UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended: July 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-38876
ATIF Holdings Limited
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Room 2803,
Dachong Business Centre, Dachong 1st Road,
Nanshan District, Shenzhen, China
+86-755-8695-0818
(Address of Principal Executive Offices)
Pishan Chi, Chief Executive Officer
Telephone: +86-755-8695-0818
Email: info@atifchina.com
Room 2803,
Dachong Business Centre, Dachong 1st Road,
Nanshan District, Shenzhen, China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares
Trading Symbol(s)
ATIF
Exchange on which registered
The Nasdaq Stock Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
47,014,674 ordinary shares were outstanding as of July 31, 2020
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “accelerated filer and large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Emerging growth company
☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of
1934). Yes ☐ No ☒
TABLE OF CONTENTS
INTRODUCTION
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3.
KEY INFORMATION
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8.
FINANCIAL INFORMATION
ITEM 9.
THE OFFER AND LISTING
ITEM 10.
ADDITIONAL INFORMATION
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.
CODE OF ETHICS
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
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4
4
4
4
29
64
64
79
87
88
89
90
98
99
99
99
99
100
101
102
102
102
102
102
“We,” “us,” “our,” or “Company” are to ATIF Holdings Limited (“ATIF”), a British Virgin Islands business company, and its Affiliated Entities
(defined below), as the case may be. Neither ATIF nor any of its Affiliated Entities are in any way or manner related to or associated with a digital
publishing company incorporated and registered in Hong Kong, Asia Times Holdings Limited. Unless the context otherwise requires, in this annual report
on Form 20-F references to:
INTRODUCTION
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“Affiliated Entities” are to our subsidiaries and Qianhai (defined below);
“ATIF HK” are to the indirect wholly-owned subsidiary of ATIF, ATIF Limited, a Hong Kong corporation;
“AT Consulting Center” are to Asia Era International Financial Consulting Center, which is owned and operated by Qianhai (defined below);
“BVI” are to the “British Virgin Islands”;
“China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and
Macau for the purposes of this annual report only;
“Company,” “we,” “us,” and “our” refers to ATIF Holdings Limited (“ATIF”), a British Virgin Islands business company, and its Affiliated
Entities (defined above), as the case may be. Neither ATIF nor any of its Affiliated Entities are in any way or manner related to or associated
with a digital publishing company incorporated and registered in Hong Kong, Asia Times Holdings Limited;
“CNNM” are to www.chinacnnm.com, a news and media platform owned and operated by ATIF HK;
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
“Huaya”, “Huaya Consultant,” or “WFOE” are to Huaya Consultant (Shenzhen) Co., Ltd., a limited liability company organized under the
laws of the PRC, which is wholly-owned by ATIF HK;
“initial public offering” or “IPO” means our initial public offering of Ordinary Shares at $5.00 per Unit which closed in April 29, 2019;
“LGC” refers to Leaping Group Co., Ltd. a limited liability organized under the laws of Cayman Islands and a majority-owned subsidiary of
the Company;
“LGC WFOE” refers to Yuezhong (Shenyang) Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which
is indirectly wholly-owned by LGC;
“LMG” refers to Leaping Media Group Co., Ltd., a limited liability company organized under the laws of the PRC, which we control via a
serious of contractual arrangements between LGC WFOE (defined below) and LMG;
“preferred shares,” or “Preferred Shares” refer to the Class A preferred shares of the Company, par value $0.001 per share;
“Qianhai” is to Qianhai Asia Era (Shenzhen) International Financial Services Co., Ltd., a limited liability company organized under the laws
of the PRC, which we control via a series of contractual arrangements between WFOE and Qianhai;
“RMB” and “Renminbi” refer to the legal currency of the PRC;
“SEC” refers to the Securities and Exchange Commission;
1
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“Securities Act” refers to the Securities Act of 1933, as amended;
“shares,” “Shares,” or “Ordinary Shares” are to the Ordinary Shares of the Company, par value $0.001 per share;
“U.S. dollars” and “$” refer to the legal currency of the United States; and
“VIE” are to variable interest entity.
Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report on Form 20-F includes our audited consolidated financial statements for the fiscal years ended July 31, 2020, 2019, and 2018.
This annual report contains translations of certain Renminbi (“RMB”) and Hong Kong Dollar (“HK$”) amounts into U.S. dollars at specified
rates. Unless otherwise stated, the translation of RMB into U.S. dollars has been made at RMB 6.9809 to US$1.00 and the translation of HK$ into U.S.
dollars has been made at HK$ 7.7502 to US$1.00 in effect on July 31, 2020 per www.oanda.com. We make no representation that any RMB/HK$ or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or RMB/HK$, as the case may be, at any particular rate, the rates stated below, or
at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference herein and therein may contain “forward-looking statements” within the meaning of,
and intended to qualify for the safe harbor from liability established by, the United States Private Securities Litigation Reform Act of 1995. These
statements are based on our management’s beliefs and assumptions and on information currently available to us. These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those
expressed or implied by the forward-looking statements.
These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding future
events, which may or may not occur. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can
identify these forward-looking statements by words or phrases such as “aim,” “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,”
“plan,” “potential,” “should,” “will,” “would,” or similar expressions, including their negatives. We have based these forward looking statements largely on
our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking statements include:
·
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any changes in the laws of the PRC or local province that may affect our operation;
future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
our ability to execute our growth and expansion, including our ability to meet our goals;
current and future economic and political conditions;
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inflation and fluctuations in foreign currency exchange rates;
our ability to compete in an industry with low barriers to entry;
our ability to continue to operate through our VIE structure;
our capital requirements and our ability to raise any additional financing which we may require;
our ability to attract new clients, and further enhance our brand recognition;
our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
our on-going ability to obtain all mandatory and voluntary government and other industry certifications, approvals, and/or licenses to conduct
our business;
our ability to maintain effective internal control over financial reporting;
trends and competition in the financial consulting services industry; and
other assumptions described in this annual report underlying or relating to any forward-looking statements.
You should thoroughly read this annual report and the documents that we refer to in this annual report with the understanding that our actual
results in the future may be materially different from or worse than what we expect. We qualify all of our forward-looking statements by these cautionary
statements. Other sections of this annual report include additional factors which could adversely affect our business and financial performance. Moreover,
we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all
risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-looking statements. Important risks and factors that could cause our actual
results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual
report.
The forward-looking statements made in this annual report relate only to events or information as of the date on which these statements are made
in this annual report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events
or otherwise, after the date of this annual report. You should not rely upon forward-looking statements as predictions of future events.
3
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not Applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following table sets forth selected historical statements of operations for the fiscal years ended July 31, 2020 2019, 2018 and 2017, and
balance sheet data as of July 31, 2020, 2019, and 2018, which have been derived from our audited consolidated financial statements included elsewhere in
this annual report. The consolidated financial statements are prepared and presented in accordance with GAAP. Historical results are not necessarily
indicative of the results for any future periods.
Selected Statements of Operations Information:
$
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling expenses
General and administrative expenses
Provision for doubtful accounts
Goodwill impairment loss
Impairment of intangible assets
Impairment of property and equipment
Total operating expenses
Income (loss) from operations
Other income (expenses):
Interest income
Other income (expenses), net
Gain from investment in trading securities
Total other income (expense)
Income (loss) before income taxes
Income tax provision
Net (loss) income
Less: Net loss attributable to non-controlling interests
Net income (loss) attributable to ATIF Holdings Limited
Other comprehensive income(loss):
Foreign currency translation gain (loss)
Comprehensive income (loss)
Less: comprehensive loss attributable to non-controlling interests
Comprehensive income (loss) attributable to ATIF Holdings Limited $
Earnings Per share
Basic and diluted
Weighted Average Shares Outstanding
Basic and diluted
$
4
For the Years Ended July 31,
2020
685,999 $
(227,410)
458,589
2019
3,078,758 $
-
3,078,758
2018
5,307,891 $
-
5,307,891
2017
3,635,371
-
3,635,371
2,638,972
6,255,109
2,645,239
5,621,467
384,492
172,728
17,718,007
(17,259,418)
(169)
(155,568)
201,051
45,314
(17,214,104)
76,264
(17,290,368)
2,407,669
(14,882,699)
(30,225)
(17,320,593)
2,449,843
(14,870,750) $
1,096,195
1,245,169
65,790
-
-
-
2,407,154
671,604
1,994
32,452
-
34,446
706,050
276,823
429,227
-
429,227
(17,642)
411,585
-
411,585 $
1,773,159
807,053
-
-
-
-
2,580,212
2,727,679
16,303
(80,283)
-
(63,980)
2,663,699
716,816
1,946,883
-
1,946,883
(113,090)
1,833,793
-
1,833,793 $
2,301,567
408,739
-
-
-
-
2,710,306
925,065
469
(67,549)
-
(67,080)
857,985
217,025
640,960
-
640,960
74,963
715,923
-
715,923
(0.37) $
0.01 $
0.06 $
0.02
39,790,520
35,522,931
35,000,000
35,000,000
Selected Balance Sheet Information:
Cash and cash equivalents
Accounts receivable, net
Inventories
Deposits
Investment in trading securities
Investment in life insurance contract
Due from a related party
Loans receivable
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Investment in life insurance contract
Intangible assets, net
Deferred film production cost
Goodwill
Right-of- use assets, net
TOTAL ASSETS
Bank borrowings
Accounts payable
Deferred revenue
Taxes payable
Accrued expenses and other current liabilities
Due to related parties
Operating lease liabilities, current
Total current liabilities
Operating lease liabilities, noncurrent
Total liabilities
Total ATIF Holdings Limited Stockholders’ equity
Noncontrolling interest
TOTAL LIABILITIES AND EQUITY
$
$
$
5
2020
428,258 $
939,392
46,778
743,122
918,675
1,290,289
-
-
870,951
5,237,465
2,623,391
-
7,925,102
328,308
25,902,394
3,768,418
45,785,078 $
143,248 $
1,069,177
1,063,642
4,004,164
753,866
As of July 31,
2019
6,459,702 $
1,472,258
-
155,397
-
-
-
-
2,499,935
10,587,292
49,029
1,277,514
428,759
-
-
-
12,342,594 $
- $
-
415,392
669,069
56,928
750,350
7,784,447
3,382,889
11,167,336
17,403,259
17,214,483
45,785,078 $
-
1,141,389
-
1,141,389
11,201,205
-
12,342,594 $
2018
72,965
137,550
-
98,971
-
-
14,966
2,750,078
622,846
3,697,376
49,378
-
-
-
-
-
3,746,754
-
-
547,235
861,683
291,679
31,366
-
1,731,963
-
1,731,963
2,014,791
-
3,746,754
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Relating to our Business
We have a limited operating history and are subject to the risks encountered by early-stage companies.
We have only been in business since November 2015. We did not generate any revenue until the fiscal year ended July 31, 2016. We launched AT
Consulting Center, which offers financial and advisory services to our clients in August 2018 and acquired CNNM, a media and news platform, in
September 2018. As a start-up company, our business strategies and model are constantly being tested by the market and operating results, and we pursue
to adjust our allocation of resources accordingly. As such, our business may be subject to significant fluctuations in operating results in terms of amounts of
revenues and percentages of total with respect to the business segments.
We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent in a new business and in an industry which is
in the early stages of development in China. As a result, we must establish many functions necessary to operate a business, including expanding our
managerial and administrative structure, assessing and implementing our marketing program, implementing financial systems and controls and personnel
recruitment. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays, and difficulties frequently encountered by
companies with a limited operating history. These risks and challenges are, among other things:
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we operate in an industry that is or may in the future be subject to increasing regulation by various governmental agencies in China;
we may require additional capital to develop and expand our operations which may not be available to us when we require it;
our marketing and growth strategy may not be successful;
our business may be subject to significant fluctuations in operating results; and
we may not be able to attract, retain and motivate qualified professionals.
Our future growth will depend substantially on our ability to address these and the other risks described in this annual report. If we do not
successfully address these risks, our business would be significantly harmed.
Our historical financial results may not be indicative of our future performance.
Our business has achieved rapid growth since our inception. Our net revenue increased from $0.1 million for the period from November 3, 2015
(when we started our consulting business), through July 31, 2016, to $3.6 million for the fiscal year ended July 31, 2017 and $5.3 million for the fiscal year
ended July 31, 2018. However, our net revenue decreased to $3.1 million for the fiscal year ended July 31, 2019 and $0.7 million for the fiscal year ended
July 31, 2020. Our net loss was $1.2 million for the period from November 3, 2015, through July 31, 2016, and increased to a net income of $0.6 million
for the fiscal year ended July 31, 2017, $1.9 million for the fiscal year ended July 31, 2018, and $0.4 million for the fiscal year ended July 31, 2019, and
decreased to a net loss of $17.29 million for the fiscal year ended July 31, 2020. However, our historically growth rate and the limited history of operation
make it difficult to evaluate our prospects. We may not be able to sustain our historically rapid growth or may not be able to grow our business at all.
6
The consolidated financial statements included herein contain disclosures that express substantial doubt about our ability to continue as a going
concern, indicating the possibility that we may not be able to operate in the future.
The consolidated financial statements included in this annual report have been prepared on a going concern basis, which assumes that we will
continue to operate in the future in the normal course of business.
For the fiscal year ended July 31, 2020, our revenue decreased by approximately $2.4 million, largely as a result of the continued pressure of the
U.S.-China trade and tariff dispute and the outbreak and spread of the COVID-19 pandemic. This caused us to suffer a net loss of approximately $17.3
million during the fiscal year.
The decrease in revenues, loss of profitability, significant decrease in working capital have caused uncertainty about our ability to continue as a
going concern for the next twelve months from the date of this report.
In light of the foregoing, our independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt
relating to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended July 31, 2020. The inclusion of
a going concern explanatory paragraph may negatively impact the trading price of our securities, have an adverse impact on our relationship with third
parties with whom we do business, including our customers, vendors and employees, and could make it challenging and difficult for us to raise additional
debt or equity financing to the extent needed, all of which could have a material adverse impact on our business, results of operations, financial condition
and prospects.
For additional information on the above-referenced accounting standards and matters affecting our ability to continue as a going concern, see Note
2 of the financial statements included in this report and the discussion included in Item 5 of this report, respectively.
We may incur liability for unpaid taxes, including interest and penalties.
In the normal course of business, we may be subject to challenges from various PRC taxing authorities regarding the
amounts of taxes due. The PRC taxing authorities may take the position that we owe more taxes than we have paid. We recorded
tax liabilities of $4.0 million and $0.7 million as of July 31, 2020 and 2019, respectively, for the possible underpayment of
income and business taxes. During the year ended July 31, 2020, we received a late payment penalty notice from local tax authorities and recorded a
penalty of $77,527 as reflected in the consolidated statements of operations. It is possible that our tax for past taxes may be higher than those amounts if the
PRC authorities determine that we are subject to penalties or that we have not paid the correct amount. Although our management believes it may be able to
negotiate with local PRC taxing authorities a reduction to any amounts that such authorities may believe are due and a reduction to any interest or penalties
thereon, we have no guarantee that we will be able to negotiate such a reduction. To the extent we are able to negotiate such amounts, national-level taxing
authorities may take the position that localities are without power to reduce such liabilities, and such PRC taxing authorities may attempt to collect unpaid
taxes, interest and penalties in amounts greatly exceeding management’s estimates.
We face business disruption and related risks resulting from the recent outbreak of the novel coronavirus 2019 (COVID-19), which could have a
material adverse effect on our business plan.
Our financial consulting services to small and mid-size enterprises (“SMEs”) and the businesses of the SMEs could be disrupted and materially
adversely affected by the recent outbreak of COVID-19. As a result of measures imposed by the China governments in affected regions, businesses and
schools have been suspended due to quarantines intended to contain this outbreak. The spread of COVID-19 from China to other countries has resulted in
the Director General of the World Health Organization declaring the outbreak of COVID-19 as a Public Health Emergency of International Concern
(PHEIC), based on the advice of the Emergency Committee under the International Health Regulations (2005), and the Centers for Disease Control and
Prevention in the U.S. issued a warning on February 25, 2020 regarding the likely spread of COVID-19 to the U.S. While the COVID-19 outbreak is still in
very early stages, international stock markets have begun to reflect the uncertainty associated with the slow-down in the Chinese economy and the reduced
levels of international travel experienced since the beginning of January and the significant declines in the Dow Industrial Average at the end of
February and beginning of March 2020 was largely attributed to the effects of COVID-19. We are still assessing our business plans and the impact COVID-
19 may have on our ability to provide financial consulting services to SMEs and to the SMEs’ businesses, but there can be no assurance that this analysis
will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or
in our sector in particular.
In addition, COVID-19 has created substantial disruption of LGC’s operations including the suspension of all theatre operations as a result of
mandatory quarantine since January 23, 2020 to July 31, 2020, resulting in the cessation of substantially all revenues related to LGC’s theater business
during that period. LGC is still assessing the impact of COVID-19 to its theater business and its other operations. In addition, no assurance can be given
that there would not be a future outbreak of COVID-19 which may result in additional quarantine and other measures taken to try to prevent the spread of
COVID-19, which may materially and adversely affect our financial condition and results of operations.
Changes in the U.S. capital markets could make our services less attractive to our clients and adversely affect our business and financial condition.
Our consulting services help our clients based in mainland China become public companies. We are expanding our consulting services to include
Chinese domestic exchanges and the Hong Kong Stock Exchange, but currently, all of our former and current clients have chosen to go public in the U.S.
We believe this is due to the more flexible rules provided by the U.S. OTC markets and exchanges than the Chinese domestic exchanges, as well as the
attractive financing and growth opportunities the U.S. capital market, which has remained relatively stable comparing to the Chinese capital market, are
perceived to be able to provide to the Chinese enterprises. As a result, our going public consulting business has flourished since its inception in 2015.
However, changes in the U.S. capital markets could make our service less desirable to Chinese enterprises. For example, if the U.S. OTC markets and
exchanges make their rules more stringent to Chinese enterprises, then fewer Chinese enterprises will be able to use our consulting services to go public in
the U.S., and our business and financial condition will be adversely affected as a result.
Because we lack a diversified client base, a severe or prolonged downturn in Chinese economy could materially and adversely affect our business and
our financial condition.
Our goal is to become an international business serving clients throughout Asia, but as of the date of this annual report all our former and current
clients are based in mainland China. Accordingly, we do not have a geographically diversified client base, and there will be a potentially devastating effect
on our business if the Chinese economy experiences a severe or prolonged downturn.
Failure to maintain or enhance our brand or image could have a material and adverse effect on our business and results of operations.
We believe our “ATIF” brand is associated with a well-recognized, integrated consulting services company in the market that it operates, with
comprehensive personalized one-stop consulting services to suit our clients’ needs. Our brand is integral to our sales and marketing efforts. Our continued
success in maintaining and enhancing our brand and image depends to a large extent on our ability to satisfy customers’ needs by further developing and
maintaining quality of services across our operations, as well as our ability to respond to competitive pressures. If we are unable to satisfy customers’ needs
or if our public image or reputation were otherwise diminished, our business transactions with our clients may decline, which could in turn adversely affect
our results of operations.
7
We may not be successful in implementing important new strategic initiatives, which may have an adverse impact on our business and financial results.
There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in an
adverse impact on our business and financial results. Our new strategic initiatives, AT Consulting Center and CNNM, which were launched in 2018, and
the investment and financing analysis reporting business, which was launched in July 2019, are designed to create growth, improve our results of
operations and drive long-term shareholder value. However, our management may lack required experience, knowledge, insight, or human and capital
resources to carry out the effective implementation to expand into new spaces outside the financial consulting industry. As such, we may not be able to
realize our expected growth, and our business and financial results will be adversely impacted.
Increasing competition within our industry could have an impact on our business prospects.
The financial consulting market is an industry where new competitors can easily enter into since there are no significant barriers to entry.
Competing companies may have significantly greater financial and other resources than we do and may offer services that are more attractive to companies
seeking funds; increased competition would have a negative impact on both our revenues and our profit margins.
Our results of operations and cash flows may fluctuate due to the non-recurring nature of our going public consulting services provided to our clients.
We generated the bulk of our total revenues from going public consulting services provided to small and medium-sized enterprises in China.
Unlike other service businesses that have the potential of retaining their clients for long-term and recurring services, our consulting contractual
relationships with our clients usually last for 12 months; there is no recurring business from our clients once they become public companies. Therefore, we
face the constant challenge of identifying and recruiting new clients in order to maintain our operations and cash flows, which are difficult for us to predict
from year to year.
In addition, even though we screen our prospective clients carefully before entering into service agreements, occasionally we have to discontinue
our consulting services due to a variety of unforeseeable reasons such as the client’s shortage in funds, disagreements regarding the going public process,
and changes in the client’s business and expectations, among others. Due to the fact that our consulting fee is paid on installments, we will not be able to
realize the complete contracted amounts under these circumstances, without getting into potentially costly litigations.
Arbitration proceedings, legal proceedings, investigations, and other claims or disputes, which are costly to defend and, if determined adversely to us,
could require us to pay fines or damages, undertake remedial measures, or prevent us from taking certain actions, any of which could adversely affect
our business.
In the course of our business, we are, and in the future may be, a party to arbitration proceedings, legal proceedings, investigations, and other
claims or disputes, which have related and may relate to subjects including commercial transactions, intellectual property, securities, employee relations, or
compliance with applicable laws and regulations. We are engaged in a lawsuit relating to certain engagement agreements we had in connection with our
and LGC’s initial public offering. While we believe that such claims against us is without merit and that we have factual and legal defenses to the
petitioner’s claim, this and other arbitration proceedings, legal proceedings, and investigations are inherently uncertain and we cannot predict their
duration, scope, outcome, or consequences. There can be no assurance that this or any such matters that have been or may in the future be brought against
us will be resolved favorably.
8
As the operator of a website atifchina.com, we may be subject to damages resulting from unauthorized access or hacking and other cyber risks.
Hacking is the process of attempting to gain or successfully gaining unauthorized access to computer system. As with any website, our website
may be subject to hacking regardless of whether we have in place securities systems which limit access to our platform. When a person engages in website
hacking, he or she takes control of the website from the website owner. Password hacking is obtaining a user’s secret password from data that has been
stored in or transmitted by a computer system. Computer hacking is obtaining access to and viewing, creating or editing material without authorization.
Hackers can bring a website down by causing large numbers of users to seek to access the website without the knowledge of the users, which is known as
denial of service hacking. Despite our disclaimers, injured parties may seek to obtain damages from us for their loss. Thus, in additional to any financial or
reputation losses that we may sustain, it is possible that a court or administrative body may hold us liable for damages sustained by others. Any such losses
could materially impair our financial condition and our ability to conduct business.
If we fail to hire, train, and retain qualified managerial and other employees, our business and results of operations could be materially and adversely
affected.
We place substantial reliance on the consulting and financial service industry experience and knowledge of our senior management team as well as
their relationships with other industry participants. The loss of the services of one or more members of our senior management could hinder our ability to
effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior management could be difficult,
and competition for such personnel of similar experience is intense. If we fail to retain our senior management, our business and results of operations could
be materially and adversely affected.
Our consulting service personnel are critical to maintaining the quality and consistency of our services, brand, and reputation. It is important for us
to attract qualified managerial and other employees who have experience in consulting services and are committed to our service approach. There may be a
limited supply of such qualified individuals. We must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid
growth while maintaining consistent quality of services across our operations. We must also provide continuous training to our managerial and other
employees so that they are equipped with up-to-date knowledge of various aspects of our operations and can meet our demand for high-quality services. If
we fail to do so, the quality of our services may decrease, which in turn, may cause a negative perception of our brand and adversely affect our business.
Any failure to protect our trademarks and other intellectual property rights could have a negative impact on our business.
We believe our trademarks, “(cid:0)(cid:0)(cid:0)(cid:0)” in Hong Kong, “ATIF” in Hong Kong and China, “(cid:0)(cid:0)(cid:0)(cid:0)” in China, “CNNM” in Hong Kong “INTERNATIONAL
SCHOOL OF FINANCE” in Hong Kong, “IPOEX” in China, the United Kingdom, the European Union, Singapore and Korea (which are in the process of
registration with the trademark offices of each respective country), and other intellectual property rights are critical to our success. Any unauthorized use of
our trademarks and other intellectual property rights could harm our competitive advantages and business. Historically, China has not protected intellectual
property rights to the same extent as the United States, and infringement of intellectual property rights continues to pose a serious risk of doing business in
China. Monitoring and preventing unauthorized use are difficult. The measures we take to protect our intellectual property rights may not be adequate.
Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial
risks to us. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, we may lose these rights and our business
may suffer materially.
As internet domain name rights are not rigorously regulated or enforced in China, other companies may incorporate in their domain names
elements similar in writing or pronunciation to the “ATIF”, “CNNM,” and “INTERNATIONAL SCHOOL OF FINANCE” trademarks or their Chinese
equivalents. This may result in confusion between those companies and our company and may lead to the dilution of our brand value, which could
adversely affect our business.
9
Risks Related to LGC’s Business
LGC’s business is susceptible to fluctuations in the advertising market of China.
We conduct our Multi-Channel Advertising Business primarily in China. Our business depends substantially on the conditions of the PRC
advertising market. Demand for pre-movie advertising in China has grown rapidly in the recent decade but such growth is often coupled with volatility in
market conditions and fluctuation in pre-movie advertising slot prices. Fluctuations of supply and demand in China’s advertising market are caused by
economic, social, political and other factors. Over the years, the Chinese government has announced and implemented various policies and measures aimed
to regulate the advertising markets, prohibiting, among other things, misleading content, superlative wording, socially destabilizing content or content
involving obscenities, superstition, violence, discrimination or infringement of the public interest. These measures can affect advertising clients’ eligibility
to purchase advertising slots. These measures have affected and may continue to affect the conditions of China’s advertising market and cause fluctuations
in advertising slot pricing and transaction volume. Furthermore, there may be situations in which advertising clients see a reduced need for marketing
initiatives and reduce their spending on such initiatives, which could potentially adversely affect our results of operations. To the extent fluctuations in the
advertising market adversely affect advertising transaction volumes or prices, our financial condition and results of operations may be materially and
adversely affected.
Failure to maintain or enhance LGC’s brands or image could have a material and adverse effect on our business and results of operations.
We believe LGC’s “Yuezhong” brand is well-recognized among advertising clients and other film industry players such as cinema operators, film
producers and advertising agencies in the local markets we operate in. LGC’s brand is integral to its sales and marketing efforts. LGC’s continued success
in maintaining and enhancing its brand and image depends to a large extent on its ability to satisfy customer needs by further developing and maintaining
quality of services across LGC’s operations, as well as LGC’s ability to respond to competitive pressures. If we are unable to satisfy customer needs or if
LGC’s public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely
affect our results of operations.
LGC may not be able to successfully execute its strategy of expanding into new geographical markets in China, which could have a material and
adverse effect on our business and results of operations.
LGC plans to expand our business into new geographical areas in China, such as first-tier, second-tier, and third-tier cities in the eastern seaboard
area and central China. As China is a large and diverse market, consumer trends and demands may vary significantly by region and LGC’s experience in
the markets in which it currently operate may not be applicable in other parts of China. As a result, LGC may not be able to leverage its experience to
expand into other parts of China. When LGC enters new markets, it may face intense competition from companies with greater experience or an established
presence in the targeted geographical areas or from other companies with similar expansion targets. In addition, LGC’s business model may not be
successful in new and untested markets and markets with a different legal and business environment, such as Hong Kong and Macau. Therefore, LGC may
not be able to grow its revenues in the new cities it enters into due to the substantial costs involved.
If advertising clients or the viewing public do not accept, or lose interest in, our pre-movie advertising network, we may be unable to generate sufficient
cash flow from our operating activities and our prospects and results of operations could be negatively affected.
The market for pre-movie advertising networks in China is relatively new and its potential is uncertain. We compete for advertising spending with
many forms of more established advertising media, such as television, print media, Internet and other types of out-of-home advertising. Our success
depends on the acceptance of our pre-movie advertising network by advertising clients and agencies and their continuing and increased interest in this
medium as a component of their advertising strategies. Our success also depends on the viewing public continuing to be receptive towards our media
network. Advertising clients may elect not to use our services if they believe that consumers are not receptive to our network or that our network does not
provide sufficient value as an effective advertising medium. Likewise, if consumers find some element of our network to be disruptive or intrusive, movie
theaters may decide not to allow us to operate the film screens in movie theaters and advertising clients may view our network as a less attractive
advertising medium compared to other alternatives. In that event, advertising clients may determine to reduce their spending on our network and pre-movie
advertising.
10
Pre-Movie advertising is a relatively new concept in China and in the advertising industry generally. If LGC is not able to adequately track
filmgoers’ responses to its programs, in particular, tracking the demographics of filmgoers most receptive to pre-movie advertising, LGC will not be able to
provide sufficient feedback and data to existing and potential advertising clients to help it to generate demand and determine pricing. Without improved
market research, advertising clients may reduce their use of pre-movie advertising and instead turn to more traditional forms of advertising that have more
established and proven methods of tracking effectiveness.
If a substantial number of advertising clients lose interest in advertising on LGC’s media network for these or other reasons or become unwilling
to purchase advertising time slots on our network, LGC will be unable to generate sufficient revenues and cash flow to operate its business, and our
revenues, prospects and results of operations could be negatively affected.
LGC derives a large portion of its revenues from the provision of Multi-Channel Advertising Services. If there is a downturn in the film industry, LGC
may not be able to diversify its revenue sources and our ability to generate revenues and our results of operations could be materially and adversely
affected.
A large portion of LGC’s historical revenues and expected future revenues have been and will be generated from the provision of Multi-Channel
Advertising Services, in particular through the display of advertisements on film screens before a movie starts. LGC plans to increase its investments in
film and TV programs production and distribution is also closely related to the film industry.
LGC does not have any current plans to expand outside of sectors related to the film industry and enter into other sectors to diversify our revenue
sources. As a result, if there were a downturn in the film industry for any reason, LGC may not be able to diversify its revenue sources and our ability to
generate revenues and our results of operations could be materially and adversely affected.
One or more of our regional distributors could engage in activities that are harmful to LGC’s reputation in the industry and to its business.
As of April 30, 2020, LGC covered 11 cities where we provide our pre-movie advertising network through contractual arrangements with regional
distributors. Under these arrangements, LGC provides its business model and operating expertise to local advertising companies in exchange for their
acting as regional distributors of our pre-movie advertising services. LGC’s contractual arrangements with its regional distributors, however, do not provide
LGC with control or oversight over their everyday business activities, and one or more of LGC’s regional distributors may engage in activities that violate
PRC laws and regulations governing the advertising industry and advertising content, or other PRC laws and regulations generally. Some of LGC’s regional
distributors may not possess all of the licenses required to operate an advertising business, or may fail to maintain the licenses they currently hold, which
could result in local regulators suspending the operations of the network in those cities. In addition, although LGC has the right to review the advertising
content that its regional distributors display on the portion of LGC’s pre-movie advertising network that they operate independently, LGC’s regional
distributors may include advertising content on their part of the pre-movie advertising network and violate PRC advertising laws or regulations or expose
them and LGC to lawsuits or result in the revocation of LGC’s business license. If any of these events occurs, it could harm LGC’s reputation in the
industry.
11
If LGC is unable to attract advertising clients to purchase advertising time slots on its network, LGC will be unable to maintain or increase its
advertising fees, which could negatively affect its ability to grow its profits.
The fees LGC charges advertising clients and agencies for time slots on its network depends on the size and quality of LGC’s network and the
demand by advertising clients for advertising time on its network. LGC believes advertising clients choose to advertise on its network in part based on the
size of its network and the desirability of the locations of the movie theaters LGC operates. If LGC fails to maintain or increase the number of film screens
it operates on or solidify its brand name and reputation as a quality pre-movie advertising provider, advertising clients may be unwilling to purchase time
on its network or to pay the levels of advertising fees LGC requires to grow its profits.
When LGC’s current pre-movie advertising network of film screens reaches saturation in the major movie theaters where it operates, LGC may be
unable to offer additional time slots to satisfy all of its advertising clients’ needs, which could hamper its ability to generate higher levels of revenues
and profitability over time.
When LGC’s pre-movie advertising network of film screens reaches saturation in any particular movie theater, LGC may be unable to offer
additional advertising time slots to satisfy all of its advertising clients’ needs. LGC would need to increase its advertising rates for advertising in such
movie theaters in order to increase its revenues. However, advertising clients may be unwilling to accept rate increases, which could hamper its ability to
generate higher levels of revenues over time. In particular, the utilization rates of LGC’s advertising time slots in the movie theaters with best location are
higher than those in other movie theaters and saturation of film screens in these movie theaters could have a material adverse effect on its growth prospects.
If LGC is unable to compete successfully, its financial condition and results of operations may be harmed.
LGC currently competes for overall advertising spending with other alternative media companies, such as Internet, street furniture, billboard and
public transportation advertising companies, and with traditional advertising media, such as newspapers, television, magazines and radio. LGC also
competes for advertising dollars spent in the pre-movie advertising industry and faces competition from new entrants into the film multimedia industry in
the future. Competition in the advertising industry is primarily based on quality of services or program, brand name recognition, network size and
geographic coverage, price, and range of services.
Significant competition could reduce LGC’s operating margins and profitability and result in a loss of market share. Some of LGC’s existing and
potential competitors may have competitive advantages, such as significant greater brand recognition, financial, marketing or other resources and may be
able to mimic and adopt our business model. Several of LGC’s competitors have significantly larger advertising networks than it does, which gives them an
ability to reach a larger number of overall potential consumers and which make them less susceptible to downturns in particular sectors, such as the film
industry. Significant competition will provide advertising clients with a wider range of media and advertising service alternatives, which could lead to
lower prices and decreased revenues, gross margins and profits.
LGC may be subject to, and may expend significant resources in defending against, government actions and civil suits based on the content LGC
provides through its pre-movie advertising network.
Civil claims may be filed against LGC for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due
to the nature and content of the information displayed on its network. If consumers find the content displayed on LGC’s network to be offensive, movie
theaters may seek to hold LGC, and us, responsible for any consumer claims or may terminate their relationships with LGC. Offensive and objectionable
content and legal standards for defamation and fraud in China are less defined than in other more developed countries and LGC may not be able to properly
screen out unlawful content.
In addition, if the security of the content management system of LGC’s pre-movie advertising network is breached and unauthorized images, text
or audio sounds are displayed on its network, viewers or the PRC government may find these images, text or audio sounds to be offensive, which may
subject LGC to civil liability or government censure despite LGC’s efforts to ensure the security of its content management system. Any such event may
also damage LGC’s reputation. If LGC’s advertising viewers do not believe LGC’s content is reliable or accurate, LGC’s business model may become less
appealing to viewers in China and its advertising clients may be less willing to place advertisements on LGC’s network.
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LGC has no control over theater chain companies and LGC’s Movie Theater Operating Business may be adversely affected if its access to films is
limited or delayed.
In China, film production and distribution entities provide films directly to theater chain companies. Operators of movie theaters lack
opportunities to negotiate directly with the film production and distribution entitles for purposes of movie screening. For a movie theater to get the license
to screen any movies, it is required to join an existing theater chain or establish its own theater chain. Therefore, we rely on theater chain companies, over
whom we have no control, for the films that we exhibit. Although LGC has entered into Theater Chain Agreements with Liaoning North Cinema Line
Co., Ltd., according to which the theater chain company will provide LGC with a certain number of films each year. LGC cannot decide which particular
films would be provided to it or whether the films provided to it are popular at the moment of exhibition. If the theater chain that LGC has joined could not
obtain licenses for first-run exhibition of popular films, LGC’s access to such films would be limited or delayed and LGC’s business may be adversely
affected. To the extent that LGC is unable to obtain the license for the exhibition of a popular film in its theaters, LGC’s operating results may be adversely
affected.
LGC’s Movie Theater Operating Business depends on film production and performance.
LGC’s ability to operate successfully depends upon the availability, diversity, and appeal of films, its ability to obtain licensed films, and the
performance of such films in our markets. The most attended films are usually released during the summer, the calendar year-end holidays, and other
holidays, making LGC’s Movie Theater Operating Business highly seasonal. Poor performance of, or any disruption in the production of these films
(including by reason of a strike or lack of adequate financing), or a reduction in the marketing efforts of the major film studios, could hurt LGC’s business
and results of operations. Conversely, the successful performance of these films, particularly the sustained success of any one film, or an increase in
effective marketing efforts of the major film studios, may generate positive results for LGC’s business and operations in a specific fiscal quarter or year that
may not necessarily be indicative of, or comparable to, future results of operations.
LGC’s movie theaters are subject, at times, to intense competition.
LGC movie theaters are subject to varying degrees of competition in the geographic areas in which it operates. Competitors may be national
circuits, regional circuits, or smaller independent exhibitors. Competition among theater exhibition companies is often intense with respect to the following
factors:
·
·
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Attracting patrons. The competition for patrons is dependent upon factors such as the availability of popular films, the location and number of
theaters and screens in a market, the comfort and quality of the theaters, and pricing. Competitors have built or may be planning to build
theaters in certain areas where LGC operates, which could result in excess capacity and increased competition for patrons.
Licensing films. LGC believes that the principal competitive factors with respect to film licensing include licensing terms, number of seats
and screens available for a particular picture, revenue potential, and the location and condition of an exhibitor’s theaters.
New sites and acquisitions. LGC must compete with exhibitors and others in our efforts to locate and acquire attractive new and existing sites
for our theaters. There can be no assurance that LGC will be able to acquire such new sites or existing theaters at reasonable prices or on
favorable terms. Moreover, some of these competitors may be stronger financially than LGC. As a result of the foregoing, LGC may not
succeed in acquiring theaters or may have to pay more than LGC would prefer to make an acquisition.
The theatrical exhibition industry also faces competition from other forms of out-of-home entertainment, such as concerts, amusement parks, and
sporting events and from other distribution channels for filmed entertainment, such as cable television, pay-per-view, and home video systems, and from
other forms of in-home entertainment.
An increase in the use of alternative film delivery methods or other forms of entertainment may drive down the attendance of LGC’s theaters and limit
its ticket prices.
LGC competes with other film delivery methods, including network, syndicated cable and satellite television, and DVDs, as well as video-on-
demand, pay-per-view services, and downloads via the Internet. LGC also competes for the public’s leisure time and disposable income with other forms of
entertainment, including sporting events, amusement parks, live music concerts, live theater, and restaurants. An increase in the popularity of these
alternative film delivery methods and other forms of entertainment could reduce attendance at LGC’s theaters, limit the prices LGC can charge for
admission, and materially adversely affect our business and results of operations.
13
General political, social, and economic conditions can reduce the attendance of our movie theaters.
LGC’s success depends on general political, social, and economic conditions and the willingness of consumers to spend money at movie theaters.
If going to films becomes less popular or consumers spend less on concessions, LGC’s operations could be adversely affected. In addition, LGC’s
operations could be adversely affected if consumers’ discretionary income falls as a result of an economic downturn. Geopolitical events, including the
threat of domestic terrorism or cyber attacks, could cause people to avoid our theaters or other public places where large crowds are in attendance. In
addition, due to LGC’s concentration in certain markets, natural disasters such as hurricanes or earthquakes in those markets could adversely affect our
overall results of operations.
Risks Relating to Doing Business in China
A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.
Although the Chinese economy has grown steadily in the past decade, there is considerable uncertainty over the long-term effects of the
expansionary monetary and fiscal policies adopted by the People’s Bank of China and financial authorities of some of the world’s leading economies,
including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe, and Africa, which have
resulted in volatility in oil and other markets. There have also been concerns on the relationship among China and other Asian countries, which may result
in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well as
changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged
slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
China’s economy has experienced increases in labor costs in recent years. China’s overall economy and the average wages in China 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. Our consulting service is heavy on labor costs, as the main cost of our business is compensation and benefits
for our professionals. Unless we are able to pass on these increased labor costs to our customers by increasing prices 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 into labor contracts with our employees and paying
various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and
childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor
Contract Law, that became effective in January 2008, its implementing rules that became effective in September 2008 and its amendments that became
effective in July 2013, 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 implementing 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.
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As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment
practice does 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.
There are uncertainties under the Foreign Investment Law relating to the status of businesses in China controlled by foreign invested projects
primarily through contractual arrangements, such as our business.
The MOFCOM, and the National Development and Reform Commission, or “NDRC,” promulgated the Special Measures for Foreign Investment
Access (2019 version), or the “2019 Negative List,” on June 30, 2019, which took effective on July 30, 2019. According to the 2019 Negative List, the
financial consulting service sector, in which we are currently engaged in business operations, is not deemed to be either “restricted” or “prohibited” for
foreign investors. The MOFCOM and NDRC, however, publish new Catalogues from time to time that may change the scope of the “negative list,” and as
such it is uncertain whether future Catalogues may re-classify the financial consulting service sector in the “negative list.”
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015, or the “2015 FIL Draft,” which expanded
the definition of foreign investment and introduced the principle of “actual control” in determining whether a company is considered an FIE. Under the
2015 FIL Draft, VIEs that are controlled via contractual arrangement would also be deemed as FIEs if they are ultimately “controlled” by foreign investors.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC, or the “FIL,” which will come into effect on
January 1, 2020, repealing simultaneously the Law of the PRC on Sino-foreign Equity Joint Ventures, the Law of the PRC on Wholly Foreign-owned
Enterprises, and the Law of the PRC on Sino-foreign Cooperative Joint Ventures, together with their implementation rules and ancillary regulations.
Pursuant to the FIL, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises, or other
organizations, including investment in new construction project, establishment of foreign funded enterprise or increase of investment, merger and
acquisition, and investment in any other way stipulated under laws, administrative regulations, or provisions of the State Council. Although the FIL has
deleted the particular reference to the concept of “actual control” and contractual arrangements in the 2015 FIL Draft, there is still uncertainty regarding
whether our VIE would be identified as a FIE in the future. As a result, we cannot assure you that the FIL, when it becomes effective, will not have a
material and adverse effect on our ability to conduct our business through our contractual arrangements.
If we are deemed to have a non-PRC entity as a controlling shareholder, the provisions regarding control through contractual arrangements could
reach our VIE arrangement, and as a result Qianhai could become subject to restrictions on foreign investment, which may materially impact the viability
of our current and future operations. Specifically, we may be required to modify our corporate structure, change our current scope of operations, obtain
approvals or face penalties or other additional requirements, compared to entities which do have PRC controlling shareholders. Uncertainties exist with
respect to the interpretation and implementation of FIL and how it may impact the viability of our current corporate structure, corporate governance and
business operations.
It is uncertain whether we would be considered as ultimately controlled by Chinese parties. A majority of our outstanding voting securities are
currently owned by PRC citizens. It is uncertain, however, if this would be sufficient to give them control over us under the FIL. If future revisions or
implementation rules of the FIL mandate further actions, such as the MOFCOM market entry clearance or certain restructuring of our corporate structure
and operations, there may be substantial uncertainties as to whether we can complete these actions in a timely manner, if at all, and our business and
financial condition may be materially and adversely affected.
15
Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC.
Currently, we conduct all of our operations and all of our revenue is generated, in the PRC. Accordingly, economic, political, and legal
developments in the PRC will significantly affect our business, financial condition, results of operations, and prospects. Policies of the PRC government
can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the
PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation that may affect
our ability to operate as currently contemplated.
Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in
the PRC may impair our ability to operate profitably, if at all.
Although the PRC government has been pursuing a number of economic reform policies for more than two decades, the PRC government
continues to exercise significant control over economic growth in the PRC. Because of the nature of our business, we are dependent upon the PRC
government pursuing policies that encourage private ownership of businesses. Restrictions on private ownership of businesses would affect the securities
business in general and businesses using real estate service in particular. We cannot assure you that the PRC government will pursue policies favoring a
market-oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political
disruption, or other circumstances affecting political, economic, and social life in the PRC.
PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and
regulations may impair our ability to operate profitably.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws
and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and
regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be
delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our
understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
We are not in compliance with the PRC’s regulations relating to offshore investment activities by PRC residents, and as a result, we and our
shareholders may be subject to severe penalties if we are not able to remediate the non-compliance.
In July 2014, SAFE promulgated the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and
Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular
75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an
offshore entity, referred to in Circular 37 as a “special purpose vehicle” for the purpose of holding domestic or offshore assets or interests. Circular 37
further requires amendment to a PRC resident’s registration in the event of any significant changes with respect to the special purpose vehicle, such as an
increase or decrease in the capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these
regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange
activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital
inflows from the offshore entity to the PRC entity, including restrictions on its ability to contribute additional capital to its PRC subsidiaries. Further, failure
to comply with the SAFE registration requirements could result in penalties under PRC law for evasion of foreign exchange regulations.
16
Qiuli Wang, Renyan Ou, Xueqing Liu, Haiyun Liu, Yanru Zhou, and Ronghua Liu (each, a “Beneficial Owner,” and together, the “Beneficial
Owners”), who are our beneficial owners and are PRC residents, have not completed the initial foreign exchange registrations. We have requested our
shareholders who are Chinese residents to make the necessary applications, filings, and amendments as required under Circular 37 and other related rules.
However, we cannot provide any assurances that all of our shareholders who are Chinese residents will comply with our request to make or obtain any
applicable registration. Any failure by any of our shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant
requirements under these regulations could subject us to fines or sanctions imposed by the PRC government, including restrictions on WFOE’s ability to
pay dividends or make distributions to us and on our ability to increase our investment in the WFOE. Although we believe that our agreements relating to
our structure are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual
arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be
adopted in the future.
We were not in compliance with the PRC’s regulations relating to employees’ social insurance fees for a period from November 2015 to
September 2018, and as a result, we and our shareholders may be subject to penalties if we are not able to remediate the non-compliance.
Qianhai did not deposit social insurance fees for employees in full since its establishment to September 2018. However, Qianhai has deposited the
social insurance fees in full for all the employees in compliance with the relevant regulations since October 2018. Shenzhen social insurance fund
administration has issued a statement showing that there is no significant violations of relevant laws and regulations by Qianhai since its establishment.
Ronghua Liu and Qiang Chen, shareholders of Qianhai, have signed consent to undertake and guarantee to fully reimburse and compensate us for any
possible losses due to its non-compliance of the rules and regulations governing employees’ social insurance fees, in case we are required by relevant
government authorities to make up for any outstanding payments and penalties for employees’ social insurance fees in the future.
We are not in compliance with the PRC’s regulations relating to employees’ housing funds, and as a result, we and our shareholders may be subject to
penalties if we are not able to remediate the non-compliance.
In accordance with the Regulations on Management of Housing Provident Fund (the “Regulations of HPF”), which were promulgated by the PRC
State Council on April 3, 1999, and last amended on March 24, 2002, employers must register at the designated administrative centers and open bank
accounts for employees’ housing funds deposits. Employers and employees are also required to pay and deposit housing funds, in an amount no less than
5% of the monthly average salary of each of the employees in the preceding year in full and on time. Qianhai has registered at the designated administrative
centers and opened bank accounts for its employees’ housing funds deposits; however, Qianhai did not deposit employees’ housing funds in accordance
with the Regulations of HPF, and there is a risk of administrative penalty being imposed by the designated administrative center to Qianhai. Ronghua Liu
and Qiang Chen, shareholders of Qianhai, have signed consents to guarantee that they will assume the full compensatory liabilities if we are to be subjected
to such penalties.
Because our business is conducted in RMB and the price of our Ordinary Shares is quoted in U.S. dollars, changes in currency conversion rates may
affect the value of your investments.
Our business is conducted in the PRC, our books and records are maintained in RMB, which is the currency of the PRC, and the financial
statements that we file with the SEC and provide to our shareholders are presented in U.S. dollars. Changes in the exchange rate between the RMB and
U.S. dollar affect the value of our assets and the results of our operations in U.S. dollars. The value of the RMB against the U.S. dollar and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the
PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue, and financial condition.
17
Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in
unfavorable tax consequences to us and our non-PRC shareholders.
The EIT Law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in
China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto
management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise.
In April 2009, the State Administration of Taxation, or SAT, issued a circular, known as Circular 82, which provides certain specific criteria for determining
whether the “de facto management bodies” of a PRC-controlled enterprise that is incorporated offshore is located in China. However, there are no further
detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.” Although our board of directors
and management are located in the PRC, it is unclear if the PRC tax authorities would determine that we should be classified as a PRC “resident
enterprise.”
If we are deemed as a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate
of 25%, although dividends distributed to us from our existing PRC subsidiary and any other PRC subsidiaries which we may establish from time to time
could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material and adverse effect on our
overall effective tax rate, our income tax expenses, and our net income. Furthermore, dividends, if any, paid to our shareholders may be decreased as a
result of the decrease in distributable profits. In addition, if we were considered a PRC “resident enterprise”, any dividends we pay to our non-PRC
investors, and the gains realized from the transfer of our Ordinary Shares may be considered income derived from sources within the PRC and be subject to
PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any
applicable tax treaty). It is unclear whether holders of our Ordinary Shares would be able to claim the benefits of any tax treaties between their country of
tax residence and the PRC in the event that we are treated as a PRC resident enterprise. This could have a material and adverse effect on the value of your
investment in us and the price of our Ordinary Shares.
There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our
PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under the EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to
its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong
and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC
subsidiary is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the
Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the
benefits under a tax treaty. These beneficial owners of the relevant dividends and the corporate shareholder to receive dividends from the PRC subsidiary
must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State
Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009,
which limits the “beneficial owner” to individuals, projects, or other organizations normally engaged in substantive operations, and sets forth certain
detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the
relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident
certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax
authority. As of the date of this annual report, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant
Hong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.
Even after we obtain the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file required forms and
materials with relevant PRC tax authorities to prove that we can enjoy 5% lower PRC withholding tax rate. ATIF HK intends to obtain the required
materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will
approve the 5% withholding tax rate on dividends received from ATIF HK.
18
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may
delay or prevent us from making loans or additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
Any funds we transfer to our PRC subsidiary and VIE, either as a shareholder loan or as an increase in registered capital, are subject to approval
by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, the
combined amount of offshore capital contributions and loans cannot exceed the FIE’s approved total investment amount. Any capital contributions to our
PRC subsidiary must be filed with MOFCOM or its local counterparts, and registered with a local bank authorized by the State Administration of Foreign
Exchange, or SAFE. In addition, (a) any loan provided by us to WFOE, which is a FIE, cannot exceed the difference between its total investment amount
and registered capital, and must be registered with SAFE or its local counterparts, and (b) any loan provided by us to our VIE which is a domestic PRC
entity, over a certain threshold, must be approved by the relevant government authorities and must be registered with SAFE or its local counterparts. Given
that the registered capital and total investment amount of WFOE are currently the same, if we seek to make a capital contribution to WFOE we must first
apply to increase both its registered capital and total investment amount, while if we seek to provide a loan to WFOE, we must first increase its total
investment amount. Although we currently do not have any immediate plans to utilize the proceeds from our initial public offering (“IPO”) to make capital
contribution into WFOE or provide any loan to WFOE or to our VIE, if we seek to do so in the future, we may not be able to obtain the required
government approvals or complete the required registrations on a timely basis, if at all. If we fail to receive such approvals or complete such registrations,
our ability to use the proceeds of our IPO and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and
our ability to fund and expand our business.
On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital
Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 launched a nationwide reform of the administration of the settlement
of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from
using the RMB fund converted from their foreign exchange capitals for expenditure beyond their business scopes, providing entrusted loans or repaying
loans between non-financial enterprises. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and relevant
foreign exchange regulatory rules may significantly limit our ability to use RMB converted from the net proceeds of our IPO to fund the establishment of
new entities in China by our consolidated affiliates, to invest in or acquire any other PRC companies through our PRC subsidiary or consolidated affiliates
or to establish new consolidated affiliates in the PRC, which may adversely affect our business, financial condition, and results of operations.
Our contractual arrangements with Qianhai and its shareholders may not be effective in providing control over Qianhai.
All of our current revenue and net income generated from consulting services are derived from Huaya and its VIE Qianhai. Pursuant to the terms
of a trust deed executed on December 11, 2017, Ronghua Liu, as trustee, is holding 4,925,000 shares, or 98.5%, of the total issued and outstanding shares
of Qianhai, for the benefit of Qiuli Wang, who beneficially owns 74.58% of our issued and outstanding Ordinary Shares. We do not have an equity
ownership interest in Qianhai but rely on contractual arrangements with it to control and operate its business. However, these contractual arrangements may
not be effective in providing us with the necessary control over Qianhai and its operations. Any deficiency in these contractual arrangements may result in
our loss of control over the management and operations of Qianhai, which will result in a significant loss in the value of an investment in our company. We
rely on contractual rights through our VIE structure to effect control over the management of Qianhai, which exposes us to the risk of potential breach of
contract by the shareholders of Qianhai.
19
Because we conduct our consulting business through Qianhai, a VIE entity, if we fail to comply with the applicable laws, we could be subject to severe
penalties and our business could be materially and adversely affected.
We operate our consulting business through Qianhai, a VIE entity, through a series of contractual arrangements, as a result of which, under United
States generally accepted accounting principles, the assets and liabilities of Qianhai are treated as our assets and liabilities and the results of operations of
Qianhai are treated in all aspects as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC
laws, rules, and regulations, including but not limited to the laws, rules, and regulations governing the validity and enforcement of the contractual
arrangements between WFOE and Qianhai.
On or around September 2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”) had prepared a
report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with VIE structures that operate
in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a
higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to VIE structures will be adopted
or what they would provide.
If WFOE, Qianhai, or their ownership structure or the contractual arrangements are determined to be in violation of any existing or future PRC
laws, rules, or regulations, or WFOE or Qianhai fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC
regulatory authorities would have broad discretion in dealing with such violations, including:
·
·
·
·
·
·
revoking the business and operating licenses of WFOE or Qianhai;
discontinuing or restricting the operations of WFOE or Qianhai;
imposing conditions or requirements with which we, WFOE, or Qianhai may not be able to comply;
requiring us, WFOE, or Qianhai to restructure the relevant ownership structure or operations which may significantly impair the rights of the
holders of our Ordinary Shares in the equity of Qianhai;
restricting or prohibiting our use of the proceeds from our IPO to finance our business and operations in China; and
imposing fines.
We cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements
violate PRC laws, rules, or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of
applicable PRC laws, rules, or regulations, our contractual arrangements will become invalid or unenforceable, and Qianhai will not be treated as a VIE
entity and we will not be entitled to treat Qianhai’s assets, liabilities, and results of operations as our assets, liabilities, and results of operations, which
could effectively eliminate the assets, liabilities, revenue, and net income of Qianhai from our balance sheet and statement of income. This would most
likely require us to cease conducting our business and would result in the delisting of our Ordinary Shares from Nasdaq Capital Market and a significant
impairment in the market value of our Ordinary Shares.
20
Our Shareholders are subject to greater uncertainties because we operate through a VIE structure due to restrictions on the transfer of Qianhai shares
imposed by applicable PRC laws even though the PRC laws and regulations do not currently prohibit direct foreign ownership of our operating
company, Qianhai, in China.
Investment in the PRC by foreign investors and foreign-invested enterprises must comply with the Catalogue for the Guidance of Foreign
Investment Industries (the “Catalogue”) (2017 Revision), which was last amended and issued by MOFCOM and NDRC on June 28, 2017, and became
effective since July 28, 2017, and the 2019 Negative List. The Catalogue and the 2019 Negative List contain specific provisions guiding market access for
foreign capital and stipulate in detail the industry sectors grouped under the categories of encouraged industries, restricted industries, and prohibited
industries. The VIE structure has been adopted by many PRC-based companies, to conduct business in the industries that are currently subject to foreign
investment restrictions in China, or are on the 2019 Negative List, due to the fact that direct foreign ownership of these companies are prohibited. Any
industry not listed in the 2019 Negative List is a permitted industry unless otherwise prohibited or restricted by other PRC laws or regulations. Currently,
the financial consulting industry falls within the permitted category in accordance with the Catalogue and the 2019 Negative List. Therefore, we are not
prohibited from direct foreign ownership of our VIE, Qianhai, in China.
However, we opted for a VIE structure instead of direct ownership due to restrictions on certain share transfer under article 141 of the Company
Law of the People’s Republic of China (“the Company Law”), which was promulgated on December 29, 1993, and last amended on October 26, 2018.
According to Article 141, directors, supervisors, and senior management of a “company limited by share” shall not transfer more than 25% of their shares
in the company during their term of appointment or transfer their shares within one year from the date on which the shares of the company are listed on a
stock exchange. The aforesaid persons also cannot transfer their shares in the company within half a year after leaving their post.
Qianhai is registered as “a company limited by shares” in PRC. Therefore its shareholders’ transfers of their shares in Qianhai are subject to the
limitation under article 141 of the Company Law. Since Ronghua Liu served as Qianhai’s director from the date of establishment and resigned on
September 7, 2018, he is not allowed to transfer his shares in Qianhai to WFOE until six months after his resignation. As a result of the above limitation,
WFOE is currently unable to control Qianhai by direct ownership and can only exert control over Qianhai via the VIE structure. As a result, our corporate
structure and VIE contractual arrangements may be subject to greater scrutiny and by various PRC government authorities, and subject our shareholders to
greater uncertainty with regard to the legality of their share ownership.
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal
counsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC
subsidiary, our VIE, and its shareholders is valid, binding, and enforceable in accordance with its terms. However, as there are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations, there can be no assurance that the PRC government authorities, such as the
Ministry of Commerce, or the MOFCOM, or other authorities would agree that our corporate structure or any of the above contractual arrangements
comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the
future. 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 we become directly subject to the scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price, and reputation.
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism, and negative
publicity by investors, financial commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity has
centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto, and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative publicity, the
publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these
companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the
allegations. It is not clear what effect this sector-wide scrutiny, criticism, and negative publicity will have on us, our business, and our stock price. If we
become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to
investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our
business. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant
decline in the value of our stock.
21
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory
bodies in the PRC.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Our SEC
reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the
disclosure in our SEC reports and other filings are not subject to the review by the China Securities Regulatory Commission, a PRC regulator that is
responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings, and our other public pronouncements
with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.
The failure to comply with PRC regulations relating to mergers and acquisitions of domestic entities by offshore special purpose vehicles may subject
us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.
On August 8, 2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council,
the SAT, the State Administration for Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated regulations entitled the Provisions Regarding
Mergers and Acquisitions of Domestic Entities by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on
June 22, 2009. These regulations, among other things, have certain provisions that require offshore special purpose vehicles formed for the purpose of
acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to
engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On
September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for
obtaining CSRC approval.
The application of the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC
law firms regarding the scope and applicability of the M&A Rules. Thus, it is possible that the appropriate PRC government agencies, including
MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in
connection with WFOE’s control of Qianhai through contractual arrangements. If the CSRC, MOFCOM, or another PRC regulatory agency determines that
government approval was required for the VIE arrangement between WFOE and Qianhai, or if prior CSRC approval for overseas financings is required and
not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC, or other PRC regulatory agencies. In such event, these
regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the
repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us, or take other actions that
could have a material adverse effect on our business, financial condition, results of operations, reputation, and prospects, as well as the trading price of our
Ordinary Shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas
financings, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.
The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For
example, Qianhai’s ability to remit its profits to us or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with
the SAFE registration requirements by Qianhai, principal shareholder of the Registrant and the VIE, over whom we may have no control.
22
Our contractual arrangements with Qianhai are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have
under these contractual arrangements.
As all of our contractual arrangements with Qianhai are governed by the PRC laws and provide for the resolution of disputes through arbitration in
the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Disputes
arising from these contractual arrangements between us and Qianhai will be resolved through arbitration in China, although these disputes do not include
claims arising under the United States federal securities law and thus do not prevent you from pursuing claims under the United States federal securities
law. The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our
ability to enforce these contractual arrangements, through arbitration, litigation, and other legal proceedings remain in China, which could limit our ability
to enforce these contractual arrangements and exert effective control over Qianhai. Furthermore, these contracts may not be enforceable in China if PRC
government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy
reasons. In the event that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Qianhai, and our
ability to conduct our business may be materially and adversely affected.
Risks Relating to the Trading Market
Our largest shareholders owns approximately 51.9% of our Ordinary Shares, which will allow them the ability to elect directors and approve matters
requiring shareholder approval by way of resolution of members.
Ms. Qiuli Wang, who was previously our President, and Chairman of the Board, is currently the beneficial owner of 26,640,357, or 51.9% of our
current outstanding Ordinary Shares (34.2% directly held by Tianzhen Investments Limited, an entity 100% owned by Ms. Wang, and the remaining 17.7%
beneficially owned by Ms. Wang through a proxy agreement entered with Eno Group Limited on September 30, 2018). Ms. Wang has the power to elect all
directors and approve all matters requiring shareholder approval without the votes of any other shareholder, significant influence over a decision to enter
into any corporate transaction, and the ability to prevent any transaction that requires the approval of shareholders, regardless of whether or not our other
shareholders believe that such a transaction is in our best interests. Such concentration of voting power could have the effect of delaying, deterring, or
preventing a change of control or other business combination, which could, in turn, have an adverse effect on the market price of our Ordinary Shares or
prevent our shareholders from realizing a premium over the then-prevailing market price for their Ordinary Shares.
Since we are deemed a “controlled company” under the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance
requirements that could adversely affect our public shareholders.
Our largest shareholder owns more than a majority of the voting power of our outstanding ordinary shares. Under the Nasdaq listing rules, a
company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and is permitted to
phase in its compliance with the independent committee requirements. Although we do not intend to rely on the “controlled company” exemptions under
the Nasdaq listing rules even though we are deemed a “controlled company,” we could elect to rely on these exemptions in the future. If we were to elect to
rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating
and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions,
during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you
would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay
any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our
Ordinary Shares increases.
23
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or
prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report
on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. As we are an “emerging growth company,” we are expected to first include a management report on
our internal controls over financial reporting in our annual report in the second fiscal year end following the effectiveness of our IPO. As such, these
requirements are expected to first apply to our annual report on Form 20-F for the fiscal year ending on July 31, 2020. Our management may conclude that
our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial
reporting are effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report
that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management,
operational and financial resources and systems for the foreseeable future.
Prior to our IPO, we were a private company with limited accounting personnel and other resources with which to address our internal controls
and procedures. We plan to remedy our material weaknesses and other control deficiencies in time to meet the deadline imposed by Section 404 of the
Sarbanes-Oxley Act. If we fail to timely achieve or maintain the adequacy of our internal controls, we may not be able to conclude that we have effective
internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could
result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the
trading price of our Ordinary Shares. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts
and other resources to comply with Section 404 of the Sarbanes-Oxley Act.
If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our Ordinary
Shares, the price of our Ordinary Shares and trading volume could decline.
The trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Ordinary Shares
would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause the price of our Ordinary Shares and the trading volume to decline.
The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance.
The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control,
including:
·
·
·
·
·
actual or anticipated fluctuations in our revenue and other operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations of investors;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint
ventures, or capital commitments;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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·
·
lawsuits threatened or filed against us; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices
of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and
adversely affect our business.
Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect
investor confidence in us and our Ordinary Shares.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from disclosure and
other requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company. As a result,
if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
After we are no longer an “emerging growth company,” we expect to incur significant additional expenses and devote substantial management effort
toward ensuring compliance increased disclosure requirements.
If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable
to U.S. domestic issuers, and we would incur significant additional legal, accounting, and other expenses that we would not incur as a foreign private
issuer.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and
our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as
promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that United States domestic
issuers are required to disclose. We may cease to qualify as a foreign private issuer in the future and therefore be subject to such requirements.
Because we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have
less protection than you would have if we were a domestic issuer.
Nasdaq Listing Rule requires listed companies to have, among other things, a majority of their board members be independent. As a foreign
private issuer, however, we are permitted to, and we may, follow home country practice in lieu of the above requirements, or we may choose to comply
with the Nasdaq requirement within one year of listing. The corporate governance practice in our home country, the BVI, does not require a majority of our
board to consist of independent directors. Since a majority of our board of directors may not consist of independent directors, fewer board members may be
exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq
listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of
independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. The
Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on
all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq
Listing Rules in determining whether shareholder approval is required on such matters and to appoint a nominating and corporate governance committee.
However, we may consider following home country practice in lieu of the requirements under the Nasdaq listing rules with respect to certain corporate
governance standards which may afford less protection to investors.
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Anti-takeover provisions in our amended and restated memorandum and articles of association may discourage, delay, or prevent a change in control.
Some provisions in our amended and restated memorandum and articles of association, may discourage, delay, or prevent a change in control of
our company or management that shareholders may consider favorable, including, among other things, the following:
·
·
provisions that permit our board of directors by resolution to amend certain provisions of the memorandum and articles of association,
including to create and issue classes of shares with preferred, deferred or other special rights or restrictions as the board of directors determine
in their discretion, without any further vote or action by our shareholders. If issued, the rights, preferences, designations, and limitations of
any class of preferred shares would be set by the board of directors by way of amendments to relevant provisions of the memorandum and
articles of association and could operate to the disadvantage of the outstanding ordinary shares the holders of which would not have any pre-
emption rights in respect of such an issue of preferred shares. Such terms could include, among others, preferences as to dividends and
distributions on liquidation, or could be used to prevent possible corporate takeovers; and
provisions that restrict the ability of our shareholders holding in aggregate less than thirty percent (30%) of the outstanding voting shares in
the company to call meetings and to include matters for consideration at shareholder meetings.
Because we are a BVI company and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and
directors or to enforce any judgment you may obtain.
We are incorporated in the BVI and conduct our operations primarily in China, and substantially all of our assets are located outside of the United
States. In addition, almost all of our directors and officers reside outside of the United States. As a result, it may be difficult or impossible for you to bring
an action against us or against these individuals in the United States in the event that you believe we have violated your rights, either under United States
federal or state securities laws or otherwise, or if you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the
BVI and of China may not permit you to enforce a judgment against our assets or the assets of our directors and officers.
Our board of directors may decline to register transfers of ordinary shares in certain circumstances.
Our board of directors may, in its sole discretion, decline to register any transfer of any Ordinary Share which is not fully paid up or on which we
have a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied by the
certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to
make the transfer; (ii) the instrument of transfer is in respect of only one class of shares; (iii) the instrument of transfer is properly stamped, if required;
(iv) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; (v) the shares
conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq Capital Market may determine to be payable, or such lesser sum
as our board of directors may from time to time require, is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each
of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one or
more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time
to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
26
Certain types of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated in the
BVI. As a result, the rights of shareholders may be limited.
Whilst statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, these rights may be
more limited than the rights afforded to minority shareholders under the laws of states in the United States and shareholders of BVI companies may not
have standing to initiate a shareholder derivative action in a court of the United States. Furthermore, questions of interpretation of our memorandum and
articles of association will be questions of BVI law and determined by the BVI courts. In any event, the circumstances in which any such action may be
brought, if at all, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer
alternatives available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce against us
judgments of courts in the United States based on certain liability provisions of U.S. securities law or to impose liabilities against us, in original actions
brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.
There is no statutory recognition in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain
circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no
retrial of the issues would be necessary provided that:
(i)
the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or
carrying on business within such jurisdiction and was duly served with process; is final and for a liquidated sum;
(ii) the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;
(iii) in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;
(iv) recognition or enforcement of the judgment would not be contrary to public policy in the BVI; and
(v) the proceedings pursuant to which judgment was obtained were not contrary to natural justice.
In appropriate circumstances, a BVI Court may give effect in the British Virgin Islands to other kinds of final foreign judgments such as
declaratory orders, orders for performance of contracts and injunctions.
A recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes
submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market
companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These
developments could add uncertainties to our continued listing on Nasdaq in the future.
On April 21, 2020, the SEC and PCAOB released a joint statement highlighting the risks associated with investing in companies based in or
having substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB
to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating
in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors for Restrictive Market
companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.
On May 20, 2020, the U.S. Senate passed an act requiring a foreign company to certify it is not owned or manipulated by a foreign government if
the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to
inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange.
On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit a report to the
President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and by
the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. However, it
remains unclear what further actions, if any, the U.S. executive branch, the SEC, and PCAOB will take to address the problem.
The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the
auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct
inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control
procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our
Ordinary Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Our auditor, Friedman LLP, is an independent registered public accounting firm with the PCAOB, and as an auditor of
publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections
to assess its compliance with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular
basis. However, the above recent developments have added uncertainties to our continued listing on Nasdaq in the future, to
which Nasdaq may apply additional and more stringent criteria after considering the effectiveness of our auditor’s audit and
quality control procedures, adequacy of personnel and training, sufficiency of resources, geographic reach, and experience as
related to our audit.
You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
Our corporate affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time,
the BVI Business Companies Act, 2004 as amended from time to time (the “BVI Act”) and the common law of the BVI. The rights of shareholders and the
statutory duties and fiduciary responsibilities of our directors and officers under BVI law may not be clearly established as they would be under statutes or
judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted
bodies of corporate law.
These rights and responsibilities are governed by our amended and restated memorandum and articles of association, the BVI Act and the common
law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has
persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and
some of the protections and safeguards (such as statutory pre-emption rights, save to the extent expressly provided for in the amended and restated
memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law.
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There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations
governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding
corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have
more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a
shareholder of a corporation incorporated in the United States.
The laws of BVI provide limited protections for minority shareholders, so minority shareholders will not have the same options as to recourse in
comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the BVI there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with
shareholder remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders for relief from
unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the amended and restated memorandum and articles of association.
Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the amended and restated memorandum and
articles of association, and are entitled to payment of the fair value of their respective shares upon dissenting from certain enumerated corporate
transactions.
The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but
not binding, authority on a court in the BVI. There are common law rights for the protection of shareholders that may be invoked, largely dependent on
English company law, since the common law of the BVI is less extensive than that of England. Under the general rule pursuant to English company law
known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its
shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is
entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of the company. As such, if those
who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of
association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (i) a company is acting or proposing
to act illegally or beyond the scope of its authority; (ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly
authorized by more than the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed
or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”
These rights may be more limited than the rights afforded to minority shareholders under the laws of states in the United States.
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There are no pre-emptive rights in favor of holders of ordinary shares so you may not be able to participate in future equity offerings.
There are no pre-emptive rights applicable under the BVI Act or the amended and restated memorandum and articles of association in favor of
holders of ordinary shares in respect of further issues of shares of any class. Consequently, you will not be entitled under applicable law to participate in
any such future offerings of further ordinary shares or any preferred or other classes of shares.
If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States
federal income tax consequences.
A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable
year if, for such year, either
· At least 75% of our gross income for the year is passive income; or
· The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which
are held for the production of passive income is at least 50%.
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business), and gains from the disposition of passive assets.
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our
ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Depending on the amount of assets held for the production of passive income, it is possible that, for our 2019 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, because we control Qianhai’s management decisions, and also because we are entitled to the economic
benefits associated with Qianhai, we are treating Qianhai as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC
analysis, in general, according to Internal Revenue Code Section 1297(c), a non-U.S. corporation is deemed to own its pro rata share of the gross income
and assets of any entity in which it is considered to own at least 25% of the stock by value. Although we do not technically own any stock in Qianhai, the
control of Qianhai’s management decisions, the entitlement to economic benefits associated with Qianhai, and the inclusion of Qianhai as part of the
consolidated group (in accordance with Accounting Standards Codification (ASC) Topic 810, “Consolidation,”) is akin to holding a stock interest in
Qianhai, and therefore we consider our interest in Qianhai as a deemed stock interest. As a result, the income and assets of Qianhai should be included in
the determination of whether or not we are a PFIC in any taxable year. Should the IRS challenge our position and consider that we are as owning Qianhai
for United States federal income tax purposes, we would likely be treated as a PFIC.
For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a
PFIC, see “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
On January 5, 2015, we established a holding company, ATIF, under the laws of the BVI. ATIF owns 100% of ATIF HK, a Hong Kong company
incorporated on January 6, 2015 (formerly known as China Elite International Holdings Limited).
On May 20, 2015, WFOE (Huaya Consultant (Shenzhen) Co., Ltd.) was incorporated pursuant to the PRC law as a wholly foreign owned
enterprise. ATIF HK holds 100% of the equity interests in WFOE.
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On November 3, 2015, our VIE, Qianhai was incorporated pursuant to the PRC law as a limited company. We operate our going public financial
consulting services through Qianhai.
On December 11, 2015, Qianhai established a wholly-owned subsidiary, Qianhai Asia Era (Shenzhen) International Fund Management Co., Ltd.
(“Asia Era Fund”). We disposed of our entire equity ownership in Asia Era Fund on September 19, 2018.
As of the date of this annual report, Qianhai has two shareholders, both are PRC residents. Ronghua Liu, as trustee, is holding 4,925,000 shares
(the “Beneficial Shares”), for their beneficial owner, Qiuli Wang (the “Beneficiary”), pursuant to a trust deed entered into and executed under the PRC law
on December 11, 2017. The trust deed stipulates, among other customary provisions, that (1) all dividends and interest accrued on the Beneficial Shares
shall be payable as directed by the Beneficiary in writing, and (2) the Beneficiary may transfer the Beneficial Shares to a third-party company or individual
as required.
In August 2018, Qianhai launched AT Consulting Center to provide financial consulting services.
On September 20, 2018, ATIF HK acquired and started operating CNNM, a news and media platform based in Hong Kong.
On March 7, 2019, ATIF HK changed its name from ASIA TIMES INTERNATIONAL FINANCE LIMITED to ATIF LIMITED. On March 8,
2019, ATIF changed its name from ASIA TIMES HOLDINGS LIMITED to ATIF HOLDINGS LIMITED.
On April 29, 2019, we completed the closing of our IPO of 2,074,672 Ordinary Shares at a public offering price of $5.00 per share. Our Ordinary
Shares commenced trading on the Nasdaq Capital Market on May 3, 2019, under the symbol “ATIF.”
Pursuant to PRC law, each entity formed under PRC law shall have a business scope as submitted to the Administration of Industry and
Commerce or its local counterpart. Depending on the particular business scopes, approval by the relevant competent regulatory agencies may be required
prior to commencement of business operations. WFOE’s business scope is to primarily engage in investment consulting, business management consulting,
corporate image engineering, and communication product development. Since the sole business of WFOE is to provide Qianhai with technical support,
consulting services, and other management services relating to its day-to-day business operations and management in exchange for a service fee
approximately equal to Qianhai’s net income after the deduction of the required PRC statutory reserve, such business scope is appropriate under PRC law.
Qianhai, on the other hand, is also able to, pursuant to its business scope, provide financial consulting businesses. Qianhai is approved by the competent
regulatory body in Shenzhen that regulates financial consulting businesses, to engage in financial consulting business operations.
Mr. Ronghua Liu was the majority shareholder of Qianhai prior to our IPO. However, we control Qianhai through contractual arrangements,
which are described under “—B. Business Overview—Contractual Arrangements between WFOE and Qianhai.”
On April 22, 2020, we acquired approximately 51.2% of the issued and outstanding ordinary shares of Leaping Group Co., Ltd. (“LGC”). LGC
operates through its VIE, Leaping Media Group Co., Ltd (“LMG”), and its subsidiaries. LMG was established in 2013 as a limited company pursuant to
PRC laws, and began generating revenue in 2014. Since the inception of LMG, LGC has consolidated its business practice, and expanded its business
operation beyond Event Planning and Execution Services to include Multi-Channel Advertising Services and more recently in 2017, started to invest in
films and TV programs production and distribution. LGC established a wholly owned subsidiary of LMG, Horgos Xinyuezhong Film Media Co., Ltd. in
2017 pursuant to PRC laws, which was subsequently dissolved on April 17, 2019. The related parties of LMG also established companies pursuant to PRC
laws, including Shenyang Tianniu Media Co., Ltd. in 2013, Yuezhong Media (Dalian) Co., Ltd. in 2016, Yuezhong (Beijing) Film Co., Ltd. in 2017, and
Harbin Yuechuzhong Media Co., Ltd., Shenyang Xiagong Hotel Management Co., Ltd., and Liaoning Leaping International Cinema Management Co., Ltd.
in 2018. The ownership of these companies was transferred to LMG, resulting in these companies being wholly owned subsidiaries of LMG.
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Pursuant to PRC laws, each entity formed under PRC law shall have a certain business scope as submitted to the Administration of Industry and
Commerce or its local counterpart. Pursuant to specific business scopes, approval by the relevant competent regulatory agencies may be required prior to
commencement of business operations. As such, LGC WFOE’s business scope is to primarily engage in technology development, provision of technology
service, technology consulting; development of computer software and hardware, computer network technology, game software, provision of enterprise
management and related consulting service, human resource consulting service and intellectual property consulting service. Since the sole business of LGC
WFOE is to provide LMG with technical support, consulting services and other management services relating to its day-to-day business operations and
management in exchange for a service fee approximately equal to LMG’s net income after the deduction of the required PRC statutory reserve, such
business scope is necessary and appropriate under PRC laws. LMG, on the other hand, is also able to, pursuant to its business scope, provide Multi-Channel
Advertising Services, Event Planning and Execution Services, and Film Production Services.
Our principal executive offices are located at Room 2803, Dachong Business Centre, Dachong 1st Road, Nanshan District, Shenzhen City,
Guangdong Province, China, and our telephone number is +86-755-8696-0818. We maintain a website at www.atifchina.com. Our website or any other
website does not constitute a part of this annual report.
For information regarding our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and
Capital Resources.”
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we are eligible to take
advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies that are not
emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related
management’s discussion and analysis of financial condition and results of operations in this annual report, (2) not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (3) reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements, and (4) 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. We intend to take advantage of these exemptions.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. As a result, an emerging growth company
can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our
annual gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which
would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in
non-convertible debt during the preceding three-year period.
Foreign Private Issuer Status
We are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable
to United States domestic public companies. For example:
·
we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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·
·
·
·
·
for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply
to domestic public companies;
we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in
respect of a security registered under the Exchange Act; and
we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and
trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
B. Business Overview
Overview
We are a consulting company providing financial consulting services to small and medium-sized enterprises (“SMEs”). Since our inception in
2015, the main focus of our consulting business has been providing comprehensive going public consulting services designed to help SMEs become public
companies on suitable markets and exchanges. Our goal is to become an international financial consulting company with clients and offices throughout
Asia. We have to date primarily focused on helping clients going public on the OTC markets and exchanges in the U.S., but we are in the process of
expanding our service to listing clients on domestic exchanges in China as well as the Hong Kong Stock Exchange.
Since our inception until July 31, 2019, our revenue was mainly generated from our going public consulting services. In April 2020, we acquired
51.2% equity interest in LGC and our revenue was mainly comprised of going public consulting services and event execution and planning services for the
year ended July 31, 2020. We generated a total revenue of approximately $5.3 million, $3.1 million and $0.7 million for the fiscal years ended July 31,
2018, 2019, and 2020, respectively. The revenues generated from going public consulting services were $5.2 million, $3.1 million and $0.6 million for the
fiscal years ended July 31, 2018, 2019, and 2020, respectively.
Beginning in August 2018, to complement and facilitate the growth of our going public consulting service, we launched AT Consulting Center to
offer financial consulting programs in Shenzhen, and in September 2018, we acquired CNNM, or www.chinacnnm.com, a news and media website focused
on distributing financial news and information. In July 2019, we launched an investment and financing analysis reporting business. We have not generated
any revenue from this financial and news platform since its acquisition, and based on our current financial condition and operating performance, our
management has assessed that the likelihood of future use of the financial and news platform is remote. As a result, a full impairment loss of $384,492 has
been applied against this financial and news platform for the year ended July 31, 2020.
In China, a fast-growing economy and a positive market environment have created many entrepreneurial and high-growth enterprises, many of
which need assistance in obtaining development funds through financing. China has relatively immature financial systems compared to developed
countries. Due to restrictions imposed by China’s foreign exchange regulations, it is difficult for foreign capital to enter China’s capital market. Because of
the strict listing policies and a relatively closed financial environment in mainland China, most small to medium sized enterprises in the development stage
are unable to list on domestic exchanges in China. Therefore, many Chinese enterprises strive to enter international capital markets through overseas listing
for equity financing. However, in China, there is a general lack of understanding of international capital markets, as well as a lack of professional
institutions that provide overseas going public consulting services to these companies, and many of them may not be familiar with overseas listing
requirements.
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We launched our consulting services in 2015. Our aim was to assist these Chinese enterprises by filling the gaps and forming a bridge between
PRC companies and overseas markets and exchanges. We have a team of qualified and experienced personnel with legal, regulatory, and language expertise
in several overseas jurisdictions. Our services are designed to help SMEs in China achieve their goal of becoming public companies. We create a going
public strategy for each client based on many factors, including our assessment of the client’s financial and operational situations, market conditions, and
the client’s business and financing requirements. Since our inception and up to July 31, 2019, we have successfully helped seven Chinese enterprises to be
quoted on the U.S. OTC markets and are currently assisting our other clients in their respective going public efforts. All of our current and past clients have
been Chinese companies, and we plan to expand our operations to other Asian countries, such as Malaysia, Vietnam, and Singapore, by 2021.
Contractual Arrangements between WFOE and Qianhai
Neither we nor our subsidiaries own any equity interest in Qianhai. Instead, we control and receive the economic benefits of Qianhai’s business
operation through a series of contractual arrangements. WFOE, Qianhai, and its shareholders entered into a series of contractual arrangements, also known
as VIE Agreements, on September 5, 2018. The VIE Agreements are designed to provide WFOE with the power, rights, and obligations equivalent in all
material respects to those it would possess as the sole equity holder of Qianhai, including absolute control rights and the rights to the assets, property and
revenue of Qianhai.
On October 9, 2018, the shareholders of Qianhai, Ronhua Liu and Ka Feng, transferred a total of 75,000 shares (25,000 shares from Ronghua Liu
and 50,000 shares from Feng Ka) of Qianhai’s stock to Qiang Chen, who is the CEO of Qianhai. As a result of the transfers, Ronghua Liu now holds
4,925,000 shares, or 98.5%, of the issued and outstanding shares of Qianhai; Qiang Chen now holds 75,000 shares, or 1.5% of the issued and outstanding
shares of Qianhai; and Ka Feng ceased to be a shareholder of Qianhai. WFOE, Qianhai, Ronghua Liu, and Feng Ka executed cancellation agreements for
each of the VIE agreements executed on September 5, 2018. At the same time, WFOE, and Qianhai entered into and executed VIE agreements with
Qianhai’s new shareholders, Ronghua Liu and Qiang Chen, together holding 100% of Qianhai’s shares (the “Qianhai Shareholders”).
According to the Exclusive Service Agreement, Qianhai is obligated to pay service fees to WFOE approximately equal to the net income of
Qianhai after deduction of the required PRC statutory reserve.
Each of the VIE Agreements is described in detail below:
Exclusive Service Agreement
Pursuant to the Exclusive Service Agreement between Qianhai and WFOE, WFOE provides Qianhai with technical support, consulting services,
intellectual services, and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its
advantages in technology, human resources, and information. Additionally, Qianhai granted an irrevocable and exclusive option to WFOE to purchase from
Qianhai, any or all of its assets at the lowest purchase price permitted under PRC laws. Should WFOE exercise such option, the parties shall enter into a
separate asset transfer or similar agreement. For services rendered to Qianhai by WFOE under this agreement, WFOE is entitled to collect a service fee
calculated based on the time of services rendered multiplied by the corresponding rate, the plus amount of the services fees or ratio decided by the board of
directors of WFOE based on the value of services rendered by WFOE and the actual income of Qianhai from time to time, which is approximately equal to
the net income of Qianhai after deduction of the required PRC statutory reserve.
The Exclusive Service Agreement shall remain in effect for 20 years unless it is terminated earlier by Qianhai and WFOE in writing.
The executive director of WFOE, Mr. Qiang Chen, who is the CEO of Qianhai, is currently managing Qianhai pursuant to the terms of the
Exclusive Service Agreement. WFOE has absolute authority relating to the management of Qianhai, including but not limited to decisions with regard to
expenses, salary raises and bonuses, hiring, firing, and other operational functions. Our audit committee is required to review and approve in advance any
related party transactions, including transactions involving WFOE or Qianhai.
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Equity Pledge Agreement
Under the Equity Pledge Agreement between WFOE, Qianhai, and the Qianhai Shareholders, the Qianhai Shareholders pledged all of their equity
interests in Qianhai to WFOE to guarantee the performance of Qianhai’s obligations under the Exclusive Service Agreement. Under the terms of the Equity
Pledge Agreement, in the event that Qianhai or the Qianhai Shareholders breach their respective contractual obligations under the Exclusive Service
Agreement, WFOE, as the pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged
equity interests. The Qianhai Shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Pledge Agreement, WFOE is
entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The Qianhai Shareholders further agreed not to dispose of the
pledged equity interests or take any actions that would prejudice WFOE’s interest.
The Equity Pledge Agreement is effective until all payments due under the Exclusive Service Agreement have been paid by Qianhai. WFOE shall
cancel or terminate the Equity Pledge Agreement upon Qianhai’s full payment of fees payable under the Exclusive Service Agreement.
The purposes of the Equity Pledge Agreement are to (1) guarantee the performance of Qianhai’s obligations under the Exclusive Service
Agreement, (2) make sure the Qianhai Shareholders do not transfer or assign the pledged equity interests, or create or allow any encumbrance that would
prejudice WFOE’s interests without WFOE’s prior written consent, and (3) provide WFOE control over Qianhai. In the event Qianhai breaches its
contractual obligations under the Exclusive Service Agreement, WFOE will be entitled to foreclose on the Qianhai Shareholders’ equity interests in
Qianhai and may (1) exercise its option to purchase or designate third parties to purchase part or all of their equity interests in Qianhai and WFOE may
terminate the VIE Agreements after acquisition of all equity interests in Qianhai or form a new VIE structure with the third parties designated by WFOE; or
(2) dispose of the pledged equity interests and be paid in priority out of proceed from the disposal in which case the VIE structure will be terminated.
Call Option Agreement
Under the Call Option Agreement, the Qianhai Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the
extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Qianhai. The option price is equal to the capital
paid in by the Qianhai Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. As of the date of this annual
report, if WFOE exercised such option, the total option price that would be paid to all of the Qianhai Shareholders would be RMB5,000,000
(approximately $730,000), which is the aggregate registered capital of Qianhai. The option purchase price shall increase in case the Qianhai Shareholders
make additional capital contributions to Qianhai, including when the registered capital is increased upon Qianhai receiving the proceeds from our IPO.
