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, 2021, the cash buying rate announced
by the People’s Bank of China was RMB 6.4466 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, 2021, 2020 and 2019, and consolidated
balance sheets data as of June 30, 2021 and 2020 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,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,031,016
|
|
|
$
|
2,179,480
|
|
|
$
|
3,180,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(260,358
|
)
|
|
|
(202,637
|
)
|
|
|
(316,718
|
)
|
Selling expenses
|
|
|
(735,402
|
)
|
|
|
(1,517,968
|
)
|
|
|
(2,005,367
|
)
|
General and administrative expenses
|
|
|
(4,962,114
|
)
|
|
|
(4,977,537
|
)
|
|
|
(3,427,040
|
)
|
Total operating expenses
|
|
|
(5,957,874
|
)
|
|
|
(6,698,142
|
)
|
|
|
(5,749,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(1,202,846
|
)
|
|
|
10,444
|
|
|
|
(142,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(5,129,704
|
)
|
|
|
(4,508,218
|
)
|
|
|
(2,710,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(11,065
|
)
|
|
|
179,449
|
|
|
|
380,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,118,639
|
)
|
|
$
|
(4,687,667
|
)
|
|
$
|
(3,102,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interest
|
|
|
(382,839
|
)
|
|
|
(641,719
|
)
|
|
|
(645,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Puhui Wealth
|
|
$
|
(4,735,800
|
)
|
|
$
|
(4,045,948
|
)
|
|
$
|
(2,457,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,507,558
|
|
|
|
11,507,558
|
|
|
|
10,793,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.41
|
)
|
|
|
(0.35
|
)
|
|
|
(0.23
|
)
|
The
following table presents our summary consolidated balance sheet data as of June 30, 2021 and 2020.
|
|
As of
June 30,
|
|
|
As of
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Current assets
|
|
$
|
3,252,478
|
|
|
$
|
5,360,216
|
|
Other assets
|
|
|
4,986,092
|
|
|
|
6,250,135
|
|
Total assets
|
|
$
|
8,429,465
|
|
|
$
|
12,046,676
|
|
Total liabilities
|
|
|
5,169,849
|
|
|
|
4,766,336
|
|
Total shareholders’ equity
|
|
$
|
3,259,616
|
|
|
$
|
7,280,340
|
|
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
Failure to comply with the PRC regulations and China Securities
Regulatory Commission’s regulatory rules may adversely affect our reputation and have a material adverse effect on our business,
financial condition or results of operations.
Qingdao Puhui, a subsidiary of our VIE, received
an Administrative Supervision Decision (“Decision”) from China Securities Regulatory Commission (“CSRC”) Qingdao
Branch on September 23, 2021 regarding the following major issues:
(1)
|
Inadequate management of investor qualifications. Certain
investors of certain private equity fund products managed by Qingdao Puhui were not qualified private equity fund investors due to lack
of certifications for their assets or income.
|
(2)
|
Failure to properly inform investors of the relevant risk
factors and follow the regulatory procedures in accepting investors.
|
(3)
|
Failure to perform the duty of care and diligence in the
management and use of private equity fund assets. Certain private equity fund products were inconsistent with the actual underlying assets.
|
(4)
|
Failure to provide necessary documentation for certain actions.
The signatures of certain investment decision makers were missing from some investment determination documents.
|
Pursuant to the Decision, CSRC Qingdao Branch
ordered Qingdao Puhui to rectify and submit a written response to CSRC Qingdao Branch prior to October 21, 2021. Currently, there are
no administrative penalty, fine or related regulatory measures imposed on Qingdao Puhui. Qingdao Puhui has proactively taken corrective
actions and improvement measures to rectify the issues raised in the Decision.
On October 19, 2021, Qingdao Puhui submitted a
written response to CSRC Qingdao Branch, explaining and clarifying the issues set forth in the Decision. Based upon advice of local counsel,
we do not believe that the Company will be subject to significant administrative penalty, fines or related regulatory measures. See “Legal
Proceedings”. However, there can be no assurance that the CSRC will not take a contrary position, and we may be penalized or fined,
or our business may be suspended for rectifications, which may have a material adverse effect on our business, financial condition or
results of operations.
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, 2021 was attributable to one-time commissions, recurring service fees and management
fees generated through our wealth management product and related services. However, these revenues may not grow at the same
rate as they have in the past. 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 $5.1 million during the year ended June 30, 2021. We had accumulated deficits of approximately $18.3
million, $13.3 million, and $ 9.2 million as of June 30, 2021, 2020 and 2019, 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 growth may
slow, 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 $1.7 million for the year ended June 30, 2021. Although we have
been able to maintain adequate working capital primarily through cash from operations, capital contribution from shareholders, borrowing
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, 2021. Our management believes that,
as of June 30, 2021, 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
temporally 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.
|
|
●
|
Puhui’s
customers has been negatively impacted by the outbreak, which reduced their budgets for investment in 2021. As a result, our revenue
and profitability have been negatively impacted in the fiscal year 2021 and we expect the result of operations for the fiscal year
2022 to improve compared to fiscal year 2021, but there is no guarantee that our total revenue or profitability will grow or remain
at a similar level compared to fiscal year 2021.
|
|
●
|
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 years ended June 30, 2019, 2020 and 2021, 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 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:
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costs
associated with, and difficulties in, integrating acquired businesses and managing newly acquired business;
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potentially
significant goodwill impairment charges;
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high
acquisition and financing costs;
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potential
ongoing financial obligations and unforeseen or hidden liabilities;
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failure
to achieve our intended objectives, benefits or revenue-enhancing opportunities;
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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
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diversion
of our resources and management attention.
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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:
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engaging
in misrepresentation or fraudulent activities when marketing or distributing wealth management products to clients;
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improperly
using or disclosing confidential information of our clients, third-party wealth management product providers or other parties;
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concealing
unauthorized or unsuccessful activities; or
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otherwise
not complying with laws and regulations or our internal policies or procedures.
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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, 2021, YingKe Innovation Asset Management Co., Ltd., Beijing Rushisan Consulting Center, Beijing Rujiu Consulting Center and Yolanda
Management Corporation accounted for 14.8%, 19.1%, 15.1% and 15.7% of the Company’s total revenues, respectively. Beijing Rushilu
Consulting Center, Beijing Rujiu Consulting Center are our related parties which are under common control of Mr. Zhe Ji, our CEO. 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 September 30, 2021, Mr. Zhe Ji beneficially
owns an aggregate of approximately 48.2% 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 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 VIE structure for operating certain of our business in China do not comply
with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these
regulations or the interpretation of existing regulations on the VIE structure change in the future, we could be subject to severe penalties
or be forced to relinquish our interests in those operations, which may therefore materially reduce the value of our ordinary shares.
We
are a holding company incorporated in the Cayman Islands. As a holding company with no material operations of our own, we conduct substantial
operations through our subsidiary and variable interest entity (“VIE”) in China. We control and receive the economic benefits
of our VIE’s business operations through certain contractual arrangements. Our Ordinary Shares offered in this offering are shares
of our offshore holding company instead of shares of our VIE in China.
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 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 our variable interest entity Puhui Wealth Investment Management
(Beijing) Co. Ltd (“Puhui Beijing”), or VIE, which, as a domestic PRC company, is not required to obtain such license for
market survey under current PRC laws.
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’s subsidiary as our VIE, and consolidate Puhui Beijing and its subsidiaries’ results of operations into
ours.
We believe that our corporate structure and contractual
arrangements do not violate the text of the current applicable PRC laws and regulations. Our PRC legal counsel, Hengdu Law Firm, based
on its understanding of the relevant laws and regulations, believes that each of the agreements among our wholly-owned PRC subsidiary,
our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, there are substantial
uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Thus, the PRC governmental
authorities may take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations
relating to variable interest entity structure will be adopted or if adopted, what they would provide. PRC laws and regulations governing
the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting
these laws and regulations.
If
our corporate structure and contractual arrangements are deemed by the relevant regulators that have competent authority, to be illegal,
either in whole or in part, we may lose control of our consolidated VIE, which conducts our substantial operations, holds significant
assets and accounts for significant revenue, and have to modify such structure to comply with regulatory requirements. However, there
can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual
arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would
have broad discretion in dealing with such violations, including, without limitation:
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revoking
our business and operating licenses;
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shutting
down our services;
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discontinuing
or restricting our operations;
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imposing
fines or confiscating any of our income that they deem to have been obtained through illegal operations;
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imposing
conditions or requirements with which we or our PRC subsidiary and consolidated entities may not be able to comply;
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requiring
us or our PRC subsidiary and consolidated entities to restructure the relevant ownership structure or operations;
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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
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taking
other regulatory or enforcement actions that could be harmful to our business.
