UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark one)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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 June 30, 2018.
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
for the transition period from ____________to ____________
Commission file number 001-38505
CLPS Incorporation
(Exact name of the Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
c/o 2nd Floor, Building 18, Shanghai Pudong Software Park
498 Guoshoujing Road, Pudong, Shanghai 201203
People’s Republic of China
Tel: (+86) 21-31268010
(Address of principal executive offices)
Raymond Ming Hui Lin, Chief Executive Officer
c/o 2nd Floor, Building 18, Shanghai Pudong Software Park
498 Guoshoujing Road, Pudong, Shanghai 201203
People’s Republic of China
Tel: (+86) 21-31268010
(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
Common Shares, par value $0.0001
Name of each exchange on which registered
The NASDAQ Stock Market LLC
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.
On September 18, 2018, the issuer had 13,813,821 shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted 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 and post 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” in Rule 12b-2 of the Exchange Act.
☐ Large Accelerated filer
☐ Accelerated filer
☒ Non-accelerated filer
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ US 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 Exchange Act).
Yes ☐ No ☒
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECT
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
RESERVED
AUDIT COMMITTEE FINANCIAL EXPERT.
CODE OF ETHICS.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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CERTAIN INFORMATION
Unless otherwise indicated, numerical figures included in this Annual Report on Form 20-F (the “Annual Report”) have been subject to rounding
adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
For the sake of clarity, this Annual Report follows the English naming convention of first name followed by last name, regardless of whether an
individual’s name is Chinese or English. Numerical figures included in this Annual Report have been subject to rounding adjustments. Accordingly,
numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain market data and other
statistical information contained in this Annual Report are based on information from independent industry organizations, publications, surveys and forecasts.
Some market data and statistical information contained in this Annual Report are also based on management’s estimates and calculations, which are derived
from our review and interpretation of the independent sources listed above, our internal research and our knowledge of the PRC information technology
industry. While we believe such information is reliable, we have not independently verified any third-party information and our internal data has not been
verified by any independent source.
Except where the context otherwise requires and for purposes of this Annual Report only:
● Depending on the context, the terms “we,” “us,” “our company,” and “our” refer to CLPS Incorporation, a Cayman Islands company, and its
subsidiary and affiliated companies:
● “Qinheng” refers to Qinheng Co., Limited, a Hong Kong company;
● “Qiner” refers to Qiner Co., Limited, a Hong Kong company;
● “CLIVST” refers to CLIVST Ltd., a British Virgin Islands company;
● “FDT-CL” refers to FDT-CL Financial Technology Services Limited, a Hong Kong company;
● “JQ” refers to JQ Technology Co., Limited, a Hong Kong company;
● “JL” refers to JIALIN Technology Limited, a Taiwan company;
● “CLPS QC (WOFE)” refers to Shanghai Qincheng Information Technology Co., Ltd., a PRC company;
● “CLPS Shanghai” refers to ChinaLink Professional Services Co., Ltd., a PRC company;
● “CLPS Dalian” refers to CLPS Dalian Co., Ltd., a PRC company;
● “CLPS RC” refers to CLPS Ruicheng Co., Ltd., a PRC company;
● “CLPS Beijing” refers to CLPS Beijing Hengtong Co., Ltd., a PRC company;
● “Judge China” refers to Judge (Shanghai) Co., Ltd., a PRC company;
● “Judge HR” refers to Judge (Shanghai) Human Resource Co., Ltd., a PRC company;
● “CLPS AU” refers to CLPS Technology (Australia) Pty. Ltd., an Australian company;
● “CLPS SG” refers to CLPS Technology (Singapore) Pte. Ltd., a Singaporean company;
● “CLPS Hong Kong” refers to CLPS Technology (HK) Co., Ltd., a Hong Kong company;
● “CLPS Shenzhen” refers to CLPS Shenzhen Co., Ltd., a PRC company;
● “Huanyu” refers to Tianjin Huanyu Qinshang Network Technology Co., Ltd., a PRC company
● “CLPS Guangzhou” refers to CLPS Guangzhou Co., Ltd., a PRC company.
● “CLPS US” refers to CLPS Technology (US) Ltd., a US company.
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● “Lihong” refers to Lihong Financial Information Services CO., LTD., a PRC company.
● “shares” and “common shares” refer to our shares, $0.0001 par value per share;
● “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Macau, Taiwan and Hong
Kong; and
● all references to “RMB,” “yuan” and “Renminbi” are to the legal currency of China, and all references to “USD,” and “U.S. dollars” are to the
legal currency of the United States.
Unless otherwise noted, all currency figures in this filing are in U.S. dollars. Any discrepancies in any table between the amounts identified as total
amounts and the sum of the amounts listed therein are due to rounding. Our reporting currency is U.S. dollar and our functional currency is Renminbi. This
Annual Report contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Other than in accordance with
relevant accounting rules and as otherwise stated, all translations of Renminbi into U.S. dollars in this Annual Report were made at the rate of RMB 6.8673 to
USD1.00, the noon buying rate on September 14, 2018, as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Where we make period-
on-period comparisons of operational metrics, such calculations are based on the Renminbi amount and not the translated U.S. dollar equivalent. We make no
representation that the Renminbi or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate or at all.
FORWARD-LOOKING STATEMENTS
This Annual Report contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. All statements
other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial items, any
statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other
developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and
objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the
future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our
actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to
correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly
available information with respect to the factors upon which our business strategy is based on the success of our business.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of
whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those
statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such
differences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,”
“Information on the Company” and elsewhere in this Annual Report.
This Annual Report should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in
Item 18 of this Annual Report.
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TABLE OF CONTENTS
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not required.
ITEM 3.
KEY INFORMATION
A.
Selected financial data
The following selected consolidated financial data as of and for the years ended June 30, 2018, 2017 and 2016 have been derived from the audited
consolidated financial statements of the Company included in this Annual Report. This information is only a summary and should be read together with the
consolidated financial statements, the related notes, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and other financial information included in this Annual Report. The Company’s results of operations in any period may not necessarily be
indicative of the results that may be expected for any future period. See “Risk Factors” included elsewhere in this Annual Report.
The following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended June 30,
2018, 2017 and 2016, respectively.
Selected Consolidated Statement of Income and Comprehensive Income
Revenues
Less: Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Income from operations
Subsidies and other income
Other expense
Income before income tax
(Benefit) provision for income taxes
Net income
Less: Net income (loss) attributable to non-controlling interests
Net income attributable to CLPS Incorporation’s shareholders
Other comprehensive (loss) income
Foreign currency translation gain (loss)
Less: foreign currency translation gain (loss) attributable to Non-controlling interest
Other comprehensive loss attributable to CLPS Incorporation’s shareholders
Comprehensive income
CLPS Incorporation shareholders
Non-controlling interests
Basic earnings per common share*
Weighted average number of share outstanding – basic
Diluted earnings per common share
Weighted average number of share outstanding – diluted
For the years ended June 30,
2017
2018
2016
$
48,938,593 $
(31,277,255)
17,661,338
31,361,976 $
(18,669,812)
12,692,164
29,024,178
(17,463,416)
11,560,762
2,225,702
7,837,873
5,871,622
15,935,197
1,726,141
960,784
(84,155)
1,206,493
4,232,788
5,647,790
11,087,071
1,605,093
508,187
(10,469)
2,602,770
(112,128)
2,714,898
280,435
2,434,463 $
2,102,811
(118,546)
2,221,357
173,912
2,047,445 $
413,016
5,579,058
4,955,037
10,947,111
613,651
1,446,408
(5,935)
2,054,124
269,153
1,784,971
(41,141)
1,826,112
55,793
10,200
45,593
(93,177) $
1,732
(94,909) $
(387,100)
(1,471)
(385,629)
2,480,056 $
290,635
2,770,691 $
1,952,536 $
175,644
2,128,180 $
1,440,483
(42,612)
1,397,871
0.21 $
11,517,123
0.21 $
11,636,367
0.18 $
11,290,000
0.18 $
11,290,000
0.16
11,290,000
0.16
11,290,000
$
$
$
$
$
$
$
* The shares and per share data are presented on a retroactive basis to reflect the nominal share issuance.
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The following table presents our summary consolidated balance sheet data as of June 30, 2018 and 2017.
Cash and cash equivalents
Total Current Assets
Total Assets
Total Liabilities
Total CLPS Incorporation’s Shareholders’ Equity
Non-controlling Interests
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
As of June 30,
2018
9,742,886 $
29,052,212 $
30,944,911 $
12,789,555 $
17,479,074 $
676,282 $
18,155,356 $
30,944,911 $
2017
4,814,568
12,325,296
13,521,923
8,210,625
4,834,188
477,110
5,311,298
13,521,923
$
$
$
$
$
$
$
$
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. On September
14, 2018, the buying rate announced by the Federal Reserve Statistical Release was RMB 6.8673 to $1.00.
Period
2016
2017
2018
January
February
March
April
May
June
July
August
Period
Ended
Spot Exchange Rate
Average
(1)
(RMB per US$1.00)
Low
6.9430
6.5063
6.2841
6.3280
6.2726
6.3325
6.4096
6.6171
6.8038
6.8300
6.6400
6.7569
6.4233
6.3183
6.3174
6.2967
6.3701
6.4651
6.7164
6.8453
6.4480
6.4773
6.2841
6.2649
6.2685
6.2655
6.3325
6.3850
6.6123
6.8018
High
6.9580
6.9575
6.5263
6.3471
6.3565
6.3340
6.4175
6.6235
6.8102
6.9330
Source: https://www.federalreserve.gov/releases/h10/hist/default.htm.
(1)
Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using the average of the
daily rates during the relevant period.
B.
Capitalization and Indebtedness
Not required.
C.
Reasons for the Offer and Use of Proceeds
Not required.
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D.
Risk factors
You should carefully consider the following risk factors, together with all of the other information included in this Annual Report. Investment in our
securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this
Annual Report before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any
of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your
investment.
Risks Related to Our Business
We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and
resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.
We have significantly grown and expanded our business recently. Our revenues grew from $29.0 million in fiscal 2016 to $31.4 million in fiscal
2017 and to $48.9 million in fiscal 2018. We maintain eleven delivery and or R&D centers, of which seven are located in China (Shanghai, Beijing, Dalian,
Tianjin, Chengdu, Guangzhou and Shenzhen) and four are located globally (Hong Kong, Taiwan, Singapore and Australia), to serve different customers in
various geographic locations. The number of our total employees grew from 1,055 in fiscal 2016 to 1,248 in fiscal 2017. As of June 30, 2018 we had 1,655
full-time employees. We are actively looking for additional locations to establish new offices and expand our current offices and sales and delivery centers.
We intend to continue our expansion in the foreseeable future to pursue existing and potential market opportunities. Our growth has placed and will continue
to place significant demands on our management and our administrative, operational and financial infrastructure. Continued expansion increases the
challenges we face in:
● recruiting, training, developing and retaining sufficient IT talents and management personnel;
● creating and capitalizing upon economies of scale;
● managing a larger number of clients in a greater number of industries and locations;
● maintaining effective oversight of personnel and offices;
● coordinating work among offices and project teams and maintaining high resource utilization rates;
● integrating new management personnel and expanded operations while preserving our culture and core values;
● developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications
and other internal systems, procedures and controls; and
● adhering to and further improving our high quality and process execution standards and maintaining high levels of client satisfaction.
Moreover, as we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with
which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges. As a result of any of these
challenges associated with expansion, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we
may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.
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Adverse changes in the economic environment, either in China or globally, could reduce our clients’ purchases from us and increase pricing pressure,
which could materially and adversely affect our revenues and results of operations.
The IT services industry is particularly sensitive to the economic environment, either in China or globally, and tends to decline during general
economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to the economic
environment, especially for regions in which we and our clients operate. During an economic downturn, our clients may cancel, reduce or defer their IT
spending or change their IT outsourcing strategy, and reduce their purchases from us. The recent global economic slowdown and any future economic
slowdown, and the resulting diminution in IT spending, could also lead to increased pricing pressure from our clients. The occurrence of any of these events
could materially and adversely affect our revenues and results of operations.
We face intense competition from onshore and offshore IT services companies, and, if we are unable to compete effectively, we may lose clients and our
revenues may decline.
The market for IT services is highly competitive and we expect competition to persist and intensify. We believe that the principal competitive factors
in our markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing and selling
skills, scalability of infrastructure and price. In addition, the trend towards offshore outsourcing, international expansion by foreign and domestic competitors
and continuing technological changes will result in new and different competitors entering our markets. In the IT outsourcing market, clients tend to engage
multiple outsourcing service providers instead of using an exclusive service provider, which could reduce our revenues to the extent that clients obtain
services from other competing providers. Clients may prefer service providers that have facilities located globally or that are based in countries more cost-
competitive than China. Our ability to compete also depends in part on a number of factors beyond our control, including the ability of our competitors to
recruit, train, develop and retain highly skilled professionals, the price at which our competitors offer comparable services and our competitors’
responsiveness to client needs. Therefore, we cannot assure you that we will be able to retain our clients while competing against such competitors. Increased
competition, our inability to compete successfully against competitors, pricing pressures or loss of market share could harm our business, financial condition
and results of operations.
Due to intense competition for highly skilled personnel, we may fail to attract and retain enough sufficiently trained personnel to support our operations;
as a result, our ability to bid for and obtain new projects may be negatively affected and our revenues could decline.
The IT services industry relies on skilled personnel, and our success depends to a significant extent on our ability to recruit, train, develop and retain
qualified personnel, especially experienced middle and senior level management. The IT services industry in China has experienced significant levels of
employee attrition. Our attrition rates were 18% and 15% per annum in 2016 and 2017, respectively; in 2018, this rate was 16%. We may encounter higher
attrition rates in the future, particularly if China continues to experience strong economic growth. There is significant competition in China for skilled
personnel, especially experienced middle and senior level management, with the skills necessary to perform the services we offer to our clients. Increased
competition for these personnel, in the IT industry or otherwise, could have an adverse effect on us. We have established TCP and TDP programs to increase
our human capital and employee loyalty, however, a significant increase in our attrition rate could decrease our operating efficiency and productivity and
could lead to a decline in demand for our services. Additionally, failure to recruit, train, develop and retain personnel with the qualifications necessary to
fulfill the needs of our existing and future clients or to assimilate new personnel successfully could have a material adverse effect on our business, financial
condition and results of operations. Failure to retain our key personnel on client projects or find suitable replacements for key personnel upon their departure
may lead to termination of some of our client contracts or cancellation of some of our projects, which could materially and adversely affect our business.
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Our success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted
if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and other key employees. In particular, we rely on the
expertise, experience, client relationships and reputation of Xiao Feng Yang, our Chairman, president and director. We currently do not maintain key man life
insurance for any of the senior members of our management team or other key personnel. If one or more of our senior executives or key employees are unable
or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition,
competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or
attract and retain new senior executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and
results of operations may be materially and adversely affected. If any of our senior executives or key personnel joins a competitor or forms a competing
company, we may lose clients, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers,
who generally keep a close relationship with our clients, joins a competitor or forms a competing company, we may lose clients, and our revenues may be
materially and adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such
personnel. Most of our executives and key personnel have entered into employment agreements with us that contain non-competition provisions, non-
solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition, non-
solicitation and nondisclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers and key
employees reside, in light of the uncertainties with China’s legal system.
We generate a significant portion of our revenues from a relatively small number of major clients and loss of business from these clients could reduce our
revenues and significantly harm our business.
We believe that in the foreseeable future we will continue to derive a significant portion of our revenues from a small number of major clients. For
the years ended June 30, 2018, 2017 and 2016, Citibank and its affiliates accounted for 30.8%, 38.6% and 59.2% of the Company’s total revenues,
respectively. For fiscal 2018 and 2017, substantially all the service provided by the Company to Citibank was IT consulting service and billed through time-
and-expense contracts. The Company has not entered into any material long term contracts with Citibank. Our ability to maintain close relationships with
these and other major clients is essential to the growth and profitability of our business. However, the volume of work performed for a specific client is likely
to vary from year to year, especially since we are generally not our clients’ exclusive IT services provider and we do not have long-term commitments from
any of our clients to purchase our services. The typical team for our service agreements is between 1 and 3 years. A major client in one year may not provide
the same level of revenues for us in any subsequent year. The IT services we provide to our clients, and the revenues and income from those services, may
decline or vary as the type and quantity of IT services we provide changes over time. In addition, our reliance on any individual client for a significant portion
of our revenues may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of service. In addition, a number of
factors other than our performance could cause the loss of or reduction in business or revenues from a client, and these factors are not predictable. These
factors may include corporate restructuring, pricing pressure, changes to its outsourcing strategy, switching to another services provider or returning work in-
house. In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. The loss of any of
our major clients could adversely affect our financial condition and results of operations.
If we are unable to collect our receivables from our clients, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. As of June 30,
2018 and 2017, our accounts receivable balance, net of allowance, amounted to approximately $16.3 million and $6.6 million, respectively. As of the years
ended June 30, 2018 and 2017, Citibank accounted for 35.9% and 39.1% of the Company’s total accounts receivable balance. Since we generally do not
require collateral or other security from our clients, we establish an allowance for doubtful accounts based upon estimates, historical experience and other
factors surrounding the credit risk of specific clients. However, actual losses on client receivables balance could differ from those that we anticipate and as a
result we might need to adjust our allowance. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic
conditions, including related turmoil in the global financial system, could also result in financial difficulties for our clients, including limited access to the
credit markets, insolvency or bankruptcy, and as a result could cause clients to delay payments to us, request modifications to their payment arrangements that
could increase our receivables balance, or default on their payment obligations to us. As a result, an extended delay or default in payment relating to a
significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to collect our
receivables from our clients in accordance with the contracts with our clients, our results of operations and cash flows could be adversely affected.
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The growth and success of our business depends on our ability to anticipate and develop new services and enhance existing services in order to keep pace
with rapid changes in technology and in the industries we focus on.
The market for our services is characterized by rapid technological change, evolving industry standards, changing client preferences and new product
and service introductions. Our future growth and success depend significantly on our ability to anticipate developments in IT services, and develop and offer
new product and service lines to meet our clients’ evolving needs. We may not be successful in anticipating or responding to these developments in a timely
manner, or if we do respond, the services or technologies we develop may not be successful in the marketplace. The development of some of the services and
technologies may involve significant upfront investments and the failure of these services and technologies may result in our being unable to recover these
investments, in part or in full. Further, services or technologies that are developed by our competitors may render our services uncompetitive or obsolete. In
addition, new technologies may be developed that allow our clients to more cost-effectively perform the services that we provide, thereby reducing demand
for our services. Should we fail to adapt to the rapidly changing IT services market or if we fail to develop suitable services to meet the evolving and
increasingly sophisticated requirements of our clients in a timely manner, our business and results of operations could be materially and adversely affected.
We may be unsuccessful in entering into strategic alliances or identifying and acquiring suitable acquisition candidates, which could impede our growth
and negatively affect our revenues and net income.
We have pursued and may continue to pursue strategic alliances and strategic acquisition opportunities to increase our scale and geographic
presence, expand our service offerings and capabilities and enhance our industry and technical expertise. However, it is possible that in the future we may not
succeed in identifying suitable alliances or acquisition candidates. Even if we identify suitable candidates, we may not be able to consummate these
arrangements on terms commercially acceptable to us or to obtain necessary regulatory approvals in the case of acquisitions. Many of our competitors are
likely to be seeking to enter into similar arrangements or acquire the same targets that we are looking to enter into or acquire. Such competitors may have
substantially greater financial resources than we do and may be more attractive to our strategic partners or be able to outbid us for the targets. In addition, we
may also be unable to timely deploy our existing cash balances to effect a potential acquisition, as use of cash balances located onshore in China may require
specific governmental approvals or result in withholding and other tax payments. If we are unable to enter into suitable strategic alliances or complete suitable
acquisitions, our growth strategy may be impeded and our revenues and net income could be negatively affected.
If we fail to integrate or manage acquired companies efficiently, or if the acquired companies do not perform to our expectations, we may not be able to
realize the benefits envisioned for such acquisitions, and our overall profitability and growth plans may be adversely affected.
Historically, we have expanded our service capabilities and gained new clients through selective acquisitions. Our ability to successfully integrate an
acquired entity and realize the benefits of any acquisition requires, among other things, successful integration of technologies, operations and personnel.
Challenges we face in the acquisition and integration process include:
● integrating operations, services and personnel in a timely and efficient manner;
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● unforeseen or undisclosed liabilities;
● generating sufficient revenue and net income to offset acquisition costs;
● potential loss of, or harm to, employee or client relationships;
● properly structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out
calculations and payments;
● retaining key senior management and key sales and marketing and research and development personnel;
● potential incompatibility of solutions, services and technology or corporate cultures;
● consolidating and rationalizing corporate, information technology and administrative infrastructures;
● integrating and documenting processes and controls;
● entry into unfamiliar markets; and
● increased complexity from potentially operating additional geographically dispersed sites, particularly if we acquire a company or business with
facilities or operations outside of China.
In addition, the primary value of many potential targets in the outsourcing industry lies in their skilled professionals and established client
relationships. Transitioning these types of assets to our business can be particularly difficult due to different corporate cultures and values, geographic
distance and other intangible factors. For example, some newly acquired employees may decide not to work with us or to leave shortly after their move to our
company and some acquired clients may decide to discontinue their commercial relationships with us. These challenges could disrupt our ongoing business,
distract our management and employees and increase our expenses, including causing us to incur significant one-time expenses and write-offs, and make it
more difficult and complex for our management to effectively manage our operations. If we are not able to successfully integrate an acquired entity and its
operations and to realize the benefits envisioned for such acquisition, our overall growth and profitability plans may be adversely affected.
If we do not succeed in attracting new clients for our services and or growing revenues from existing clients, we may not achieve our revenue growth
goals.
We plan to significantly expand the number of clients we serve to diversify our client base and grow our revenues. Revenues from a new client often
rise quickly over the first several years following our initial engagement as we expand the services that we provide to that client. Therefore, obtaining new
clients is important for us to achieve rapid revenue growth. We also plan to grow revenues from our existing clients by identifying and selling additional
services to them. Our ability to attract new clients, as well as our ability to grow revenues from existing clients, depends on a number of factors, including our
ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing teams. If we are not
able to continue to attract new clients or to grow revenues from our existing clients in the future, we may not be able to grow our revenues as quickly as we
anticipate or at all.
