — We may fail to obtain and maintain licenses and permits necessary to conduct our operations in China, and our
business may be materially and adversely affected as a result of any changes in the laws and regulations governing the financial
services industry in China.”
In April 2018, the People’s Bank
Of China (“PBOC”), the China Banking and Insurance Regulatory Commission (“CBIRC”), the CSRC and SAFE
joint issued the Asset Management Guidance. Pursuant to the Asset Management Guidance, investors of asset management plans are
divided into non-specific public and qualified investors. Qualified investors shall be natural persons, legal entities or other
organizations that have corresponding risk identification ability and risk-taking ability to invest in a single asset management
production no less than a certain amount and meets certain requirements. Rigid payment is not allowed under such guidance.
In October 2018, the CSRC promulgated
Administration Measures on Privately Offered Asset Management Business of Securities and Futures Operation Institutions, or the
Asset Management Administration Measures. The Asset Management Administration Measures replaced former administration measures
on assets management business of fund companies, securities companies and futures companies.
The Asset Management Administration Measures
apply to privately offered asset management plans established and managed by securities and futures operation institutions (including
securities company, fund management company, futures companies and subsidiaries established by the aforesaid institutions that
engage in privately offered asset management business) through private placement of funds or acceptance of property entrustment,
with a custodian institution acting as the asset custodian, and makes investments according to the asset management agreement.
Securities and futures operation institutions engaging in privately offered asset management business shall be approved by the
CSRC. The securities and futures operation institutions may sell its asset management plans on its own or through an agency qualified
to sell mutual funds. The securities and futures operation institutions, custodian, selling agency shall ensure the authenticity,
accuracy, completeness and promptness of information disclosure. The assets management plans shall be raised to qualified investors
in a non-public manner, and securities and futures operation institutions and selling agencies shall perform appropriate management
obligations. Selling agency shall provide investors’ information to the securities and futures operation institutions within
prescribed time limit. For the sale of asset management plan, selling agency shall strictly fulfill the appropriate management
obligations, fully know the investors and classify the investors, conduct risk assessment on the asset management plan, follow
the risk match principle, recommend appropriate products to investors. Selling agency is not allowed to mislead investors to purchase
products not matching their risk tolerance, to sell asset management plans to investors with lower risk identification capabilities
and lower risk tolerances below the product risk levels. Records relating to the sale of asset management plans shall be kept
at least 20 years from the termination date of the asset management plans. The Asset Management Administration Measures provided
for a transition period ending on December 31, 2020 for rectification.
On October 2018, the CSRC promulgated
Administration Measures on Operation of Privately Offered Asset Management Plan of Securities and Futures Operation Institutions,
or the Asset Management Plan Operation Measures, which prescribed the raise, investment, risk management, valuation, information
disclosure and other operation activities of asset management plans by securities and futures operation institutions. Securities
and futures operation institutions and their entrusting selling agencies shall fully acknowledge investors’ capital source,
individual and family financial assets and debts, and shall adopt necessary measure to verify. The Asset Management Plan Operation
Measures provided for a transition period ending on December 31, 2020 for rectification.
Regulations on Private Offered Fund (or Privately-raised
Investment Fund)
In China, Renminbi denominated private
equity funds are typically formed as limited liability companies or partnerships, and therefore, their establishment and operation
is subject to the PRC company laws or partnership laws. The PRC Partnership Enterprise Law was revised in August 2006 when it
expanded the scope of eligible partners in partnerships from individuals to legal persons and other organizations and added limited
partnerships as a new form of partnership. A limited partnership shall consist of limited partners and at least one general partner.
The general partners shall be responsible for the operation of the partnership and assume joint and several liabilities for the
debts of the partnership, and the limited partners shall assume liability for the partnership’s debts limited by the amount
of their respective capital commitment.
On May 8, 2014, the State Council promulgated
Several Opinions of the State Council on Further Promoting the Sound Development of the Capital Market, which put forward several
opinions to improve the multi-level capital market system. The private fund shall establish a system of standards for eligible
investors, specify the eligibility requirements of investors in private offering of various products and the requirements on information
disclosure in private offering to the same type of investors, and regulate offering activities. The State Council would play the
role of securities intermediaries, assets management institutions and other market organizations, establish and improve the regulatory
system for offering of privately-raised products, and effectively intensify interim and ex post regulation. And any kind of illegal
fund-raising activities in the name of private placement would be strictly cracked down.
CSRC is now in charge of the supervision
and regulation of private funds, including, but not limited to, private equity funds, private securities investment funds, venture
capital funds and other forms of private funds. Further, CSRC authorized the Asset Management Association of China, or AMAC, to
supervise the registration of private fund managers, record filing of private funds and perform its self-regulatory role. Thus,
the AMAC formulated the Measures for the Registration of Private Investment Fund Managers and Filling of Private Investment Funds
(for Trial Implementation), or the Measures, which became effective as of February 7, 2014, setting forth the procedures and requirements
for the registration of private fund managers and filing of private funds to perform self-regulatory administration of privately
placement funds. On August 21, 2014, CSRC promulgated the Interim Provisions for the Supervision and Management of Private Equity
Funds, which further clarified the self-regulatory requirements for private funds. Local governments in certain cities, such as
Beijing, Shanghai and Tianjin, have promulgated local administrative rules to encourage and regulate the development of private
equity investment in their areas. These regulations typically provide preferential treatment to private equity funds registered
in the cities or districts that satisfy the specified requirements. Such local administrative rules may be changed or preempted
according to the new regulations to be issued by CSRC. On February 5, 2016, AMAC promulgated the Announcement of the Asset Management
Association of China on Matters Concerning Further Regulating the Registration of Privately Offered Fund Managers, in which AMAC
canceled the registration certificates for Private Offered Fund managers, put some requirements for strengthening information
reporting of Private Offered Fund and gave a guideline for the legal opinion for the manager registration. Thus, we have completed
the private fund manager registration and filing of private funds under our management with AMAC for the relevant entities that
act as private fund managers, including Qingdao Puhui and Shanghai Pucai.
In April 2016, AMAC issued the Measures
for the Administration of the Fund Raising Conducts of the Private Investment Funds, or the Fund Raising Measures. According to
the Fund Raising Measures, only two types of institutions are qualified to conduct fund raising activities for private investment
funds: (a) private fund managers which have registered with AMAC (only allowed to raise fund for the funds established and managed
by such fund managers); and (b) the fund distributors that have are the members of AMAC and obtained the fund distribution license.
In addition, the Fund Raising Measures set out detailed procedures for conducting fund raising business and introduced new process
such as “cooling-off period” and the “re-visit”. We are qualified to conduct the fund raising activities
of the funds managed by us and are complying with such procedures when raising the fund.
In February 2017, AMAC released the No.
4 Filing Rules to regulate the securities and futures institution’s investment into the real estate area. According to the
No. 4 Filing Rules, private fund managers shall follow relevant rules when investing into real estate development enterprises
or projects. Among others, the No.4 Filing Rules specify that AMAC will not accept the filing application of private asset management
plans or private funds investing in ordinary residential properties in “popular cities”, including Beijing, Shanghai,
Guangzhou, Shenzhen, Xiamen, Hefei, Nanjing, Suzhou, Wuxi, Hangzhou, Tianjin, Fuzhou, Wuhan, Zhengzhou, Jinan and Chengdu, by
way of debt investment, the specific types of which are identified in the No. 4 Filing Rules.
In January 2018, AMAC issued Notice regarding
Filing of Private Investment Fund, or the Filing Notice. The Filing Notice provides that private investment funds are prohibited
from raising funds from unqualified investors. It also provides that private investment fund manager should file the contracts
and other documents of the fund with AMAC on a timely basis and keep proper records of all filing materials. In addition, the
Fling Notice also provides that private investment funds should not make debt investments, including (i) investing in private
loans, small loans or factoring facilities or other assets or beneficiary interests of which the nature is borrowing;(ii) lending
money through entrusted bank loans or trusts; and (iii) conducting the aforementioned activities through the form of special purpose
vehicle or investment enterprise. AMAC will not approve the filing of private investment funds that are engaged in the unpermitted
debt investment activities. Starting from February 2018, we have ceased to make any new investment in debt assets through our
private investment funds.
In August 2018, AMAC issued an explanation
specifying requirements for application for private fund manager engaging in cross-class investment, which covers requirements
on actual controller, equity structure stability, senior management, and initial fund-raising scale.
Regulations on Labor Protection
On June 29, 2007, the Standing Committee
of the National People’s Congress, or the SCNPC, promulgated the Labor Contract Law, as amended on December 28, 2012, which
formalizes employees’ rights concerning employment contracts, overtime hours, layoffs and the role of trade unions and provides
for specific standards and procedure for the termination of an employment contract. In addition, the Labor Contract Law requires
the payment of a statutory severance pay upon the termination of an employment contract in most cases, including in cases of the
expiration of a fixed-term employment contract. In addition, under the Regulations on Paid Annual Leave for Employees and its
implementation rules, which became effective on January 1, 2008 and on September 18, 2008 respectively, employees are entitled
to a paid vacation ranging from 5 to 15 days, depending on their length of service and to enjoy compensation of three times their
regular salaries for each such vacation day in case such vacation days are deprived by employers, unless the employees waive such
vacation days in writing. Although we are currently in compliance with the relevant legal requirements for terminating employment
contracts with employees in our business operation, in the event that we decide to lay off a large number of employees or otherwise
change our employment or labor practices, provisions of the Labor Contract Law may limit our ability to effect these changes in
a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.
Enterprises in China are required by PRC
laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan,
a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan,
and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including
bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate
their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance
contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee of 0.05%
of the amount overdue per day from the original due date by the relevant authority. If the employer still fails to rectify the
failure to make social insurance contributions within such stipulated deadline, it may be subject to a fine ranging from one to
three times the amount overdue. According to Regulations on Management of Housing Fund, an enterprise that fails to make housing
fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline;
otherwise, an application may be made to a local court for compulsory enforcement.
Regulations on Foreign Investment
The PRC Foreign Investment Law and Related Regulations
The Ministry of Commerce, or the MOFCOM,
published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming, upon its enactment, to replace the
trio of existing laws regulating foreign investment in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the
Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its
foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic investments.
Among other things, the draft Foreign
Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining
whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides
that an entity established in China but “controlled” by foreign investors will be treated as an FIE, whereas an entity
set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the MOFCOM, treated as a PRC domestic investor
provided that the entity is “controlled” by PRC entities and/or citizens. In this connection, “control”
is broadly defined in the draft law to cover any of the following summarized categories: (i) holding 50% or more of the voting
rights or similar equity interest of the subject entity; (ii) holding less than 50% of the voting rights or similar equity interest
of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making
bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent
decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the
subject entity’s operations, financial matters or other key aspects of business operations. Once an entity is determined
to be an FIE, and if its investment amount exceeds certain thresholds or if its business operation falls within a “negative
list” to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts
will be required. Otherwise, all foreign investors may make investments on the same terms as Chinese investors without being subject
to additional approval from the government authorities as mandated by the existing foreign investment legal regime.
The “variable interest entity”
structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits
in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law,
a VIE that is controlled via contractual arrangements will also be deemed as an FIE, if it is ultimately “controlled”
by foreign investors. Therefore, for companies with a VIE structure in an industry category that is on the “negative list,”
the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either
PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities,
then the VIE will be treated as an FIE and any operation in the industry category on the “negative list” without market
entry clearance may be found illegal.
In December 2018, the Standing Committee
of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law, aiming to replace
the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft with slight revisions,
or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment Law, foreign investment
shall be subject to the negative list management system. The “negative list”, which is issued or approved by the State
Council, specifies the special management measures for the access of foreign investments in specific areas. If a foreign investor
is found to invest in any prohibited industry in the “negative list”, such foreign investor may be required to, among
other aspects, suspend its investment activities, dispose of its equity interests or assets in the target companies, and forfeit
its income. In addition, if a foreign investor is found to invest in any restricted industry in the “negative list”,
the relevant competent department shall require the foreign investor to take the measures to correct itself. However, the New Draft
Foreign Investment Law does not mention “actual control” as regulated in the previous draft and the position to be
taken with respect to existing or future companies with the “variable interest entity” structure.
On March 15, 2019, the Foreign Investment
Law of the People’s Republic of China, or the Foreign Investment Law, was finally issued and became effective on January
1, 2020. On December 12, 2019, the State Council approved the Regulation on Implementing the Foreign Investment Law, or the
Implementation Regulations, effective from January 1, 2020. On December 26, 2019, the Supreme People’s Court of China
issued a judicial interpretation on the Foreign Investment Law, effective from January 1, 2020, to ensure fair and efficient
implementation of the Foreign Investment Law. The judicial interpretation clarifies the issues regarding the validity of the investment
contract violating the restrictive or prohibitive requirements in the negative list. According to the judicial interpretation,
courts in China shall not, among other things, support contracted parties to claim foreign investment contracts in sectors not
on the Negative List as void because the contracts have not been approved by or registered with administrative authorities. However,
since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual
terms, it is difficult to predict the outcome of a judicial or administrative proceeding, and such unpredictability towards our
contractual rights could adversely affect our business and impede our ability to continue our operations. The Foreign Investment
Law and the Implementation Regulations embody an expected PRC regulatory trend to rationalize its foreign investment regulatory
regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
both foreign and domestic investments.
The Foreign Investment Law removes all references to the terms
of “actual control” or “contractual control” as defined in the draft published in 2015 by the MOFCOM. However,
the Foreign Investment Law has a catch-all provision under the definition of “foreign investment” which includes
investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods
prescribed by the State Council. Therefore, it is uncertain whether any interpretation and implementation of the Foreign Investment
Law or new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If any laws or regulations relating to variable interest entity structures are issued and an updated “negative
list” mandates further actions, such as market entry clearance or certain restructuring of our corporate structure and operations,
to be completed by companies with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete
these actions in a timely manner, or at all, and our business and financial condition may be materially and adversely affected.
Negative List Relating to Foreign Investment
Investment activities in the PRC by foreign investors are principally
governed by the Guidance Catalog of Industries for Foreign Investment promulgated and as amended from time to time by MOFCOM and
National Development and Reform Commission (the “NDRC”). In June 2017, MOFCOM and the NDRC promulgated the Catalog
(2017 Revision), which became effective in July 2017 and was amended in June 2018. In June 2018, the Catalog (2017 Revision) was
replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018 Version), subsequently in June
2019 (2019 Version) and further in June 2020 (2020 Version). Industries listed in the Negative List are divided into two categories:
restricted and prohibited. Industries not listed in the Negative List are generally open to foreign investment unless specifically
restricted by other PRC regulations. Establishment of wholly foreign-owned enterprises is generally allowed in permitted industries.
Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required
to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government
approvals. Foreign investors are not allowed to invest in industries in the prohibited category.
Pursuant to the currently effective Negative
List, market survey, a business activity that we currently engage in through our VIE, is restricted for foreign investment. As
market survey may be constantly involved during our development and expansion, we may continue this business activity through
contractual arrangements with our consolidated subsidiary, Puhui Beijing.
In addition, if our PRC subsidiary and
consolidated entities plan to engage in promoting or distributing wealth management plans through the Internet, or allows our
clients to purchase wealth management products on any of our websites, such business is likely to be deemed as value-added telecommunications
service and call for approvals from relevant authorities. Foreign investment in value-added telecommunications businesses is governed
by the State Council’s Administrative Rules for Foreign Investments in Telecommunications Enterprises, issued by the State
Council on December 11, 2001 and amended on February 6, 2016, under which a foreign investor’s beneficial equity ownership
in an entity providing value-added telecommunications services in China cannot exceed 50%. In addition, for a foreign investor
to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a
positive track record and experience in providing such services. The Ministry of Industry and Information Technology of the People’s
Republic China (“MIIT”)’s Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added
Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing,
transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending
to conduct such businesses in China. Although MIIT promulgated its Notice on Lifting Foreign Investment Restrictions on Online
Data and Deal Processing Business on June 19, 2015, which permits foreign ownership, in whole or in part, of online data and deal
processing business, a sub-type of value-added telecommunications service, we still expect our potential business of online promotion
and distribution of wealth management products to face foreign investment restrictions or uncertainties, since it is not clear
whether our potential business will be deemed as online data and deal processing.