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Furthermore,
new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure
and contractual arrangements. 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 the imposition of any of these penalties or requirement to restructure our corporate structure causes
us to lose the rights to direct the activities of Puhui Beijing or our right to receive its economic benefits, we would no longer be
able to consolidate the financial results of Puhui Beijing and its subsidiaries in our consolidated financial statements in accordance
with accounting principles generally accepted in the United States (“U.S. GAAP”), which may cause the value of our securities
to significantly decline or even become worthless. However, we do not believe that such actions would result in the liquidation or dissolution
of our company, our wholly-owned subsidiary in China or our consolidated VIE.
Our
current corporate structure and business operations and the market price of our ordinary shares may be affected by the newly enacted
Foreign Investment Law which does not explicitly classify whether VIE that are controlled through contractual arrangements would be deemed
as foreign-invested enterprises if they are ultimately “controlled” by foreign investors.
The
VIE structure has been adopted by many Chinese-based companies, including us, to obtain necessary licenses and permits in the industries
that are currently subject to foreign investment restrictions in China. On March 15, 2019, the National People’s Congress,
China’s national legislative body (the “NPC”) approved the Foreign Investment Law, which took effect on January 1,
2020. On December 26, 2019, the PRC State Council approved the Implementation Rules of the Foreign Investment Law, which came into effect
on January 1, 2020. Since they are relatively new, uncertainties exist in relation to their interpretation. The Foreign Investment Law
does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed
as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision
under definition of “foreign investment” that includes investments made by foreign investors in China through other means
as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative
regulations or provisions of the State Council to provide for contractual arrangements being viewed as a form of foreign investment.
Therefore, there can be no assurance that our control over our consolidated VIE through contractual arrangements will not be deemed as
foreign investment in the future.
According
to the Foreign Investment Law, the State Council shall promulgate or approve a list of special administrative measures for market access
of foreign investments, or the Negative List. The Foreign Investment Law grants national treatment to foreign-invested entities,
except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited”
from foreign investment in the Negative List. The Foreign Investment Law provides that foreign-invested entities operating in “restricted”
or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities.
Pursuant to the Negative List, part of our business includes conducting market surveys, which is categorized as restricted to foreign
investment
under
Negative List. However, since the Negative List has been adjusted and updated almost on an annual basis in the recent years, we cannot
assure you that the aforementioned business will continuously be beyond the “prohibited” category. If our control over our
consolidated VIE through contractual arrangements are deemed as foreign investment in the future, and any business of our consolidated
VIE is “restricted” or “prohibited” from foreign investment under the “Negative List” effective at
the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control
over our consolidated VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or
restructure our business operations, any of which may have a material adverse effect on our business operation and the market price of
our ordinary shares.
Furthermore,
if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations and the market price of our ordinary shares.
We
conduct a significant portion of our operations through our VIE, which is established in China, and we rely on contractual arrangements
with our consolidated VIE and its shareholders to operate our business, which may not be as effective as direct ownership in providing
operational control and otherwise have a material adverse effect as to our business.
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 years 2021 and 2020, 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.
All
of these contractual arrangements are governed by PRC law. Accordingly, these agreements would be interpreted in accordance with PRC
laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed
as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time
delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control
over our consolidated VIE, and our ability to conduct our business and our financial condition and results of operations may be materially
and adversely affected.
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.
The
interests of the shareholders of our consolidated VIE in their capacities as such shareholders may differ from the interests of our company
as a whole, as what is in the best interests of our consolidated VIE, including matters such as whether to distribute dividends or to
make other distributions to fund our offshore requirement to the extent that such funding is permitted under PRC laws, may not be in
our best interests. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in our
best interests of or that any conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause
our consolidated VIE and its subsidiaries to breach or refuse to renew the existing contractual arrangements with us.
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
% beneficially 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 Market Regulation, or the SAMR. Under the PRC Property Law, when an obligor
fails to pay its debt when due, the pledgee may 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 repayment from 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 SAMR 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.
Any
failure by the other shareholders of our VIE to perform their obligations under our contractual arrangements with them would have a material
and adverse effect on our business.
If
the other shareholders of our VIE fail to perform their respective obligations under the contractual arrangements, we could be limited
in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may
have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies
under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective
under PRC law. For example, if the other shareholders of our VIE refuse to transfer their shares of our VIE to our PRC subsidiary or
its designee after we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith
or otherwise fail to fulfill their contractual obligations, we may have to take legal actions to compel them to perform their contractual
obligations. In addition, if there are any disputes or governmental proceedings involving any interest in such shareholders’ shares
of our VIE, our ability to exercise shareholders’ rights or foreclose the share pledges according to the contractual arrangements
may be impaired. If these disputes or proceedings were to impair our control over our VIE, we may not be able to maintain effective control
over our business operations in the PRC and thus would not be able to continue to consolidate our VIE’s financial results, which
would in turn result in a material adverse effect on our business, operations and financial condition.
PRC
government may impose more restrictions or regulations on those China-based companies listing offshore
As
at the date hereof, our PRC subsidiary and VIE have not received any notice or other official document regarding permission or denial
of permission to list on U.S. exchanges from Chinese authorities, as PRC laws and regulations are generally silent on whether
overseas listing through offshore shell entities is subject to any approval or review by the China Securities Regulatory Commission or
other governmental authority. However, recently, the General Office of the Central Committee of the Communist Party of China and the
General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According
to Law” (the “Opinions”), which was made available to the public on July 6, 2021. The Opinions emphasize the
need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision and regulations
over overseas listings by China-based companies. Effective legal measures, such as promoting the construction of relevant regulatory
systems, will be taken to deal with the risks and incidents of China-concept overseas listing companies, cybersecurity and data privacy
protection requirements and other related matters. The Opinions and any related implementing rules to be enacted may subject us to compliance
requirement in the future. Furthermore, recently, several PRC operating entities intending to raise capital overseas through offshore
shell entities have been subject to government-led cybersecurity review, which also indicates the strong tendency to impose more restrictions
or regulations by the PRC government on those China-based companies raising capital offshore.
In
addition, with respect to our VIE arrangement, we continue to face uncertainty about future actions by the government of China that could
significantly affect the enforceability of the VIE agreements entered into by our PRC subsidiary and VIEs.
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 Civil Code, 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 rate 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.
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:
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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
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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.
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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.
Our
PRC subsidiary and VIEs are subject to various PRC laws and regulations generally applicable to companies in China. The PRC legal system
is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the
late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past four decades has significantly increased the protections afforded to various forms of
foreign or private-sector investment in China.
As
relevant laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult
to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy 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) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and
rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property
(including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China
could materially and adversely affect our business and impede our ability to continue our operations.
Recently,
the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued
the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law(the “Opinions”),
which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal
securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such
as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas
listed companies, and state security, cybersecurity and data privacy protection requirements and similar matters. The Opinions and any
related implementing rules to be enacted may subject us to compliance requirement in the future.
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:
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general
economic and business conditions;
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overall
demand for our products and services; and
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general
legal, regulatory and political developments.
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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/filing 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 or consolidated entities are subject to PRC regulations and foreign exchange loan registrations. For
example, loans by us to our wholly owned PRC subsidiary or consolidated entities to finance their activities cannot exceed statutory
limits and relevant loan agreements must be filed 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 registered with SAMR or its local counterpart.
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 using RMB registered capital converted
from foreign currencies.
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 filing 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 filings 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 is subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy
our liquidity requirements.
We
are an exempted company incorporated in the Cayman Islands with limited liability structured as a holding company. We may need dividends
and other distributions on equity from our PRC subsidiary to satisfy our liquidity requirements. Current PRC regulations permit our PRC
subsidiary to pay dividends to us only out of their accumulated profits after all losses of such PRC subsidiary have been made up, 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 accumulated profits to fund the statutory common reserves each year until the total amount of the statutory common
reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiary
incurs 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. Any limitation on the ability of our subsidiary to distribute dividends or to make payments to us may restrict
our ability to satisfy our liquidity requirements.
In
addition, the PRC Laws on the Income Tax, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable
to dividends payable by Chinese 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.
Some
PRC laws and 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 approval shall be obtained if an equity 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.
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 may delay
or inhibit our ability to complete such transactions. It is unclear whether our future 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 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 might 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 June
30, 2021. 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-PRC 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 and the Decision of the State Administration of Taxation on Promulgation of the Catalog of Invalid or Repealed Departmental Rules
and Regulatory Documents of Tax Authorities. SAT Notice No. 7 introduces a new tax regime and extends the SAT’s tax jurisdiction
to capture not only the direct transfer but also transactions involving indirect transfer of (i) real properties in China and (ii) equity
interests in the entities 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 some other implementing matters
on issues relating to withholding at source of income tax of non-resident enterprises.