As a result of our significant recent growth, evaluating our business and prospects may be difficult and our past results may not be indicative of our
future performance.
Our future success depends on our ability to significantly increase revenue and maintain profitability from our operations. Our business has grown
and evolved significantly in recent years. Our growth in recent years makes it difficult to evaluate our historical performance and make a period-to-period
comparison of our historical operating results less meaningful. We may not be able to achieve a similar growth rate or maintain profitability in future periods.
Therefore, you should not rely on our past results or our historic rate of growth as an indication of our future performance. You should consider our future
prospects in light of the risks and challenges encountered by a company seeking to grow and expand in a competitive industry that is characterized by rapid
technological change, evolving industry standards, changing client preferences and new product and service introductions. These risks and challenges include,
among others:
● the uncertainties associated with our ability to continue our growth and maintain profitability;
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● preserving our competitive position in the IT services industry in China;
● offering consistent and high-quality services to retain and attract clients;
● implementing our strategy and modifying it from time to time to respond effectively to competition and changes in client preferences;
● managing our expanding operations and successfully expanding our solution and service offerings;
● responding in a timely manner to technological or other changes in the IT services industry;
● managing risks associated with intellectual property; and
● recruiting, training, developing and retaining qualified managerial and other personnel.
If we are unsuccessful in addressing any of these risks or challenges, our business may be materially and adversely affected.
We face risks associated with having a long selling and implementation cycle for our services that require us to make significant resource commitments
prior to realizing revenues for those services.
We have a long selling cycle for our technology services, which requires significant investment of capital, human resources and time by both our
clients and us. In our consulting service request, we collect service fees on monthly and quarterly basis; in our solution services segment – by performance
obligation fulfillment. Before committing to use our services, potential clients require us to expend substantial time and resources educating them on the value
of our services and our ability to meet their requirements. Therefore, our selling cycle is subject to many risks and delays over which we have little or no
control, including our clients’ decision to choose alternatives to our services (such as other providers or in-house resources) and the timing of our clients’
budget cycles and approval processes. Implementing our services also involves a significant commitment of resources over an extended period of time from
both our clients and us. Our clients may experience delays in obtaining internal approvals or delays associated with technology, thereby further delaying the
implementation process. Our current and future clients may not be willing or able to invest the time and resources necessary to implement our services, and
we may fail to close sales with potential clients to which we have devoted significant time and resources, which could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
Our profitability will suffer if we are not able to maintain our resource utilization levels and continue to improve our productivity levels.
Our gross margin and profitability are significantly impacted by our utilization levels of human resources as well as other resources, such as
computers, IT infrastructure and office space, and our ability to increase our productivity levels. We have expanded our operations significantly in recent
years through organic growth and external acquisitions, which has resulted in a significant increase in our headcount and fixed overhead costs. We may face
difficulties maintaining high levels of utilization, especially for our newly established or newly acquired businesses and resources. The master service
agreements with our clients typically do not impose a minimum or maximum purchase amount and allow our clients to place service orders from time to time
at their discretion. Client demand may fall to zero or surge to a level that we cannot cost-effectively satisfy. Although we try to use all commercially
reasonable efforts to accurately estimate service orders and resource requirements from our clients, we may overestimate or underestimate, which may result
in unexpected cost and strain or redundancy of our human capital and adversely impact our utilization levels. In addition, some of our professionals are
specially trained to work for specific clients or on specific projects and some of our sales and delivery center facilities are dedicated to specific clients or
specific projects. Our ability to continually increase our productivity levels depends significantly on our ability to recruit, train, develop and retain high-
performing professionals, staff projects appropriately and optimize our mix of services and delivery methods. If we experience a slowdown or stoppage of
work for any client or on any project for which we have dedicated professionals or facilities, we may not be able to efficiently reallocate these professionals
and facilities to other clients and projects to keep their utilization and productivity levels high. If we are not able to maintain high resource utilization levels
without corresponding cost reductions or price increases, our profitability will suffer.
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A significant portion of our income is generated, and will in the future continue to be generated, on a project basis with a fixed price; we may not be able
to accurately estimate costs and determine resource requirements in relation to our projects, which would reduce our margins and profitability.
A significant portion of our income is generated, and will in the future continue to be generated, from fees we receive for our projects with a fixed
price. Our projects often involve complex technologies, entail the coordination of operations and workforces in multiple locations, utilizing workforces with
different skill sets and competencies and geographically distributed service centers, and must be completed within compressed timeframes and meet client
requirements that are subject to change and increasingly stringent. In addition, some of our fixed-price projects are multi-year projects that require us to
undertake significant projections and planning related to resource utilization and costs. If we fail to accurately assess the time and resources required for
completing projects and to price our projects profitably, our business, results of operations and financial condition could be adversely affected.
Increases in wages for professionals in China could prevent us from sustaining our competitive advantage and could reduce our profit margins.
Our most significant costs are the salaries and other compensation expenses for our professionals and other employees. Wage costs for professionals
in China are lower than those in more developed countries and India. However, because of rapid economic growth, increased productivity levels, and
increased competition for skilled employees in China, wages for highly skilled employees in China, in particular middle- and senior-level managers, are
increasing at a faster rate than in the past. We may need to increase the levels of employee compensation more rapidly than in the past to remain competitive
in attracting and retaining the quality and number of employees that our business requires. Increases in the wages and other compensation we pay our
employees in China could reduce our competitive advantage unless we are able to increase the efficiency and productivity of our professionals as well as the
prices we can charge for our services. In addition, any appreciation in the value of the Renminbi relative to U.S. dollar and other foreign currencies will cause
an increase in the relative wage levels in China, which could further reduce our competitive advantage and adversely impact our profit margin.
The international nature of our business exposes us to risks that could adversely affect our financial condition and results of operations.
We conduct our business throughout the world in multiple locations. As a result, we are exposed to risks typically associated with conducting
business internationally, many of which are beyond our control. These risks include:
● significant currency fluctuations between the Renminbi and the U.S. dollar and other currencies in which we transact business;
● legal uncertainty owing to the overlap and inconsistencies of different legal regimes, problems in asserting contractual or other rights across
international borders and the burden and expense of complying with the laws and regulations of various jurisdictions;
● potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate;
● current and future tariffs and other trade barriers, including restrictions on technology and data transfers;
● unexpected changes in regulatory requirements; and
● terrorist attacks and other acts of violence or war.
The occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.
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Our net revenues and results of operations are affected by seasonal trends.
Our business is affected by seasonal trends. In particular, our net revenues are typically progressively higher in the second, third and fourth quarters
of each year compared to the first quarter of each year due to seasonal trends, such as: (i) a general slowdown in business activities and a reduced number of
working days for our professionals during the first quarter of each year as a result of the Chinese New Year holiday period, and (ii) our customers in general
tend to spend their IT budgets in the second half of the year and in particular the fourth quarter. Other factors that may cause our quarterly operating results to
fluctuate include, among others, changes in general economic conditions in China and the impact of unforeseen events. We believe that our net revenues will
continue to be affected in the future by seasonal trends. As a result, you may not be able to rely on period to period comparisons of our operating results as an
indication of our future performance, and we believe it is more meaningful to evaluate our business on an annual basis.
We may be forced to reduce the prices of our services due to increased competition and reduced bargaining power with our clients, which could lead to
reduced revenues and profitability.
The services outsourcing industry in China is developing rapidly and related technology trends are constantly evolving. This results in the frequent
introduction of new services and significant price competition from our competitors. We may be unable to offset the effect of declining average sales prices
through increased sales volumes and or reductions in our costs. Furthermore, we may be forced to reduce the prices of our services in response to offerings
made by our competitors. Finally, we may not have the same level of bargaining power we have enjoyed in the past when it comes to negotiating for the
prices of our services.
If we cause disruptions to our clients’ businesses or provide inadequate service, our clients may have claims for substantial damages against us, and as a
result our profits may be substantially reduced.
If our professionals make errors in the course of delivering services to our clients or fail to consistently meet service requirements of a client, these
errors or failures could disrupt the client’s business, which could result in a reduction in our net revenues or a claim for substantial damages against us. In
addition, a failure or inability to meet a contractual requirement could seriously damage our reputation and affect our ability to attract new business. The
services we provide are often critical to our clients’ businesses. We generally provide customer support from three months to one year after our customized
application is delivered. Certain of our client contracts require us to comply with security obligations including maintaining network security and back-up
data, ensuring our network is virus-free, maintaining business continuity planning procedures, and verifying the integrity of employees that work with our
clients by conducting background checks. Any failure in a client’s system or breach of security relating to the services we provide to the client could damage
our reputation or result in a claim for substantial damages against us. Any significant failure of our equipment or systems, or any major disruption to basic
infrastructure like power and telecommunications in the locations in which we operate, could impede our ability to provide services to our clients, have a
negative impact on our reputation, cause us to lose clients, reduce our revenues and harm our business. Under our contracts with our clients, our liability for
breach of our obligations is in some cases limited to a certain percentage of contract price. Such limitations may be unenforceable or otherwise may not
protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients, are
generally not limited under our contracts. We currently do not have commercial general or public liability insurance. The successful assertion of one or more
large claims against us could have a material adverse effect on our business, reputation, results of operations, financial condition and cash flows. Even if such
assertions against us are unsuccessful, we may incur reputational harm and substantial legal fees.
We may be liable to our clients for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees
or otherwise.
We are typically required to manage, utilize and store sensitive or confidential client data in connection with the services we provide. Under the
terms of our client contracts, we are required to keep such information strictly confidential. We use network security technologies, surveillance equipment and
other methods to protect sensitive and confidential client data. We also require our employees and subcontractors to enter into confidentiality agreements to
limit access to and distribution of our clients’ sensitive and confidential information as well as our own trade secrets. We can give no assurance that the steps
taken by us in this regard will be adequate to protect our clients’ confidential information. If our clients’ proprietary rights are misappropriated by our
employees or our subcontractors or their employees, in violation of any applicable confidentiality agreements or otherwise, our clients may consider us liable
for those acts and seek damages and compensation from us. Any such acts could cause us to lose existing and future business and damage our reputation in
the market. In addition, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our subcontractors
or employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion
of resources and management attention.
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We may not be able to prevent others from unauthorized use of intellectual property of our clients, which could harm our business and competitive
position.
We rely on software licenses from our clients with respect to certain projects. To protect proprietary information and other intellectual property of
our clients, we require our employees, subcontractors, consultants, advisors and collaborators to enter into confidentiality agreements with us. These
agreements may not provide effective protection for trade secrets, know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in
China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, protection of intellectual
property rights and confidentiality in China may not be as effective as that in the United States or other developed countries. Policing unauthorized use of
proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of proprietary technology of
our clients. Reverse engineering, unauthorized copying or other misappropriation of proprietary technologies of our clients could enable third parties to
benefit from our or our clients’ technologies without paying us and our clients for doing so, and our clients may hold us liable for that act and seek damages
and compensation from us, which could harm our business and competitive position.
We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of clients, reduce our revenues and
harm our competitive position.
We rely on a combination of copyright, trademark, software registration, anti-unfair competition and trade secret laws, as well as confidentiality
agreements and other methods to protect our intellectual property rights. To protect our trade secrets and other proprietary information, employees, clients,
subcontractors, consultants, advisors and collaborators are required to enter into confidentiality agreements. These agreements might not provide effective
protection for the trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily
because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may
not be as effective as those in the United States or other developed countries, and infringement of intellectual property rights continues to pose a serious risk
of doing business in China. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to
prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized copying, other misappropriation, or negligent or accidental
leakage of our proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying us for doing so,
which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may
need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in
substantial costs and diversion of resources and management attention.
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We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such
claims, we may lose significant intellectual property rights and may be unable to continue providing our existing services.
Our success largely depends on our ability to use and develop our technology and services without infringing the intellectual property rights of third
parties, including copyrights, trade secrets and trademarks. We may be subject to litigation involving claims of violation of other intellectual property rights of
third parties. We typically indemnify clients who purchase our services and solutions against potential infringement of intellectual property rights underlying
our services and solutions, which subjects us to the risk of indemnification claims. The holders of other intellectual property rights potentially relevant to our
service offerings may make it difficult for us to acquire a license on commercially acceptable terms. Also, we may be unaware of intellectual property
registrations or applications relating to our services that may give rise to potential infringement claims against us. There may also be technologies licensed to
and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such
technologies. We are subject to additional risks as a result of our recent and proposed acquisitions and the hiring of new employees who may misappropriate
intellectual property from their former employers. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our
services or using technology involving the allegedly infringing intellectual property. Intellectual property litigation is expensive and time-consuming and
could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others
things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may
not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights.
Protracted litigation could also result in existing or potential clients deferring or limiting their purchase or use of our products until resolution of such
litigation, or could require us to indemnify our clients against infringement claims in certain instances. Any intellectual property claim or litigation in this
area, whether we ultimately win or lose, could damage our reputation and have a material adverse effect on our business, results of operations or financial
condition.
We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our
business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We believe that our current cash, cash flow from operations and the proceeds from our recently completed IPO should be sufficient to meet our
anticipated cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders.
The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that
would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
● investors’ perception of, and demand for, securities of technology services outsourcing companies;
● conditions of the U.S. and other capital markets in which we may seek to raise funds;
● our future results of operations and financial condition;
● PRC government regulation of foreign investment in China;
● economic, political and other conditions in China; and
● PRC government policies relating to the borrowing and remittance outside China of foreign currency.
Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us,
or at all, could limit our ability to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive
challenges.
Failure to adhere to regulations that govern our clients’ businesses could result in breaches of contracts with our clients. Failure to adhere to the
regulations that govern our business could result in our being unable to effectively perform our services.
Our clients’ business operations are subject to certain rules and regulations in China or elsewhere. Our clients may contractually require that we
perform our services in a manner that would enable them to comply with such rules and regulations. Failure to perform our services in such a manner could
result in breaches of contract with our clients and, in some limited circumstances, civil fines and criminal penalties for us. In addition, we are required under
various Chinese laws to obtain and maintain permits and licenses to conduct our business. If we do not maintain our licenses or other qualifications to provide
our services, we may not be able to provide services to existing clients or be able to attract new clients and could lose revenues, which could have a material
adverse effect on our business and results of operations.
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We may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events.
Our operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other
events such as fires. Such natural disasters or other events may lead to disruption of information systems and telephone service for sustained periods. Damage
or destruction that interrupts our provision of outsourcing services could damage our relationships with our clients and may cause us to incur substantial
additional expenses to repair or replace damaged equipment or facilities. We may also be liable to our clients for disruption in service resulting from such
damage or destruction. Prolonged disruption of our services as a result of natural disasters or other events may also entitle our clients to terminate their
contracts with us. We currently do not have insurance against business interruptions.
Fluctuation in the value of the Renminbi and other currencies may have a material adverse effect on the value of your investment.
Our financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in Renminbi (RMB). Our
exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional currencies of each entity and
limited revenue contracts dominated in Singapore dollar, Hong Kong dollar and Australian dollar in certain PRC operating entities. We do not believe that we
currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial
instruments. However, the value of your investment in our common shares will be affected by the foreign exchange rate between U.S. dollars and RMB
because the primary value of our business is effectively denominated in RMB, while the common shares will be traded in U.S. dollars. The value of the RMB
against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign
exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rate and achieve
certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable.
As we may rely on dividends paid to us by our PRC subsidiaries, any significant revaluation of the RMB may have a material adverse effect on our
revenues and financial condition, and the value of any dividends payable on our common shares in foreign currency terms. For example, to the extent that we
need to convert U.S. dollars we receive from the recently completed IPO into for our operations, appreciation of the RMB against the U.S. dollar would have
an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of
making payments for dividends on our common share or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative
effect on the U.S. dollar amount available to us. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our
financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. We cannot predict the
impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert into foreign currencies.
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Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Changes in the value of the RMB against the U.S. dollar, euro and other foreign currencies are affected by, among other things, changes in china’s
political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and
the value of, and any dividends payable on our shares in U.S. dollar terms. Conversely, if we decide to convert our RMB into U.S. dollar for the purpose of
paying dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the
U.S. dollar amount available to us. Since July 2005, the RMB is no longer pegged to the U.S. dollar, although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in
value against the U.S. dollar in the medium to long term. Moreover, it is possible that in future, PRC authorities may lift restrictions on fluctuations in the
RMB exchange rate and lessen intervention in the foreign exchange market. Very limited hedging transactions are available in China to reduce our exposure
to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Legislation in certain countries in which we have clients may restrict companies in those countries from outsourcing work to us.
Offshore outsourcing is a politically sensitive issue in the United States. For example, many organizations and public figures in the United States
have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in their home countries. A number
of U.S. states have passed legislation that restricts state government entities from outsourcing certain work to offshore service providers. Other U.S. federal
and state legislation has been proposed that, if enacted, would provide tax disincentives for offshore outsourcing or require disclosure of jobs outsourced
abroad. Similar legislation could be in enacted in other countries in which we have clients. Any expansion of existing laws or the enactment of new legislation
restricting or discouraging offshore outsourcing by companies in the United States, or other countries in which we have clients could adversely impact our
business operations and financial results. In addition, from time to time there has been publicity about negative experiences associated with offshore
outsourcing, such as theft and misappropriation of sensitive client data. As a result, current or prospective clients may elect to perform such services
themselves or may be discouraged from transferring these services from onshore to offshore providers. Any slowdown or reversal of existing industry trends
towards offshore outsourcing in response to political pressure or negative publicity would harm our ability to compete effectively with competitors that
operate out of onshore facilities and adversely affect our business and financial results.
Disruptions in telecommunications or significant failure in our IT systems could harm our service model, which could result in a reduction of our
revenue.
A significant element of our business strategy is to continue to leverage and expand our sales and delivery centers strategically located in China. We
believe that the use of a strategically located network of sales and delivery centers will provide us with cost advantages, the ability to attract highly skilled
personnel in various regions of the country and the world, and the ability to service clients on a regional and global basis. Part of our service model is to
maintain active voice and data communications, financial control, accounting, customer service and other data processing systems between our main offices
in Shanghai, our clients’ offices, and our other deliveries centers and support facilities. Our business activities may be materially disrupted in the event of a
partial or complete failure of any of these IT or communication systems, which could be caused by, among other things, software malfunction, computer virus
attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events
beyond our control. Loss of all or part of the systems for a period of time could hinder our performance or our ability to complete client projects on time
which, in turn, could lead to a reduction of our revenue or otherwise have a material adverse effect on our business and business reputation. We may also be
liable to our clients for breach of contract for interruptions in service.
Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by
unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate
proprietary information or cause interruptions or malfunctions in our operations. Although we intend to continue to implement security measures, computer
attacks or disruptions may jeopardize the security of information stored in and transmitted through our computer systems. Actual or perceived concerns that
our systems may be vulnerable to such attacks or disruptions may deter our clients from using our solutions or services. As a result, we may be required to
expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. Data networks are also
vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and
misappropriated confidential information. It is possible that, despite existing safeguards, an employee could misappropriate our clients’ proprietary
information or data, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a result of any of the foregoing
could have a material adverse effect on our business.
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We have identified material weaknesses in our internal control over financial reporting.
The material weakness related to the Company’s lack of controls and procedures in place to monitor, capture, report and disclose subsequent events
that occurred after the balance sheet date, specifically relating to certain revolving credit facilities that were put in place by the Company following such date
(See Item 15. Controls and Procedures for a discussion of the material weakness in question). While no material adjustments, restatement or other revisions
to our previously issued financial statements were required, we determined that the Company needed to continue to strengthen its accounting staff and to
enhance its internal controls function, which monitoring and remedial steps will be carried out by the Company during our fiscal year 2019. If we fail to
develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent
fraud.
Our insurance coverage may be inadequate to protect us against losses.
Although we maintain professional liability insurance and property insurance coverage for certain of our facilities and equipment, we do not have
any loss of data or business interruption insurance coverage for our operations. If any claims for damage are brought against us, or if we experience any
business disruption, litigation or natural disaster, we might incur substantial costs and diversion of resources.
We will likely not pay dividends in the foreseeable future.
Risks Relating to Our Corporate Structure
Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition,
capital requirements and other factors. There is no assurance that our Board of Directors will declare dividends even if we are profitable. The payment of
dividends by entities organized in China is subject to limitations as described herein. Under Cayman Islands law, we may only pay dividends from profits of
the Company, or credits standing in the Company’s share premium account, and we must be solvent before and after the dividend payment in the sense that
we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our Company will not be
less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. Pursuant to the Chinese enterprise
income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable
by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax
of 5%. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit
payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The transfer to this
reserve must be made before distribution of any dividend to shareholders.
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Our business may be materially and adversely affected if any of our Chinese subsidiaries declare bankruptcy or become subject to a dissolution or
liquidation proceeding.
The Enterprise Bankruptcy Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall
due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts. Our Chinese subsidiaries hold certain assets that are important to
our business operations. If any of our Chinese subsidiaries undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may
claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business,
financial condition and results of operations.
Our WOFE is required to allocate a portion of its after-tax profits to the statutory reserve fund, and as determined by its board of directors, to the staff
welfare and bonus funds, which may not be distributed to equity owners.
Pursuant to Company Law of P.R. China (2013 Revision), Wholly Foreign-Owned Enterprise (“WOFE”) Law of the P.R. China (2000 Revision) and
Implementing Rules for the Law of the People’s Republic of China on Wholly Foreign Owned Enterprises (2014 Revision), our WOFE entity is required to
allocate a portion of its after-tax profits, to the statutory reserve fund, and in its discretion, to the staff welfare and bonus funds. No lower than 10% of an
enterprise’s after tax-profits should be allocated to the statutory reserve fund. When the statutory reserve fund account balance is equal to or greater than 50%
of the WOFE’s registered capital, no further allocation to the statutory reserve fund account is required. WOFE determines, in its own discretion, the amount
contributed to the staff welfare and bonus funds. These reserves represent appropriations of retained earnings determined according to Chinese law.
Our failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading of our common shares on a
foreign stock exchange could have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.
On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), jointly
issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rule”). The M&A Rule contains provisions
that require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or
individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21,
2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas
listings. However, the application of the M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the
scope and applicability of the CSRC approval requirement. The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to
voluntarily request approval under the M&A Rule. We may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities.
These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the
IPO proceeds into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common shares.