Under the Call Option Agreement, WFOE may at any time under any circumstances, purchase, or have its designee purchase, at its discretion, to
the extent permitted under PRC law, all or part of the Qianhai Shareholders’ equity interests in Qianhai. The Call Option Agreement, together with the
Equity Pledge Agreement, Exclusive Service Agreement, and the Shareholders’ Voting Rights Proxy Agreement, enable WFOE to exercise effective
control over Qianhai.
The Call Option Agreement remains effective for a term of 20 years and may be renewed at WFOE’s election.
Shareholders’ Voting Rights Proxy Agreement
Under the Shareholders’ Voting Rights Proxy Agreement, the Qianhai Shareholders authorize WFOE to act on their behalf as their exclusive agent
and attorney with respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s
rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or
transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the
executive director, supervisor, the chief executive officer and other senior management members of Qianhai.
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The term of the Shareholders’ Voting Rights Proxy Agreement is the same as the term of the Call Option Agreement. The Shareholders’ Voting
Rights Proxy Agreement is irrevocable and continuously valid from the date of execution of the Shareholders’ Voting Rights Proxy Agreement, so long as
the Qianhai Shareholders are shareholders of Company.
Competitive Strengths
We believe that the following strengths enable us to capture opportunities in the financial service industry in China and differentiate us from our
competitors:
Experienced and Highly Qualified Team
We have a highly qualified professional service team with extensive experience in going public consulting services. Our professional team
members have an average of five years of experience in their respective fields of international finance and capital market, cross-border and domestic listing
services, and marketing. The majority of the members of our team previously worked in the technology or finance industries. Our President, Ms. Qiuli
Wang, has five years of experience in corporate management. She maintains a strong network with various government agencies and business leaders. She
has extensive experience in domestic and overseas capital markets, M&A, FinTech, and other related fields. Ms. Wang was previously the deputy general
manager of Morgan Networks, an integrated B2C online shopping mall utilizing its proprietary Morgan Payment Instant Settlement System. The CEO of
Qianhai, Mr. Qiang Chen, has 10 years of experience in the Chinese, U.S. and Hong Kong capital markets. He has personally assisted three companies to
go public in the U.S., and has provided financing, corporate restructuring, and M&A strategy consulting services. We highly value members of our
qualified professional team and are on the constant lookout for new talents to join our team.
Recognition and Reputation Achieved from Our Previous Success
Since our inception in 2015, we have successfully helped seven clients to be quoted on the U.S. OTC markets. Our proven track records and
professionalism have won us recognition and reputation within the consulting service industry in China. We believe we are one of the few going public
consulting service providers that possess the necessary resources and expertise to provide comprehensive personalized one-stop going public consulting
services to clients.
Long-Term Cooperation Relationship with Third-Party Professional Providers
We have established long-term professional relationships with a group of well-known third-party professional providers both domestically and in
the U.S., such as investment banks, certified public accounting firms, law firms, and investor relations agencies, whose services and support are necessary
for us to provide high-quality one-stop going public consulting service to our clients. It took us years of hard work to demonstrate to these professional
organizations that we are a worthy partner capable of providing high-quality professional services that conforms to their high standards. As a result, our
clients are able to gain direct access to and obtain high-quality professional services from our third-party professional providers.
Long-Term Cooperation Relationships with Local Chamber of Commerce and Associations
We believe our recent success was at least partially attributable to our long-term cooperation relationships with local chambers of commerce and
associations. There are no contractual relationships between us and these organizations. We were able to gain access to many prospective clients through
events organized by these organizations. Our cooperation relationships with these local organizations help us to: (1) understand the evolving needs of our
potential clients; (2) recognize the trends of the local business community we strive to serve; and (3) provide timely feedbacks to our potential clients and
maintain open communication channels with local business communities.
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Growth Strategies
Since our inception in 2015, we have grown our consulting business. Our goal is to continue building upon the prior success, expand our consulting
services from China to the rest of Asia, and grow into an international consulting service company. We believe the following strategies will help us achieve
our goal.
Attract and recruit highly-qualified professionals to join our team.
As a consulting company, the services we offer our clients are based on the knowledge, expertise, and insight of our professional team. In order to
expand and grow our business, we need to aggressively recruit and attract highly-qualified professionals to join our team. We have an internal promotion
system and a vocational training program as part of our staff benefits. The Chinese economy has grown steadily in recent years, but its financial system is
not yet fully developed and there has been a lack of qualified professionals well-versed in the operations of international financial markets. One of our main
objectives for launching AT Consulting Center is to educate, train, and cultivate qualified professionals for China’s fast expanding financial industry, with
the potential of becoming a source of supply of highly-qualified members of our growing consulting team.
Expand our going public consulting services from U.S. based markets and exchanges to include Chinese domestic exchanges and the Stock Exchange of
Hong Kong.
To develop our business, we need to expand our client base. In April 2018, the Stock Exchange of Hong Kong (SEHK) announced a set of new
listing rules designed to accommodate Chinese enterprises. These new rules have made the SEHK more attractive and accessible to Chinese enterprises,
while also presenting an opportunity for us to expand our client base to include those who would prefer to be listed on the SEHK rather than on PRC
domestic or overseas exchanges. We are presently in the process of assembling a team specialized in SEHK consulting listing services. In addition, for
enterprises not willing to list abroad but meeting the requirements of the Chinese domestic exchanges, we will develop personalized going public
consulting service to guide them through the domestic listing process.
Invest in new complementary business ventures to facilitate the growth of our consulting services business and create more additional sources of revenues.
In 2018, we made the strategic decision to launch our AT Consulting Center. Due to the growth of the Chinese economy, there is a high demand
for financial consulting services. With a population of 1.4 billion, China has a consumer market unmatched by any country in the World. According to
statistics from Credit Suisse’s 2015 Global Wealth Report, China’s total household wealth reached 22.8 trillion US dollars in 2015, second only to the
United States. With newly accumulated wealth, more individuals, families, and enterprises need financial services. However, we believe that traditional
consulting organizations are not meeting such market demand by offering professional financial consulting services; we have practical knowledge and
hands-on experience in financial planning and capital markets operations, and other resources to offer such financial consulting services. AT Consulting
Center was launched to meet the demand for real world financial advisory services designed specifically to meet the needs of each of our three targeted
groups - enterprises, individuals, and families.
Although an upfront capital investment is necessary to fund the launch and operations of AT Consulting Center, we anticipate a positive revenue
flow will be realized in consulting fees for our services. In addition, we also plan to utilize AT Consulting Center as a marketing platform to expand and
promote our going public consulting business.
On September 20, 2018, we acquired CNNM, www.chinacnnm.com, a news and media on line platform with over 10 million registered users.
However, we have not generated any revenue from this financial and news platform since its acquisition, and based on our current financial condition and
operating performance, our management has assessed that the likelihood of future use of the financial and news platform is remote. As a result, a full
impairment loss of $384,492 has been applied against this financial and news platform for the year ended July 31, 2020.
In July 2019, we launched an investment and financing analysis reporting business to provide investment and financing analysis reports to SMEs
and due diligence reports to investors. Through these reports, we aim to help SMEs with their self-diagnosis and financial planning, thereby increasing the
options available for obtaining equity financing, and help investors analyze and explore the investment value of venture companies in a comprehensive and
multi-perspective manner to aid in decision making and minimize investment risks.
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We believe, if we are able to successfully implement and execute our business strategies for AT Consulting Center, and investment and financing
analysis reporting business, then each will have the potential to bring additional revenue streams, and together, combined with our existing going public
consulting business, will form an integrated business that is capable of continued growth and expansion into a successful international enterprise.
Termination of an intended acquisition of Sino-fortune Securities Limited
On December 20, 2019, we entered into an Agreement for Sale and Purchase in Respect of Shares and Subordinated Loan of Sinofortune
Securities Limited (“Sino-fortune”). Sinofortune is licensed by the Securities and Futures Commission of Hong Kong (the “SFC”) to carry on Type 1
(dealing in securities), Type 2 (dealing in futures contracts), and Type 4 (advising on securities) regulated activities under the SFC.
The purpose of this intended acquisition of Sino-fortune was to establish a platform to help our customers and potential customers to be listed in
Hong Kong, or conduct investment or securities trading through Sino-fortune. Pursuant to the agreement, we were required to pay total of HK$15.3
million (approximately $1.97 million) to acquire 100% equity interest of Sino-fortune, the acquisition consideration included two components: cash
consideration of HK$5.7 million (approximately $0.73 million) and absorb a loan of HK$10 million (approximately $1.24 million) that Sino-fortune
borrowed from lender Listco. In connection with this intended acquisition, we paid an acquisition deposit of HK$1.71 million (approximately $0.22
million) to Sino-fortune and the remaining balance would be paid upon closing the transaction. However, this transaction was subject to the review and
approval by SFC, and due to the impact of COVID-19, the approval process had been delayed, and accordingly, this acquisition had not been consummated
as of January 31, 2020. In June 2020, given the uncertainty of the Hong Kong capital market, we terminated the intended acquisition of Sino-fortune and
Sino-fortune refunded the acquisition deposit of HK$1.0 million (approximately $0.13 million) to us after deducting a default penalty of HK$710,000
(approximately $92,000) due to our termination of this intended acquisition.
Acquisition of LGC
On April 22, 2020, we completed the acquisition of approximately 51.2% of the issue and outstanding ordinary shares of Leaping Group Co., Ltd.
(“LGC”) pursuant to the (i) Debt Conversion and Share Purchase Agreement dated as of April 8, 2020 (the “Debt Conversion SPA”) between us and LGC,
and (ii) Share Exchange Agreement dated as of April 8, 2020 (the “Share Exchange Agreement”) by and among the Company, LGC, and all of the
shareholders of LGC (the “Sellers”). Under the terms of the Debt Conversion SPA, LGC issued 3,934,029 of its ordinary shares to us in exchange for (i) the
satisfaction of the outstanding debt owed to us in the amount of US$1,851,000, and (ii) the issuance of 2,800,000 of our ordinary shares to LGC.
Concurrent with the closing of the Debt Conversion SPA and under the terms of the Share Exchange Agreement (the “Acquisitions”), the Sellers assigned
an aggregate of 6,283,001 ordinary shares of LGC to us in exchange for an aggregate of 7,140,002 ordinary shares of the Company. After giving effect to
the Acquisitions, LGC will be considered our majority-owned subsidiary and its financial statements will be consolidated with ours.
Our Services
Our Going Public Consulting Services
We started our consulting services in China in November 2015, and while currently still in the development stage, we have steadily grown into a
company that has achieved some degree of recognition in the going public consulting services industry in China. In 2016, for the purpose of promoting and
generating awareness of our business, we held nearly one hundred forums and lectures in Shenzhen, Guangzhou, Hangzhou, Shenyang, Dalian, Jilin, and
Xiamen with local government, organizations, and enterprises covering cross-border listing related topics. We also aggressively grew our relationship
resources with prospective clients by establishing cooperation with various provincial and city chambers of commerce and business associations throughout
mainland China, such as the Wenzhou Chamber of Commerce in Shenyang, Zhejiang Chamber of Commerce in Shenzhen, Shenzhen Elite Chamber of
Commerce, and SME Service Platform for the Northeast China. As a result, our consulting services grew rapidly and we were able to achieve profitability
in the following years. In 2016, we entered into consulting agreements with three enterprises, which became public companies in the U.S. by being quoted
on the OTC market in 2017 under our guidance. We entered into new consulting agreements with three enterprises in fiscal year 2017, twelve in fiscal year
2018, and five in fiscal year 2019. As of the date of this annual report, all our clients are based in mainland China; however, we plan to expand our
operations throughout Asia in the near future. We have an experienced professional service team, with extensive experience in going public consulting
services, and a network of third-party service providers including accounting firms, law firms, institutional investors, and investment banks.
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We provide each client with comprehensive one-stop going public consulting services adapted to each client’s specific needs. Before becoming a
client, a prospective client must first meet a set of requirements similar to the eligibility standards of its targeted exchange or markets. If we are able to
confirm the qualifications of the prospective client after an initial due diligence investigation, we enter into a service agreement and our professional
consulting team starts to guide the client through the going public process in each of the following three phases.
Phase I
steps:
We carry out the following evaluation and planning in order to assess and prepare our client for becoming a public company through the following
we conduct a due diligence investigation and evaluation of the business and financial position of the client, including its assets and liabilities,
capital structure, management, development prospect, and business model;
we research the capital market and study the feasibility of raising capital on the market; and
we help the client integrate its resources to highlight the value of its business.
·
·
·
Phase II
Based on the result of our evaluation of the client in the pre-listing phase we devise a detailed going public plan on behalf of our client through the
following steps:
·
·
·
·
·
·
·
we offer assistance in streamlining and standardization of the client’s business model and organization structure to achieve optimization;
we help the client become familiar with regulations of the securities markets and assist it in meeting the standards for going public;
we assist the client in identifying potential employees, advisory board members, board of director members, consultants, advisors, market
experts, and any other persons that can add value to the client’s strategy and/or business;
we assist the client in identifying qualified professional firms in legal, accounting, investment banking, investor relations, and other required
service to support the client’s transition to a public company and its subsequent offerings and investor awareness campaigns;
we help review documents related to the going public process such as VIE contracts;
we work with other third-party professional parties engaged by the client to identify the most suitable path in going public for the client by
means of (i) IPO; (ii) acquisition by or merger with a public company with business operations, (iii) merger with a public company with
nominal operations other than a “special purpose acquisition company” (“SPAC”), or (iv) merger with a SPAC:
we assess to validate or modify the equity position of the client, and work with qualified investment bankers, certified public accountants, and
attorneys to set up the capital structure, stock par value, and holding percentages of its shareholders, and, where necessary, help the clients
build a new equity structure in accordance with requirements of the relevant securities regulatory commission;
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we connect the client facing funding shortages with venture capital funds, banks, or other financial institutions that can provide potential
assistance in its financing needs; and
we provide business management trainings to the client’s management to prepare them for the responsibilities and requirements that come
with being a public company.
·
·
Phase III
After the client starts its going public process through public filings, we continue to work with the client to navigate the path to become a public
company, to that effect:
·
·
·
·
·
·
·
we help the client establish an effective corporate governance system, including the board of directors, audit committee, compensation
committee, corporate governance and nominating committee, when applicable, to oversee the client’s management team;
we assist, using outside legal counsel as required, with the preparation of all internal corporate documents, including corporate resolutions,
minutes, changes and amendments to corporate documents, as required;
we assist the client in meeting public reporting requirements and the preparation of required legal and regulatory documents, including, but
not limited to disclosure statements and agreements, subscription agreements, federal, state and regulatory filings, as required;
we assist the client in preparation for investor presentations, assembling due diligence material required for interested investors or investment
banks in financing the client’s going public process;
we assist the client with key negotiations with various third parties and help the client navigate the process and procedure of listing on an
exchange;
we assist in liaising with investors for the purposes of raising capital, as required; and
we assist the clients in up-listing, debt and equity financing, as required.
We strive to complete the going public process for our clients within a pre-defined time period, and once listed in the chosen exchange, we
continue supporting our clients for the next six months to assist with transitioning from private companies to public companies. We also offer options,
through a separate engagement agreement, to extend our services after the end of our initial going public service, if a client expresses interest.
Our Fee Structure for Going Public Consulting Service
Our consulting fees are negotiated on a case-by-case basis, taking into consideration the specific services that our team provides, the nature of the
business and requirements, and our business relationship with each client.
We charge our clients a fixed consulting fee in installments determined by the projected completion phases of services rendered. Our fees range
from $1,000,000 to $2,500,000 based on the technical complexity and conditions of each individual client. In general, the first installment is due within
three days following the signing of the service agreement; the second installment is due once we complete the work for Phase I; the third and the
subsequent installments are due once we complete certain predefined milestones during the going public process. The installment payment schedule is
designed to ensure that we get compensated in a timely manner while affording our clients flexibility in securing the funds for our consulting fees.
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Occasionally, for certain clients who demonstrate outstanding growth potential, such as a 30% or more year-to-year growth of revenues for at least
the past three years, and (or) possess excellent market positions, represented by at least a 5% market share in the Chinese domestic market in the industry
the company operates, we are willing to adopt a fee structure that includes both cash payment and partial equity ownership, which usually amounts to 3 -
10% of the clients’ total equity shares. Such approach has the potential to bring us a considerable return on capital while easing the clients’ burden of
raising funds for going public. Currently, we do not hold any position in any of our clients’ equities.
Consulting Services Clients
The majority of our clients are small to medium-sized enterprises seeking growth and expansion through going public on recognized exchanges,
and $0.6 million, which is 94.0% of our total revenues, was generated from our consulting services for the fiscal year ended July 31, 2020 while 100.0% of
our total revenues of $3.1 million was generated from our consulting services for the fiscal year ended July 31, 2019. Since our inception in 2015 through
July 31, 2020, all of our former and current clients were based in mainland China. The number of our new consulting service clients was twelve, five and
two for the fiscal years ended July 31, 2018, 2019, and 2020 respectively. Due to the nature of our consulting business, which requires us to dedicate a large
amount of resources to each of our clients, we were able to generate a relatively large revenue from a small number of clients. As a result, we had two,
three, and one clients that accounted for more than 10% of our total revenues, for the fiscal years ended July 31, 2018, 2019, and 2020, respectively. As we
continue to expand and grow the number of clients, we expect the number of clients that account for more than 10% of our total revenue will decrease
accordingly.
Some of Our Representative Clients
Fortune Valley Treasures, Inc. (“FVTI”)
FVTI engages in the business of retail and wholesale of a wide spectrum of wine products in China and Hong Kong. We entered into a consulting
agreement with FVTI on May 25, 2016, and completed our services on April 19, 2018. We assisted FVTI in a reverse merger with a U.S. OTC quoted
company under the ticker “FVTI.”
Porter Holding International Inc. (“ULNV”)
ULNV operates an online to offline (O2O) business platform for consumer manufacturing enterprises utilizing cloud technology to provide
Internet-based intelligent e-commerce information services. We entered into a consulting agreement with ULNV on August 28, 2016, and completed our
services on April 14, 2018. We assisted ULNV in a reverse merger with a U.S. OTC quoted company under the ticker “ULNV.”
Addentax Group Corp. (“ATXG”)
ATXG provides garment decoration and textile printing services. It focuses on producing images on multiple surfaces, such as glass, leather,
plastic, ceramic, and textile using 3D sublimation vacuum heat transfer machine. We entered into a consulting agreement with ATXG on September 27,
2016, and completed our services on June 15, 2018. We assisted ATXG in a reverse merger with a U.S. OTC quoted company under the ticker “ATXG.”
Bangtong Technology International Limited (“LBAO”)
LBAO is a startup e-commerce company with operations in China. We entered into a consulting agreement with LBAO on December 20, 2017,
and completed our services on June 21, 2019. We assisted LBAO in a reverse merger with a U.S. OTC quoted company under the ticker “LBAO.”
Shenzhen Micro Union Gold League Electronic Commerce Technology Co., Ltd. (“MUGL”)
MUGL operates through its e-commerce platform under a community-based e-commerce retail model to create a global brand for coffee, tea, and
health preservation culture. We entered into a financial consulting service agreement with MUGL on July 8, 2019. Pursuant to the agreement, we agreed to
provide services including business consulting, capital market advising for business planning and strategy development, planning and assisting with fund
raising activities, and investor and public relations services. Currently we are in the process of preparing for a reverse merger of MUGL.
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Client A.
This company operates an agriculture park in Hubei Province in China. The park covers about 3,300 acres land dedicated to ecological agriculture
and leisure agriculture. We entered into a consulting agreement with the company on July 25, 2017. Currently we are in the process of assisting the
company completing a reverse merger with a U.S. OTC quoted company.
Client B.
This company is a full-service real estate agent located in Liaoning China and was founded in November 2016. It owns 177 directly operated
stores and has over 2000 employees, servicing realty markets in Heilongjiang, Liaoning, Hebei and Hainan provinces in North East China. We entered into
a consulting agreement with the company on December 29, 2017. Currently we are in the process of assisting the company in its going public process.
Client C.
This company is a multimedia investment and marketing company located in Northeast China, specializing in movie trailers, commercials, and
multimedia marketing. It also invests in television and film original content and manages movie theaters across China. We entered into a listing agreement
with the company on May 14, 2018, to assist with its planned IPO on Nasdaq.
Caiz Optronics Corp. (“Caiz”)
We entered into a $1 million consulting service agreement with Caiz on February 3, 2020 to act as a business advisor for Caiz to provide various
consulting services to Caiz for its initial public offering in the United States. Due to the COVID-19 outbreak and its negative impact, our consulting
services to Caiz has been delayed. As of the date of this filing, we only completed the due diligence work for Caiz and charged Caiz $42,000 for such
services performed. We estimate to start the market analysis, business planning, legal structure re-organization consulting services for Caiz in the upcoming
months.
Shenzhen Agrecoe Biotechnology Co., Ltd. (“Agrecoe”)
Agrecoe is an emerging growth biotechnology company specializing in the research, development, production and sales of microbial inoculants in
the three major fields of agriculture, environmental protection and food. We entered into a $1 million consulting service agreement with Agrecoe on June 3,
2020 to act as a business advisor to provide various consulting services to Agrecoe for its initial public offering in the United States. As of the date of this
filing, our consulting services to Agrecoe were limited to the due diligence work and preliminary planning.
Yinfu Gold Corporation (OTC: ELRE)
ELRE is an emerging growth company specializing in new-emerging application industries of Internet Technology, Artificial Intelligence (AI) and
the Internet of Things (IOT). We entered into a $0.8 million consulting service agreement with ELRE on June 9, 2020 to act as a financial advisor for
ELRE. The Agreement was signed to help ELRE for its up-listing to Nasdaq or New York Stock Exchange. As of the date of this filing, our consulting
services provided to ELRE were limited to due diligence work and preliminary planning.
Heilongjiang WKG Advertising Co., Ltd., (“WKG”)
WKG is a comprehensive media company for sports event planning, operation and promotion. We entered into a consulting service agreement
with WKG on June 17, 2020 to act as a business advisor to provide various consulting services to WKG for its initial public offering in the United States.
As of the date of this filing, our consulting services provided to WKG were limited to the due diligence work and preliminary planning.
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Costs Related to the Operation of Our Consulting Services
Our costs to provide consulting services consist of fees paid to our third-party professional providers, operational and administrative expenses,
such as rent for our office space located in Shenzhen, and compensation for our employees. From time to time, we also incur expenses for marketing and
promotional events such as organized forums, salons, and lectures.
Asia Era International Financial Consulting Center
In August 2018, our management launched Asia Era International Financial Consulting Center (“AT Consulting Center”) in Shenzhen, upon
recognizing a general lack of consulting services designed to meet the growing demand for financial consulting services arising from the rapid
accumulation of wealth of the Chinese population.
Advisors of AT Consulting Center
Our advisors are experts in their respective fields and many enjoy stellar reputations in the consulting industry. The followings are some of our
advisors:
Jun Liu - Mr. Liu is our Chairman and President of our Board. Mr. Liu earned his Doctorate degree in International Finance from Camden
University in the U.S., in 2015. He was awarded “China’s outstanding innovative entrepreneur” in 2009. He is a former expert committee member of E-
government of Chinese Academy of Science, and former Director of the Shenzhen Service Centre of the National Internet Project. Mr. Liu served as the
Head of Sales for Alibaba’s South China District from December 2000 to December 2001. He is the founder of B2B.CN, one of China’s top 10 largest e-
commerce companies. He is also the founder of Morgan Network Ltd., a B2C online shopping mall. Mr. Liu has theoretical and practical experience in
domestic and overseas capital markets, financing, mergers and acquisitions.
Jinsheng Guan - Mr. Guan is the president of Shanghai Jiusong Shanhe Equity Investment Fund Management Limited. He has a Master’s degree
in French Literature from Shanghai International Studies University, and a Master’s degree in Business Administration from Brussels University of Liberty
in Belgium. He is the founder of Shenyin Wanguo Securities Co., Ltd., and is nicknamed as “China’s Securities Godfather.”
Lingyao Li - Ms. Li is a part-time professor at the School of Economics of Peking University, as well as a special professor at Tsinghua University
and a well-known economist in China. She studied computer science at the Research Institute of University of Maryland. Since 1985, she has toured
dozens of cities in China to give speeches, and was received by the Chinese state leaders and local government leaders as recognitions for her achievements
and contributions to China.
Xiangfa Zhang - Mr. Zhang is a senior partner of Beijing Dentons (Guangzhou) Law Firm. He has in-depth knowledge of securities and capital
markets (IPO, new third board, delisted old third board and re-listing), domestic and foreign investment and financing (mergers and acquisitions, foreign
investment, cross-border investment and financing, corporate bonds and private equity funds), Hong Kong-related legal affairs (notarization of Hong Kong,
international notarization, Hong Kong litigation and arbitration, and offshore companies), real estate investment (project investment and development,
engineering construction and commercial housing sales), corporate governance and corporate legal risk management, and litigation and dispute resolution.
Programs of AT Consulting Center
AT Consulting Center is currently offering financial consulting programs structured to target three groups of clients, enterprises, families, and
individual. For enterprise clients, the program is called “Becoming Public” with a fee of $20,000; for individual clients, the program is called “Family
Wealth Management,” with fees ranging from $5,000 to $20,000; and for family clients, the program is called “Career Planning,” with fees ranging from
$5,000 to $10,000.
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Becoming Public
Becoming Public targets enterprise executive clients by offering a comprehensive and in-depth program covering various aspects of the domestic
and foreign capital markets, as well as the processes, operations, and management of taking private companies public. The program is offered over six
months, and is comprised of the following 11 sections: Capital Market Introduction, How to Become a Public Company, Business Plan Workshop,
Management, Asset-Backed Securitization, Red-chip Structures, Financial and Tax Rules, Business Valuation, Public Company Management, Market
Value of Public Companies, and Equity Financing.
Family Wealth Management
Family Wealth Management targets our family clients by offering a program designed to help families with financial planning, investment, and
management. The program is offered over six days and is comprised of the following three sections: Family Wealth Planning I, Family Investing, and
Family Wealth Planning II.
Career Planning
Career Planning targets our individual clients by offering career planning and training consultations designed to help professionals achieve a more
successful and rewarding career. The program is offered over 12 weeks and covers the following sections: Logical Thinking, How to Study Effectively,
Effective Speech, Influence Training, Dealing with Personal Emotions, Social Relations, Career Planning, Practical Application of Philosophy, Family
Relations, and The Meaning of Life.
Our Lectures and Events
We intend to develop AT Consulting Center as a platform that facilitates the marketing of our consulting business by offering private lectures and
events for entrepreneurs, business managers, and financial professionals. Since the establishment of the AT Consulting Center in August 2018, we have
held two private lectures, each with about 100 participants.
On September 14, 2018, we held the “Becoming Public” lecture. The expert speakers included Mr. Jun Liu, our Chairman and President and
previously our CEO, and president of Elite Trade Association; Mr. Ming, president of the Elite Chamber of Commerce; Mr. Jianwen Huang, committee
member of Datong World International; Mr. Xiao Liu, Chairman of board of Bausch & Lomb Glasses; Mr. Wei Xu, Chairman of the board of
Xinmingguang Holding Group; Ms. Wei Zhang, Chairman of Jingjian Investment Co.; Mr. Xiangfa Zhang, senior partner of Dentons Law Firm; and
Ms. Jingwen Li, a professional financial auditor. We invited more than 50 enterprises and dozens of financial investment institutions to participate at the
lecture, during which our expert speakers carried out evaluations and offered valuable professional guidance for the participating enterprises’ going public
projects.
On September 28, 2018, we held another lecture, at which Mr. Jun Liu, our Chairman and President and previously our CEO, and president of the
Elite Trade Association, spoke about the wisdom of life. Mr. Liu analyzed the true meaning of an “excellent life” from various aspects such as self-
improvement, career development, and fulfillment. Speaking about his own life experience, Mr. Liu provided an outlook of an “excellent life” through the
perspectives of a successful entrepreneur, and illustrated the importance of continuing learning and pursuing of excellence in life.
Investment and Financing Analysis Reporting
In July 2019, we launched an investment and financing analysis reporting business. We expect to provide SMEs with comprehensive investment
and financing analysis reports for their sustainable development, and to provide investors with objective and fair due diligence reports so that they can
accurately understand market positioning and investment opportunities of SMEs.
LGC’s Multi-channel Advertising, Event Planning and Execution, Film Production and Movie Theater Operating Business
LGC currently operates a multi-channel advertising business, event planning and execution business, film production business, and movie theater
operating business in China. Currently, LGC’s primary market is Heilongjiang and Liaoning, covering major second-tier cities in the areas such as Harbin
and Shenyang. LGC’s services are as follows:
· Multi-Channel Advertising Services. LGC provides advertising creation and production, pre-movie advertisements display, and advertising
result evaluation. Typically, LGC will sign an advertising service agreement with an advertising client to undertake the advertising campaign
of the client. The scope of service varies according to clients’ needs; it could be a full package of all the above services, or the combination of
the latter two services. The price of 15-second slots on our pre-movie advertising network currently ranges from US$3,810 to US$5,276 based
on the number of movie theaters in which the advertisement is placed, the length of the time slot purchased, and the duration of the
advertising campaign.
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·
·
Event Planning and Execution Services. LGC provides services related to planning and arrangement of events, and production of related
advertising materials. After entering an event planning and execution service agreement with a client, LGC will first decide on the suitable
form for a marketing event. If it is an offline event, LGC will choose an event venue based on the target customers and budget, design and
order exhibition models, decorate the venue, and hold the event on the designated date. If it is an online event, LGC will develop the concept
and discuss them with the client. Upon approval, LGC’s designers will design the website based on the concept, and provide background
support to make sure that the website is successfully launched and maintained. Typical marketing events include brand promotion through
elevator and in-store LED billboard advertisements and potential customer information collection by offering incentives such as static display,
performances, free movie tickets, and VR experiences. LGC’s fees for providing Event Planning and Execution Services for an event is
negotiated with the client on a case-by-case basis, depending on the scale and length of the event, the number of employees and independent
contractors involved, and the desired effect of the event.
Film Production Services. LGC Film Production Services include investment in films and TV programs and their distribution in movie
theaters or through online platforms.
· Movie Theater Operating Business. LGC invests in and operates movie theaters in China. LGC currently operates three movie theaters in
Shenyang with a total of 17 screens. The operating of our own movie theaters will further enhance both our Multi-Channel Advertising
Business and Film Production Business.
·
5G & AI Information Distribution Platform. LGC is investing in and developing a 5G & AI information distribution platform (the “Platform”)
to integrate big data of urban cities, enhance effective interaction between consumers and merchants, and boost China’s digital economy. The
Platform will feature integration of big platforms, systems, and services, as well as decision making through big data. Once completed, it will
be an intelligent information publishing platform that utilizes a unified government network as the channel, a unified cloud data center as the
carrier, and a unified information security protection feature as the safeguard. In addition, the Platform will mainly focus on facilitating
information sharing, interconnectivity, and business collaboration.
Marketing
We believe the success of our consulting business requires building mutually beneficial long-term relationships with relevant and influential
entities, and we have developed our main marketing channels based on these relationships.
Since our inception, we have cultivated and maintained cooperation with a number of city and provincial chambers of commerce and business
associations in China, including the Zhejiang Chamber of Commerce in Shenzhen and Guangdong, Shenzhen Industrial Park Association, Meixian
Chamber of Commerce in Shenzhen, Wenzhou Chamber of Commerce in Shenyang, Shenzhen Elite Chamber of Commerce, and the SME Service
Platform in Northeast China. There are no contractual relationships between us and these organizations. However, these local business organizations have
helped our marketing efforts greatly, due to the fact that: (1) they have access to the information of local enterprises and often recommend and connect us
with potential clients; (2) they help us organize going public briefings and international financial lectures with local enterprises; and (3) they are able to
utilize relationships with local government to initiate and organize government sponsored financial forums to promote and introduce our consulting
services to the local enterprises.
We also strive to maintain professional relationships with our former and prospective clients. Our former clients have benefited from our services
and oftentimes are willing and able to introduce prospective clients to us. After nearly three years operating as a consulting service provider specialized in
cross-border going public services, we have developed a database consisting of former and prospective clients, using each as a resource for business
connections and social relations.
Our employees have been working in various industries for many years, and accumulated networks of business and social relations including
personal connections, corporate associations, and governmental affiliations, which are all valuable resources through which we can potentially obtain new
clients.
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We are constantly seeking new and effective marketing channels in order to grow into an international consulting company with clients and
branches throughout Asia. To complement and facilitate our growth perspectives, in 2018, we launched AT Consulting Center, we believe, it has the great
potential in becoming instrumental in our marketing efforts for continued growth of our consulting business.
In addition to our marketing efforts described above, we also market our consulting services, through:
Social media, principally WeChat and Weibo;
Newsletters to our prospective clients; and
Business relationships with well-known corporations and web platforms with large online traffics that can direct traffic to our website
through links on their websites.
·
·
·
Competition
We face competition from a number of consulting companies providing going public consulting services such as Greenpro Capital Corp., Forward
Capital, and Dragon Victory, who recently entered going public consulting services in 2018. We believe that our relatively mature operating history of
nearly three years differentiates our company from other competitors. Our comprehensive one-stop consulting services, through which we are directly
involved in each of the three pre-defined phases of our clients’ going public process (see —Our Going Public Consulting Services), are unlike the services
provided by many of our competitors, who often act as mere initial order takers, and then outsource a majority of services to third-party providers.
Currently, many of the going public consulting providers in China operate on a relatively small scale, only with a few employees. We believe that
we are currently one of the few consulting companies capable of providing comprehensive one-stop going public services to qualified enterprises.
However, due to favorable market conditions, which may have been overheated by various Chinese government stimulus programs offered recently to
encourage and reward enterprises going public, a number of companies have entered and are entering the going public consulting business. As such, we
expect competition will become more intense, and it is possible that we will not be able to maintain the growth rate we have achieved previously.
LGC’s Multi-Channel Advertising Business and Event Planning and Execution Business compete primarily with several different groups of
competitors:
·
·
·
advertising companies that operate pre-movie advertising networks, and out-of-home digital advertising networks beyond the film sector;
in-house advertising companies of cinemas that may operate their own advertising networks; and
other advertising media companies, such as Internet, street furniture displays, billboards and public transport advertising companies, and with
traditional advertising media, such as newspapers, TV, magazines and radio, some of which may advertise near the cinemas in which we have
exclusive contract rights to operate pre-movie advertising.
LGC competes for advertising clients primarily on the basis of network size and coverage, location, price, quality of our programs, and the range
of services that we offer and our brand recognition. In the advertising market, LGC’s main competitors include Focus Media Holding Ltd., JCDecaux, and
VisionChina Media Inc., all of which operate in multiple cities in China. In addition, LGC competes with local advertising providers in each geographic
market where LGC has a presence. LGC’s major competitor in the Heilongjiang market is Harbin Zhuri Media Co., Ltd. LGC’s major competitors in the
Liaoning market are Shenyang Focus Media Co., Ltd. and Shenyang Xinliaoguang Advertisement Co., Ltd.
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LGC believes that it currently does not have any credible competitors in the pre-movie advertising market in Liaoning. Companies that offer
Multi-Channel Advertising Services in Northeast China include Harbin Zhuri Media Co., Ltd. and Jilin Xinzhan Media Co., Ltd.
Although LGC currently does not operate its Multi-Channel Advertising Business in Liaoning, LGC plans to expand it to cover major cities in
eight provinces on the eastern seaboard and in the central area of China. In the pre-movie advertising markets outside Liaoning, LGC’s potential
competitors include Shanghai Jingmao Culture Communication Co., Ltd., and Wanda Media Co., Ltd. Many competitors have a longer history than LGC in
the pre-movie advertising industry and may have a more extensive network that extends beyond the film sector and offers a more diversified portfolio. This
may make their networks more attractive to advertising clients and less reliant on a particular advertising sector. In addition, LGC may also face
competition from new entrants into the pre-movie advertising sector in the future.
LGC’s Film Production Business competes with other investors and distributors of films and TV programs, internet media and entertainment
services, as well as major TV stations.
LGC’s Movie Theater Operating Business competes with national movie circuits, regional circuits, or smaller independent exhibitors. LGC’s main
competitors include Wanda Cinemas, Dadi Cinemas, Jingyi Cinemas, and CGV Cinemas, all of which have significant presence in Shenyang, the major
area in which LGC operates its movie theaters. Although LGC currently does not operate its movie theaters outside Shenyang, LGC plans to build new
theaters in cities in Northeast China, such as Dalian, Harbin and Anshan. In those markets, LGC’s potential competitors include Wanda Cinemas, Dadi
Cinemas, Jingyi Cinemas, and CGV Cinemas. Many competitors have a longer history than LGC in the movie theater operating business. Potential
customers’ familiarity with their theater brand may make their theaters more attractive to moviegoers. In addition, LGC may also face competition from
new entrants into the movie theater operating business in the future. Further, the theatrical exhibition industry faces competition from other forms of
entertainment such as concerts, amusement parks and sports events, and from other channels for filmed entertainment, such as DVDs, online streaming, and
home video systems.
Employees
As of July 31, 2020, we had approximately 19 full-time employees and LGC had approximately 78 full-time employees. None of our employees
are subject to collective bargaining agreements governing their employment with us. We believe our employee relations are good.
Seasonality
We currently do not experience seasonality in our consulting operations.
For our media business, revenues generated by LGC’s Movie Theater Operating Business are dependent upon the timing of movie releases by
theater chain companies. The most marketable movies are usually released during the summer, the year-end holiday seasons and other holidays. Therefore,
LGC’s business experiences seasonality, with higher attendance and revenues generally occurring during the summer months and holiday seasons.
Legal Proceedings
Except for the arbitration proceeding and litigation disclosed below, we are not currently a party to any legal or arbitration proceeding the outcome
of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business,
operating results, cash flows, or financial condition.
On November 4, 2019, Shenzhen Court of International Arbitration notified Qianhai regarding the request for arbitration initiated by Huale Group
Co., Limited (“Huale”) related to a Going Public Consulting Service Agreement dated March 2, 2017, by and between Qianhai and Huale. Huale claimed
that Qianhai failed to refund a deposit of $300,000 after the parties terminated the agreement. Huale asserted its claim at $300,000 (RMB2,073,750), plus
any related arbitration fees. On November 14, 2019, Qianhai submitted a counterclaim request, claiming that the $300,000 shall not be refunded since it
constituted service fees for consulting services provided to Huale by Qianhai pursuant to the Going Public Consulting Service Agreement. Qianhai asserted
its counterclaim for legal fees of RMB88,000, plus any related arbitration fees and travel, translation, and other expenses related to this arbitration
proceeding. Qianhai intends to vigorously defend itself and pursue its counterclaim in this proceeding. On September 27, 2020, we received notice of the
arbitration award dated September 25, 2020 issued by the Shenzhen Court of International Arbitration that Huale won the arbitration case and that Qianhai
is obligated to pay back to Huale a deposit of $250,000 and shall bear the arbitration fees. Based on the court ruling, we accrued legal liabilities of
$261,724 as of and for the year ended July 31, 2020.
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On May 14, 2020, Boustead Securities, LLC (“Boustead”) filed its original complaint in the United States District Court for the Southern District
of New York (CV-03749) against Leaping Group Co., Ltd. and us. The case arises from a consulting agreement between us and Boustead, wherein
Boustead claims that it is entitled to fees in connection with our cancellation of an $1,851,000 outstanding debt owed by Leaping Group and issuance of
9,940,002 ordinary shares to Leaping Group in exchange for a 51.2% interest in Leaping Group. Boustead claims that we breached that consulting
agreement and is entitled to fees in connection with the Company acquiring control of Leaping Group. Boustead’s complaint alleges four causes of action
against us including breach of contract; breach of the implied covenant of good faith and fair dealing; tortious interference with business relationships and
quantum meruit.
On October 6, 2020, we filed a motion to dismiss Boustead’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). On
October 9, 2020, the United States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint
by November 10, 2020. Boustead opted to amend its complaint and filed the amended complaint on November 10, 2020. Boustead’s amended complaint
asserts the same four causes of action against ATIF and Leaping Group as its original complaint. The Company filed another motion to dismiss Boustead’s
amended complaint on December 8, 2020. As such, the Boustead litigation is currently in the pleadings stage. Our management believes it is premature to
assess and predict the outcome of this pending litigation.
Tax
Qianhai, WFOE, LMG and LGC WFOE, as PRC entities, are subject to enterprise income tax (“EIT”) according to applicable PRC tax rules and
regulations.
PRC enterprises are required to prepay the EIT on a monthly or quarterly basis and to file provisional EIT returns with the tax authorities within
15 days of the end of each quarter based on actual monthly or quarterly profits. Enterprises that have difficulty in paying monthly or quarterly tax based on
actual monthly or quarterly profits may make payments based on the monthly or quarterly average taxable income in the preceding calendar year, or by any
other methods approved by the relevant tax authorities. Qianhai, WFOE, LMG and LGC WFOE have filed all quarterly EIT returns based on actual
quarterly profits since inception.
·
·
ATIF HK, a Hong Kong entity, has not generated revenues as July 31, 2020 but it will be subject to 16.5% tax rate according to Hong Kong
tax rules and regulations, if it starts to generate revenue in the future.
Yuezhong Media HK, a Hong Kong entity, is subject to a 16.5% tax rate according to Hong Kong tax rules and regulations for any revenues it
may generate.
Facilities/Property
Please refer to “Item 4. Information on the Company—D. Property, Plants and Equipment.”
47
Intellectual Property
We have received the approval for the following trademark registrations:
Trademark
ATIF
ATIF
(cid:0)(cid:0)(cid:0)(cid:0)
(cid:0)(cid:0)(cid:0)(cid:0)
CNNM
INTERNATIONAL SCHOOL
Jurisdiction
China
Hong Kong
China
Hong Kong
Hong Kong
Category
36
36
36
35;36;41
35; 38
Effective Date
May 7, 2019
January 31, 2019
May 14, 2017
November 26, 2019
August 29, 2018
Expiration Date
May 6, 2029
August 28, 2028
May 13, 2027
April 11, 2029
August 28, 2028
OF FINANCE
Hong Kong
41
August 29, 2018
August 28, 2028
In addition, we are in the process of registering the “IPOEX” trademark in China, the United Kingdom, the European Union, Singapore and
Korea.
LGC received a certificate of registration for its design mark and is in the process of registering the “Leaping Media Group” trademark in China.
LGC owns the copyright of its logo, the web TV series “Meet Myself,” and the film “The Master-Hand,” and the internet domain names “yzcmmedia.cn”
and “yzcmmedia.com.”
We also own six domain names: asiaerachina.com, chinacnnm.com, atifchina.com, atifus.com, and atifcn.com.
Below are images of our trademarks:
PRC Regulations
We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative
body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its
authority, including the SAIC, and their respective local offices, and Ministry of Housing & Urban-Rural Development (the “MHURD”) and their
respective local offices. This section summarizes the principal PRC regulations applicable to our business.