The
PRC tax authorities have discretion under the 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 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 SAMR.
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 maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract
Law, or the Labor Contract Law, that became effective on January 1, 2008, as amended on December 28, 2012 and effective as
of July 1, 2013, and its implementation rules that became effective on September 18, 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, as amended on December 29, 2018. 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 Securities
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:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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conditions
in the Chinese wealth management industry;
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changes
in the economic performance or market valuations of other wealth management companies;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. dollar; and
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general
economic or political conditions in China.
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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:
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limited availability of market quotations for our ordinary shares;
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reduced
liquidity for our ordinary shares;
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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;
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limited amount of news and analyst coverage; and
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a
decreased ability to issue additional securities or obtain additional financing in the future.
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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. As a result, the exclusive forum provision will not apply to suits
brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal courts have concurrent
jurisdiction. 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:
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we
are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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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;
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we
are not required to provide the same level of disclosure on certain issues, such as executive compensation;
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we
are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material non-public
information;
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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
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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.
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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:
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at
least 75% of our gross income for the year is passive income; or
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the
average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or
which are held for the production of passive income is at least 50%.
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Passive
income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of
a trade or business) and gains from the disposition of passive assets.
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.
Our obligations
under the convertible debenture will be unsecured and will be subordinated.
On August 18, 2021, Puhui Cayman entered into a securities purchase
agreement (the “Securities Purchase Agreement”) with certain institutional investor (the “Investor”), pursuant
to which the Company agreed to sell and the Investor will purchase a Convertible Subordinated Debenture (the “Convertible Debenture”)
in the principal amount of $2,750,000 with an original issue discount of 10% (the “Transaction”). On August 20, 2021,
pursuant to the Securities Purchase Agreement, the Company issued the Convertible Debenture to the Investor.
Our obligations under the Convertible Debenture
are unsecured. Our obligations under the Convertible Debenture, with respect to priority of payment, will be subordinated to our existing
and future indebtedness. This means that we may not make any payments of principal or interest on the Convertible Debenture if we default
on a payment on our senior indebtedness. As of June 30, 2021, our total consolidated indebtedness was approximately $ 5.2 million. After
the effectiveness of the offering of the Convertible Debenture and the application of the net proceeds therefrom, on June 30, 2021, the
face value of our indebtedness would have totaled approximately $ 6.4 million.
If a bankruptcy, liquidation, dissolution, reorganization
or similar proceeding occurs with respect to us, then the holders of any of our secured indebtedness may proceed directly against the
assets securing that indebtedness. Accordingly, those assets will not be available to satisfy any outstanding amounts under our unsecured
indebtedness, including the Convertible Debenture, unless the secured indebtedness is first paid in full. The remaining assets, if any,
would then be allocated pro rata among the holders of our senior, unsecured indebtedness, including the Convertible Debenture. There may
be insufficient assets to pay all amounts then due.
If a bankruptcy, liquidation, dissolution, reorganization
or similar proceeding occurs with respect to any of our subsidiaries, then we, as a direct or indirect common equity owner of that subsidiary
(and, accordingly, holders of our indebtedness, including the debenture), will be subject to the prior claims of that subsidiary’s
creditors, including trade creditors and preferred equity holders. We may never receive any amounts from that subsidiary to satisfy amounts
due under the Convertible Debenture e.
The Convertible
Debenture will not be guaranteed by any of our subsidiaries and will be structurally subordinated to the debt and other liabilities of
our subsidiaries, which means that creditors of our subsidiaries will be paid from their assets before holders of the debentures would
have any claims to those assets.
We conduct substantially all of our operations
through, and substantially all of our consolidated assets are held by, our VIEs; however, the Convertible Debenture will be obligations
exclusively of ours and will not be guaranteed by any of our PRC subsidiary or VIEs. None of our PRC subsidiary or VIEs has guaranteed
or otherwise become obligated with respect to the Convertible Debenture. Furthermore, none of our PRC subsidiary or VIEs is under any
obligation to make payments to us, and any payments to us would depend on the earnings or financial condition of our PRC subsidiary or
VIEs and various business considerations. Statutory, contractual or other restrictions may also limit our PRC subsidiary or VIEs’
ability to pay dividends or make distributions, loans or advances to us. For these reasons, we may not have access to any assets or cash
flows of our PRC subsidiary or VIEs to make payments on the Convertible Debenture.
You may experience
future dilution as a result of future equity offerings and other issuances of our ordinary shares or other securities. In addition, the
Convertible Debenture and any future equity offerings and other issuances of the debenture or other securities may adversely affect our
share price.
In order to raise additional capital, we may in
the future offer additional ordinary shares or other securities convertible into or exchangeable for our ordinary shares at prices that
may not be the same as the conversion price per share for the Convertible Debenture. We may not be able to sell shares or other securities
in any other offering at a price per share that is equal to or greater than the conversion price per share paid by investors of the Convertible
Debenture. The price per share at which we sell additional ordinary shares or securities convertible into ordinary shares in future transactions
may be higher or lower than the price per share in this offering.
In addition, we issued to the placement agent
a five year warrant to purchase up to 41,667 ordinary shares at an exercise price of $3.60 (“Placement Agent Warrant”). We
have registered the debenture, Placement Agent Warrant and the ordinary shares underlying such warrant on Form F-3 effective on November
10, 2020. You will incur dilution upon exercise of any outstanding share options or warrants. The sale of shares underlying the Convertible
Debenture and Placement Agent Warrant and any future sales of a substantial number of ordinary shares in the public market, or the perception
that such sales may occur, could adversely affect the price of our ordinary shares. We cannot predict the effect, if any, that market
sales of those ordinary shares or the availability of those ordinary shares for sale will have on the market price of our ordinary shares.
Provisions in the indenture could delay
or prevent an otherwise beneficial takeover of us.
Certain provisions in the indenture could make
a third party attempt to acquire us more difficult or expensive. For example, the Convertible Debenture may not be converted if,
as a result of the conversion, the holder and its affiliates would beneficially own in excess of 4.99% of the our ordinary shares, which
may be increased to up to 9.99% of the ordinary shares by such holders upon notice to the Company. In addition, if a takeover constitutes
a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. In either case, and in other cases,
our obligations under the Convertible Debenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring
us or removing incumbent management.
ITEM
4.
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INFORMATION ON
THE COMPANY
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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. (“Puhui Cayman” or the “Company”) under the laws of the Cayman Islands as our offshore holding
company on November 30, 2017. Puhui Cayman owns 100% of the equity interest in PCZ Limited (“Puhui BVI”), a company formed
under the laws of the British Virgin Islands on December 6, 2017. Through Puhui BVI, we indirectly own 100% of the equity interest in
HZF (HK) Limited (“Puhui HK”), a Hong Kong company established on December 18, 2017. Rucong, a wholly owned PRC subsidiary
of Puhui HK 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.
On
January 30, 2018, Puhui Cayman completed a reorganization of entities under common control of its five shareholders, who collectively
owned a majority of the equity interests of Puhui Cayman prior to the reorganization. Puhui Cayman, Puhui BVI, and Puhui HK were established
as the holding companies of WFOE. WFOE is the primary beneficiary of Puhui Beijing and its subsidiaries, and all of these entities included
in Puhui Cayman are under common control which results in the consolidation of Puhui Beijing and subsidiaries which have been accounted
for as a reorganization of entities under common control at carrying value. The financial statements are prepared on the basis as if
the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements
of Puhui Cayman.
On
December 3, 2019, Puhui Cayman acquired 100% of the shares of Granville Financial Services Company Limited (“Granvill”)
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 October 20, 2021, the Company paid approximately $3.4 million and approximately $0.4 million in acquisition
payable is still outstanding.
On
August 18, 2021, Puhui Cayman entered into a Securities Purchase Agreement with certain Investor, pursuant to which the Company agreed
to sell and the Investor will purchase a Convertible Debenture in the principal amount of $2,750,000 with an original issue discount
of 10%. On August 20, 2021, pursuant to the Securities Purchase Agreement, the Company issued the Convertible Debenture to the Investor.
The Convertible Debenture bears interest at the rate of 8.00% per year from the date of original issuance and matures on February 20,
2022.
On
August 20, 2021, pursuant to a supplement agreement (the “Supplement Agreement”) by and between the Company and Joseph Stone
Capital, LLC (the “Placement Agent”), the Company paid the Placement Agent a commission of $143,750, a management fee of
$12,500 and issued to the Placement Agent a five-year warrant to purchase up to 41,667 ordinary shares at an exercise price of $3.60
(“Placement Agent Warrant”) in connection with the Transaction. In addition, the Company reimbursed the Placement Agent $50,000
for one-time non-accountable expenses and actual out-of-pocket expenses of $20,000. The Convertible Debenture, Placement Agent Warrant
and the underlying Ordinary Shares were registered under the Company’s Registration Statement on Form F-3 (File No. 333-245003)
as filed with SEC on August 12, 2020 and declared effective by the SEC on November 10, 2020 and the Prospectus Supplement filed with
the SEC under Rule 424(b)(3) on August 20, 2021.