We plan to engage in the direct sales
of private fund products. While the distribution of private fund is not explicitly categorized as restricted to foreign investment,
a qualification is required for the direct sales of private fund by private fund management companies. In practice, such qualification
is generally unavailable to foreign invested enterprises or their subsidiaries. In order to conduct our direct sales services
in the future, we have entered into contractual arrangements through WFOE, our PRC subsidiary, with Puhui Beijing, our PRC variable
interest entity. In March 31, 2017, Qingdao Puhui has completed the private fund manager registration and filing of private funds
under our management with AMAC, and in February 22, 2017, Shanghai Pucai has completed the private fund manager registration and
filing of private funds under our management with AMAC. Accordingly, we plan to start the private fund business and other regulated
fund products through Qingdao Puhui and Shanghai Pucai in the near future. Similarly, although asset management services are not
prohibited or restricted from foreign investments, PRC authorities are more accustomed to dealing with domestic PRC fund managers
without foreign investment. As a result, we conduct our asset management services through our VIE to ensure smooth operations.
Regulations on Tax
PRC Enterprise Income Tax
The PRC enterprise income tax is calculated
based on the taxable income determined under the PRC laws and accounting standards. On March 16, 2007, the National People’s
Congress of China enacted a new PRC Enterprise Income Tax Law, which became effective on January 1, 2008 and amended the PRC Enterprise
Income Tax Law on February 24, 2017. On December 6, 2007, the State Council promulgated the Implementation Rules to the PRC Enterprise
Income Tax Law, or the Implementation Rules, which also became effective on January 1, 2008. On December 26, 2007, the State Council
issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the PRC Enterprise Income Tax
Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the PRC Enterprise Income Tax
Law. On October 17, 2017, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation
on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, which became effective on December 12,
2017. The PRC Enterprise Income Tax Law imposes a uniform enterprise income tax rate of 25% on all domestic enterprises, including
foreign-invested enterprises unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions
and preferential treatments available under previous tax laws and regulations.
Moreover, under the PRC Enterprise Income
Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies”
located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate
of 25% on their worldwide income. The Implementation Rules define the term “de facto management body” as the management
body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and
properties of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a Chinese holding Company
Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the
State Administration of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company
group will be classified as a “resident enterprise” with its “de facto management bodies” located within
China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its
daily operations function mainly in China; (ii) its financial and human resources decisions are subject to determination or approval
by persons or bodies in China; (iii) its major assets, accounting books, company seals and minutes and files of its board and
shareholders’ meetings are located or kept in China; and (iv) more than half of the enterprise’s directors or senior
management with voting rights reside in China. Although the circular only applies to offshore enterprises controlled by PRC enterprises
and not those controlled by PRC individuals or foreigners, the determining criteria set forth in the circular may reflect the
State Administration of Taxation’s general position on how the “de facto management body” test should be applied
in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises,
individuals or foreigners.
We do not believe Puhui Wealth Investment
Management Co., Ltd. or any of its subsidiaries outside of China was a PRC resident enterprise for the year ended June 30, 2019,
but we cannot predict whether such entities may be considered as a PRC resident enterprise for any subsequent taxable year. Although
our company is not controlled by any PRC company or company group, substantial uncertainty exists as to whether we will be deemed
as a PRC resident enterprise for enterprise income tax purposes. In the event that we were considered a PRC resident enterprise,
we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income, but the dividends that we receive
from our PRC subsidiary would be exempt from the PRC withholding tax since such income is exempted under the PRC Enterprise Income
Tax Law for a PRC resident enterprise recipient. See “Risk Factors — Risks Related to Doing Business in China —
The dividends we receive from our PRC subsidiary may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would
have a material adverse effect on our financial condition and results of operations. In addition, 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.”
PRC VAT and Business Tax
Pursuant to the Interim Regulation of
the People’s Republic of China on Value-Added Tax (the “VAT Regulation”), which was amended on November
19, 2017, any entity or individual engaged in the sales of goods, provision of specified services and importation of goods into
China is generally required to pay a VAT, at the rate of 17% of the gross sales proceeds received, less any deductible VAT already
paid or borne by such entity.
Pursuant to the PRC Provisional Regulations
on Business Tax, taxpayers falling under the category of service industry in China are required to pay a business tax at a normal
tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated
the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. Pursuant to this plan and relevant notices, from January
1, 2012, the value-added tax has been imposed to replace the business tax in the transport and shipping industry and some of the
modern service industries in certain pilot regions, of which Shanghai is the first one. A value-added tax, or VAT, rate of 6%
applies to revenue derived from the provision of some modern services.
On December 12, 2013, the Ministry of
Finance and State Administration of Taxation issued Notice of the Ministry of Finance and the State Administration of Taxation
on Including the Railway Transportation and Postal Industries in the Pilot Program of Replacing Business Tax with Value-Added
Tax (2013 Amendment), along with Pilot Implemental Rules of Replacing Business Tax with VAT, which is effective on May 1, 2016
(“Pilot Rules”). Pursuant to Pilot Rule, the unit and individual who provide service in transportation, postal and
other modern service industrial shall be tax payer of VAT. Taxpayer who provide taxable service shall pay VAT, instead of Business
Tax. The tax rate for provision of modern service industrial (exclusive of leasing of tangible chattel) is 6%.
On April 19, 2016, the State Administration
of Taxation issued the Announcement of the State Administration of Taxation on Tax Collection and Administration Matters Relating
to Full Launch of the Pilot Scheme for Levying VAT in place of Business Tax (the “VAT Announcement”), which became
effective on May 1, 2016. According to the VAT Announcement, a pilot taxpayer who has been determined as a general VAT taxpayer
before the implementation of the pilot program and concurrently provides taxable services is not required to apply for the qualification
again. The competent tax authority shall prepare and deliver the Notice of Tax-Related Matters and inform the taxpayer. A pilot
taxpayer with annual sales amount of taxable services exceed RMB5.0 million (US$0.8 million) before the implementation of the
pilot program of VAT in lieu of business tax shall go through the formalities for the qualification of a general VAT taxpayer
with the competent tax authority under the State Administration of Taxation.
On March 23, 2016, Ministry of Finance
and State Administration of Taxation promulgated the Notice of the Ministry of Finance and the State Administration of Taxation
on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner, which became effective
on May 1, 2016. According to such Notice, the pilot scheme on levying value-added tax in place of business tax shall be launched
nation-wide, all business tax taxpayers in the construction industry, real estate industry, financial industry, living services,
etc. shall be included in the scope of the pilot scheme, and subject to value-added tax instead of business tax.
In November 2017, PRC State Council issued
the amendment to Interim Regulations of PRC Value Added Taxes, or the VAT Regulation, pursuant to which entities and individuals
that sell goods or labor services of processing, repair or replacement, sell services, intangible assets, or immovables, or import
goods within the territory of the PRC are taxpayers of VAT, and shall pay VAT. The tax rate for VAT shall be, among others, (1)
17% for taxpayers engaged in sale of goods, services, lease of tangible movables or importation of goods, unless otherwise stipulated
in VAT Regulation; (2) 11% for taxpayers engaged in sale of transportation, postal, basic telecommunications, construction, lease
of immovables, sale of immovable, transfer of land use rights, sale or importation of certain types of goods; (3) 6% for taxpayers
engaged in sale of services and intangible assets, unless otherwise stipulated in VAT Regulation.
According to a Notice issued by the Ministry
of Finance and the State Administration of Taxation on April 4, 2018 and came into effect on May 1, 2018, the rate for taxable
sale and import of goods have been lowered from 17% and 11% to 16% and 10%, respectively. From April 1, 2019, the rate will be
further lowered to 13% and 9% respectively.
In 2017, the Ministry of Finance and the
State Administration of Taxation issued Notice on Issues Relating to VAT on Asset Management Products, or Circular 56, which became
effective in January 2018. According to Circular 56, VAT taxable transactions in the operations of asset management products by
their managers should temporarily use simple tax computation method and be levied at 3%. In order to be qualified for the 3% VAT
rate, the asset management product managers are required to separate the audit of revenues and VAT taxable amount of the operations
of assets management products business from other businesses. The management services provided by the managers as entrusted by
the investors or by the trustee to the entrusted assets should still apply ordinary VAT rate in accordance with the relevant laws
and regulations.
Dividend Withholding Tax
Pursuant to the PRC Enterprise Income
Tax Law and the Implementation Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in
China to its foreign investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a Cayman Islands holding
company and substantially all of our income may come from dividends we receive from our PRC subsidiary directly or indirectly.
Since there is no such tax treaty between China and the Cayman Islands, dividends we receive from our PRC subsidiary will generally
be subject to a 10% withholding tax. We have evaluated whether Puhui Wealth Investment Management Co., Ltd. is a PRC resident
enterprise and we believe that Puhui Wealth Investment Management Co., Ltd. was not a PRC resident enterprise for the year ended
December 31, 2017. However, as there remains uncertainty regarding the interpretation and implementation of the PRC Enterprise
Income Tax Law and the Implementation Rules, it is uncertain whether, if Puhui Wealth Investment Management Co., Ltd. will be
deemed a PRC resident enterprise in the future, any dividends distributed by Puhui Wealth Investment Management Co., Ltd. to our
non-PRC shareholders would be subject to any PRC withholding tax. See “Risk Factors — Risks Related to Doing Business
in China — The dividends we receive from our PRC subsidiary may be subject to PRC tax under the PRC Enterprise Income Tax
Law, which would have a material adverse effect on our financial condition and results of operations. In addition, 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 to our non-PRC shareholders.”
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 November 1st, 2015, non-resident taxpayers which satisfy the criteria for entitlement
to tax treaty benefits may, at the time of tax declaration or withholding declaration through a withholding agent, enjoy the tax
treaty benefits, and be subject to follow-up administration by the tax authorities. There are also other conditions for enjoying
such reduced withholding tax rate according to other relevant tax rules and regulations. Accordingly, HZF (HK) Limited may be
able to enjoy the 5% withholding tax rate for the dividends it receives from Rucong, if it satisfies the conditions prescribed
under Circular 81 and other relevant tax rules and regulations and follow up the administration of the PRC tax authorities. However,
according to Notice 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 Foreign Account Tax Compliance Act
The United States has passed the Foreign
Account Tax Compliance Act, or FATCA, that imposes a new reporting regime and, potentially, a 30% withholding tax on certain payments
made to certain non-U.S. entities. In general, the 30% withholding tax applies to certain payments made to a non-U.S. financial
institution unless such institution is treated as deemed compliant or enters into an agreement with the US Treasury to report,
on an annual basis, information with respect to certain interests in, and accounts maintained by, the institution to the extent
such interests or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned
by certain U.S. persons and to withhold on certain payments. The 30% withholding tax also generally applies to certain payments
made to a non-financial non-U.S. entity that does not qualify under certain exemptions unless such entity either (i) certifies
that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding
the entity’s “substantial United States owners.” An intergovernmental agreement between the United States and
another country may also modify these requirements. We do not expect FATCA will have a material impact on our business or operations,
but because FATCA is particularly complex and its application is uncertain at this time, we cannot assure you that we will not
be adversely affected by this legislation in the future.
Regulations on Foreign Exchange
Foreign exchange regulations in China
are primarily governed by Foreign Exchange Administration Rules (1996), as amended in 2008, or the Exchange Rules. Under the Exchange
Rules, Renminbi is convertible for current account items, including the distribution of dividends, interest and royalty payments,
trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment,
loan, securities investment and repatriation of investment, however, is still subject to the approval of SAFE.
On May 10, 2013, SAFE promulgated the
Circular on Printing and Distributing the Provisions on Foreign Exchange Administration Over Domestic Direct Investment by Foreign
Investors and the Supporting Documents, which specifies that the administration by SAFE or its local branches over foreign direct
investment in the PRC shall be conducted by way of registration. Institutions and individuals shall register with SAFE and/or
its branches for their direct investment in China. Banks shall process foreign exchange business relating to the direct investment
in China based on the registration information provided by SAFE and its branches.
In February 2015, SAFE promulgated the
Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment,
or Circular 13, which became effective on June 1, 2015. Upon the implementation of Circular 13, the current foreign exchange procedures
will be further simplified, foreign exchange registrations of direct investment will be handled by designated foreign exchange
settlement banks instead of SAFE and its branches.
On March 30, 2015, SAFE issued the Circular
on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises
(“SAFE Circular 19”), which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises
may either continue to follow the current payment-based foreign currency settlement system or elect to follow the “conversion-at-will”
regime of foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will regime of foreign currency
settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time.
The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested
enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and
provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by
a foreign-invested enterprise of its RMB registered capital converted from foreign currencies. According to SAFE Circular 19,
such Renminbi capital may be used at the discretion of the foreign-invested enterprise and SAFE will eliminate the prior approval
requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises like
our PRC subsidiary are still not allowed to extend intercompany loans to our PRC consolidated entities. In addition, as Circular
19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this
circular by relevant authorities.
On June 9, 2016, SAFE issued the Circular
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”),
which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign
debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of
foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary
basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited
by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular
16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain
how these rules will be interpreted and implemented.
On January 26, 2017, SAFE issued the Notice
of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange
Control, or the Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit
from domestic entities to offshore entities, including: (i) under the principle of genuine transaction, banks shall check board
resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii)
domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant
to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements,
and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound
investment.
Regulations on Dividend Distribution
The principal regulations governing dividend
distributions of wholly foreign-owned companies include:
|
●
|
Foreign Investment
Law became into force on January 1, 2020.
|
|
●
|
Wholly Foreign-Owned
Enterprise Law, as amended on September 3rd, 2016;
|
|
●
|
Wholly Foreign-Owned
Enterprise Law Implementing Rules, as amended on February 19, 2014; and
|
|
●
|
Company Law of China,
as amended on December 28, 2013.
|
Under these laws and regulations, wholly
foreign-owned companies in China may pay dividends only out of their accumulated profits as determined in accordance with PRC
accounting standards and regulations. In addition, these wholly foreign-owned companies are required to set aside no less than
10% of the after-tax profits, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of
its registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as
cash dividends except in the event of liquidation. At the discretion of these wholly foreign-owned companies, they may allocate
a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and
staff welfare and bonus funds are not distributable as cash dividends.
Regulations on Offshore Investment by PRC Residents
Pursuant to the SAFE’s Notice on
Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Round Trip Investment
via Overseas Special Purpose Companies and its subsequent amendments, supplements or implementation rules, or SAFE Circular 75,
issued on October 21, 2005, a PRC resident (whether a natural person or legal persons) shall register with the local branch of
the SAFE before it establishes or controls an overseas SPV, with assets or equity interests in a PRC company, for the purpose
of overseas equity financing. On July 4, 2014, SAFE issued the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Outbound Investment and Financing and Inbound Investment via Special Purpose Vehicles
(“SPV”), or SAFE Circular 37, which has superseded SAFE Circular 75. According to SAFE Circular 37, the PRC domestic
resident shall apply for SAFE registration for overseas investment before paying capital to SPV by using his, her or its legal
assets whether overseas or domestic. The SPV is defined as “offshore enterprise directly established or indirectly controlled
by the domestic residents (including domestic institutions and individuals) with their legally owned assets and equity of the
domestic enterprise, or legally owned offshore assets or equity, for the purpose of off shore investment and financing”.
In addition, in the event that the SPV undergoes changes of its basic information such as the individual shareholder, name, operation
term, etc., or material events including increase or decrease by domestic individual shareholder in investment amount, equity
transfer or swap, merge, spinoff, etc., the domestic resident shall timely complete the change of foreign exchange registration
formality for offshore investment.
According to SAFE Circular 37, failure
to make such registration or truthfully disclose actual controllers of the round-trip enterprises may subject PRC residents to
fines up to RMB300,000 in case of domestic institutions or RMB50,000 in case of domestic individuals. If the registered or beneficial
shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches,
the PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer
or liquidation to the offshore company, and the offshore company maybe restricted in its ability to contribute additional capital
to its PRC subsidiary. Moreover, failure to comply with SAFE registration and amendment requirements described above could result
in liability under PRC law for violating applicable foreign exchange restrictions.
Our principal shareholders who directly
or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents have completed
the foreign exchange registrations required in connection with our recent corporate restructuring.
However, we may not be informed of the
identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial
owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial
owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations
or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations,
or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit our PRC subsidiary’ ability to make distributions or
pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Regulations on Stock Incentive Plans
On December 25, 2006, the People’s
Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, setting forth the respective
requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account
or the capital account.