If the chops of our PRC companies and subsidiaries are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the
corporate governance of these entities could be severely and adversely compromised.
In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature.
Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In
addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC
subsidiaries are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those
chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be
severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were
chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could
experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to
resolve while distracting management from our operations.
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If we fail to maintain continuing compliance with the PRC state regulatory rules, policies and procedures applicable to our industry, we may risk losing
certain preferential tax and other treatments which may adversely affect the viability of our current corporate structure, corporate governance and
business operations.
According to the Guidelines on Foreign Investment issued by the State Council in 2002 and the Catalog on Foreign Invested Industries (2007
Revision) issued by the National Development and Reform Commission and the Ministry of Commerce, IT services fall into the category of industries in
which foreign investment is encouraged. The State Council has promulgated several notices since 2000 to launch favorable policies for IT services, such as
preferential tax treatments and credit support. Under rules and regulations promulgated by various Chinese government agencies, enterprises that have met
specified criteria and are recognized as software enterprises by the relevant government authorities in China are entitled to preferential treatment, including
financing support, preferential tax rates, export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. Software
enterprise qualifications are subject to annual examination. Enterprises that fail to meet the annual examination standards will lose the favorable enterprise
income tax treatment. Enterprises exporting software or producing software products that are registered with the relevant government authorities are also
entitled to preferential treatment including governmental financial support, preferential import, export policies and preferential tax rates. Companies in China
engaging in systems integration are required to obtain qualification certificates from the Ministry of Industry and Information Technology. Companies
planning to set up computer information systems may only retain systems integration companies with appropriate qualification certificates. Currently the
Company does not engage in information system integration business, therefore the Company is not required to have such qualification certificates. The
qualification certificate is subject to review every two years and is renewable every four years. In 2003, the Ministry of Industry and Information Technology
promulgated the Amended Appraisal Condition for Qualification Grade of Systems Integration of Computer Information to elaborate the conditions for
appraising each of the four qualification grades of systems integration companies. Companies applying for qualification are graded depending on the scale of
the work they undertake. The grades range from Grade 1 (highest) to Grade 4 (lowest) in the scale of the work the respective companies can undertake.
Companies with Grade 3 qualification can independently undertake projects at the medium-scale and small-scale enterprise level and undertake projects at the
large-scale enterprise level in cooperation with other entities. If and to the extent we fail to maintain compliance with such applicable rules and regulations,
our operations and financial results may be adversely affected.
Risks Related to Doing Business in China
Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth
of China, which could materially and adversely affect the growth of our business and our competitive position.
The majority of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects
are affected significantly by economic, political and legal developments in China. Although the PRC economy has been transitioning from a planned
economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic
growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict
investment in certain industries by foreign investors, control the exchange between the Renminbi and foreign currencies, and regulate the growth of the
general or specific market. While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically
and among various sectors of the economy. Furthermore, the current global economic crisis is adversely affecting economies throughout the world. As the
PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major
economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s
economic growth could materially affect our business. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws
and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such
developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.
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Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late
1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic matters in general. The overall effect has
been to significantly enhance the protections afforded to various forms of foreign investments in China. We conduct our business primarily through our
subsidiaries established in China. These subsidiaries are generally subject to laws and regulations applicable to foreign investment in China. However, since
these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are
not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. In addition,
some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local
government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we
may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC
administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the
outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may
impede our ability to enforce the contracts we have entered into with our business partners, clients and suppliers. In addition, such uncertainties, including any
inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our
business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or
other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws,
changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit
the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial
costs and diversion of our resources and management attention.
U.S. regulators’ ability to conduct investigations or enforce rules in China is limited.
The majority of our operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations or
inspections, or to effect service of process within the U.S. or elsewhere outside China on us, our subsidiaries, officers, directors and shareholders, and others,
including with respect to matters arising under U.S. federal or state securities laws. China does not have treaties providing for reciprocal recognition and
enforcement of judgments of courts with the U.S. and many other countries. As a result, recognition and enforcement in China of these judgments in relation
to any matter, including U.S. securities laws and the laws of the Cayman Islands, may be difficult or impossible.
We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by
the PRC State Administration of Taxation on December 10, 2009, or Circular 698, where a foreign investor transfers the equity interests of a PRC resident
enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is
located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should
report such Indirect Transfer to the competent tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of the Indirect
Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement in order to avoid PRC tax, they will disregard the
existence of the overseas holding company and re-characterize the Indirect Transfer and as a result, gains derived from such Indirect Transfer may be subject
to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise is supposed to provide necessary assistance to support the
enforcement of Circular 698. At present, the PRC tax authorities will neither confirm nor deny that they would enforce Circular 698, in conjunction with other
tax collection and tax withholding rules, to make claims against our PRC subsidiary as being indirectly liable for unpaid taxes, if any, arising from Indirect
Transfers by shareholders who did not obtain their shares in the public offering of our shares.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to
personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise materially and adversely affect us.
The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in 2005 known as Circular 75 that requires PRC residents,
including both legal persons and natural persons, to register with an appropriate local SAFE branch before establishing or controlling any company outside of
China, referred to as an offshore special purpose company, for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds
from overseas. When a PRC resident contributes the assets or equity interests it holds in a PRC company into the offshore special purpose company, or
engages in overseas financing after contributing such assets or equity interests into the offshore special purpose company, such PRC resident must modify its
SAFE registration in light of its interest in the offshore special purpose company and any change thereof. In addition, any PRC resident that is the shareholder
of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose
company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over
any assets located in China. If these shareholders fail to comply, the PRC subsidiaries of the offshore special purpose company may be prohibited from
distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent
company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE
registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions.
We are committed to complying with the Circular 75 requirements and to ensuring that our shareholders who are PRC citizens or residents comply
with them. We believe that all of our current PRC citizen or resident shareholders and beneficial owners have completed their required registrations with
SAFE. However, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC citizens or residents, and we
may not always be able to compel our beneficial owners to comply with the Circular 75 requirements. As a result, we cannot assure you that all of our
shareholders or beneficial owners who are PRC citizens or residents will at all times comply with, or in the future make or obtain any applicable registrations
or approvals required by, Circular 75 or other related regulations. Failure by any such shareholders or beneficial owners to comply with Circular 75 could
subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or
pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
In addition, the PRC National Development and Reform Commission promulgated a rule in 2004 requiring its approval for overseas investment
projects made by PRC entities. However, there exist extensive uncertainties as to the interpretation of this rule with respect to its application to a PRC
individual’s overseas investment and, in practice, we are not aware of any precedents that a PRC individual’s overseas investment has been either approved by
the National Development and Reform Commission or challenged by the National Development and Reform Commission based on the absence of its
approval. Our current beneficial owners who are PRC individuals did not apply for the approval of the National Development and Reform Commission for
their investment in us. We cannot predict how and to what extent this will affect our business operations or future strategy.
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PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional
capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
In utilizing the proceeds from the recently completed IPO or any future offerings, as an offshore holding company of our PRC subsidiaries, we may
make loans to our PRC subsidiaries and controlled PRC affiliate, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our
PRC subsidiaries or controlled PRC affiliate are subject to PRC regulations and approvals. For example, loans by us to our PRC subsidiaries in China, each of
which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterpart.
We may also decide to finance our PRC subsidiaries through capital contributions. These capital contributions must be approved by the Ministry of
Commerce in China or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely
basis, if at all, with respect to future loans by us to our PRC subsidiaries or controlled PRC affiliate or capital contributions by us to our subsidiaries or any of
their respective subsidiaries. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected,
which could adversely and materially affect our liquidity and our ability to fund and expand our business.
In 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested enterprise of foreign currency into Renminbi by
restricting how the converted Renminbi may be used. Circular 142 requires that Renminbi converted from the foreign currency-denominated capital of a
foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used
for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the
flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such Renminbi may not
be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes
within the foreign-invested enterprise’s approved business scope.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a
timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or controlled PRC affiliate or with respect to future capital contributions by us
to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may
be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiaries to obtain
financing.
The PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out
of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency. Restrictions on currency conversion
imposed by the PRC government may limit our ability to use revenues generated in Renminbi to fund our expenditures denominated in foreign currencies or
our business activities outside China. Under China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for
payments relating to current account transactions, which include among other things dividend payments and payments for the import of goods and services,
by complying with certain procedural requirements. Our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from
SAFE, by complying with certain procedural requirements. Our PRC subsidiaries may also retain foreign currency in their respective current account bank
accounts for use in payment of international current account transactions. However, we cannot assure you that the PRC government will not take measures in
the future to restrict access to foreign currencies for current account transactions. Conversion of Renminbi into foreign currencies, and of foreign currencies
into Renminbi, for payments relating to capital account transactions, which principally includes investments and loans, generally requires the approval of
SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the
ability of our PRC subsidiaries to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or
capital contributions from us. We cannot assure you that the registration process will not delay or prevent our conversion of Renminbi for use outside of
China.
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We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders.
The Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are
considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In addition,
a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises
established outside of China as resident enterprises clarified that dividends and other income paid by such resident enterprises will be considered to be PRC
source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also
subjects such resident enterprises to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income
Tax Law, a de facto management body is defined as a body that has material and overall management and control over the manufacturing and business
operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain
Chinese-invested enterprises will be classified as resident enterprises if the following are located or resident in China: senior management personnel and
departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting
books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting
rights.
Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which
are applicable to our company or our overseas subsidiary. If our company or any of our overseas subsidiaries is considered a PRC tax resident enterprise for
PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, our company or our overseas subsidiary will be
subject to the uniform 25% enterprise income tax rate as to our global income as well as PRC enterprise income tax reporting obligations. Second, although
under the Enterprise Income Tax Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as tax-exempted income, we
cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC
enterprise income tax purposes. Finally, dividends payable by us to our investors and gain on the sale of our shares may become subject to PRC withholding
tax. It is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation in which a withholding tax of
10% for our non-PRC enterprise investors or a potential withholding tax of 20% for individual investors is imposed on dividends we pay to them and with
respect to gains derived by such investors from transferring our shares. In addition to the uncertainty in how the new resident enterprise classification could
apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to
withhold PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of our shares
under the circumstances mentioned above, the value of your investment in our shares or ADSs may be materially and adversely affected. It is unclear whether,
if we are considered a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into
between China and other countries or areas.
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The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which
could make it more difficult for us to pursue growth through acquisitions in China.
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 China Securities Regulatory Commission, or 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. These M&A Rules and some other regulations and rules concerning mergers and acquisitions
established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex,
including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if
certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and
acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may
acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any
activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we
may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant
rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local
counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market
share.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan
participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens
and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas
publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC
subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle
matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other
employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other
awards under the equity incentive plan will be subject to these regulations as an overseas listed company. Failure to complete the SAFE registrations may
subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’
ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors,
executive officers and employees under PRC law.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the
future.
The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity
interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became
effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.
Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise”
indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC
enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result,
gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident
enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority
has the power to make a reasonable adjustment to the taxable income of the transaction.
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In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax
regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular
698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition,
Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group
restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and
transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by
transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor,
or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was
established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise
income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10%
for the transfer of equity interests in a PRC resident enterprise.
We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident
enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a
result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 or
Circular 698 and Circular 7, and may be required to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we
and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of
operations.
The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains
based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any
acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered
a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions
under SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an
adverse effect on our financial condition and results of operations.
We may rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could
have a material adverse effect on our ability to conduct our business.
As a holding company, we conduct substantially all of our business through our consolidated subsidiaries incorporated in China. We may rely on
dividends paid by these PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our
shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to
limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting
standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards
each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital.
As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. In addition, if any of our
PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other
distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
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Our current employment practices may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.
The PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and its
employees and establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. Because the Labor
Contract Law and its implementing rules have not been in effect very long and because there is lack of clarity with respect to their implementation and
potential penalties and fines, it is uncertain how it will impact our current employment policies and practices. We cannot assure you that our employment
policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that we will not be subject to related penalties, fines or
legal fees. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results
of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce
the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the employee on a monthly basis
during the term of the restriction period after the termination or ending of the labor contract, which may cause extra expenses to us. Furthermore, the Labor
Contract Law and its implementation rules require certain terminations to be based upon seniority rather than merit, which significantly affects the cost of
reducing workforce for employers. In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could
adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost effective manner, thus
our results of operations could be adversely affected.
We may not meet continued listing standards on the NASDAQ Capital Market.
If our shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition,
if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin
Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less
efficient markets than the NASDAQ Capital Market. In addition, if our common shares are delisted at some later date, our common shares may be subject to
the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than
established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny
stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are
delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would
decline and that our shareholders would find it difficult to sell their shares.
The market price for our shares may be volatile.
The trading prices of our common shares are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen
because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial
results of internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these
companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial decline in their trading prices. The
trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the
United States, which consequently may impact the trading performance of our common shares, regardless of our actual operating performance. In addition,
any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other
Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have
conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not
related to our operating performance, which may have a material adverse effect on the market price of our shares. In addition to the above factors, the price
and trading volume of our common shares may be highly volatile due to multiple factors, including the following:
● regulatory developments affecting us, our users, or our industry;
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● regulatory uncertainties with regard to our variable interest entity arrangements;
● announcements of studies and reports relating to our service offerings or those of our competitors;
● actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
● changes in financial estimates by securities research analysts;
● announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital
commitments;
● additions to or departures of our senior management;
● detrimental negative publicity about us, our management or our industry;
● fluctuations of exchange rates between the RMB and the U.S. dollar;
● release or expiry of lock-up or other transfer restrictions on our outstanding common shares; and
● sales or perceived potential sales of additional common shares.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide
you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for
you to evaluate our performance and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we
will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example,
we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation
information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will
not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of
Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer
before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act.
Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you
should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than
under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our Memorandum and Articles of Association, the Cayman Islands Companies Law (Revised) (the
“Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as
that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in
some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the United States. In addition, some U.S.
states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. There is no statutory
recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances
recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public
shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or
controlling shareholders than they would as shareholders of a U.S. public company.
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Judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and all of our assets are located outside of the United States. Our current operations are based in China. In
addition, our current directors and executive officers are nationals and residents of countries other than the United States. Substantially all of the assets of
these persons are located outside 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 that your rights have been infringed under the United States federal securities laws or otherwise.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment
against our assets or the assets of our directors and officers.
We are a foreign private issuer and, as a result, will not be subject to U.S. proxy rules and will be subject to more lenient and less frequent Exchange Act
reporting obligations than a U.S. issuer.
We report under the Securities Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we
will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including:
● the sections of the Exchange Act that regulate the solicitation of proxies, consents or authorizations in respect of a security registered under the
Exchange Act;
● the sections of the Exchange Act that require insiders to file public reports of their stock ownership and trading activities and impose liability on
insiders who profit from trades made in a short period of time; and
● the rules under the Exchange Act that require the filing of quarterly reports on Form 10-Q containing unaudited financial and other specified
information and current reports on Form 8-K upon the occurrence of specified significant events.
In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while
U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual report on Form 10-K within 90 days after the
end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, aimed at preventing issuers from making selective disclosures of material
information. There is no formal requirement under the Company’s memorandum and articles of association mandating that we hold an annual meeting of our
shareholders. However, notwithstanding the foregoing, we intend to hold such meetings on our annual meeting to, among other things, elect our directors. As
a result, you may not have the same protections afforded to stockholders of companies that are not foreign private issuers.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
The determination of our status as a foreign private issuer is made annually on the last business day of our most recently completed second fiscal
quarter and, accordingly, the next determination will be made with respect to us on or after June 30, 2018. We would lose our foreign private issuer status if
(1) a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents, and (2) a majority of our shareholders or a
majority of our directors or management are U.S. citizens or residents, a majority of our assets are located in the United States, or our business is administered
principally in the United States. If we were to lose our foreign private issuer status, the regulatory and compliance costs to us under U.S. securities laws as a
U.S. domestic issuer may be significantly higher. We may also be required to modify certain of our policies to comply with corporate governance practices
associated with U.S. domestic issuers, which would involve additional costs.
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We will incur increased costs as a publicly-traded company.
As a company with publicly-traded securities, we will incur additional legal, accounting and other expenses not presently incurred. In addition, the
Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as rules promulgated by the SEC and the
national securities exchange on which we list, requires us to adopt corporate governance practices applicable to U.S. public companies. These rules and
regulations will increase our legal and financial compliance costs.
We may be exposed to risks relating to evaluations of controls required by Sarbanes-Oxley Act of 2002.
Pursuant to Sarbanes-Oxley Act of 2002, our management will be required to report on, and our independent registered public accounting firm may
in the future be required to attest to, the effectiveness of our internal control over financial reporting. Our internal accounting controls may not meet all
standards applicable to companies with publicly traded securities. If we fail to implement any required improvements to our disclosure controls and
procedures, we may be obligated to report control deficiencies and, if required, our independent registered public accounting firm may not be able to certify
the effectiveness of our internal controls over financial reporting. In either case, we could become subject to regulatory sanction or investigation. Further,
these outcomes could damage investor confidence in the accuracy and reliability of our financial statements.
As an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions
from certain disclosure requirements.
As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.
We are an emerging growth company until the earliest of:
● the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;
● the last day of the fiscal year following the fifth anniversary of our IPO;
● the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or
● the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.
For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are
applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor
attestation requirements of section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of the IPO. We cannot predict if investors will find
our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may
be a less active trading market for our common shares and the trading price of our common shares may be more volatile. In addition, our costs of operating as
a public company may increase when we cease to be an emerging growth company.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our
common shares.
Based on the anticipated market price of our common shares in the IPO and expected price of our common shares following the IPO, and the
composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for U.S. federal income
tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects,
and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made
annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds our common shares, certain adverse U.S.
federal income tax consequences could apply to such U.S. Holder.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our
common shares and trading volume could decline.
The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our
business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our
common shares or publish inaccurate or unfavorable research about our business, the market price for our common shares would likely decline. If one or
more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in
turn, could cause the market price or trading volume for our common shares to decline.
Our corporate structure, together with applicable law, may impede shareholders from asserting claims against us and our principals.
All of our operations and records, and all of our senior management are located in the PRC. Shareholders of companies such as ours have limited
ability to assert and collect on claims in litigation against such companies and their principals. In addition, China has very restrictive secrecy laws that
prohibit the delivery of many of the financial records maintained by a business located in China to third parties absent Chinese government approval. Since
discovery is an important part of proving a claim in litigation, and since most if not all of our records are in China, Chinese secrecy laws could frustrate
efforts to prove a claim against us or our management. In addition, in order to commence litigation in the United States against an individual such as an
officer or director, that individual must be served. Generally, service requires the cooperation of the country in which a defendant resides. China has a history
of failing to cooperate in efforts to affect such service upon Chinese citizens in China.
If we become directly subject to the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate
and or defend the matter, which could harm our business operations, stock price and reputation and could result in a complete loss of your investment in
us.
Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors,
financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of
effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S.
listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to
shareholder lawsuits and or SEC enforcement actions that are conducting internal and or external investigations into the allegations. If we become the subject
of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations and or defend our
company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our
reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
We are a global information technology (“IT”), consulting and solutions service provider focused on delivering services to global institutions in
banking, insurance and financial sectors, both in China and globally. For more than ten years, we have served as an IT solutions provider to a growing
network of clients in the global financial industry, including large financial institutions in the US, Europe, Australia and Hong Kong and their PRC-based IT
centers.
Since our inception, we have aimed to build one of the largest sales and service delivery platforms for IT services and solutions in China. The nature
of the Company’s services is such that it provides a majority of services to its banking and credit card clients in order to build new or modify existing clients’
own proprietary systems. We maintain eleven delivery and or research & development (“R&D”) centers to serve different customers in various geographic
locations. Seven centers are located in China including cities of Shanghai, Beijing, Dalian, Tianjin, Chengdu, Guangzhou and Shenzhen. The remaining four
centers are located in Hong Kong, Taiwan, Singapore and Australia. By combining onsite (when we send our team to our client) or onshore (when we send
our team to client’s overseas location) support and consulting with scalable and high-efficiency offsite (when we send our team to a location other than
client’s location) or offshore (when we send our team to a location that is other than a client’s location overseas) services and processing, we are able to meet
client demands in a cost-effective manner while retaining significant operational flexibility. By serving both Chinese and global clients on a common
platform, we are able to leverage the shared resources, management, industry expertise and technological know-how to attract new business and remain cost
competitive.
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Corporate History and Background
CLPS Incorporation was incorporated under the laws of the Cayman Islands on May 11, 2017. Our share capital is US$10,000, which is divided into
100,000,000 common shares authorized, or US$0.0001 par value per share. On December 7, 2017, the Board of Directors approved a nominal issuance of the
following shares to the existing shareholders: 5,000,000 shares to Qinrui Ltd., 5,000,000 shares to Qinhui Ltd; 430,823 shares to Qinlian Ltd., 430,804 shares
to Qinmeng Ltd. and 428,373 shares to Qinyao Ltd. All of the five shareholders are incorporated in the British Virgin Islands.
The Company owns all of the outstanding capital stock of both Qinheng (incorporated on June 9, 2017) and Qiner (incorporated on April 21, 2017).
Qinheng owns all of the outstanding capital stock of CLPS QC (WOFE) (incorporated on August 4, 2017). CLPS QC (WOFE) and Qiner respectively own
55.30% and 44.70% of the outstanding capital stock of CLPS Shanghai, the Company’s operating subsidiary based in Pudong New District, Shanghai, China,
originally incorporated on August 30, 2005.
On August 30, 2005, CLPS Shanghai was established by Jingsu Pan and Xiaochun Deng as a PRC limited liability company. Jingsu Pan and
Xiaochun Deng each actually paid RMB250,000 (approximately US$30,881) in cash for 50% of equity interest in CLPS Shanghai, and the total registered
capital of CLPS Shanghai was RMB500,000 (approximately US$61,763).
On December 23, 2005, CLPS Shanghai increased its registered capital to RMB1,000,000 (approximately US$123,671). Jingsu Pan and Xiaochun
Deng respectively made full payment for their subscribed capital to RMB500,000 (approximately US$61,835) on December 21.
On March 29, 2010, Yan Pan entered into a Share Purchase Agreement with Jingsu Pan to purchase all of Jingsu Pan’s shares in CLPS Shanghai.