PRC Laws and Regulations relating to Foreign Investment
Investment in the PRC by foreign investors and foreign-invested enterprises shall comply with the Catalogue for the Guidance of Foreign
Investment Industries (the “Catalogue”) (2017 Revision), which was last amended and issued by MOFCOM and NDRC on June 28, 2017, and became
effective since July 28, 2017, and the Special Management Measures for Foreign Investment Access (2019 version), or the Negative List, which came into
effect on June 30, 2019. The Catalogue and the Negative List contains specific provisions guiding market access for foreign capital and stipulates in detail
the industry sectors grouped under the categories of encouraged industries, restricted industries and prohibited industries. Any industry not listed in the
Negative List is a permitted industry unless otherwise prohibited or restricted by other PRC laws or regulations. The management consulting industry falls
within the permitted category in accordance with the Catalogue and the Negative List.
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PRC Laws and Regulations relating to Wholly Foreign-owned Enterprises
The establishment, operation and management of corporate entities in China are governed by the PRC Company Law, which was promulgated by
the Standing Committee of the National People’s Congress on December 29, 1993 and became effective on July 1, 1994. It was last amended on
December 28, 2013 and the amendments became effective on March 1, 2014. Under the PRC Company Law, companies are generally classified into two
categories, namely, limited liability companies and joint stock limited companies. The PRC Company Law also applies to limited liability companies and
joint stock limited companies with foreign investors. Where there are otherwise different provisions in any law on foreign investment, such provisions shall
prevail.
The Law of the PRC on Wholly Foreign-invested Enterprises was promulgated and became effective on April 12, 1986, and was last amended and
became effective on October 1, 2016. The Implementing Regulations of the PRC Law on Foreign-invested Enterprises were promulgated by the State
Council on October 28, 1990. They were last amended on February 19, 2014, and the amendments became effective on March 1, 2014. The Provisional
Measures on Administration of Filing for Establishment and Change of Foreign Investment Enterprises were promulgated by MOFCOM and became
effective on October 8, 2016, and were last amended on July 20, 2017 with immediate effect. The above-mentioned laws form the legal framework for the
PRC Government to regulate WFOEs. These laws and regulations govern the establishment, modification, including changes to registered capital,
shareholders, corporate form, merger and split, dissolution and termination of WFOEs. On March 15, 2019, the National People’s Congress approved the
Foreign Investment Law of the PRC, or the “FIL,” which will come into effect on January 1, 2020, repealing simultaneously the Law of the PRC on Sino-
foreign Equity Joint Ventures, the Law of the PRC on Wholly Foreign-owned Enterprises, and the Law of the PRC on Sino-foreign Cooperative Joint
Ventures, together with their implementation rules and ancillary regulations.
According to the above regulations, a wholly foreign-owned enterprise should get approval by MOFCOM before its establishment and operation.
WFOE is a wholly foreign-owned enterprise since established, and has obtained the approval of the local administration of MOFCOM. Its establishment
and operation are in compliance with the above-mentioned laws. Qianhai is a PRC domestic company, and it is not subject to the record-filling or
examination applicable to FIE.
PRC Laws and Regulations Relating to Management Consulting Industry
Law of the People’s Republic of China on Promotion of Small and Medium-sized Enterprises (the “SME Promotion Law”) was promulgated by
the standing committee of the National People’s Congress on June 29, 2002, amended on September 1, 2017, and became effective on January 1, 2018.
According to the SME Promotion Law, the government encourage all kinds of services organization to provide services including training and counselling
on entrepreneurship, intellectual property protection, management consulting, information consulting, credit service, marketing, development of projects,
investment and financing, accounting and taxation, equity transaction, technology support, talent introduction, foreign cooperation, exhibition, and legal
consulting.
Pursuant to the Opinions of the State Council on Further Promoting The Development of Small And Medium-sized Enterprises (the “Opinions”),
which were promulgated by the State Council on September 19, 2009, the government supports organizations of management consulting for SMEs and
activities of management consulting to guide SMEs to use external sources to improve their level on management.
According to the SME Promotion Law and the Opinions, our business is encouraged by the government and is in compliance with relevant
regulations in PRC. There are no further regulations on management consulting industry in the PRC presently. However, we cannot assure that there will
not be more regulations on the management consulting industry to be issued by PRC government in the future that could affect our business.
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Regulation on Intellectual Property Rights
Regulations on trademarks
The Trademark Law of the People’s Republic of China was adopted at the 24th meeting of the Standing Committee of the Fifth National People’s
Congress on August 23, 1982. Three amendments were made on February 22, 1993, October 27, 2001, and August 30, 2013, respectively. The last
amendment was implemented on May 1, 2014. The regulations on the implementation of the trademark law of the People’s Republic of China were
promulgated by the State Council of the People’s Republic of China on August 3, 2002, and took effect on September 15, 2002. It was revised on April 29,
2014 and became effective as of May 1, 2014. According to the trademark law and the implementing regulations, a trademark which has been approved
and registered by the trademark office is a registered trademark, including a trademark of goods, services, collective trademark, and certification trademark.
The trademark registrant shall enjoy the exclusive right to use the trademark and shall be protected by law. The trademark law also specifies the scope of
registered trademarks, procedures for registration of trademarks, and the rights and obligations of trademark owners. For a detailed description of our
trademark registrations, please refer to “—Intellectual Property.”
Regulations on domain names
The Ministry of Industry and Information Technology of the PRC, or the MIIT, promulgated the Measures on Administration of Internet Domain
Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017, and replaced the Administrative Measures on China
Internet Domain Name promulgated by the MIIT on November 5, 2004. According to the Domain Name Measures, the MIIT is in charge of the
administration of PRC internet domain names. The domain name registration follows a first-to-file principle. Applicants for registration of domain names
shall provide true, accurate, and complete information of their identities to domain name registration service institutions. The applicant will become the
holder of such domain names upon completion of the registration procedure. As of July 31, 2020, we had completed registration of six domain names,
“asiaerachina.com,” “chinacnnm.com,” “atifchina.com,” “atifus.com,” “atifcn.com,” and “ipoex.com,” in the PRC and became the legal holder of such
domain names.
PRC Laws and Regulations Relating to Merger and Acquisition
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC
domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC, prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents
and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A
Rules remains unclear.
Our PRC counsel has advised us based on their understanding of the current PRC laws, rules, and regulations that the CSRC’s approval should not
be required for the listing and trading of our ordinary shares on the NASDAQ in the context of our IPO, given that: (i) we established our PRC subsidiary,
WFOE, by means of direct investment rather than by merger with or acquisition of PRC domestic companies; and (ii) no explicit provision in the M&A
Rules classifies the respective contractual arrangements between WFOE, Qianhai, and its shareholders as a type of acquisition transaction falling under the
M&A Rules.
However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and
the CSRC’s opinions summarized above are subject to any new laws, rules, and regulations or detailed implementations and interpretations in any form
relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do.
If the CSRC or any other PRC regulatory agencies subsequently determines that we need to obtain the CSRC’s approval for our IPO or if the CSRC or any
other PRC government agencies promulgates any interpretation or implements rules that would require us to obtain CSRC or other governmental approvals
for our IPO, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. Sanctions may include fines and penalties on our
operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from our IPO into the
PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation, and prospects, as well as the trading price of our ordinary shares. In addition, if
the CSRC or other PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our IPO, we may be
unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative
publicity regarding such approval requirement could have a material adverse effect on the trading price of ordinary shares.
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PRC Laws and Regulations Relating to Foreign Exchange
General administration of foreign exchange
The principal regulation governing foreign currency exchange in the PRC is the Administrative Regulations of the PRC on Foreign Exchange (the
“Foreign Exchange Regulations”), which were promulgated on January 29, 1996, became effective on April 1, 1996, and were last amended on August 5,
2008. Under these rules, RMB is generally freely convertible for payments of current account items, such as trade- and service-related foreign exchange
transactions and dividend payments, but not freely convertible for capital account items, such as capital transfer, direct investment, investment in securities,
derivative products, or loans unless prior approval by competent authorities for the administration of foreign exchange is obtained. Under the Foreign
Exchange Regulations, foreign-invested enterprises in the PRC may purchase foreign exchange without the approval of SAFE to pay dividends by
providing certain evidentiary documents, including board resolutions, tax certificates, or for trade- and services-related foreign exchange transactions, by
providing commercial documents evidencing such transactions.
Circular No. 75, Circular No. 37, and Circular No. 13
Circular 37 was released by SAFE on July 4, 2014, and abolished Circular 75 which had been in effect since November 1, 2005. Pursuant to
Circular 37, a PRC resident should apply to SAFE for foreign exchange registration of overseas investments before it makes any capital contribution to a
special purpose vehicle, or SPV, using his or her legitimate domestic or offshore assets or interests. SPVs are offshore enterprises directly established or
indirectly controlled by domestic residents for the purpose of investment and financing by utilizing domestic or offshore assets or interests they legally
hold. Following any significant change in a registered offshore SPV, such as capital increase, reduction, equity transfer or swap, consolidation or division
involving domestic resident individuals, the domestic individuals shall amend the registration with SAFE. Where an SPV intends to repatriate funds raised
after completion of offshore financing to the PRC, it shall comply with relevant PRC regulations on foreign investment and foreign debt management. A
foreign-invested enterprise established through return investment shall complete relevant foreign exchange registration formalities in accordance with the
prevailing foreign exchange administration regulations on foreign direct investment and truthfully disclose information on the actual controller of its
shareholders.
If any shareholder who is a PRC resident (as determined by Circular 37) holds any interest in an offshore SPV and fails to fulfil the required
foreign exchange registration with the local SAFE branches, the PRC subsidiaries of that offshore SPV may be prohibited from distributing their profits
and dividends to their offshore parent company or from carrying out other subsequent cross-border foreign exchange activities. The offshore SPV may also
be restricted in its ability to contribute additional capital to its PRC subsidiaries. Where a domestic resident fails to complete relevant foreign exchange
registration as required, fails to truthfully disclose information on the actual controller of the enterprise involved in the return investment or otherwise
makes false statements, the foreign exchange control authority may order them to take remedial actions, issue a warning, and impose a fine of less than
RMB300,000 (approximately $43,000) on an institution or less than RMB50,000 (approximately $7,300) on an individual.
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Circular 13 was issued by SAFE on February 13, 2015, and became effective on June 1, 2015. Pursuant to Circular 13, a domestic resident who
makes a capital contribution to an SPV using his or her legitimate domestic or offshore assets or interests is no longer required to apply to SAFE for foreign
exchange registration of his or her overseas investments. Instead, he or she shall register with a bank in the place where the assets or interests of the
domestic enterprise in which he or she has interests are located if the domestic resident individually seeks to make a capital contribution to the SPV using
his or her legitimate domestic assets or interests; or he or she shall register with a local bank at his or her permanent residence if the domestic resident
individually seeks to make a capital contribution to the SPV using his or her legitimate offshore assets or interests.
As of the date of this annual report, our Beneficial Owners have not completed registrations in accordance with Circular 37, they are currently
working on their registrations in the local Administration of Exchange Control. The failure of our Beneficial Owners to comply with the registration
procedures may subject each of our Beneficial Owners to fines of less than RMB50,000 (approximately $7,300). If the registration formalities cannot be
processed retrospectively, then the repatriation of the financing funds, profits, or any other interests of our shareholders obtained through special purpose
vehicles, for use in China, would be prohibited. As a result, any cross-border capital flows between our PRC subsidiary and its offshore parent company,
including dividend distributions and capital contributions, would be illegal
Circular 19 and Circular 16
Circular 19 was promulgated by SAFE on March 30, 2015, and became effective on June 1, 2015. According to Circular 19, foreign exchange
capital of foreign-invested enterprises shall be granted the benefits of Discretional Foreign Exchange Settlement (“Discretional Foreign Exchange
Settlement”). With Discretional Foreign Exchange Settlement, foreign exchange capital in the capital account of a foreign-invested enterprise for which the
rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau, or for which book-entry registration of monetary
contribution has been completed by the bank, can be settled at the bank based on the actual operational needs of the foreign-invested enterprise. The
allowed Discretional Foreign Exchange Settlement percentage of the foreign exchange capital of a foreign-invested enterprise has been temporarily set to
be 100%. The RMB converted from the foreign exchange capital will be kept in a designated account and if a foreign-invested enterprise needs to make
any further payment from such account, it will still need to provide supporting documents and to complete the review process with its bank.
Furthermore, Circular 19 stipulates that foreign-invested enterprises shall make bona fide use of their capital for their own needs within their
business scopes. The capital of a foreign-invested enterprise and the RMB if obtained from foreign exchange settlement shall not be used for the following
purposes
·
·
·
·
directly or indirectly used for expenses beyond its business scope or prohibited by relevant laws or regulations;
directly or indirectly used for investment in securities unless otherwise provided by relevant laws or regulations;
directly or indirectly used for entrusted loan in RMB (unless within its permitted scope of business), repayment of inter-company loans
(including advances by a third party) or repayment of bank loans in RMB that have been sub-lent to a third party; and
directly or indirectly used for expenses related to the purchase of real estate that is not for self-use (except for foreign-invested real estate
enterprises).
Circular 16 was issued by SAFE on June 9, 2016. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts
from foreign currency to RMB on a self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange capital items
(including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis applicable to all enterprises registered in the PRC.
Circular 16 reiterates the principle that an enterprise’s RMB converted from foreign currency-denominated capital may not be directly or indirectly used for
purposes beyond its business scope or purposes prohibited by PRC laws or regulations, and such converted RMB shall not be provided as loans to non-
affiliated entities.
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Circulars 16 and 19 address foreign direct investments into the PRC, and stipulate the procedures applicable to foreign exchange settlement. As
we do not plan to transfer proceeds raised in our IPO to our WFOE or VIE in the PRC, the proceeds raised in our IPO would not be subject to Circular 19
or Circular 16. However, if and when circumstances require funds to be transferred to our WFOE or VIE in the PRC from our offshore entities, then any
such transfer would be subject to Circulars 16 and 19.
PRC Laws and Regulations Relating to Taxation
Enterprise Income Tax
The EIT Law was promulgated by the Standing Committee of the National People’s Congress on March 16, 2007, and became effective on
January 1, 2008, and was later amended on February 24, 2017. The Implementation Rules of the EIT Law (the “Implementation Rules”) were promulgated
by the State Council on December 6, 2007, and became effective on January 1, 2008. According to the EIT Law and the Implementation Rules, enterprises
are divided into resident enterprises and non-resident enterprises. Resident enterprises shall pay enterprise income tax on their incomes obtained in and
outside the PRC at the rate of 25%. Non-resident enterprises setting up institutions in the PRC shall pay enterprise income tax on the incomes obtained by
such institutions in and outside the PRC at the rate of 25%. Non-resident enterprises with no institutions in the PRC, and non-resident enterprises whose
incomes having no substantial connection with their institutions in the PRC, shall pay enterprise income tax on their incomes obtained in the PRC at a
reduced rate of 10%.
The Arrangement between the PRC and Hong Kong Special Administrative Region for the Avoidance of Double Taxation the Prevention of Fiscal
Evasion with respect to Taxes on Income (the “Arrangement”) was promulgated by the State Administration of Taxation (“SAT”) on August 21, 2006, and
came into effect on December 8, 2006. According to the Arrangement, a company incorporated in Hong Kong will be subject to withholding tax at the
lower rate of 5% on dividends it receives from a company incorporated in the PRC if it holds a 25% interest or more in the PRC company. The Notice on
the Understanding and Identification of the Beneficial Owners in the Tax Treaty (the “Notice”) was promulgated by SAT and became effective on
October 27, 2009. According to the Notice, a beneficial ownership analysis will be used based on a substance-over-form principle to determine whether or
not to grant tax treaty benefits.
WFOE and Qianhai are resident enterprises and pay EIT tax at the rate of 25% in PRC. It is more likely than not that we and our offshore
subsidiary would be treated as a non-resident enterprise for PRC tax purposes. Please see Section of “Item 10. Additional Information—Taxation—
People’s Republic of China Taxation.”
Value-added Tax
The Provisional Regulations on Value-Added Tax of the PRC (the “VAT Regulations”) were promulgated by the State Council on December 13,
1993, and took effect on January 1, 1994, which were last amended on November 19, 2017. The Rules for the Implementation of the Provisional
Regulations on Value Added Tax of the PRC (the “Rules”) were promulgated by the Ministry of Finance (“MOF”) on December 25, 1993, and were last
amended on October 28, 2011. Pursuant to the VAT Regulations and the Rules, entities or individuals in the PRC engaged in the sale of goods, the
provision of processing, repairs, and replacement services and the importation of goods are required to pay VAT, on the value added during the course of
the sale of goods or provision of services. Unless otherwise specified, the applicable VAT rate for the sale or importation of goods and provision of
processing, repair, and replacing services is 17%.
The SAT and the MOF jointly promulgated the Circular on Comprehensively Promoting the Pilot Program of the Collection of Valued-added Tax
in lieu of Business Tax on March 23, 2016, which became effective on May 1, 2016. Pursuant to this new circular, entities and individuals shall pay VAT at
a rate of 6% for any taxable activities unless otherwise stipulated.
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According to the above-regulations, our PRC subsidiary and consolidated affiliated entities are generally subject to a 6% VAT rate.
Dividend Withholding Tax
The Enterprise Income Tax Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared
to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business
but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources
within the PRC.
Pursuant to an Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes (“Double Tax Avoidance Arrangement”) and other applicable PRC laws,
if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such
Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from
a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend
Provisions in Tax Treaties (the “SAT Circular 81”) issued on February 20, 2009, by SAT, if the relevant PRC tax authorities determine, in their discretion,
that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may
adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in Tax Treaties, which was issued
on February 3, 2018, by the SAT and took effect on April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax
treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is
obligated to pay more than 50% of his or her income in 12 months to residents in a third country or region, whether the business operated by the applicant
constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on
relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the
specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant
documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’
Enjoyment of the Treatment under Tax Agreements.
We have not commenced the application process for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is
no assurance that we will be granted such a Hong Kong tax resident certificate. We also have not filed required forms or materials with the relevant PRC
tax authorities to prove that we should enjoy the 5% PRC withholding tax rate.
PRC Laws and Regulations Relating to Employment and Social Welfare
Labor Law of the PRC
Pursuant to the Labor Law of the PRC, which was promulgated by the Standing Committee of the NPC on July 5, 1994, with an effective date of
January 1, 1995, and was last amended on August 27, 2009, and the Labor Contract Law of the PRC, which was promulgated on June 29, 2007, became
effective on January 1, 2008, and was last amended on December 28, 2012, with the amendments coming into effect on July 1, 2013, enterprises and
institutions shall ensure the safety and hygiene of a workplace, strictly comply with applicable rules and standards on workplace safety and hygiene in
China, and educate employees on such rules and standards. Furthermore, employers and employees shall enter into written employment contracts to
establish their employment relationships. Employers are required to inform their employees about their job responsibilities, working conditions,
occupational hazards, remuneration, and other matters with which the employees may be concerned. Employers shall pay remuneration to employees on
time and in full accordance with the commitments set forth in their employment contracts and with the relevant PRC laws and regulations. Qianhai has
entered into written employment contracts with all its employees and performed its obligations required under the relevant PRC laws and regulations.
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Social Insurance and Housing Fund
Pursuant to the Social Insurance Law of the PRC, which was promulgated by the Standing Committee of the NPC on October 28, 2010, and
became effective on July 1, 2011, employers in the PRC shall provide their employees with welfare schemes covering basic pension insurance, basic
medical insurance, unemployment insurance, maternity insurance, and occupational injury insurance. Qianhai did not deposit social insurance fees for
employees in full for the period from its establishment to September 2018. However, Qianhai has deposited the social insurance fees in full for all the
employees in compliance with the relevant regulations since October 2018. Shenzhen social insurance fund administration has issued a statement showing
that there is no significant violations of relevant laws and regulations by Qianhai since its establishment.
In accordance with the Regulations on Management of Housing Provident Fund, which were promulgated by the State Council on April 3, 1999,
and last amended on March 24, 2002, employers must register at the designated administrative centers and open bank accounts for depositing employees’
housing funds. Employer and employee are also required to pay and deposit housing funds, with an amount no less than 5% of the monthly average salary
of the employee in the preceding year in full and on time.
Qianhai has registered at the designated administrative centers and opened bank accounts for depositing employees’ housing funds; however,
Qianhai has not deposited employees’ housing funds in full according the Regulations of HPF. There is a risk of administrative penalty imposed by the
designated administrative center.
Ronghua Liu and Qiang Chen, shareholders of Qianhai, have signed a consent to undertake and guarantee to fully reimburse and compensate us
for any possible losses due to its non-compliance of the rules and regulations governing employees’ social insurance and housing funds, in case we are
required by relevant government authorities to make up for any outstanding payments and penalties for employees’ social insurance and housing funds in
the future.
PRC Regulations Related to LGC
LGC operate its business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative
body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its
authority. This section summarizes the principal PRC regulations applicable to LGC’s business.
Regulation on Advertising Services
The Standing Committee of the National People’s Congress, enacted the Advertising Law of the People’s Republic of China, or the Advertising
Law, on October 27, 1994, and revised it on October 26, 2018. As the most important law aimed at regulating the advertising service industry, the
Advertising Law sets the code of conduct for enterprise providing advertising services in China. The Advertising Law stipulates in detail the content, forms
for distribution, productions and areas prohibited from advertising, as well as penalties and liabilities for violating the Advertising Law.
Regulation on Foreign Direct Investment in Advertising Companies
According to the Provisions on Guiding the Orientation of Foreign Investment (Order No. 346 of the State Council), which were promulgated by
the State Council of the PRC on February 11, 2002, and came into effect on April 1, 2002, projects with foreign investment are divided into four categories,
namely, encouraged, permitted, restricted and prohibited. The encouraged, permitted, restricted and prohibited projects with foreign investment are listed in
the Catalogue of Industries for Guiding Foreign Investment (2017 version), or the Catalogue, which was jointly amended by the NDRC and the MOFCOM,
on June 28, 2017, and came into effect on July 28, 2017, and the 2019 Negative List, which came into effect on July 30, 2019. According to the Catalogue
and the 2019 Negative List, advertising service is a permitted industry. Since foreign investors have been permitted to directly own 100% interest in
advertising companies in China, LGC would not be subject to access restrictions for operations in advertising industry as required by the Chinese
government. LGC is not required to apply to the MOFCOM for special approval for our operations. LGC is permitted to acquire the equity interests of its
VIE under the rules allowing for whole foreign ownership.
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Regulations on Business License for Advertising Companies
The State Council promulgated the Regulations on Control of Advertisement, on October 26, 1987, according to which a company that wishes to
engage in advertising activities must obtain from the State Administration for Industry and Commerce, or the SAIC, or its local branches, a business license
which specifically includes advertising within its scope. Companies conducting advertising activities without such a license may be subject to penalties,
including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid for
the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. LGC does not expect to
encounter any difficulties in maintaining its business licenses. LMG, LGC’s VIE, has obtained such a business license from the local branches of the SAIC
as required by existing PRC regulations.
Regulations on Advertising Content
The Advertising Law sets forth certain content requirements for advertisements in China, which include prohibitions on, among other things,
misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are also prohibited. The dissemination of
tobacco advertisements via media is also prohibited as well as the display of tobacco advertisements in any waiting lounge, theater, cinema, conference
hall, stadium or other public area. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented
products or processes, pharmaceuticals, medical instruments, agrochemical, foodstuff, alcohol and cosmetics. In addition, all advertisements relating to
pharmaceuticals, medical instruments, agrochemical and veterinary pharmaceuticals advertised through radio, film, television, newspaper, magazine, out-
of-home and other forms of media, together with any other advertisements which are subject to censorship by administrative authorities according to
relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination.
Regulations on Production and Operation of Radio/Television Programs
On July 19, 2004, the State Administration of Press, Publication, Radio, Film, and Television (the “SAPPRFT”) promulgated the Administrative
Measures on the Production and Operation of Radio and Television Programs, or the “Radio and Television Program Production Measures,” which came
into effect on August 20, 2004 and were amended on August 28, 2015. The Radio and Television Program Production Measures provide that any business
that produces or operates radio or television programs must obtain a Broadcasting and Television Program Production and Operation Permit. Entities
holding such permits shall conduct their business within the permitted scope as provided in their permits.
On July 6, 2012, the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT, and the Cyberspace Administration
of China, or the CAC, promulgated the Notice on Further Strengthening on the Administration of Internet Audio-video Programs including Web TV
Series and Micro Movies. On January 12, 2014, the SAPPRFT promulgated the Supplementary Notice on Further Improving the Administration of Internet
Audio-video Programs including Web TV Series and Micro Movies, or the “Supplementary Notice,” providing that the entities engaged in producing
internet audio-video programs, including web TV series and micro movies, shall legally obtain the Broadcasting and Television Program Production and
Operation Permit.
Each of LMG and Yuezhong (Beijing) Film Co., Ltd. has obtained a Broadcasting and Television Program Production and Operation Permit for
their respective businesses.
Regulations on Internet Audio-video Programs
According to the Notice on Further Strengthening the Planning, Construction and Management of Internet Original Audio-video Programs issued
by the SAPPRFT, Internet movies (micro movies) with an investment of more than RMB one million (approximately US$145,560.41) are key Internet
original audio-video programs. For a key internet audio-video program, Internet audio-video service entities shall record its name, production agency
subject matter, and duration, a content brief of no less than 1500 words, an explanation of its ideological connotation of no less than 300 words, and other
relevant information at the stage of creation planning, and file the records through the recording system for web series, micro movies, and other Internet
audio-video programs.
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According to the Notice on Further Strengthening the Management of Internet Audio-video Programs including Web Series and Micro Movies as
well as the Supplementary Notice on Further Perfecting the Management of Internet Audio-video Programs including Web Series and Micro Movies, prior
to publishing Internet audio-video programs, including web series and micro movies, Internet audio-video service entities shall organize examiners to
review such programs. After this self-examination is completed, the Internet audio-video service entities shall also submit information of their self-
examined programs to provincial branches of the SAPPRFT. The programs shall not be published online until the processes of information filing have been
completed and the filing numbers have been labeled on the programs by the Internet audio-video service entities.
As of the date of this annual report, LGC have not completed the above-mentioned filing procedures as required by the regulations for our original
Internet film “The Master-Hand.” See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in the PRC. As of the date of this
report, we have not completed the necessary filing procedures for our original Internet film “The Master-Hand,” and, as a result, the planned release of the
film may be delayed or we may even be ordered to cancel the release, which could materially and adversely affect our business and our financial condition.
Regulations on Foreign Investment in Film Production Companies
According to the 2019 Negative List, which came into effect on July 30, 2019, foreign investors are prohibited from investing in film production
or distribution companies, cinema line companies and film importing business. As for construction and operation of movie theaters, the controlling
shareholder shall be Chinese citizens or institutions.
In view of these restrictions on foreign direct investment in film production companies under which LGC’s business may fall, including
radio/television programs production, film production and operation business, LGC has established various domestic consolidated affiliated entities to
engage in film production business. LMG, LGC’s VIE, holds the Broadcasting and Television Program Production and Operation Permit and is responsible
for our Film Production Business; LGC WFOE is not involved in film production, although it provides management and consulting services to LMG and
receives service fees from LMG through contractual arrangements. Due to the lack of interpretative guidance from the relevant PRC governmental
authorities, there are uncertainties regarding whether PRC governmental authorities would consider our corporate structure and contractual arrangements to
constitute foreign ownership of a film production business. See “Item 3. Key Information — D. Risk Factors —Risks Related to LGC’s Business —There
are uncertainties under the Foreign Investment Law relating to the status of businesses in China controlled by foreign invested projects primarily through
contractual arrangements, such as our business.” In order to comply with PRC regulatory requirements, LGC operates a substantial portion of its business
through its consolidated affiliated entities, which LGC has contractual relationships with but LGC does not have actual ownership interests in. If LGC’s
current ownership structure is found to be in violation of current or future PRC laws, rules, or regulations regarding the legality of foreign investment in
film production or distribution business and other types of businesses on which foreign investment is restricted or prohibited, LGC could be subject to
severe penalties.
Regulations on Film Production
On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Film Industry Promotion Law of the People’s
Republic of China (the “Film Promotion Law”), which took effect on March 1, 2017. On April 3, 2004, the SAPPRFT promulgated the Provisions on the
Archival Filing of Film Scripts (Abstracts) and the Administration of Films, or the “Filing Provisions,” which took effect on June 22, 2006, and was
amended on December 11, 2017. The Film Promotion Law and Filing Provisions provide that any person or any organization that plans to make a film
shall, prior to the production of the film is commenced, file an outline of the film script, with the SAPPRFT or its local branches in the PRC. If the film
involves a major theme or a theme relating to national security, diplomacy, nationality, religion, or military affairs, the film script shall be submitted for
review according to relevant regulations of the PRC. Where the outline of the film script conforms to the required standards, the SAPPRFT or its local
branches shall make an announcement on the basic information about the film to be made, and issue a filing certificate within the time limit prescribed in
the Administrative License Law. The producer of the film is not qualified to apply for a Film Release License until it obtains a filing certificate. Only when
the Film Release License has been issued could the film be distributed and projected in movie theaters.
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Regulations on Movie Censorship
Pursuant to the Film Promotion Law, a legal person or any other organization shall submit a film completed by it to the film department of the
State Council or the film department of the people’s government of the province, autonomous region, or municipality directly under the Chinese central
government for censorship. The film department shall make a censorship decision within 30 days of acceptance of the application for censorship. If the film
conforms to the provisions of the Film Promotion Law, the film department shall permit the public release of the film, grant a permit for public release of
the film, and issue an announcement of it; otherwise, it shall not permit the public release of the film, and notify in writing the applicant of the decision and
the reasons.
According to the Film Promotion Law, a film shall not include: (1) any content violating the basic principles as established in the Constitution or
instigating resistance to or disruption of the implementation of the Constitution, laws, and administrative regulations; (2) any content jeopardizing China’s
unity, sovereign, or territorial integrity, leaking national secrets, endangering national security, damaging China’s dignity, honor, and interests, or
advocating terrorism or extremism; (3) any content defaming fine national cultural traditions, instigating ethnic hate or discrimination, infringing upon
ethnic customs and habits, distorting national history or national historical figures, hurting national sentiments, or undermining national solidarity; (4) any
content instigating the disruption of the religious policies of the state or propagating cults or superstition; (5) any content jeopardizing social ethics,
disrupting the public order, undermining social stability, advocating obscenity, gambling, or drug abuse, highlighting violence or terror, instigating crimes
or teaching methods for committing crimes; (6) any content infringing upon the lawful rights and interests of minors or damaging the physical and mental
health of minors; (7) any content insulting or defaming others, disseminating others’ privacy, or infringing upon the lawful rights and interests of others;
and (8) any other content as prohibited by the laws and administrative regulations.
Regulations on Film Projection
According to the Film Promotion Law and the Regulations on the Administration of Films which took effective on February 1, 2002, upon the
approval of the film authority under the local people's government at the county level and the issuance of the “License for Operating Projection of Films,”
an enterprise with appropriate conditions in terms of personnel, site, technology, and equipment may carry out film projection activities at cinemas and
other fixed projection sites. Cinemas shall abide by the laws and administrative regulations on public security, fire control, and public place hygiene,
maintain the public order and environmental hygiene at projection sites, and ensure the safety and health of audience. A film is not allowed to be
distributed or projected until it has obtained the License for Public Projection of Film. Projection of films shall be undertaken in compliance with the state
regulations regarding the time proportions specified for domestic films and imported films. The time of projection allotted by a film projection unit to
domestic films shall account for no less than two-thirds of the total amount of time of projection each year. Cinemas shall truthfully keep statistics of film
sales revenue and provide authentic and accurate statistics, and shall not cheat or mislead the audience or disturb film market order by any illegal means
such as fabricating transactions, or falsely reporting or concealing sales revenue.
Those who establish a film projection unit or those who are engaged in the activities of film projection without authorization, shall be banned by
SAIC or its local branches, and shall be investigated for criminal liabilities in accordance with the provisions in the Criminal Law on the crime of illegal
business operation. If the case is not serious enough for criminal punishment, the illegal proceeds and special instruments and equipment used in the illegal
operation shall be confiscated. In addition, if the amount of illegal proceeds is no less than RMB50,000 (approximately US$7,300), a fine of no less than
five times but no more than 10 times the amount of illegal proceeds shall be imposed; if there are no illegal proceeds or the amount of illegal proceeds is
less than RMB50,000 (approximately US$7,300), a fine of no less than RMB200,000 (approximately US$29,000) but no more than RMB500,000
(approximately US$73,000) shall be imposed.
Liaoning Leaping International Cinema Management Co., Ltd. has obtained the License for Operating Projection of Films, which will expire on
January 29, 2022, the Hygiene License, which will expire on January 29, 2023, and the certification for fire control examination. Liaoning Leaping
International Cinema Management Co., Ltd. is allowed to engage in the film projection business.
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Hong Kong Regulations
We own and operate CNNM, www.chinacnnm.com, a news and media platform, in Hong Kong. The following is a summary of certain aspects of
major Hong Kong laws and regulations that are or may be applicable to us.
Regulations on Digital Media Publication, Domain Name Registration, and Advertising Services
There are no specific legislations governing domain name registration or digital media publication in Hong Kong. There are certain ordinances
which contain provisions that may be applicable to digital media publication business and advertising services in Hong Kong: the Control of Obscene and
Indecent Articles Ordinance (Chapter 390 of the Laws of Hong Kong), the Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong),
the Copyright Ordinance (Chapter 528 of the Laws of Hong Kong), the Defamation Ordinance (Chapter 21 of the Laws of Hong Kong), the Undesirable
Medical Advertisements Ordinance (Chapter 231 of the Laws of Hong Kong), and the Business Registration Ordinance (Chapter 310 of the Laws of Hong
Kong). Contravention of the relevant laws and regulations may expose us to criminal and civil liabilities including penalties, fines, damages, and other
sanctions. These ordinances are discussed in further details below.
Control of Obscene and Indecent Articles Ordinance (Chapter 390 of the Laws of Hong Kong) (the “COIAO”)
There are no specific regulations targeting advertising practice or digital media publication in Hong Kong. However, COIAO is applicable to
digital materials and contents posted on our website, www.chinacnnm.com.
Section 21 of the COIAO stipulates that any person who publishes, or possesses for the purpose of publication, any obscene article commits an
offence and is liable to a fine of HK$1,000,000 (approximately US$128,000) and may be subject imprisonment for up to three years.
Section 22 of the COIAO stipulates that any person who publishes any indecent material accessible to a juvenile commits an offence, whether
intentionally or unintentionally. Such offences impose a fine of HK$400,000 (approximately US$51,000) and imprisonment of 12 months on first
conviction. A second or subsequent conviction will give rise to a fine of HK$800,000 (approximately US$102,000) and imprisonment of up to 12 months.
Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong) (the “PDPO”)
We, as a data user, need to comply with the PDPO to ensure that personal data it collects are accurate, securely kept, and used only for the purpose
for which they are collected.
The PDPO protects the privacy interests of living individuals in relation to personal data and regulates the conducts of a data user, i.e., any person
who, either alone or jointly or in common with other persons, controls the collection, holding, processing, or use of personal data. Pursuant to section 2 of
the PDPO, personal data means any data (i) relating directly or indirectly to a living individual; (ii) from which it is practicable for the identity of the
individual to be directly or indirectly ascertained; and (iii) in a form in which access to or processing of the data is practicable. In general, the personal data
shall be lawfully and fairly collected and steps should be taken to ensure that the data collection subject is explicitly and implicitly informed on or before
the data collection.
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There are six principles under the PDPO which regulate the purpose and manner of collection of data, the accuracy and duration of retention of
collected data, the use of personal data, the security of personal data, and the access to personal data. As we may collect personal data of users of its
website, www.chinacnnm.com, it is subject to the following principles, which are:
Principle 1 - Data Collection Principle
Personal data must be collected in a lawful and fair way, for the purpose directly related to a function/activity of the data user. Data collection
subjects must be notified of the purpose of the collection and the classes of persons to whom the data may be transferred. Data collection should be
necessary, and not excessive for the purpose of collection.
Principle 2 - Accuracy & Retention Principle
Personal data must be accurate and should not be kept for a period longer than is necessary to fulfil the purpose for which it is used.
Principle 3 - Data Use Principle
Personal data must be used for the purpose for which the data is collected or for a directly related purpose, unless voluntary and explicit consent of
a new purpose is obtained from the data collection subject.
Principle 4 - Data Security Principle
A data user needs to take practical steps to safeguard personal data from unauthorized or accidental access, processing, erasure, loss, or use.
Principle 5 - Openness Principle
A data user must make personal data policies and practices known to the public regarding the types of personal data it holds and how the data is
used.
Principle 6 - Data Access & Correction Principle
A data collection subject must be given access to his/her personal data and allowed to make corrections if it is inaccurate.
Pursuant to the PDPO, if any of the above principles are not complied with, the Privacy Commissioner for Personal Data (the “PDPD”) may serve
an enforcement notice to direct the data user to remedy the contravention and/or instigate prosecution actions. Further, section 50A of the PDPO provides
that contravention of an enforcement notice is an offence which could result in a maximum fine of HK$50,000 (approximately US$6,400) and
imprisonment for two years. The PDPO also criminalizes misuse or inappropriate use of personal data in direct marketing activities under Part VI of the
PDPO.
As we may collect and possess private and confidential data of the users of www.chinacnnm.com, we are subject to the principles set out in the
PDPO regarding the collection, use, retention, accuracy, and security of and access to personal data.
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Copyright Ordinance (Chapter 528 of the Laws of Hong Kong) (the “Copyright Ordinance”)
The Copyright Ordinance provides comprehensive protection for recognized categories of work such as literary, dramatic, musical, and artistic
works, as well as for films, television broadcasts, and cable diffusion, and works made available to the public on the internet.
In the course of providing advertising services and digital media publication, certain copyrights may subsist in the works we create in relation to
its publications, digital media content, and advertising materials, including artistic works (such as artworks and photos), films (such as videos), or literary
works (such as text) that qualify for copyright protection without registration. It is not necessary to register a copyright nor are there other formalities
required to obtain copyright protection for a work in Hong Kong. There is no official registry in Hong Kong for registration of copyright works.
The Copyright Ordinance restricts certain acts such as copying and/or issuing or making available copies to the public of a copyright work without
the authorization from the copyright owner which, if done, constitutes “primary infringement” of copyright which does not require knowledge of
infringement.
The Copyright Ordinance permits certain acts that can be done in relation to copyright works without authorization from the copyright owner, one
of which being fair dealing with a copyright work for the purpose of criticism, review, or reporting current events if accompanied by a sufficient
acknowledgement of such copyright work and its author.
Under the Copyright Ordinance, a person may incur civil liability for “secondary infringement” if that person, amongst others, possesses, sells,
distributes, or deals with a copy of a work which is, and which he knows or has reason to believe to be, an infringing copy of the work for the purposes of
or in the course of any trade or business without the consent of the copyright owner. However, the person will only be liable if, at the time he committed the
act, he knew or had reason to believe that he was dealing with infringing copies of the work.
Defamation Ordinance (Chapter 21 of the Laws of Hong Kong) (the “DO”)
As our website, www.chinacnnm.com, may contain information and or/news from other sources and such information and/or news may not be
independently verified by us, such information may lead to defamatory matters.
Under the DO, any person who maliciously publishes defamatory matter regarding another person or an organization in writing or by word of
mouth or by conduct may be liable for defamation. In general, there are two main kinds of defamation, libel and slander. Libel is the malicious publication
of defamatory matter in writing or in some other permanent form. Slander is the publication of defamatory matter by word of mouth or in some other
transient (temporary) form.
Section 5 of the DO provides that any person who maliciously publishes any defamatory libel, knowing the same to be false, shall be liable to
imprisonment for two years, and, in addition, to pay such fine as the court may award.
There are several defenses available, including but not limited to (a) unintentional defamation; (b) an offer of amends; (c) defense of justification,
which means the words were true in substance and in fact; (d) fair comment; and (e) publication which was privileged as prescribed in the schedule of the
DO.
Undesirable Medical Advertisements Ordinance (Chapter 231 of the Laws of Hong Kong) (the “UMAO”)
As our website, www.chinacnnm.com, may contain information and/or advertisements relating to medical aspects, we may be subject to the
provisions under the UMAO. The UMAO aims to protect public health through prohibiting or restricting advertisements which may induce the seeking of
improper management of certain health conditions.
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As defined in the UMAO, “advertisement” includes any notice, poster, circular, label, wrapper, or document, and any announcement made orally
or by means of producing or transmitting light or sound. These include advertisements published in newspapers and magazines, leaflets, on radio,
television, and internet, as well as on the label of a container or package containing any medicine, surgical appliance, treatment, or orally consumed
product.
Pursuant to the UMAO, no person shall publish, or cause to be published any advertisements likely to lead to the use of any medicine, surgical
appliance, or treatment for: (a) the purpose of treating human beings for, or preventing them from contracting any of the diseases or conditions specified in
the UMAO which include, among others, any disease of the skin, hair, or scalp except for a purpose specified in the UMAO which, among others, include
prevention of pimples and relief or prevention of minor skin conditions including dry and chapped skin; or (b) treating human beings for any purpose
specified in the UMAO which include, among others, the restoration of lost youth and the correction of deformity or the surgical alteration of a person’s
appearance.
Business Registration Ordinance (Chapter 310 of the Laws of Hong Kong) (the “BRO”)
The BRO requires every person, whether a company or an individual, who carries on a business in Hong Kong to apply for business registration
certificate from the Inland Revenue Department within one month from the date of commencement of the business, and to display the valid business
registration certificate at the place of business. Any person who fails to apply for business registration or display a valid business registration certificate at
the place of business shall be guilty of an offence, and shall be liable to a fine of HK$5,000 (approximately US$640) and to imprisonment for one year.
C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report:
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D. Property, Plants and Equipment
Our principal executive office is located at Room 2803, Dachong Business Centre, Dachong 1st Road, Nanshan District, Shenzhen City,
Guangdong Province, China. We lease an aggregate of 890 square meters of property from an unrelated third party pursuant to the terms of a lease
agreement. The term of the lease is from November 27, 2019, through December 27, 2021, with monthly rental expenses of RMB172,642.2 (approximately
$25,000).
On April 1, 2019, we entered into a lease agreement to lease office space in Hong Kong in order to provide additional administration and service
department office space for our subsidiary ATIF Limited. The term of the lease is from April 1, 2019, through December 27, 2019, with monthly rental
expenses of HK$100,000 (approximately $12,800). We do not plan to renew the lease agreement upon its expiration. On October 30, 2019, we entered into
another lease agreement to rent a larger office space in Hong Kong. The term of the lease is from November 18, 2019, through November 17, 2021, with
monthly rental expenses of HK$175,584 (approximately $22,400).
On August 16, 2019, we entered into a lease agreement to lease an office space in California. The term of the lease is three years from
September 1, 2019, to August 31, 2022, with total rental expenses of $175,662.
LGC’s principal executive office is located at 2010 Huaruntiexi Center, Tiexi District, Shenyang, Liaoning Province, People’s Republic of China.
LGC leases over 7,230 square feet of office space for its headquarters pursuant to a lease agreement entered on July 23, 2018, with monthly rental expenses
of RMB55,000 (approximately US$8,000). The lease expired on July 22, 2021, and was renewed for an additional 12 months on July 22, 2020, with
monthly rental expenses of RMB56,667 (approximately US$8100). LGC also leases approximately 80,654 square feet of spaces for its movie theaters in
Shenyang.