On February 15, 2012, SAFE issued the
Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan
of Overseas Publicly-Listed Company, or the Stock Incentive Plan Rules. The purpose of the Stock Incentive Plan Rules is to regulate
foreign exchange administration of PRC domestic individuals who participate in employee stock holding plans and stock option plans
of overseas listed companies. According to the Stock Incentive Plan Rules, if PRC “domestic individuals” (both PRC
residents and non-PRC residents who reside in China for a continuous period of not less than one year, excluding the foreign diplomatic
personnel and representatives of international organizations) participate in any stock incentive plan of an overseas listed company,
a PRC domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, shall, among others things,
file, on behalf of such individual, an application with SAFE to conduct the SAFE registration with respect to such stock incentive
plan, and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding
or stock option exercises. In addition, SAFE Circular 37 also provides certain requirements and procedures of foreign exchange
registration in relation to equity incentive plan of SPV before listing. In this regard, if a non-listed SPV grants equity incentives
to its directors, supervisors, senior officers and employees in its domestic subsidiaries, the relevant domestic individual residents
may register with SAFE before exercising their rights.
The Stock Incentive Plan Rules and SAFE
Circular 37 were promulgated only recently and many issues require further interpretation. If we or our PRC employees fail to
comply with the Stock Incentive Plan Rules, we and our PRC employees may be subject to fines and other legal sanctions. In addition,
the General Administration of Taxation has issued a few circulars concerning employee stock options. Under these circulars, our
employees working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary has obligations
to file documents related to employee stock options with relevant tax authorities and withhold individual income taxes of those
employees who exercise their stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face
sanctions imposed by tax authorities or other PRC government authorities.
Properties:
We have leased substantially more office properties to accommodate
the increase in our operations in the year ended June 30, 2020. Below is a summary of our properties.
Locations
|
|
Purpose
Of Use
|
|
Size
|
|
Lessor
|
|
Lessee
|
|
Start
Date And Duration
|
|
Rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suite 801/ 802, W1
Office Building, Oriental Commerce Tower No.1 Chang An Street, Dong Cheng District, Beijing
|
|
business and office
use
|
|
886.49m2
|
|
Beijing Oriental
Plaza Co., Ltd.
|
|
Puhui Beijing
|
|
April 1, 2019 –
March 31, 2021
|
|
100,468.87 RMB/month
(April 1, 2019 to June 30, 2019); 301,406.6 RMB/month (July 1, 2019 to March 31, 2021)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suite 01 & 08,
45th Floor, Shanghai Magnolia Square, 501 Dongdaming Road, Hongkou District, Shanghai
|
|
business and office
use
|
|
685.96m2
|
|
Shanghai Jingang
North Bund Real Estate Co., Ltd.
|
|
Shanghai Ruyue
|
|
September 1, 2019
– August 31, 2022
|
|
239,943.09 RMB/month
(September 1, 2019 to December 31, 2019); 119,971.55 RMB/month (January 1, 2020 to February 29, 2020) 239,943.09 RMB/month
(March 1, 2020 to August 31, 2022)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suite 1806, Building
1, Honghai Building, 72 Xingdu Street, Industrial Park, Suzhou
|
|
business and office
use
|
|
144.45m2
|
|
Suhuoji
|
|
Suzhou
Shanghui
|
|
March 16, 2019 –
March 15, 2022
|
|
12,133.8 RMB/month
(March 16, 2019 to March 15, 2021); 12,892.16 RMB/month (March 16, 2021 to March 15, 2022)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room 6, Floor 9,
W1 Office Building, Oriental Commerce Tower No.1 Chang An Street, Dong Cheng District, Beijing
|
|
business and office
use
|
|
192.21m2
|
|
Beijing Oriental
Plaza Co., Ltd.
|
|
Beijing Shanying
|
|
January 1, 2020 –
December 31, 2021 (Beijing Shanying)
|
|
64,390.35 RMB/month
(January 1, 2020 to December 31, 2021)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room 1, Floor 10,
C1 Office Building, Oriental Commerce Tower No.1 Chang An Street, Dong Cheng District, Beijing
|
|
business and office
use
|
|
307.62m2
|
|
Beijing Oriental
Plaza Co., Ltd
|
|
Beijing
Ruyuehaipeng
|
|
August 1, 2018 -
July 31, 2020
|
|
52,295.40 RMB/month
(August 1, 2018 to September 30, 2018);
104,590.80 RMB/month (October 1, 2018 to July 31, 2020)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room 2506, Building
2, Excellence Century Center, Long Cheng Road, ShiBei District, Qingdao
|
|
business and office
use
|
|
260.34 m2
|
|
Excellence Century
Center
|
|
Qingdao Puhui
|
|
March 1, 2020 - February
28, 2021
|
|
76,019 RMB/quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit C, 11 Floor,
OfficePlus
@Mongkok
998 Canton Road
Mong Kok, Kowloon.
|
|
business and office use
|
|
30.00 m2
|
|
Hip Shing Hong
(Agency)
Co. Ltd.
|
|
Granville
|
|
November 1, 2019 - October 31, 2021
|
|
20,400
HKD/month
|
We
believe that our current property rights are sufficient for our current operations.
Available Information
Our annual reports on Form 20-F, current
reports on Form 6-K, and other forms and periodic reports when we were filing as a foreign private issuer, are available free
of charge on our website http://www.puhuiwealth.com as soon as reasonably practicable after we have electronically filed such
materials with, or furnished such materials to the Securities and Exchange Commission. They are also available at www.sec.gov.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not Applicable
ITEM 5.
|
OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
|
The following discussion and analysis
should be read in conjunction with our consolidated financial statements, the notes to those financial statements and other financial
data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking
statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events
may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set
forth in “Risk Factors” and elsewhere in this report. Our consolidated financial statements are prepared in conformity
with U.S. GAAP.
Overview
We are a third-party
wealth management service provider focusing on marketing financial products to, and managing funds for individuals and corporate
clients in the PRC. Our main operating activities are carried out through our VIE, Puhui Wealth Investment Management (Beijing)
Co., Ltd. (Puhui Beijing), and its subsidiaries.
We market financial
products to high-net-worth individuals with investable assets of between RMB 3 million and RMB 15 million (approximately US $0.4
million to $2.2 million) and small and medium enterprises with investable assets of RMB 5.0 million to RMB 20.0 million (approximately
US $0.7 million to $2.9 million). As of June 30, 2020, we have facilitated the sale of financial products which include primarily
private equity fund products, securities investment fund products and private placement bond products. For the year ended June
30, 2020, we had 116 new high-net-worth clients with average transaction value per client of $107,852. We charge financial institutions
one-time commissions, calculated as a percentage of the value of the financial products purchased by our clients from such institutions.
In addition, during the life cycle of certain of the products sold by various institutions to our clients, we charge such institutions
recurring service fees for our ongoing services, such as investment relationship maintenance and coordination and product reports
distribution.
For our in-house asset management business, we served as manager
or general partner of five funds with an aggregate value of over approximately RMB 153.2 million (US$21.6 million) under management
as of June 30, 2020. Three of these funds are in the form of a limited partnership where we serve as general partner with investors
being limited partners. We did not consolidate any of the three limited partnerships based on our VIE analysis. See “Critical
Accounting Policies” below. We charge investors subscription fees for fund formation services and recurring management fees
in exchange for our managing such funds as general partner or manager. Subscription fees are computed as a percentage of the capital
contributions made to the funds. Recurring management fees are paid to us on a quarterly basis. Performance fees and carried interest
are required to be paid to us upon maturity of such funds.
On December 3, 2019,
we acquired 100% of the shares of Granville Financial Services Company Limited (“Granville”) for HK$29,390,000 or
approximately $3.8 million. The purpose of this acquisition of Granville is to expand the Company’s operations outside of
China and to take advantage of its financial qualifications and licenses to broaden the Company’s existing product portfolio.
In January 2020, there
was an ongoing outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world.
The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in
China for the past few months. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly
expanding nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated
in China, our business, results of operations, and financial condition has been adversely affected. Potential impact to our results
of operations beyond fiscal year 2020 will also depend on future developments and new information that may emerge regarding the
any resurgence of the COVID-19 and its impact on macro-economies, which are beyond our control.
The impacts of COVID-19
on our business, financial condition, and results of operations include, but are not limited to, the following:
|
●
|
We closed
our offices and implemented work from-home policy beginning in February 2020, as required
by relevant PRC regulatory authorities. We reopened our offices in June 2020 as COVID-19
was under control in China. Due to regulations about public gatherings, we were not able
to hold meetings and seminars for customers and have reduced the headcount of our sales
and marketing departments.
|
|
●
|
Our customers
have been negatively impacted by the outbreak, which reduced their budgets for investment
in 2020. As a result, our revenue and income has been negatively impacted in 2020.
|
|
●
|
For the
year ended June 30, 2020, our business was impacted due to the uncertainty in macroeconomic
outlook as a result of slower economic growth and impact of COVID-19. Investors became
increasingly conservative in investing in financial products, especially products based
on equities in China. As such, the aggregate value of wealth management products we distributed
decreased.
|
Factors Affecting Our Results of Operations
Our management team
monitors the following key business metrics:
Number of Active High-Net-Worth
Clients
Our core business is
the marketing of wealth management product advisory services to high-net-worth individuals and small and medium enterprises in
China. Our active clients are those who, during any given period, purchased wealth management products that we distribute at least
once during that period. Our ability to attract new and repeat clients and to increase purchases by existing clients depends on
our ability to provide high-quality wealth management product advisory services and products. To achieve this, we constantly strive
to increase the level of expertise of our wealth management product advisors, enrich our product selection, and by expanding our
coverage network into new markets.
Average Transaction Value Per Client
Average transaction
value per client for any given period refers to the simple average of the value of wealth management products distributed by us
to each active client during that period. The average transaction value per client is related to the total amount of wealth management
products we distribute, which is a function of the number of active clients and the average transaction value per client. An increase
in the total amount of wealth management products we distribute may increase the one-time commissions and recurring fees we earn,
which in turn drives our revenue growth. The average transaction value per client is also affected by our clients’ amount
of investable assets and the level of satisfaction of our clients with our wealth management product advisory services.
Mix of Financial Products
Our product mix affects
the amount of revenues we are able to generate. The financial products that we have marketed for the years ended June 30, 2020
and 2019 include the following:
|
●
|
private equity fund
products, consisting primarily of investments in equity of private equity funds whose underlying assets consist of equity
interests in private companies based in China, primarily in the medical and life science industries; and
|
|
●
|
entities that invest
in U.S. publicly listed companies.
|
The composition and
level of revenues that we derive from the distribution of financial products are affected by the type of products in which our
clients invest. The product type determines whether we can receive one-time commissions only, or both one-time commissions and
recurring service fees. With respect to all product types, we receive one-time commissions paid by product providers, calculated
as a percentage of the value of the products that our clients purchase. With respect to non-fixed income products, we also receive
recurring service fees in exchange for providing recurring services to our clients that have purchased such products.
The table below sets
forth the total value, based on historical cost, of different types of products that were distributed to our clients, both in
absolute amount and as a percentage of the total value of all products distributed, during the periods indicated. All our clients
are either individuals or small and medium size enterprises who are not related to us.
We categorize products
as third-parties products and related-parties products. Financial products issued by unrelated parties are categorized as third-party
products.
|
|
For the Years Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
|
US $ in
thousands
|
|
|
Average
Fee Rate
(%)
|
|
|
% of Total
Investments
|
|
|
US $ in
thousands
|
|
|
Average
Fee Rate
(%)
|
|
|
% of Total
Investments
|
|
Private equity funds products - related
parties
|
|
|
7,807
|
|
|
|
10.4
|
|
|
|
45.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Private equity funds products - third parties
|
|
|
9,202
|
|
|
|
10.2
|
|
|
|
54.1
|
|
|
|
16,632
|
|
|
|
10.1
|
|
|
|
69.5
|
|
Private equity funds products - total
|
|
|
17,009
|
|
|
|
10.3
|
|
|
|
100.0
|
|
|
|
16,632
|
|
|
|
10.1
|
|
|
|
69.5
|
|
Entities that invest in
U.S. publicly listed companies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,307
|
|
|
|
11.3
|
|
|
|
30.5
|
|
All Products
|
|
|
17,009
|
|
|
|
10.3
|
|
|
|
100.0
|
|
|
|
23,939
|
|
|
|
10.3
|
|
|
|
100.0
|
|
Fee Rates. Our one-time
commissions are a function of the dollar amount of financial products our clients purchase and our commission rate. Similarly,
our recurring fees are a function of the amount of underlying assets and the applicable recurring fee rates. We refer to our commission
rates and recurring fee rates collectively as our fee rates. Our net revenues are affected by our fee rates, which are based on
individually negotiated service contracts with product providers. Our fee rates will differ across products of different types
and sizes. For the same type of products, the fee rate of each product is mainly based on the risk profiles of such product.
For the year ended June 30, 2020, we have only marketed private
equity products due to current market conditions, representing 100.0% of the total products we marketed. As a result, we marketed
approximately $17.0 million in private equity fund products which was consistent to the products we marketed in the year ended
June 30, 2019. As a percentage of all the products that our clients purchased, private equity products comprised 100.0% and 69.5%
for the years ended June 30, 2020 and 2019, respectively.
Funds invested by our
clients in entities that invest in U.S. publicly listed companies decreased from approximately $7.3 million during the year ended
June 30, 2019 to $0 during the year ended June 30, 2020. For the years ended June 30, 2020 and 2019, these products comprised
0% and 30.5 % of the financial products that our clients purchased, respectively. The decrease was because we did not market these
products in 2020.
Assets Management Business
We completed our registration with the Assets Management Association
of China in March 2017, at which time we obtained our license to act as fund managers of private equity and private security products.
In June 2017, we began to operate our asset management business. Currently we have five funds under management with over $21.6
million in assets in the aggregate. With respect to two of the funds we manage, we charge investors subscription fees for fund
formation services and recurring management fees in exchange for our managing such funds as general partner or manager. Subscription
fees are computed as a percentage of the capital contributions made to the funds. Recurring management fees are paid to us on a
quarterly basis. Performance-related commissions and carried interest are required to be paid to us upon maturity of such funds.
We did not receive any performance-related commissions and/or carried interest to date. Our funds are set to mature within three
to five years of formation. Revenues generated from asset management services amounted to approximately $78,000 and $64,000, representing
3.6% and 2.0% of our overall total revenues during the years ended June 30, 2020 and 2019, respectively. The slight increase was
because we started a new fund in early 2020.
Assets under Management
For private equity funds,
our assets under management (“AUM”) are recorded at the historical cost of such assets. Management fees are calculated
either as a percentage of the investments in a fund per annum or a percentage of daily asset value and are recognized as earned
over the specified contract period. Performance fees are not determinable until the winding up of the relevant funds. Accordingly,
we do not accrue performance-based income based on net asset value before the winding up of the relevant fund.
Typical fee rates include
both subscription fee and recurring management fee rates.
|
|
Typical
fee rates
|
|
As of June 30,
2019
|
|
|
Funds
Inflow
|
|
|
Funds
Outflow
|
|
|
As of June 30, 2020
|
|
|
|
USD in thousands, except percentages
|
|
Product type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity
funds
|
|
0.1% - 1.5%
|
|
|
23,023
|
|
|
|
100
|
%
|
|
|
2,617
|
|
|
|
4,001
|
|
|
|
21,639
|
|
|
|
100
|
%
|
The total amount of
AUM was approximately $21.6 million as of June 30, 2020, a decrease of approximately $1.4 million, from approximately $23.0 million
as of June 30, 2019. The net increase was due to:
(1)
|
Inflows of approximately
$0.6 million was dividends from Pingtan No.1 investment and approximately $2.0 million was investment for new private equity
fund Xinyu Yuanyuan during the year ended June 30, 2020.
|
|
|
(2)
|
Outflows of approximately
$4.0 million was the liquidation of the private equity funds and approximately $30,000 was the subscription and recurring
management fees for the new private equity fund Xinyu Yuanyuan during the year ended June 30, 2020.
|
Key Components of Our Results of Operations
Revenue:
One-time commissions: We generated
the majority of our revenues from one-time commissions from marketing of financial products purchased by our client and related
services where we charge product providers a commission calculated as a percentage of the financial products purchased by our
clients. One-time commissions received prior to the establishment of the product will be deferred. One-time commissions also include
fees negotiated case by case when we serve as an intermediary to facilitate the sale of our customer’s products. The one-time
commission rates typically range from 1.0% to 15.0% for equity related products.
Subscription fees
A one-time subscription fee is charged
on funds that the Company manages as stipulated in the fund agreement for fund formation services the Company provides and for
distribution of products. These subscription fees are computed as a percentage of the investment received in the funds and recognized
upon the establishment of the funds.
Recurring Service Fees: Recurring
service fees arise from on-going services provided to product providers after the distribution of financial products including
investment relationship maintenance and coordination, product reports, and due diligence reports distribution. Recurring service
fees that we received were mainly from securities investment fund products and equity investments in U.S. publicly listed companies
that our clients purchased. Recurring service fees generated from securities investment fund products are typically calculated
as 1.0% of the net asset value of the portfolio underlying the products purchased by our clients calculated on a daily basis.