Pursuant to the Share Purchase Agreement, Yan Pan paid RMB500,000 (approximately US$61,835) for 50% shares of CLPS Shanghai. After this share
transfer, Yan Pan and Xiaochun Deng respectively held 50% shares of CLPS Shanghai.
On October 19, 2010, Raymond Ming Hui Lin entered into a Share Purchase Agreement with Xiaochun Deng to purchase all of Xiaochun Deng’s
shares in CLPS Shanghai. Pursuant to the Share Purchase Agreement, Raymond Ming Hui Lin paid RMB500,000 (approximately US$61,835) for 50% shares
of CLPS Shanghai. After this share transfer, Yan Pan and Raymond Ming Hui Lin respectively held 50% shares of CLPS Shanghai. Since Raymond Ming
Hui Lin is a Hong Kong resident, CLPS Shanghai changed its form in a Sino-foreign equity joint venture.
On October 31, 2012, CLPS Shanghai increased its registered capital to RMB5,000,000 (approximately US$799,987). Yan Pan and Raymond Ming
Hui Lin each increased their subscribed capital to RMB2,500,000 (approximately US$399,993). Yan Pan actually paid RMB1,000,000 (approximately
US$159,997) and Raymond Ming Hui Lin actually paid RMB1,008,120 (approximately US$161,296) for the capital contributions on October 18, 2012.
On October 30, 2013, Xiao Feng Yang entered into a Share Purchase Agreement with Yan Pan to purchase all of Yan Pan’s shares in CLPS
Shanghai. Pursuant to the Share Purchase Agreement, Xiao Feng Yang paid RMB2,500,000 (approximately US$399,993) for 50% shares of CLPS Shanghai.
After this share transfer, Xiao Feng Yang and Raymond Ming Hui Lin respectively held 50% shares of CLPS Shanghai.
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On June 24, 2014, CLPS Shanghai increased its registered capital to RMB30,000,000 (approximately US$4,759,004). Xiao Feng Yang and
Raymond Ming Hui Lin respectively increased their subscribed capital to RMB15,000,000 (approximately US$2,379,502).
On April 23, 2015, Raymond Ming Hui Lin paid RMB6,163,560 (approximately US$994,523) for the capital contribution that he has made.
On May 27, 2015, Raymond Ming Hui Lin paid RMB3,391,883 (approximately US$546,980) for the capital contribution that he has made.
On May 29, 2015, Xiao Feng Yang paid RMB4,400,000 (approximately US$709,906), plus with his cash dividends for the capital contribution that
he has made.
On August 5, 2015, Raymond Ming Hui Lin paid RMB3,894,060 (approximately US$627,103) for the capital contribution that he has made.
On August 27, 2015, Raymond Ming Hui Lin paid RMB42,377 (approximately US$6,615) for the capital contribution that he has made.
On July 21, 2015, Xiao Feng Yang paid RMB1,100,000 (approximately US$177,147) for the capital contribution that he has made.
On August 14, 2015, Xiao Feng Yang paid RMB8,000,000 (approximately US$1,251,799), plus with his cash dividends for the capital contribution
that he has made.
On December 15, 2015, CLPS Shanghai changed its form into a PRC joint stock limited company. The share capital of CLPS Shanghai was
RMB30,000,000, which was divided into 30,000,000 shares of RMB1.00 per share.
On May 26, 2016, three limited partnerships subscribed new shares issued by CLPS Shanghai and became shareholders of CLPS Shanghai. These
three limited partnerships were: Shanghai Qinyao Investment Partnership (LLP), Shanghai Qinzhi Investment Partnership (LLP) and Shanghai Qinshang
Software Technology Counsel Partnership (LLP). After the above-mentioned subscription, the shareholding structure of CLPS Shanghai was as follows:
INVESTORS
Xiao Feng Yang
Raymond Ming Hui Lin
Shanghai Qinyao Investment Partnership (LLP)
Shanghai Qinzhi Investment Partnership (LLP)
Shanghai Qinshang Software Technology Counsel Partnership (LLP)
Total:
PLACE OF REGISTRATION
SHARES
PRC
Hong Kong
PRC
PRC
PRC
15,000,000
15,000,000
1,700,000
1,270,000
900,000
33,870,000
On June 5, 2017, Qinheng was established by CLPS Incorporation in Hong Kong. The total amount of share capital of Qinheng to be subscribed by
CLPS Incorporation was HKD 10,000.00 and CLPS Incorporation held 100% of equity interest in Qinheng.
In July 2017, three of the abovementioned limited partnerships transferred all of their equity interest in CLPS Shanghai to their individual partners
according to the proportion of each partner’s capital contribution. A total of 47 individuals became shareholders of CLPS Shanghai.
In August 2017, Qiner entered into three Share Purchase Agreements with three non-Chinese individual shareholders of CLPS Shanghai, The three
non-Chinese individual shareholders are Raymond Ming Hui Lin (Hong Kong), Limpiada Zosimo (Philippines) and Lin James De-Mou (Taiwan). Including,
Raymond Ming Hui Lin sold 15,000,000 shares, Limpiada Zosimo sold 71,229 shares and Lin James De-Mou sold 67,510 shares. The aforementioned share
transfer was part of reorganization of the group.
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On August 4, 2017, CLPS QC (WOFE) received a business license from China (Shanghai) Pilot Free Trade Zone Administration for Industry and
Commerce and was established by Qinheng as a PRC limited liability company. Qinheng subscribed USD 200,000 and held 100% of equity interest in CLPS
QC (WOFE).
On October 31, 2017, CLPS Incorporation entered into a SOLD NOTE with Raymond Lin Ming Hui to purchase all of Raymond Lin Ming Hui’s
shares in Qiner. After this transfer, CLPS Incorporation held 100% shares of Qiner. Qiner has become CLPS Incorporation’s wholly-owned subsidiary.
In October 2017, all Chinese individual shareholders of CLPS Shanghai completed the procedures for foreign exchange registration of overseas
investments in accordance with the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over
the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles (SAFE 2014 No. 37). After these
registrations, CLPS QC (WOFE) entered into 46 Share Purchase Agreements with all 46 Chinese individual shareholders of which the 46 Chinese individual
shareholders in total held 18,731,261 shares of CLPS Shanghai. The aforementioned share transfer was part of a reorganization of the group.
On November 2, 2017, the transfer between the 46 Chinese individual shareholders and CLPS QC (WOFE) has completed the record-filing of
changes of Foreign-invested Company and got the record receipt.
The shareholding structure of CLPS Shanghai is as follows:
INVESTORS
Shanghai Qincheng Information Technology Co., Ltd.
Qiner Co., Limited
Total:
PLACE OF REGISTRATION
PRC
Hong Kong
SHARES
18,731,261
15,138,739
33,870,000
As of the date of this Annual Report, CLPS Shanghai has two wholly-owned subsidiaries: CLPS Dalian, and CLPS RC. Besides the two wholly-
owned subsidiaries, CLPS Shanghai participated in the following investments:
● CLPS Beijing — CLPS Shanghai holds 70% of equity interest in CLPS Beijing, a PRC limited liability company
● Judge China — CLPS Shanghai holds a 60% of equity interest in Judge China, a PRC limited liability company
● CLPS Hong Kong — CLPS Shanghai holds 80% of equity interest in CLPS Hong Kong, a Hong Kong company
● CLPS Shenzhen — CLPS Shanghai holds 70% of equity interest in CLPS Shenzhen, a PRC limited liability company.
● Huanyu — CLPS Shanghai holds 30% of equity interest in Huanyu a PRC limited liability company.
● CLPS Guangzhou — CLPS Shanghai holds 51% of equity interest in CLPS Guangzhou, a PRC limited liability company.
IT consulting services primarily includes application development services for banks and institutions in the financial industry and which are billed
for on a time-and-expense basis. Customized IT Solutions Service primarily includes customized solution development and maintenance service for general
enterprises and which are billed for on a fixed-price basis. The following entities provide either consulting or solution services or both, depending on where
our clients are based. The entities are currently servicing one of the services might expand to both services if our clients’ needs arise:
● CLPS Dalian provides both consulting and solution services. CLPS Dalian services clients in China’s north east region, including Dalian.
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● CLPS RC provides both consulting and solution services. CLPS RC focuses on small and medium domestic financial institutions.
● CLPS Beijing provides both consulting and solution services. CLPS Beijing services clients in China’s central east region, including Beijing and
Tianjin.
● CLPS AU currently only provides consulting services. CLPS AU services clients in Australia.
● CLPS SG currently only provides consulting services CLPS SG services clients in South East Asia region, including Singapore.
● Judge China is a joint venture with The Judge Group in the US. Judge China continues to service The Judge Group’s clients in China. Judge
China focuses on expanding its client bases with collaboration efforts with The Judge Group.
● CLPS Hong Kong currently only provides consulting services. CLPS Hong Kong services clients in East Asia region, including Hong Kong.
● CLPS Shenzhen currently only provides consulting services. CLPS Shenzhen services clients in Shenzhen.
● CLPS Guangzhou currently only provides consulting services. CLPS Guangzhou services clients in Guangzhou.
● CLPS Shanghai holds 30% of equity interest in Huanyu which was incorporated in September 2017 for the purposes of providing Internet
technology services and products to clients. CLPS Shanghai, CLPS Dalian, CLPS RC, CLPS Beijing and Judge China all contribute material
amounts of the Company’s total revenues.
Corporate Information
Our principal executive office is located at the 2nd Floor, Building 18, Shanghai Pudong Software Park, 498 Guoshoujing Road, Pudong, Shanghai
201203, PRC. Our telephone number is (+86)21-31268010. Our website is as follows www.clpsglobal.com. The information on our website is not part of this
Annual Report.
The following diagram illustrates our corporate structure:
* On July 20, 2018, the Company decided to close down FDT-CL.
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The Initial Public Offering
On May 24, 2018, the Company completed its initial public offering of 2,000,000 common shares, $0.0001 par value per share. The common shares
were sold at an offering price of $5.25 per share, generating gross proceeds of approximately $10.5 million, and net proceeds of approximately $9.5 million.
The registration statement relating to this IPO also covered the underwriters’ common stock purchase warrants and the common shares issuable upon the
exercise thereof in the total amount of 83,162 common shares. Each five-year warrant entitles the warrant holder to purchase the Company’s shares at the
exercise price of $6.30 per share and is not be exercisable for a period of 180 days from May 23, 2018. On June 8, 2018, the Company closed on the exercise
in full of the over-allotment option to purchase an additional 300,000 common shares of the Company by The Benchmark Company, LLC, the representative
of the underwriters in connection with and the book running manager of the Company’s IPO, at the IPO price of $5.25 per share. As a result, the Company
has raised gross proceeds of approximately $1.58 million, in addition to the IPO gross proceeds of approximately $10.5 million, or combined gross IPO
proceeds of approximately $12.08 million, before underwriting discounts and commissions and offering expenses. Our common shares began trading on the
NASDAQ Capital Market on May 24, 2018 under the ticker symbol “CLPS”.
We have earmarked and have been using the proceeds of the initial public offering as follows: approximately $4.41 million for global expansion, i.e.,
to expand our existing locations to develop new clients by hiring more qualified personnel, system integration and marketing effort; approximately $3.31
million for working capital and general corporate purposes; approximately $2.21 million for R&D; and approximately $1.09 million for talent development.
B.
Business Overview
Overview
We are a global information technology (“IT”), consulting and solutions service provider focused on delivering services to global institutions in
banking, insurance and financial sectors, both in China and globally. For more than ten years, we have served as an IT Solutions provider to a growing
network of clients in the global financial industry, including large financial institutions from the US, Europe, Australia and Hong Kong, and their PRC-based
IT centers. We have created and developed a particular market niche by providing turn-key financial solution. Since our inception, we have aimed to build
one of the largest sales and service delivery platforms for IT services and solutions in China. We maintain eleven delivery and or research and development
(“R&D”) centers to serve different customers in various geographic locations. Seven centers are located in China, including cities of Shanghai, Beijing,
Dalian, Tianjin, Chengdu, Guangzhou and Shenzhen. The remaining four centers are located in Hong Kong, Taiwan, Singapore and Australia. By combining
onsite or onshore support and consulting with scalable and high-efficiency offsite or offshore services and processing, we are able to meet client demands in a
cost-effective manner while retaining significant operational flexibility. We believe that maintaining our Company as a proven, reliable partner to our
financial industry clients both in China and globally positions us well to capture greater opportunities in the rapidly evolving global market for IT consulting
and solutions.
Industry and Market Background
China’s Banking Industry
According to the 2017 annual report of China Banking Regulatory Commission (CBRC), China’s banking financial institutions had total assets of
RMB 525.4 trillion (USD80 trillion) at the end of 2017, year-on-year increase of RMB 20.2 trillion (USD3.1 trillion), or 8.7%. Total liabilities equaled to
RMB 232.9 trillion (USD35.2 trillion), year-on-year increase of RMB 18.1 trillion (USD2.7 trillion), or 8.4%. The total assets of banking financial
institutions were RMB 27.6 trillion (USD4.1 trillion) in 2003. Over the past 10 years, total assets of China’s banking financial institutions grew at a
compound annual growth rate of nearly 20%. Notwithstanding the growth rates, however, the banking industry is facing many challenges, such as the
competition with private capital, the participation of technological enterprises, changes in the financial market, the tightening of regulatory policies, and more
diversified deposit substitute products, among others. Following the 2006 repeal of geographical and customer restrictions on foreign banks, the CBRC
continued the policies to open China’s banking industry for entry by foreign competitors to promote healthy competition in the industry. As a result, foreign
banks are now present in 70 cities of 27 provinces in China, with headquarters, branches, sub-branches and a complete service network with certain coverage
and market depth, with more than 1044 outlets.
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Software and Information Technology Service Industry in China
According to the 2017 Economic Performance of the Software Industry report of Ministry of Industry and Information Technology (MIIT), China’s
software and information technology service industry continued to show a steady and significant operating trend. The income and profit have grown,
innovation capability continued to improve, industrial structures were continually developed and optimized, and services and support have been significantly
enhanced.
China’s software and information technology service industry has developed and grown rapidly in recent years. The MIIT data shows that the
industry’s revenue reached RMB 5.5 trillion (USD831.2 billion) in 2017, an increase of 13.9% compared to 2016 with a growth rate of 0.8% year-on –year.
Industry profits grew faster than revenues. In 2017, the industry achieved a total profit of RMB 702 billion (USD106.1 billion), an increase of 15.8% from the
previous year, i.e., 2.1% higher than in 2016, and 1.9% higher than the growth rate of revenue.
R&D investment and innovation capability has been continuously and strategically improved. Data from key software companies showed that the
annual R&D investment is close to 11%. China Copyright Protection Center data showed that the number of software copyright registrations in China
exceeded 700,000 in 2017, an increase of 85% over the previous year, showing exponential growth. Emerging technologies such as big data, cloud computing
and artificial intelligence were quickly applied and expanded. This proves that the industry continues to grow vigorously.
The structure of the software and information technology service industry has been continued to develop, and the ecological industry chain is
continuously optimized to provide crucial support and guarantee construction of a dependable network powerhouse within the country.
Data Source: The Ministry of Industry and Information Technology, National Bureau of Statistics of China.
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The development of China’s software and IT service industry is generally characterized by:
● Information technology services —stayed ahead and continued to evolve towards cloud computing. In 2017, the industry’s revenue from
information technology services reached RMB 2.9 trillion (USD438.3 billion), an increase of 16.8% over the previous year. The growth rate was
2.9% higher than the industry’s average, accounting for 53.3% of the industry’s revenue. Among them, cloud computing-related operational
services (including SaaS, PaaS, at IaaS, etc.) revenues exceeded RMB800 billion (USD121 billion), an increase of 16.5% over the previous year.
● Software products —grew steadily and the capabilities were significantly enhanced. In 2017, the industry’s revenue from software product
reached RMB1.7 trillion (USD257 billion), an increase of 11.9% over the previous year, accounting for 31.3% of the industry’s revenue. Among
them, information security and industrial software products revenues exceeded RMB100 billion (USD15.1 billion), an increase of 14% and
19.9% respectively. With the breakthrough of emerging technologies, the software industry is moving towards building a strong industrial
foundation, advancing information system security control, and driving industrial intelligence.
● Software technology application and capabilities in various IT field —revenues from technology services for e-commerce platforms increased
by 30.3% from previous year. The 15.6% year-on-year revenue increase in integrated circuit (IC) design ably contributed in the development of
IC industry. Aggressive penetration in communications, hospitals, transportation, machineries, and other industries saw embedded system
software as a key driving force in using technology to digitally transform products and equipment into smarter ones with more value-added
features. The annual revenue for these reached RMB847.9 billion (USD128.1 billion), an increase of 8.9% over the previous year.
● Development on regional level —the eastern region has developed steadily, and the software industry in the central and western regions has
accelerated. In 2017, revenue from software business completed in eastern regions reached RMB4.4 trillion (USD665 billion), with a growth
rate of 13.8% year-on-year, accounting for 79.2% of the national software industry, a decrease of 0.1% from the previous year. Revenue from
software business completed in central and western regions was RMB249.7 billion (USD38 billion) and RMB618.7 billion (USD94 billion),
respectively, with a growth rate of 15.9% and 17.3%, accounting for 4.5% and 11.2 %t of the national software industry, respectively, an
increase of 0.1% and 0.3% from the previous year. Software business revenue in northeast China reached RMB277.8 billion (USD42 billion), an
increase of 7.1%, accounting for 5.1% of the national software industry, a decrease of 0.3% year-on-year.
Financial institutions/Banking IT solutions refer to the software or IT related services provided by professional IT service providers who use their
own experience and technology to meet each bank’s individual needs in business development, strategic development and management efficiency. The market
shares of China Banking IT Solution Industry are shown as below:
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Data Source: IDC data
According to IDC’s 2017 China Banking IT Solution Market Share report, 2017 can be considered as a “highly regulated year” for China’s banking
industry. It is now the dawning of the age for fully-integrated banking industry and financial technology in China. In the financial services domain, applying
financial technology in the banking industry is becoming evident in its platform and smart offerings. With the increasing application of emerging technologies
like big data, cloud computing, artificial intelligence and blockchain, complete integration of banking and financial technology will help accelerate the
penetration of new financial products into traditional banking ultimately achieving the goal of transforming the industry into a generation of intelligent
banking.
In 2017, China’s banking IT solution market continued to maintain a strong and stable development. Although some manufacturers’ profit margins
have declined, overall, they have maintained relatively strong growth. IDC believes that city commercial banks and rural commercial banks are becoming the
main sectors of the bank’s IT solution market. Specialized services are still an important development trend in the future of the IT solutions market in China’s
banking industry. The current Chinese banking IT solution market is gradually transforming from a “software plus service” delivery model to a service-
oriented delivery model In 2017, this trend continues to extend from large to urban and rural commercial banks. Cloud delivery model becomes an important
development direction, which will help improve the overall quality level of the solution.
In 2017, the overall market size of China’s banking IT solution market reached RMB 33.96 billion (USD5.13 billion), an increase of 22.5% over
2016. IDC predicts that the market will grow at a compound annual growth rate of 20.8% from 2018 to 2022. By 2022, the scale of China’s banking IT
solution market will reach RMB88.295 billion (USD13.34 billion).
IDC believes that China’s banking IT solution market will continue to maintain a stable growth trend in the next few years, and its growth rate will
still be higher than of China’s banking industry’s overall IT investment. Large commercial banks are increasingly emphasizing building their own IT systems.
City commercial banks and rural commercial banks with medium-sized assets, however, become the main battlefields of the IT solution market, with small
banks seen to increasingly adopt specialized cloud services in the future.
China’s banking IT industry faces various challenges. In accordance with CRBC’s 2014 Guiding Opinions, China’s banking institutions are required
to master core knowledge and key technologies of banking informatization by 2019. Beginning in 2015, and every year thereafter, banking financial
institutions are required to increase the application rate of safe and controllable information technologies by 15%. They are also required to set aside no less
than 5% of the annual information budget to support their forward-looking, innovative and planning research on safe and controllable information systems,
and help the organization to grasp the core IT knowledge and skills. In addition, as traditional banks combine their services with online banking, IT support is
required from the front payment to background asset structure matching.
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With the participation of private banks, foreign banks, Internet banks and other non-traditional, non-state-owned banks, the competition in the
banking industry has intensified and the banking IT service support is an important means for banks to enhance the user experience, gain an upper hand in the
competition and save costs. In order to increase market share, new participants in the banking industry invest in what differentiates them from existing
players. Improved user experience, risk control and risk prevention, information upgrades, network infrastructure, and mobile terminal layout are complex
projects, requiring significant capital investment. These factors contribute to the continuous growth of China’s banking IT investment, and promote the rapid
development of China’s banking IT industry.
Our primary focus is in the following key operational areas:
Consulting Services
Credit Card Services
Most of the global credit card issuers maintain branches and supporting technical infrastructure in China. The development, testing, support and
maintenance of these platforms require in-depth understanding and knowledge of business processes supported by IT. There is a significant demand for such
IT consulting services among large-scale credit card platforms because many of such institutions experience shortage of qualified personnel and resources.
We offer more than ten years of experience in IT consulting services across key credit card business areas, including credit card applications, account setup,
authorization and activation, settlement, collection, promotion, point system, anti-fraud, statement, reporting and risk management. In the past years, we have
successfully helped our China and global clients manage their credit card IT systems such as VisionPLUS. We offer expertise in customizing these credit card
tools and platforms to suit a variety of business models. Our highly experienced team possesses the requisite expertise in providing the credit card services.
The IT consulting professional teams provides the credit card services from Shanghai, Dalian and Hong Kong. We offer this experience and expertise in
various currencies, across different geographical regions, including, but not limited to China, Singapore, UK, Philippine, Indonesia, Latin America. In
addition, we have developed a series of credit card solutions in order to meet the needs of our clients better.
Core Banking Services
We are one of China’s largest core banking system services providers for global banks. Most global banks establish their IT development centers and
gradually expand their business in China. Those banks require significant core banking IT services. We offer more than ten years of experience in providing
leading global banks with the support and expertise needed to implement their core banking system, including business analysis, system design, development,
testing services, system maintenance, and global operation support. We provide services across multiple functions including loans, deposit, general ledger,
wealth management, debit card, anti-money-laundering, statement and reporting, and risk management. We also provide architecture consulting services for
core banking systems and online and mobile banking. We successfully transformed the centralized core banking system for one of our US-based clients to a
service-oriented architecture and integrate it into a global unified version, which successfully satisfied its business needs in various markets. In addition, we
engage the cloud-native solution of core banking system with micro services architecture, which can serve both Chinese and global banks to meet the ever-
changing demands of the market with high flexibility, high scalability, high reliability and multichannel connectivity.