LGC’s other subsidiaries do not have leases for office space.
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Item 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included in this annual report. This report contains forward-looking statements. See “Cautionary
Language Regarding Forward-Looking Statements.” In evaluating our business, you should carefully consider the information provided under the caption
“Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial
risks and uncertainties.
Overview
We are a consulting company offering financial consulting services to small and medium-sized enterprise customers in China. Our goal is to
become an international financial consulting company with clients and offices throughout Asia. Since our inception in 2015, we have primarily focused on
helping clients going public on the OTC markets and exchanges in the United States (U.S.), but we are in the process of expanding our service to listing
clients on domestic exchanges in China as well as the Hong Kong Stock Exchange.
On April 22, 2020, we completed the acquisition of approximately 51.2% of the equity interest of Leaping Group Co., Ltd. (“LGC”) from its
original shareholders. LGC, through its subsidiaries and VIE operating entities, is engaged in the Multi-Channel Advertising Business, Event Planning and
Execution Business, Film Production Business and Movie Theater Operating Business (collectively “media business”) in China.
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As of July 31, 2020, we have two business lines, which include the provision of financial consulting services, and a media business, which
provides of multi-channel advertising, event planning and execution, and movie theater operating business.
Our financial consulting services
We launched our consulting services in 2015. Our aim was to assist these Chinese enterprises by filling the gaps and forming a bridge between
PRC companies and overseas markets and exchanges. We have a team of qualified and experienced personnel with legal, regulatory, and language expertise
in several overseas jurisdictions. Our services are designed to help SMEs in China achieve their goal of becoming public companies. We create a going
public strategy for each client based on many factors, including our assessment of the client’s financial and operational situations, market conditions, and
the client’s business and financing requirements. Since our inception and up to the date of this report, we have successfully helped three Chinese enterprises
to be quoted on the U.S. OTC markets and are currently assisting our other clients in their respective going public efforts. All of our current and past clients
have been Chinese companies, and we plan to expand our operations to other Asian countries, such as Malaysia, Vietnam, and Singapore, by 2021.
For the year ended July 31, 2018, we entered into consulting service agreements with 12 companies, and for the year ended July 31, 2019, we
provided consulting services to five companies, among which two companies aimed to go public in the U.S. through IPOs and the remaining three clients
aimed to go public through reverse mergers. For the year ended July 31, 2020, we provided consulting services to two companies, among which one
company aimed to go public through reverse merger. The decrease in volume of consulting services was due to the recent intense tariff issues between the
U.S. and China, which has become more fragile as a result of the outbreak and spread of COVID-19, plus the tightening of U.S. legislation and public
listing rules to curb some small Chinese companies to access the U.S. capital markets. As a result, an increasing number of Chinese companies are putting
off or slowing down their plans for U.S. listings due to these uncertainties
Our total revenue generated from consulting services amounted to $0.6 million, $3.1 million and $5.3 million for the years ended July 31, 2020,
2019, and 2018, respectively.
Revenue from consulting services
Revenue from customer's initial registration fee
Total revenue
2020
Amount
$
$
645,127
-
645,127
% of total
revenue
100.0% $
0.0%
100.0% $
For the years ended July 31,
2019
Amount
3,078,758
-
3,078,758
% of total
revenue
100.0% $
0.0%
100.0% $
2018
Amount
5,236,196
71,695
5,307,891
% of total
revenue
98.6%
1.4%
100.0%
Although our consulting service revenue decreased in fiscal year 2020, we established new branch offices in Hong Kong and the United States in
2020 in order to increase our exposure, and we also plan to hire more specialized and talented employees in order to provide better services to our
customers in the future. We believe our competitive strengths, including but not limited to, highly qualified professional service team with extensive
experience in going public and consulting services, recognition and reputation of our services achieved from our previous success helping our clients going
public, established long-term professional relationships with a group of well-known third-party professional providers both domestically and in the U.S.,
and established long-term cooperation relationships with local chambers of commerce and associations, will help us develop more customers for our
consulting services to generate increased revenue in the long run.
Our Media business
On April 22, 2020 (the “Closing Date”), we completed the acquisition of 51.2% of the equity interest of LGC from its original shareholders for a
total consideration of approximately $22.92 million, including cash consideration of $1.85 million and a share consideration of 9,940,002 shares of our
common stock with fair value of approximately $21.07 million. Upon closing of the acquisition, LCG became a subsidiary of ATIF, over which ATIF owns
51.2% equity interest. LGC, through its subsidiaries and VIE operating entities, is engaged in the media business in China. LGC used to be one of our
clients that sought to be listed in the United States through an IPO. Effective April 22, 2020, we were able to consolidate the operations of LGC and are
now operating a separate media business.
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Our Multi-Channel Advertising Services include advertising creation and production, pre-movie advertisements display, and advertising result
evaluation. Typically, we will sign an advertising service agreement with an advertising client to undertake the advertising campaign of the client. The
scope of service varies according to clients’ needs; it could be a full package of all the above services, or the combination of the latter two services. The
price of 15-second slots on our pre-movie advertising network currently ranges from US$3,810 to US$5,276 based on the number of movie theaters in
which the advertisement is placed, the length of the time slot purchased, as well as the duration of the advertising campaign.
Our Event Planning and Execution Services include planning and arrangement of events, and production of related advertising materials. After
entering an event planning and execution service agreement with a client, we will first decide on the suitable form for a marketing event. If it is an offline
event, we choose an event venue based on the target customers and budget, design and order exhibition models, decorate the venue, and hold the event on
the designated date. If it is an online event, our creatives come up with ideas and discuss them with our client, our designers design a website based on the
idea, and our background supporters make sure that the website is successfully launched and maintained. Typical marketing events include brand
promotion through elevator and in-store LED billboard advertisements and potential customer information collection by offering incentives such as static
display, performances, free movie tickets, and VR experiences. Our fee for providing Event Planning and Execution Services is negotiated with the client
on a case-by-case basis, depending on the scale and length of the event, the number of employees and independent contractors involved, and the desired
effect of the event.
Our Film Production Services include investment in films and TV programs and their distribution in movie theaters or through online platforms.
The only film or TV program we released was the web TV series “Meet Myself.” This web TV series debuted in April 2018, and we received from our
distributor fees in fiscal year 2019.
Our Movie Theater Operating Business includes investment in and running of movie theaters in China. During the years ended July 31, 2020 and
2019, we opened two and two movie theaters in Shenyang, respectively. As of July 31, 2020, we had four movie theaters under operations in Shenyang
with a total of 22 film screens.
Due to the outbreak and spread of COVID-19, LGC’s media business was limited during the period from April to July 2020 because most of the
movie theaters in China remained closed or struggled to draw crowds as a result of government operating restrictions, we did not generate revenues from
multi-channel advertising services and movie theatre operating business during the period ended July 31, 2020. In addition, our event planning and
execution services resumed in July 2020 and generated limited revenues. As a result, for the period from acquisition of LGC on April 22, 2020 to July 31,
2020, we generated revenue of $40,872 from event planning and execution services.
Although our revenue from media services was insignificant in fiscal year 2020, we witnessed a boom in revenues from multiple-channel
advertising services and movie theater operating business with resume of operations of movie theatres in July 2020. We plan to continue to promote our
brand name and invest in movie theaters and film screens to further develop our multi-channel advertising services and movie operation services, and to
increase investment in film and TV program production in the future.
Key Factors that Affect Operating Results
We believe the following key factors may affect our consulting services:
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The trade disputes between China and the United States has negatively impacted our business.
During the past two years, the U.S. government has, among other actions, imposed new or higher tariffs on specified products imported from
China to penalize China for what it characterizes as unfair trade practices and China has responded by imposing new or higher tariffs on specified products
imported from the United States. The uncertainties arising from the trade disputes between China and the United States negatively impacted our potential
customers’ confidence to go public through IPOs in the United States in fiscal year 2019 and 2020. As a result, both the number of our new going public
consulting service customers and our going public consulting service revenue decreased in fiscal year 2019 and 2020.
Our business success depends on our ability to acquire customers effectively.
Our customer acquisition channels primarily include our sales and marketing campaigns and existing customer referrals. In order to acquire
customers, we have made significant efforts in building mutually beneficial long-term relationships with local government, academic institutions, and local
business associations. In addition, we also market our consulting services through social media, such as WeChat or Weibo. If any of our current customer
acquisition channels becomes less effective, if we are unable to continue to use any of these channels or if we are not successful in using new channels, we
may not be able to attract new customers in a cost-effective manner or convert potential customers into active customers or even lose our existing
customers to our competitors. To the extent that our current customer acquisition and retention efforts become less effective, our service revenue may be
significantly impacted, which would have a significant adverse effect on our revenues, financial condition, and results of operations.
Our consulting business faces strong market competition.
We are currently facing intense market competition. Some of our current or potential competitors have significantly more financial, technical,
marketing, and other resources than we do and may be able to devote greater resources to the development, promotion, and support of their customer
acquisition and retention channels. In light of the low barriers to entry in the financial consulting industry, we expect more players to enter this market and
increase the level of competition. Our ability to differentiate our services from other competitors will have significant impact on our business growth in the
future.
Changes in PRC regulatory environment may impact our business and results of operations.
The regulatory environment for the financial consulting industry in China is evolving. Recently, many local governments have established various
subsidization schemes and policies to stimulate and encourage local business enterprises to go public, and this may stimulate the growth of more financial
consulting firms to become new players given the low barrier of entry into the financial consulting industry as well. As more players enter into the
competition, PRC governmental authorities may publish and promulgate various new laws and rules to regulate the financial consulting marketplace. We
have been closely tracking the development and implementation of new rules and regulations likely to affect us. We will continue to ensure timely
compliance with any new rules and regulations and believe that such timely compliance is essential to our growth. To the extent that we may be required to
adapt our operations to new laws and regulations, our operating costs may increase which will impact our profitability.
Our business depends on our ability to attract and retain key personnel.
We rely heavily on the expertise and leadership of our directors and officers to maintain our core competence. Under their leadership, we have
been able to achieve rapid expansion and significant growth since our inception in 2015. As our business scope increases, we expect to continue to invest
significant resources in hiring and retaining a deep talent pool of financial consultancy professionals. Our ability to sustain our growth will depend on our
ability to attract qualified personnel and retain our current staff.
We believe the following key factors may affect our media business:
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Changes in governmental policies and laws affecting advertising and film and TV investment
We conduct our Multi-Channel Advertising Business primarily in China. Our business depends substantially on the conditions of the PRC
advertising market. Demand for pre-movie advertising in China has grown rapidly in the recent decade but such growth is often coupled with volatility in
market conditions and fluctuation in pre-movie advertising slot prices. Fluctuations of supply and demand in China’s advertising market are caused by
economic, social, political and other factors. Over the years, the Chinese government has announced and implemented various policies and measures aimed
to regulate the advertising markets, prohibiting, among other things, misleading content, superlative wording, socially destabilizing content or content
involving obscenities, superstition, violence, discrimination or infringement of the public interest. These measures can affect advertising clients’ eligibility
to purchase advertising slots. These measures have affected and may continue to affect the conditions of China’s advertising market and cause fluctuations
in advertising slot pricing and transaction volume. Furthermore, there may be situations in which advertising clients see a reduced need for marketing
initiatives and reduce their spending on such initiatives, which could potentially adversely affect our results of operations. To the extent fluctuations in the
advertising market adversely affect advertising transaction volumes or prices, our financial condition and results of operations may be materially and
adversely affected.
Uneven economic growth and development across different regions of China
The rapid growth of the Chinese economy has slowed down since 2012 and such slowdown may continue. There is considerable uncertainty over
the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading
economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which
have resulted in volatility in oil and other markets. There have also been concerns on the relationship among China and other Asian countries, which may
result in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well
as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged
slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition. In addition,
continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.
Supply of and demand for films and pre-movie advertisements in local markets
The market for pre-movie advertising networks in China is relatively new and its potential is uncertain. We compete for advertising spending with
many forms of more established advertising media, such as television, print media, Internet and other types of out-of-home advertising. Our success
depends on the acceptance of our pre-movie advertising network by advertising clients and agencies and their continuing and increased interest in this
medium as a component of their advertising strategies. Our success also depends on the viewing public continuing to be receptive towards our media
network. Advertising clients may elect not to use our services if they believe that consumers are not receptive to our network or that our network does not
provide sufficient value as an effective advertising medium. Likewise, if consumers find some element of our network to be disruptive or intrusive, movie
theaters may decide not to allow us to operate the film screens in movie theaters and advertising clients may view our network as a less attractive
advertising medium compared to other alternatives. In that event, advertising clients may determine to reduce their spending on our network and pre-movie
advertising.
Pre-Movie advertising is a relatively new concept in China and in the advertising industry generally. If we are not able to adequately track
filmgoers’ response to our programs, in particular tracking the demographics of filmgoers most receptive to pre-movie advertising, we will not be able to
provide sufficient feedback and data to existing and potential advertising clients to help us generate demand and determine pricing. Without improved
market research, advertising clients may reduce their use of pre-movie advertising and instead turn to more traditional forms of advertising that have more
established and proven methods of tracking effectiveness.
If a substantial number of advertising clients lose interest in advertising on our media network for these or other reasons or become unwilling to
purchase advertising time slots on our network, we will be unable to generate sufficient revenues and cash flow to operate our business, and our revenues,
prospects and results of operations could be negatively affected.
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Entry barriers and competition from other advertising and film companies
In the pre-movie advertising market inside Liaoning, we believe that we current do not have any credible competitors in the pre-movie advertising
market and Liaoning. We, however, compete for overall advertising spending with other alternative media companies, such as Internet, street furniture,
billboard and public transportation advertising companies, and with traditional advertising media, such as newspapers, television, magazines and radio. We
also compete for advertising dollars spent in the pre-movie advertising industry and face competition from new entrants into film multimedia industry in
the future. Competition in the advertising industry is primarily based on quality of services or program, brand name recognition, network size and
geographic coverage, price, and range of services.
Significant competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and
potential competitors may have competitive advantages, such as significant greater brand recognition, financial, marketing or other resources and may be
able to mimic and adopt our business model. Several of our competitors have significantly larger advertising networks than we do, which gives them an
ability to reach a larger number of overall potential consumers and which make them less susceptible to downturns in particular sectors, such as film
industry. Significant competition will provide advertising clients with a wider range of media and advertising service alternatives, which could lead to
lower prices and decreased revenues, gross margins and profits.
Coronavirus (“COVID-19”) Impact
Our operations have been affected by the outbreak and spread of the coronavirus disease 2019 (COVID-19), which in March 2020, was declared a
pandemic by the World Health Organization. The COVID-19 outbreak has caused lockdowns, travel restrictions, and closures of businesses. Our businesses
have been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent.
Due to the outbreak of COVID-19, in early February 2020, the Chinese government required the nationwide closure of many business activities in
the PRC to prevent the spread of COVID-19 and protect public health. As a result, we temporarily suspended our consulting services for the period from
February to March 2020. In addition, we acquired a 51.2% equity interest in LGC in April 2020 which was expected to diversify our revenue streams into
multi-channel advertising, event planning and execution, film and TV program production, and movie theater operations going forward. However, due to
the outbreak and spread of COVID-19, LGC’s movie theater operations was limited during the period from April to July 2020 because most of the movie
theaters in China remained closed or struggled to draw crowds as a result of government operating restrictions and customer health and safety concerns.
Furthermore, some of the our existing customers have experienced financial distress and disruption of business, which resulted in delay or default on their
payments.
During the period from February to July 2020, revenues from our business advisory and consulting services were approximately 92% lower as
compared to the same period of last year while LGC’s operating entities in China did not generate any revenues from multi-channel advertising services
and movie theater operation services from the date of acquisition through July 31, 2020.
As of the date of this filing, the spread of COVID-19 in China appears to have slowed down and most provinces and cities have resumed business
activities under the guidance and support of the local government. However, based on the assessment of current economic environment, customer demand
and revenue trend, and the negative impact from COVID-19 outbreak and spread, it appears that our revenue and operating cash flows may continue to
underperform in the next 12 months. Further, a resurgence of COVID-19 could further negatively affect both major business segments and impair their
ability to regain pre-COVID-19 operating levels. As such, the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the
financial statement reporting date.
69
A. Operating Results
Comparison of Operation Results for the Years Ended July 31, 2020 and 2019
The following table summarizes the results of our operations for the years ended July 31, 2020 and 2020, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such periods.
Year ended
July 31, 2020
Year ended
July 31, 2019
As %
of
Total revenue
As %
of
Total revenue
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
Amount
Amount
685,999
(227,410)
458,589
100.0% $
(33.2)%
66.8%
3,078,758
-
3,078,758
100.0% $
-
100.0% $
(2,392,759)
(227,410)
(2,620,169)
(77.7)%
100%
(85.1)%
2,638,972
384.7%
1,096,195
35.6%
1,542,777
140.7%
6,255,109
2,645,239
5,621,467
384,492
172,728
17,718,007
(17,259,418)
(169)
(155,568)
201,051
45,314
(17,214,104)
76,264
(17,290,368)
911.8%
385.6%
918.5%
56.0%
25.2%
2,582.8%
(2,516.0)%
(0.0)%
(22.7)%
29.3%
6.6%
(2,509.4)%
11.1%
(2,520.5)% $
1,245,169
65,790
-
-
-
2,407,154
671,604
1,994
32,452
-
34,446
706,050
276,823
429,227
40.4%
2.2%
-
-
-
78.2%
21.8%
0.1%
1.1%
-
1.1%
22.9%
9.0%
13.9% $
5,009,940
2,579,449
5,621,467
384,492
172,728
15,310,853
(17,931,022)
(2,163)
(188,020)
201,051
10,868
(17,920,154)
(200,559)
(17,719,595)
402.4%
3,920.7%
100%
100%
100%
636.1%
(2,669.9)%
(108.5)%
(579.4)%
100%
31.6%
(2,538.1)%
(72.5)%
(4,128.3)%
2,407,669
351.0%
-
-
2,407,669
100%
$
Revenue
Cost of revenue
Gross margin
Operating expenses
Selling expenses
General and administrative
expenses
Provision for doubtful accounts
Goodwill impairment loss
Impairment of intangible assets
Impairment of property and
equipment
Total operating expenses
Income (loss) from operations
Other income (expense)
Interest income (expense)
Other income (expense)
Investment income
Total other income (expense), net
Income (loss) before income taxes
Provision for income taxes
Net income(loss)
$
Less: Net loss attributable to non-
controlling interests
Net income (loss) attributable to
ATIF Holdings Limited
$
(14,882,699)
(2,169.5)% $
429,227
13.9% $
(15,311,926)
(3,567.3)%
Revenues. In connection with our acquisition of LGC in April 2020, we generated revenues from two business lines – consulting services and
multi-channel advertising, event planning and execution services and movie theater operations for the year ended July 31, 2020, as compared with revenue
from consulting services only in fiscal year 2019. Our total revenue decreased by $2.4 million, or 77.7%, to $0.7 million for the fiscal year ended July 31,
2020, from $3.1 million for the fiscal year ended July 31, 2019. Revenue from consulting services accounted for 94.0% and 100.0% of our total revenue,
while revenue from channel advertising, event planning and execution services accounted for 6.0% and nil% of our total revenue, for the years ended
July 31, 2020 and 2019, respectively.
Revenue from consulting services
Revenue from event planning and execution
Total revenue
For the years ended July 31,
2019
Amount
3,078,758
-
3,078,758
% of total
revenue
100.0% $
0.0%
100.0% $
Changes
Amount
(2,433,631)
40,872
(2,392,759)
%
(79.0)%
100.0%
(77.7)%
2020
Amount
$
$
645,127
40,872
685,999
% of total
revenue
94.0% $
6.0%
100.0% $
70
Revenue from consulting services decreased by $2.4 million, or 79.0%, from $3.1 million in fiscal year 2019, to $0.6 million in fiscal year 2020,
primarily attributable to decreased going public consulting services provided to customers during fiscal year 2020, as compared to fiscal year 2019. The
total number of customers engaged us for going public consulting services decreased from five in fiscal year 2019, to two in fiscal year 2020. The decrease
was mainly caused by changes of market conditions and financial health of our customers affected by the outbreak and spread of COVID-19. Furthermore
due to the recent intense tariff issues between the U.S. and China, which has become more fragile as a result of the outbreak and spread of COVID-19, plus
the tightening of U.S. legislation and public listing rules to curb some small Chinese companies to access the U.S. capital markets, an increasing number of
Chinese companies are putting off or slowing down their plans for U.S. listings due to these uncertainties. As a result, our potential customers’ perception
and confidence to go public through initial public offerings (“IPOs”) in the United States has been negatively impacted.
Given the uncertainty arising from the current intense relationship between China and the United States, plus tightened U.S. legislation and public
listing rules to curb IPOs by small Chinese companies to access the United States capital market, we anticipate our limited revenue growth from our
consulting services and our continuous operating net loss in the near terms. However, we have recently established new branch offices in Hong Kong and
the United States to increase our exposure. From February 2020 to October 2020, we entered into consulting service agreements with eight customers for
going public services with total contract price of $7.8 million. We also plan to hire more specialized and talented employees in order to provide better
services to our customers in the future. We believe our competitive strengths, including but not limited to, highly qualified professional service team with
extensive experience in going public and consulting services, recognition and reputation of our services achieved from our previous success helping our
clients going public, established long-term professional relationships with a group of well-known third-party professional providers both domestically and
in the U.S., and established long-term cooperation relationships with local chambers of commerce and associations, will help us develop more customers
for our consulting services to generate increased revenue in the long run.
Affected by the outbreak and spread of COVID-19, our movie theatres remained closed as a result of government operating restrictions until
July 2020. As a result, we did not generate revenues from multi-channel advertising services and movie theatre operating services for the year ended
July 31, 2020. We generated limited revenue of $40,872 from event planning and execution services which was resumed in July 2020. Since the resume of
movie theater in July 2020, we witnessed a boom in the sales by theater box office, and our revenues from multi-channel advertising services and movie
operation business grew accordingly. In October 2020, we were awarded contracts of approximately $1.0 million from certain reputable customers for
multi-channel advertising services. In addition, a film produced by us is expected to be released in December 2020 on China’s top 3 online video streaming
platforms. We plan to continue to promote our brand name and invest in movie theaters and film screens to further develop our multi-channel advertising
services and movie operation services, and to increase investment in film and TV program production in the future. Although LGC’s movie theater
operations was limited during the period from April to July 2020 because most of the movie theaters in China remained closed or struggled to draw crowds
as a result of government operating restrictions, from a long-term growth perspective, we still anticipate the acquisition of LGC will diversify our revenue
source for our future growth.
Cost of revenue. Our cost of revenue of $0.2 million for the year ended July 31, 2020 was related to LGC’s event planning and execution services.
The cost of revenue included venue rental fees, equipment costs, performers compensation, and other expenses in related activities.
Expenses
Selling expenses
$
General and administrative expenses
Bad debt provisions and impairment
losses
Total operating expenses
$
Years ended July 31,
2020($)
2020(%)
2019($)
2019(%)
Changes
($)
Changes
(%)
2,638,972
6,255,109
14.9% 1,096,195
35.3% 1,245,169
45.5%
51.8%
1,542,777
5,009,940
140.7%
402.4%
8,823,926
17,718,007
49.8%
65,790
100.0 2,407,154
2.7%
100.0
8,758,136
15,310,853
13,312.3%
636.1%
Selling expenses. Selling expenses increased by $1.5 million, or 140.7%, from $1.1 million in fiscal year 2019 to $2.6 million in fiscal year 2020.
Our selling expenses primarily consisted of outsourced service fees charged by third-party service providers, business development expenses, potential
customer referral commissions, salary and welfare expenses of our business development team, and business travel expenses. The increase in our selling
expenses was primarily due to the following reasons: 1) an increase of $0.2 million in salary and welfare expenses and entertainment expenses incurred by
LGC, which was acquired by us in April 2020; 2) an increase of $1.2 million in outsourced consulting services. The increase was mainly attributable to an
increase of $1.0 million in business development expenses paid to third parties to help us to identify and refer new customers to us; and an increase of $0.3
million in outsourced professional service fees in connection with the due diligence works performed for our new customers and potential business
projects; and 3) an increase of $0.1 million in promotion and advertising expenses to attract more customers. As a percentage of sales, our selling expenses
were 384.7% and 35.6% of our total revenues for the years ended July 31, 2020 and 2019, respectively.
71
General and administrative expenses. Our general and administrative expenses increased by $5.0 million, or 402.4%, from $1.2 million in fiscal
year 2019 to $6.3 million in fiscal year 2020. Our general and administrative expenses primarily consisted of salary and welfare expenses of management
and administrative team, office expenses, operating lease expenses, and professional fees such as audit and legal fees. The increase was mainly due to 1) an
increase of $2.4 million in general and administrative expenses incurred by LGC, primarily for rental expense of $0.5 million for movie theatre and office
space, write off previously record deferred offering cost of $1.3 million due to LGC’s failure for an intended initial public offering, and salary and welfare
expenses of $0.2 million; 2) an increase of $0.3 million in consulting expenses primarily because we engaged with a third party consulting firm to provide
advisory services for our business expansion in North America; 3) an increase of $0.3 million in donation expenses when we purchased and donated certain
hospital-used masks to help our community in response to the COVID-19 outbreak and spread; 4) an increase of $261,621 in legal loss accrual. Our former
customer Huale Group Co., Limited (“Huale”), previously engaged us for the IPO consulting services and later cancelled the agreement and initiated an
arbitration against us. Based on the court’s final ruling judgement, we accrued legal loss of $0.3 million for the year ended July 31, 2020; 5) an increase of
$0.2 million in salary and welfare expenses because we hired several employees for our newly established Hong Kong office; 6) an increase of $0.2
million in office expenses because we opened our new headquarter office in Los Angeles (“LA”) in order to expand our business operation in the United
States; and 7) an increase of $0.2 million in agent expense paid to a third party individual who referred Sino-fortune Securities Limited to us as an
acquisition target, but we later terminated the intended acquisition by paying a default penalty of HK$710,000 (approximately $92,000) due to our
termination of this intended acquisition.
As a percentage of sales, our general and administrative expenses were 911.8% and 40.4% of our total revenues for the years ended July 31, 2020
and 2019, respectively.
Bad Debt Provisions and impairment losses . During the year ended July 31, 2020, we incurred significant impairment loss on its fixed assets,
intangible assets and goodwill and bad debt expense on uncollectible accounts and other receivable due to change in market conditions and financial health
of its customers as affected by the COVID-19 outbreak and spread. The provisions and impairments were comprised of the followings:
Provision for doubtful accounts
Goodwill impairment loss
Impairment of intangible assets
Impairment of property and equipment
Total
For the years ended July 31,
2020(%)
2019($) 2019(%)
2020($)
2,645,239
5,621,467
384,492
172,728
8,823,926
30.0% 65,790
-
63.6%
-
4.4%
2.0%
-
100% 65,790
100%
-
-
-
100%
Changes
($)
2,579,449
5,621,467
384,492
172,728
8,758,136
(%)
3,920.7%
100%
100%
100%
13,312.3%
Provision for doubtful accounts. The provision for doubtful accounts primarily includes 1) provision for doubtful accounts receivable of $0.4
million due from two customers with which we provided public listing related consulting services. Due to the recent intense tariff issues between the
United States (“U.S.”) and China, which has become more fragile as a result of the outbreak and spread of COVID-19, plus the tightening of U.S.
legislation and public listing rules to curb some small Chinese companies to access the U.S. capital markets, these two customers have put off their plans
for U.S listings due to these uncertainties. After rigorous collection efforts, the collection of such accounts receivable became remote. As a result, we
provided 100% allowance against the accounts receivable balance; 2) provision for doubtful accounts receivable of $1.0 million due from certain customers
with which we provided media services through LGC. Due to the outbreak and spread of COVID-19, some of LGC’s customers experienced financial
distress, suffered disruptions in their businesses and delayed or defaulted their payments. In addition, LGC’s movie theater operations was limited during
the period from April to July 2020 because most of the movie theaters in China remained closed or struggled to draw crowds as a result of government
operating restrictions. Given these uncertainties, approximately $1.0 million bad debt reserve has been accrued; and 3) provision of doubtful other
receivable of $0.6 million due from one employee for business development and marketing campaign, and of $0.7 million due from Mr. Tao Jiang, the chief
executive officer of LGC. Both individuals did not reimburse the advances within three months or return the advances to us. We provided full provision
because we assessed that we may not be able to collect amounts due.
Goodwill impairment loss. In connection with our acquisition of 51.2% ownership interest in LGC, goodwill represents the excess of the
consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. As of July 31,
2020, we elected to assess goodwill for impairment using the two-step process for the year ended July 31, 2020, with the assistance of a third-party
appraiser. Based on discounted cash flows assessment, the fair value of the reporting unit fell below its carrying value, as a result, we recorded a goodwill
impairment of $5.6 million.
Impairment of intangible assets. The impairment of intangible assets was provided for our financial and news platform. We originally planned to
use this financial and news platform to market its consulting services to potential clients, as well as help its clients distribute corporate news and worldwide
press releases, and accordingly charge customer services fees for such services as new revenue source. However, we have not generated any revenue from
this financial and news platform since its acquisition, and based on our current financial condition and operating performance, our management assessed
that the likelihood of future use of the financial and news platform is remote. As a result, a full impairment loss of $0.4 million has been applied against
this financial and news platform for the year ended July 31, 2020.
72
Impairment of property and equipment. Given our net loss position in fiscal 2020 which became more fragile as affected by the COVID-19
outbreak and spread, we assessed that the expected future cash flows may not cover the carrying value of our fixed asset. As a result, we recorded an
impairment of $0.2 million on its fixed assets for the year ended July 31, 2020.
Other income (expense). Other income primarily includes interest income, tax refund from local government authorities, and subsequent bad debt
collection after write-off provision. Our other income (expense) changed from other income of $32,452 in fiscal year 2019 to other expense of $0.2 million
in fiscal year 2020. In fiscal year 2020, we were charged of penalties of $76,843 for late payment of enterprise income tax expenses and a default penalty of
HK$710,000 (approximately $91,151) due to our termination of an intended acquisition of Sino-fortune Securities Limited. In fiscal year 2019, we
received payment of $38,285 from Asia Era Fund after the 2018 write-off provision, which had been recorded as non-operating income for fiscal year
2019.
Investment income. Investment income represented unrealized gains from investment in trading securities, which was measured at market price.
For the years ended July 31, 2020 and 2019, the investment income was $0.2 million and $nil, respectively.
Income taxes. Our parent company ATIF and its indirectly owned subsidiary Leaping BVI were incorporated in the British Virgin Islands. Under
the current laws of the British Virgin Islands, ATIF is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the
shareholders, no British Virgin Islands withholding tax will be imposed.
LGC, was incorporated in the Cayman Islands. Under the current and applicable laws of the Cayman Islands, LGC is not subject to tax on income
or capital gain. Additionally, upon payments of dividends by LGC to its shareholders, no Cayman Islands withholding tax will be imposed.
ATIF HK and Leaping HK are subject to Hong Kong profits tax at a rate of 16.5%. However, they did not have any assessable profits arising in or
derived from Hong Kong for the fiscal years ended July 31, 2020 and 2019, and accordingly no provision for Hong Kong profits tax had been made in
these periods.
Huaya, Qianhai, LMG and its subsidiaries were incorporated in the PRC. Under the Income Tax Laws of the PRC, Huaya is subject to income tax
at a rate of 10% under the preferential tax treatment to Smaller-scale Taxpayers, and Qianhai is subject to the standard unified income tax at a rate of 25%.
Income tax expense decreased by $0.2 million, or 72.5%, from $0.3 million in fiscal year 2019, to $76,264 in fiscal year 2020. The decrease was
mainly due to significant net operating loss in fiscal year 2020 which resulted in decreased taxable income.
Net Income (loss). Net loss was $17.3 million for the year ended July 31, 2020, a change of $17.7 million from net income of $0.4 million in
fiscal year 2019. Net loss attributable to non-controlling interests was $2.4 million for the year ended July 31, 2020, a change of $2.4 million from $nil in
fiscal year 2019. Net loss attributable to us was $14.9 million for the year ended July 31, 2020, a change of $15.3 million from net income of $0.4 million
in fiscal year 2019. The change from net income to net loss was the result of decreased revenue and gross profit, and increased operating expenses as
discussed above.
Comparison of Operation Results for the Years Ended July 31, 2019 and 2018
The following table summarizes the results of our operations for the years ended July 31, 2019 and 2018, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such periods.
Revenue
Operating expenses
Selling expenses
General and administrative expenses, and bad debt
provisions
Total operating expenses
Income from operations
Other income (expense)
Interest income
Other income (expense)
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Year ended
July 31, 2019
Year ended
July 31, 2018
As %
of
Total
revenue
Amount
As %
of
Total
revenue
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
100.0% $
5,307,891
100.0% $ (2,229,133)
(42.0)%
Amount
$
3,078,758
1,096,195
35.6%
1,773,159
33.4%
(676,964)
(38.2)%
1,310,959
2,407,154
671,604
42.6%
78.2%
21.8%
807,053
2,580,212
2,727,679
15.2%
48.6%
51.4%
503,906
(173,058)
(2,056,075)
1,994
32,452
34,446
706,050
276,823
429,227
$
0.1%
1.1%
1.1%
22.9%
9.0%
13.9% $
16,303
(80,283)
(63,980)
2,663,699
716,816
1,946,883
(14,309)
0.3%
112,735
(1.5)%
98,426
(1.2)%
(1,957,649)
50.2%
13.5%
(439,993)
36.7% $ (1,517,656)
62.4%
(6.7)%
(75.4)%
(87.8)%
(140.4)%
(153.8)%
(73.5)%
(61.4)%
(78.0)%
73
Revenues. Our total revenue decreased by $2.2 million, or 42.0%, to $3.1 million for the fiscal year ended July 31, 2019, from $5.3 million for the
fiscal year ended July 31, 2018. Revenue from consulting services accounted for 100.0% and 98.6% of our total revenue, while revenue from registration
fees accounted for 0.0% and 1.4% of our total revenue, for the years ended July 31, 2019 and 2018, respectively.
Revenue from consulting services
Revenue from customer's initial registration fee
Total revenue
2019
For the years ended July 31,
2018
Changes
Amount
3,078,758
-
3,078,758
$
$
% of total
revenue
100.0% $
0.0%
100.0% $
Amount
5,236,196
71,695
5,307,891
% of total
revenue
Amount
%
98.6% $ (2,157,438)
(71,695)
1.4%
100.0% $ (2,229,133)
(41.2)%
(100.0)%
(42.0)%
Revenue from consulting services decreased by $2.2 million, or 41.2%, from $5.2 million in fiscal year 2018, to $3.1 million in fiscal year 2019,
primarily attributable to decreased going public consulting services provided to customers during fiscal year 2019, as compared to fiscal year 2018. The
total number of customers engaged us for going public consulting services decreased from 12 in fiscal year 2018, to five in fiscal year 2019. In fiscal year
2018, we focused on providing consulting services to customers to help them go public through reverse merger transactions, such services include pre-
listing knowledge education and tutoring, due diligence, market information analysis and business plan drafting, shell company identification, and reverse
merger transaction assistance. In contrast, since August 2018, we started to provide consulting services to customers going public through an IPO, which
normally takes us a longer time to select customers, check their backgrounds, and negotiate consulting services, and we are also required to provide more
extensive consulting services to qualified IPO customers, including but not limited to due diligence, market information collection and analysis, business
planning, pre-listing education and tutoring, legal structure re-organization advisory services, auditing and legal firms recommendation, investors referral
and pre-listing financing coordination, as well as follow-up services. In addition, the uncertainties arising from the trade disputes between China and the
United States also negatively impacted customers’ confidence to go public through IPOs in the United States. As a result, our consulting service revenue
decreased as we only provided going public consulting services to five customers in fiscal year 2019, including two customers for IPO consulting services
and three customers for reverse merger transactions.
We charge our new customers an initial non-refundable registration fee for account setup before we post their information and profiles on our
website, at which point, we recognize such registration fee as revenue. We do not charge our customers additional profile maintenance fees after the initial
posting is completed as limited efforts are required for us to maintain such information on an on-going basis. Registration fee decreased by $71,695, or
100.0%, when comparing fiscal year 2019 to fiscal year 2018 because we did not sign on any new customer in fiscal year 2019, as compared to four new
customers in fiscal year 2018.
Although our revenue decreased during fiscal year 2019, as compared to fiscal year 2018, we plan to establish new branch offices in Hong Kong
and the United States to increase our exposure, and we also plan to hire more specialized and talented employees in order to provide better services to our
customers in the future. We believe our competitive strengths, including but not limited to, highly qualified professional service team with extensive
experience in going public and financial consulting services, recognition and reputation of our services achieved from our previous success helping our
clients going public, established long-term professional relationships with a group of well-known third-party professional providers both domestically and
in the U.S., and established long-term cooperation relationships with local chambers of commerce and associations, will continue to help us develop more
customers for our consulting services to generate increased revenue in the future.
Expenses
Selling expenses
General and administrative expenses and bad debt
provisions
Total operating expenses
$
$
Years ended July 31,
Changes
Changes
2019($)
1,096,195
2019(%)
45.5
2018($)
1,773,159
2018(%)
68.7
($)
(676,964)
(%)
(38.2)%
1,310,959
2,407,154
54.5
100.0
807,053
2,580,212
31.3
100.0
503,906
(173,058)
62.4%
(6.7)%
74
Selling expenses. Selling expenses decreased by $0.7 million, or 38.2%, from $1.8 million in fiscal year 2018 to $1.1 million in fiscal year 2019.
The decrease in our selling expenses was primarily due to reduced use of third-party providers as we continue hiring and retaining more qualified and
competent employees in fiscal year 2019; this enabled us to bring more services in house and to save the outsourcing costs by $0.9 million from $1.5
million in fiscal year 2018 to $0.5 million in fiscal year 2019. The decrease in our selling expenses was offset by an increase in salary and employee
welfare expenses by approximately $0.2 million because we hired more sales personnel to promote business development. In fiscal year 2018, we initiated
more marketing and promotional campaigns and seminars in order to attract and educate potential enterprise customers, and accordingly, we incurred
substantial related expenses. In fiscal year 2019, with a greater reputation on the market, our promotional campaigns related expenditures were reduced
accordingly. As a percentage of sales, our selling expenses were 35.6% and 33.4% of our total revenues for the years ended July 31, 2019 and 2018,
respectively.
We expect our overall sales and marketing expenses, including but not limited to, brand promotion, salary, incentive, and servicing expense, will
continue to increase in the foreseeable future as and if our business further grows.
General and administrative expenses. Our general and administrative expenses increased by $0.5 million, or 62.4%, from $0.8 million in fiscal
year 2018 to $1.3 million in fiscal year 2019. The increase was mainly due to increased office lease expenses by approximately $0.1 million, increased
office expense by approximately $0.1 million, increased bad debt reserve by approximately $65,790, and increased professional fees by approximately $0.2
million such as auditing fees, investor relations fees, legal counsel fees, capital market advisory fees as well as secretary company services fees. As a
percentage of sales, our general and administrative expenses were 42.6% and 15.2% of our total revenues for the years ended July 31, 2019 and 2018,
respectively.
We expect our general and administrative expenses, including, but not limited to, salaries and business consulting, to continue to increase in the
foreseeable future, as our business further grows. We expect our rental expenses to remain consistent unless we need to further expand our administrative
office due to lack of office spaces. We expect our professional fees for legal, audit, and advisory services will increase as we have become a public
company.
Interest income. Our interest income decreased by $14,309 from $16,303 in fiscal year 2018 to $1,994 in fiscal year 2019. From February to
July 2018, we advanced a short-term loan of $2.8 million (RMB18,743,157) to a third-party company, Jinqisheng Technology Co., Ltd. with an interest rate
of 5% per annum. The related interest income had been accrued for the fiscal year ended July 31, 2018. The loan was repaid in full in July 2018, which led
to our decreased interest income in fiscal year 2019.
Other income (expense). Other income primarily includes interest income, tax refund from local government authorities, and subsequent bad debt
collection after write-off provision. Our other income increased by $0.1 million from other expense of $80,283 in fiscal year 2018 to other income of
$32,452 in fiscal year 2019. In fiscal year 2018, we sold the subsidiary of Qianhai, Asia Era Fund and recorded a disposal loss of $79,994 (RMB520,000).
In fiscal year 2019, we received payment of $38,285 from Asia Era Fund after the 2018 write-off provision, which had been recorded as non-operating
income for fiscal year 2019.
Income taxes. Our parent company ATIF was incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, ATIF
is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no British Virgin Islands withholding tax will
be imposed.
ATIF HK is subject to Hong Kong profits tax at a rate of 16.5%. However, it did not have any assessable profits arising in or derived from Hong
Kong for the fiscal years ended July 31, 2019 and 2018, and accordingly no provision for Hong Kong profits tax had been made in these periods.
Huaya and Qianhai were incorporated in the PRC. Under the Income Tax Laws of the PRC, Huaya is subject to income tax at a rate of 10% under
the preferential tax treatment to Smaller-scale Taxpayers, and Qianhai is subject to the standard unified income tax at a rate of 25%.
Income tax expense decreased by $0.4 million, or 61.4%, from $0.7 million in fiscal year 2018, to $0.3 million in fiscal year 2019. The decrease
was mainly due to decreased taxable income in fiscal year 2019.
Net Income. Net income was $0.4 million for the year ended July 31, 2019, a decrease of $1.5 million from $1.9 million in fiscal year 2018. The
decrease in net income was the result of decreased revenue and gross profit, and increased general and administrative expenses as discussed above.
75
B. Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, working capital loans from our major shareholders,
proceeds from our initial public offering, and equity financing through public offerings of our securities. We plan to support our future operations primarily
from cash generated from our operations and cash on hand.
Liquidity and Going concern
As reflected in our consolidated financial statements, our revenue decreased from approximately $3.1 million in fiscal year 2019 to approximately
$0.7 million in fiscal year 2020 primarily due to decreased number of customers for our public listing related consulting services. In addition, as a result of
our acquisition of LGC, we recorded significant impairment loss on our fixed assets, intangible assets and goodwill and bad debt expense on uncollectible
accounts receivable due to change in market conditions and financial health of its customers as affected by the COVID-19 outbreak. Accordingly, for the
fiscal year 2020, we reported a net loss of approximately $17.3 million. In addition, we reported negative cash flows of approximately $5.9 million and a
working capital deficit of $2.5 million as of July 31, 2020. Furthermore, due to the tightening of U.S. legislation and new public listing rules that could
limit small China-based companies to access the U.S. capital markets, there appears to be a slowing down of business activities for our consulting services
due to these uncertainties. Although we acquired a 51.2% equity interest in LGC in April 2020 with the intention to diversify our revenue streams going
forward, LGC’s operations were adversely affected by the outbreak of COVID-19. During the period from April to July 2020, all movie theaters in China
were temporarily closed and have been struggling to draw crowds afterwards. LGC’s movie theatre operations and multi-channel advertising business were
especially hit hard.