Recurring management fees: Recurring
management fee arises from the asset management services provided to funds we manage. Recurring management fees are computed as
a percentage of the capital contribution in a fund and are recognized over the specified contract period. The recurring management
fee rates are within the range of 0.1% to 1% annually.
Other service fees: Other service
fees refer to revenue generated from consulting services provided to companies. Service fees are negotiated case by case and depends
on the service we provided.
Sales taxes: Revenues earned and
received in the PRC are not only subject to a Chinese value-added tax (“VAT”) at a rate of 3% to 6% of the gross proceeds
or at a rate approved by the Chinese local government but also various miscellaneous VAT add-on taxes at a rate of 1% to 7% of
the VAT.
Cost of Revenues
Our cost of revenues
consists of compensation of financial product development team members and related social welfare and benefits. Our cost of revenues
for the years ended June 30, 2020 and 2019 has slightly decreased, in line with the decrease in our revenues. Our cost of revenues
were approximately $0.2 million and approximately $0.3 million for the years ended June 30, 2020 and 2019, respectively.
Selling expenses
Our selling expenses
consist of compensation of financial product advisors, benefits and social welfare. Selling expenses also include rents for offices
where marketing activities were conducted.
General and administrative expenses
General and administrative
expenses consist primarily of salaries and benefits expense for our accounting and finance, business development, fund relations,
legal, human resources and other personnel, and outside professional services fees and facilities expenses.
Results of Operations
The tables in the following
discussion summarize our consolidated statements of operations for the periods indicated. This information should be read together
with our consolidated financial statements and related notes included elsewhere in this report. The operating results in any period
are not necessarily of the results that may be expected for any future period.
Year Ended June 30, 2020 Compared to
Year Ended June 30, 2019
|
|
For the year ended
June
30,
2020
|
|
|
For the year ended
June
30,
2019
|
|
|
Change
|
|
|
Change
(%)
|
|
Revenues
|
|
$
|
1,481,980
|
|
|
$
|
3,052,371
|
|
|
$
|
(1,570,391
|
)
|
|
|
(51.4
|
)%
|
Revenues – related parties
|
|
|
697,500
|
|
|
|
128,263
|
|
|
|
569,237
|
|
|
|
443.8
|
%
|
Cost of revenues
|
|
|
(202,637
|
)
|
|
|
(316,718
|
)
|
|
|
(114,081
|
)
|
|
|
(36.0
|
)%
|
Selling expenses
|
|
|
(1,517,968
|
)
|
|
|
(2,005,367
|
)
|
|
|
(487,399
|
)
|
|
|
(24.3
|
)%
|
General and administrative expenses
|
|
|
(4,977,537
|
)
|
|
|
(3,427,040
|
)
|
|
|
1,550,497
|
|
|
|
45.2
|
%
|
Loss from operations
|
|
|
(4,518,662
|
)
|
|
|
(2,568,491
|
)
|
|
|
(1,950,171
|
)
|
|
|
75.9
|
%
|
Other income, net
|
|
|
201,682
|
|
|
|
63,775
|
|
|
|
137,907
|
|
|
|
216.2
|
%
|
Other expenses
|
|
|
(191,238
|
)
|
|
|
(206,081
|
)
|
|
|
14,843
|
|
|
|
(7.2
|
)%
|
Loss before income taxes
|
|
|
(4,508,218
|
)
|
|
|
(2,710,797
|
)
|
|
|
(1,797,421
|
)
|
|
|
66.3
|
%
|
Provision (Benefit) for current income taxes
|
|
|
-
|
|
|
|
11,803
|
|
|
|
(11,803
|
)
|
|
|
(100.0
|
)%
|
Provision for deferred income
taxes
|
|
|
179,449
|
|
|
|
380,302
|
|
|
|
(200,853
|
)
|
|
|
(52.8
|
)%
|
Net loss
|
|
|
(4,687,667
|
)
|
|
|
(3,102,902
|
)
|
|
|
(1,584,765
|
)
|
|
|
51.1
|
%
|
Foreign currency translation
(loss) Income
|
|
|
159,935
|
|
|
|
(271,194
|
)
|
|
|
431,129
|
|
|
|
(159.0
|
)%
|
Comprehensive loss
|
|
$
|
(4,527,732
|
)
|
|
$
|
(3,374,096
|
)
|
|
$
|
(1,153,636
|
)
|
|
|
34.2
|
%
|
Revenue:
We categorize revenues
into third-party revenues and related-party revenues.
For
the year ended June 30, 2020, related party revenues consisted of one-time commissions from Beijing Rululu Consulting Center,
Beijing Rusan Consulting Center and Beijing Ruqi Consulting Center which are the related party companies owned by Mr. Zhe Ji,
our CEO. For the year ended June 30, 2019, related party revenues also consisted of one-time commissions from Mr. Peng Ji, limited
partner of Beijing Puhui Rushun Management Consulting Center Limited Partnership.
The following table
sets forth the principal components of our net revenues by amounts and percentages of our net revenues for the periods indicated:
|
|
For the year ended
June 30,
2020
|
|
|
%
|
|
|
For the year ended
June 30,
2019
|
|
|
%
|
|
|
Change
|
|
|
Change %
|
|
One-time commissions (1)
|
|
$
|
2,002,409
|
|
|
|
91.9
|
%
|
|
$
|
2,450,654
|
|
|
|
77.1
|
%
|
|
$
|
(448,245
|
)
|
|
|
(18.3
|
)%
|
Related party
|
|
|
639,696
|
|
|
|
29.4
|
%
|
|
|
113,458
|
|
|
|
3.6
|
%
|
|
|
526,238
|
|
|
|
463.8
|
%
|
Third party
|
|
|
1,362,713
|
|
|
|
62.5
|
%
|
|
|
2,337,196
|
|
|
|
73.5
|
%
|
|
|
(974,483
|
)
|
|
|
(41.7
|
)%
|
Recurring service fees (2)
|
|
|
76,602
|
|
|
|
3.5
|
%
|
|
|
411,040
|
|
|
|
12.9
|
%
|
|
|
(334,438
|
)
|
|
|
(81.4
|
)%
|
Third party
|
|
|
76,602
|
|
|
|
3.5
|
%
|
|
|
411,040
|
|
|
|
12.9
|
%
|
|
|
(334,438
|
)
|
|
|
(81.4
|
)%
|
Recurring management fees (3)
|
|
|
77,586
|
|
|
|
3.5
|
%
|
|
|
63,508
|
|
|
|
2.0
|
%
|
|
|
14,078
|
|
|
|
22.2
|
%
|
Third party
|
|
|
46,470
|
|
|
|
2.1
|
%
|
|
|
47,845
|
|
|
|
1.5
|
%
|
|
|
(1,375
|
)
|
|
|
(2.9
|
)%
|
Related parties
|
|
|
31,116
|
|
|
|
1.4
|
%
|
|
|
15,663
|
|
|
|
0.5
|
%
|
|
|
15,453
|
|
|
|
98.7
|
%
|
Subscription fees (4)
|
|
|
28,625
|
|
|
|
1.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
28,625
|
|
|
|
100.0
|
%
|
Other services fees(5)
|
|
|
309
|
|
|
|
0.1
|
%
|
|
|
276,729
|
|
|
|
8.7
|
%
|
|
|
(276,420
|
)
|
|
|
(99.9
|
)%
|
Sales taxes(6)
|
|
|
(6,051
|
)
|
|
|
(0.3
|
)%
|
|
|
(21,297
|
)
|
|
|
(0.7
|
)%
|
|
|
15,246
|
|
|
|
(71.6
|
)%
|
Total operating revenues
|
|
$
|
2,179,480
|
|
|
|
100.0
|
%
|
|
$
|
3,180,634
|
|
|
|
100.0
|
%
|
|
$
|
(1,001,154
|
)
|
|
|
(31.5
|
)%
|
The overall 31.5% decrease
in operating revenue for the year ended June 30, 2020 from the year ended June 30, 2019 was mainly due to the decrease in one-time
commissions and recurring services fees.
|
(1)
|
One-time commissions decreased by approximately $0.4 million
or 18.3% for the year ended June 30, 2020 compared to the same period in 2019. The decrease was mainly due to the decreases in
the aggregate value of wealth management products we distributed and in line with the decrease in total revenue as the COVID-19
has impacted the financial market.
|
|
(2)
|
Recurring service fees for the year ended June 30, 2020 decreased
by approximately $0.3 million or 81.4% compared to the year ended June 30, 2019. For the years ended June 30, 2020 and 2019, recurring
services fees amounted to approximately $77,000 and $0.4 million, respectively, representing 3.5% and 12.9% of our total revenues,
respectively. The increase in recurring service fees is because we received the final portion of service fees from two entities
that invest in U.S. publicly listed companies that have each completed a business combination.
|
|
(3)
|
We received approximately
$78,000 and $64,000 in recurring management fees for the years ended June 30, 2020 and
2019, respectively. We expect these services fees will continue to provide us with a
steady stream of income during the cycle of the products.
|
|
(4)
|
We received one-time
subscription fees from the fund we managed, Xinyu Yuanyuan, for the year ended June 30,
2020 amounting to $29,000. A one-time subscription fee is charged up front to funds that
we manage. These revenues are recognized upon formation of the funds and distribution
of products. These subscription fees average 1.5% and are also computed as a percentage
of the capital contribution in the funds. We expect revenue from subscription fees to
increase as we expand our asset management business. We did not have subscription fees
revenue for the year ended June 30, 2019.
|
|
(5)
|
Other service
fees amounted to $309 and $0.3 million for the years ended June 30, 2020 and 2019, respectively.
Such services are not our primary services.
|
Operating Expenses
Our operating expenses
consist of cost of revenues, selling expenses, general and administrative expenses and impairment loss.
|
|
For the Year Ended
June
30,
2020
|
|
|
%
|
|
|
For the Year Ended
June
30,
2019
|
|
|
%
|
|
|
Change
|
|
|
Change (%)
|
|
Cost of revenues
|
|
$
|
202,637
|
|
|
|
3.0
|
%
|
|
$
|
316,718
|
|
|
|
5.5
|
%
|
|
$
|
(114,081
|
)
|
|
|
(36.0
|
)%
|
Selling expenses
|
|
|
1,517,968
|
|
|
|
22.7
|
%
|
|
|
2,005,367
|
|
|
|
34.9
|
%
|
|
|
(487,399
|
)
|
|
|
(24.3
|
)%
|
General and administrative
expenses
|
|
|
4,977,537
|
|
|
|
74.3
|
%
|
|
|
3,427,040
|
|
|
|
59.6
|
%
|
|
|
1,550,497
|
|
|
|
45.2
|
%
|
Total operating expenses
|
|
$
|
6,698,142
|
|
|
|
100.0
|
%
|
|
$
|
5,749,125
|
|
|
|
100.0
|
%
|
|
$
|
949,017
|
|
|
|
16.5
|
%
|
Cost of Revenues
Our cost of revenues
were approximately $0.2 million and approximately $0.3 million for the years ended June 30, 2020 and 2019, respectively. It has
consisted of the employees’ salaries of our financial products. As we experienced slower growth and product distribution,
some of our financial product department employees were relocated to other departments.
Selling expenses
|
|
For the Year Ended
June
30,
2020
|
|
|
For the Year Ended
June
30,
2019
|
|
|
Change
|
|
|
Change (%)
|
|
Salaries
|
|
$
|
818,563
|
|
|
$
|
1,228,992
|
|
|
$
|
(410,429
|
)
|
|
|
(33.4
|
)%
|
Rent (including amortization of right of use assets)
|
|
$
|
386,501
|
|
|
$
|
390,200
|
|
|
$
|
(3,699
|
)
|
|
|
(0.9
|
)%
|
Others
|
|
$
|
312,904
|
|
|
$
|
386,175
|
|
|
$
|
(73,271
|
)
|
|
|
(19.0
|
)%
|
Total selling expenses
|
|
$
|
1,517,968
|
|
|
$
|
2,005,367
|
|
|
$
|
(487,399
|
)
|
|
|
(24.3
|
)%
|
Our selling expenses
were $1,517,968 and $2,005,367 for the years ended June 30, 2020 and 2019, respectively, a decrease of $487,399 or 24.3%. The
decrease was mainly due to the decrease in salaries as we closed our office in early 2020 due to the COVID-19 outbreak and reduced
headcount in selling department due to inability to carry out marketing functions such as customer meetings and seminars during
the pandemic.
General and administrative expenses
|
|
For the Year Ended
June
30,
2020
|
|
|
For the Year Ended
June
30,
2019
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
1,131,736
|
|
|
$
|
1,079,319
|
|
|
$
|
52,417
|
|
|
|
4.9
|
%
|
Rent (including amortization of right of use assets)
|
|
$
|
961,430
|
|
|
$
|
573,449
|
|
|
$
|
387,981
|
|
|
|
67.7
|
%
|
Professional fees
|
|
$
|
1,639,582
|
|
|
$
|
928,692
|
|
|
$
|
710,890
|
|
|
|
76.5
|
%
|
Others
|
|
$
|
1,244,789
|
|
|
$
|
845,580
|
|
|
$
|
399,209
|
|
|
|
47.2
|
%
|
Total general and administrative
expenses
|
|
$
|
4,977,537
|
|
|
$
|
3,427,040
|
|
|
$
|
1,550,497
|
|
|
|
45.2
|
%
|
Our general and administrative
expenses were $4,977,537 and $3,427,040 for the years ended June 30, 2020 and 2019, respectively, an increase of $1,550,497 or
45.2%. The increase was primarily due to approximately $711,000 in professional fees and approximately $388,000 in rent. We incurred
more consulting fees for business development including the acquisition of Granville, and other consulting fees for future business
developments. As we acquired Granville in December 2019, Granville’s general and administrative expenses and amortization
of intangible assets were also included.
Provision (Benefits) for Income
Taxes
The Company recorded
$0 current income tax expense in the year ended June 30, 2020, compared to income tax expense of $11,803 in the year ended June
30, 2019. The decrease was mainly due to the operational loss from all entities caused by the impact of COVID-19.
We recorded deferred
taxes of $179,449 and $380,302 mainly due to deferred taxes recorded as a result of net operating loss of Granville.
Net Loss
Net loss for the
year ended June 30, 2020 was approximately $4.7 million as compared to approximately $3.1 million for the year ended June 30,
2019. Such change was the result of the combination of the changes discussed above.
Foreign Currency Translation Adjustment
Changes in foreign currency
translation adjustment are mainly due to the fluctuation of foreign exchange rates between RMB (the functional currency of our
operating entities).
Translation adjustments
included in accumulated other comprehensive income (loss) amounted to approximately $0.2 million and approximately $(0.3) million
as of June 30, 2020 and 2019, respectively. The balance sheet amounts, with the exception of shareholders’ equity at June
30, 2020 and 2019 were translated at 7.08 RMB and 6.87 RMB to $1.00, respectively. The shareholders’ equity accounts were
stated at their historical rates. The average translation rates applied to statement of income accounts for the years ended June
30, 2020 and 2019 were 7.02 RMB and 6.82 RMB, respectively. As we acquired Granville in December 2019, the balance sheet amounts
with the exception of shareholders’ equity of that entity were translated at 7.75 HKD to $1.00. The average translation
rates applied to statement of income accounts were translated at 7.77 HKD to $1.00. Cash flows are also translated at average
translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance sheets.