As of October 26, 2021, 1,150,463 shares were
issued for a partial conversion of $1,894,206 principal amount of the Convertible Debenture with an average conversion price of approximately
$1.65.
On June 28, 2021 and July 1, 2021, Beijing Fenghui
and Beijing Lingsheng were dissolved and completed the deregistration, respectively, with their respective local State Administration
for Market Regulation.
On October 10, 2020, January 14, 2021 and September 11, 2021, Shanghai
Shengshi, Beijing Puhui Shanying Management Consulting Co., Ltd. and Beijing Ruchang, were dissolved and completed the deregistration,
respectively, with their respective local State Administration for Market Regulation,
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 and 802, 8th Floor, W1 Office Building, Oriental Commerce TowerNo.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:
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(1)
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Beijing
Synergetic SIFT Asset Management Company Limited is not a party to any of the VIE Agreements.
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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 $nil, $288,000, and $160,000 for the years ended June 30, 2021, 2020 and 2019, respectively,
primarily purchase of equipment and leasehold improvements.
We expect that our capital expenditures in fiscal
year 2022 will be incurred primarily in connection with 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 SAMR 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, 2018, we served
as manager or general partner of four funds with an aggregate of over RMB155.4 million (approximately US$23.5 million) under management.
Two 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 two 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 two 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 four 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
|
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 October 30, 2021, the Company paid approximately $3.4 million and approximately $0.4 million in acquisition payable is still outstanding.
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
|
|
●
|
small and midsize
enterprises (“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 17 sales people and five offices strategically
located in Shanghai, Beijing, Qingdao, Suzhou and Hong Kong. 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 138 clients as of June 30, 2021, 54 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%, 100%, 91% of our revenues for the year ended June 30, 2021,
2020 and 2019.
Our client base has been expanding rapidly. We
had 138 clients as of June 30, 2021, of which 54 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 9 to 10 from June 30, 2020 to June 30, 2021. Our corporate clients purchased RMB 3,000,000 (approximately
US$0.5 million) worth of wealth management products through us as of June 30, 2021.
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 26 financial products, of which 5 are self-developed and 21 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:
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●
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private
equity funds products, the underlying assets of which are portfolios of equity investment in private companies;
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●
|
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;
|
|
●
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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 1,313,719,124 (approximately US$203.4 million) worth of wealth management products to our clients
in aggregate . For the fiscal year ended June 30, 2021, YingKe Innovation Asset Management Co., Ltd ., Beijing Rushisan Consulting
Center, Beijing Rujiu Consulting Center and Yolanda Management Corporation accounted for 14.8%, 19.1%, 15.1% and 15.7% of
the Company’s revenues, respectively. Beijing Rushilu Consulting Center, Beijing Rujiu Consulting Center are our related parties
which are under common control of Mr. Zhe Ji, our CEO.
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, 2021, our coverage network
consisted of approximately 13 relationship managers and 5 offices located in Shanghai, Beijing, Suzhou, Qingdao and Hong Kong, respectively. 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:
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●
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Management
institutions of privately-raised investment funds. As of June 30, 2021, there were
more than 24,400 management institutions of privately-raised investment funds registered
with Asset Management Association of China, for a total of approximately RMB 17.89 trillion
assets under management. We believe that we can compete effectively due to our loyal client
base and trusted investment expertise.
|
|
●
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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, 2021, we had 40 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, 2021.
Function
|
|
Number of Employees
|
|
|
% of Total
|
|
Management and administrative
|
|
|
8
|
|
|
|
20
|
%
|
Operations
|
|
|
3
|
|
|
|
7
|
%
|
Product development
|
|
|
4
|
|
|
|
10
|
%
|
Sales and marketing
|
|
|
17
|
|
|
|
43
|
%
|
Finance and legal
|
|
|
8
|
|
|
|
20
|
%
|
Total
|
|
|
40
|
|
|
|
100
|
%
|
We reduced the number of our employees to 40 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
26 registered trademarks, 2 software copyrights 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 other than a Decision from CSRC Qingdao Branch on September
23, 2021 against Qingdao Puhui regarding the following major issues:
(1)
|
Inadequate management of investor qualifications. Certain
investors of certain private equity fund products managed by Qingdao Puhui were not qualified private equity fund investors due to lack
of certifications for their assets or income.
|
(2)
|
Failure to properly inform investors of the relevant risk
factors and follow the regulatory procedures in accepting investors.
|
(3)
|
Failure to perform the duty of care and diligence in the
management and use of private equity fund assets. Certain private equity fund products were inconsistent with the actual underlying assets.
|
(4)
|
Failure to provide necessary documentation for certain actions.
The signatures of certain investment decision makers were missing from some investment determination documents.
|
Pursuant to the Decision, CSRC Qingdao Branch
ordered Qingdao Puhui to rectify and submit a written response to CSRC Qingdao Branch prior to October 21, 2021. Currently, there are
no administrative penalty, fine or related regulatory measures imposed on Qingdao Puhui. Qingdao Puhui has proactively taken corrective
actions and improvement measures to rectify the issues raised in the Decision.
On October 19, 2021, Qingdao Puhui submitted a
written response to CSRC Qingdao Branch, explaining and clarifying the issues set forth in the Decision. Based upon advice of local counsel,
we do not believe that the Company will be subject to significant administrative penalty, fines or related regulatory measures. See “Legal
Proceedings”. However, there can be no assurance that the CSRC will not take a contrary position, and we may be penalized or fined,
or our business may be suspended for rectifications, which may have a material adverse effect on our business, financial condition or
results of operations.
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 and was
invalidated by the Administrative Measures on Private Offering Asset Management Business of Securities and Futures Business Organizations
on October 22, 2018. 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, which now has been invalidated by the Administrative Measures on Private Offering Asset Management Business of Securities and
Futures Business Organizations on October 22, 2018, 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.
On October 22, 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, namely the Pilot Measures and the Administrative Measures. The
Asset Management Administration Measures have made some minor adjustments on the assets available to be invested by the asset management
plans.
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
The
Ministry of Commerce, or the MOFCOM, published a discussion draft of the proposed Foreign Country 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.
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.
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.
Pursuant
to the 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, stop 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. 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”) and MOFCOM. 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 Guidance Catalog of Industries for Foreign Investment (2017 Revision) was replaced by the Special Administrative Measures
(Negative List) for Foreign Investment Access (2018 Version). In June 2019, the 2018 version was replaced by the Special Administrative
Measures (Negative List) for Foreign Investment Access (2019 Version), and further in December 10, 2020 , the 2019 version was replaced
by the Special Administrative Measures (Negative List) for Foreign Investment Access (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.
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 may 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 and December 29, 2018, respectively. 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 and was amended on April 23, 2019. 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, 2021, 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 enacted on December 13, 1993 and was amended on November 10, 2008, February 6, 2016 and November 19, 2017, respectively, 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 which is now invalid, 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 entities and individuals who provide service in transportation,
postal and other modern service industrial shall be tax payers of VAT. Taxpayers who provide taxable services 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 June 30, 2021. 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. Announcement of the State Administration of Taxation
on Issues Relating to “Beneficial Owner” in Tax Treaties (the “Beneficial Owner Announcement”) which came into
effect on April 1, 2018 further provides that if non-resident enterprises meet the following conditions, among others, they would not
be deemed as the beneficially owners who can enjoy the reduced withholding tax for dividends set forth in the relevant tax treaty, i)
it is obligated to transfer over 50% received dividends to residents of a third country or region within 12 months after receiving the
dividends, ii) it is not engaged in substantive business operations; iii) the other contracting country (region) of the tax treaty does
not impose any tax on or exempts tax from the relevant income, or imposes tax on the relevant income but the actual tax is extremely
low. Accordingly, HZF (HK) Limited may not be able to enjoy the 5% withholding tax rate for the dividends it receives from Rucong, if
it satisfies the conditions set forth in Beneficial Owner Announcement.
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
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 local 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 using RMB registered capital
converted from foreign currencies.
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 provided as loans to its non-affiliated entities.
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 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 or
remittance of funds offshore.
Regulations
on Dividend Distribution
The
principal regulations governing dividend distributions of wholly foreign-owned companies include:
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Foreign
Investment Law became into force on January 1, 2020.
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●
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Company
Law of China, as amended on December 28, 2013.
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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.
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 round trip investment. 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 update the foreign exchange registration 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.
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.
Property,
Plants and Equipment
We
have leased substantially more office properties to accommodate the increase in our operations in the year ended June 30, 2021. Below
is a summary of our properties.