For the years ended June 30, 2018 and 2017, revenues from our IT consulting services were approximately USD47.2 million and USD29.1 million,
respectively. Revenues from our IT consulting services accounted for 96.4% and 92.9% of our total revenues in fiscal 2018 and 2017, respectively.
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Solution Services
We are also an IT solution services provider in China and globally. We offer our clients over a decade of experience proving Chinese and global
financial institutions with business and technological know-how including cloud computing and big data. We have accumulated an in-depth knowledge base
that enables us to provide end-to-end customized solutions for our clients. The performance from our R&D center supports tour ability to offer our clients
creative solution design, especially in the areas of new information technology such as blockchain.
We offer software project development, maintenance and testing solution services, including COBOL, Java, .NET, Mobile and other technology
applications. Specifically, we assist our clients in three aspects: (i) adopting and applying the most suitable technologies to ensure that software solutions are
designed with information security and intellectual property rights protection in mind, (ii) building and managing a dedicated or leveraged software
development, maintenance and testing quality and efficiency testing, and (iii) providing onshore and offshore IT solution services to ensure turn-key delivery.
We have been working with a number of Chinese domestic banks to assist them in leveraging blockchain technology. Using this technology, a
loyalty reward solution was developed allowing domestic banks to track and trace transactions in real-time. It was recently implemented in Jiangnan Rural
Commercial Bank. Also, the pilot phase of this solution was completed for Taicang Rural Commercial Bank.
The solution sets up a consortium chain platform using blockchain technology. When a bank or a merchant joins the consortium, it becomes a node
of the consortium chain. This allows the bank’s customers to manage and use their rewards among different banks and merchants, as well as share rewards
among different customers. There are four layers in the overall architecture in this solution which includes the blockchain core layer, the blockchain SDK
layer, the application system layer and the front-end layer. The consensus mechanism, P2P protocol, distributed ledger and storage mechanism of core layer
are used to record transactions and prevent fraud. We will continue to develop our new IT solutions to meet the evolving needs of our Chinese and global
financial institutional clientele drawing upon the forward-looking research of our R&D center.
For the years ended June 30, 2018 and 2017, revenues from our customized IT solution services were approximately USD1.6 million and USD1.8
million, respectively. Revenues from our customized IT solution service accounted for 3.3% and 5.9% of our total revenues in fiscal years 2018 and 2017,
respectively.
Other Services
CLPS Virtual Banking Platform (CLB) — CLB is a unique and successful training platform for IT talents owned by CLPS. For more than ten years,
we have been focusing on recruiting, training, developing and retaining human capital and talents. We have been developing and continuously upgrading our
CLB to train specialized financial IT personnel in order to differentiate ourselves from general IT developers. CLB is one of the crucial components of our
Talent Creation Program (“TCP”). It contains a full set of banking application modules covering areas such as core banking, credit cards, and wealth
management, incorporated with cutting-edge technologies, such as JAVA, Android & iOS, HTML, blockchain, cloud computing and big data.
Our Strategies
We have developed and intend to implement the following strategies to expand and grow the size of our Company:
● Grow revenue with existing and new clients — We intend to pursue additional revenue opportunities from existing Chinese and global clients,
which include many of the leading companies in our financial industry. We will focus on continuing to deliver high quality services and
solutions and identifying additional opportunities with existing clients as they will continue to constitute a significant portion of our revenues
and medium-term growth. We will also continue to target certain new Chinese and global clients, using our comprehensive service and solution
offerings, combined with increasingly deep domain expertise in finance industry. Furthermore, we will continue to invest in a delivery platform
that benefits both Chinese and global clients, capturing synergies between the China and global markets to benefit both groups of clients.
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● Continue to invest in research and development, deepen domain expertise and develop specific solutions for target industry verticals — We will
continue to enhance our domain knowledge in the financial industry and relevant business-specific processes. As we grow our industry and
service area expertise, we intend to leverage the domain knowledge accumulated in our work with our Chinese and global clients to more
effectively address their business-specific needs. In addition, we plan to continue investing in R&D, focusing on developing solutions that
leverage our industry experience and R&D capabilities, to combine proprietary applications with our services to best address client needs.
● Continue to invest in training and development of our world-class human capital base — We place a high priority on attracting, training,
developing and retaining our human capital base to be increasingly competitive. We will continue to build our professional talent pool through
our Talent Creation Program (“TCP”) and Talent Development Program (“TDP”) to ensure the sustainable supply of financial IT talent
resources. These programs are the result of our collaboration with Shanda University and utilization of a technical curriculum and professional
certifications developed and maintained by our Company. We will continue to develop our scalable human capital platform by implementing
resource planning and staffing systems and by attracting, training and developing high-quality professionals to form CLPS’s large talent pool in
order to meet ever-changing clients’ needs. We will build on and leverage existing training programs and leverage the CLPS College, which we
intend to expand to other key cities and other industries, such as the insurance sector, to tap deeper into CLPS’s talent pool. In addition to our
dedicated training centers, we expect to open additional training centers overseas as we anticipate increasing demand for our services and
solutions. We will continue to strengthen our collaboration with leading domestic universities to improve our on-campus recruiting results and
help to better prepare graduates for work in our industry. The strength of our TCP/TDP program adds to our recognition in the industry by
competitors and customers alike.
● Drive efficiencies through ongoing improvements in operational excellence — We strive to gain significant operating efficiencies by leveraging
historical and ongoing investments in infrastructure, research and development and human capital. We operate our business on a single,
integrated platform, with centralized functions which provide significant economies of scale across our business both domestically and globally,
as well as cross service offerings. We also expect to continue investing in our own IT infrastructure and more advanced technologies, such as
cloud computing, to allow us to enhance our scalability and continue to grow in a more cost-effective fashion. As part of expanding our scale,
we intend to continue building up training centers tailored to our human capital needs to deploy human capital more efficiently, thereby
improving overall resource utilization and productivity.
● Capture new growth opportunities through strategic alliances and acquisitions — We will continue to pursue selective alliances and
acquisitions in order to enhance our industry-specific technology and service delivery capabilities by building on our track record of
successfully acquiring and integrating targeted companies. We will continue to identify and assess opportunities to enhance our abilities to serve
our clients. We will focus on enhancing our technology capabilities, deepening our penetration into key clients, expanding our portfolio of
service offerings and expanding our operations geographically.
Our Competitive Strengths
We believe that the principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services
offered, reputation and track record, marketing and selling skills, scalability of infrastructure and price.
We believe that there are several key strengths that differentiate us from our competitors and will continue to contribute to our growth and success.
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We have established employee loyalty through the core engine of TCP and TDP programs both are integral parts of our supply chain which supports
our service lines. Since 2008, our talent training services have offered training courses in five areas, including domain knowledge, technology skills, data
security and management compliance training, soft skills for personnel; and English language skills including verbal and business correspondence for all
level, especially for those who need to communicate with global customers directly on a daily basis. We believe that the depth and comprehensive nature of
our talent training services are key features that distinguish us from our competitions. For more than ten years, the Company has been recruiting, training,
developing and retaining human capital and talents. We have been developing and upgrading our CLPS Virtual Banking Platform (CLB) to train specialized
financial IT professionals. CLB is one of the crucial components which enables our Talent Creation Program. It contains a full set of banking application
modules covering areas such as core banking, credit cards and wealth management incorporated with cutting-edge technologies, such as JAVA, Android &
iOS, HTML and big data. We select more than 200 students each year to participate in our training program. During their junior and senior years, the students
learn to implement the concepts covered by our TCP platform along with their other computer science theory and coursework. Thereafter, the students join us
as interns to continue improving their software development skills and will eventually become part of our development teams. As a result, graduates have an
equivalent of nine months’ worth of “on the job” training and experience. In 2017, we collaborated with Global Business College of Australia (GCBA) to set
up a Financial Innovation Center (FIC) on its campus to offer our TCP training program to GCBA students with a specific interest in banking industry.
Our TDP program is a continuous internal training program for our skilled-professionals in order to serve our clients better. The TDP program
increases our professionals’ skillsets and business knowledge in their respective domain and technical fields. Our joint effort with Fudan University has
established support to our senior staff to earn a financial-IT oriented master’s degree in Software Engineering (MSE). Since 2005, through our TCP and TDP
programs, we have trained and retained a large pool of specialized personnel skilled in serving financial-related industry clients.
As a result of our employee loyalty programs, we have established an ecosystem of loyal client relationships. Employee satisfaction and enhanced
career development have resulted in better service to our clients. Client satisfaction in return motivates our employees to continue to provide excellent service
to our clients. In addition to the above-mentioned benefits, our Company’s strengths include the following:
● core competency particularly in banking and insurance industry;
● deep domain knowledge and solutions in financial industry verticals;
● strategic engagements with financial blue-chip clients most of whom have been with us since our inception;
● comprehensive service offerings including financial IT solutions & consulting as well as other services;
● experienced senior management team with proven track record of success.
Customers
Our clients include large corporations headquartered in China and globally which include, among others:
● Banking or their China-based IT centers — Citibank, Standard Chartered Bank (China) Ltd., ANZ Bank, Commonwealth Bank of Australia,
Bank of Communications.
● Financial Industry — AIA, China Life Insurance, First Data, Haitong Securities, Orient Securities and China Universal Asset Management
Company.
● Technology Customers — eBay, CRIF Information Technology, Experian, AGFA Healthcare and Neusoft.
By serving both Chinese and global clients on a common platform, we are able to leverage the shared resources, management, industry expertise and
technology know-how to attract new business and remain cost competitive.
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Sales and Marketing
We have invested in building a broad sales force and marketing team. As of June 30, 2018, our business development teams consisted of 29 full-time
sales and marketing personnel, including 21 sales managers, each of whom is responsible for a designated sales region or client account. We plan to enhance
our sales efforts by recruiting more sales personnel both domestically and overseas.
Competition
The market for IT services is highly competitive and we expect competition to intensify. We believe that the principal competitive factors in our
markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing skills and price.
Domestically, we face competition from the following major competitors: Shenzhen Forms Syntron Information Co., Ltd, Sunline Tech, Amarsoft and CSII.
These competitors are all domestic listed companies and possess a considerable market share in IT services industry. Shenzhen Forms Syntron Information
Co., Ltd is committed to provide professional IT service outsourcing and consulting for large domestic commercial banks. Sunline Tech, Amarsoft and CSII
have the similar business model who are engaged in providing IT solutions and services mainly for domestic banks and other financial institutions. While
compared with above competitors, as an IT solution and consulting services provider, we’ve been specializing in industry demands analysis and focusing on
delivering services to global institutions in banking, insurance and financial sectors, both in China and globally. As one of the earliest companies engaging in
Banking IT services in China, we have accumulated rich industrial experience and successful cases during more than 10 years of business development and
our market share is gradually increased. With the interest marketization and rise of Internet Finance, banking industry market grows more competitive. Since
Core Banking Business is occupying a key position in the overall banking IT services market, we will enhance our core market competence by taking
advantage of our current technology; internationally, our competitors include Wipro, TCS Consultancy, and Infosys Limited. To date, we do not typically
compete directly with the larger global consulting and outsourcing firms, such as Accenture, Capgemini, Hewlett-Packard and IBM, who are typically
engaged in conjunction with large global projects. However, we may compete with these firms if they seek smaller engagements, particularly in conjunction
with a strategy to enter the domestic Chinese market. In addition, the trend towards offshore outsourcing, international expansion by foreign and domestic
competitors and continuing technological innovation will result in new and different competitors entering our markets. We believe that our delivery
capabilities are competitive with companies such as these, and that our domestic China market experience and know-how provides us with a competitive
advantage in serving our clients.
Research and Development
R&D is an integral part of our continued growth. In order to serve our Chinese and global clients’ needs better, we focus on exploring and
researching new and advanced technologies and how to best integrate them into our existing and new solutions.
Currently, we are working on applying new and advanced technologies and tools to enhance our project delivery capability and efficiency. For
instance, we applied the DevOps methodology and tools in our project delivery process and platform. This methodology has greatly enhanced the
development, operational efficiency and project quality. We focus on block chain, big data and cloud native applications. We have developed a loyalty reward
solution based on a block chain platform and implemented this solution with several China-based banks. With micro services architecture, we engage the
cloud-native solution of core banking system, and have developed the first pilot business module to be tested on the client side. By utilizing big data
technology, we research, develop and apply new features to existing credit scoring and anti-fraud solutions. We have invested a significant amount of capital
in technology research and solution development. As a result, we have expanded our technological capabilities, improved efficiency of project delivery, and
enhanced our solution offerings by improving existing solutions and inventing new solutions, which drive new revenue opportunities and improve our core
competencies.
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Employees
We believe resource management and planning is critically important to supporting our growth, and we are committed to effectively recruiting,
training, developing and retaining our human capital. Our total number of employees has grown from 1,055 employees in fiscal 2016 to 1,655 employees as
of June 30, 2018. Approximately 70% of our personnel are dedicated to serving our foreign financial institution clients. Such personnel maintain up to date
financial domain knowledge, technical development and testing skills in Java, .Net, C, C++, testing tools, android or IOS app, blockchain, big data, cloud
computing and mainframe COBOL. None of our employees are represented by a labor union or collective bargaining agreements. We consider our employee
relations to be good. We believe that attracting and retaining highly experienced associates and sales and marketing personnel is a key to our success. In
addition, we believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes or any
difficulty in recruiting staff for our operations.
Intellectual Property Rights
The PRC has domestic laws for the protection of rights in copyrights, trademarks and trade secrets. The PRC is also a signatory to all of the world’s
major intellectual property conventions, including:
● Convention establishing the World Intellectual Property Organization (June 3, 1980);
● Paris Convention for the Protection of Industrial Property (March 19, 1985);
● Patent Cooperation Treaty (January 1, 1994); and
● Agreement on Trade-Related Aspects of Intellectual Property Rights (November 11, 2001).
The PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks. The
Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants trademark registrations for a
term of ten years.
Our intellectual property rights are important to our business. We rely on a combination of trade secrets, confidentiality procedures and contractual
provisions to protect our intellectual property. We also rely on and protect unpatented proprietary expertise, recipes and formulations, continuing innovation
and other trade secrets to develop and maintain our competitive position. We enter into confidentiality agreements with most of our employees and
consultants, and control access to and distribution of our documentation and other licensed information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our technology without authorization, or to develop similar technology independently. Since the Chinese legal
system in general, and the intellectual property regime in particular, is relatively weak, it is often difficult to enforce intellectual property rights in China.
Policing unauthorized use of our technology is difficult and the steps we take may not prevent misappropriation or infringement of our proprietary
technology. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of our resources and could have a material adverse
effect on our business, results of operations and financial condition. We require our employees to enter into non-disclosure agreements to limit access to and
distribution of our proprietary and confidential information. These agreements generally provide that any confidential or proprietary information developed
by us or on our behalf must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in
the course of our business must be kept confidential by such third parties. In the event of trademark infringement, the State Administration for Industry and
Commerce has the authority to fine the infringer and to confiscate or destroy the infringing products.
Our primary trademark portfolio consists of 9 registered trademarks (with 5 trademarks currently under review). Our trademarks are valuable assets
that reinforce the brand and our consumers’ favorable perception of our products. The current registrations of these trademarks are effective for varying
periods of time and may be renewed periodically, provided that we, as the registered owner, comply with all applicable renewal requirements including,
where necessary, the continued use of the trademarks in connection with similar goods. In addition to trademark protection, we own 3 URL designations and
domain names, including clps.com.cn, clpsglobal.com.cn, and clpsgroup.com.cn.
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We have registered for the following trademarks:
Mark
Country of
Registration
China
Application
Number
19288958
China
19289112
China
19289503
China
19289341
Current Owner
ChinaLink
Professional Services
Co., Ltd
Status
Registered
ChinaLink
Professional Services
Co., Ltd
Registered
ChinaLink
Professional Services
Co., Ltd
Registered
ChinaLink
Professional Services
Co., Ltd
Registered
Class/Description
Class 9: Recorded computer programs (programs);
Recorded computer operating programs Computer
peripherals; Computer software (recorded); Connector
(data processing equipment); Monitor program (computer
program); Electronic publications (downloadable);
Computer program (downloadable software);
Downloadable computer application software; Computer
hardware
Class 38: Information transmission; Computer terminal
communication; Computer-aided information and image
transmission; Information transmission equipment rental;
Provide telecommunications link services to connect with
the global computer network; Telecommunications
routing and junction services; Provide access service for
global computer network users; Provide database access
service; Digital file transfer Teleconference call service
Class 9: Recorded computer programs (programs);
Recorded computer operating programs; Computer
peripherals; Computer software (recorded); Connector
(data processing equipment); Monitor program (computer
program); Electronic publications (downloadable);
Computer program (downloadable software);
Downloadable computer application software; Computer
hardware
Class 42: Technical research; Research or develop new
products for others; Computer programming; Computer
software design; Computer hardware design and
development consulting; Computer software rental;
Computer software maintenance; Computer system
analysis; Computer software installation; Computer
software consulting
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TABLE OF CONTENTS
We have applied to register the following trademarks:
Mark
Country of
Registration
China
Application
Number
19289066
Class/Description
Class 35: Advertising; Advertising agency Advertising space
rental; Online advertising on the computer network;
Advertisement layout design; Business management
assistance; Business inquiry; Business information agency;
Business management and organization consulting; Business
management consulting
Current Owner
ChinaLink
Professional
Services Co., Ltd
Status
Pending
China
19289214
Class 41: Teaching; Education; Training; Practical training
China
19289175
China
19289492
(demonstration); Employment guidance (education or training
consultants); Arrange and organize academic seminars;
Arrange and organize meetings; Arrange and organize general
meeting; Arrange and organize symposium; Arrange and
organize training classes
Class 42: Technical research; Research or develop new
products for others; Computer programming; Computer
software design; Computer hardware design and development
consulting; Computer software rental; Computer software
maintenance; Computer system analysis; Computer software
installation; Computer software consulting
Class 38: Information transmission; Computer terminal
communication; Computer-aided information and image
transmission; Information transmission equipment rental;
Provide telecommunications link services to connect with the
global computer network; Telecommunications routing and
junction services; Provide access service for global computer
network users; Provide database access service; Digital file
transfer; Teleconference call service
ChinaLink
Professional
Services Co., Ltd
Pending
ChinaLink
Professional
Services Co., Ltd
Pending
ChinaLink
Professional
Services Co., Ltd
Pending
China
19289420
Class 41: Teaching; Education; Training; Practical training
(demonstration); Employment guidance (education or training
consultants); Arrange and organize academic seminars;
Arrange and organize meetings; Arrange and organize general
meeting; Arrange and organize symposium; Arrange and
organize training classes
ChinaLink
Professional
Services Co., Ltd
Pending
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TABLE OF CONTENTS
The following is a list of the Company’s copyrights:
Software Name
CLPS HR Management Platform Software V1.0
Country of
Registration
China
Registration
Number
2009SR015975
CLPS Food and Beverage Report Analysis and
Management Platform Software V1.0
China
2009SR060110
CLPS Apparel Industry POS Management Platform
Software V1.0
China
2009SR060102
CLPS Express Information Interactive Platform
Software V1.0
China
2009SR060112
CLPS Chain Store Information Interactive Platform
Software V1.0
China
2009SR060108
CLPS Project Analysis and Management Platform
Software V1.0
China
2009SR060169
CLPS Payroll Accounting System Platform Software
V1.0
China
2010SR043564
CLPS Fast Moving Consumer Goods Frontline Staff
Management Platform Software V1.0
China
2010SR043561
CLPS Staff Management Platform Software V1.0
China
2010SR043562
CLPS Coal Mining Enterprise Information System
Management Platform Software V1.0
China
2010SR045449
CLPS Campus Expense Card Web Service System
Platform Software V1.0
China
2010SR045441
CLPS Campus Expense Card Bathroom Management
Service Software V1.0
China
2010SR045444
CLPS Machinery Industry ERP Management Platform
Software V1.0
China
2010SR045802
CLPS Assignment and Task Management Platform
Software(short name: Assignment and Task
Management System) V1.0
CLPS Marketing Assistant System Platform Software
V1.0
China
2011SR076863
China
2012SR096727
CLPS Outsourcing Service Staff Management System
Platform Software V1.0
China
2012SR096666
CLPS Outsourcing Service Staff System Background
Management Software V1.0
China
2012SR096731
45
Current Owner Approval Date
29th April 2009
Status
Registered
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd.