Fiscal Year Ended June 30, 2019 Compared
to Fiscal Year Ended June 30, 2018
|
|
For the year ended
June
30,
2019
|
|
|
For the year ended
June
30,
2018
|
|
|
Change
|
|
|
Change
(%)
|
|
Revenue – third parties
|
|
$
|
3,072,809
|
|
|
$
|
2,808,346
|
|
|
$
|
264,463
|
|
|
|
9.4
|
%
|
Revenues – related parties
|
|
|
129,122
|
|
|
|
1,351,515
|
|
|
|
(1,222,393
|
)
|
|
|
(90.4
|
)%
|
Sales taxes
|
|
|
(21,297
|
)
|
|
|
(20,680
|
)
|
|
|
617
|
|
|
|
3.0
|
%
|
Cost of revenues
|
|
|
316,718
|
|
|
|
367,548
|
|
|
|
(50,830
|
)
|
|
|
(13.8
|
)%
|
Selling expenses
|
|
|
2,005,367
|
|
|
|
1,500,572
|
|
|
|
504,795
|
|
|
|
33.6
|
%
|
General and administrative expenses
|
|
|
3,421,412
|
|
|
|
1,888,310
|
|
|
|
1,533,102
|
|
|
|
81.2
|
%
|
Impairment loss
|
|
|
5,628
|
|
|
|
78,984
|
|
|
|
(73,356
|
)
|
|
|
(92.9
|
)%
|
(Loss) income from operations
|
|
|
(2,568,491
|
)
|
|
|
303,767
|
|
|
|
(2,872,258
|
)
|
|
|
(945.5
|
)%
|
Other income
|
|
|
62,967
|
|
|
|
11,526
|
|
|
|
51,441
|
|
|
|
446.3
|
%
|
Other expenses
|
|
|
(205,273
|
)
|
|
|
(41,146
|
)
|
|
|
(164,127
|
)
|
|
|
398.9
|
%
|
(Loss) income before income taxes
|
|
|
(2,710,797
|
)
|
|
|
274,147
|
|
|
|
(2,984,944
|
)
|
|
|
(1,088.8
|
)%
|
Provision for current income taxes
|
|
|
11,803
|
|
|
|
298,935
|
|
|
|
(287,132
|
)
|
|
|
(96.1
|
)%
|
Provision (benefit) for deferred
income taxes
|
|
|
380,302
|
|
|
|
(150,615
|
)
|
|
|
530,917
|
|
|
|
(352.5
|
)%
|
Net (loss) income
|
|
|
(3,102,902
|
)
|
|
|
125,827
|
|
|
|
(3,228,729
|
)
|
|
|
(2,566
|
)%
|
Foreign currency translation
loss
|
|
|
(271,194
|
)
|
|
|
(34,199
|
)
|
|
|
(236,995
|
)
|
|
|
693.3
|
%
|
Comprehensive (loss) income
|
|
$
|
(3,374,096
|
)
|
|
$
|
91,628
|
|
|
$
|
(3,465,724
|
)
|
|
|
(3,782.4
|
)%
|
Revenue:
We categorize revenues
into third-party revenues and related-party revenues. Related party revenues mainly consist of one time commission and recurring
management fees paid by limited partnership funds where we serve as general partner.
The following table
sets forth the principal components of our net revenues by amounts and percentages of our net revenues for the periods indicated:
|
|
For the year ended
June
30,
2019
|
|
|
%
|
|
|
For the year ended
June
30,
2018
|
|
|
%
|
|
|
Change
|
|
|
Change %
|
|
One-time commissions (1)
|
|
$
|
2,450,654
|
|
|
|
77.1
|
%
|
|
$
|
3,532,269
|
|
|
|
85.3
|
%
|
|
$
|
(1,081,615
|
)
|
|
|
(30.6
|
)%
|
Third party
|
|
|
2,337,196
|
|
|
|
73.5
|
%
|
|
|
2,220,878
|
|
|
|
53.7
|
%
|
|
|
116,318
|
|
|
|
5.2
|
%
|
Related party
|
|
|
113,458
|
|
|
|
3.6
|
%
|
|
|
1,311,391
|
|
|
|
31.7
|
%
|
|
|
(1,197,933
|
)
|
|
|
(91.3
|
)%
|
Recurring service fees (2)
|
|
|
411,040
|
|
|
|
12.9
|
%
|
|
|
479,881
|
|
|
|
11.6
|
%
|
|
|
(68,841
|
)
|
|
|
(14.3
|
)%
|
Recurring management fees (3)
|
|
|
63,508
|
|
|
|
2.0
|
%
|
|
|
33,380
|
|
|
|
0.8
|
%
|
|
|
30,128
|
|
|
|
90.3
|
%
|
Third party
|
|
|
47,845
|
|
|
|
1.5
|
%
|
|
|
32,012
|
|
|
|
0.8
|
%
|
|
|
15,833
|
|
|
|
49.5
|
%
|
Related parties
|
|
|
15,663
|
|
|
|
0.5
|
%
|
|
|
1,368
|
|
|
|
0.0
|
%
|
|
|
14,295
|
|
|
|
1,045.0
|
%
|
Subscription fees (4)
|
|
|
-
|
|
|
|
-
|
%
|
|
|
105,690
|
|
|
|
2.6
|
%
|
|
|
(105,690
|
)
|
|
|
(100.0
|
)%
|
Third party
|
|
|
-
|
|
|
|
-
|
%
|
|
|
66,934
|
|
|
|
1.6
|
%
|
|
|
(66,934
|
)
|
|
|
(100.0
|
)%
|
Related parties
|
|
|
-
|
|
|
|
-
|
%
|
|
|
38,756
|
|
|
|
0.9
|
%
|
|
|
(38,756
|
)
|
|
|
(100.0
|
)%
|
Other services fees(5)
|
|
|
276,729
|
|
|
|
8.7
|
%
|
|
|
8,641
|
|
|
|
0.2
|
%
|
|
|
268,088
|
|
|
|
3,102.5
|
%
|
Sales taxes
|
|
|
(21,297
|
)
|
|
|
(0.7
|
)%
|
|
|
(20,680
|
)
|
|
|
(0.5
|
)%
|
|
|
(617
|
)
|
|
|
3.0
|
%
|
Total operating revenues
|
|
$
|
3,180,634
|
|
|
|
100.0
|
%
|
|
$
|
4,139,181
|
|
|
|
100.0
|
%
|
|
$
|
(958,547
|
)
|
|
|
(23.2
|
)%
|
The overall 23.2% decrease
in operating revenue for the year ended June 30, 2019 from the same period in 2018 was mainly due to the decrease in one-time
commissions.
(1)
|
Total one-time commissions
decreased by approximately $1.1 million or 30.6% for the year ended June 30, 2019 compared to the same period in 2018. The
decrease was mainly due to the decrease in the aggregate value of wealth management products distributed by the Company as
a result of uncertainty in macroeconomic outlook in fiscal year 2019.
|
(2)
|
Recurring service
fees for the years ended June 30, 2019 and 2018 remained relatively consistent. For the years ended June 30, 2019 and 2018,
recurring services fees amounted to approximately $0.4 million and $0.5 million, respectively, representing 12.9% and 11.6%
of our total revenues. We expect these services fees will continue to provide us with a steady stream of income during the
cycle of the products.
|
(3)
|
We received approximately
$64,000 and $33,000 in recurring management fees for the years ended June 30, 2019 and 2018, respectively. We expect these
services fees will continue to provide us income during the cycle of the products.
|
(4)
|
Subscription fees
amounted to $0 and $105,690 for the years ended June 30, 2019 and 2018, respectively. The decrease was mainly due to the fact
that we did not establish any new funds during the year ended June 30, 2019 due to uncertainty with current economic outlook.
|
(5)
|
Other service fees
amounted to approximately $0.3 million and approximately $9,000 for the years ended June 30, 2019 and 2018, respectively.
Such services are not our primary services and we provide this service only when there is specific needs from the clients
that we serviced.
|
Operating Expenses
Our operating expenses
consist of cost of revenues, selling expenses, general and administrative expenses and impairment loss.
|
|
For the Year Ended
June
30,
2019
|
|
|
%
|
|
|
For the Year Ended
June
30,
2018
|
|
|
%
|
|
|
Change
|
|
|
Change
(%)
|
|
Cost of revenues
|
|
$
|
316,718
|
|
|
|
5.5
|
%
|
|
$
|
367,548
|
|
|
|
9.6
|
%
|
|
$
|
(50,830
|
)
|
|
|
(13.8
|
)%
|
Selling expenses
|
|
|
2,005,367
|
|
|
|
34.9
|
%
|
|
|
1,500,572
|
|
|
|
39.1
|
%
|
|
|
504,795
|
|
|
|
33.6
|
%
|
General and administrative expenses
|
|
|
3,421,412
|
|
|
|
59.5
|
%
|
|
|
1,888,310
|
|
|
|
49.2
|
%
|
|
|
1,533,102
|
|
|
|
81.2
|
%
|
Impairment loss
|
|
|
5,628
|
|
|
|
0.1
|
%
|
|
|
78,984
|
|
|
|
2.1
|
%
|
|
|
(73,356
|
)
|
|
|
(92.9
|
)%
|
Total operating expenses
|
|
$
|
5,749,125
|
|
|
|
100.0
|
%
|
|
$
|
3,835,414
|
|
|
|
100.0
|
%
|
|
$
|
1,913,711
|
|
|
|
49.9
|
%
|
Cost of Revenues
Our cost of revenues
for the years ended June 30, 2019 and 2018 were approximately $0.3 million and approximately $0.4 million for the years ended
June 30, 2019 and 2018, respectively which remained relatively consistent. We maintained the same staffing levels in our development
team for both years ended June 30, 2019 and 2018.
Selling expenses
|
|
For the Year Ended
June
30,
2019
|
|
|
For the Year Ended
June
30,
2018
|
|
|
Change
|
|
|
Change
(%)
|
|
Salaries
|
|
$
|
1,228,992
|
|
|
$
|
660,371
|
|
|
$
|
568,621
|
|
|
|
86.1
|
%
|
Rent
|
|
$
|
390,200
|
|
|
$
|
254,361
|
|
|
$
|
135,839
|
|
|
|
53.4
|
%
|
Others
|
|
$
|
386,175
|
|
|
$
|
585,840
|
|
|
$
|
(199,665
|
)
|
|
|
(34.1
|
)%
|
Total selling expenses
|
|
$
|
2,005,367
|
|
|
$
|
1,500,572
|
|
|
$
|
504,795
|
|
|
|
33.6
|
%
|
Our selling expenses
were $2,005,367 and $1,500,572 for the years ended June 30, 2019 and 2018, respectively, an increase of $504,795 or 33.6%. The
increase was mainly due the increase in salaries and rent as we opened more branch offices thus hired more financial product advisors
and rented more office space to meet our operating needs.
General and administrative expenses
|
|
For the Year ended
June
30,
2019
|
|
|
For the Year ended
June
30,
2018
|
|
|
Change
|
|
|
Change (%)
|
|
Salaries
|
|
$
|
1,079,319
|
|
|
$
|
652,834
|
|
|
$
|
426,485
|
|
|
|
65.3
|
%
|
Rent
|
|
$
|
573,449
|
|
|
$
|
307,405
|
|
|
$
|
266,044
|
|
|
|
86.5
|
%
|
Professional fees
|
|
$
|
928,692
|
|
|
$
|
340,893
|
|
|
$
|
587,799
|
|
|
|
172.4
|
%
|
Others
|
|
$
|
839,952
|
|
|
$
|
587,178
|
|
|
$
|
252,774
|
|
|
|
43.0
|
%
|
Total general and administrative
expenses
|
|
$
|
3,421,412
|
|
|
$
|
1,888,310
|
|
|
$
|
1,533,102
|
|
|
|
81.2
|
%
|
Our general and administrative expenses
were $3,421,412 and $1,888,310 for the years ended June 30, 2019 and 2018, respectively, an increase of $1,533,102 or 81.2%. The
increase was primarily due to approximately $426,000 increase in salaries and approximately $266,000 in rent as we opened more
branch offices thus hired more employees and rented more office space for general and administrative purpose to meet our operating
needs, and approximately $590,000 increase in professional fees which mainly includes consulting fees for business development,
audit and financial reporting services, and legal services as a public company.
Impairment loss
The Company recorded impairment loss on
equity securities of approximately $6,000 and approximately $79,000 for the years ended June 30, 2019 and 2018, respectively,
a decrease of approximately $73,000 or 92.9% due to decrease in market price of the securities.
Provision (Benefits) for Income
Taxes
The Company recorded income tax expense of approximately $0.4
million in the year ended June 30, 2019, compared to income tax expense of $0.1 million in the year ended June 30, 2018.
For the year ended June
30, 2019, the Company generated an operating loss of approximately $2.7 million and utilized approximately $0.4 million of deferred
tax assets. Deferred tax assets amounted to approximately $2.1 million with valuation allowance of approximately $1.8 million,
resulting in net deferred tax assets of approximately $0.3 million.
For the year ended June
30, 2018, the Company generated an operating income of approximately $0.3 million and recognized approximately $0.2 million of
deferred tax benefits. Deferred tax assets amounted to approximately $1.8 million with valuation allowance of approximately $1.0
million, resulting in net deferred tax assets of approximately $0.8 million.
The Company’s NOL resides with different
tax reporting entities. Management has provided 100% allowances for those NOL incurred by all its PRC VIE and subsidiaries except
for Puhui Beijing because those entities either had historical losses or were in set up stage thus are not probable to generate
adequate taxable income in next five years. Puhui Beijing incurred net operating loss of approximately $8.6 million in our initial
stages of operation, from December 31, 2013 to June 30, 2015. Such net operating loss can be carried forward to offset taxable
income for the next five years in accordance with the Chinese tax regulations, resulting in approximately $2.2 million of deferred
tax assets as of June 30, 2015. Puhui Beijing has been profitable since the fiscal year of 2016. We evaluated the likelihood of
the realization of deferred tax assets, and reduced the carrying amount of the deferred tax assets by a valuation allowance of
approximately $0.5 million as of June 30, 2019 as we believed a portion will not be realized. We considered both positive and
negative factors when assessing the future realization of the deferred tax assets to determine whether valuation allowance is
sufficient relative to net operating loss carry forwards and other deferred tax assets.
Net Income (Loss)
Net loss for year ended
June 30, 2019 was approximately $3.1 million as compared to net income of approximately $0.1 million for the year ended June 30,
2018. Such change was the result of the combination of the changes discussed above.
Foreign Currency Translation Adjustment
Changes in foreign currency
translation adjustment are mainly due to the fluctuation of foreign exchange rates between RMB (the functional currency of our
operating entities).
Translation adjustments
included in accumulated other comprehensive loss amounted to approximately $0.3 million and approximately $7,000 as of June 30,
2019 and 2018, respectively. The balance sheet amounts, with the exception of shareholders’ equity at June 30, 2019 and
2018 were translated at 6.87 RMB and 6.62 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their
historical rates. The average translation rates applied to statement of income accounts for the years ended June 30, 2019 and
2018 were 6.82 RMB and 6.51 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore,
amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Liquidity and Capital Resources
In January 2020, a novel strain of coronavirus,
or COVID-19, surfaced and it has spread rapidly to many parts of China and eventually all over the world. The pandemic has resulted
in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially all
of our revenue is concentrated in China. Consequently, the COVID-19 pandemic affected our business operations, financial condition
and operating results for second half of fiscal year 2020 (especially from January to May 2020), including but not limited to negative
impact on the Company’s total revenues, gross profit, net income and cash flows. As the COVID-19 pandemic is largely under
control in China, the Company’s operations resumed in June 2020.
In assessing the Company’s
liquidity, the Company monitors and analyzed its cash on-hand and its operating and capital expenditure commitments. As of
June 30, 2020, our working capital was approximately $2.3 million and we had cash of approximately $0.7 million. Also, we
have approximately $1.1 million deferred revenue which we expect to realize as we do not expect to make any significant
refund based on historical experience. The Company renewed its loan agreements in October 2020 with lenders to extend the due
date to December 31, 2021. This obligation was reclassified from current liabilities to long-term debt accordingly. Excluding
deferred revenue, our working capital was approximately $3.4 million. Although we incurred net loss of approximately $4.7
million, our net operating cash outflow for the year was only approximately $1.1 million.
Management believes that we will require a minimum of approximately
$1.0 million cash over the next twelve months to operate at our current level, either from revenues or funding. Based on our current
revenue and expense projection, we believe we will generate at least the same amount of revenue in the coming year compared to
the current year as the Company and China are both recovering from the impact of the pandemic. In addition, several investments
made by the Company’s managed funds are expected to be liquidated and we are entitled to additional performance bonus. If
our revenue does not achieve its expected level, we will also be implementing cost saving measures to reduce our operating cash
outflow. Furthermore, our principal shareholder has committed to provide financial support to fund the Company’s working
capital needs whenever necessary.
If the Company is unable to realize its
current assets within the normal operating cycle of a twelve month period, the Company will also consider supplementing its available
sources of funds through the following sources:
|
●
|
Security offering
of approximately $12 million expected to complete in December 2020; the Company filed latest form F-3/A in October 2020 and
has completed due diligence procedures with underwriters;
|
|
|
|
|
●
|
other available
sources of financing from PRC banks and other financial institutions;
|
|
|
|
|
●
|
financial support
and credit guarantee commitments from the Company’s related parties.
|
Based on the above
considerations, the Company’s management is of the opinion that the Company has sufficient funds to meet its future
liquidity and working capital requirements for at least twelve months from the date of this
report.