As of July 31, 2020, we only had cash of $0.4 million and accounts receivable of approximately $0.9 million, of which approximately $0.2 million
or 23% has been subsequently collected as of the financial reporting date. As of July 31, 2020, we had approximately $1.3 million investment in a life
insurance contract and approximately $0.9 million short-term investment in trading securities, which are highly liquid at our discretion. We do not believe
that our existing cash and cash resources will be sufficient to fund operations for the next twelve months following the filing of our financial statements.
These factors raise substantial doubt about our ability to continue as a going concern. Due to the impact of COVID-19, some of our existing customers may
experience financial distress or business disruptions, which could lead to potential delay or default on their payments. Any increased difficulty in collecting
accounts receivable, or early termination of agreements due to deterioration in economic conditions could further negatively impact our cash flow.
Currently, we intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and
funds raised from equity financing. On November 6, 2020, we closed a registered direct offering and issued 4,347,826 of our ordinary shares to certain
institutional investors and raised net proceeds of $3.5 million (see Note 18 to our Consolidated Financial Statements). However, unless the business
recovers, additional financing will be required and there is no assurance such financing, if required, would be available on favorable terms or at all.
Based on the assessment of current economic environment, customer demand and revenue trend, there is an uncertainty that our revenue and
operating cash flows may be improved in the near terms, which raised substantial doubt about our ability to continue as a going concern for the next 12
months from the date of this filing.
Substantially all of our operations are conducted in China and all of our revenue, expenses, cash, and cash equivalents are denominated in RMB.
Due to the PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars, we may have difficulty distributing any dividends
outside of China.
We have not declared nor paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our restricted net assets as of
July 31, 2020.
We have limited financial obligations denominated in U.S. dollars, thus the foreign currency restrictions and regulations in the PRC on the
dividends distribution will not have a material impact on our liquidity, financial condition, and results of operations.
The following table sets forth summary of our cash flows for the years indicated:
76
Net cash (used in) provided by operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Effect of exchange rate change on cash
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Operating Activities
2020
For the Years Ended July 31,
2019
2018
(5,893,735) $
(176,470)
141,983
(103,222)
(6,031,444)
6,459,702
428,258 $
(3,018,838) $
739,084
8,741,487
(74,996)
6,386,737
72,965
6,459,702 $
2,036,439
(2,898,916)
755,139
35,490
(71,848)
144,813
72,965
$
$
Net cash used in operating activities was $5.9 million in fiscal year ended July 31, 2020, primarily including the net loss of $17.3 million, adjusted
for depreciation and amortization of $1.0 million, amortization of right-of-use assets of $0.6 million, provision of doubtful account of $2.6 million,
goodwill impairment loss of $5.6 million, impairment of intangible assets of $0.4 million, and impairment of property and equipment of $0.2 million, and
net changes in our operating assets and liabilities, principally comprising of an increase of accounts payable by $1.5 million because we delayed payments
to suppliers as our multi-channel advertising, event planning and execution, film and TV program production, and movie theater operation were limited for
the period during April to July 2020, as a result of outbreak and spread of COVID-19.
Net cash used in operating activities amounted to $3.0 million for the fiscal year ended July 31, 2019, including net income of $0.4 million
generated from providing consulting services to our customers and net changes in our operating assets and liabilities, principally comprising of 1) an
increase in our accounts receivable by $1.4 million, because we focused on providing IPO related consulting services to customers in fiscal year 2019.
Given the longer duration of the IPO process, we extended the credit terms to customers, which led to increased accounts receivable balance as of July 31,
2019; 2) an increase in our prepaid expenses and other current assets by $1.7 million, which was due to prepayment of $1.2 million (RMB0.8 million) for
certain consulting service providers, prepayment of $0.4 million (RMB2.76 million) to one media company to produce media films to advertise our brand
name and business, and prepayment of $0.2 million to an artificial intelligence company to design a stock trading platform for us in order to improve our
future business service process and enhance our competitiveness in the market; and 3) a decrease in our taxes payable by $0.2 million due to decreased
taxable income.
Net cash provided by operating activities amounted to $2.0 million for the fiscal year ended July 31, 2018, including net income of $1.9 million
generated from providing consulting services to our customers and net changes in our operating assets and liabilities, principally comprising of 1) a
decrease in our accounts payable by $0.6 million because we had decreased outsourcing arrangements in the fiscal year 2018; 2) an increase in our taxes
payable also by $0.7 million due to our increased taxable income in the fiscal year 2018; and 3) a decrease of our deferred revenue by $0.5 million because
some of the cash deposits we received in the fiscal year 2017 from customers for our going public consulting services and other services had been rendered
in the fiscal year 2018. The overall increase in our cash flow from operating activities reflected the above combined factors.
Investing Activities
Net cash used in investing activities was $0.2 million in fiscal year 2020, primarily consisting of purchase of property and equipment of $0.5
million for movie theatres, investment of $0.7 million in listed equity securities, against acquisition of cash of $1.1 million from acquisition of LGC.
Net cash provided by investing activities was $0.7 million in fiscal year 2019, primarily consisting of purchase of property and equipment of
$20,762, purchase of a financial and news media platform (www.chinacnnm.com) of $0.5 million, prepayment for purchase of a used Bentley car of $0.2
million and payment of deposits of deposit of $1.3 million on life insurance contract, against a collection of loans receivable from third-party of $2.7
million.
77
Net cash used in investing activities amounted to $2.9 million for the fiscal year ended July 31, 2018, including purchases of property and
equipment of $26,765, an increase in loans receivable of $2.9 million because we advanced a short-term loan to a third-party company, Jinqisheng
Technology Co., Ltd., to generate interest income at an interest rate of 5% per annum. We fully collected this loan receivable in August 2018.
Financing Activities
Net cash provided by financing activities was $0.1 million in fiscal year 2020, attributable to proceeds of $0.1 million from bank borrowings.
Net cash provided by financing activities was $8.7 million in fiscal year 2019, which was mainly the net proceeds of $8.7 million from our IPO,
offset by repayment of related borrowing of $31,267.
Net cash provided by financing activities amounted to $0.8 million for the fiscal year ended July 31, 2018, representing proceeds from capital
contributions from our shareholders to meet the paid in capital requirement of Qianhai during fiscal year 2018.
C. Research and Development, Patents and Licenses, etc.
Research and Development
None.
Intellectual Property
See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the
year ended July 31, 2020 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that are reasonably likely to cause the disclosed information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements for the years ended July 31, 2020, 2019 and 2018, that have or that in the opinion of management
are likely to have, a current or future material effect on our financial condition or results of operations.
F. Tabular Disclosure of Contractual Obligations
Effective August 1, 2019, we adopted the new lease accounting standard Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842)
using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative
periods presented. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of approximately $3.29 million and
$3.50 million, respectively, as of August 1, 2019, with no impact on accumulated deficit. Financial position for reporting periods beginning on or after
August 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous
guidance.
78
As of July 31, 2020 and 2019, we lease offices space and movie theatres under non-cancelable operating leases, with terms ranging between 2 and
15 years. The following is a schedule, by years, of maturities of lease liabilities as of July 31, 2020:
12 months ending July 31,
2021
2022
2023
2024
2025
2025 and thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities
G. Safe Harbor
Lease payments
942,360
$
667,392
477,151
481,817
396,682
2,169,094
5,134,496
(1,001,257)
4,133,239
$
See “Cautionary Language Regarding Forward-Looking Statements.”
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business address
of all of our directors and executive officers is Room 2803, Dachong Business Centre, Dachong 1st Road, Nanshan district, Shenzhen, China.
Name
Jun Liu
Pishan Chi
Fang Cheng
Kwong Sang Liu
Yongyuan Chen
Longdley Zephirin
Age
43
34
57
58
57
49
Position(s)
President and Chairman and Director
Chief Executive Officer and Director
Chief Financial Officer
Independent Director
Independent Director
Independent Director
The following is a brief biography of each of our executive officers and directors:
Mr. Jun Liu has been our director since June 2019 and has been our President and Chairman since July 2020. Mr. Liu has served as the President
and Director of Asian Equity Exchange Group Co., Ltd., a subsidiary of a U.S. public company Asia Equity Exchange Group, Inc. (“AEEX”), since
November 2015. Mr. Liu served as the Chairman of the Board of Directors, President, and CEO of AEEX from July 2015 to September 2017, and the Chief
Financial Officer of AEEX from December 2015 to July 2016. Previously, Mr. Liu founded Shenzhen Hubao Brother TV Co., Ltd. in November 2011 and
was responsible for the company’s operations until June 2015. From May 2008 to December 2009, he served as the Chairman and President of Morgan
Networks, an online shopping center in China. In December 2001, he founded an e-commerce company called the B2B.cn Group and served as Chairman
and President and was responsible for company management and development planning until December 2007. During his six years in office, the B2B.cn
Group developed into one of China’s ten largest e-commerce companies with 12 branches and 2,000 employees. From December 2000 to December 2001,
he served as the head of marketing for the South China Branch of Alibaba. From February 2000 to December 2000, he served as the Vice President and
President, successively, of the ZhongHua United Network. Mr. Liu received his Ph.D. in International Finance from Camden University U.S.A. in 2015 and
his Senior College degree in Applied Physics from the Harbin Institute of Technology in 1998.
79
Mr. Pishan Chi has been our CEO and director since July 2020. Mr. Chi graduated from the Queen’s University of Canada. He served as the
Production Assistant Manager of ASIAPAC (Dongguan) Biotech Ltd. from September 2009 to April 2016. From May 2016 to December 2016, Mr. Chi
served as Platform Service Assistant at Asia-America (Shenzhen) Co., Ltd. Previously since January 2016, Mr. Chi served as IPO Service Specialist for the
Company.
Ms. Fang Cheng has been our Chief Financial Officer (“CFO”) since September 2018. Ms. Cheng has also served as the CFO of Qianhai Asia Era
(Shenzhen) International Financial Services Co., Ltd. since November 2015. From July 1984 to October 2015, Ms. Cheng served as the Chief Accountant
of China Railway Zhuzhou Bridge Co., Ltd. She graduated from Correspondence College of Central Party School with a bachelor's degree in Economic
Management in 1997 and has a strong understanding of international accounting and tax policies.
Mr. Kwong Sang Liu has served as our independent director since April 2019. Since May 1997, Mr. Liu has managed K.S. Liu & Company, CPA
Limited, a company he founded. Mr. Liu is a practicing accountant in Hong Kong for over 20 years specializing in audit, taxation, and corporate financial
advisory. He is currently a non-executive director in a number of Hong Kong Stock Exchange listed companies. Mr. Liu graduated with honors from the
Hong Kong Polytechnic University with a bachelor’s degree in Accountancy in 1997 and obtained a Master of Business Administration degree from the
University of Lincoln, England in 2002. He is a certified tax advisor andfellow member of the Institute of Chartered Accountants in England and Wales, the
Association of Chartered Certified Accountants, the Institute of Financial Accountants of the United Kingdom, the Institute of Certified Public Accountants
of Australia, the Institute of Certified Public Accountants of Hong Kong, the Taxation Institute of Hong Kong, and the Society of Registered Financial
Planners.
Mr. Yongyuan Chen has served as our independent director since April 2019. Mr. Chen is a practicing lawyer in China and Australia for over 20
years. He is currently the director of China Commercial Law Co. Australia Pty Limited specializing in foreign investment, merger, and acquisition and
intellectual property laws. He received a bachelor’s degree in international law from Jilin University of China in 1986, a Master’s degree in international
economic law from Renmin University of China in 1988, and a Doctor’s degree in law from the University of Sydney in 2002. Mr. Chen is a member of the
Pacific Rim Bar Association and All-China Law Society, a legal assistant to the Standing Committee of the Shenzhen Municipal People’s Congress, and a
member of the WTO Committee of the Shenzhen Bar Association. He formerly served as legal counsel of the Ministry of Foreign Economic Relations and
Trade, China National Technology Import and Export Corporation, and chief of the Policy and Regulation Division of Shenzhen Science and Technology
Bureau. From April 2011, Mr. Chen has worked as senior partner at Guangdong Huashang Law Firm, Sydney Branch. From October 2007 to April 2008,
Mr. Chen worked as senior partner at the Beijing office of the UK Law Firm Lovells.
Mr. Longdley Zephirin has served as our independent director since April 2019. Mr. Zephirin was selected as the No. 1 Stock Picker by the
Thomson Reuters Analyst Survey in 2010, and as a Master Stock Picker by the Wall Street Journal in 2008. Mr. Zephirin has served as the CEO and
Director of Research at The Zephirin Group, Inc. since January 2014. From March 2015 to December 2016, he worked as a consultant at Barclays Wealth;
from October 2006 to December 2012, he worked as an analyst consultant at Deutsche Asset Management. He received a bachelor's degree in Finance and
International Law from Pace University Lubin School of Business in 1997. Mr. Zephirin was a member of the board and benefit committee of Complexions
Contemporary Ballet and Wiyo Ltd.
Family Relationships
None of the directors or executive officers have a family relationship as defined in Item 401 of Regulation S-K.
80
B. Compensation
The following table sets forth certain information with respect to compensation for the fiscal year ended July 31, 2020, earned by or paid to our
chief executive officer and principal executive officer, our principal financial officer, and our other most highly compensated executive officers whose total
compensation exceeded $100,000.
Name and Principal Position
Qiuli Wang*
Former President, Chairman and director of ATIF
Jun Liu**
President and Chairman of ATIF, former CEO of
ATIF
Pishan Chi***
CEO of ATIF
Fang Cheng
CFO of ATIF and Qianhai
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
Deferred
Compensation
Earnings
Other
33,090
240,000
27,962
29,899
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
($)
33,090
240,000
27,962
29.899
-
-
-
-
* Qiuili Wang ceased to be our director, president and chairman of our Board on July 10, 2020.
** Jun Liu was appointed as our CEO on June 6, 2019 and ceased to be our CEO on July 10, 2020. Mr. Liu was appointed as our president and
chairman of our Board on July 10, 2020.
*** Pishan Chi was appointed as our CEO on July 10, 2020.
Our PRC subsidiary is required by PRC laws and regulations to make contributions equal to certain percentages of each employee’s salary for his
or her retirement benefit, medical insurance benefits, housing funds, unemployment, and other statutory benefits. Our PRC subsidiary paid retirement and
similar benefits for our officers and directors in the fiscal year ended July 31, 2020.
For the fiscal year ended July 31, 2020, we paid aggregate compensation and benefits of approximately $58,932 to our independent directors as a
group and reimbursed them for out-of-pocket expenses incurred in connection with their attendance at meetings of the board of directors.
C. Board Practices
Pursuant to our amended and restated articles of association, the minimum number of directors shall consist of not less than one person unless
otherwise determined by the shareholders in a general meeting. Unless removed or re-appointed, each director shall be appointed for a term expiring at the
next-following annual general meeting, if any is held. At any annual general meeting held, our directors will be elected by a majority vote of shareholders
eligible to vote at that meeting. At each annual general meeting, each director so elected shall hold office for a one-year term and until the election of their
respective successors in office or removed.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years, been involved in any legal proceedings
described in subparagraph (f) of Item 401 of Regulation S-K.
81
Controlled Company
Ms. Qiuli Wang beneficially owns approximately 51.9% of the aggregate voting power of our outstanding ordinary shares. As a result, we are
deemed a “controlled company” for the purpose of the Nasdaq listing rules and are permitted to elect to rely on certain exemptions from the obligations to
comply with certain corporate governance requirements, including:
·
·
the requirement that our director nominees be selected or recommended solely by independent directors; and
the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of
independent directors with a written charter addressing the purposes and responsibilities of the committees.
Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules even though we are deemed a controlled
company, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies
that are subject to all of the corporate governance requirements of Nasdaq.
Board of Directors
Our board of directors consist of five directors as of the date of this annual report.
Duties of Directors
Under British Virgin Islands law, our directors owe fiduciary duties both at common law and under statute, including a statutory duty to act
honestly, in good faith and with a view to our best interests. When exercising powers or performing duties as a director, our directors also have a duty to
exercise the care, diligence and skills that a reasonable director would exercise in comparable circumstances, taking into account without limitation the
nature of the company, the nature of the decision and the position of the director and the nature of the responsibilities undertaken by him. In exercising the
powers of a director, the directors must exercise their powers for a proper purpose and shall not act or agree to the company acting in a manner that
contravenes our amended and restated memorandum and articles of association or the BVI Act. In fulfilling their duty of care to us, our directors must
ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our
directors is breached.
The functions and powers of our board of directors include, among others:
·
·
·
·
appointing officers and determining the term of office of the officers;
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds, or associations as deemed advisable;
exercising the borrowing powers of the company and mortgaging the property of the company;
executing checks, promissory notes, and other negotiable instruments on behalf of the company; and
· maintaining or registering a register of relevant charges of the company.
Terms of Directors and Executive Officers
Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors,
in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of
our executive officers are appointed by and serve at the discretion of our board of directors.
82
Qualification
There is currently no shareholding qualification for directors.
Committees of the Board of Directors
We have established three committees under the board of directors: an audit committee, a compensation committee, and a nominating and
corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described
below.
Audit Committee. Our audit committee consists of Kwong Sang Liu, Yongyuan Chen, and Longdley Zephirin. Kwong Sang Liu is the chairman of
our audit committee. We have determined that Kwong Sang Liu, Yongyuan Chen, and Longdley Zephirin satisfy the “independence” requirements of
Section 5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange Act. Our board also has determined that Kwong Sang Liu
qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses financial sophistication within the meaning of the Nasdaq
Listing Rules. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company.
The audit committee is responsible for, among other things:
·
·
·
·
·
appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;
reviewing with the independent auditors any audit problems or difficulties and management’s response;
discussing the annual audited financial statements with management and the independent auditors;
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and
control major financial risk exposures;
reviewing and approving all proposed related party transactions;
· meeting separately and periodically with management and the independent auditors; and
· monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance.
Compensation Committee. Our compensation committee consists of Kwong Sang Liu, Yongyuan Chen, and Longdley Zephirin. Longdley
Zephirin is the chairman of our compensation committee. We have determined that Kwong Sang Liu, Yongyuan Chen, and Longdley Zephirin satisfy the
“independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. The compensation
committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and
executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The
compensation committee is responsible for, among other things:
·
·
·
·
reviewing and approving to the board with respect to the total compensation package for our most senior executive officers;
approving and overseeing the total compensation package for our executives other than the most senior executive officers;
reviewing and recommending to the board with respect to the compensation of our directors;
reviewing periodically and approving any long-term incentive compensation or equity plans;
83
·
·
selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s
independence from management; and
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee currently consists of Kwong Sang Liu,
Yongyuan Chen, and Longdley Zephirin. Yongyuan Chen is the chairman of our nominating and corporate governance committee. Kwong Sang Liu,
Yongyuan Chen, and Longdley Zephirin satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3
under the Securities Exchange Act. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to
become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is
responsible for, among other things:
·
·
·
·
identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy;
reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience
and availability of service to us;
identifying and recommending to our board the directors to serve as members of committees;
advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our
compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate
governance and on any corrective action to be taken; and
· monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance.
Employment Agreements
On September 29, 2018, we entered into employment agreements with Qiuli Wang and Fang Cheng; on June 6, 2019, we entered into an
employment agreement with Jun Liu; on July 10, 2020, we entered into an employment agreement with Pishan Chi. Pursuant to employment agreements,
the form of which is filed as Exhibit 10.3 to our F-1 registration statement filed with the SEC on December 11, 2018, we agree to employ each of our
executive officers for a specified time period, which will be renewed upon both parties’ agreement thirty days before the end of the current employment
term, and payment of cash compensation and benefits became payable when we became a public reporting company in the US. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the commitments of
any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense, willful disobedience of
a lawful and reasonable order, fraud or dishonesty, receipt of bribery, or severe neglect of his or her duties. An executive officer may terminate his or her
employment at any time with a one-month prior written notice. Each executive officer has agreed to hold, both during and after the employment agreement
expires, in strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential information.
Our employment agreement with Qiuli Wang, who was previously our President, is for a term of three years beginning on October 1, 2018, and
provides for an annual salary of $87,108, the payment of which commenced when we became a public reporting company in the US. On November 26,
2018, we amended the employment agreement with Qiuli Wang to provide that she would also be acting as our CEO. On June 6, 2019, we amended our
employment agreement with Qiuli Wang to clarify that she had ceased to be employed as our CEO. On July 10, 2020, Qiuli Wang stepped down as our
director, president and chairman of the Board and her employment agreement was terminated with immediate effect.
84
Our employment agreement with Fang Cheng, our CFO, is for a term of three years beginning on October 1, 2018, and provides for an annual
salary of $87,108, the payment of which commenced when we became a public reporting company in the US.
Our employment agreement with Jun Liu, our President and former CEO, is for a term of three years beginning on June 6, 2019, and provides for
an annual salary of $240,000. On July 10, 2020, we amended our employment agreement with Jun Liu to clarify that he had ceased to be employed as our
CEO and had been appointed as our president.
Our employment agreement with Pishan Chi, our CEO, is for a term of three years beginning on July 10, 2020, and provides for an annual salary
of US$87,108.
D. Employees
As of July 31, 2020, we had approximately 19 full-time employees, including 18 in Shenzhen and 1 in Hong Kong. The table below sets forth the
numbers of employees by functions as of July 31, 2020:
Function
Executive Office
Administration Department
Financial Department
Business Department
Consulting Services Department
Media Department
Technology Department
Total
Number of
Employees
% of Total
3
3
3
4
3
1
2
19
16%
16%
16%
21%
16%
5%
11%
100%
As of July 31, 2020, LGC had approximately 78 full-time employees. The table below sets forth the numbers of employees by functions as of
July 31, 2020:
Function
Executive Office
Administration Department
Finance Department
Multi-Channel Advertising Department
Operation Department
Event Planning and Execution Department
Film Production Department
Movie Theater Management Department
Total
Number of
Employees
% of Total
3
7
3
9
4
2
9
41
78
3.8%
9.0%
3.8%
11.5%
5.1%
2.6%
11.5%
52.6%
100.0%
There is no labor union. We believe our relations with our employees are good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of
our Ordinary Shares as of the date of this annual report.
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·
·
each of our directors and executive officers who beneficially own our Ordinary Shares; and
each person known to us to own beneficially more than 5.0% of our Ordinary Shares.
Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable
community property laws, the persons named in the table have sole voting and investment power with respect to all Ordinary Shares shown as beneficially
owned by them. Percentage of beneficial ownership of each listed person is based on 51,362,500 Ordinary Shares outstanding as of December 11, 2020.
Information with respect to beneficial ownership has been furnished by each director, officer, or beneficial owner of 5% or more of our Ordinary
Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment
power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed below and the percentage ownership of
such person, Ordinary Shares underlying options, warrants, or convertible securities held by each such person that are exercisable or convertible within 60
days of the date of this annual report are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.
Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and
investment power for all Ordinary Shares shown as beneficially owned by them.
Directors and Executive Officers(1):
Jun Liu(2)
Pishan Chi
Fang Cheng
Kwong Sang Liu
Yongyuan Chen
Longdley Zephirin
All directors and executive officers as a group (six persons):
5% Shareholders(1):
Qiuli Wang(3)
Leaping Group Co., Ltd.(4)
Ordinary Shares
Beneficially Owned
Number
Percent
4,062,074
0
0
0
0
0
4,061,574
7.9%
0%
0%
0%
0%
0%
7.9%
26,640,357
2,800,000
51.9%
5.5%
(1) Unless otherwise indicated, the business address of each of the individuals is Room 2803, Dachong Business Centre, Dachong 1st Road, Nanshan
District, Shenzhen, China.
(2) Jun Liu, our president and chairman, beneficially owns 4,062,074 Ordinary Shares through his direct ownership of 500 of our Ordinary Shares and
through separate voting rights proxy agreements entered with certain holders of our Ordinary Shares, which includes (i) 696,941 shares through a
voting rights proxy agreement entered with Mr. Tao Jiang, who owns approximately 1.4% of our Ordinary Shares; (ii) 2,030,786 shares through a
voting rights proxy agreement entered with Mr. Bo Jiang, who owns approximately 4.0% of our Ordinary Shares; and (iii) 1,333,847 shares
through a voting rights proxy agreement entered with Ms. Di Wang, who owns approximately 2.6% of our Ordinary Shares.
(3) Qiuli Wang beneficially owns 26,640,357 Ordinary Shares through her 100% ownership of Tianzhen Investment Limited, which owns
approximately 34.2% of our Ordinary Shares, and 9,100,000 shares through a proxy agreement entered with Eno Group Limited, which owns
approximately 17.7% of our Ordinary Shares.
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(4) Leaping Group Co., Ltd. is our majority-owned subsidiary. Pursuant to our amended and restated memorandum and articles of association, our
shares by another body corporate of which we hold, directly or indirectly, shares having more than 50 per cent of the votes in the election of
directors of the other body corporate, all rights and obligations attaching to our shares held by the other body corporate are suspended and shall
not be exercised by the other body corporate.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
During the year ended July 31, 2020, the Company leased office space in Hong Kong from Asia Time (HK) International Finance Service Limited
(“Asia Time HK”), an entity controlled by the Company’s controlling shareholder. The Company paid office lease expense of $79,875 to Asia Time HK for
the year ended July 31, 2020.
There were no related party transactions for the years ended July 31, 2019 and 2018, respectively.
Contractual Arrangements with WFOE, Qianhai, and Its Shareholders
We conduct our financial services business through Qianhai, a VIE entity that we control through a series of contractual arrangements between our
PRC subsidiary WFOE, Qianhai and its shareholders including but not limited to our principal shareholder, Qiuli Wang. Such contractual arrangements
provide us (i) the power to control Qianhai, (ii) the exposure or rights to variable returns from our involvement with Qianhai, and (iii) the ability to affect
those returns through use of our power over Qianhai to affect the amount of our returns. Therefore, we control Qianhai. For a description of these
contractual arrangements, see “Item 4. Information on the Company—B. Business Overview—Contractual Arrangements between WFOE and Qianhai.”
Material Transactions with Related Parties
On February 27, 2019, our pre-IPO shareholders surrendered an aggregated 15,000,000 Ordinary Shares, par value $0.001 per share, which were
subsequently cancelled, for no consideration, and resulted in a reduction in our issued and outstanding shares from 50,000,000 ordinary shares, par value
$0.001 per share, to 35,000,000 ordinary shares with a par value of $0.001 per share, as listed in the following table:
Number of shares
prior to Surrender
Amount Paid Per
Share
Number of Shares
after Surrender
Amount Paid Per
Share
Name of
Shareholder
2,000,000
26,500,000
13,000,000
26,500,000
13,000,000
26,500,000
50,000,000
USD0.001
USD0.001
USD0.001
USD0.001
USD0.001
USD0.001
1,400,000
18,550,300
9,100,000
2,800,000
1,470,000
1,680,000
35,000,000
USD0.001
USD0.001
USD0.001
USD0.001
USD0.001
USD0.001
Ronghua Liu
Tianzhen Investments Limited
Eno Group Limited
Great State Investments Limited
Xueqing Liu
Renyan Ou
On November 2, 2018, we issued 49,950,000 Ordinary Shares to our Beneficial Owners, in private transactions, for a total consideration of
$49,950: 26,473,500 Ordinary Shares were issued to Tianzhen Investments Limited, an entity that owned 53% of our outstanding shares, and is 100%
controlled by Qiuli Wang, our President and Chairman of the board of directors; 12,987,000 Ordinary Shares were issued to Eno Group Limited, an entity
that owned 26% of our outstanding Shares, and is 100% controlled by our Beneficial Owner, Yanru Zhou; 3,996,000 Ordinary Shares were issued to Great
State Investments Limited, an entity that owned 8% of our outstanding shares and is 100% controlled by our Beneficial Owner, Haiyun Liu; and 1,998,000
Ordinary Shares were issued to our Beneficial Owner, Ronghua Liu, who owned 98.5% equity of Qianhai, our VIE.
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On August 23 and September 27, 2018, we issued 26,500 Ordinary Shares to Tianzhen Investments Limited, an entity 100% controlled by Qiuli
Wang, our President and Chairman of the board of directors; and 2000 Ordinary Shares to Ronghua Liu, who owns 98.5% equity of Qianhai, our VIE.
On August 13, 2018, through a reorganization in connection with the intended IPO, Qianhai sold 45% of its equity ownership in its former wholly-
owned subsidiary, Asia Era Fund, for a total price of RMB31,500 (approximately $4,600) to Yanru Zhou, who beneficially owns 13,000 shares, or 26% of
our Ordinary Shares, through his 100% ownership in the equity of Eno Group Limited. Qianhai’s remaining 55% equity ownership interest in Asia Era
Fund was sold to two unrelated individuals in September 2018.
As of July 31, 2020 and 2019, we had no balances due from or due to related parties, respectively.
For the years ended July 31, 2020 and 2019, we repaid loans of $nil and $31,267 to related parties.
Employment Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements.”
Legal Proceedings
From time to time, we are subject to legal proceedings, investigations, and claims incidental to the conduct of our business. We are currently
engaged in a lawsuit relating to certain engagement agreements we had in connection with our and LGC’s IPOs. See “Item 4. Information on the Company
—B. Business Overview—Legal Proceedings” for additional information.
Dividend Policy
We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in
the foreseeable future.
Subject to the BVI Act and our amended and restated memorandum and articles of association, our board of directors may authorize declare a
dividend to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately following the
dividend the value of our assets will exceed our liabilities and we will be able to pay our debts as they become due. There is no further BVI statutory
restriction on the amount of funds which may be distributed by us by dividend.
If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds
from our Hong Kong subsidiary, ATIF HK.
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Current PRC regulations permit our indirect PRC subsidiary to pay dividends to ATIF HK only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiary and VIE in China is required to set aside at least 10%
of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is
also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is
determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the
event of liquidation.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC.
Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of
dividends from our profits, if any. Furthermore, if our subsidiary and affiliates in the PRC incur debt on their own in the future, the instruments governing
the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our
operations through the current contractual arrangements, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes,
any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a
rate of up to 10.0%. See “Item 10. Additional Information—Taxation—People’s Republic of China Taxation.”
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident
enterprise owns no less than 25% of a PRC entity. However, the 5% withholding tax rate does not automatically apply and certain requirements must be
satisfied, including without limitation that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity
must directly hold no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current
practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate.
As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax
resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation
Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding company, ATIF HK. As of the date of this annual report,
we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. ATIF HK intends to apply for the tax resident certificate
when WFOE plans to declare and pay dividends to ATIF HK. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China
—There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC
subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offer and Listing Details.
Our Ordinary Shares have been listed on the Nasdaq Capital Market since May 3, 2019, under the symbol “ATIF.”
B. Plan of Distribution
Not applicable.
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C. Markets
Our Ordinary Shares have been listed on the Nasdaq Capital Market since May 3, 2019, under the symbol “ATIF.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association and
Exhibit 3.1 contained in our registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange
Commission on December 11, 2018.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4.
Information on the Company” or elsewhere in this annual report.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—PRC Laws and Regulations Relating to Foreign
Exchange.”
E. Taxation
British Virgin Islands Taxation
The Government of the British Virgin Islands does not, under existing legislation, impose any income, corporate or capital gains tax, estate duty,
inheritance tax, gift tax, or withholding tax upon us or our shareholders who are not tax residents in the British Virgin Islands.
We and all distributions, interest, and other amounts paid by us to persons who are not tax residents in the British Virgin Islands will not be subject
to any income, withholding, or capital gains taxes in the British Virgin Islands, with respect to our Ordinary Shares owned by them and dividends received
on such shares, nor will they be subject to any estate or inheritance taxes in the British Virgin Islands.
No estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable by persons who are not tax residents in the British Virgin
Islands with respect to any of our shares, debt obligations, or other securities.
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Except to the extent that we have any interest in real property in the British Virgin Islands, all instruments relating to transactions in respect of our
shares, debt obligations, or other securities and all instruments relating to other transactions relating to our business are exempt from the payment of stamp
duty in the British Virgin Islands.
People’s Republic of China Taxation
The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect
the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Item 8. Financial Information—A. Consolidated Statements and
Other Financial Information—Dividend Policy.”
We are a holding company incorporated in the British Virgin Islands and we gain income by way of dividends paid to us from our PRC subsidiary.
The EIT Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its
equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a preferential tax rate or a tax exemption.
Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation
rules of the EIT Law define “de facto management body” as a managing body that actually, comprehensively manage and control the production and
operation, staff, accounting, property, and other aspects of an enterprise, the only official guidance for this definition currently available is set forth in SAT
Notice 82, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an
enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling
shareholder. Although ATIF does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-
controlled offshore incorporated enterprise within the meaning of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied
the guidance set forth in SAT Notice 82 to evaluate the tax residence status of ATIF and its subsidiaries organized outside the PRC.
According to SAT Notice 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a
“de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are
met: (i) the places where senior management and senior management departments that are responsible for daily production, operation and management of
the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing
and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided or need to be decided by
organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the
minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or more) of the directors or
senior management staff having the right to vote habitually reside within the territory of China.
We believe that we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the
key assets and records of ATIF, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our
shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure
similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that ATIF and its offshore
subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Notice
82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and
uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to
monitor our tax status.
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The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are
realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or gains are treated as China-sourced income. It is not
clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if
we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident
enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result become
subject to PRC withholding tax at a rate of up to 10%. Our PRC counsel believes that it is more likely than not that we and our offshore subsidiaries would
be treated as a non-resident enterprise for PRC tax purposes because they do not meet some of the conditions out lined in SAT Notice. In addition, we are
not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax
authorities as of the date of this annual report. Therefore we believe that it is possible but highly unlikely that the income received by our overseas
shareholders will be regarded as China-sourced income.
Tax Law, or the EIT Law, we may be classified as a ‘resident enterprise’ of China, which could result in unfavorable tax consequences to us and
our non-PRC shareholders.”
Our company pays an EIT rate of 25% for WFOE. The EIT is calculated based on the entity’s global income as determined under PRC tax laws
and accounting standards. If the PRC tax authorities determine that WFOE a PRC resident enterprise for enterprise income tax purposes, we may be
required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident
enterprise shareholders may be subject to a 10% PRC withholding tax on gains realized on the sale or other disposition of our Ordinary Shares, if such
income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on
dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were
to apply to dividends or gains realized by non-PRC individuals, it would generally apply at a rate of 20% unless a reduced rate is available under an
applicable tax treaty. However, it is also unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their
country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. There is no guidance from the PRC government to
indicate whether or not any tax treaties between the PRC and other countries would apply in circumstances where a non-PRC company was deemed to be a
PRC tax resident, and thus there is no basis for expecting how tax treaty between the PRC and other countries may impact non-resident enterprises.
United States Federal Income Tax Considerations The following does not address the tax consequences to any particular investor or to persons in
special tax situations such as:
·
·
·
·
·
·
·
·
·
·
·
banks;
financial institutions;
insurance companies;
regulated investment companies;
consulting investment trusts;
broker-dealers;
persons that elect to mark their securities to market;
U.S. expatriates or former long-term residents of the U.S.;
governments or agencies or instrumentalities thereof;
tax-exempt entities;
persons liable for alternative minimum tax;
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·
·
·
·
persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own 10% or more of our voting power or value (including by reason of owning our Ordinary Shares);
persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as compensation; or
persons holding our Ordinary Shares through partnerships or other pass-through entities.
In addition, this discussion does not discuss any non-United States, alternative minimum tax, state, or local tax or any non-income tax (such as the
U.S. federal gift or estate tax) considerations, or the Medicare tax on net investment income.
Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares
The following brief description sets forth the material U.S. federal income tax consequences related to the ownership and disposition of our
Ordinary Shares and applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar as their
functional currency. This description does not deal with all possible tax consequences relating to ownership and disposition of our Ordinary Shares or U.S.
tax laws, other than the U.S. federal income tax laws, such as the tax consequences under non-U.S. tax laws, state, local and other tax laws. This brief
description is based on the federal income tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in
effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before
such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described
below. No ruling has been sought from the Internal Revenue Service 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.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of
Ordinary Share and you are, for U.S. federal income tax purposes,
·
·
·
·
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any
state thereof or the District of Columbia;
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all
substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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 (“PFIC”) 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.
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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 British Virgin Islands, clause
(1) above can be satisfied only if the Ordinary Shares are readily tradable on an established securities market in the United States. Under U.S. Internal
Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the
United States if they are listed on the Nasdaq Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for
dividends paid with respect to our Ordinary Shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income
(as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross
amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our
Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution
exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a
non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange, or other
taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the
Ordinary Shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any
such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes which will
generally limit the availability of foreign tax credits.
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Passive Foreign Investment Company (“PFIC”)
A non-U.S. corporation is considered a PFIC, as defined in Section 1297(a) of the US Internal Revenue Code, for any taxable year if either:
·
·
at least 75% of its gross income for such taxable year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets
that produce or are held for the production of passive income (the “asset test”).
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and
composition of our assets for purposes of the PFIC asset test, (1) the cash we raised in our IPO will generally be considered to be held for the production of
passive income and (2) the value of our assets must be determined based on the market value of our Ordinary Shares from time to time, which could cause
the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised in our IPO) on any particular quarterly
testing date for purposes of the asset test.
Based on our operations and the composition of our assets, we do not expect to be treated as a PFIC under the current PFIC rules. However, we
must make a separate determination each year as to whether we are a PFIC, and there can be no assurance with respect to our status as a PFIC for our
current taxable year or any future taxable year. Depending on the amount of assets held for the production of passive income, it is possible that, for our
current taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held for the production of passive income. We will
make this determination following the end of any particular tax year. Although the law in this regard is unclear, we are treating Qianhai as being owned by
us for United States federal income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic
benefits associated with Qianhai, and as a result, we are treating Qianhai as our wholly-owned subsidiary for U.S. federal income tax purposes. If we are
not treated as owning Qianhai for United States federal income tax purposes, we would likely be treated as a PFIC. In addition, because the value of our
assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares and because cash is generally considered
to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of our Ordinary Shares. Accordingly,
fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to
uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised in our
IPO. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our
assets will depend upon material facts (including the market price of our Ordinary Shares from time to time) that may not be within our control. If we are a
PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold
Ordinary Shares. However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, you may
avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the Ordinary Shares.
If we are a PFIC for your taxable year(s) during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any
“excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you
make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual
distributions you received during the shorter of the three preceding taxable years or your holding period for the Ordinary Shares will be treated as an excess
distribution. Under these special tax rules:
95
·
·
·
the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;
the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in
which we were a PFIC, will be treated as ordinary income, and
the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses
for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as
capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election, under Section 1296 of the US Internal
Revenue Code, for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold
(or are deemed to hold) Ordinary Shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the
excess, if any, of the fair market value of the Ordinary Shares as of the close of such taxable year over your adjusted basis in such Ordinary Shares, which
excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the Ordinary
Shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market
gains on the Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as
gain on the actual sale or other disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized
on the actual sale or disposition of the Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such Ordinary Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid
mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the
lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends and Other Distributions on our Ordinary
Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least
15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the Nasdaq Capital Market. If the Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you are a holder of Ordinary Shares,
the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election, under Section 1295(b) of the US Internal Revenue
Code, 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.
96
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections
discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Ordinary Shares and proceeds from the sale, exchange, or redemption of our Ordinary Shares may be
subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding, under Section 3406 of the US Internal
Revenue Code with, at a current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer
identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup
withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service
Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax
liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders. However,
transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding), and such brokers
or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our Ordinary
Shares, subject to certain exceptions (including an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold
Ordinary Shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the SEC our registration statements on Form F-1 (File Number 333-228750), as amended, and Form F-3 (File
Number 333-239131), as amended.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to
file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal
year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public
reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing, among other things, the furnishing and content of proxy
statements to shareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.
97
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our functional currency is the RMB. Any significant revaluation of RMB against U.S. dollar may materially the value of, and any dividends
payable on, our Ordinary Shares in U.S. dollars in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in the
PRC—Because our business is conducted in RMB and the price of our Ordinary Shares is quoted in U.S. dollars, changes in currency conversion rates may
affect the value of your investments.”
Concentration Risks
For the years ended July 31, 2020, 2019 and 2018, a substantial part of our assets were located in the PRC and a substantial part of our revenues
were derived from our subsidiary and VIE located in the PRC.
For the year ended July 31, 2020, one customer accounted for 91% of the Company’s consolidated revenue, respectively. For the year ended July
31, 2019, three customers accounted for approximately 44%, 29%, and 19% of the Company’s total revenue. For the year ended July 31, 2018, two
customers accounted for approximately 33% and 21% of the Company’s total revenue.
As of July 31, 2020, two customers accounted for 40% and 26% of the Company’s total accounts receivable balance, respectively. As of July 31,
2019, four customers accounted for approximately 61%, 15%, 14%, and 11% of the Company’s outstanding accounts receivable. As of July 31, 2018, one
customer accounted for 100% of our outstanding accounts receivable.
For the year ended July 31, 2020, the Company purchased 22%, 21%, and 15% of its services from three suppliers, respectively. For the year
ended July 31, 2019 and 2018, the Company purchased 50% and 48% from one supplier, respectively.
Risks related to our VIE structure
We believe that the contractual arrangements with our VIE and respective shareholders are in compliance with PRC laws and regulations and are
legally enforceable. However, uncertainties in the PRC legal system could limit the our ability to enforce the contractual arrangements. If the legal structure
and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
·
·
·
·
·
·
revoke the business and operating licenses of our PRC subsidiary and VIE;
discontinue or restrict the operations of any related-party transactions between our PRC subsidiary and VIE;
limit our business expansion in China by way of entering into contractual arrangements;
impose fines or other requirements with which our PRC subsidiary and VIE may not be able to comply;
require us or our PRC subsidiary and VIE to restructure the relevant ownership structure or operations; or
restrict or prohibit our use of the proceeds from the IPO to finance our business and operations in China.
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Our ability to conduct its consulting services business may be negatively affected if the PRC government were to carry out of any of the
aforementioned actions. As a result, we may not be able to consolidate our VIE in our consolidated financial statements as we may lose the ability to exert
effective control over the VIE and its respective shareholders and we may lose the ability to receive economic benefits from our VIE. We, however, does
not believe such actions would result in the liquidation or dissolution of us, our PRC subsidiary, or our VIE.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not Applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-228750) for our
IPO of up to 4,000,000 Ordinary Shares, which was declared effective by the SEC on February 8, 2019, and the registration statement on Form F-3, as
amended (File Number 333-239131) for the sale of our securities of up to an aggregate initial offering price not to exceed $50,000,000, which was declared
effective by the SEC on September 21, 2020.
In April 2019, we completed our IPO in which we issued and sold an aggregate of 2,074,672 Ordinary Shares, at a price of $5.00 per Ordinary
Share for a total offering size of approximately $10,373,360. The net proceeds raised from the IPO were $9,558,243.47 after deducting underwriting
commissions and the offering expenses payable by us. Boustead Securities, LLC was the underwriter of our IPO.
We incurred approximately $1,440,680 in expenses in connection with our IPO, which included approximately $720,253 in underwriting
commissions for the IPO and approximately $720,427 in other costs and expenses. None of the transaction expenses included payments to directors or
officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds we
received from the IPO were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity
securities or our affiliates.