Locations
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Purpose
Of Use
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Size
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Leasor
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Leasee
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Start
Date And Duration
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Rent
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Suite
801/ 802, W1 Office Building, Oriental Commerce Tower No.1 Chang An Street, Dong Cheng District, Beijing
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business
and office use
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886.49m2
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Beijing
Oriental Plaza Co., Ltd.
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Puhui
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April
1, 2019 to March 31, 2023
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100,468.87
RMB/month (April 1, 2019 to June 30, 2019); 301,406.6 RMB/month (July 1, 2019 to March 31,
2021); 305,839.05 RMB/month (April 1, 2021 to December 31, 2021); RMB101,946.35 (January 1,
2022 to March 31, 2022); 305,839.05 RMB/month (April 1, 2022 to December 31, 2022); 152,919.53
RMB/month (January 1, 2023 to February 28, 2023);
305,839.05
RMB/month (March 1, 2023 to March 31, 2023)
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Locations
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Purpose Of Use
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Size
|
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Lessor
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Leasee
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Start Date And Duration
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Rent
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Yinli Golf Villa No.7, Suzhou
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Business use
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392m2
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Hong Wang
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Puhui Beijing
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April 1, 2021 to April 10,
2022
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29,000 RMB/month
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Building III-16, 1500 Hami Road, Changning District, Shanghai
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business and office use
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165m2
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Shanghai Xinzhao Enterprise Management and Service Co., Ltd
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Shanghai Pucai
|
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June 1, 2021 to May 31, 2024
|
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476,663 RMB/Year (June 1, 2021 to May 31, 2022);
546,000 RMB/Year (June 1, 2022 to May 31, 2023); 573,300
RMB/Year (June 1, 2023 to May 31, 2024)
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33F, Room 9, Building 1, Excellence Century Center, Long Cheng Road, Shibei District, Qingdao
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business and office use
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128.98 m2
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Qingdao Excellence Qisheng Real Estate Development Co., Ltd
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Qingdao Puhui
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March 20, 2021 to March 19, 2022
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39,428 RMB/quarter
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Unit C, 11 Floor, OfficePlus@MongKok, 998 Canton Road, Mong Kok, Kowloon, Hong Kong
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Commercial use
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46.5 m2
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Hip Shing Hong (Agency) Limited
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Granville
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November 1, 2020 to October 31, 2021
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20,400
RMB/month
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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 SEC. They are also available at www.sec.gov.
ITEM
4A.
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UNRESOLVED STAFF
COMMENTS
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Not
Applicable
ITEM
5.
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OPERATING AND
FINANCIAL REVIEW AND PROSPECTS
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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, 2021, we have facilitated the sale of financial products which include primarily
private equity fund products. For the year ended June 30, 2021, we had 138 high-net-worth clients
with average transaction value per client of approximately $150,000. 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
serve as manager or general partner of five funds (including one matured fund in the process of winding down) with an aggregate value
of over approximately RMB117.1 million ($16.7 million) under management as of June 30, 2021. 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 these 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) first found 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 2021 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:
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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 got under control in China.
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|
Our
customers have been negatively impacted by the outbreak, which reduced their budgets for investment in 2021. As a result, our revenue
and income has been negatively impacted in the fiscal year 2021 and we expect the result of operations for the fiscal year 2022 to improve
but there is no guarantee that our total revenue or profitability will remain at a similar level compared to fiscal year 2021.
|
|
●
|
The
economy may worsen if the COVID-19 outbreak continues. Our product provider may be negatively impacted by the outbreak and resurgence,
however the Company has not seen any significant disruption of its product supply to date.
|
For
the year ended June 30, 2021, 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.
In fiscal year 2021, the Company disposed six
of its majority owned subsidiaries which were mainly sales branches of Puhui as a result of COVID-19 where more meetings were conducted
online, including Beijing Ruchang Management Consulting Co., Ltd. (“Beijing Ruchang”) which was dissolved in September 2020
and Shanghai Shengshi Enterprise Management Consulting Co., Ltd. (“Shanghai Shengshi”) dissolved in October 2020, with Beijing
Fenghui Management Consulting Co., Ltd. (“Beijing Fenghui”), Beijing Ruihe Suzhou Management Consulting Co., Ltd (“Beijing
Ruihe”), Suzhou Shanghui Management Consulting Co., Ltd. (“Suzhou Shanghui”) and Shanghai Junshen Enterprise Management
Consulting Co., Ltd. (“Shanghai Junshen”) dissolved in June 2021, and recognized approximately $950,000 of loss from such
dispositions. These subsidiaries were mainly used as sales office of Puhui which did not have material assets. The loss was mainly from
write-off of intercompany receivables from Shanghai Rueyue, the holding company of these subsidiaries. Since the dispositions did not
represent any strategic change of the Company’s operation, the dispositions were not presented as discontinued operations.
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.
Assets
Management Business
We
completed our registration with the Assets Management Association of China by 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 four funds under management with over $16.7 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 $106,000, $78,000 and $64,000, representing 5.2%, 3.6% and 2.0% of
our overall total revenues during the years ended June 30, 2021, 2020 and 2019, respectively.
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,
2020
|
|
|
Funds
Inflow
|
|
|
Funds
Outflow
|
|
|
As
of June 30, 2021
|
|
|
|
USD
in thousands, except percentages
|
|
Product type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
0.1% - 1.5%
|
|
|
21,639
|
|
|
|
100
|
%
|
|
|
5
|
|
|
|
4,962
|
|
|
|
16,682
|
|
|
|
100
|
%
|
The
total amount of AUM was approximately $16.7 million as of June 30, 2021, a decrease of approximately $5.0 million, from approximately
$21.6 million as of June 30, 2020. The net increase was due to:
(1)
|
Inflows of approximately
$5,000 was interest income during the year ended June 30, 2021.
|
|
|
(2)
|
Outflows of approximately
$5.0 million was the liquidation of the private equity funds of approximately $4.8 million and expenses of approximately $0.2 million.
|
Key
Component 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 includes
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 the company 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.
Selling
expenses
Our
selling expenses consist of compensation of financial product advisors, benefits and social welfare. Selling expenses also includes office
rental 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, 2021 Compared to Year Ended June 30, 2020
|
|
For the year ended
June 30,
2021
|
|
|
For the year ended
June 30,
2020
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,006,000
|
|
|
$
|
1,481,980
|
|
|
$
|
(475,980
|
)
|
|
|
-32.1
|
%
|
Revenues – related parties
|
|
|
1,025,016
|
|
|
|
697,500
|
|
|
|
327,516
|
|
|
|
47.0
|
%
|
Cost of revenues
|
|
|
(260,358
|
)
|
|
|
(202,637
|
)
|
|
|
(57,721
|
)
|
|
|
28.5
|
%
|
Selling expenses
|
|
|
(735,402
|
)
|
|
|
(1,517,968
|
)
|
|
|
782,566
|
|
|
|
-51.6
|
%
|
General and administrative expenses
|
|
|
(4,962,114
|
)
|
|
|
(4,977,537
|
)
|
|
|
15,423
|
|
|
|
-0.3
|
%
|
Loss from operations
|
|
|
(3,926,858
|
)
|
|
|
(4,518,662
|
)
|
|
|
591,804
|
|
|
|
-13.1
|
%
|
Other income (expenses), net
|
|
|
(1,202,846
|
)
|
|
|
10,444
|
|
|
|
(1,213,290
|
)
|
|
|
-11617.1
|
%
|
Loss before income taxes
|
|
|
(5,129,704
|
)
|
|
|
(4,508,218
|
)
|
|
|
(621,486
|
)
|
|
|
13.8
|
%
|
Provision (Benefit) for income taxes
|
|
|
(11,065
|
)
|
|
|
179,449
|
|
|
|
(190,514
|
)
|
|
|
-106.2
|
%
|
Net loss
|
|
|
(5,118,639
|
)
|
|
|
(4,687,667
|
)
|
|
|
(430,972
|
)
|
|
|
9.2
|
%
|
Less: Net loss attributable to noncontrolling interest
|
|
|
(382,839
|
)
|
|
|
(641,719
|
)
|
|
|
258,880
|
|
|
|
-40.3
|
%
|
Net loss attributable to Puhui Wealth
|
|
$
|
(4,735,800
|
)
|
|
$
|
(4,045,948
|
)
|
|
$
|
(689,852
|
)
|
|
|
17.1
|
%
|
Revenue:
We
categorize revenues into third-party revenues and related-party revenues.