All of our revenue is
denominated in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior
SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to
pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However,
current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are required to set aside at least 10% of their
after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until
the total amount set aside reaches 50% of their registered capital. These reserves are not distributable as cash dividends. Furthermore,
capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE
and its local branches. See “Risk Factors -Risks Relating to Doing Business in China” - We rely on dividends and other
distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our
business.
Cash Flows
The table below sets
forth a summary of our cash flows for the periods indicated:
|
|
For the year ended
June
30,
2020
|
|
|
For the year ended
June
30,
2019
|
|
|
For the year ended
June
30,
2018
|
|
Net cash used in operating activities
|
|
$
|
(1,138,336
|
)
|
|
$
|
(7,134,495
|
)
|
|
$
|
(320,272
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
331,999
|
|
|
$
|
(3,534,027
|
)
|
|
$
|
(2,043,256
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(334,434
|
)
|
|
$
|
8,032,912
|
|
|
$
|
6,869,904
|
|
Operating Activities
Net cash used in operating
activities was approximately $1.1 million for the year ended June 30, 2020 which was attributable primarily to the net loss of
approximately $4.7 million, the increase in related parties account receivables of approximately $0.2 million and the decrease
in operating lease liabilities of approximately $0.8 million as we paid off the expense of those rental property, offset by the
non-cash expense for depreciation and amortization of approximately $0.3 million, the deferred tax provision of approximately
$ 0.2 million, the decrease in account receivables of approximately $1.4 million as we collected the outstanding balances, the
increase in deferred revenue of approximately $0.8 million as we received cash from the future services we need to provide, the
amortization of operating lease right-of-use assets of approximately $0.8 million, the decrease in long-term prepaid expenses
of approximately $0.6 million, the increase in taxes payable of approximately $0.2 million, and the decrease in other receivable
of approximately $0.1 million.
Net cash used in operating
activities was approximately $7.1 million for the year ended June 30, 2019 which was attributable primarily to the net loss of
approximately $3.1 million, the increase in account receivables of approximately $0.2 million, the increase in other receivables
of approximately $0.4 million as we paid more security deposits to lease additional office space, the increase of prepaid expenses
and long-term prepaid expenses of approximately $3.2 million since we paid more consulting fees in strategic planning and business
development in connection with our expansion plans, the return of approximately of $0.2 million customer deposits to investors
and the payment of various taxes of approximately $0.4 million.
Net cash used in operating
activities was approximately $0.3 million for the year ended June 30, 2018 which was attributable primarily to the increase of
accounts receivables from a third party and related parties of approximately $2.4 million, offset by net income of approximately
$0.1 million, the increase of other payables to related parties, other payables and accrued liabilities of approximately $0.4
million, the increase of deferred revenue of approximately 0.3 million, and the increase of taxes payable of approximately $0.3
million. We collected $1.0 million from certain clients to be invested in targeted financial products.
Investing Activities
Net cash provided by
investing activities was approximately $0.3 million for the year ended June 30, 2020, which was attributable primarily to approximately
$0.2 million of proceeds from sales of short-term investments, approximately $0.3 million of repayment from related parties and
cash received from acquisition in a Hong Kong based financial services company named Granville of approximately $0.1 million,
offset by purchase of property and equipment of approximately $0.3 million.
Net cash used in investing
activities was approximately $3.5 million for the year ended June 30, 2019, which was attributable primarily to our acquisition
prepayment of approximately $2.0 million in a Hong Kong based financial services company, loans to a related party of approximately
$1.7 million and approximately $0.2 million to purchase property and equipment, offset by proceeds from sale of short-term investments
of approximately $0.4 million.
Net cash used in investing
activities was approximately $2.0 million for the year ended June 30, 2018, which we invested in $0.8 million private funds and
$1.1 million of available for sale investments. We also spent approximately $0.1 million on leasehold improvements. Non-cash transactions
of investing activities amounted to approximately $0.7 million from offsetting customer deposits with short-term investment.
Financing Activities
Net cash used in financing
activities was approximately $0.3 million for year ended June 30, 2020, which were attributable to principal payments of long-term
debt of approximately $0.3 million and decrease in financing lease liabilities of approximately $25,000.
Net cash provided by financing activities
was approximately $8.0 million for the year ended June 30, 2019, which was entirely attributable to the proceeds from issuance
of ordinary shares through IPO.
Net cash provided by
financing activities was approximately $6.9 million for the year ended June 30, 2018, which was from capital contribution in the
amount of approximately $6.5 million from shareholders and proceeds from loan in the amount of approximately $1.5 million and
was offset by approximately $0.7 million of deferred offering costs and approximately $0.4 million of refundable down payment
to acquire a Hong Kong company.
Contractual Obligations
Our contractual obligations
as of June 30, 2020 consisted of approximately $2.7 million of lease commitments due within three years and long term debt discussed
above. We lease our office premises under non-cancelable operating leases with various expiration dates, of which the latest expiration
date is November 30, 2022.
Twelve Months
Ending
June 30,
|
|
|
Long Term Debt
|
|
|
Minimum Lease
Payment
|
|
|
Total
|
|
2021
|
|
|
$
|
25,835
|
|
|
$
|
952,584
|
|
|
$
|
978,419
|
|
2022
|
|
|
|
1,145,825
|
|
|
|
492,989
|
|
|
|
1,638,814
|
|
2023
|
|
|
|
-
|
|
|
|
85,837
|
|
|
|
85,837
|
|
Total
minimum payments required
|
|
|
$
|
1,171,660
|
|
|
$
|
1,531,410
|
|
|
$
|
2,703,070
|
|
Off-Balance Sheet Arrangements
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.
Critical Accounting Policies
Our management’s
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements
that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions.
We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant
accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this annual report,
we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our management’s
discussion and analysis:
Principles of consolidation
The consolidated financial
statements include the accounts of our subsidiaries and VIEs. All intercompany transactions and balances are eliminated upon consolidation.
A subsidiary is an entity
in which we, directly or indirectly, controls more than one half of the voting power or has the power to: govern the financial
and operating policies; appoint or remove the majority of the members of the board of directors; cast a majority of votes at the
meeting of the board of directors.
U.S. GAAP provides guidance
on the identification of VIE and financial reporting for entities over which control is achieved through means other than voting
interests. We evaluate each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether
we are the primary beneficiary of such VIE. In determining whether we are the primary beneficiary, we consider if we (1) have
power to direct the activities that most significantly affects the economic performance of the VIE, and (2) receive the economic
benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, we consolidate the VIE. We have determined
that Puhui Beijing is a VIE subject to consolidation and Puhui Cayman is the primary beneficiary.
In the PRC, investment activities by foreign
investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated
and is amended from time to time by the PRC Ministry of Commerce, or MOFCOM, and the PRC National Development and Reform Commission,
or NDRC. The Catalog divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in
the Catalog are generally open to foreign investment unless specifically restricted by other PRC regulations. However, the provision
of conducting market surveys business by foreign-invested enterprises is currently restricted. Since we and Beijing Rucong Enterprise
Management and Advisory Co. Ltd. (“WFOE”) (its PRC subsidiary) are both considered as foreign investors or foreign
invested enterprises under PRC law, we conduct the majority of our activities in PRC through our consolidated VIE, Puhui Beijing,
in order to comply with the aforementioned regulations. As such, Puhui Beijing is controlled through contractual arrangements
in lieu of direct equity ownership by us or any of its subsidiaries.
Such contractual arrangements
are a series of five agreements (collectively the “Contractual Arrangements”) including a Technical Consultation and
Services Agreement, a Business Cooperation Agreement, an Equity Option Agreements, a Pledge Agreement, and a Voting Rights Proxy
and Financial Supporting Agreement. These contractual agreements obligate WFOE to absorb a majority of the risk of loss from Puhui
Beijing’s activities and entitle WFOE to receive a majority of their residual returns. In essence, WFOE has gained effective
control over Puhui Beijing. Therefore, we believe that Puhui Beijing should be considered as a Variable Interest Entity (“VIE”)
under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
810 “Consolidation”. Accordingly, the accounts of Puhui Beijing are consolidated with those of WFOE and ultimately
are consolidated into those of Puhui Cayman.
We analyzed its limited
partnerships according to Accounting Standards Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis”.
The guidance amends the current consolidation guidance and ends the deferral granted to investment companies from applying the
VIE guidance. The revised consolidation guidance, among other things, (i) modifies the evaluation of whether limited partnerships
and similar legal entities are VIEs, (ii) eliminated the presumption that a general partner should consolidate a limited partnership,
and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related
party relationships.
We are general partner
in ten limited partnerships we set up. The purpose of these limited partnerships is to raise capital from investors and for asset
management business. Upon establishment, we are deemed to be the primary beneficiary and the limited partnerships are consolidated
as we have control of all these entities and absorb all their losses. Once investors have been admitted as the new partners with
agreed capital injection, these limited partners will file their status with the PRC authority in accordance with the rules and
regulations on investment funds in China, and therefore obtain the qualification to officially start business as an investment
fund in China. Upon filing of the investment fund status, we reassess our interests in these limited partnerships and determine
if consolidation is still applicable.
In September 2019, we
set up an investment fund named Xinyu Yuanyuan Investment Center (Limited Partnership) (“Xinyu Yuanyuan”) with planned
initial capital of RMB 30,000,000 (approximately $4.3 million) where Qingdao Puhui is a general partner. As the general partner
of this fund, Qingdao Puhui has the authority to make investment decisions mainly to develop, manage and market financial products
for Xinyu Yuanyuan. As of June 30, 2020, we own 0.07% interest of this fund, as such we are not deemed a primary beneficiary of
Xinyu Yuanyuan as the general partner is not obligated to absorb its losses or receive benefits that could potentially be significant
to the entity. Therefore, Xinyu Yuanyuan is not consolidated but accounted for in accordance with ASC Topic 321.
As of June 30, 2020,
three out of the ten limited partnerships have been registered as investment funds and are in operations, including Beijing Ruying
Consulting Center (LP), Xinyu Jiji and Xinyu Yuanyuan. Those limited partnerships are not consolidated in the Company’s
consolidated financial statements. The other seven limited partnerships has no activities as of June 30, 2020 other than initial
set up fees incurred
Revenue recognition
On July 1, 2018, we adopted ASC 606, Revenue from Contracts
with Customers using the modified retrospective method for all contracts not completed as of the date of adoption. Accordingly,
revenue for the years ended June 30, 2020 and 2019 was presented under ASC 606, while comparative information has not been restated
and continues to be reported under the accounting standards in effect for those periods.
Those types of revenues
are accounted for as contracts with customers. Under the guidance of ASC 606, the Company is required to (a) identify the contract(s)
with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the
transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Company satisfies
its performance obligation. Revenues are recorded, net of sales related taxes and surcharges.
The adoption of ASC 606 did not significantly change (i) the
timing and pattern of revenue recognition for all of the Group’s revenue streams, and (ii) the presentation of revenue as
gross versus net. Therefore, the adoption of ASC 606 did not have a significant impact on the Company’s financial position,
results of operations, equity or cash flows as of the adoption date and for the years ended June 30, 2020 and 2019.
Transaction Price Allocation
At times, the Company enters into contracts
that provides wealth management advisory, recurring services and other services to funds that it serves as general partner/co-general
partner or fund manager.
Each of the wealth management
service, recurring service, and other service represent a separate performance obligation. The Company allocates the total consideration
among various performance obligations at inception of contracts based on their relative stand-alone selling price (“SSP”).
The Company has observable SSP for its wealth management marketing services and other services for certain products as it provides
such services separately to other similar customers. The Company has not sold its recurring services separately. The Company adopts
either the adjusted market assessment approach or the residual approach when the SSP is not directly observable and is either
highly variable or uncertain. Revenue for the respective performance obligation is recognized in the same manner as described
above.
One-time commissions
We enter into one-time
commission agreements with product providers, which specifies the key terms and conditions of the arrangement. Such agreements
do not include rights of return, credits or discounts, rebates, price protection or other similar privileges. Upon establishment
of a financial product, we earn a one-time commission from product providers, calculated as a percentage of the financial products
purchased by its clients. The Company defines the “establishment of a financial product” for its revenue recognition
purpose as the time when both of the following two criteria are met: (1) the Company’s client has entered into a purchase
or subscription contract with the relevant product provider and, if required, the client has transferred a deposit to an escrow
account designated by the product provider and (2) the product provider has issued a formal notice to confirm the establishment
of a financial product. Revenue is recorded upon the establishment of the financial product, when the provision of service concludes
and the fee becomes fixed and determinable, assuming all other revenue recognition criteria have been met, and there are no future
obligations or contingencies.
Recurring service fees
Recurring service fee
arises from on-going services provided to product providers after the distribution of financial products including investment
relationship maintenance and coordination and product reports distribution. Recurring services fees is based on the type of product
we distribute. Typically fixed income type products do not have recurring services fee. For private equity fund products, it is
calculated as a percentage of the total value of investments in the financial products purchased by our clients, calculated at
the establishment date of the financial product. For securities investment funds, our recurring service fees are typically calculated
as a percentage of the net asset value of the portfolio underlying the products purchased by our clients at the time of calculation,
which is generally done on a daily basis. As we provide these services throughout the contract term, revenue is recognized over
the contract term, assuming all other revenue recognition criteria have been met. Recurring service agreements do not include
rights of return, credits or discounts, rebates, price protection or other similar privileges.
Subscription fees
A one-time subscription
fee is charged to certain funds that we manage. These subscription fees are also computed as a percentage of the capital contribution
in the funds. The fee is mainly for fund formation services and distribution of products. The fee is charged upfront when the
investment is received from clients, but only recognized when the fund is formerly established and products are distributed when
our services are completed.
Recurring management fees
Recurring management
fee arises from the asset management services provided to funds we manage. Management fees are computed as a percentage of the
capital contribution in a fund per annum or a percentage of daily asset value and are recognized as earned over the specified
contract period. Management fees received in advance of the specified contract period are recorded as deferred revenues.
Performance-based income
In a typical arrangement
in which the Company serves as fund manager or general partner, the Company is entitled to a performance-based fee or carried
interest based on the extent by which the fund’s investment performance exceeds a certain threshold at the end of the contract
term. Such performance-based fee is typically calculated and distributed at the end of the contract term when the cumulative return
of the fund can be determined, and is not subject to clawback provisions. The Company does not record any performance-based income
until the end of the contract term.
Other service fees
Other service fee refers
to revenue generated from consulting services provided to clients per their specific needs. Service fees are negotiated case by
case, and are specified in agreements before services are provided. Revenue is recognized upon completion of the services when
collectability is reasonably assured.
Sales taxes:
One-time commissions, recurring service fees, recurring management fees, and other service fees that are earned and received in
the PRC are subject to a Chinese value-added tax (“VAT”) at a rate of 3% to 6% of the gross proceed or at a rate approved
by the Chinese local government. One-time commissions, recurring service fees, recurring management fees, and other service fees
that are earned and received in the PRC are also subject to various miscellaneous sales taxes at a rate of 1% to 7% of the VAT.
VAT and miscellaneous sales taxes are accounted for as reduction of revenue.
Income taxes
Current income taxes
are provided for in accordance with the relevant statutory tax laws and regulations. We have only reported on PRC income taxes
since all our operations are carried out in PRC.
We account for income
taxes in accordance with U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard,
the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences
between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes
currently due plus deferred taxes.
The charge for taxation
is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using
tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes are accounted
for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount
of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of
assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax
assets are recognized to the extent that it is probable that taxable income will be available against which deductible temporary
differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset
is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related
to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
An uncertain tax position
is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income
tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the
year ended June 30, 2020. Our income tax return filed for December 31, 2019 is subject to examination by Chinese tax authority.
Business Combination
The purchase price of
an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business
based on their estimated fair values. The excess of the purchase price over the fair value of the net identifiable assets of the
acquired subsidiaries at the date of acquisition is recorded as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.
Transaction costs associated with business
combinations are expensed as incurred, and are included in general and administrative expenses in our consolidated statements
of operations. The results of operations of the acquired business are included in our operating results from the date of acquisition.
Goodwill
Goodwill represents
the excess of the consideration paid over the fair value of the net identifiable assets of the acquired subsidiaries at the date
of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate
impairment may have occurred. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized
in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.