28th December 2009
Registered
28th December
2009
28th December
2009
28th December
2009
28th December
2009
Registered
Registered
Registered
Registered
25th August 2010
Registered
25th August 2010
Registered
25th August 2010
Registered
1st September 2010
Registered
1st September 2010
Registered
1st September 2010
Registered
2nd September 2010
Registered
25th October 2011
Registered
15th October 2012
Registered
15th October 2012
Registered
15th October 2012
Registered
TABLE OF CONTENTS
Software Name
CLPS Logistics Terminal Distribution Platform
Software V1.0
Country of
Registration
China
Registration
Number
2012SR096668
CLPS HR Background Support Management System
V1.0
China
2012SR098440
CLPS HR Management System Platform
Software(short name: HR management system) V1.0
China
2012SR098429
CLPS Outsourcing Service Staff Resume Entry System
Platform Software V1.0
China
2012SR098687
CLPS Bank Document Business Management
Software(short name: Document Management) V1.0
China
2013SR054800
CLPS Bank Monetary Transaction Management
Software (short name: Monetary Transaction
Management) V1.0
CLPS Bank Expense Management Software V1.0
China
2013SR054796
China
2014SR168125
CLPS Bank Repayment Process Software V1.0
China
2014SR168130
CLPS Bank Point Accumulative Management
Software V1.0
China
2014SR168132
CLPS Bank Interest Process Software V1.0
China
2014SR168136
CLPS Bank Credit Application Software V1.0
China
2014SR168138
CLPS Credit Card Risk Management Software V1.0
China
2015SR028695
CLPS Credit Card Account Establishment and Card
Making Software V1.0
China
2015SR029015
CLPS Credit Card Customer Service Management
Software V1.0
China
2015SR029012
CLPS Credit Card Cleaning Management Software
V1.0
China
2015SR028884
CLPS Credit Card Authorization Management
Software V1.0
China
2015SR028914
CLPS Mortgage Loan Plan Spreadsheet Tool Software
(short name: loan spreadsheet) V1.0
China
2015SR198772
CLPS Bank Product Management Software V1.0
China
2015SR198610
46
Current Owner Approval Date
15th October 2012
Status
Registered
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
19th October 2012
Registered
19th October 2012
Registered
19th October 2012
Registered
5th June 2013
Registered
5th June 2013
Registered
4th November 2014
Registered
4th November 2014
Registered
4th November 2014
Registered
4th November 2014
Registered
4th November 2014
Registered
10th February 2015
Registered
10th February 2015
Registered
10th February 2015
Registered
10th February 2015
Registered
10th February 2015
Registered
16th October 2015
Registered
16th October 2015
Registered
TABLE OF CONTENTS
Software Name
CLPS Bank Deposit and Withdrawal Services
Management Software V1.0
Country of
Registration
China
Registration
Number
2015SR198176
CLPS Bank Loan Application Management Software
V1.0
China
2015SR198654
CLPS Bank Repayment Management Software V1.0
China
2015SR198649
CLPS Bank Exchange Rate Management Software
V1.0
China
2015SR198774
CLPS Bank Interest Settlement Software V1.0
China
2015SR198246
CLPS Bank Foreign Exchange Transaction Software
V1.0
China
2015SR198240
CLPS Bank Investment Management Securities
Business Software V1.0
China
2016SR376924
CLPS Bank Big Data Decision-making Platform
Customer Portrayal Software V1.0
China
2016SR382920
CLPS Internet Financial Cloud Mobile Banking
Software V2.0
CLPS Wantong Calculas Mall Software V2.0
CLPS RcRules Engine Software
CLPS Internet Financing Collection Management
Software V2.0
CLPS Points Management Platform Software
CLPS Full-web Order Receiving Unified Platform
Management Software V2.0
CLPS Quanxi Intelligent Marketing Platform Clients
Growth Center Software V2.0
China
2016SR398821
China
China
China
China
China
China
2017SR118507
2017SR169307
CLPS Ruicheng
Co., Ltd
2017SR119266
CLPS Ruicheng
Co., Ltd
2017SR119078
CLPS Ruicheng
Co., Ltd
2017SR202535
CLPS Ruicheng
2017SR565576
CLPS Enterprise Recruitment Intelligent Cooperation
Platform Software V2.0
China
2017SR646712
CLPS Intelligent Online Training Test Instructional
Management Software V1.0
China
2017SR646507
CLPS Enterprise Internet Qinqin Loan Background
Management Software V1.0
China
2017SR647634
47
Current Owner Approval Date
16th October 2015
Status
Registered
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Ca, Ltd
ChinaLink
Professional
Services Co., Ltd
CLPS Beijing
Hengtong Co., Ltd
Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
16th October 2015
Registered
16th October 2015
Registered
16th October 2015
Registered
16th October 2015
Registered
16th October 2015
Registered
16th December 2016
Registered
20th December 2016
Registered
27th December 2016
Registered
17th April 2017
Registered
9th May 2017
Registered
17th April 2017
Registered
17th April 2017
Registered
24th May 2017
Registered
13th October 2017
Registered
24th November 2017
Registered
24th November
2017
24th November
2017
Registered
Registered
TABLE OF CONTENTS
Software Name
CLPS Blockchain Based Virtual Credits Background
Management Software V2.0
Country of
Registration
China
Registration
Number
2017SR645676
CLPS Enterprise Talent Information Intelligent
Mangement Software V2.0
China
2017SR645650
CLPS Credit Card Big Data Integrated Management
Background Software V2.0
China
2017SR645763
CLPS Enterprise Recruitment Intelligent Cooperation
Platform Software V2.0
China
2017SR647190
Properties
Current Owner Approval Date
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
ChinaLink
Professional
Services Co., Ltd
24th November 2017
24th November
2017
24th November
2017
24th November
2017
Status
Registered
Registered
Registered
Registered
Our principal executive office is located at the 2nd Floor, Building 18, Shanghai Pudong Software Park 498 Guoshoujing Road, Pudong, Shanghai
201203, PRC. We lease the premise and the lease term expires on June 30, 2019.
In addition, the Company manages and operates several other facilities. We rent office space in Tianjin, Shenzhen, Guangzhou, Dalian, Chengdu,
Beijing, Australia and Singapore. Rent expenses amounted to $730,705, $565,328 and $431,043 for the years ended June 30, 2018, 2017 and 2016,
respectively. We believe our facilities are adequate for our current needs.
Facility
Shanghai Office
Tianjin Office
Address
Space (m2)
2nd Floor, Building 18, Shanghai Pudong Software Park, 498 Guoshoujing Road, Pudong District,
Shanghai, PRC
W5-C1-403-1, 51 West Area of Financial Street, the 3rd Street, Economic Development District,
Tianjian, PRC
1,259.94
61.52
Shenzhen Office
Room 2008, Anhui Building, Shennan Avenue, Futian District, Shenzhen, Guangdong Province, PRC
234.16
Guangzhou Office
6C03, 377 Tianhe Road, Tianhe District, Guangzhou, Guangdong Province, PRC
Dalian Office
Room#01-04, 1/F, 1 Huixian Garden, New & High-tech Industrial Park, Dalian, Liaoning Province,
PRC
Chengdu Office
Unit 10, 25/Floor, Tower 2, 88 Jitai 5th Road, Gaoxin District, Chengdu, Sichuan District, PRC
Beijing Office
1/F, Shangke Chuangye Area, Guotou Shangke Building, 111 Huihe South Street, Gaobeidian,
Chaoyang District, Beijing, PRC
Australia Office
Part Tenancy 5, Part Level 9, 276 Flinders Street, Melbourne, VIC, Australia
Singapore Office
No. 456 Office, Singapore
10
2,344.04
59.74
64
83.5
16
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TABLE OF CONTENTS
Legal Proceedings
We are currently not involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Government Regulation
Regulations Relating to PRC Information Technology Service Industry
According to the Guidelines on Foreign Investment issued by the State Council in 2002 and the Catalog on Foreign Invested Industries (2007
Revision) issued by the National Development and Reform Commission and the Ministry of Commerce, IT services fall into the category of industries in
which foreign investment is encouraged. The State Council has promulgated several notices since 2000 to launch favorable policies for IT services, such as
preferential tax treatments and credit support.
Under rules and regulations promulgated by various Chinese government agencies, enterprises that have met specified criteria and are recognized as
software enterprises by the relevant government authorities in China are entitled to preferential treatment, including financing support, preferential tax rates,
export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. Software enterprise qualifications are subject to
annual examination. Enterprises that fail to meet the annual examination standards will lose the favorable enterprise income tax treatment. Enterprises
exporting software or producing software products that are registered with the relevant government authorities are also entitled to preferential treatment
including governmental financial support, preferential import, export policies and preferential tax rates.
Companies in China engaging in information systems integration are required to obtain qualification certificates from the Ministry of Industry and
Information Technology. “Information systems integration” means plan, design, development, implementation, service and safeguard of computer system and
network system. Currently the Company does not engage in information system integration business, therefore the Company is not required to have such
qualification certificates. Companies planning to set up computer information systems may only retain systems integration companies with appropriate
qualification certificates. The qualification certificate is subject to review every two years and is renewable every four years. In 2003, the Ministry of Industry
and Information Technology promulgated the Amended Appraisal Condition for Qualification Grade of Systems Integration of Computer Information to
elaborate the conditions for appraising each of the four qualification grades of systems integration companies. Companies applying for qualification are
graded depending on the scale of the work they undertake. The grades range from Grade 1 (highest) to Grade 4 (lowest) in the scale of the work the respective
companies can undertake. Companies with Grade 3 qualification can independently undertake projects at the medium-scale and small-scale enterprise level
and undertake projects at the large-scale enterprise level in cooperation with other entities.
In 2009, the Ministry of Commerce and the Ministry of Industry and Information Technology jointly promulgated a rule aiming to protect a fair
competition environment in the PRC service outsourcing industry. This rule requires that each of the domestic enterprises which provides IT and
technological BPO services and each of its shareholders, directors, supervisors, managers and employees should not violate the service outsourcing contract
to disclose, use or allow others to use the confidential information of its client. Such enterprises are also required to establish an information protection
system and take various measures to protect clients’ confidential information, including causing their employees and third parties who have access to clients’
confidential information to sign confidentiality agreements and or non-competition agreements.
Regulations on Intellectual Property Rights
The PRC Copyright Law, as amended, together with various regulations and rules promulgated by the State Council and the National Copyright
Administration, protect software copyright in China. These laws and regulations establish a voluntary registration system for software copyrights
administered by the Copyright Protection Center of China. Unlike patent and trademark registration, copyrighted software does not require registration for
protection. Although such registration is not mandatory under PRC law, software copyright owners are encouraged to go through the registration process and
registered software may receive better protection. The PRC Trademark Law, as amended, together with its implementation rules, protect registered
trademarks. The Trademark Office of the State Administration for Industry and Commerce handles trademark registrations and grants a renewable protection
term of 10 years to registered trademarks.
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TABLE OF CONTENTS
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and the
Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current account items, including
the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items, such as direct
investment, loans, repatriation of investment and investment in securities outside China, unless the prior approval of SAFE or its local counterparts is
obtained. In addition, any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference
between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be
registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered capital must be
approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or registrations on a timely
basis, if at all, which could result in a delay in the process of making these loans.
The dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange,
subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the
capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.
Dividend Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include the Company Law
of the PRC (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000, and the Administrative Rules under the Foreign
Investment Enterprise Law (2001), as amended in 2014.
Under these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises in China are required to
allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the
registered capital of the enterprises. These reserves are not distributable as cash dividends, and a wholly foreign-owned enterprise is not permitted to
distribute any profits until losses from prior fiscal years have been offset.
Circular 37. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, PRC residents shall
apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments before contributing the domestic
assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required if the registered
overseas SPV’s basic information such as domestic individual resident shareholder, name, operating period, or major events such as domestic individual
resident capital increase, capital reduction, share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by
overseas SPV, overseas investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to make
foreign exchange registration if required by SAFE and its branches. Moreover, Circular 37 applies retroactively. As a result, PRC residents who have
contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration of overseas investments as required prior to
implementation of Circular 37, are required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the
registration procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine of up to RMB 300,000
for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital outflow occurred, a fine up to 30% of the illegal
amount may be assessed. PRC residents who control our company are required to register with SAFE in connection with their investments in us. If we use our
equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents in the future, such PRC residents will be subject to the
registration procedures described in Circular 37.
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New M&A Regulations and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006 and was
amended on June 22, 2009. This New M&A Rule, among other things, includes provisions that purport to require that an offshore special purpose vehicle
formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the
approval of CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles.
The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval
process. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope
of the applicability of the CSRC approval requirement.
Our PRC counsel has advised us that, based on their understanding of the current PRC laws and regulations, that the corporate structure of the Group
Companies shall not be deemed as “a foreign investor’s merger and acquisition of a domestic enterprise” as specified in the Article 2 of the New M&A Rule,
so the Company is not required to obtain approval from the CSRC for listing and trading of its shares. However, uncertainties still exist as to how the New
M&A Rule will be interpreted and implemented and our opinion stated above is subject to any new laws, rules and regulations or detailed implementations
and interpretations in any form relating to the New M&A Rule.
Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which
include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture
Enterprise Law, all as amended from time to time, and their respective implementing rules; the Administrative Provisions on Foreign Exchange in Domestic
Direct Investment by Foreign Investors; and the Notice of the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign
Exchange Administration Policies for Direct Investment. Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested
enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total
investment amount shall both be registered with SAIC and SAFE. Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are
regarded as foreign debts in China for regulatory purpose, which is subject to a number of PRC laws and regulations, including the PRC Foreign Exchange
Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange. Under these regulations, the
shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of
foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment
amount and the registered capital amount of the PRC subsidiaries, both of which are subject to the governmental approval.
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ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
We are a global information technology (“IT”), consulting and solutions service provider focused on delivering services to global institutions in
banking, insurance and financial sectors, both in China and globally. For more than ten years, we have served as an IT Solutions provider to a growing
network of clients in the global financial industry, including large financial institutions from the US, Europe, Australia and Hong Kong, and their PRC-based
IT centers. We have created and developed a particular market niche by providing turn-key financial solution. Since our inception, we have aimed to build
one of the largest sales and service delivery platforms for IT services and solutions in China. We maintain eleven delivery and or research and development
(“R&D”) centers to serve different customers in various geographic locations. Seven centers are located in China, including cities of Shanghai, Beijing,
Dalian, Tianjin, Chengdu, Guangzhou and Shenzhen. The remaining four centers are located in Hong Kong, Taiwan, Singapore and Australia. By combining
onsite or onshore support and consulting with scalable and high-efficiency offsite or offshore services and processing, we are able to meet client demands in a
cost-effective manner while retaining significant operational flexibility. We believe that maintaining our Company as a proven, reliable partner to our
financial industry clients both in China and globally positions us well to capture greater opportunities in the rapidly evolving global market for IT consulting
and solutions.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”) and pursuant to the rules and requirements of the Securities Exchange Commission (“SEC”). The accompanying
consolidated financial statements include the financial statements of CLPS, Qinheng, Qiner, CLPS QC, CLPS Shanghai, CLPS Beijing, CLPS RC, CLPS
Dalian, CLPS AU, CLPS SG, CLPS Hong Kong, CLPS Shenzhen, CLPS US, Judge China, Judge HR, CLIVST, CLPS Guangzhou, FDT-CL, JQ and JL. All
intercompany balances and transactions have been eliminated upon consolidation.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited
consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report.
Overview of Company
CLPS Incorporation (“CLPS” or the “Company”), is a company that was established under the laws of the Cayman Islands on May 11, 2017 as a
holding company. The Company, through its subsidiaries, designs, builds, and delivers IT services, solutions and other services. The Company customizes its
services to specific industries with customer service teams typically based on-site at the customer locations. The Company’s solutions enable its clients to
meet the changing demands of an increasingly global, internet-driven, and competitive marketplace. Mr. Xiao Feng Yang, the Company’s Chairman of the
Board and President, together with Mr. Raymond Ming Hui Lin, the Company’s Chief Executive Officer and Director are the controlling shareholders of the
Company (the “Controlling Shareholders”).
A reorganization of the Company’s legal structure was completed on November 2, 2017. The reorganization involved the incorporation of CLPS, a
Cayman Islands holding company; Qinheng Co., Limited (“Qinheng”) and Qiner Co., Limited (“Qiner”), two holding companies established in Hong Kong,
and Shanghai Qincheng Information Technology Co., Ltd (“CLPS QC” or “WOFE”) established in the People’s Republic of China (“PRC”); and the transfer
of ChinaLink Professional Service Co., Ltd (“CLPS Shanghai”) from the Controlling Shareholders to CLPS QC.
Prior to the reorganization, CLPS Shanghai’s equity interests were 100% controlled by the same group of Controlling Shareholders of CLPS.
CLIVST and FDT-CL are subsidiaries of Qinheng. JQ Technology Co., Limited (“JQ”) and JIALIN Technology Limited (“JL”) are subsidiaries of Qiner
since October 17, 2017. CLPS Dalian Co., Ltd (“CLPS Dalian”), CLPS Ruicheng Co., Ltd (“CLPS RC”), CLPS Beijing Hengtong Co., Ltd (“CLPS
Beijing”), CLPS TECHNOLOGY (SINGAPORE) PTE.LTD (“CLPS SG”), CLPS TECHNOLOGY (AUSTRALIA) PTY LTD (“CLPS AU”), CLPS
Technology (Hong Kong) Co., Limited (“CLPS Hong Kong”), Judge (Shanghai) Co., Ltd (“Judge China”), Judge (Shanghai) Human Resource Co., Ltd
(“Judge HR”), CLPS Shenzhen Co., Ltd (“CLPS Shenzhen”) and CLPS Guangzhou Co., Ltd (“CLPS Guangzhou”) are all subsidiaries of CLPS Shanghai.
On July 25, 2017, the Company incorporated CLIVST, as a holding company, in BVI. On September 27, 2017 and October 24, 2017, the Company
incorporated CLPS Guangzhou in Guangzhou, PRC and FDT-CL in Hong Kong.
On September 27, 2017, the Company and a non-controlling interest shareholder of CLPS Beijing incorporated Tianjin Huanyu Qinshang Network
Technology Co., Ltd. (“Huanyu”). The Company subscribed 30% of equity interest in Huanyu for $0.15 million (RMB 1,000,000).
On October 17, 2017, the Company acquired 55% of JQ equity interest and its 100% owned subsidiary – JL for a cash consideration of
approximately $0.07 million to operate software consulting business in Taiwan.
On November 2, 2017, the Controlling Shareholders transferred their 100% ownership interests in CLPS Shanghai to CLPS QC and Qiner, which are
100% owned by Qinheng and CLPS. On October 31, 2017, the Controlling Shareholders transferred 100% of their equity interests in Qiner to CLPS. After
the reorganization, CLPS owns 100% equity interests of the entities mentioned above. On December 7, 2017, the Board of Directors approved an amendment
of the Article of Association of CLPS and a nominal share issuance to the existing shareholders. As a result, the existing shareholders own the same
percentage of ownership in CLPS as their ownership interests in CLPS Shanghai prior to the reorganization. Since the Company and its subsidiaries are
effectively controlled by the same group of the shareholders before and after the reorganization, they are considered under common control. The above-
mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical
cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the consolidated
financial statements.
On June 5, 2018, the Company incorporated CLPS US to develop business in related areas.
On June 27, 2018, Qiner entered into a new share purchase agreement and purchased the remaining 30% equity interest of CLPS Beijing for
consideration of $0.6 million. The consideration was paid on July 5, 2018. As of June 30, 2018, the Company held 100% of CLPS Beijing’s equity and CLPS
Beijing became our wholly-owned subsidiary.
The Company is dedicated to providing a full range of services and solutions across technology needs in finance. In recent years, we have both one
of the largest IBM mainframe teams, and the largest VisionPLUS team in China, providing both development and implementation of core banking, credit
card, online and e-commerce systems, as well as expertise across technology stacks including J2EE, .Net, C, C++ and mobile. We are ISO9001:2008 and
CMMI 5 certified, and have been granted certificates of recognition by the Shanghai government, including Enterprise Software Certification, High-tech
Enterprise, Little Giant Company for Science and Technology and Professional Talent Development Training Camp. In addition, the Company was
recognized as one of the recipients of 2017 IDC China Top 25 FinTech Pioneers during the award ceremony spearheaded by IDC on August 25, 2017.
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Our operations are primarily based in China, where we derive a substantial portion of our revenues. For the years ended June 30, 2018, 2017 and
2016, our revenues were $48.9 million, $31.4 million and $29.0 million, respectively. Revenues generated outside of China were approximately $1.7 million,
$0.5 million and Nil for fiscal 2018, 2017 and 2016, respectively. In fiscal 2018, 2017 and 2016, we had a net income of $2.7 million, $2.2 million and $1.8
million, respectively. Our total assets as of June 30, 2018 were $30.9 million of which cash and cash equivalent amounted to $9.7 million. Our total liabilities
as of June 30, 2018 were $12.8 million.
Factors Affecting Our Results of Operations
We believe the most significant factors that affect our business and results of operations include the following:
● Our ability is to obtain new clients and repeat business from existing clients. Revenues from individual clients typically grow over time as we
seek to increase the number and scope of services provided to each client and as clients increase the complexity and scope of the work
outsourced to us also increases. Therefore, our ability to obtain new clients, as well as our ability to maintain and increase business from our
existing clients, will have a significant effect on our results of operations and financial condition. During fiscal 2018, our revenue derived from
our IT consulting services increased by 61.8% or $18.0 million from fiscal 2017, all attributable to revenue growth from our new clients. IT
consulting service revenue from new clients amounted to approximately $4.1 million in fiscal 2018, offset with a reduction of revenue from our
existing clients. During fiscal 2017, our revenue derived from our IT consulting services increased by 4.0% or $1.1 million from fiscal 2016, all
attributable to revenue growth from our new clients. IT consulting service revenue from new clients amounted to approximately $2.5 million in
fiscal 2017, offset with a reduction of revenue from our existing clients. Our revenues derived from our customized IT solution service
significantly increased by 99.1% or $0.9 million from fiscal 2016. The increase in revenue attributable to our new clients was approximately
$0.6 million and the rest of our growth was attributable to revenue from our existing clients.
● Our ability is to expand our portfolio of service offerings. We intend to increase our revenues by continuing to expand our service offerings and
providing quality service to our existing customers and to attract new customers. Through research and development, targeted hiring and
strategic acquisitions, we have proactively invested in broadening our existing service lines, including those for serving our specific industry
verticals.
● Our ability is to attract, retain and motivate qualified employees. Our ability to attract, train and retain a large and cost-effective pool of qualified
professionals, including our ability to leverage and expand our proprietary database of qualified IT professionals, to develop additional joint
training programs with universities, and our employees’ job satisfaction, will affect our financial performance.
We use the following key operating metrics to oversee and manage the Company’s business: (i) developing new business, (ii) focusing on the
TCP/TDP training programs to provide highly trained and qualified employees to the clients; and (iii) retaining employees to continue to meet client ever-
changing needs.
Our objective is to create value for both our customers and shareholders by enhancing our position as a leading IT services provider in the banking
industry in China. We believe our strategic initiatives will continue to generate our sales growth, allow us to focus on managing capital and leveraging costs
and drive margins to produce profitability and return on investment for our stockholders.
Acquisitions
Acquisition of Judge China
On November 9, 2016, CLPS Shanghai acquired 60% of Judge China and its 70% owned subsidiary Judge HR from Judge Company Asia Limited
(“Judge Asia”) with the final purchase price of $480,061 (RMB 3.25 million). The Company funded the acquisition with cash and a payable to Judge Asia of
$128,928 (RMB 0.9 million), of which $103,255 was subsequently offset with the Company’s receivables from Judge Asia.