Related party revenues consist of one time commission
from related parties and recurring management fees paid by limited partnership funds where we serve as general partner. For the year ended
June 30, 2021 and 2020, related party revenues consisted of one-time commissions from Beijing Rululu Consulting Center, Beijing Rusan
Consulting Center, Beijing Ruqi Consulting Center, Beijing Rushilu Consulting Center and Beijing Rujiu Consulting Center which are the
related party companies majority owned by Mr. Ji Zhe. Related party revenues also consisted of management fees from Qingdao Puhui’s
invested and managed limited partnership, Xinyu JiJi Investment Center, LP. and Xinyu Yuan Yuan Investment Center.
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,
2021
|
|
|
%
|
|
|
For the year ended
June 30,
2020
|
|
|
%
|
|
|
Change
|
|
|
Change %
|
|
One-time commissions (1)
|
|
$
|
1,294,102
|
|
|
|
63.7
|
%
|
|
$
|
2,002,409
|
|
|
|
91.9
|
%
|
|
$
|
(708,307
|
)
|
|
|
-35.4
|
%
|
Related parties
|
|
|
992,890
|
|
|
|
48.9
|
%
|
|
|
639,696
|
|
|
|
29.4
|
%
|
|
|
353,194
|
|
|
|
55.2
|
%
|
Third parties
|
|
|
301,212
|
|
|
|
14.8
|
%
|
|
|
1,362,713
|
|
|
|
62.5
|
%
|
|
|
(1,061,501
|
)
|
|
|
-77.9
|
%
|
Recurring service fees (2)
|
|
|
638,866
|
|
|
|
31.5
|
%
|
|
|
76,602
|
|
|
|
3.5
|
%
|
|
|
562,264
|
|
|
|
734.0
|
%
|
Third party
|
|
|
638,866
|
|
|
|
31.5
|
%
|
|
|
76,602
|
|
|
|
3.5
|
%
|
|
|
562,264
|
|
|
|
734.0
|
%
|
Recurring management fees (3)
|
|
|
105,980
|
|
|
|
5.2
|
%
|
|
|
77,586
|
|
|
|
3.5
|
%
|
|
|
28,394
|
|
|
|
36.6
|
%
|
Third party
|
|
|
69,652
|
|
|
|
3.4
|
%
|
|
|
46,470
|
|
|
|
2.1
|
%
|
|
|
23,182
|
|
|
|
49.9
|
%
|
Related parties
|
|
|
36,328
|
|
|
|
1.8
|
%
|
|
|
31,116
|
|
|
|
1.4
|
%
|
|
|
5,212
|
|
|
|
16.8
|
%
|
Subscription fees (4)
|
|
|
-
|
|
|
|
-
|
|
|
|
28,625
|
|
|
|
1.3
|
%
|
|
|
(28,625
|
)
|
|
|
-100.0
|
%
|
Other services fees(5)
|
|
|
394
|
|
|
|
0.0
|
%
|
|
|
309
|
|
|
|
0.1
|
%
|
|
|
85
|
|
|
|
27.5
|
%
|
Sales taxes(6)
|
|
|
(8,326
|
)
|
|
|
-0.4
|
%
|
|
|
(6,051
|
)
|
|
|
-0.3
|
%
|
|
|
(2,275
|
)
|
|
|
37.6
|
%
|
Total operating revenues
|
|
$
|
2,031,016
|
|
|
|
100
|
%
|
|
$
|
2,179,480
|
|
|
|
100
|
%
|
|
$
|
(148,464
|
)
|
|
|
-6.8
|
%
|
The
overall 6.8% decrease in operating revenue for the year ended June 30, 2021 from the same period in 2020 was mainly due to the decrease
in one-time commissions.
(1)
One-time commissions decreased by approximately $0.7 million or 35.4% for the year ended June 30, 2021 compared to the same period in
2020. The decrease was mainly due to the decreases in the aggregate value of wealth management products we distributed in line with the
decrease in total revenue as the COVID-19 has impact the financial market.
(2) For
the years ended June 30, 2021 and 2020, recurring services fees amounted to approximately $849,969 and $76,602, respectively,
representing 37.9% and 3.5% of our total revenues. The increase in recurring service fees was because we received the final portion
of service fees from three entities that invest in U.S. publicly listed companies in 2021 to which we provided consulting services
in their IPOs and mergers.
(3)
We received approximately $105,980 and $78,000 in recurring management fees for the years ended June 30, 2021 and 2020, respectively.
We expect these services fees will continue to provide us with a steady stream of income during the cycle of the products.
(4)
Subscription fees: We received one-time subscription fees of $29,000 from our related parties for the year ended June 30, 2020. A one-time
subscription fee is charged upfront to one 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. There
was no subscription fees in 2021 as we did not set up new funds.
(5)
Other service fees amounted to $394 and $309 for the years ended June 30, 2021 and 2020, 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,
2021
|
|
|
%
|
|
|
For the Year
Ended
June 30,
2020
|
|
|
%
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
260,358
|
|
|
|
4.4
|
%
|
|
$
|
202,637
|
|
|
|
3.0
|
%
|
|
$
|
57,721
|
|
|
|
28.5
|
%
|
Selling expenses
|
|
|
735,402
|
|
|
|
12.3
|
%
|
|
|
1,517,968
|
|
|
|
22.7
|
%
|
|
|
(782,566
|
)
|
|
|
(51.6
|
)%
|
General and administrative
|
|
|
4,962,114
|
|
|
|
83.3
|
%
|
|
|
4,977,537
|
|
|
|
74.3
|
%
|
|
|
(15,423
|
)
|
|
|
(0.3
|
)%
|
Total operating expenses
|
|
$
|
5,957,874
|
|
|
|
100.0
|
%
|
|
$
|
6,698,142
|
|
|
|
100.0
|
%
|
|
$
|
(740,268
|
)
|
|
|
(11.1
|
)%
|
Cost
of Revenues
Our
cost of revenues were approximately $0.3 million and approximately $0.2 million for the years ended June 30, 2021 and 2020, respectively.
The increase was mainly due to increase in salary of product development team.
Selling
expenses
|
|
For the Year
Ended
June 30,
2021
|
|
|
For the Year
Ended
June 30,
2020
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
540,825
|
|
|
$
|
818,563
|
|
|
$
|
(277,738
|
)
|
|
|
(33.9
|
)%
|
Rent (including amortization of right of use assets)
|
|
$
|
71,805
|
|
|
$
|
386,501
|
|
|
$
|
(314,696
|
)
|
|
|
(81.4
|
)%
|
Others
|
|
$
|
122,772
|
|
|
$
|
312,904
|
|
|
$
|
(190,132
|
)
|
|
|
(60.8
|
)%
|
Total selling expenses
|
|
$
|
735,402
|
|
|
$
|
1,517,968
|
|
|
$
|
(782,566
|
)
|
|
|
(51.6
|
)%
|
Our
selling expenses were $735,402 and $1,517,968 for the years ended June 30, 2021 and 2020, respectively, a decrease of $782,566 or 51.6%.
The decrease was mainly due to the decrease in salaries and rent as we closed several of our sales offices in fiscal year 2021 which
reduced headcounts in selling department due to inability to carry out marketing functions during the pandemic.
General
and administrative expenses
|
|
For the Year
Ended
June 30,
2021
|
|
|
For the Year
Ended
June 30,
2020
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
1,305,103
|
|
|
$
|
1,131,736
|
|
|
$
|
173,367
|
|
|
|
15.3
|
%
|
Rent (including amortization of right of use assets)
|
|
$
|
991,257
|
|
|
$
|
961,430
|
|
|
$
|
29,827
|
|
|
|
3.1
|
%
|
Professional fees
|
|
$
|
1,590,862
|
|
|
$
|
1,639,582
|
|
|
$
|
(48,720
|
)
|
|
|
(3.0
|
)%
|
Others
|
|
$
|
1,074,892
|
|
|
$
|
1,244,789
|
|
|
$
|
(169,897
|
)
|
|
|
(13.6
|
)%
|
Total general and administrative expenses
|
|
$
|
4,962,114
|
|
|
$
|
4,977,537
|
|
|
$
|
(15,423)
|
|
|
|
(0.3
|
)%
|
Our general and administrative expenses were approximately
$5.0 million for the years ended June 30, 2021 and 2020, respectively, a slight decrease of $15,423 or 0.3%.
Other
income (expense)
Other
income (expenses) mainly consists of interest income, finance expenses for our loan and loss from disposal of the Company’s subsidiaries.
Total other expenses increased by approximately $1.2 million mainly due to decrease in interest income of approximately $0.1 million
as we waived the interest on loan receivable this year and approximately $1.0 million from disposal of our subsidiaries.