We perform annual goodwill impairment analysis as of June 30,
2020 with the assistance of independent valuation expert in accordance with the subsequent measurement provisions of FASB ASC Topic
350, Intangibles—Goodwill and Other and concludes there was no impairment as of June 30, 2020 as our fair value exceeds the
carrying value. The fair values is determined by income approach where projected future cash flows discounted at rates commensurate
with the risks involved, (“Discounted Cash Flow” or “DCF” of the income approach). Assumptions used in
a DCF analysis require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values,
growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows are based on current plans and
for years beyond that plan, the estimates are based on assumed growth rates. We believe that our assumptions are consistent with
the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent
in future cash flow projections, used in a DCF analysis are based on estimates of the weighted-average cost of capital “WACC”)
of a market participant. Such estimates are derived from our analysis of peer companies and consider the industry weighted average
return on debt and equity from a market participant perspective and adjusted for our specific risks.
Leases
Effective July 1, 2019,
we adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that does not require us to reassess:
(1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases
and (3) initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted
to make an accounting policy election not to recognize lease assets and liabilities. The Company also adopted the practical expedient
that allows lessees to treat the lease and non-lease components of a lease as a single lease component. On July 1, 2019,we recognized
approximately $2.1 million right of use (“ROU”) assets and approximately $2.1 million operating lease liabilities
and approximately $0.1 million financing lease liabilities based on the present value of the future minimum rental payments of
leases, using incremental borrowing rate of 6.73%.
Operating lease ROU
assets and lease liabilities are recognized at the adoption date of July 1, 2019 or the commencement date, whichever is earlier,
based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not
readily determinable, we used its incremental borrowing rate based on the information available at the commencement date in determining
the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay
to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar
term.
Lease terms used to
calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as
the Company does not have reasonable certainty at lease inception that these options will be exercised. We generally considered
the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. We have elected
the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of
twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease
incentives. Lease expense is recognized on a straight-line basis over the lease term.
We reviewed the impairment
of ROU assets consistent with the approach applied for its other long-lived assets. We reviewed the recoverability of the long-lived
assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted
future pre-tax cash flows of the related operations. We have elected to include the carrying amount of operating lease liabilities
in any tested asset group and includes the associated operating lease payments in the undiscounted future pre-tax cash flows.
Quantitative and Qualitative Disclosures about Market Risks
Liquidity risk
We are exposed to liquidity
risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and
business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When
necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Inflation risk
Inflationary factors,
such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales
revenue if the selling prices of our products do not increase with such increased costs.
Interest rate risk
Our exposure to interest
rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand. Interest-earning instruments
carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase,
however, may raise the cost of any debt we incur in the future.
Foreign currency translation and transaction
Our operating transactions
and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies for capital account
transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s
political and economic conditions and China’s foreign exchange policies. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk.
Recently Issued Accounting Pronouncements
A list of recently issued
accounting pronouncements that are relevant to us is included in “Summary of Principal Accounting Policies - (aa) Recently
issued accounting pronouncements” of our audited consolidated financial statements included elsewhere in this annual report.
Controls and Procedures
During the year ended
June 30, 2020, we implemented changes to our internal controls related to the implementation ASC 842 to provide reasonable assurance
that we have properly applied the guidance in our financial statements. These changes included: (i) monitoring the adoption process
and developing new disclosures required under the standard; (ii) performing an analysis of our leases; (iii) establishing policies
and procedures to determine the incremental borrowing rate when an implicit rate cannot be readily determined and (iv) establishing
internal controls surrounding the implementation and use of a new lease accounting system.to calculate Right-of-Use assets and
lease liabilities.
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
|
Zhe Ji
|
|
41
|
|
Chief Executive Officer,
Chairman of the Board
|
Yan Long
|
|
47
|
|
Vice President and Chief Financial Officer
|
Jun Wang
|
|
40
|
|
Independent Director
|
Qingbin Meng
|
|
40
|
|
Independent Director
|
Zhi Su
|
|
42
|
|
Independent Director
|
Biography
Mr. Zhe Ji, our founder,
has served as our Chairman of the Board of Directors and Chief Executive Officer since our inception in 2013. Prior to founding
our company, Mr. Ji served as a senior broker at Credit Ease Wealth, another third-party wealth management company in China, from
2011 to 2013. Previously, he served as a member of China Bohai Bank from 2008 to 2011, Hang Seng Bank from 2006 to 2008, ABN AMRO
Bank N.V from 2002 to 2005. Mr. Ji received a bachelor’s degree in commodity science from Beijing University of Technology
in 2002.
Ms. Yan Long has severed
as our Chief Financial Officer since September 2017. Previously, Ms. Long served as vice chief financial officer of Guanghui Auto
Finance Leasing Co., Ltd. from 2013 to May 2015. From May 2015 to December 2015, Ms. Long severed as chief financial officer of
Yixin Auto Finance Leasing. From March 2016 to May 2017, Ms. Long served as chief financial officer of Dunhuang Asset Management
Co., Ltd. Ms. Long graduated from Yanshan University. She has obtained a certificate of intermediate title of accountant. Ms.
Long received a Bachelor’s degree in accounting from Yanshan University in 2000.
Mr. Jun Wang has served
as a member of our Board of Directors since January 2019. Mr. Wang has been serving as a lecturer at the School of Economics and
Management since 2011 and Deputy Dean of the Department of Finance in the School of Economics and Management since 2017 at China
Agricultural University. He has also been serving as a director of Zhongxin Construction Investment Fund Management Co., Ltd.
since December 2018. In addition, he has been serving as the Deputy Director and Secretary General of China Futures and Financial
Derivatives Research Center since 2012, and the Deputy Director of the MBA Education Center since 2013. Mr. Wang received a bachelor’s
degree in Public Service Management from Harbin Normal University, a master’s degree in International Trade from China Agricultural
University and a doctorate degree in Agricultural Economic Management from China Agricultural University.
Mr. Qingbin Meng has served
as a member of our board of directors since 2017. Since June 2013, he has served as an Associate Professor in the School of Business
of Renmin University of China. He has also worked as a senior economist at Yinhe Future Co. Ltd. since 2013 and at Mowei Asset
Management Co. Ltd. since 2015 and as a senior investment adviser at Wanda Futures Co. Ltd. since 2016. Mr. Meng graduated from
Tianjin University and Nankai University. He obtained a bachelor degree in mathematics in 2003, a masters degree in mathematics
in 2006, and a PhD degree in finance in 2009.
Mr. Zhi Su has served as
a member of our board of directors since 2018. Since June 2009, he has served as lecturer in the School of Statistics Central
University of Finance and Economics, and was promoted to the director of Financial Technology in July 2017. Mr. Su obtained a
bachelor’s degree and a PhD degree from Jilin University in 2001 and 2006, respectively. He obtained a EMBA degree from
the University of Texas and a postdoctoral degree in finance from Tsinghua University in 2009.
Executive Officers
Our executive officers
are designated by, and serve at the discretion of, our board of directors. There are no family relationships among any of our
directors or executive officers.
6.B. Compensation
For the years ended
June 30, 2020 and 2019, we paid an aggregate of approximately $0.13 million and $0.27 million, respectively, in cash to our executive
officers, and $68,000 and $18,000, respectively, to our non-executive directors. We have not set aside or accrued any amount to
provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and consolidated
variable interest entities are required by law to make contributions equal to certain percentages of each employee’s salary
for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident
fund. We contributed an aggregate of $0.05 million and $0.03 million for employee social insurance for the years ended June 30,
2020 and 2019, respectively.
Employment Agreements
We have entered into
employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed
for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain
acts of the executive officer, such as a conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent
or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s
employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance
payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based.
The executive officer may resign at any time with a three-month advance written notice.
Each executive officer
has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and
not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable
law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective
clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations.
The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive,
develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest
in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs
and trade secrets.
In addition, each executive
officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and
typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach
our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity
as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships
with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether
as principal, partner, licensor or otherwise, with any of our competitors, without our express consent; or (iii) seek directly
or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s
termination, or in the year preceding such termination, without our express consent.
We have also entered
into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify
our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims
made by reason of their being a director or officer of our company.
Our board of directors
currently consists of 4 directors, including 3 independent directors. We have established an audit committee, a compensation committee
and a nominating committee. Each of the committees of the board of directors shall have the composition and responsibilities described
below.
Puhui Wealth Investment Management Co., Ltd. 2018 Equity
Incentive Plan
The Puhui Wealth Investment
Management Co., Ltd. 2018 Equity Incentive Plan (“Incentive Plan”) was approved by our board of directors on June
15, 2018 by unanimous written consent. The Incentive Plan, which is administered by the Compensation Committee of our Board of
Directors, allows for awards up to a maximum of 1,500,000 restricted ordinary shares. Under the Incentive Plan, the Compensation
Committee may grant ordinary shares to directors, officers, managers, employees, consultants and advisors of our company or our
affiliates; provided, that the Compensation Committee may not grant to any one person in any one calendar year awards for more
than 150,000 ordinary share in the aggregate. No shares have been granted as of the date of this annual report.
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.
Duties of Directors
Under Cayman Islands
law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also
have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise
in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our Memorandum
and Articles of Association, as amended and restated from time to time, and the class rights vested thereunder in the holders
of the shares. Our board of directors has all the powers necessary for managing, and for directing and supervising, our business
affairs. The functions and powers of our board of directors include, among others:
|
●
|
convening shareholders’
annual and extraordinary general meetings;
|
|
●
|
declaring dividends
and distributions;
|
|
●
|
appointing officers
and determining the term of office of the officers;
|
|
●
|
exercising the borrowing
powers of our company and mortgaging the property of our company; and
|
|
●
|
approving the transfer
of shares in our company, including the registration of such shares in our share register.
|
Our company has the
right to seek damages if a duty owed by our directors is breached. A shareholder may, in certain limited exceptional circumstances,
have the right to seek damages in our name if a duty owed by the directors is breached.
Board Leadership Structure and Role in Risk Oversight
The Board does not have
a lead independent director. Zhe Ji is our Chief Executive Officer and Chairman of the Board.
Committees of the Board of Directors
Audit Committee
Zhi Su, Jun Wang and
Qingbin Meng are the members of our Audit Committee, where Zhi Su serves as the chairman. Zhi Su, Jun Wang and Qingbin Meng satisfy
the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.
We have adopted and
approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee performs several
functions, including:
|
●
|
evaluates the independence
and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
|
|
●
|
approves the plan
and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit
service to be provided by the independent auditor;
|
|
●
|
monitors the independence
of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
|
|
●
|
reviews the financial
statements to be included in our Annual Report on Form 20-F and Current Reports on Form 6-K and reviews with management and
the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
|
|
●
|
oversees all aspects
our systems of internal accounting control and corporate governance functions on behalf of the board;
|
|
●
|
reviews and approves
in advance any proposed related-party transactions and report to the full board of directors on any approved transactions;
and
|
|
●
|
Provides oversight
assistance in connection with legal, ethical and risk management compliance programs established by management and the board
of directors, including Sarbanes-Oxley Act implementation, and makes recommendations to the board of directors regarding corporate
governance issues and policy decisions.
|
It is determined that
Zhi Su possesses accounting or related financial management experience that qualifies him as an “audit committee financial
expert” as defined by the rules and regulations of the SEC.
Compensation Committee
Zhi Su, Jun Wang and
Qingbin Meng are the members of our Compensation Committee and Jun Wang is the chairman. All members of our Compensation Committee
are qualified as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Compensation
Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing
and making recommendations to the board of directors regarding the salaries and other compensation of our executive officers and
general employees and providing assistance and recommendations with respect to our compensation policies and practices.
Nominating and Governance Committee
Zhi Su, Jun Wang and
Qingbin Meng are the members of our Nominating and Governance Committee where Qingbin Meng serves as the chairman. All members
of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. The
board of directors has adopted and approved a charter for the Nominating and Governance Committee. In accordance with the Nominating
and Governance Committee’s Charter, the Nominating and Corporate Governance Committee is responsible to identity and propose
new potential director nominees to the board of directors for consideration and review our corporate governance policies.
Director Independence
Our board of directors
reviewed the materiality of any relationship that each of our proposed directors has with us, either directly or indirectly. Based
on this review, it is determined that Zhi Su, Jun Wang and Qingbin Meng are “independent directors” as defined by
NASDAQ.
Family Relationships
There is no family relationship
among any of our directors or executive officers.
Involvement in Certain Legal Proceedings
No executive officer or director of ours
has been involved in the last ten years in any of the following:
|
●
|
Any bankruptcy petition
filed by or against any business or property of such person, or of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to that time;
|
|
|
|
|
●
|
Any conviction in
a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
|
|
●
|
Being subject to
any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or
banking activities;
|
|
|
|
|
●
|
Being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated
a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
|
●
|
Being the subject
of or a party to any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or
vacated relating to an alleged violation of any federal or state securities or commodities law or regulation, or any law or
regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent
injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order, or any law or regulation prohibiting mail, fraud, wire fraud or fraud in connection with any
business entity; or
|
|
|
|
|
●
|
Being the subject
of or a party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization
(as defined in Section 3(a)(26) of the Exchange Act, any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members
or persons associated with a member.
|
6.D. Employees
See the section entitled “Employees”
in Item 4.B above.
6.E. Share Ownership
As of September 30,
2020, 11,507,558 of our ordinary shares were issued and outstanding. Holders of our ordinary shares are entitled to vote together
as a single class on all matters submitted to shareholders for approval. No holder of ordinary shares has different voting rights
from any other holders of ordinary shares. We are not aware of any arrangement that may, at a subsequent date, result in a change
of control of our company.
Beneficial ownership
is determined in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the table
below are based on 11,507,558 ordinary shares outstanding as of September 30, 2020.
The following table
sets forth information with respect to the beneficial ownership of our common shares as of September 30, 2020 by:
|
●
|
each of our directors
and executive officers; and
|
|
●
|
each person known
to us to beneficially own more than 5% of our outstanding ordinary shares.
|
|
|
Ordinary
Shares
Beneficially Owned
As of September 30,
2020
|
|
Name
of Beneficial Owners
|
|
Number
|
|
|
%
(1)
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers:
|
|
|
|
|
|
|
Zhe
Ji (2)
|
|
|
5,017,650
|
|
|
|
43.6
|
%
|
Yan
Long
|
|
|
-
|
|
|
|
-
|
|
Jun
Wang
|
|
|
-
|
|
|
|
-
|
|
Qingbin
Meng
|
|
|
-
|
|
|
|
-
|
|
Zhi
Su
|
|
|
-
|
|
|
|
-
|
|
Directors
and Executive Officers as a group (5 persons)
|
|
|
5,017,650
|
|
|
|
43.6
|
%
|
5%
shareholders:
|
|
|
|
|
|
|
|
|
DFHH
Limited (3)
|
|
|
5,017,650
|
|
|
|
43.6
|
%
|
BFJH
Limited (4)
|
|
|
910,000
|
|
|
|
7.9
|
%
|
BFRY
Limited (5)
|
|
|
907,470
|
|
|
|
7.9
|
%
|
Ru
Peng Limited (6)
|
|
|
907,470
|
|
|
|
7.9
|
%
|
(1)
|
Applicable percentage
of ownership is based on 11,507,558 ordinary shares outstanding.
|
|
|
(2)
|
Zhe Ji, our Chief
Executive Officer and Chairman, is deemed to beneficially own 5,017,650 ordinary shares through DFHH Limited, a British Virgin
Islands company wholly owned by Mr. Ji.
|
(3)
|
Zhe Ji, our Chief
Executive Officer and Chairman, is the sole member and director of DFHH Limited with voting and dispositive power over the
shares held by such entity.
|
|
|
(4)
|
Yan Sun, the sole
member and director of BFJH Limited, has voting and dispositive power over the shares held by such entity. Yan Sun has no
family relationship with our officers and directors.
|
|
|
(5)
|
Wendi Liang, the
sole member and director of BFRY Limited, has voting and dispositive power over the shares held by such entity. Wendi Liang
has no family relationship with our officers and directors.
|
|
|
(6)
|
Peng Ji, the sole
member and director of Ru Peng Limited, has voting and dispositive power over the shares held by such entity. Peng Ji has
no family relationship with our officers and directors.
|
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
Prior to October 2016,
our operating entity, Puhui Beijing marketed and distributed the financial products designed by its sole shareholder, Finup and
charged Finup commissions based on specified rates. Puhui Beijing historically relied upon such commissions received from Finup,
which accounted for substantially all of our revenues. Finup had 100% ownership in Puhui Beijing from Puhui Beijing’s inception
in 2013 to October 2016.
For the years ended
June 30, 2020, 2019 and 2018, revenue from Finup amounted to $0, $0 and $0, respectively, representing 0%, 0% and 0% of the Company’s
revenue.