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The transaction was accounted for as a business combination using the purchase method of accounting. The purchase price allocation of the
transaction was determined by the Company with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquired and
liabilities assumed as of the acquisition date. The purchase price allocation to assets acquired and liabilities assumed as of the date of acquisition was as
follows:
Cash acquired
Accounts receivable
Prepayment and other receivable
Property and equipment, net
Intangible – customer relationship, net
Wages payable and accruals
Tax payables
Other payable and other current liabilities
Deferred tax liability
Non-controlling interests
Goodwill
Total consideration
$
Amounts
268,014
325,888
67,570
1,875
339,883
(86,483)
(16,147)
(259,361)
(65,264)
(290,994)
195,080
$
480,061
The intangible assets include customer contacts of $339,883, which was acquired by Judge China in 2013 with an estimated useful life of 10 years.
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, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the
synergy resulting from the acquisition.
Investment in Tianjin Huanyu Qinshang Network Technology Co., Ltd (“Huanyu”)
On September 27, 2017, the Company and a non-controlling interest shareholder of CLPS Beijing incorporated Huanyu. The Company subscribed
for 30% of equity interest in Huanyu for $0.15 million (RMB 1,000,000).
Investment in JQ
On October 17, 2017, the Company acquired a 55% equity interest in JQ, and its 100% owned subsidiary – JL in Taiwan for cash consideration of
approximately $0.07 million. As of the acquisition date, the assets of JQ were cash and other receivables and JQ and its subsidiary has no significant
operating activities since inception. The estimated fair value of the assets acquired and liabilities assumed at the acquisition date was approximately the
carrying value of the assets and liabilities based on the short-term nature of the assets acquired and liabilities assumed. The Company believes that this
investment could offer new opportunities for operational synergies in the related markets.
Investment in Lihong Financial Information Services Co., Ltd (“Lihong)
On June 13, 2018, the Company purchased a 2.7% equity interest in Lihong in Shanghai for consideration of $0.2 million (or approximately RMB
1,000,000) to develop business in the related area. The consideration has not been paid for and is recorded as a liability as of June 30, 2018.
Investment in CLPS Beijing
Prior to June 2018, the Company held a 70% equity interest of CLPS Beijing which primarily engages in software development. On June 27, 2018,
Qiner entered into a new share purchase agreement and purchased the remaining 30% equity interest of CLPS Beijing for consideration of $0.6 million,
holding 100% of CLPS Beijing’s equity interest. The consideration was not paid for and was recorded as a liability by Qiner as of June 30, 2018. The
consideration was paid on July 5, 2018. Prior to June 2018, the remaining 30% equity interest of CLPS Beijing was recorded as non-controlling interests on
the balance sheet. The Company engaged an independent valuation firm to assist management in assessing the enterprise value of CLPS Beijing. The
enterprise value of CLPS Beijing as of June 27, 2018 was $1.94 million based on the evaluation report.
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Results of Operations
Results of Operations for Continuing Operations
The following table sets forth a summary of our consolidated statements of operations for the periods indicated.
Revenues
Less: Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Income from operations
Subsidies and other income
Other expense
Income before income tax
(Benefit) provision for income taxes
Net income
Less: Net income (loss) attributable to non-controlling interests
Net income attributable to CLPS Incorporation’s shareholders
For the Years Ended June 30, 2018 and 2017
Revenues
For the years ended June 30,
2017
2018
2016
$
48,938,593 $
(31,277,255)
17,661,338
31,361,976 $
(18,669,812)
12,692,164
29,024,178
(17,463,416)
11,560,762
2,225,702
7,837,873
5,871,622
15,935,197
1,726,141
960,784
(84,155)
1,206,493
4,232,788
5,647,790
11,087,071
1,605,093
508,187
(10,469)
2,602,770
(112,128)
2,714,898
280,435
2,434,463 $
2,102,811
(118,546)
2,221,357
173,912
2,047,445 $
$
413,016
5,579,058
4,955,037
10,947,111
613,651
1,446,408
(5,935)
2,054,124
269,153
1,784,971
(41,141)
1,826,112
We derive revenues by providing integrated IT services and solutions, including: (i) IT consulting services, which primarily includes application
development services for banks and institutions in the financial industry and which are billed for on a time-and-expense basis, (ii) customized IT Solutions
Service, which primarily includes customized solution development and maintenance service for general enterprises and which are billed for on a fixed-price
basis, (iii) software sales, and (iv) other revenue from product and third-party software sales.
Our customer contracts may be categorized by pricing model into time-and-expense contracts and fixed-price contracts. Under time-and-expense
contracts, we are compensated for actual time incurred by our IT professionals at negotiated daily billing rates. We are also entitled to charge overtime fees in
addition to the daily billing rates under some time-and-expense contracts. Fixed-price contracts require us to develop customized IT solutions throughout the
contractual period, and we are paid in installments upon completion of specified milestones under the contracts with enforceable right to payments.
For fiscal 2018 and 2017, all of our time-and-expense contracts were generated by our IT consulting service for clients in the financial industry. In
comparison, all of our fixed-price contracts were generated by our customized IT solution business for clients in the financial industry and others.
The following table presents our revenues by our service lines.
2018
Revenue
% of total
Revenue
For the Year ended June 30,
2017
Revenue
% of total
Revenue
Variance
Variance
%
IT consulting service
Customized IT solution service
Other
Total
$
$
47,159,651
1,634,100
144,842
48,938,593
96.4% $
3.3%
0.3%
100.0% $
29,146,470
1,846,423
369,083
31,361,976
92.9% $
5.9%
1.2%
100.0% $
18,013,181
(212,323)
(224,241)
17,576,617
61.8%
(11.5)%
(60.8)%
56.0%
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Our total revenues increased by approximately $17.6 million, or 56.0%, to approximately $48.9 million for the fiscal year ended June 30, 2018 from
approximately $31.4 million for the fiscal year ended June 30, 2017. The overall growth in our revenues reflected an increase in revenues from our IT
consulting service.
For the year ended June 30, 2018, revenue derived from our IT consulting services increased by 61.8% to $47.2 million from $29.1 million in fiscal
2017, primarily reflecting the increasing demands for our IT consulting service from banks and other financial institutions. For fiscal 2018 and 2017, 46.8%
and 54.0% of our IT consulting service revenue were from international banks. In fiscal 2018, we strengthened our expertise in the financial industry to
leverage our existing industry knowledge and grew our customer base of local Chinese financial institutions.
Cost of revenues
Our cost of revenues mainly consisted of compensation benefit expenses for our IT professionals, travel expenses and material costs. Our cost of
revenues increased by $12.6 million or 67.5% to approximately $31.3 million in fiscal 2018 from approximately $18.7 million in fiscal 2017 primarily as a
result of increased revenue and, therefore resulting in increased headcount, expanded office facilities and increase of depreciation and amortization expenses
to enable and match the growth of our business revenue. As a percentage of revenues, our cost of revenues was 63.9% and 59.5% for fiscal 2018 and 2017,
respectively. Our total number of employees grew from 1,242 employees as of June 30, 2017 to 1,655 employees as of June 30, 2018.
Gross Profit and Gross Margin
Our gross profit increased by $5.0 million, or 39.2%, to approximately $17.7 million in fiscal 2018 from approximately $12.7 million in fiscal 2017.
The higher gross profit in fiscal 2018 was primarily attributable to the increase in our billing rates of both IT consulting services and customized IT solution
services. Also, customized IT solution services contribute favorably to our client retention and understanding of our clients’ businesses and provide
opportunities to cross-sell our other services. Gross margin decreased to 36.1% in fiscal 2018, from 40.5% for the same period of last year. The decrease in
gross margin was primarily due to the lower gross margin of the new projects.
Selling and marketing expenses
Selling and marketing expenses primarily consisted of salary and compensation expenses relating to our revenues and marketing personnel, and also
included entertainment, travel and transportation, and other expenses relating to our marketing activities.
Selling and marketing expenses increased by $1.0 million or 84.5% from $1.2 million in fiscal 2017 to $2.2 million in fiscal 2018. The increase was
primarily attributable to our expansion of the pre-sales and marketing teams in Shanghai and Dalian in China to support our operations. Accordingly, as a
percentage of sales, our selling expenses were 4.5% of revenues in fiscal 2018 as compared to 3.8% in fiscal 2017. While we expect our selling and marketing
expenses to increase as we continue our business expansion, we expect these expenses to remain relatively steady as a percentage of our net revenues to
support our business growth in the near future.
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Research and development (“R&D”) expenses
R&D expenses primarily consisted of compensation and benefit expenses relating to our research and development personnel as well as office
overhead and other expenses relating to our R&D activities. Our R&D expenses increased by $3.6 million from $4.2 million in fiscal 2017 to $7.8 million in
fiscal 2018, representing 16.0% and 13.5% of our total revenues for fiscal 2018 and 2017, respectively. The increased R&D expense in fiscal 2018 is
attributable to our launching several research projects related to cloud computing and mobile internet application in fiscal 2018. We expect to increase our
investment in research and development to enhance our industry knowledge, improve our competitiveness and enable us to identify attractive market
opportunities for new and enhanced services and solutions.
General and administrative expenses
General and administrative expenses primarily consisted of salary and compensation expenses relating to our finance, legal, human resources and
executive office personnel, and included rental expenses, depreciation and amortization expenses, office overhead, professional service fees and travel and
transportation costs.
General and administrative expenses increased by $0.3 million or 4.0% from approximately $5.6 million in fiscal 2017 to approximately $5.9 million
in fiscal 2018. As a percentage of revenues, general and administrative expenses were 12.0% and 18.0% of our revenue in fiscal 2018 and 2017, respectively.
Subsidies and other income
Subsidies and other income primarily included government subsidies which represented amounts granted by local government authorities as a
general incentive for us to promote development of the local technology industry. The Company records government subsidies in subsidies and other income
upon received and when there is no further performance obligation. Total government subsidies amounted to $0.9 million and $0.4 million for the years ended
June 30, 2018 and 2017, respectively. The increase in government subsidies in fiscal 2018 was because local government was in the process of amending the
existing subsidy policy and increased the approvals for government subsidies that are applicable to us. While we expect the continued support of local
government to promote the technology industry, we only record government subsidies as subsidies and other income when received due to uncertainties.
Income before income taxes
Our income before income taxes was approximately $2.6 million in fiscal 2018, an increase of 23.8% compared with fiscal 2017, mainly due to the
expansion of business and increased revenues.
Provision (benefit) for income taxes
Our provision for income taxes benefit in fiscal 2018 was almost the same with the income tax benefit in fiscal 2017, mainly due to the Company
recognized deferred tax assets as a result of the net operating losses carry forward for some of the Company’s subsidiaries. Certain net operating losses were
not used and carried forward to future years.
Net Income
Our net income was approximately $2.7 million in fiscal 2018, an increase of $0.5 million from $2.2 million in fiscal 2017. The increase in net
income was in line with increased revenues, gross profit and operating expenses for fiscal 2018 as compared to fiscal 2017 as mentioned above.
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Other comprehensive income
Foreign currency translation adjustments amounted to a gain of $0.06 million and a loss of $0.1 million for the years ended June 30, 2018 and 2017,
respectively. The balance sheet amounts with the exception of equity as of June 30, 2018 were translated at 6.6171 RMB to 1.00 USD as compared to 6.7793
RMB to 1.00USD as of June 30, 2017. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements
accounts for the years ended June 30, 2018 and 2017 were 6.5023 RMB to 1.00 USD and 6.8087 RMB to 1.00 USD, respectively. The change in the value of
the RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our
business or results of operation.
For the Years Ended June 30, 2017 and 2016
Revenues
We derive revenues by providing integrated IT services and solutions, including: (i) IT consulting services, which primarily includes application
development services for banks and institutions in the financial industry and which are billed for on a time-and-expense basis, (ii) customized IT Solutions
Service, which primarily includes customized solution development and maintenance service for general enterprises and which are billed for on a fixed-price
basis, and (iii) other revenue from product and third-party software sales.
Our customer contracts may be categorized by pricing model into time-and-expense contracts and fixed-price contracts. Under time-and-expense
contracts, we are compensated for actual time incurred by our IT professionals at negotiated daily billing rates. We are also entitled to charge overtime fees in
addition to the daily billing rates under some time-and-expense contracts. Fixed-price contracts require us to develop customized IT solutions throughout the
contractual period, and we are paid in installments upon completion of specified milestones under the contracts with enforceable right to payments.
For fiscal 2017 and 2016, all of our time-and-expense contracts are generated by our IT consulting service for clients in the financial industry. In
comparison, all of our fixed-price contracts are generated by our customized IT solution business for clients in the financial industry and others.
The following table presents our revenues by our service lines.
2017
Revenue
% of total
Revenue
For the Year ended June 30,
2016
Revenue
% of total
Revenue
Variance
Variance
%
IT consulting service
Customized IT solution service
Other
Total
$
$
29,146,470
1,846,423
369,083
31,361,976
92.9% $
5.9%
1.2%
100.0% $
28,015,173
927,185
81,820
29,024,178
96.5% $
3.2%
0.3%
100.0% $
1,131,297
919,238
287,263
2,337,798
4.0%
99.1%
351.1%
8.1%
Our total revenues increased by approximately $2.3 million, or 8.1%, to approximately $31.4 million for the fiscal year ended June 30, 2017 from
approximately $29.0 million for the fiscal year ended June 30, 2016. The overall growth in our revenues reflected an increase in revenues from both of our IT
consulting service and customized IT solution service.
For the year ended June 30, 2017, revenue derived from our IT consulting services increased by 4.0% to $29.1 million from $28.0 million in fiscal
2016, primarily reflecting the increasing demands for our IT consulting service from banks and other financial institutions. For fiscal 2017 and 2016, 54.0%
and 69.5% of our IT consulting service revenue were from international banks. In fiscal 2017, we strengthened our expertise in the financial industry to
leverage our existing industry knowledge and grew our customer base of local Chinese financial institutions.
For the year ended June 30, 2017, revenues derived from our customized IT solution service significantly increased by 99.1% to $1.8 million from
$0.9 million in fiscal 2016. Historically, IT consulting services have contributed the substantial majority of our net revenues. In recent years, we started to
develop customized IT solution service to small and medium enterprises (“SME”) in China. With the growing demand for our financial IT solution
innovations and e-banking technology, our financial IT solutions service provides SMEs affordable integrated technologies that are reshaping our customers’
business and operating models. We plan to expand our financial IT solution service in China, which is driven by the increased adoption of big data, platform
engineering for cloud solutions and an expanded range of services, such as artificial intelligence.
Cost of revenues
Our cost of revenues mainly consists of compensation benefit expenses for our IT professionals, travel expenses and material costs. Our cost of
revenues increased by $1.2 million or 6.9% to approximately $18.7 million in fiscal 2017 from approximately $17.5 million in fiscal 2016, primarily as a
result of increased revenue and, therefore resulting in increased headcount, expanded office facilities and increase of depreciation and amortization expenses
to enable and match the growth of our business. As a percentage of revenues, our cost of revenues has remained around 60% for both fiscal 2017 and 2016.
Our total number of employees grew from 1,055 employees as of June 30, 2016 to 1,242 employees as of June 30, 2017.
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Gross profit and gross margin
Our gross profit increased by $1.1 million, or 9.8%, to approximately $12.7 million in fiscal 2017 from approximately $11.6 million in fiscal 2016.
As a percentage of revenues, our gross margin slightly increased from 39.8% in fiscal 2016 to 40.5% in fiscal 2017. The higher gross profit margin in fiscal
2017 was primarily attributable to the increase in our billing rates of both IT consulting services and customized IT solution services. Also, customized IT
solution services contribute favorably to our client retention and understanding of our clients’ businesses, and provide opportunities to cross-sell our other
services. The decrease in gross margin was primarily due to the lower gross margin of the new projects.
Selling and marketing expenses
Selling and marketing expenses primarily consisted of salary and compensation expenses relating to our revenues and marketing personnel, and also
included entertainment, travel and transportation, and other expenses relating to our marketing activities.
Selling and marketing expenses increased by $0.8 million or 192.1% from $0.4 million in fiscal 2016 to $1.2 million in fiscal 2017. The increase was
primarily attributable to our expansion of the pre-sales and marketing teams in Shanghai and Dalian, China to support our operations. Accordingly, as a
percentage of sales, our selling expenses were 3.8% of revenues in fiscal 2017 as compared to 1.4% in fiscal 2016. While we expect our selling and marketing
expenses to increase as we continue our business expansion, we expect these expenses to remain relatively steady as a percentage of our net revenues to
support our business growth in the near future.
Research and development (“R&D”) expenses
R&D expenses primarily consisted of compensation and benefit expenses relating to our research and development personnel as well as office
overhead and other expenses relating to our R&D activities. Our R&D expenses decreased by $1.4 million from $5.6 million in fiscal 2016 to $4.2 million in
fiscal 2017, representing 13.5% and 19.2% of our total revenues for fiscal 2017 and 2016, respectively. R&D expense in fiscal 2016 is attributable to the
launch of several research projects related to cloud computing and mobile internet application in fiscal 2016. Upon completion of these projects in fiscal
2017, the related IT developers were transferred to our production department. As a result, the related compensation for these individuals was included as a
cost of revenue in fiscal 2017. We expect to increase our investment in research and development to enhance our industry knowledge, improve our
competitiveness and enable us to identify attractive market opportunities for new and enhanced services and solutions.
General and administrative expenses
General and administrative expenses primarily consisted of salary and compensation expenses relating to our finance, legal, human resources and
executive office personnel, and included rental expenses, depreciation and amortization expenses, office overhead, professional service fees and travel and
transportation costs.
General and administrative expenses increased by $0.6 million or 14.0% from approximately $5.0 million in fiscal 2016 to approximately $5.6
million in fiscal 2017, almost all of which is attributable to increasing headcount and related staff costs in Hong Kong and Australia, which approximated
$0.6 million. We incorporated CLPS Technology (Australia) PTY LTD (“CLPS AU”) in November 2015 and CLPS Technology (Hong Kong) Co., Limited
(“CLPS Hong Kong”) in January 2016 to provide service for our international client’s local operations. Additionally, we acquired Judge (Shanghai)
Technology service Co., Ltd (“Judge China”) in November 2016; Judge China accounted for approximately $0.1 million increase in our general and
administrative expense in fiscal 2017. As a percentage of revenues, general and administrative expenses were 18.0% and 17.1% of our revenue in fiscal 2017
and 2016, respectively.
Subsidies and other income
Subsidies and other income primarily included government subsidies which represented amounts granted by local government authorities as a
general incentive for us to promote development of the local technology industry. The Company records government subsidies in subsidies and other income
upon received and when there is no further performance obligation. Total government subsidies amounted to $0.4 million and $1.3 million for the years ended
June 30, 2017 and 2016, respectively. The decrease in government subsidies in fiscal 2017 was because local government was in the process of amending the
existing subsidy policy and deferred the approvals for government subsidies that are applicable to us. While we expect the continued support of local
government to promote the technology industry, we only record government subsidies as subsidies and other income when received due to uncertainties.
Income before income taxes
Our income before income taxes was approximately $2.1 million in fiscal 2017, an increase of 2.4% compared with fiscal 2016.
Provision (benefit) for income taxes
Our provision for income taxes benefit was $0.1 million in fiscal 2017, compared to $0.3 million income tax expense in fiscal 2016. Our current
income tax provision decreased by approximately $0.3 million. The decrease of the current income tax provision is mainly due to CLPS Dalian has qualified
as Software Enterprise and is enjoying two-year income tax exemption starting from their first profitable year. The increase of $0.1 million in deferred tax
benefit was mainly because we recorded deferred tax assets as a result of the net operating losses carry forward for some of our subsidiaries.
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Net Income
Our net income was approximately $2.2 million in fiscal 2017, an increase of $0.4 million from $1.8 million in fiscal 2016. The increase in net
income was in line with increased revenues, gross profit and operating expenses for fiscal 2017 as compared to fiscal 2016 as mentioned above.
Other comprehensive income
Foreign currency translation adjustments amounted to a loss of $0.1 million and $0.4 million for the years ended June 30, 2017 and 2016,
respectively. The balance sheet amounts with the exception of equity as of June 30, 2017 were translated at 6.7793 RMB to 1.00 USD as compared to 6.6459
RMB to 1.00USD as of June 30, 2016. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements
accounts for the years ended June 30, 2017 and 2016 were 6.8087 RMB to 1.00 USD and 6.4405 RMB to 1.00 USD, respectively. The change in the value of
the RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our
business or results of operation.
Liquidity and Capital Resources
As of June 30, 2018, we had cash and cash equivalents of approximately $9.7 million. Our current assets were approximately $29.1 million, and our
current liabilities were approximately $12.8 million. Total shareholders’ equity as of June 30, 2018 was approximately $18.2 million. We believe that we will
have sufficient working capital to operate our business for the next 12 months from the issuance date of this report.
Substantially all of our operations are conducted in China and all of our revenue, expenses, cash and cash equivalents are denominated in RMB.
RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC
exchange control regulations that restrict our ability to convert RMB into U.S. dollars. As of June 30, 2018, cash and cash equivalents of approximately
$4,012,088, $81,644, $4,005, $5,568,360 and $76,789 were held by the Company and its subsidiaries in mainland PRC, Singapore, Australia, Hong Kong and
Taiwan, respectively. We would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiaries in China to our offshore
subsidiaries. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in PRC for general corporate
purposes.
In assessing our liquidity, we monitor and analyze our cash on hand, our ability to generate sufficient revenue sources in the future and our operating
and capital expenditure commitments. The Company plans to fund working capital through its operations, bank borrowings and additional capital
contribution from shareholders. Our operating cash flow was negative for the year ended June 30, 2018. For the years ended June 30, 2017 and 2016, our
operating cash flow was positive. We have historically funded our working capital needs primarily from operations, advance payments from customers and
loans from shareholders. Our working capital requirements are affected by the efficiency of our operations, the numerical volume and dollar value of our sales
contracts, the progress or execution on our customer contracts, and the timing of accounts receivable collections.
The following table sets forth summary of our cash flows for the periods indicated:
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate change
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents at the end of the year
Operating Activities
$
$
For the Years Ended June 30,
2017
2018
(4,772,610) $
(492,672)
10,103,240
90,360
4,928,318
4,814,568
9,742,886 $
624,344 $
(101,218)
(832,752)
(153,002)
(462,628)
5,277,196
4,814,568 $
2016
4,462,268
(374,348)
(378,837)
(227,771)
3,481,312
1,795,884
5,277,196
Net cash used in operating activities was approximately $4.8 million in fiscal 2018, including net income of $2.7 million, adjusted for non-cash
items of $0.1 million and negative adjustments for changes in operating assets and liabilities of $7.6 million. The adjustments for changes in operating assets
and liabilities mainly included an increase in accounts receivable of $9.8 million due to increased sales in fiscal 2018. During fiscal 2018, our accounts
receivable turnover was 84 days, increased from 65 days in fiscal 2017 due to the longer payment approval process of the major customers compared with
payment time of fiscal 2017. The adjustments for changes in operating assets and liabilities also included offset with an increase in salaries and benefits
payable of $1.8 million due to unpaid employee compensation and benefits, an increase in prepayments and other assets of $0.6 million and an increase in tax
payable of $0.3 million due to increased revenue in fiscal 2018.