We
disposed of Beijing Ruchang in September 2020, Shanghai Shengshi in October 2020, Beijing Fenghui, Beijing Ruihe, Suzhou Shanghui and
Shanghai Shengshi in June 2021 and recognized approximately $1.0 million of loss from such dispositions. These subsidiaries were mainly
used for our sales office which did not have material assets, the loss was mainly from write off of intercompany receivables from
Shanghai Rueyue, the holding company of these subsidiaries. Since the dispositions did not represent any strategic change of our operation,
the dispositions were not presented as discontinued operations. We disposed of Beijing Hongsheng and Shanghai Junshen in fiscal year
2020. No gain or loss from these dispositions was recognized.
Provision
(Benefits) for Income Taxes
The Company recorded no current income tax expenses for
each of the years ended June 30, 2021 and 2020due to the operational loss from all entities caused by the impact of COVID-19.
We recorded deferred taxes benefit of $11,065
for the year ended June 30, 2021 compared to provision of $179,449 for the year ended June 30, 2020 mainly as a result of increase in
deferred tax benefit from Granville due to net operating loss carryforward which reduced our forecasted income for coming years. Management
believes Granville’s losses incurred this year was mainly as a result of impact from COVID-19 and the Company believes its continuing
utilization of its net operating losses (“NOL”) and its internal forecast of future taxable income based on existing
products and NOL is carried indefinitely in Hong Kong outweighs the negative evidences of a decrease in revenue and net income for the
year ended June 30, 2021.
Net
Loss
Net
loss for year ended June 30, 2021 was approximately $5.1 million as compared approximately $4.7 million for the year ended June 30, 2020.
Such change was the result of the combination of the changes discussed above. After deducting non-controlling interests of $0.4 million,
net loss attributable to our holding company increased from $4.0 million for the year ended June 30, 2020 to $4.8 million for the year
ended June 30, 2021.
Fiscal
Year Ended June 30, 2020 Compared to Fiscal 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
|
)
|
|
|
1,550,374
|
|
|
|
45.2
|
%
|
Loss from operations
|
|
|
(4,518,662
|
)
|
|
|
(2,568,491
|
)
|
|
|
(1,950,048
|
)
|
|
|
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
|
)
|
|
|
(1,797,298
|
)
|
|
|
66.3
|
%
|
Provision (Benefit) for current income taxes
|
|
|
-
|
|
|
|
11,803
|
|
|
|
(11,803
|
)
|
|
|
(100.0
|
)%
|
Provision for deferred income taxes
|
|
|
179,449
|
|
|
|
380,302
|
|
|
|
(167,263
|
)
|
|
|
(52.8
|
)%
|
Net loss
|
|
|
(4,687,667
|
)
|
|
|
(3,102,902
|
)
|
|
|
(1,584,765
|
)
|
|
|
51.1
|
%
|
Less: Net loss attributable to noncontrolling interest
|
|
|
(359,391
|
)
|
|
|
(645,716
|
)
|
|
|
3,997
|
|
|
|
(0.6
|
)%
|
Net loss attributable to Puhui Wealth
|
|
$
|
(4,045,948
|
)
|
|
$
|
(2,457,186
|
)
|
|
$
|
(1,588,762
|
)
|
|
|
64.7
|
%
|
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.
(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
|
|
|
1,517,968
|
|
|
|
22.7
|
%
|
|
|
2,005,367
|
|
|
|
34.9
|
%
|
|
|
(487,399
|
)
|
|
|
(24.3
|
)%
|
General and administrative
|
|
|
4,977,537
|
|
|
|
74.3
|
%
|
|
|
3,427,040
|
|
|
|
59.6
|
%
|
|
|
1,550,497
|
|
|
|
45.2
|
%
|
Total operating expenses
|
|
$
|
6,698,142
|
|
|
|
100
|
%
|
|
$
|
5,749,125
|
|
|
|
100
|
%
|
|
$
|
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
|
|
$
|
1,244,666
|
|
|
$
|
845,580
|
|
|
$
|
399,086
|
|
|
|
47.2
|
%
|
Total general and administrative expenses
|
|
$
|
4,977,414
|
|
|
$
|
3,427,040
|
|
|
$
|
1,550,374
|
|
|
|
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.
Liquidity
and Capital Resources
To
date, we have financed our operations primarily through cash flows from operations, capital contributions from shareholders, long term
debt and initial public offering. As of June 30, 2021, we had two unsecured loans from two unrelated investors, in the aggregate amount
of approximately $1.2 million with average interest rates of 13.5% per annum and due in December 2021.
As of June 30, 2021, our working capital deficit
was approximately $0.5 million and we had cash of approximately $0.6 million. Although we net loss of approximately $5.1 million, our
operating cash outflow was only approximately $1.7 million.
Management
believes that we will require a minimum of approximately $1.5 million 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.
If our revenue does not achieve its expected level, we will also be implementing cost saving measures to reduce our operating cash outflow.
On August 18, 2021, we entered into a Securities
Purchase Agreement with certain institutional Investor pursuant to which we issued to the investors certain Convertible Debenture in the
principal amount of $2,750,000 with an original issue discount of 10%. We received approximately $2.2 million proceed upon the closing
of the issuance on August 24, 2021. As of October 26, 2021, 1,150,463 shares were issued for a partial conversion of $1,894,206 principal
amount of the Convertible Debenture with an average conversion price of approximately $1.65.
Therefore
we believe with our projected cash flows and current working capital, management is of the opinion that the Company has sufficient funds
to meet its working capital requirements. If the Company is unable to realize its current assets within the normal operating cycle of
a twelve month period, we may have to consider supplementing its available sources of funds through the following sources:
|
●
|
other available sources
of financing from PRC banks and other financial institutions;
|
|
|
|
|
●
|
financial support and credit
guarantee commitments from our related parties.
|
Based
on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet the Company’s
working capital requirements and current liabilities as they become due one year 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,
2021
|
|
|
For the year ended
June 30,
2020
|
|
|
For the year ended
June 30,
2019
|
|
Net cash used in operating activities
|
|
$
|
(1,670,646
|
)
|
|
$
|
(1,138,336
|
)
|
|
$
|
(7,134,495
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
657,679
|
|
|
$
|
331,999
|
|
|
$
|
(3,534,027
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
808,845
|
|
|
$
|
(334,434
|
)
|
|
$
|
8,032,912
|
|
Operating
Activities
Net
cash used in operating activities was approximately $ 1.7 million for the year ended June 30, 2021 which was attributable primarily to
the net loss of approximately $5.1 million, offset by the non-cash expense for depreciation and amortization of approximately $0.3 million,
amortization of ROU of approximately $0.7 million and loss from disposal of subsidiaries of approximately $1.0 million, cash inflow of
approximately $3.0 million and cash outflow of approximately $1.8 million from changes in operating assets and liabilities. Cash inflow
was attributable to collection of $1.6 million from accounts receivable, $0.2 million from other receivable and increase in long term
prepaid expenses and other payable of $1.3 million. Cash outflow was due to decrease in deferred revenue of approximately $0.8 million
as we have completed our performance obligation and recognized revenue and payment of lease liabilities of approximately $0.8 million.
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 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.
Investing
Activities
Net
cash provided by investing activities was approximately $0.7 million for the year ended June 30, 2021, which was attributable primarily
to approximately $0.2 million of proceeds from sales of short-term investments, approximately $0.5 million of repayment from related
parties.
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.
Financing
Activities
Net
cash provided by financing activities was approximately $0.8 million for year ended June 30, 2021 which were mainly attributable to approximately$
0.9 million loan from related parties for operation purpose which was due in September 2022 offset by principal payments of long-term
debt and decrease in financing lease liabilities of approximately $75,000.
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.
Contractual
Obligations
Our
contractual obligations as of June 30, 2021 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
|
|
2022
|
|
$
|
1,255,687
|
|
|
$
|
560,993
|
|
|
$
|
1,816,680
|
|
2023
|
|
|
909,382
|
|
|
|
473,661
|
|
|
|
1,387,687
|
|
2024
|
|
|
-
|
|
|
|
65,534
|
|
|
|
65,334
|
|
Total minimum payments required
|
|
$
|
2,165,069
|
|
|
$
|
1,100,188
|
|
|
$
|
3,265,257
|
|
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 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 thus consolidates these limited partnerships
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, we hae the authority to make
investment decisions mainly to develop, manage and market financial products for Xinyu Yuanyuan. As of June 30, 2021, we owns 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, 2021, 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 have no activities as of June 30, 2021 other than initial set
up fees incurred and were dissolved in July 2021. On April 8, 2021, Qingdao Puhui set up three additional limited partnerships with no
operation in fiscal year 2021.
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 six months ended December 31, 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 six
months ended December 31, 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 allocate
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 December
31, 2019. Our income tax return filed for December 31, 2018 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, 2021 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, 2021 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
On
July 1, 2019, we adopted the lease accounting guidance in ASC 842 described in Note 2 of the notes to consolidated financial statements.
The implementation of this guidance had a material impact on our balance sheet as of June 30, 2021 and on our results of operations and
cash flows for the year ended June 30, 2021.