99
As of July 31, 2019, we have used approximately $3,624,851 of the net proceeds from our IPO, including (i) $793,609 for daily operations,
(ii) $479,421 for outsourced services, (iii) $244,698 for marketing, (iv) $191,908 for IPO related expenses, (v) $180,000 for stock trading platform
development; (vi) 1,452,792 for investment in financial instruments, and (vii) 282,423 for purchases of fixed assets. We intend to use the remaining net
proceeds from our IPO in the manner as disclosed in our registration statement on Form F-1, as amended (File Number 333-228750).
In June 2020, we filed a registration statement on Form F-3, as amended (File Number 333-239131), to offer ordinary shares, preferred shares,
warrants to purchase ordinary shares, preferred shares, debt securities, (not to exceed $10,000,000 in the aggregate), or units consisting of a combination of
any or all of these securities at an aggregate offering price of up to $50,000,000 We intend to use the net proceeds from such offerings in the manner as
disclosed in our registration statement on Form F-3, as amended (File Number 333-239131).
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we carried
out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of July 31,
2020. Based on that evaluation, our management has concluded that, as of July 31, 2020, our disclosure controls and procedures were not effective in
ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed,
summarized, and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our conclusion is based on the fact that we do not have
sufficient full-time accounting and financial reporting personnel with appropriate levels of accounting knowledge and experience to monitor the daily
recording of transactions, to address complex U.S. GAAP accounting issues and the related disclosures under U.S. GAAP. In addition, there was a lack of
sufficient documented financial closing procedure and a lack of risk assessment in accordance with COSCO 2013 framework. Our management is currently
in the process of evaluating the steps necessary to remediate the ineffectiveness, such as (i) hiring more qualified accounting personnel with relevant U.S.
GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control
framework, and (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and
financial reporting personnel, and (iii) establishing an internal audit function and standardizing the Company’s semi-annual and year-end closing and
financial reporting processes.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. In assessing our internal control over financial reporting, prior to the offering in April 2019, we
have been a private company with limited accounting personnel and other resources to address our internal controls and procedures. Our independent
registered public accounting firm, has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our
consolidated financial statements for the year ended July 31, 2020, we identified four "material weaknesses" in our internal control over financial reporting.
· We did not have sufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP
accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. Specifically, our control did not
operate effectively to ensure the appropriate and timely analysis of and accounting for unusual and non-routine transactions and certain
financial statement accounts;
· We have not established an internal control department and had a lack of adequate policies and procedures in internal audit function to ensure
that our policies and procedures have been carried out as planned;
· We have not established sufficient risk assessment in accordance with the requirement of COSCO 2013 Framework; and
· We did not have sufficient documented financial closing policies and procedures.
100
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of PCAOB Auditing Standard AS 2201, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. We have hired additional accounting staffs and are in the progress of improving our system security
environment and conducting regular backup plan and penetration testing to ensure the network and information security. In addition, we plan to address the
weaknesses identified above by implementing the following measures:
Furthermore, we are in the process of implementing a number of measures to address the first to third material weakness that has been identified,
including:
1) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the
financial reporting function and to set up a financial and system control framework; and
2)
implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial
reporting personnel.
Especially for the identified material weakness related to internal control, we will hire experts to improve and test our internal control and the set
up a series of standard and recurring internal audit work procedures before April 2021. We schedule to will perform self-assessment of internal control
effectiveness on a continuous basis, which will be led by our accounting and risk management department within year 2021. We will also hire more
competent personnel and involve professional service companies to help us implement SOX 404 compliance together with the establishment of our internal
audit function.
However, we cannot assure you that we will remediate our material weaknesses in a timely manner. See "Risk Factors—Risks Relating to Our
Business and Industry—If we fail to implement and maintain an effective internal controls over financing reporting, we may be unable to accurately report
our results of operations, meet our reporting obligations or prevent fraud." in the annual report for the year ended July 31, 2020.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of our registered public accounting firm due to rules of the SEC where
domestic and foreign registrants that are non-accelerated filers, which we are, and “emerging growth companies” which we also are, are not required to
provide the auditor attestation report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Kwong Sang Liu qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. Kwong Sang Liu satisfies the
“independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules as well as the independence requirements of Rule 10A-3 under the
Exchange Act.
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Item 16B. CODE OF ETHICS
We adopted a code of ethics as of the date of the filing of our Form F-1 on December 11, 2018, and filed it as exhibit 99.1 to our Form F-1.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered and billed
by Friedman LLP, our independent registered public accounting firm for the periods indicated.
Audit Fees(1)
Audit-Related Fees
Tax Fees
All Other Fees
Total
For the Fiscal Years Ended July 31,
2020
2019
$
$
270,000 $
0
0
0
270,000 $
200,000
0
0
0
200,000
(1) Audit fees include the aggregate fees billed in each of the fiscal years for professional services rendered by our independent registered public
accounting firm for the audit of our annual financial statements or for the audits of our financial statements and review of the interim financial
statements in connection with our IPO in 2019.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by Friedman LLP, our independent registered public
accounting firm, including audit services, audit-related services, tax services and other services as described above.
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the
period covered by this annual report.
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
Item 16G. CORPORATE GOVERNANCE
As a British Virgin Islands company listed on the Nasdaq Capital Market, we are subject to the Nasdaq Capital Market corporate governance
listing standards. However, Nasdaq Capital Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home
country. Certain corporate governance practices in the British Virgin Islands, which is our home country, may differ significantly from the Nasdaq Capital
Market corporate governance listing standards. We intend to follow the following home country practices in lieu of the Nasdaq Listing Rules as follows:
·
Nasdaq Listing Rule 5605(b)(1) requires listed companies to have, among other things, a majority of its board members be independent. As a
foreign private issuer, however, we are permitted to, and we may follow home country practice in lieu of the above requirements, or we may
choose to comply with the above requirement within one year of listing. The corporate governance practice in our home country, the British
Virgin Islands, does not require a majority of our board to consist of independent directors. Currently, a majority of our board members are
independent.
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· We do not intend to follow Nasdaq Listing Rule 5620 requirements regarding annual meeting of shareholders or the provision of proxy
statements for general meetings of shareholders. Pursuant to British Virgin Islands corporate law, we are not required to hold annual meeting
of shareholders. In addition, British Virgin Islands corporate law does not have a regulatory regime for the solicitation of proxies and the
solicitation of proxies is not a generally accepted business practice in British Virgin Islands. We do intend to provide shareholders with an
agenda and other relevant documents for the general meeting of shareholders.
· We do not intend to follow Nasdaq’s requirements regarding shareholder approval for certain issuances of securities under Nasdaq Listing
Rule 5635. Pursuant to British Virgin Islands corporate law our shareholders have authorized our board of directors to issue securities
including in connection with certain events such as the acquisition of shares or assets of another company, the establishment of or
amendments to equity-based compensation plans for employees, a change of control of us, rights issues at or below market price, certain
private placements and issuance of convertible notes, and the issuance of 20% or more of our outstanding ordinary shares.
Other than those described above, there are no significant differences between our corporate governance practices and those followed by U.S.
domestic companies under Nasdaq Capital Market corporate governance listing standards.
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
Item 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
Item 18. FINANCIAL STATEMENTS
PART III
The consolidated financial statements of ATIF Holdings Limited, and its subsidiaries are included at the end of this annual report.
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Item 19. EXHIBITS
Exhibit
No.
Description
EXHIBIT INDEX
1.1
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Form of Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to
Exhibit 3.1 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange
Commission on December 11, 2018)
Registrant’s Specimen Certificate for Ordinary Shares (incorporated herein by reference to Exhibit 4.1 to the registration statement on
Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange Commission on December 11, 2018)
Agreement of Website (CNNM) Transfer dated September 20, 2018, between ATIF HK and Shenzhen Shangyuan Electronic Commerce
Ltd. (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1 (File No. 333-228750), as amended,
initially filed with the Securities and Exchange Commission on December 11, 2018)
Voting Right Proxy Agreement dated September 30, 2018, between Qiuli Wang and Eno Group (incorporated herein by reference to
Exhibit 10.2 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and
Exchange Commission on December 11, 2018)
Form of Employment Agreement by and between executive officers and the Registrant (incorporated herein by reference to Exhibit 10.3
to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange
Commission on December 11, 2018)
Form of Indemnification Agreement between directors and the Registrant (incorporated herein by reference to Exhibit 10.4 to the
registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange Commission on
December 11, 2018)
Exclusive Service Agreement dated October 9, 2018, between WFOE and VIE (incorporated herein by reference to Exhibit 10.5 to the
registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange Commission on
December 11, 2018)
Equity Pledge Agreement dated October 9, 2018, between WFOE, Beneficial Owners, and VIE (incorporated herein by reference to
Exhibit 10.6 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and
Exchange Commission on December 11, 2018)
Exclusive Call Option Agreement dated October 9, 2018, between WFOE, Beneficial Owners, and VIE (incorporated herein by
reference to Exhibit 10.7 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities
and Exchange Commission on December 11, 2018)
Shareholders’ Voting Rights Proxy Agreement dated October 9, 2018, between WFOE, Beneficial Owners, and VIE (incorporated herein
by reference to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333228750), as amended, initially filed with the
Securities and Exchange Commission on December 11, 2018)
Equity Transfer Agreement dated August 13, 2018, by and between WFOE and Yanru Zhou (incorporated herein by reference to
Exhibit 10.10 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and
Exchange Commission on December 11, 2018)
Equity Transfer Agreement dated September 19, 2018, by and between WFOE and Zhuorong Cai (incorporated herein by reference to
Exhibit 10.11 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and
Exchange Commission on December 11, 2018)
Equity Transfer Agreement dated September 19, 2018, by and between WFOE and Zehong Lai (incorporated herein by reference to
Exhibit 10.12 to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and
Exchange Commission on December 11, 2018)
Trust Deed dated December 11, 2017, by and between Ronghua Liu and Qiuli Wang (incorporated herein by reference to Exhibit 10.13
to the registration statement on Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange
Commission on December 11, 2018)
104
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
8.1*
11.1
12.1*
12.2*
13.1 **
13.2 **
23.1*
Letter of Undertaking by Qianhai Shareholder (incorporated herein by reference to Exhibit 10.14 to the registration statement on
Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange Commission on December 11, 2018)
English Translation of Lease Agreement dated October 31, 2019, by and between Qianhai and Shenzhen Dedian Investment Ltd.
(incorporated herein by reference to Exhibit 4.14 to the annual report on Form 20-F, as amended, initially filed with the Securities and
Exchange Commission on December 2, 2019)
Lease Agreement dated October 30, 2019, by and between ATIF HK and Begin Land Limited (incorporated herein by reference to
Exhibit 4.15 to the annual report on Form 20-F, as amended, initially filed with the Securities and Exchange Commission on
December 2, 2019)
Life Insurance Investment Agreement dated July 12, 2019, by and between ATIF HK and Manulife (International) Limited (incorporated
herein by reference to Exhibit 4.15 to the annual report on Form 20-F, as amended, initially filed with the Securities and Exchange
Commission on December 2, 2019)
Agreement for Sale and Purchase in Respect of Shares and Subordinated Loan of Sinofortune Securities Limited dated December 20,
2019, by and between ATIF Limited and Sinofortune Financial Holdings (BVI) Limited (incorporated herein by reference to
Exhibit 10.1 to the report of foreign private issuer on Form 6-K initially filed with the Securities and Exchange Commission on
December 28, 2019)
Second Amendment to Amended and Restated Consulting Agreement dated February 11, 2020, by and between Leaping Media Group
Co., Ltd. and Qianhai Asia Era (Shenzhen) International Financial Services Co., Ltd. (incorporated herein by reference to Exhibit 10.1 to
the report of foreign private issuer on Form 6-K initially filed with the Securities and Exchange Commission on February 12, 2020)
Share Exchange Agreement, dated April 8, 2020, by and among ATIF Holdings Limited, Leaping Group Co., Ltd., and each of the
shareholders of Leaping Group Co., Ltd.(incorporated herein by reference to Exhibit 99.2 to the report of foreign private issuer on
Form 6-K initially filed with the Securities and Exchange Commission on April 8, 2020)
Debt Conversion and Share Purchase Agreement, dated April 8, 2020, by and among ATIF Holdings Limited and Leaping Group
Co., Ltd. (incorporated herein by reference to Exhibit 99.3 to the report of foreign private issuer on Form 6-K initially filed with the
Securities and Exchange Commission on April 8, 2020)
List of subsidiaries of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on
Form F-1 (File No. 333-228750), as amended, initially filed with the Securities and Exchange Commission on December 11, 2018)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Consent of Friedman LLP
105
101. INS*
101. SCH*
101. CAL*
101. DEF*
101. LAB*
101. PRE*
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed with this annual report on Form 20-F
** Furnished with this annual report on Form 20-F
106
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Date: December 30, 2020
ATIF Holdings Limited
/s/ Pishan Chi
By:
Name: Pishan Chi
Title: Chief Executive Officer
107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ATIF Holdings Limited AND SUBSIDIARIES
TABLE OF CONTENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of July 31, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Income (loss) for the years ended July 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended July 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended July 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6 – F-36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ATIF Holdings Limited.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ATIF Holdings Limited and its subsidiaries (collectively, the “Company”) as of July 31,
2020 and 2019, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for
each of the three years in the period ended July 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2020 and 2019,
and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2020, in conformity with accounting principles
generally accepted in the United States of America.
The Company’s ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has incurred significant losses from operations, has a significant working capital deficit, will
require additional capital to fund its current operating plan and has stated that substantial doubt exists about its ability to continue as a going concern.
Management’s evaluation of the events and conditions and plans in regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statement. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2019.
New York, New York
December 30, 2020
F-1
ATIF HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories
Deposits
Investment in trading securities
Investment in life insurance contract
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Investment in life insurance contract
Intangible assets, net
Deferred film production cost
Goodwill
Right-of- use assets, net
TOTAL ASSETS
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Bank borrowings
Accounts payable
Deferred revenue
Taxes payable
Accrued expenses and other current liabilities
Operating lease liabilities, current
Total current liabilities
Operating lease liabilities, noncurrent
TOTAL LIABILITIES
Commitments
EQUITY
Ordinary shares, $0.001 par value, 100,0000,000 shares authorized, 47,014,674 shares and 37,074,672 shares
issued and outstanding as of July 31, 2020 and 2019, respectively
Additional paid-in capital
Statutory reserve
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Total ATIF Holdings Limited Stockholders’ equity
Noncontrolling interest
TOTAL LIABILITIES AND EQUITY
$
$
$
As of July 31,
2020
2019
428,258 $
939,392
46,778
743,122
918,675
1,290,289
870,951
5,237,465
2,623,391
-
7,925,102
328,308
25,902,394
3,768,418
45,785,078 $
143,248 $
1,069,177
1,063,642
4,004,164
753,866
750,350
7,784,447
3,382,889
11,167,336
6,459,702
1,472,258
-
155,397
-
-
2,499,935
10,587,292
49,029
1,277,514
428,759
-
-
-
12,342,594
-
-
415,392
669,069
56,928
-
1,141,389
-
1,141,389
47,015
30,555,757
355,912
(13,491,659)
(63,766)
17,403,259
37,075
9,492,893
355,912
1,391,040
(75,715)
11,201,205
17,214,483
-
$
45,785,078 $
12,342,594
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ATIF HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended July 31,
2019
2020
2018
Revenues
Revenues from consulting services and customer’s initial registration services
Revenues from multi-channel advertising, event planning and execution
Total Revenue
Cost of revenues – multi-channel advertising, event planning and execution
Gross profits
$
645,127 $
40,872
685,999
(227,410)
458,589
3,078,758 $
-
3,078,758
-
3,078,758
Operating expenses:
Selling expenses
General and administrative expenses
Provision for doubtful accounts
Goodwill impairment loss
Impairment of intangible assets
Impairment of property and equipment
Total operating expenses
Income (Loss) from operations
Other income (expenses):
Interest income (expenses), net
Other income (expenses), net
Gain from investment in trading securities
Total other income (expense), net
5,307,891
-
5,307,891
-
5,307,891
1,773,159
807,053
-
-
-
-
2,580,212
2,638,972
6,255,109
2,645,239
5,621,467
384,492
172,728
17,718,007
1,096,195
1,245,169
65,790
-
-
-
2,407,154
(17,259,418)
671,604
2,727,679
(169)
(155,568)
201,051
45,314
1,994
32,452
-
34,446
16,303
(80,283)
-
(63,980)
Income (loss) before income taxes
(17,214,104)
706,050
2,663,699
Income tax provision
Net income (loss)
76,264
(17,290,368)
276,823
429,227
716,816
1,946,883
Less: Net loss attributable to non-controlling interests
2,407,669
-
-
Net income (loss) attributable to ATIF Holdings Limited
(14,882,699)
429,227
1,946,883
Other comprehensive loss:
Total foreign currency translation adjustment
Comprehensive income (loss)
Less: comprehensive loss attributable to non-controlling interests
Comprehensive income (loss) attributable to ATIF Holdings Limited
Earnings (Loss) Per share
Basic and diluted
Weighted Average Shares Outstanding
Basic and diluted
$
$
(30,225)
(17,320,593)
2,449,843
(14,870,750) $
(17,642)
411,585
-
411,585 $
(113,090)
1,833,793
-
1,833,793
(0.37) $
0.01 $
0.06
39,790,520
35,522,931
35,000,000
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ATIF HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JULY 31, 2020, 2019, AND 2018
Ordinary Share
Shares
Amount
Additional
Paid in
Capital
Statutory
Reserves
Retained
Earnings
(accumulated
deficit)
Accumulated
Other
Comprehensive
Loss
Noncontrolling
interests
Balance at July 31, 2017
Capital contribution
Appropriation to statutory reserve
Net income for the year
Foreign currency translation adjustment
Balance at July 31, 2018
Proceeds from initial public offering
Appropriation to statutory reserve
Net income for the year
Foreign currency translation adjustment
Balance at July 31, 2019
Acquisition of 51.2% equity interest in
LGC
Net loss for the year
Foreign currency translation adjustment
Balance at July 31, 2020
35,000,000
-
-
-
-
35,000,000
2,074,672
-
-
-
37,074,672
9,940,002
-
-
47,014,674
$
$
$
$
35,000
-
-
-
-
35,000
2,075
-
-
-
37,075
9,940
-
-
47,015
$
$
$
$
(35,000) $
755,139
-
-
-
720,139
8,772,754
-
-
-
9,492,893
$
$
21,062,864
-
-
30,555,757
$
64,111
-
214,725
-
-
278,836
-
77,076
-
-
355,912
-
-
-
355,912
$
(693,269) $
-
(214,725)
1,946,883
-
1,038,889
-
$
(77,076)
429,227
-
1,391,040
$
-
(14,882,699)
$
$
$
(13,491,659) $
55,017
-
-
-
(113,090)
(58,073) $
-
-
-
(17,642)
(75,715) $
-
-
11,949
(63,766) $
The accompanying notes are an integral part of these consolidated financial statements.
F-4
$
$
Total
(574,141)
755,139
-
1,946,883
(113,090)
2,014,791
8,774,829
-
429,227
(17,642)
$
11,201,205
-
-
-
-
-
-
-
-
-
-
-
19,664,326
(2,407,669)
(42,174)
17,214,483
$
40,737,130
(17,290,368)
(30,225)
34,617,742
ATIF HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
For the Years Ended July 31,
2019
2020
2018
$
(17,290,368) $
429,227 $
1,946,883
activities:
Depreciation and amortization
Changes in bad debt allowance
Amortization of right-of-use assets
Goodwill impairment loss
Impairment of intangible assets
Impairment of property and equipment
Loss from disposal of property and equipment
Gain from investment in trading securities
Deferred tax expense
Changes in operating assets and liabilities:
Accounts receivable
Deposits
Due from a related party
Prepaid expenses and other current assets
Inventories, net
Accounts payable
Deferred revenue
Taxes payable
Accrued expenses and other liabilities
Lease liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of intangible assets
Prepayment for fixed assets purchase
Loans to a third party
Collection of third party loans
Cash acquired from business combination
Payment for investment in trading securities
Investment deposit for life insurance contract
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Capital contribution
Net proceeds from initial public offering
Proceeds from bank borrowings
Repayment of related party borrowings
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest expenses
Cash paid for income tax
Supplemental disclosure of Non-cash investing and financing activities
Common shares issued for acquisition of LGC
Debt conversion for acquisition of LGC
Net assets acquired from LGC
Right-of-use assets obtained in exchange for operating lease obligations
968,396
2,645,239
639,587
5,621,467
384,492
172,728
12,388
(201,051)
76,264
27,336
(315,667)
-
115,128
2,599
1,520,365
640,977
39,873
(554,744)
(398,744)
(5,893,735)
(525,463)
-
-
-
-
1,066,617
(717,624)
-
(176,470)
-
-
141,983
-
141,983
(103,222)
(6,031,444)
6,459,702
428,258 $
50,323
65,790
-
-
-
-
-
-
-
(1,411,180)
-
14,919
(1,686,683)
-
-
(61,860)
(185,246)
(234,128)
16,458
-
-
-
-
-
-
-
-
(144,202)
-
(7,691)
329,750
-
(571,121)
(472,721)
688,781
250,302
(3,018,838)
2,036,439
(20,762)
(458,100)
(247,534)
-
2,741,430
-
-
(1,275,950)
739,084
-
8,772,754
-
(31,267)
8,741,487
(74,996)
6,386,737
72,965
6,459,702 $
(26,765)
-
-
(2,872,151)
-
-
-
-
(2,898,916)
755,139
-
-
-
755,139
35,490
(71,848)
144,813
72,965
608 $
- $
- $
490,397 $
-
142,681
21,072,804 $
1,851,000 $
3,064,269 $
4,103,831 $
- $
- $
- $
- $
-
-
-
-
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATIF Holdings Limited (“ATIF” or the “Company”), formerly known as Eternal Fairy International Limited and Asia Times Holdings Limited, was
incorporated under the laws of the British Virgin Islands (“BVI”) on January 5, 2015, as a holding company to develop business opportunities in the
People’s Republic of China (the “PRC” or “China”). The Company adopted its current name on March 7, 2019.
ATIF owns 100% equity interest of ATIF Limited (“ATIF HK”), formerly known as China Elite International Holdings Limited and Asia Times
International Finance Limited, a limited liability company established in Hong Kong on January 6, 2015, and adopted its current name on March 7, 2019.
ATIF HK acquired a financial and news media platform www.chinacnnm.com in September 2018.
On May 20, 2015, ATIF HK incorporated Huaya Consultant (Shenzhen) Co., Ltd. (“Huaya”) as a Wholly Foreign Owned Enterprise (“WFOE”) in China.
On September 5, 2018, Huaya entered into a series of contractual arrangements with the owners of Qianhai Asia Era (Shenzhen) International Financial
Service Co., Ltd. (“Qianhai”), a company incorporated on November 3, 2015, under the laws of China with a registered capital of RMB5 million
(approximately $0.75 million), which had been fully funded in December 2017. Qianhai is primarily engaged in providing business advisory and financial
consulting services to small and medium-sized enterprise customers in the PRC.
Qianhai originally owned a 100% controlled subsidiary Qianhai Asia Era (Shenzhen) International Fund Management Co., Ltd. (“Asia Era Fund”), which
had limited operation since its inception on December 11, 2015. In connection with the reorganization of the legal structure for the initial public offering
(“IPO”) of the Company, Asia Era Fund was spun off.
Reorganization
A reorganization of the Company’s legal structure was completed on September 19, 2018 (the “Reorganization”). The Reorganization involved the transfer
of the ownership interest in ATIF and the spinoff of Asia Era Fund. ATIF became the ultimate holding company of ATIF HK, Huaya, and Qianhai, which
were all controlled by the same shareholders before and after the Reorganization.
On September 5, 2018, Huaya entered into a series of contractual arrangements with the owners of Qianhai. These agreements include an Exclusive Service
Agreement, an Equity Pledge Agreement, a Call Option Agreement, and a Shareholders’ Voting Rights Proxy Agreement (collectively “VIE Agreements”).
Pursuant to the above VIE Agreements, Huaya has the exclusive right to provide Qianhai consulting services related to business operations including
technical and management consulting services. All the above contractual arrangements obligate Huaya to absorb a majority of the risk of loss from business
activities of Qianhai and entitle Huaya to receive a majority of Qianhai’s residual returns. In essence, Huaya has gained effective control over Qianhai.
Therefore, the Company believes that Qianhai should be considered as a Variable Interest Entity (“VIE”) under the Statement of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.”
Initial Public Offering
On April 29, 2019, the Company completed its IPO of 2,074,672 ordinary shares at the price of $5.00 per share. The gross proceeds were approximately
$10.4 million before deducting the underwriter’s commissions and other offering expenses, resulting in net proceeds of approximately $8.8 million to the
Company. In connection with the offering, the Company’s ordinary shares began trading on the NASDAQ Capital Market on May 3, 2019, under the
symbol “ATIF.”
F-6
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS (continued)
Acquisition of Leaping Group Co,. Ltd. (“LGC”)
On April 22, 2020 , the Company completed an acquisition of 51.2% of the equity interest of Leaping Group Co., Ltd. (“LGC”) from its original
shareholders for a total consideration of approximately $22.92 million, including cash consideration of $1.85 million and issuance of 9,940,002 shares of
ATIF’s common stock with fair value of approximately $21.07 million (see Note 4). LGC, through its subsidiaries and similar VIE contractual agreements,
controls Leaping Media Group Co., Ltd. (“LMG”), an operating entity located in Shenyang, China. LMG, along with its operating subsidiaries, is engaged
in the multi-channel advertising business, event planning and execution business, film production business and movie theater operating business
(collectively “media business”) in China. LMG used to be one of the Company’s clients that sought business advisory services. Upon closing of the
acquisition, ATIF owns 51.2% equity interest of LGC and hereby consolidates operations of LGC.
NOTE 2 - LIQUIDITY and GOING CONCERN
As reflected in the Company’s consolidated financial statements, the Company’s revenue decreased from approximately $3.1 million in fiscal year 2019 to
approximately $0.7 million in fiscal year 2020 primarily due to decreased number of customers for the Company’s public listing related consulting
services. In addition, as a result of the Company’s acquisition of LGC, the Company recorded significant impairment loss on its fixed assets, intangible
assets and goodwill and bad debt expense on uncollectible accounts receivable due to change in market conditions and financial health of its customers as
affected by the COVID-19 outbreak. Accordingly, for the fiscal year 2020, the Company reported a net loss of approximately $17.3 million. In addition, the
Company reported negative cash flows from operations of approximately $5.9 million and a working capital deficit of $2.5 million as of July 31, 2020.
Furthermore, due to the tightening of U.S. legislation and new public listing rules that could limit small China-based companies to access the U.S. capital
markets, there appears to be a slowing down of business activities for the Company’s consulting services due to these uncertainties. Although the Company
acquired a 51.2% equity interest in LGC in April 2020 with the intention to diversify its revenue streams going forward, LGC’s operations were adversely
affected by the outbreak of COVID-19. During the period from April to July 2020, all movie theaters in China were temporarily closed and have been
struggling to draw crowds afterwards. LGC’s movie theatre operations and multi-channel advertising business were especially hit hard.
As of July 31, 2020, the Company had cash of $0.4 million and accounts receivable of approximately $0.9 million of which approximately $0.2 million or
23% has been subsequently collected as of the financial reporting date. As a of July 31, 2020, the Company also had approximately $1.3 million investment
in a life insurance contract and approximately $0.9 million short-term investment in trading securities, which are highly liquid at the Company’s discretion.
On November 6, 2020, the Company closed a registered direct offering and issued 4,347,826 of its ordinary shares to certain institutional investors and
raised net proceeds of $3.5 million (see Note 18). However, the Company does not believe its existing cash and cash resources will be sufficient to fund
operations for the next twelve months following the filing of these financial statements. These factors raise substantial doubt about the Company’s ability to
continue as a going concern.
Currently, the Company intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities
and funds raised from equity financings. However, unless the business recovers, additional financing will be required and there is no assurance that such
financing, if required, would be available on favorable terms or at all.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
F-7
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The consolidated financial
statements of the Company include the accounts of the Company, its subsidiaries, and its VIEs. All intercompany balances and transactions have been
eliminated upon consolidation.
As of July 31, 2020, the Company’s consolidated financial statements reflect the operating results of the following entities:
Name of Entity
Parent company:
ATIF
Wholly owned subsidiaries of ATIF
ATIF HK
Huaya
Variable interest entity of ATIF
Qianhai VIE
Majority owned subsidiary of ATIF
Date of
Incorporation
Place of
Incorporation
% of
Ownership
Principal Activities
January 5, 2015
British Virgin
Parent
Investment holding
Islands
January 6, 2015
May 20, 2015
Hong Kong
PRC
100%
100%
Investment holding
WFOE, Consultancy and information
technology support
November 3, 2015
PRC
VIE
Listing and financial consulting services
LGC and its subsidiaries
August 21, 2018
Cayman Islands
51.2%
Multi-channel advertising, event planning
and execution, film production and
movie theater operation
The VIE contractual arrangements
Foreign investments in domestic Chinese companies that engage in private equity investment business and media business are both restricted in China
under current PRC laws and regulations. Huaya and LGC’s subsidiary Leaping Shenyang are both WFOEs and are subject to such legal restrictions.
Therefore, the Company’s main operating entities Qianhai and LMG are controlled through contractual arrangements in lieu of direct equity ownership by
the Company or any of its subsidiaries.
Risks associated with the VIE structure
The Company believes that the contractual arrangements with its VIEs and respective shareholders are in compliance with PRC laws and regulations and
are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the
legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
●
●
revoke the business and operating licenses of the Company’s PRC subsidiary and VIEs;
discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiary and VIEs;
F-8
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●
●
●
●
limit the Company’s business expansion in China by way of entering into contractual arrangements;
impose fines or other requirements with which the Company’s PRC subsidiary and VIEs may not be able to comply;
require the Company or the Company’s PRC subsidiary and VIEs to restructure the relevant ownership structure or operations; or
restrict or prohibit the Company’s use of the proceeds from the IPO to finance the Company’s business and operations in China.
The Company’s ability to conduct its consulting services business may be negatively affected if the PRC government were to carry out of any of the
aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability
to exert effective control over the VIEs and its respective shareholders and it may lose the ability to receive economic benefits from its VIEs. The
Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiary, or its VIEs.
The Company has not provided any financial support to the VIEs for the years ended July 31, 2020, 2019, and 2018.
F-9
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements after elimination
of intercompany transactions and balances:
Qianhai VIE
$
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Shareholders’ equity (deficit)
$
2,469,829 $
184,740
2,654,569
1,441,148
65,574
1,506,722
1,147,847 $
As of July 31,
2020
LMG VIE
Total
Qianhai VIE
2019
LMG VIE
1,554,585 $
5,493,284
7,047,869
5,736,358
3,179,625
8,915,983
(1,868,114) $
4,024,414 $
5,678,024
9,702,438
7,177,506
3,245,199
10,422,705
(720,267) $
3,673,890 $
68,375
3,742,265
980,364
-
980,364
2,761,901 $
- $
-
-
-
-
-
- $
Total
3,673,890
68,375
3,742,265
980,364
-
980,364
2,761,901
The summarized operating results of the VIEs are as follows:
For the years ended July 31,
Operating revenue
Income (loss) from operations
Income (loss) before income taxes
Net income (loss)
Qianhai VIE
$
$
$
$
645,127 $
(1,471,095) $
(1,562,037) $
(1,562,037) $
The summarized cash flow information of the VIEs are as follows:
2020
LMG VIE
Total
40,872 $
(4,781,593) $
(4,857,484) $
(4,933,748) $
2019
2018
685,999 $
(6,252,688) $
(6,419,521) $
(6,495,785) $
Qianhai VIE Qianhai VIE
5,341,271
2,927,679
2,863,744
2,146,927
2,777,618 $
884,789 $
930,361 $
697,631 $
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Business Combination
Qianhai VIE
$
$
$
175,530 $
36,412 $
- $
2020
LMG VIE
(662,795) $
1,415,579 $
(734,347) $
2019
2018
Total
Qianhai VIE Qianhai VIE
2,036,439
(2,898,916)
755,139
(3,380,071) $
2,700,687 $
(14,626) $
(487,265) $
1,451,991 $
(734,347) $
For the years ended July 31,
In April 2020, the Company acquired 51.2% ownership interest in LGC (see Note 4). Business combination is accounted for under the purchase method of
accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition
with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of
operations of the acquired business are included in the income statement from the date of acquisition.
F-10
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Noncontrolling Interests
Non-controlling interests represent minority shareholders’ 48.8% ownership interest in LGC not acquired by the Company in connection with the
Company’s acquisition of LGC. The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the
stockholders of the Company. Non-controlling interests in the results of the Company are presented on the face of the consolidated statements of operations
and comprehensive loss as an allocation of the total loss for the year between non-controlling interest holders and the stockholders of the Company.
Use of Estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements.
Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, useful lives of property and
equipment and intangible assets, the recoverability of long-lived assets, impairment of goodwill, revenue recognition ,provision necessary for contingent
liabilities and realization of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash includes cash on hand and demand deposits in accounts maintained with commercial banks. The Company considers all highly liquid investment
instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains most of its bank
accounts in the PRC. Cash balances in bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Accounts Receivable, net
Accounts receivable are presented net of allowance for doubtful accounts. The Company usually determines the adequacy of reserves for doubtful accounts
based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective
evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual
exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding
charge recorded in the consolidated statements of income and comprehensive income. Delinquent account balances are written off against the allowance for
doubtful accounts after management has determined that the likelihood of collection is not probable. Allowance for uncollectible balances amounted to
$1,380,161 and $65,335 as of July 31, 2020 and 2019, respectively.
Inventories
The Company’s subsidiary LGC produces and contracts third parties to produce advertising films and/or television series to be shown in movie theaters
and/or on popular online portal. Produced content includes direct production costs, production overhead and acquisition costs and is stated at the lower of
unamortized cost or estimated fair value. Produced content also includes cash expenditures made to enter into arrangements with third parties to co-produce
certain of its theatrical and television productions.
The Company uses the individual-film-forecast-computation method and amortizes the produced content based on the ratio of current period actual revenue
(numerator) to estimated remaining unrecognized ultimate revenue as of the beginning of the fiscal year (denominator) in accordance with ASC subtopic
926-20, Entertainment — Films, Other Assets — Film Costs (“ASC 926-20”).
F-11
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ultimate revenue estimates for the produced content are periodically reviewed and adjustments, if any, will result in prospective changes to amortization
rates. When estimates of total revenues and other events or changes in circumstances indicate that a film or television series has a fair value that is less than
its unamortized cost, a loss is recognized currently for the amount by which the unamortized cost exceeds the film or television series’ fair value. As of
July 31, 2020, 2019, based on management analysis, no inventory impairment was recorded.
Investment in Trading Securities
Equity securities not accounted for using the equity method are carried at fair value with unrealized gains and losses recorded in the consolidated
statements of operations and comprehensive income (loss), according to ASC 321 “Investments — Equity Securities”. During the year ended July 31,
2020, the Company purchased certain publicly-listed equity securities through various open market transactions and accounted for such investments as
“investment in trading securities” and subsequently measure the investments at fair value. Gain from investment in trading securities amounted to $201,051
for the year ended July 31, 2020. There was no such transaction for the years ended July 31, 2019 and 2018.
Property and Equipment, net
Property and equipment are stated at cost. The straight-line depreciation method is used to compute depreciation over the estimated useful lives of the
assets, as follows:
Furniture, fixtures and equipment
Transportation vehicles
Leasehold improvement
Useful life
3-10 years
3-5 years
Lesser of useful life and lease term
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures
for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of
assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of operations and other
comprehensive income (loss) in other income or expenses.
Intangible Assets, net
Intangible assets are stated at cost less accumulated amortization. The straight-line method is used to compute amortization over the estimated useful lives
of the intangible assets, as follows:
Trade name
Customer relationship
Accounting software
Financial and news platform
Goodwill
Useful life
9.6 years
6.2 years
4-10 years
15 years
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary 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. Goodwill is carried at cost less accumulated impairment losses. 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.
F-12
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist
annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the
opinion to access qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes,
as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.
The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its
carrying amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a
reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation
of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation
techniques, with the primary technique being a discounted cash flow. 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.
The Company determines the fair values of the reporting unit by preparing a discounted cash flow analysis using forward looking projection of future
operating results. Significant estimates and assumptions used in the discounted cash flow analysis included revenue growth rate ranging from 9.0% to
50.0% (which is determined based on LGC’s historical revenue growth rate of 30% to 130% from 2017 to 2019, as conservatively adjusted by taking into
considerations of certain metrics such as general economic conditions, market risks associated with the post-COVID 19 recovery of the media business
industry, revenue growth of comparable companies, management’s forecast and market expectations of the real long-term growth of its media business and
inflation, etc.), terminal growth rate of 3%, and weighted average cost of capital of 20%. The discounted cash flow model indicated that the fair value of
the reporting unit was $31,701,250, which was below the carrying value of the report unit of $37,322,717, accordingly, a goodwill impairment of
$5,621,467 was recorded for the year ended July 31, 2020 (see Note 9).
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. For
Impairment of Long-lived Assets Other Than Goodwill
Long-lived assets, including plant and equipment and intangible with finite lives are reviewed for impairment whenever events or changes in circumstances
(such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not
be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and
recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from
disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount
of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values.
For the years ended July 31, 2020, 2019 and 2018, an impairment of $384,492, $Nil, and $Nil, respectively were recorded for intangible assets (see Note
8), and an impairment of $172,728, $Nil and $Nil, respectively, were recorded for property and equipment (see Note 7 ).
Fair Value of Financial Instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy
prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are as follows:
F-13
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
● Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for
identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or
corroborated by observable market data.
● Level 3 - inputs to the valuation methodology are unobservable.
Fair value of investment in trading securities are based on quoted prices in active markets. The fair value of the Company’s other financial instruments
including cash and cash equivalents, accounts receivable, inventories, deposits, investment in life insurance contract, prepaid expenses and other current
assets, short-term borrowings, accounts payable, taxes payable, and accrued expenses and other current liabilities and current portion of lease liabilities
approximate their fair values because of the short-term nature of these assets and liabilities.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 Revenue from Contracts with Customers (“ASC 606”).
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract with the customer,
(ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable
that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize
revenue when (or as) the Company satisfies the performance obligation.
The Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company
expects to be entitled in such exchange.
The Company currently generates its revenue from the following main sources:
(1) Revenue from customer’s initial registration fee
In order to engage with the Company for various consulting services, a new customer is required to pay an initial non-refundable registration fee to the
Company and the Company will then post the customer’s information and profiles on its website, at which point, the Company’s performance obligations
are satisfied and such registration fee is recognized as revenue. The Company does not charge additional customer profile maintenance fee after the initial
posting is completed as limited effort is required for the Company to maintain such information on an on-going basis. Revenues of $nil, $nil and $71,695
was generated from customer’s initial registration for the years ended July 31, 2020, and 2019 and 2018.
(2) Revenue from consulting services
The Company provides various consulting services to its members, especially to those who have the intention to be publicly listed in the stock exchanges in
the United States and other countries. The Company categorizes its consulting services into three Phases:
Phase I consulting services primarily include due diligence review, market research and feasibility study, business plan drafting, accounting record review,
and business analysis and recommendations. Management estimates that Phase I normally takes about three months to complete based on its past
experience.
F-14
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
Phase II consulting services primarily include reorganization, pre-listing education and tutoring, talent search, legal and audit firm recommendation and
coordination, VIE contracts and other public-listing related documents review, merger and acquisition planning, investor referral and pre-listing equity
financing source identification and recommendations, and independent directors and audit committee candidate’s recommendation. Management estimates
that Phase II normally takes about eight months to complete based on its past experience.
Phase III consulting services primarily include shell company identification and recommendation for customers expecting to become publicly listed
through reverse merger transaction; assistance in preparation of customers’ public filings for IPO or reverse merger transactions; and assistance in
answering comments and questions received from regulatory agencies. Management believes it is very difficult to estimate the timing of this phase of
service as the completion of Phase III services is not within the Company’s control.
Each phase of consulting services is stand-alone and fees associated with each phase are clearly identified in service agreements. Revenue from providing
Phase I and Phase II consulting services to customers is recognized ratably over the estimated completion period of each phase as the Company’s
performance obligations related to these services are carried out over the whole duration of each Phase. Revenue from providing Phase III consulting
services to customers is recognized upon completion of the reverse merger transaction or IPO transaction when the Company’s promised services are
rendered and the Company’s performance obligations are satisfied. Revenue that has been billed and not yet recognized is reflected as deferred revenue on
the balance sheet.
Depending on the complexity of the underlying service arrangement and related terms and conditions, significant judgments, assumptions, and estimates
may be required to determine when substantial delivery of contract elements has occurred, whether any significant ongoing obligations exist subsequent to
contract execution, whether amounts due are collectible and the appropriate period or periods in which, or during which, the completion of the earnings
process occurs. Depending on the magnitude of specific revenue arrangements, adjustment may be made to the judgments, assumptions, and estimates
regarding contracts executed in any specific period.
(3) Multi-Channel advertising
The Company’s multi-channel advertising services include pre-movie advertisements display, elevator and supermarket advertising, and brand promotion.
Most of the Company’s client contracts are individually negotiated and, accordingly, the service period and prices vary significantly. Service periods
typically range from one day to one year.
The Company provides advertising services over the contract period. Revenues from advertising services are recognized on straight-line basis over the
contract period, which approximates the pattern of when the underlying services are performed. Prepayments for advertising services are deferred and
recognized as revenue when the advertising services are rendered and the Company’s performance obligations are satisfied.
The Company also provides advertising services through its regional distributors. Pursuant to advertising services distribution agreements, the Company
grants the regional distributors the exclusive rights to provide local pre-movie advertising. The advertising services distribution agreements with these
regional distributors typically have terms ranging from 11 to 24 months without automatic renewal provisions. Under the advertising services distribution
agreements, the Company has the right to set the minimum local pre-movie advertisement prices in the movie theaters, regulate the content and quality of
local pre-movie advertisements according to related laws and movie theater rules, and examine the source of local pre-movie advertisements and refuse to
display advertisements from any competitors. The receipt of distribution fee is initially recorded as deferred revenue and is recognized as revenue ratably as
services are rendered and the Company’s performance obligations are satisfied.
F-15
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition (continued)
(4) Event planning and execution
The Company’s event planning and execution business includes planning and arrangement of events, and production of related advertising materials. From
the preparation of the events to executing it typically takes no more than one week. Revenue is realized when the service is performed in accordance with
the client arrangement and upon the completion of the earnings process.
(5) Movie Theater Operating
The Company’s movie theater operating revenues are generated primarily from box office admissions and theater food and beverage sales. Revenues of this
business line are recognized when admissions and food and beverage sales are rendered at the theaters and are reported net of sales tax. The Company
defers 100% of the revenue associated with the sales of gift cards and packaged tickets until such time as the items are redeemed.
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets
are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of related
services are rendered and delivered to the customers. The contract liability balance can vary significantly depending on the timing when the Company’s
services are rendered and the Company’s performance obligations are satisfied. As of July 31, 2020 and 2019, other than accounts receivable and deferred
revenue, the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet.