Shanghai Fengsui Investment
Management Co., Ltd., acquired 10% ownership from Finup in October 2016 and increased its ownership to 30.2% in June 2017. In
October 2017, Fengsui sold all its ownership to DongFang HengHui, the majority shareholder for Puhui Beijing.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Shanghai Fengsui amounted to $0, $0 and $0, respectively, representing 0%,
0% and 0% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Huzhou Meiyu Investment and Management LP which is under common control of
Shanghai Fengsui, our former shareholder, amounted to $0, $0 and $0, respectively, representing 0%, 0% and 0% of the Company’s
revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from the Beijing Synergetic SIFT Asset Management Co. Ltd., our non-controlling
shareholder, amounted to $0, $0, and $171,555, respectively, representing 0%, 0%, and 4.1% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Xinyu Jiji, VIE of our subsidiary Qingdao Puhui, amounted to $15,213, $15,663,
and $169,914, respectively, representing 0.7%, 0.5%, and 4.1% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Xinyu Yuanyuan, VIE of our subsidiary Qingdao Puhui, amounted to $44,528,
$0, and $0, respectively, representing 2.0%, 0%, and 0% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Dongfang Henghui, a majority shareholder of Puhui Beijing, amounted to $0,
$0, and $652,578, respectively, representing 0%, 0%, and 15.7% of the Company’s revenue. As of June 30, 2020 and 2019, accounts
receivable generated from the aforementioned sales from DongFang HengHui amounted to $635,638 and $654,574, respectively. Other
receivable arises from short term cash advance amounted to $15,538 and $0, respectively.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Dongfang Puzhong, a majority shareholder of Puhui Beijing, amounted to $0,
$0, and $357,468, respectively, representing 0%, 0%, 8.6% of the Company’s revenue. As of June 30, 2020, accounts receivable
generated from the aforementioned sales from DongFang PuZhong amounted to $42,376 and $358,561, respectively.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Peng Ji, limited partner of Beijing Puhui Rushun Management Consulting Center
Limited Partnership, amounted to $0, $113,459 and $0, respectively, representing 0%, 3.6%, and 0% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Beijing Rululu Management Consulting Center Limited Partnership, amounted
to $107,512, $0 and $0, respectively, representing 4.9%, 0%, and 0% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Beijing Ruqi Management Consulting Center Limited Partnership, amounted to
$403,170, $0 and $0, respectively, representing 18.4%, 0%, and 0% of the Company’s revenue.
For the years ended
June 30, 2020, 2019 and 2018, revenue generated from Beijing Rusan Management Consulting Center Limited Partnership, amounted
to $129,014, $0 and $0, respectively, representing 5.9%, 0%, and 0% of the Company’s revenue.
As of June 30, 2020
and 2019, loan receivables from Beijing Sipaike Customer Management Consulting Co., Ltd., a company under common control of shareholder
of Puhui Beijing, amounted to $1,269,138 and $1,647,858, respectively. Other payable arises from short term borrowings amounted
to $5,153 and $0, respectively.
As of June 30, 2020 and 2019, other payables
arises from short term borrowings to Zhe Ji, the chairman of Puhui Wealth Investment Management Co., Ltd., amounted to $483 and
$0, respectively.
As of June 30, 2020 and 2019, other payables
arises from short term borrowings to Huicai Hengyun, one of the shareholders of Puhui Beijing., amounted to $698 and $0, respectively.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
|
FINANCIAL
INFORMATION
|
Consolidated Statements and Other Financial Information
The financial statements
required by this item may be found at the end of this 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.
|
THE OFFER AND LISTING
|
9.A. Offer and Listing Details
Our ordinary shares
are listed for trading on the NASDAQ Capital Market under the symbol “PHCF.” The shares began trading on December
27, 2018 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.
|
ADDITIONAL
INFORMATION
|
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands
company and our affairs are governed by our Memorandum and Articles of Association and Companies Law. The following are summaries
of material provisions of our Memorandum and Articles of Association and the Companies Law insofar as they relate to the material
terms of our ordinary shares.
Ordinary shares
General.
We are authorized to issue 49,000,000 ordinary shares of par value US$0.001 each. All of our outstanding ordinary shares are fully
paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders, whether
or not they are non-residents of the Cayman Islands, may freely hold and transfer their ordinary shares in accordance with the
Memorandum and Articles of Association.
Dividends.
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Our articles of
association provide that our board of directors may declare and pay dividends if justified by our financial position and permitted
by law.
Voting Rights.
In respect of all matters subject to a shareholders’ vote, each common share is entitled to one vote. Voting at any meeting
of shareholders is by show of hands unless voting by way of a poll is required by the rules of any stock exchange on which our
shares are listed for trading, or a poll is demanded by the chairman of such meeting or one or more shareholders holding not less
than 10% of the total voting rights of all shareholders having the right to vote at the meeting. A quorum required for a meeting
of shareholders consists of one shareholder who holds at least one-third of our issued voting shares. Shareholders’ meetings
may be held annually. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Extraordinary
general meetings may be called by a majority of our board of directors or upon a requisition of shareholders holding at the date
of deposit of the requisition not less than 40% of the aggregate share capital of our company that carries the right to vote at
a general meeting, in which case an advance notice of at least 120 clear days is required for the convening of our annual general
meeting and other general meetings by requisition of the shareholders. An ordinary resolution to be passed at a meeting by the
shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting,
while a special resolution requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares
cast at a meeting. A special resolution will be required for important matters such as a change of name or making changes to our
Memorandum and Articles of Association.
Transfer of Ordinary
shares. Subject to the restrictions set out below, any of our shareholders may transfer all or any of his 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. Our board
of directors may, in its absolute discretion, decline to register any transfer of any common share irrespective of whether the
shares is fully paid or the Company has no lien over it. If our board of directors refuses to register a transfer, it shall, within
two months after the date on which the transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
After the completion of our initial public offering, we have waived our right to refuse transfers of any ordinary shares. The
registration of transfers may, after compliance with any notice required of the stock exchange on which our shares are listed,
be suspended at such times and for such periods as our board of directors may determine, provided, however, that the registration
of transfers shall not be suspended for more than 30 days in any year as our board of directors may determine.
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 clear days prior to the specified
time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of
Ordinary shares. The Companies Law and our Memorandum of Association permit us to purchase our own shares. In accordance
with our articles of association and provided the necessary shareholders or board approval have been obtained, we may issue shares
on terms that are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such
manner, provided the requirements under the Companies Law have been satisfied, including out of capital, as may be determined
by our board of directors.
Inspection of
Books and Records. Holders of our ordinary shares have no general right under our articles of association to inspect or
obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited
financial statements. See “Where You Can Find Additional Information.”
Issuance of Additional
Shares. Our memorandum of association authorizes our board of directors to issue additional ordinary shares from time
to time as our board of directors shall determine, to the extent of available authorized but unissued shares. Our memorandum of
association also authorizes our board of directors to establish from time to time one or more series of preference shares and
to determine, with respect to any series of preference shares, the terms and rights of that series, including:
|
●
|
the designation
of the series to be issued;
|
|
●
|
the number of shares
of the series;
|
|
●
|
the dividend rights,
dividend rates, conversion rights, voting rights; and
|
|
●
|
the rights and terms
of redemption and liquidation preferences.
|
Our board of directors
may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares
may dilute the voting power of holders of ordinary shares.
Anti-Takeover
Provisions. Some provisions of our Memorandum and Articles of Association may discourage, delay or prevent a change of
control of our company or management that shareholders may consider favorable, including provisions that authorize our board of
directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions
of such preference shares without any further vote or action by our shareholders.
Articles of Association
– Exclusive Forum Provision. Our Articles of Association provides that the courts of the Cayman Islands shall be
the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting
a claim of breach of a fiduciary duty owed by any director or officer of the Company to the Company or the Company’s shareholders,
(iii) any action asserting a claim against the Company arising pursuant to any provision of the Companies Law, the Memorandum
of Association of the Company or the Articles of Association of the Company, and (iv) any action asserting a claim against the
Company in respect of shareholders’ rights as shareholders or distributions of dividends. This choice of forum provision
may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our
directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
Alternatively, a court, including a Cayman Islands court, could find these provisions of our Articles of Association to be inapplicable
or unenforceable in respect of one or more of the specified types of actions or proceedings, which may require us to incur additional
costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Preferred shares
We are authorized to
issue 1,000,000 preferred shares of a par value of $0.001 each. Subject to the Companies Law, our directors may, in their absolute
discretion and without the approval of the shareholders, create and designate out of the unissued preferred shares of our company
one or more classes or series of preferred shares, comprising such number of preferred shares and having such designations, powers,
preferences, privileges and other rights, including dividend rights, voting rights, conversion rights, terms of redemption and
liquidation preferences, as our directors may determine.
Differences in 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 some 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
The Companies Law permits
mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies.
For these purposes, a “merger” means the merging of two or more constituent companies and the vesting of their undertaking,
property and liabilities in one of such companies as the surviving company, and a “consolidation” means the combination
of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities
of such companies to the consolidated company.
In order to effect a
merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which
must then be authorized by a special resolution of the shareholders of each constituent company, and such other authorization,
if any, as may be specified in such constituent company’s articles of association.
The plan of merger or
consolidation must be filed with the Registrar of Companies of the Cayman Islands together with a declaration as to the solvency
of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking
that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company
and that notification of the merger and consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders
have the right to be paid the fair value of their shares if they follow the required procedures under the Companies Law subject
to certain exceptions. The fair value of the shares will be determined by the Cayman Islands court if it cannot be agreed among
the parties. Court approval is not required for a merger or consolidation effected in compliance with these statutory procedures.
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:
|
●
|
the statutory provisions
as to the required majority vote have been met;
|
|
●
|
the shareholders
have been fairly represented at the meeting in question;
|
|
●
|
the arrangement
is such that an intelligent and honest man of that class acting in respect of his interest would reasonably approve; and
|
|
●
|
the arrangement
is not one that would more properly be sanctioned under some other provision of the Companies Law.
|
When a take-over offer
is made and accepted by holders of not less than 90% of the shares within four months, the offer, or may, within a two-month period
conversing on the expiration of such four months 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 unless
there is evidence of fraud, bad faith or collusion.
If the 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 United States 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 to sue for a wrong done to us as a company 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:
|
●
|
a company acts or
proposes to act illegally or ultra vires and is therefore incapable of ratification by the shareholders;
|
|
●
|
the act complained
of, although not ultra vires, could only be duly effected if authorized by more than a simple majority vote that has not been
obtained; and
|
|
●
|
those who control
the company are perpetrating a “fraud on the minority.”
|
Indemnification of Directors and Executive Officers and
Limitation of Liability
The Companies Law does
not limit the extent to which a company’s 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 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 of such directors or officers willful default of fraud.
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.
Directors’ Fiduciary Duties
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, courts are moving towards an objective
standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
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.
Shareholder Action by Written Consent
The Cayman Islands law
and our 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.
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.
Shareholder Proposals
The Companies 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 articles of association. Our articles of association
allow our shareholders holding not less than 40% 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 articles of association do not provide our shareholders
other right to put proposal before a meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’
annual general meetings.
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.
Cumulative Voting
There are no prohibitions
in relation to cumulative voting under the Companies Law but our articles of association do not provide for 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.
Removal of Directors
Under our articles of
association, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Under the Delaware General
Corporation Law, a director of a corporation with a may be removed with the approval of a majority of the outstanding shares entitled
to vote, unless the certificate of incorporation provides otherwise.
Transactions with Interested Shareholders
The Companies 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 for a proper corporate
purpose and not with the effect of constituting a fraud on the minority 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.
Dissolution; Winding up
Under the Companies
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 articles of association, our company may be dissolved, liquidated or wound up by a special
resolution of our shareholders.
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.
Variation of Rights of Shares
Under the Companies
Law and our 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 two-thirds of the issued shares of that class or with the sanction
of a special resolution passed at a separate general meeting of the holders of the shares of that class.
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.
Amendment of Governing Documents
As permitted by the
Companies Law, our Memorandum and Articles of Association may only be amended with a special resolution of our shareholders.
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.
Rights of Non-resident or Foreign
Shareholders
There are no limitations
imposed by our 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 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:
|
●
|
Foreign Currency
Administration Rules of 1996, as amended; and
|
|
●
|
Administrative Rules
of the Settlement, Sale and Payment of Foreign Exchange of 1996.
|
As we disclosed in the
risk factors above, 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 except for stamp duties which maybe applicable on instruments executed in, or brought
within the jurisdiction of the Cayman Islands. The Cayman Islands is a party to a double tax arrangement with the United Kingdom
but is not otherwise a 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 Corporate
Income Tax Law (“CIT Law”), an enterprise established outside the PRC with a “de facto management body”
within the PRC is considered a PRC resident enterprise for PRC corporate income tax purposes and is generally subject to a uniform
25% corporate income tax rate on its worldwide income as well as tax reporting obligations. Under the Implementation Rules, a
“de facto management body” is defined as a body that has material and overall management and control over the manufacturing
and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the SAT Circular
82 issued in April 2009 specifies that certain offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise
groups will be classified as PRC resident enterprises if all of the following conditions are met: (a) senior management personnel
and core management departments in charge of the daily operations of the enterprises have their presence mainly in the PRC; (b)
their financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) major
assets, accounting books and company seals of the enterprises, and minutes and files of their board’s and shareholders’
meetings are located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior management personnel
with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45, which took effect
in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures
and administration details of determination on PRC resident enterprise status and administration on post-determination matters.
If the PRC tax authorities determine that PCZ Limited is a PRC resident enterprise for PRC corporate income tax purposes, a number
of unfavorable PRC tax consequences could follow. For example, PCZ Limited may be subject to corporate income tax at a rate of
25% with respect to its worldwide taxable income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC
enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our ordinary
shares and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and
with respect to gains derived by our non-PRC individual shareholders from transferring our ordinary shares.
It is unclear whether,
if we are considered a PRC resident enterprise, holders of our ordinary shares would be able to claim the benefit of income tax
treaties or agreements entered into between China and other countries or areas. See “Risk Factors—Risk Factors Relating
to Doing Business in China—Under the PRC corporate income tax Law, we may be classified as a PRC resident enterprise for
PRC corporate income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC
Shareholders and have a material adverse effect on our results of operations and the value of your investment”.
United States Federal Income Tax Considerations
The following 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 acquired our ordinary shares in the initial public offering completed in December 2018
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 annual 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:
|
●
|
at least 75% of
its gross income for such taxable year is passive income; or
|
|
●
|
at least 50% of
the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”).
|
Passive income generally
includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25%
(by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash
we raise in a public offering completed in December 2018 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 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 raise in a public offering completed in
December 2018, together with any other assets held for the production of passive income, it is possible that, for our 2020 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 WFOE as being wholly owned by us for United States federal income tax purposes, not only because we exercise effective control
over the operation of the WFOE but also because we are entitled to substantially all of its 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 raise in a public offering completed in December 2018. Accordingly,
fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, the application of the PFIC
rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and
how quickly, we spend the cash we raise in a public offering completed in December 2018. 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 and the amount of cash we raised in a
public offering completed in December 2018) that may not be within our control. If we are a PFIC for any year during which you
hold ordinary shares, we will continue to be treated as a PFIC for all succeeding years during which you hold ordinary shares.
However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described
below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below)
with respect to the ordinary shares.
If we are a PFIC for
your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ordinary
shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year
that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable
years or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:
|
●
|
the excess distribution
or gain will be allocated ratably over your holding period for the ordinary shares;
|
|
●
|
the amount allocated
to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which
we were a PFIC, will be treated as ordinary income, and
|
|
●
|
the amount allocated
to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
|
The tax liability for
amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating
losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital, even
if you hold the ordinary shares as capital assets.
A U.S. Holder of “marketable
stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment
discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ordinary
shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess,
if any, of the fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such
ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the
excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year.
However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in
your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual
sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any
loss realized on the actual sale or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed
the net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary shares will be adjusted
to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions
by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for
qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our ordinary shares”
generally would not apply.
The mark-to-market election
is available only for “marketable stock”, which is stock that is traded in other than the minima 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 our website
at http://www.puhuiwealth.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
|
Financial instruments
that expose us to financial market risk, including the financial crisis and law changing in financial services industry.
As of June 30, 2020,
2019, and 2018, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is currently
no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have
not experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.
We are exposed to various
types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course of business.
Liquidity risk
We are exposed to liquidity
risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and
business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When
necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Interest rate risk
We are subject to risks
resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest
bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations
in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest
rate risk.
Foreign exchange
risk
The RMB is not a freely
convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current
or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.
Very limited hedging
transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions
in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully
hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Inflation risk
Inflationary factors
such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of inflation
may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.
ITEM 12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.