During
the year ended June 30, 2021, 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
|
|
42
|
|
Chief
Executive Officer, Chairman of the Board
|
Yan Long
|
|
48
|
|
Vice President and
Chief Financial Officer
|
Jun Wang
|
|
41
|
|
Independent Director
|
Qingbin Meng
|
|
41
|
|
Independent Director
|
Zhi Su
|
|
43
|
|
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’s degree in mathematics in 2003, a master’s
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, 2021 and 2020, we paid an aggregate of
approximately $0.23 million and $0.13 million, respectively, in cash to our executive officers, and approximately $30,000 and $68,000,
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 approximately $0.03
million and $0.05 million for employee social insurance for the years ended June 30, 2021 and 2020, 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, 2021, 12,256,586 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 12,256,586 ordinary
shares outstanding as of September 30, 2021.
The
following table sets forth information with respect to the beneficial ownership of our common shares as of September 30, 2021 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, 2021
|
|
Name of Beneficial Owners
|
|
Number
|
|
|
% (1)
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Zhe Ji (2)
|
|
|
5,910,420
|
|
|
|
48.2
|
%
|
Yan Long
|
|
|
-
|
|
|
|
-
|
|
Jun Wang
|
|
|
-
|
|
|
|
-
|
|
Qingbin Meng
|
|
|
-
|
|
|
|
-
|
|
Zhi Su
|
|
|
-
|
|
|
|
-
|
|
Directors and Executive Officers as a group (5 persons)
|
|
|
5,017,650
|
|
|
|
48.2
|
%
|
5% shareholders:
|
|
|
|
|
|
|
|
|
DFHH Limited (3)
|
|
|
5,017,650
|
|
|
|
40.9
|
%
|
BFJH Limited (4)
|
|
|
910,000
|
|
|
|
7.4
|
%
|
BFRY Limited (5)
|
|
|
907,470
|
|
|
|
7.4
|
%
|
Ru Peng Limited (6)
|
|
|
907,470
|
|
|
|
7.4
|
%
|
(1)
|
Applicable percentage of ownership is based on 12,256,586 ordinary shares outstanding as of September 30, 2021.
|
(2)
|
Zhe Ji, our Chief Executive Officer and Chairman, is deemed to beneficially own an aggregate of 5,910,420 ordinary shares of the Company, of which 5,017,650 ordinary shares are held through DFHH Limited, 350,000 shares through HCHY Limited, 150,910 shares through Long Fei Peng Limited, 387,210 shares through DFPZ Limited, and 4,650 shares through Yan Fei Guo Limited. Zhe Ji is the sole member and director of each of the aforesaid companies, all of which were incorporated in British Virgin Islands ,
|
(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
Accounts
receivables – related party represent receivables generated from wealth management advisory services provided to our related parties
where we earned one-time commission from the following related parties:
|
|
Relationship
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
Beijing Dongfang Puzhong Consulting Center (Limited Partnership)
|
|
Shareholder of Puhui Beijing
|
|
$
|
-
|
|
|
$
|
42,376
|
|
Beijing Dongfang Henghui Consulting Center (Limited Partnership)
|
|
Shareholder of Puhui Beijing
|
|
|
-
|
|
|
|
635,638
|
|
Beijing Ruqi Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
222,907
|
|
|
|
353,132
|
|
Beijing Rusan Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
-
|
|
|
|
107,352
|
|
Total
|
|
|
|
$
|
222,907
|
|
|
$
|
1,138,498
|
|
Other receivables – related parties are
funds we advanced to related parties, which consisted of the following:
|
|
Relationship
|
|
Nature
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Sipaike Customer Management Consulting Co., Ltd.*
|
|
Under common control of shareholder of Puhui Beijing
|
|
Short term cash advance
|
|
$
|
885,107
|
|
|
$
|
1,269,138
|
|
Beijing Dongfang Henghui Consulting Center (Limited Partnership)
|
|
Shareholder of Puhui Beijing
|
|
Short term cash advance
|
|
|
2,848
|
|
|
|
15,538
|
|
Total
|
|
|
|
|
|
$
|
887,955
|
|
|
$
|
1,284,676
|
|
|
*
|
As of
June 30, 2020, we advanced RMB 8.9 million or approximately $1.3 million to Beijing Sipaike Customer Management Consulting Co., Ltd.
The loans are due on demand and bear an interest rate is 0.5% per month. For the year ended June 30, 2021, e received repayment of approximately
$510,000 and we waived the interest for 2021. Interest income amounted to approximately nil and $49,000 for the years ended June 30,
2021 and 2020, respectively.
|
Other payables – related party consisted
of the following which are mainly borrowings from senior management for operation, the funds are non-interest bearing and are due in September
2022:
|
|
Relationship
|
|
Nature
|
|
June
30,
2021
|
|
|
June
30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Ji
Zhe
|
|
Shareholder and CEO of Puhui
|
|
Loan
|
|
$
|
216,900
|
|
|
$
|
483
|
|
Long Yan
|
|
CFO of Puhui
|
|
Loan
|
|
|
34,954
|
|
|
|
|
|
Chen,
Yue Xian
|
|
Senior VP of Puhui
|
|
Loan
|
|
|
657,528
|
|
|
|
|
|
Beijing
Sipaike Customer Management Consulting Co., Ltd.
|
|
Under common control of shareholder of Puhui Beijing
|
|
Advance from shareholder
|
|
|
-
|
|
|
|
5,153
|
|
Beijing
Huicai Hengyun Consulting Center (Limited Partnership)
|
|
Shareholder of Puhui Beijing
|
|
Advance from shareholder
|
|
|
-
|
|
|
|
698
|
|
Total
|
|
|
|
|
|
$
|
909,382
|
|
|
$
|
6,334
|
|
Revenues
– related parties are one-time commissions we earned from providing wealth management advisory services to the following related
parties:
|
|
Relationship
|
|
For the years ended June 30,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Peng Ji
|
|
limited partner of Beijing Puhui Rushun Management Consulting Center Limited Partnership
|
|
$
|
-
|
|
|
|
|
|
|
|
$$112,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinyu Jiji Investment Center (Limited Partnership)
|
|
Company’s investee under equity method
|
|
|
16,115
|
|
|
|
15,171
|
|
|
|
15,559
|
|
Beijing Rululu Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
-
|
|
|
|
107,214
|
|
|
|
-
|
|
Beijing Ruqi Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
-
|
|
|
|
402,053
|
|
|
|
-
|
|
Beijing Rusan Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
-
|
|
|
|
128,657
|
|
|
|
-
|
|
Xinyu Yuanyuan Investment Center (Limited Partnership)
|
|
Company’s investee under equity method
|
|
|
20,213
|
|
|
|
44,405
|
|
|
|
-
|
|
Beijing Rushi Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
128,115
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Rushisan Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui
|
|
|
385,836
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Rushilu Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and shareholder of Puhui Beijing
|
|
|
167,261
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Rujiu Consulting Center (Limited Partnership)
|
|
Owned by Mr. Ji Zhe, CEO and, shareholder of Puhui
|
|
|
307,476
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
1,025,016
|
|
|
$
|
697,500
|
|
|
$
|
128,263
|
|
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:
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the
designation of the series to be issued;
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the
number of shares of the series;
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the
dividend rights, dividend rates, conversion rights, voting rights; and
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the
rights and terms of redemption and liquidation preferences.
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Our
board of directors may issue 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:
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the
statutory provisions as to the required majority vote have been met;
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the
shareholders have been fairly represented at the meeting in question;
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the
arrangement is such that an intelligent and honest man of that class acting in respect of his interest would reasonably approve;
and
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the
arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
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When
a 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:
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a
company acts or proposes to act illegally or ultra vires and is therefore incapable of ratification by the shareholders;
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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
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those
who control the company are perpetrating a “fraud on the minority.”
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Indemnification
of Directors and Executive Officers and Limitation of Liability
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:
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Foreign
Currency Administration Rules of 1996, as amended; and
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Administrative
Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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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:
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at
least 75% of its gross income for such taxable year is passive income; or
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at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”).
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Passive
income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of
a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by
value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we 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 2021
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:
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the
excess distribution or gain will be allocated ratably over your holding period for the ordinary shares;
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the
amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable
year in which we were a PFIC, will be treated as ordinary income, and
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the
amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by
any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as
capital, even if you hold the ordinary shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect
out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed
to hold) ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the
excess, if any, of the fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such
ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess,
if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year. However, such
ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in your income for prior
taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale
or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect any such income or loss amounts. If
you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation
of Dividends and Other Distributions on our ordinary shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than 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.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Financial
instruments that expose us to financial market risk, including the financial crisis and law changing in financial services industry.
As
of June 30, 2021, 2020, and 2019, 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.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not
applicable.