Contract liabilities related to going public consulting services amounted to $512,238 and $415,392 as of July 31, 2020 and 2019, respectively. Contract
liabilities related to multi-channel advertising and event planning and execution services amounted to $551,404 and $nil as of July 31, 2020 and 2019,
respectively. The July 31, 2020 contract liabilities balances are expected to be recognized as revenue within one year when the Company’s performance
obligations going public consulting services are satisfied.
Disaggregation of Revenues
The Company disaggregates its revenue from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and
uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the years ended July 31, 2020,
2019 and 2018 are disclosed in Note 15 of this consolidation financial statements.
Cost of revenue
Cost of the multi-channel advertising revenues consists primarily of payments to movie theater operators for pre-movie advertising right and the billboards
of elevators and supermarkets.
Cost of event planning and execution consists primarily of advertising design costs, salary and benefits expenses, leasing costs, and other related expenses.
F-16
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of film production consists primarily of direct production costs and production overhead.
Cost of movie theater operating consists primarily of film exhibition costs, which is accrued on the applicable admissions revenues and estimates of the
final settlement pursuant to film licenses of the Company. These licenses typically state that rental fees are based on aggregate terms established prior to the
opening of the film.
Income Taxes
The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including
the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. 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. As of July 31, 2020, the Company had large tax payable of approximately $4 million, primarily related to the unpaid income tax in
China. Management has discussed with local tax authorities regarding the outstanding tax payable balance and is in the process of negotiating a settlement
plan. As of July 31, 2020, the Company recorded a penalty of $77,527 based on the late payment penalty notice received from local tax authorities. The
Company believes it is likely that the Company can fully settle its tax liabilities within one year but cannot guarantee such settlement will ultimately occur.
As of July 31, 2020, all of the Company’s tax returns of its PRC subsidiaries and VIE operating entities remain open for statutory examination by PRC tax
authorities.
Value Added Tax (“VAT”)
Sales revenue derived from advertising service revenues is subject to VAT. The applicable VAT rates for the Company is 6%. Entities that are VAT general
taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output
VAT is recorded in the line item of taxes payable on the consolidated balance sheets. All of the VAT returns of the Company have been and remain subject
to examination by the tax authorities for five years from the date of filing.
Earnings (Loss) per Share
The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common
shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options
and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-
dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the years ended
July 31, 2020, 2019 and 2018, there were no dilutive shares.
F-17
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The functional currency for ATIF and LGC is the U.S Dollar (“US$”). ATIF HK and LGC’s subsidiary Leaping HK uses Hong Kong dollar as their
functional currency. However, ATIF, LGC, ATIF HK and Leaping HK currently only serve as the holding companies and did not have active material
operations as of the date of this report. The Company operates its business through its VIEs and subsidiaries of the VIEs in the PRC as of July 31, 2020.
The functional currency of the Company’s VIEs and VIEs’ subsidiaries is the Chinese Yuan (“RMB”). The Company’s consolidated financial statements
have been translated into US$.
Assets and liabilities accounts are translated using the exchange rate at each reporting period end date. Equity accounts are translated at historical rates.
Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported
under other comprehensive income (loss). Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the
results of operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
July 31, 2020
July 31, 2019
July 31, 2018
Foreign currency
RMB: 1USD
HKD: 1USD
Comprehensive income (loss)
Period-end spot
rate
Average rate
Period-end spot
rate
Average rate
Period-end spot
rate
0.1432
0.1290
0.1420
0.1284
0.1453
0.1278
0.1463
0.1276
Average rate
0.1538
0.1278
0.1467
0.1274
Comprehensive income consists of two components, net income (loss) and other comprehensive income (loss).
The foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$ is reported in other
comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
Operating Leases
The Company adopted ASU No. 2016-02—Leases (Topic 842) since August 1, 2019, using a modified retrospective transition method permitted under
ASU No. 2018-11. This transition approach provides a method for recording existing leases only at the date of adoption and does not require previously
reported balances to be adjusted. In addition, we elected the package of practical expedients permitted under the transition guidance within the new
standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording
of additional lease assets and lease liabilities of approximately $3.29 million and $3.50 million, respectively, as of August 1, 2019. The standard did not
materially impact our consolidated net earnings and cash flows.
F-18
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheets.
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, which cover a
wide range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated.
If the assessment of a contingency indicates that it is probable that a material loss is incurred and the amount of the liability can be estimated, then the
estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable,
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of
possible loss, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be
disclosed.
Risks and Uncertainty
The Company’s major operations are conducted in the PRC. Accordingly, the political, economic, and legal environments in the PRC, as well as the general
state of the PRC’s economy may influence the Company’s business, financial condition, and results of operations.
The Company’s major operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment. The Company’s results
may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of
taxation, among other things. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing
laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
(a) Credit risk
Substantially all of the Company’s operating activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange
transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a
payment application form together with suppliers’ invoices, shipping documents and signed contracts.
F-19
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains certain bank accounts in the PRC, Hong Kong, and British Virgin Islands, which are not insured by Federal Deposit Insurance
Corporation (“FDIC”) insurance or other insurance. As of July 31, 2020 and 2019, $234,653 and $409,037 of the Company’s cash were on deposit at
financial institutions in the PRC where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank
deposits in the event of bank failure.
(b) Concentration risk
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the
Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
The Company’s sales are made to customers that are located primarily in China. The Company has a concentration of its revenues and receivables with
specific customers. For the year ended July 31, 2020, one customer accounted for 91% of the Company’s consolidated revenue, respectively. For the year
ended July 31, 2019, three customers accounted for approximately 44%, 29%, and 19% of the Company’s total revenue. For the year ended July 31, 2018,
two customers accounted for approximately 33% and 21% of the Company’s total revenue.
As of July 31, 2020, two customers accounted for 40% and 26% of the Company’s total accounts receivable balance, respectively. As of July 31, 2019, four
customers accounted for approximately 61%, 15%, 14%, and 11% of the Company’s outstanding accounts receivable.
For the year ended July 31, 2020, the Company purchased 22%, 21%, and 15% of its services from three suppliers, respectively. For the year ended July
31, 2019 and 2018, the Company purchased 50% and 48% from one supplier, respectively.
(c) Other risks and uncertainties
The Company’s business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme
weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations.
The Company’s operations have been affected by the outbreak and spread of the coronavirus disease 2019 (COVID-19), which in March 2020, was
declared a pandemic by the World Health Organization. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses. The
Company’s businesses have been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent.
Due to the outbreak of COVID-19, in early February 2020, the Chinese government required the nationwide closure of many business activities in the PRC
to prevent the spread of COVID-19 and protect public health. As a result, the Company temporarily suspended its consulting services for the period from
February to March 2020. In addition, the Company acquired a 51.2% equity interest in LGC in April 2020 which was expected to diversify its revenue
streams into multi-channel advertising, event planning and execution, film and TV program production, and movie theater operations going forward.
However, due to the outbreak and spread of COVID-19, LGC’s movie theater operations was limited during the period from April to July 2020 because
most of the movie theaters in China remained closed or struggled to draw crowds as a result of government operating restrictions and customer health and
safety concerns. Furthermore, some of the Company’s existing customers have experienced financial distress and disruption of business, which resulted in
delay or default on their payments.
During the period from February to July 2020, revenues from the Company’s business advisory and consulting services were approximately 92% lower as
compared to the same period of last year while LGC’s operating entities in China did not generate any revenues from multi-channel advertising services
and movie theater operation services from the date of acquisition through July 31, 2020.
As of the date of this filing, the spread of COVID-19 in China appears to have slowed down and most provinces and cities have resumed business activities
under the guidance and support of the local government. The Company’s movie theater operation, pre-movie advertising displays and event planning and
execution business has gradually resumed during the subsequent period from August to December 2020. In addition, the Company also signed eight
consulting service agreements with customers for going public consulting services. Nevertheless, the continued uncertainties associated with COVID 19
may cause the Company’s revenue and cash flows to underperform in the next 12 months. A resurgence could negatively affect the execution of the going
public consulting service agreements, the collection of the payments from customers, and the disruption of the Company’s ability to regain market share of
LGC’s media business to pre-COVID 19 levels. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the
financial statement reporting date.
Recent Accounting Pronouncements
On March 6, 2019, the FASB issued ASU 2019-02, Entertainment — Films — Other Assets — Film Costs (Subtopic 926-20) and Entertainment —
Broadcasters — Intangibles — Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for
Program Materials. ASU 2019-02 helps organizations align their accounting for production costs for films and episodic content produced for television and
streaming services. For public business entities, the amendments in ASU 2019-02 are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and
interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The amendments in this ASU should be
applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the period that includes the adoption date.
The Company is now assessing the impact of the new guidance and does not expects that the adoption of this ASU will not have a material impact on the
Company’s consolidated financial statements.
F-20
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13
was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses,
Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13
and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities,
this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an
emerging growth company, the Company plans to adopt this guidance effective August 1, 2023. The Company is currently evaluating the impact of its
pending adoption of ASU 2016-13 on its consolidated financial statements.
In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes
to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value
measurements. ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2019,
with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and
the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance will have a material impact on its consolidated
financial statements.
In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842)” (“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective dates for future major accounting standards and (ii) amends the
effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes
some effective dates for certain new standards on the following topics in the FASB Accounting Standards Codification (ASC): (a) Derivatives and Hedging
(ASC 815) – now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021;
(b) Leases (ASC 842) - now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after
December 15, 2021; (c) Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years; and (d) Intangibles — Goodwill and Other (ASC 350) - now effective for fiscal years beginning after
December 15, 2022, including interim periods within those fiscal years. The Company does not expect the cumulative effect resulting from the adoption of
this guidance will have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is
intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to
improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years,
which is 2022 fiscal year for us, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on
its consolidated financial statements.
F-21
NOTE 4 – BUSINESS COMBINATION
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 8, 2020, the Company signed a Share Exchange Agreement and a Debt Conversion and Share Purchase Agreement with the shareholders of
Leaping Group Co., Ltd (“LGC”), to acquire 51.2% of the equity interest of LGC. LGC is primarily engaged in multi-channel advertising, event planning
and execution, film and TV program production, and movie theater operations in the PRC.
On April 22, 2020 (the “Closing Date”), the Company completed the acquisition of approximately 51.2% of the equity interest of LGC for a total
consideration of approximately $22.92 million, including cash consideration of $1.85 million in the form of debt forgiveness and issuance of a total of
9,940,002 shares of ATIF’s common stock with the fair value of approximately $21.07 million based on the closing price of the Company’s stock at the
Closing Date.
Under the terms of the Debt Conversion and Share Purchase Agreement, LGC issued 3,934,029 of its ordinary shares to the Company in exchange for
(i) the satisfaction of the outstanding debt owed to the Company in the amount of US$1,851,000, and (ii) the issuance of 2,800,000 the Company’s ordinary
shares to LGC. Concurrent with the closing of the Debt Conversion and Share Purchase Agreement, and under the terms of the Share Exchange Agreement,
LGC assigned an aggregate of 6,283,001 of its ordinary shares to the Company in exchange for an aggregate of the Company’s 7,140,002 ordinary shares.
The transaction was accounted for as a business combination using the purchase method of accounting in accordance with ASC 805-10-20. The purchase
price allocation of the transaction was determined by the Company with the assistance of an independent appraisal firm based on the fair value of the assets
acquired and liabilities assumed as of the acquisition date.
The following table presents the purchase price allocation to assets acquired and liabilities assumed for LGC as of the acquisition date. The non-controlling
interest represents the fair value of the 48.8% equity interest not held by the Company:
Cash and cash equivalents
Accounts receivable
Prepayment and other current assets
Property and equipment
Intangible assets (trade name and customer relationship)
Deferred film production cost
Deferred income tax assets
Taxes payable
Other current liabilities
Fair value of non-controlling interest
Goodwill
Total purchase consideration
F-22
As of April 22, 2020
1,060,435
$
2,613,970
2,219,950
2,728,000
8,000,000
323,522
75,822
(3,255,935)
(2,701,495)
(19,664,326)
31,523,861
22,923,804
$
NOTE 4 – BUSINESS COMBINATION (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The intangible assets mainly include LGC’s trade name of $1.3 million and customer relationship of $6.7 million, with definite lives of 9.6 years and 6.2
years, respectively. The goodwill is mainly attributable to the excess of the consideration paid over the fair value of the net assets acquired that cannot be
recognized separately as identifiable assets under U.S. GAAP. Goodwill is not amortized and is not deductible for tax purposes.
The fair value of the non-controlling interest in LGC was determined based on the purchase price allocation report prepared by an independent third-party
appraiser by using discount cash flow model.
The amounts of revenue and net loss of LGC included in the Company’s consolidated statement of operations from the acquisition date to July 31, 2020 are
as follows:
Net Revenue
Net loss
From acquisition
date to July 31, 2020
40,872
$
$
(4,933,748)
The following table presents the Company’s unaudited pro forma results for the years ended July 31, 2020 and 2019, respectively, as if the LGC
Acquisition had occurred on August 1, 2018. The unaudited pro forma financial information presented includes the effects of adjustments related to the
amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and
other professional service fees. Statutory rates were used to calculate income taxes.
Pro forma revenue
Pro forma net income (loss)
Pro forma net income (loss) attributable to ATIF Holdings Limited
Pro forma earnings (loss) per common share - basic and diluted
Weighted average shares - basic and diluted
$
$
$
$
For the years ended July 31,
2020
6,192,939
$
(20,975,818) (1)
(17,165,275) (1)
2019
14,758,448
4,402,083(1)
1,869,892(1)
(0.37)
$
0.04
47,014,674
45,462,933
(1) Includes intangibles asset amortization expense of $810,708 and $1,216,062 for the years ended July 31, 2020 and 2019, respectively.
F-23
NOTE 5 – ACCOUNTS RECEIVABLE, NET
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable from business advisory and consulting services
Accounts receivable from multi-channel advertising, event planning and execution
Total gross accounts receivable
Less: allowances for doubtful accounts
Accounts receivables, net
As of July 31, 2020 and 2019, the aging of the Company’s accounts receivable is as follows:
Accounts receivable by aging bucket
1-3 months
4-6 months
7-12 months
More than 1 year
Total gross accounts receivable
As of July 31,
2020
425,106 $
1,894,447
2,319,553
(1,380,161)
939,392 $
2019
1,537,593
-
1,537,593
(65,335)
1,472,258
As of July 31,
2020
2019
27,027 $
67,441
1,130,348
1,094,737
2,319,553 $
364,430
147,722
894,771
130,670
1,537,593
$
$
$
$
As of July 31, 2020, substantial portion of the outstanding accounts receivable resulted from the Company’s acquisition of LGC in April 2020 (see Note 4).
Due to the outbreak and spread of COVID-19, some of LGC’s customers experienced financial distress, suffered disruptions in their businesses and delayed
or defaulted their payments. In addition, LGC’s movie theater operations was limited during the period from April to July 2020 because most of the movie
theaters in China remained closed or struggled to draw crowds as a result of government operating restrictions. Given these uncertainties, approximately
$0.96 million bad debt reserve has been accrued.
Allowance for doubtful accounts movement is as follows:
Beginning balance
Additions
Reductions
Foreign currency translation adjustments
Ending balance
July 31, 2020 July 31, 2019
-
65,790
-
(455)
65,335
65,335 $
1,304,108
-
10,718
1,380,161 $
$
$
Approximately 23% of the July 31, 2020 accounts receivable balance has been subsequently collected as of the date of this Report and the remaining
balances are expected to be collected by March 31, 2021.
F-24
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
Advance to employees for business development purposes (a)
Prepaid service fees (b)
Prepayment for advertising services (c )
Advance to vendors (d)
Others (e)
Total
As of July 31,
2020
2019
131,790 $
64,189
609,763
10,000
55,209
870,951 $
700,940
891,098
400,895
428,349
78,653
2,499,935
$
$
(a) During the Company’s normal course of business, the Company made short-term advances to employees for business development and marketing
campaign. Such business advances are normally expensed within three months when invoices and other supporting documents been submitted for
reimbursement. The Company establishes a provision for doubtful account when there is objective evidence that the Company may not be able to
collect amounts due. Allowance for doubtful accounts amounted to $1,350,615, $Nil and $Nil for the years ended July 31, 2020,2019 and 2018,
respectively.
(b) Prepaid service fees represent cash advance payment to third-party firms whom the Company uses to identify and refer potential new customers to the
Company for business advisory and consulting services, and to outsource market research and capital funding related services. These prepaid
consulting expense are amortized over their respective contract service periods.
Amortization of prepaid consulting expense for the years ended July 31, 2020, 2019 and 2018 was $861,360, $282,434 and $nil, respectively.
(c) Prepayment for advertising services represent the advance payments made by the Company to various third party advertising companies for producing
advertising contents. These prepayments are typically expensed over the period when the services are performed. The prepayment of $400,895 made in
2019 was subsequently refunded to the Company after the service agreement was terminated.
(d) Advance to vendors represents advance payments made to various vendors for purchases of equipment or services. These amounts will be either
reclassified or expenses upon delivery of equipment or performance of services.
(e) Other prepaid expenses primarily include prepayment to logistic companies for express mail services and prepaid employee housing fund, which
normally are expensed when the invoices are received and reimbursed.
F-25
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
Furniture, fixtures and equipment
Leasehold improvement
Vehicles
Total
Less: Impairment of fixed assets
Less: accumulated depreciation
Property and equipment, net
As of July 31,
2020
2019
$
$
980,188 $
1,737,898
731,782
3,449,868
(173,799)
(652,678)
2,623,391 $
98,615
-
-
98,615
-
(49,586)
49,029
During the year ended July 31, 2020, the Company disposed certain outdated office equipment and reported a loss of $12,388 from such disposal. In
addition, the Company recorded an impairment of $172,728 on its fixed assets for the year ended July 31, 2020 based on its assessment that the expected
future cash flows may not cover the carrying value of the Company’s fixed asset.
Depreciation expense was $527,497, $20,615, and $16,458 for the years ended July 30, 2020, 2019, and 2018, respectively.
NOTE 8 – INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following:
Customer relationship (a)
Tradename (a)
Financial and news platform (b)
Software
Total
Less: accumulated amortization
Impairment of intangible assets
Intangible assets, net
As of July 31,
2020
6,700,000 $
1,300,000
443,043
339,569
8,782,612
(471,078)
(386,432)
7,925,102 $
2019
-
-
438,657
19,842
458,499
(29,740)
-
428,759
$
$
(a)
In connection with the acquisition of 51.2% equity interest of LGC, the Company acquired an aggregate of $8,000,000 of intangible assets, primarily
consisted of customer relationships and tradenames, which have an estimated weighted-average amortization period of approximately 6.2 years and 9.6
years, respectively.
(b) In order to diversify the Company’s business and revenue source, on September 20, 2018 (the “Acquisition Date”), ATIF HK entered into a purchase
agreement with Shenzhen Shangyuan Electronic Commerce Co., Ltd. (“Shangyuan”) to acquire a financial and news media platform,
www.chinacnnm.com, from Shangyuan, for a total cash consideration of approximately $0.46 million (or RMB3 million).The purchase price was
based on the estimated fair value of this asset as of the Acquisition Date in accordance with the valuation report of an independent appraisal firm. The
transaction costs (including title search and legal costs) associated with the news media platform acquisition were immaterial and transaction cost
capitalization is not deemed necessary. The Company acquired only the financial and news platform/website from Shangyuan, rather than the equity
interest of Shangyuan. Thus, the Company determined that the acquisition constituted as an acquisition of assets for financial statement purposes.
F-26
NOTE 8 – INTANGIBLE ASSETS, NET (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company originally planned to use this financial and news platform to market its consulting services to potential clients, as well as help its clients
distribute corporate news and worldwide press releases, and accordingly charge customer services fees. However, the Company has not generated any
revenue from this financial and news platform since its acquisition, and based on the Company’s current financial condition and operating performance,
management assessed that the likelihood of future use of the financial and news platform is remote. As a result, a full impairment loss of $384,492 has
been applied against this financial and news platform for the year ended July 31, 2020.
Amortization expense was $440,899, $29,707, and $Nil for the years ended July 31, 2020, 2019, and 2018, respectively.
Estimated future amortization expense for intangible assets is as follows:
Year ending July 31,
2021
2022
2023
2024
2025
Thereafter
Total
NOTE 9- GOODWILL
Amortization
expense
$
$
1,298,019
1,298,019
1,298,019
1,291,352
1,218,019
1,521,674
7,925,102
Goodwill represents the excess of the consideration paid for the acquisition of 51.2% equity interest of LGC over the fair value of the net identifiable assets
of LGC at the date of acquisition (see Note 4).
As of July 31, 2020, the changes in the Company’s carrying amount of goodwill are presented below:
Balance as of July 31, 2019
Goodwill
Goodwill impairment
Balance as of July 31, 2020
Total
$
-
31,523,861
(5,621,467)
$ 25,902,394
The Company assesses goodwill for impairment using the two-step process with the assistance of a third-party appraiser. Based on the Company’s
assessment, the fair value of the reporting unit fell below its carrying value. As a result, the Company recorded a goodwill impairment of $5,621,467 as
reflected in the consolidated statements of operations and comprehensive income (loss) for the year ended July 31, 2020.
F-27
NOTE 10 – INVESTMENT IN LIFE INSURANCE CONTRACT
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 29, 2019, the Company invested $1,290,289 (HKD10 million) to purchase a long-term life insurance investment instrument with Manulife
(International) Limited (“Manulife”) in order to earn interest income, with ATIF Limited as the insurance beneficiary. The Company originally expects to
hold this investment for five years in order to avoid surrender charge. Early redemption fee applies to subscription less than five years. The insurance
company Manulife will invest the funds in certain portfolio of financial instruments, including money market funds, private fund, bonds or mutual funds,
with variable rates of return on the investment. Historically, the rates of return on similar investment products with Manulife ranged from 8.69% to 11.49%,
with an average of 9.48% per annum. Interest income is to be paid to the Company on a monthly basis. The interest earned will be recognized in the
consolidated statements of operations over the contractual term of this investment, unless the Company elects to early terminate the contract. The life
insurance policy became effective on August 3, 2019. In order to support the Company’s working capital need, on September 22, 2020, the Company early
terminated the life insurance investment instrument (Note 18). Accordingly, the Company reclassified such investment as a current asset as of July 31,
2020. Interest income earned from this investment amounted to $95,797 for the years ended July 31, 2020.
NOTE 11 – OPERATING LEASES
The Company leases offices space and movie theatres under non-cancelable operating leases, with lease terms ranging between 2 to 15 years. The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Rent expense for the years ended
July 31, 2020, 2019 and 2018 was $1,071,822, $515,010, $400,151, respectively.
Effective August 1, 2019, the Company adopted the new lease accounting standard using a modified retrospective transition method, which allows the
Company not to recast comparative periods presented in its consolidated financial statements. In addition, the Company elected the package of practical
expedients, which allows the Company to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as
operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the
lease term for its leases at transition. The Company combines the lease and non-lease components in determining the ROU assets and related lease
obligation. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities as disclosed
below. ROU assets and related lease obligations are recognized at commencement date based on the present value of remaining lease payments over the
lease term.
The following table presents the operating lease related assets and liabilities recorded on the balance sheets as of July 31, 2020.
Rights of use lease assets
Operating lease liabilities, current
Operating lease liabilities, noncurrent
Total operating lease liabilities
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of July 31, 2020:
Remaining lease term and discount rate
Weighted average remaining lease term (years)
Weighted average discount rate
F-28
July 31, 2020
3,768,418
$
750,350
3,382,889
4,133,239
$
July 31, 2020
$
8.78
4.90%
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – OPERATING LEASES (continued)
The following is a schedule of maturities of lease liabilities as of July 31, 2020
2021
2022
2023
2024
2025
2025 and thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities
$
$
942,360
667,392
477,151
481,817
396,682
2,169,094
5,134,496
(1,001,257)
4,133,239
NOTE 12 – RELATED PARTY TRANSACTIONS
During the year ended July 31, 2020, the Company leased office space in Hong Kong from Asia Time (HK) International Finance Service Limited (“Asia
Time HK”), an entity controlled by the Company’s controlling shareholder. The Company paid office lease expense of $79,875 to Asia Time HK for the
year ended July 31, 2020.
NOTE 13 – TAXES
(a) VAT, Business Tax and related surcharges
Effective on September 1, 2012, a pilot program (the “Pilot Program”) for transition from the imposition of PRC business tax (“Business Tax”) to the
imposition of VAT for revenues from certain industries and certain cities. On May 1, 2016, the transition from the imposition of Business Tax to the
imposition of VAT, was expanded to all industries in China, and as a result all of the Company’s revenues have been subject to a 6% VAT and related
surcharges on VAT payable at a rate of 12% since that date. To record VAT payable, the Company adopted the net presentation method, which presents the
difference between the output VAT (at a rate of 6%) and the available input VAT amount (at the rate applicable to the supplier).
In addition, LGC’s multi-channel advertising business is also subject to a culture construction fee surcharge of 3% based on its gross revenue amount.
(b) Corporate Income Taxes (“CIT”)
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
British Virgin Islands
Under the current laws of the British Virgin Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends
to the shareholders, no British Virgin Islands withholding tax will be imposed.
F-29
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
Cayman Islands
Under the current and applicable laws of the Cayman Islands, LGC is not subject to tax on income or capital gain. Additionally, upon payments of
dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
ATIF HK and Leaping HK are subject to Hong Kong profits tax at a rate of 16.5%. However, ATIF HK and Leaping HK did not generate any assessable
profits arising in or derived from Hong Kong for the fiscal years ended July 31, 2020, 2019, and 2018, and accordingly no provision for Hong Kong profits
tax has been made in these periods.
PRC
Huaya, Qianhai, Leaping Shenyang, LMG and its subsidiaries were incorporated in the PRC. Under the Income Tax Laws of the PRC, these companies are
subject to income tax rate of 25%
The following table reconciles the statutory rate to the Company’s effective tax rate:
China income tax rate
Rate differential
Permanent difference on non-deductible expenses
Utilization of the VIE’s Net Operating Loss (“NOL”) from prior years
Change in valuation allowance
Effective tax rate
The income tax expenses consists of the following:
Current income tax provision
BVI
Hong Kong
China
Subtotal
Deferred income tax provision
BVI
Hong Kong
China
Total income tax provision
F-30
For the years ended July 31,
2019
%
2020
%
2018
%
25.0
(12.6)
(0.1)
-
(12.7)
(0.4)
25.0
15.8
0.1
(1.7)
-
39.2
25.0
-
1.9
-
-
26.9
For the years ended July 31,
2019
2020
2018
$
$
- $
-
-
-
-
-
76,264
76,264 $
- $
-
276,823
276,823
-
-
-
276,823 $
-
-
716,816
716,816
-
-
-
716,816
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
Deferred tax assets
The Company’s deferred tax assets are comprised of the following:
Deferred tax assets:
Net operating loss carry forwards
Allowance for doubtful account
Deferred tax assets before valuation allowance
Less: valuation allowance
Net deferred tax assets
ATIF
July 31, 2020
LGC
Total
July 31, 2019
ATIF
$
$
746,024 $
212,010
958,034
(958,034)
- $
816,747 $
438,350
1,255,097
(1,255,097)
- $
1,562,771 $
650,360
2,213,131
(2,213,131)
- $
-
-
-
-
The Company follows ASC 740, “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company’s deferred tax assets primarily derived from the net operating loss (“NOL”) and allowance for doubtful accounts. For the year ended July 31,
2020, both ATIF and LGC suffered net operating losses due to reduced number of customers for ATIF’s consulting services and for LGC’s pre-movie
adverting display services, event planning and execution services and movie theater operation service as affected by the COVID-19 outbreak and spread. In
addition, some of the Company’s existing customers have experienced financial distress and disruption of business due to COVID-19, which resulted in
delay or default on their payments and increased allowance for doubtful accounts. The Company periodically evaluates the likelihood of the realization of
deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion or all of the
deferred tax assets will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets,
including its recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes, and other
relevant factors. For the year ended July 31, 2020, management believes that the realization of the deferred tax assets appears to be uncertain and may not
be realizable in the near future. Therefore, a 100% valuation allowance has been provided against the deferred tax assets at July 31, 2020.
(c) Taxes Payable
The Company’s taxes payable consists of the following:
Value added tax payable
Income tax payable
Other taxes payable
Total taxes payable
ATIF
July 31, 2020
LGC
Total
July 31, 2019
ATIF
73,031 $
584,503
2,582
660,116 $
186,028 $
3,001,124
156,896
3,344,048 $
259,059 $
3,585,627
159,478
4,004,164 $
91,978
574,778
2,313
669,069
$
$
In connection with the acquisition of LGC on April 22, 2020, the Company assumed LGC’s tax liabilities of approximately $3.3 million (see Note 4). As of
July 31, 2020, approximately 84% of the Company’s total tax liabilities were related to LGC’s accumulated unpaid tax.
Uncertain tax positions
As of July 31, 2020, the Company had accrued tax liabilities of approximately $4.0 million, mostly related to LGC’s accumulated unpaid corporate income
tax in China. According to PRC taxation regulation, if tax has not been fully paid, tax authorities may impose tax and late payment penalties within three
years. In practice, since all of the taxes owed are local taxes, the local tax authority is typically more flexible and willing to provide incentives or
settlements with local small and medium-size businesses to relieve their burden and to stimulate the local economy. During the year ended July 31, 2020,
the Company received a late payment penalty notice from local tax authorities and recorded a penalty of $77,527 as reflected in the consolidated statements
of operations. Management has discussed with local tax authorities regarding the outstanding tax payable balance and is in the process of negotiating a
settlement plan. The Company believes it is likely that LGC can fully settle its tax liabilities and tax penalties within one year but cannot guarantee such
settlement will ultimately occur.
F-31
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – EQUITY
Ordinary Shares
The Company was established under the laws of the British Virgin Islands on January 5, 2015. Prior to the Reorganization, the authorized capital was
100,000,000 ordinary shares with par value of $0.0004 per share and 50,000,000 shares were issued at par value. On August 21, 2018, the Company
amended its Memorandum of Association to cancel the 50,000,000 issued shared and simultaneously increased the number of the authorized shares to
100,000,000,000 and increase the par value of each share to $0.001. In connection with the cancellation of the 50,000,000 shares, the Company issued
50,000 new shares to the controlling shareholders at $0.001 per share.
On November 2, 2018, the Company issued additional 49,950,000 ordinary shares, at par value of $0.001 per share, to its beneficial owners, in private
transactions, for a total consideration of $49,950.
On February 27, 2019, the Company’s pre-IPO shareholders surrendered an aggregated 15,000,000 ordinary shares, which were subsequently cancelled, for
no consideration, and resulted in a reduction in outstanding issued shares from 50,000,000 ordinary shares to 35,000,000 ordinary shares with a par value
of $0.001 per share (the “Surrender”).
The above-mentioned transactions were considered as a part of the Reorganization of the Company, which was retroactively applied as if the transaction
occurred at the beginning of the period presented.
Initial Public Offering
On April 29, 2019, the Company completed its IPO of 2,074,672 ordinary shares at a public offering price of $5.00 per share. The gross proceeds were
approximately $10.4 million before deducting the underwriter’s commissions and other offering expenses, resulting in net proceeds of approximately $8.8
million to the Company. In connection with the offering, the Company’s ordinary shares began trading on the NASDAQ Capital Market on May 3,
2019, under the symbol “ATIF.”
Shares issued for acquisition of LGC
As disclosed in Note 4 above, on April 22, 2020, the Company completed an acquisition of approximately 51.2% of the equity interest of LGC. In
connection with the acquisition, the Company issued a total of 9,940,002 shares of its common stock to LGC’s shareholders with fair value of
approximately $21.07 million based on the closing price of the Company’s stocks at the Closing Date.
As of July 31, 2020 and 2019, the Company had a total of 47,014,674 and 37,074,672 ordinary shares issued and outstanding, respectively.
F-32
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – EQUITY (continued)
Noncontrolling interest
Non-controlling interests represent minority shareholders’ 48.8% ownership interest in LGC not acquired by the Company in connection with the
Company’s acquisition of equity interest in LGC. The following table reconciles the non-controlling interest as of July 31, 2020 and 2019:
As of July 31, 2018
Net income (loss) attributable to non-controlling interest
Foreign currency translation adjustment
As of July 31, 2019
Acquisition of noncontrolling interest
Net loss attributable to non-controlling interest
Foreign currency translation adjustment
As of July 31, 2020
Statutory reserve and restricted net assets
Total
-
-
-
-
19,664,326
(2,407,669)
(42,174)
17,214,483
$
$
$
The Company’s VIE operating entities are required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the
discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC
GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC
GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of
the Board of Directors. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and
production or increase in registered capital, but are not distributable as cash dividends.
The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit
payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The results of
operations reflected in the consolidated financial statements prepared in accordance with U.S GAAP may differ from those in the statutory financial
statements of the WFOEs and VIEs. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks
designated by State Administration of Foreign Exchange.
In light of the foregoing restrictions, the Company’s WFOEs, Huaya and LMG, and their respective VIEs and VIEs’ subsidiaries are restricted in their
ability to transfer their net assets to the Company. Foreign exchange and other regulations in the PRC may further restrict the WFOEs, VIEs and VIE’s
subsidiaries from transferring funds to the Company in the form of dividends, loans and advances.
As of July 31, 2020 and 2019, the restricted amounts as determined pursuant to PRC statutory laws totaled $355,912 and $355,912, respectively, and total
restricted net assets amounted to $2,268,330 and $962,374, respectively.
F-33
NOTE 15 – SEGMENT REPORTING
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is
identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Company’s chief operating decision maker in
order to allocate resources and assess performance of the segment.
In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate
resources and in assessing performance. The Company uses the “management approach” in determining reportable operating segments. The management
approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and
assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker,
reviews operation results by the revenue of different services. Based on management’s assessment, the Company has determined that it has four operating
segments as defined by ASC 280, including Business Advisory and Consulting Services, Multi-channel Advertising Services, Event Planning and
Execution Services and Movie Theater Operation Services.
The following tables present summary information by segment for the years ended July 2020, 2019 and 2018, respectively:
Revenue
Cost of revenue and related taxes
Gross profit (loss)
Operating expenses
Loss from operations
Net loss
Revenue
Gross profit
Operating expenses
Income from operations
Net income
$
$
$
$
$
$
$
$
$
$
$
For the year ended July 31, 2020
Business
advisory and
consulting
services
Multi-Channel
Advertising
Event planning
and
execution
Movie theatre
operation
645,127 $
(4,068) $
641,059 $
(7,092,062) $
(6,451,003) $
(6,329,798) $
- $
- $
- $
(3,951,015) $
(3,951,015) $
(3,951,015) $
40,872 $
(223,342) $
(182,470) $
(4,331,370) $
(4,513,840) $
(4,665,995) $
- $
- $
- $
(2,343,560) $
(2,343,560) $
(2,343,560) $
Go public
consulting
services
For the year ended July 31, 2019
Event planning
and
execution
Multi-Channel
Advertising
Movie theatre
operation
3,078,758 $
3,078,758 $
(2,407,154) $
671,604 $
429,227 $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
F-34
Total
685,999
(227,410)
458,589
(17,718,007)
(17,259,418)
(17,290,368)
Total
3,078,758
3,078,758
(2,407,154)
671,604
429,227
NOTE 15 – SEGMENT REPORTING (continued)
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended July 31, 2018
Go public
consulting
services and
customer initial
registration
services
Multi-Channel
Advertising
Event planning
and
execution
Movie theatre
operation
Revenue
Gross profit
Operating expenses
Income from operations
Net income
$
$
$
$
$
5,307,891 $
5,307,891 $
(2,580,212) $
2,727,679 $
1,946,883 $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
The following tables present total assets by segment for as of July 31, 2020 and 2019:
Total
5,307,891
5,307,891
(2,580,212)
2,727,679
1,946,883
Total assets:
Business Advisory and Consulting Services
Multi-Channel Advertising Services
Event Planning and Execution Services
Movie Theater Operation Services
NOTE 16 - CONTIGENCIES
As of July 31,
2020
2019
$
5,240,172 $
4,854,583
4,088,225
31,602,098
12,342,594
-
-
-
$
45,785,078 $
12,342,594
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with
these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred.
As of July 31, 2020, the Company had two pending arbitration and legal proceeding cases as follows:
(a) Arbitration with Huale Group Co., Limited (“Huale”)
On November 4, 2019, the Company received an arbitration notice from Shenzhen Court of International Arbitration (the “Court”), pursuant to which, the
Company’s former customer Huale Group Co., Limited (“Huale”) filed the arbitration with the Court against the Company and requested a refund of
$300,000 consulting service fee that Huale paid to the Company in 2017. Huale suspended its original plan after the Company already provided certain
consukting services outlined in their consulting agreement. Both parties were in dispute over whether or not the initial payment of $300,000 should be
refunded.
On September 25, 2020, the Court issued a final judgment ruling in favor of Huale and required the Company to return a deposit of $250,000 to Huale and
pay arbitration fee and counterclaim fee of $11,724 (RMB 81,844). Based on the Court ruling, the Company accrued legal liabilities of $261,724 as of and
for the year ended July 31, 2020.
F-35
ATIF HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONTIGENCIES (continued)
(b) Pending Legal Proceeding with Boustead Securities, LLC (“Boustead”)
On May 14, 2020, Boustead filed a lawsuit against the Company and LGC for breaching the underwriting agreement Boustead had with each of the
Company and LGC, in which Boustead was separately engaged as the exclusive financial advisor to provide financial advisory services to the Company
and LGC.
In April 2020, the Company acquired 51.2% equity interest in LGC after LGC terminated its efforts to launch an IPO on its own. Boustead alleged that the
acquisition transaction between the Company and LGC was entered into during the lockup period of the exclusive agreement between Boustead and LGC,
and therefore deprived Boustead of compensation that Boustead would otherwise have been entitled to receive under its exclusive agreement with LGC.
Therefore, Boustead is attempting to recover from the Company an amount equal to a percentage of the value of the transaction it conducted with LGC.
Boustead’s Complaint alleges four causes of action against the Company, including breach of contract; breach of the implied covenant of good faith and
fair dealing; tortious interference with business relationships and quantum meruit.
On October 6, 2020, ATIF filed a motion to dismiss Boustead’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). On October
9, 2020, the United States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint by
November 10, 2020. Boustead opted to amend its complaint and filed the amended complaint on November 10, 2020. Boustead’s amended complaint
asserts the same four causes of action against ATIF and LGC as its original complaint. The Company filed another motion to dismiss Boustead’s amended
complaint on December 8, 2020. Boustead’s opposition to the Company’s motion to dismiss is due by January 13. The Company’s reply is due January 27,
2021.
As such, the Boustead litigation is currently in the pleadings stage. Because Boustead’s amended complaint does not adequately allege any causes of action,
the Court may completely dismiss all causes of action, some, or none at all. Once the Court rules on the motion to dismiss, the Company can begin
developing its defenses to claims. Therefore, the Company’s management believes it is premature to assess and predict the outcome of this pending
litigation.
NOTE 17 – SUBSEQUENT EVENTS
(a) Early Termination of a Life Insurance Investment Instrument
On July 29, 2019, the Company invested $1,290,289 (HKD10 million) to purchase a long-term life insurance investment instrument with Manulife
(International) Limited (“Manulife”) in order to earn interest income, with ATIF as the insurance beneficiary (see Note 10). In order to support the
Company’s working capital need, on September 22, 2020, the Company early terminated this life insurance investment contract and received a refund of
$1,219,128 (HKD 9.5 million) after deducting an early redemption penalty of $64,684.
(b) Direct Registered Offering
On November 6, 2020, the Company completed a registered direct offering and issued 4,347,826 of its ordinary shares at $0.92 per share to certain
investors. The gross proceeds were $4.0 million before deducting the underwriter’s commissions and other offering expenses, resulting in net proceeds of
approximately $3.5 million to the Company. The Company has issued to the investors warrants to purchase up to an aggregate of 4,347,826 of its ordinary
shares. The exercise price of each warrant is $1.10 per share, and each warrant is exercisable immediately and will expire five years from the date of
issuance. After one-year, the exercise price may reset to the closing bid price if it is lower than the exercise price then in effect. In addition, the warrant
exercise price may be subject to adjustment in the event that the Company issues certain securities at prices below the then exercise price. Further, the
exercise price and the number of warrant shares issuable upon exercise of the warrants are subject to adjustment upon the occurrence of specified events,
including stock dividends, stock splits, combinations and reclassifications of the ordinary shares.. The Company plans to use the proceeds to acquire
another target company in the near future.
(c) Pending NASDAQ Compliance Issue
On December 16, 2020, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the
Company that it was no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing
Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. NASDAQ provided the Company with 180 days, or until
June 14, 2021, to regain compliance with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10
consecutive business days. The Company intends to monitor the closing bid price of its ordinary shares between now and June 14, 2021, and to evaluate its
available options to regain compliance within the compliance period.
F-36
LIST OF SUBSIDIARIES
Jurisdiction of Incorporation or
EXHIBIT 8.1
Name of Subsidiary
Organization
ATIF LIMITED
Huaya Consultant (Shenzhen) Co., Ltd.
Qianhai Asia Era (Shenzhen) International Financial Services Co., Ltd
Leaping Group Co., Ltd.*
Yue Zhong International Co., Ltd
Yue Zhong Media Co., Ltd
Yuezhong (Shengyang) Technology Co. Ltd
Leaping Media Group Co., Ltd.
Yuezhong (Beijing) Film Co., Ltd.
Shenyang Tianniu Media Co., Ltd.
Yuezhong Media (Dalian) Co., Ltd
Harbin Yuchuzhong Media Co., Ltd.
Shenyang Xiagong Hotel Management Co., Ltd
Liaoning Leaping International Cinema Management Co. Ltd
* A majority-owned subsidiary of ATIF Holdings Limited
Hong Kong
PRC
PRC
Cayman Islands
BVI
Hong Kong
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
EXHIBIT 12.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Pishan Chi, certify that:
1. I have reviewed this annual report on Form 20-F of ATIF HOLDINGS LIMITED (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Date: December 30, 2020
/s/ Pishan Chi
By:
Name: Pishan Chi
Title: Chief Executive Officer
EXHIBIT 12.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Fang Cheng, certify that:
1. I have reviewed this annual report on Form 20-F of ATIF HOLDINGS LIMITED (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Date: December 30, 2020
/s/ Fang Cheng
By:
Name: Fang Cheng
Title: Chief Financial Officer
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of ATIF HOLDINGS LIMITED (the “Company”) on Form 20-F for the year ended July 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Pishan Chi, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 30, 2020
EXHIBIT 13.1
/s/ Pishan Chi
By:
Name: Pishan Chi
Title: Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of ATIF HOLDINGS LIMITED (the “Company”) on Form 20-F for the year ended July 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Fang Cheng, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 30, 2020
EXHIBIT 13.2
/s/ Fang Cheng
By:
Name: Fang Cheng
Title: Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in this Registration Statement on Form F-3 (“Registration Statement”) of our report dated December
30, 2020, relating to the consolidated financial statements of ATIF Holdings Limited included in its annual report (Form 20-F) for the year ended July 31,
2020. We also consent to the reference to our firm under the heading “Experts” in such Registration Statement.
/s/ Friedman LLP
New York, New York
December 30, 2020