Net cash provided by operating activities was approximately $0.6 million in fiscal 2017, including net income of $2.2 million, adjusted for non-cash
items of $8,975 and negative adjustments for changes in operating assets and liabilities of $1.6 million. The adjustments for changes in operating assets and
liabilities mainly included an increase in accounts receivable of $2.4 million due to increased sales in fiscal 2017. During fiscal 2017, our revenue turnover in
days was 65 days, slightly increased from 64 days in fiscal 2016. The adjustments for changes in operating assets and liabilities also included an increase in
deferred costs of $0.2 million for project progress and an increase in prepaid income tax of $0.2 million, and offset with an increase in salaries and benefits
payable of $0.9 million due to unpaid employee compensation and benefits and an increase in tax payable of $0.2 million due to increased revenue in fiscal
2017.
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Net cash provided by operating activities for the year ended June 30, 2016 was approximately $4.5 million, which was primarily attributable to net
income of approximately $1.8 million, adjusted for non-cash items for approximately $0.04 million and positive adjustments for changes in working capital
of approximately $2.7 million. The adjustments for changes in working capital mainly included (i) decrease in accounts receivable of approximately $1.1
million due to an increase in sales collections in fiscal 2016, (ii) increase in salaries and benefits payable of $1.0 million due to unpaid employee
compensation and benefits and (iii) decrease in prepayment of approximately $0.4 million due to utilization in our operation.
Investing Activities
Net cash used in investing activities was approximately $0.5 million in fiscal 2018, primarily due to our purchase of office equipment and furniture
of $0.2 million, our acquisition of Judge China of $0.1 million (RMB 700,000) and our acquisition of Tianjin Huanyu Qinshang Network Technology Co.,
Ltd (“Huanyu”) of $0.15 million (RMB 1,000,000) in fiscal 2018, to better manage opportunities and capitalize on the growth potential in the human resource
related industry in China. On September 27, 2017, the Company and a non-controlling interest shareholder of CLPS Beijing incorporated Huanyu. The
Company paid $0.15 million (RMB 1,000,000) for a 30% of equity interest in Huanyu in fiscal 2018.
Net cash used in investing activities was approximately $0.1 million in fiscal 2017, primarily due to our acquisition of Judge China in fiscal 2017, to
better manage opportunities and capitalize on the growth potential in the human resource related industry in China.
Net cash used in investing activities was approximately $0.4 million in fiscal 2016, primarily due to our purchases of office equipment and furniture.
Financing Activities
Net cash provided by financing activities was approximately $10.1 million in fiscal 2018. During the fiscal 2018, we had bank loans of
approximately $5.7 million, repaid loans of approximately $3.1 million, and paid $0.6 million of dividends to our existing shareholders. On May 24, 2018,
CLPS consummated its initial public offering, or IPO, of 2,000,000 shares, $0.0001 par value per share. The units were sold at an offering price of $5.25 per
unit, generating total gross proceeds of $10.5 million. Net proceeds from the IPO were $9.5 million. On June 8, 2018, CLPS closed on the over-allotment
option on the additional 300,000 common shares at the IPO price of $5.25 per share. As a result, the Company raised additional gross proceeds of
approximately $1.58 million, in addition to the IPO gross proceeds of approximately $10.5 million, or combined gross proceeds in this IPO of approximately
$12.08 million, before underwriting discounts and commissions and offering expenses. Net proceeds from the IPO and the over-allotment were approximately
$11.0 million.
Net cash used in financing activities was approximately $0.8 million in fiscal 2017. During fiscal 2017, we repaid related parties loans of
approximately $0.1 million and paid $0.7 million of dividends to our existing shareholders.
Net cash used in financing activities was approximately $0.4 million in fiscal 2016. In fiscal 2016, proceeds from our shareholder’s contributions
amounted to $2.1 million, and collection of restricted cash of $2.5 million. We paid $5.3 million of dividends to our existing shareholders.
Capital Expenditures
The Company made capital expenditures of $0.2 million, $0.06 million and $0.3 million for the years ended June 30, 2018, 2017 and 2016,
respectively. In these periods, our capital expenditures were mainly used for purchases of office equipment. The Company will continue to make capital
expenditures to meet the expected growth of its business.
Impact of Inflation
We do not believe the impact of inflation on our company is material. Our operations are in China and China’s inflation rates have been relatively
stable over the last two years: 1.9% in 2018 and 1.6% in 2017.
Contractual Obligations
The Company’s subsidiaries lease office spaces under various operating leases. Operating lease expense amounted to $730,705, $565,328 and
$431,043 for the years ended June 30, 2018, 2017 and 2016, respectively. The following table sets forth our contractual obligations and commercial
commitments as of June 30, 2018:
Total
Less than 1
Year
1-3 Years
3-5 Years
More than 5
Years
Payment Due by Period
Operating lease arrangements
Short-term loans
Total
$
$
948,539 $
2,553,989
3,502,528 $
699,019 $
2,553,989
3,253,008 $
249,520
-
249,520
-
-
- $
-
-
-
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Subsequent Events
On July 12, 2018, the Company granted an aggregate of 671,469 restricted share units (“RSUs”) to key employees and directors under the share
incentive plans. No RSUs were granted to in fiscal 2018. RSUs granted to key employees and directors generally have a term of three years, but are subject to
earlier termination in connection with termination of continuous service to the Company. RSUs are valid for a period of 10 years from July 12, 2018 to July
11, 2028. RSUs vest 33% per year over a three-year period, with the first 33% vesting on the grant date. As at the grant date of July 12, 2018, the weighted-
average fair value per share was $12.22 and the estimated total fair value of the RSUs granted was $8.2 million.
On August 15, 2018, the shareholders of CLPS SG and CLPS AU were changed to Qiner from CLPS Shanghai pursuant to the share purchase
agreements. Qiner purchased the 100% equity interest of CLPS SG and CLPS AU from CLPS Shanghai for consideration of $0.6 million (or approximately
850,000 Singapore dollars) and $0.1 million (or approximately 200,000 Australian dollars), respectively. These transactions did not change the holding
company’s ownership of these entities.
On August 20, 2018, CLPS SG acquired an 80% interest in Infogain Solutions PTE. Ltd. (“Infogain”) located in Singapore from Sharma Devendra
Prasad and Deepak Malhotra with the final purchase price of $420,000 (or approximately 576,000 Singapore dollars).
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted by the United States of America
(“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and
expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past two years, we
continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make
significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated
financial condition and results of operations.
Use of Estimates and Assumptions
In preparing the consolidated financial statements in conformity with US 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 consolidated 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, valuation of accounts receivable, prepayments, deposits
and other assets, useful lives of property and equipment, intangible assets, goodwill impairment, the impairment of long-lived assets, provision for contingent
liabilities, revenue recognition, accrued expenses and other current liabilities and realization of deferred tax assets. Actual results could differ from those
estimates.
Revenue recognition
The Company provides a comprehensive range of IT services and solutions, the contracts for which are billed for primarily are on a time-and-
expense basis, or fixed-price basis.
Revenue is considered realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery
has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured.
Time-and-expense basis contracts
Revenues from time-and-expense basis contracts are recognized as the related services are rendered assuming all other basic revenue recognition
criteria are met. Under time-and-expense basis contracts, the Company is reimbursed for actual hours incurred at pre-agreed negotiated hourly billing rates.
Clients may terminate the contracts at any time before the work is completed but are obligated to pay the actual service hours incurred through the termination
date at the contract billing rate.
Fixed-price basis contracts
Revenues from fixed-price customized solution contracts require the Company to perform services for systems design, planning and integration
based on customers’ specific needs. These solutions require significant production and customization. The required customization work period is generally
less than one year. Upon delivery of the services, customer acceptance is generally required. In the same contract, the Company is generally required to
provide post-contract customer support (“PCS’) for a period of time ranging from three months to one year (“PCS period”) after the customized application is
delivered. The type of service for PCS clause is generally not specified in the contract or stand-ready service on when-and-if-available basis.
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The Company considers the following service elements in negotiating a fixed-fee solution contract:
1. Solution development service
2. PCS, and
3. Specific service such as training, if applicable
For multiple-element arrangements that include application customized services and PCS as well as specific service components, if applicable, the
Company allocates contract revenue to all deliverables based on their relative selling prices. The Company uses a hierarchy to determine the selling price to
be used for allocating revenue to the deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of the selling price
(“TPE”) and (iii) best estimate of the selling price (“BESP”). The Company uses VSOE of selling price in the selling price allocation in all instances where it
exists; otherwise, BESP is used. Because the Company’s customized application differs substantially from that of competitors, it is difficult to obtain the
reliable standalone competitive pricing necessary to establish TPE. VSOE of selling price for products and services is determined when a substantial majority
of the selling prices fall within a reasonable range when sold separately.
Revenue allocated to solution development service components is recognized using contract accounting in accordance with Accounting Standards
Codification (“ASC”) 605-35. The revenue recognition for these contracts varies depending on the terms of the individual contracts, and may be recognized
proportionally over the term of the contract or deferred until the end of the contract term and recognized when our obligations to the customer have been
fulfilled with the customer. For contacts with development period within three months, the related revenue is recognized on the completed contract method.
Otherwise, revenue is recognized as the service is performed using the percentage of completion method of accounting, under which the total value of
revenue is recognized on the basis of the percentage that total labor cost to date bears to the total expected labor costs. The Company considers labor time as
the best available indicator of the pattern and timing in which contract obligations are fulfilled. Pursuant to the contract terms, the Company has enforceable
rights to payments for the work performed. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses
become probable based on the current contract estimates. In instances where substantive acceptance provisions are specified in customer contracts, revenues
are deferred until all acceptance criteria have been met.
The fixed-priced customized solution arrangement provides customers with rights to unspecified PCS, if and when available. These services grant
the customers on line and telephone access to technical support personnel during the term of the service. The revenue allocated to unspecific PCS component
is deferred and recognized on a straight-line basis over the PCS period. Revenue allocates to the specific PCS or other services is recognized as the related
services are rendered.
To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions for estimated losses on such engagements
will be made during the period in which a loss becomes probable and can be reasonably estimated.
Differences between the timing of billings and the recognition of revenue based on various methods of accounting are recorded as deferred revenue.
Net revenue includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue. The
Company reports revenues net of value added tax (“VAT”). The Company’s subsidiaries in the PRC are subject to a 6% to 17% value added tax (“VAT”) and
related surcharges on the revenues earned from providing services.
Accounts receivable
Accounts receivable are recorded at original invoice. The Company determines the adequacy of a reserve 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 customer
exposures, as well as the historical trends of collections. Delinquent account balances are written off against the allowance for doubtful accounts after
management has determined that the likelihood of collection is not probable.
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Unbilled accounts receivable included in accounts receivable represent revenue earned on contracts to be billed, in subsequent periods, as per the
terms of the related contracts.
Business combination
Business combinations are recorded using the business acquisition method of accounting. The assets acquired, the liabilities assumed, and any non-
controlling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the
excess of the total consideration transferred plus the fair value of any non-controlling interest of the acquiree, if any, at the acquisition date over the fair
values of the identifiable net assets acquired.
Non-controlling interests
The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the
Company. Non-controlling interests in the results of the Company are presented on the face of the consolidated statement of operations as an allocation of the
total income or loss for the year between non-controlling interest holders and the shareholders of the Company.
Impairment of long-lived assets
The Company reviews its long-lived assets, other than goodwill including property and equipment and intangible assets with definite lives for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events
occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected
to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the
assets, the Company would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount.
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Research and development
Research and development incurred in the development of new software modules and products, either as part of the internally used software or in
conjunction with anticipated customer projects. Technological feasibility for the Company’s software products is reached before the products are released for
sale. To date, expenditures incurred after technological feasibility was established and prior to completion of software development have not been material,
and accordingly, the Company has expensed all when incurred.
Government subsidies
Government subsidies mainly represent amounts granted by local government authorities as an incentive for companies to promote development of
the local technology industry. The Company receives government subsidies related to government sponsored projects, and records such government subsidies
as a liability when it is received. The Company records government subsidies as other income when there is no further performance obligation.
Income Taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized
when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. 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 as a benefit 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. No significant penalties or interest relating to income taxes have been incurred during the years ended June 30, 2018, 2017
and 2016. All of the tax returns of the Company remain subject to examination by the tax authorities for five years from the date of filing through year 2022.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of ordinary shares outstanding during the period. Restricted share units and
warrants are not considered outstanding in computation of basic earnings per share.
Diluted earnings per share is computed using the weighted average number of ordinary shares and potential ordinary shares outstanding during the
period, which include restricted share units and warrants. The computation of diluted earnings per share does not assume conversion, exercise, or contingent
issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on
earnings per share.
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Share-based payment
Share awards issued to non-employees, such as consultants and underwriters, including warrants and options are measured at fair value at the earlier
of the commitment date or the date the service is completed and recognized over the period the service is provided. The Company uses the Black-Scholes
option pricing model to estimate the fair value of warrants. The determination of estimated fair value of share-based payment awards on the grant date using a
Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables.
These variables include the Company’s expected stock price volatility over the expected term of the awards, actual and projected warrant exercise behaviors,
a risk-free interest rate and any expected dividends.
All share-based awards to employees and directors, including restricted share units (“RSUs”), are measured at the grant date based on the fair value
of the awards. Share-based compensation, net of forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period.
The Company recognizes the estimated compensation cost of service-based restricted share units based on the fair value of its ordinary shares on the
date of the grant. The Company recognizes the compensation cost, net of estimated forfeitures, over a vesting term of generally three years.
Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company uses
historical data to estimate pre-vesting restricted share units’ forfeitures and records share-based compensation expense only for those awards that are expected
to vest.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it
becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No.
2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods),
which means it will be effective for the Company’s fiscal year beginning July 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus
Agent Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent
considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and
Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the
operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements
and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and
other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a
significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address
implementation and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have
the same effective date as the new revenue standard. In September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public
business entities and other entities were required to adopt ASC Topic 606 for annual reporting. A public business entity and certain other specified entities
adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We
are planning to adopt Topic 606 in the first quarter of our fiscal 2019 using the retrospective transition method, and are continuing to evaluate the impact our
pending adoption of Topic 606 will have on our consolidated financial statements. The Company’s current revenue recognition policies are generally
consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to input measures are not expected to be pervasive to
the majority of the Company’s contracts.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among
entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires
additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires
a modified retrospective approach to adoption assuming the Company will remain an emerging growth company at that date. Early adoption is permitted. In
September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public business entities and other entities were required to adopt
ASC Topic 842 for annual reporting. A public business entity that otherwise would not meet the definition of a public business entity except for a requirement
to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for annual
reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. ASU
No. 2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the revised after tax cash flows
arising from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and the recalculated amounts must
be included in income of the year in which the tax law is enacted. In July 2018, the FASB issued ASU No. 2018-10, about improvements to clarify the
Codification or to correct unintended application of guidance in ASU No. 2016-02. The amendments in ASU No. 2018-10 are of a similar nature to the items
typically addressed in the Codification improvements project. The amendments in ASU No. 2018-10 affect narrow aspects of the guidance issued in the
amendments in ASU No.2016-02. In July 2018, the FASB issued ASU No. 2018-11, which to clarify two requirements in the new leases standard: transition
—comparative reporting at adoption and separating components of a contract. The amendments in this Update provide entities with an additional (and
optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the
adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’
requests. ASU No. 2018-11 also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the
associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted
for under the new revenue guidance (Topic 606) and both of the following are met: the timing and pattern of transfer of the nonlease component(s) and
associated lease component are the same, and the lease component, if accounted for separately, would be classified as an operating lease. The effective date
and transition requirements for ASU No 2018-11 related to separating components of a contract are the same as the effective date and transition requirements
in ASU 2016-02. The Company has not early adopted this update and it will become effective on July 1, 2020. The Company is currently evaluating the
impact of this new standard on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued a new pronouncement ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash
flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s
amendments add or clarify guidance on eight cash flow issues: (1)Debt prepayment or debt extinguishment costs; (2)Settlement of zero-coupon debt
instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) Contingent
consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial
interests in securitization transactions; (8) Separately identifiable cash flows and application of the predominance principle. For public business entities, the
guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years assuming the
Company will remain as emerging growth company at that date. Early adoption is permitted for all entities. Entities must apply the guidance retrospectively
to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company
has not early adopted this update and it will become effective on July 1, 2018.
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In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments
in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. These amendments take effect for public businesses for fiscal years beginning after
December 15, 2017 and interim periods within those periods assuming the Company will remain an emerging growth company at that date. The Company has
not early adopted this update and it will become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a
material impact on its consolidated financial statements.
In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with
its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed
the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020 assuming the
Company still remains an emerging growth company at that date. Early adoption is permitted. The Company is currently evaluating the impact of our pending
adoption of ASU 2017-04 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, to provide guidance to clarify when to account for a change to
the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value,
the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is
effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 assuming the Company still
remains an emerging growth company at that date. Early adoption is permitted and application is prospective. The Company has not early adopted this update
and it will become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated
financial statements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and
Derivatives and Hedging (Topic 815). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial
instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike
price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued
financial instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in
accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of
income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now
subject to the specialized guidance for contingent beneficial conversion features. The amendments also recharacterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting
effect. The amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this
Update do not require any transition guidance because those amendments do not have an accounting effect. The Company has not early adopted this update
and it will become effective on July 1, 2020. The Company is currently evaluating the impact of our pending adoption of ASU 2017-11 on its consolidated
financial statements.
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In September 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718)”. The amendments affect any entity that
changes the terms or conditions of a share-based payment award. An entity should account for the effects of a modification unless the fair value (or calculated
value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value, the vesting conditions of the
modified award are the same as the vesting conditions of the original award, and the classification of the modified award as an equity instrument or a liability
instrument is the same as the classification of the original award. The amendments in this Update are effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for public
business entities for reporting periods for which financial statements have not yet been issued. The Company has not early adopted this update and it will
become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial
statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and
Jobs Act and will improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. The Company has not early adopted this update and it will become effective
on July 1, 2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-
10), to provide guidance to clarify recognition and measurement of financial assets and financial liabilities. The amendments clarify certain aspects of the
guidance issued in ASU No. 2016-01. All entities may early adopt ASU No. 2018-03 for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years, as long as they have adopted Update 2016-01. The Company has not early adopted this update and it will become effective
on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued ASU No 2018-07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting. The amendments expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing
model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contracts with Customers. The amendments are effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that fiscal year. The Company has not early adopted this update and it will become effective on
July 1, 2019. The Company is currently evaluating the impact of our pending adoption of ASU 2018-07 on its consolidated financial statements.
In August 2018, the FASB issued ASU No 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair
Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update are
effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently
evaluating the impact of our pending adoption of ASU 2018-07 on its consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting statements, if recently adopted, would have a material effect on
the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and senior management
The following table sets forth our executive officers and directors, their ages and the positions held by them:
Name
Xiao Feng Yang
Raymond Ming Hui Lin
Tian van Acken
Jian Xu
Jin He Shao(1)(4)
Kewei Huang(2)
Kathryn Amooi(3)
(1) Chair of the Audit Committee.
(2) Chair of the Compensation Committee.
(3) Chair of the Nominating Committee.
(4) Audit Committee Financial Expert.
Age
54
53
48
45
50
50
63
Position
Chairman, President and Director
Chief Executive Officer and Director
Chief Financial Officer
Senior Vice President of Operations, Corporate Secretary
Independent Director
Independent Director
Independent Director
Xiao Feng Yang is the chairman, president and director of the Company. Mr. Yang has over 20 years of executive management and operational
experience in the IT services business. From October 2012 to present, Mr. Yang served as chairman and president of ChinaLink. From April 2009 to October
2012, Mr. Yang served as deputy general manager of ADP China managing the service operations of HR BPO in China. Prior to 2002, Mr. Yang was the
Human Resource Director of Phillips. Mr. Yang graduated from Tongji University, Shanghai, China, with a Bachelor’s degree in electrical engineering. Mr.
Yang received his MBA degree both from Shanghai University of Finance and Webster University (US).
Raymond Ming Hui Lin, is the chief executive officer and director of the Company. Mr. Lin joined CLPS in February 2009 as chief executive
officer. From January 2008 to January 2009, Mr. Lin was a business consultant of VanceInfo after VanceInfo acquired A-IT Software (Shanghai) Co. Ltd. Mr.
Lin acted as general manager of A-IT Software (Shanghai) Co. Ltd. from April 2002 to December 2007. Mr. Lin is an IT outsourcing service veteran with a
deep understanding of IT talent acquisition, training, development and service delivery. He has developed and pioneered the first kind of training programs
for mainframe and VisionPLUS (a credit card processing solution) in China, which has made CLPS as one of the largest mainframe resource powerhouse and
the VisionPLUS project team in Greater China. In 2015, Mr. Lin became the MSE senior advisor in Fudan University, Shanghai, China.
Tian van Acken Ms. Tian van Acken is the chief financial officer of the company. From December 2015 to September 2017, Ms. van Acken served
as chief financial officer at ec+ Communication Corporation. From September 2011 to December 2015, Ms. van Acken held chief financial officer positions
at various start-up companies in China. From March 2006 to September 2011, Ms. van Acken served as Greater China chief financial officer at Lowe China,
subsidiary of Lowe Worldwide (Interpublic Group of Companies) in China. From 1996 to 2006, Ms. van Acken held various managerial financial positions at
Siegfried Resources LLC in New York, Highland Capital Partners and PricewaterhouseCoopers in Boston, respectively. Ms. van Acken holds an MBA degree
in Finance and Accounting from Rochester Institute of Technology. She is a Chartered Financial Analyst and a certified public accountant licensed in the
State of Massachusetts.
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Jian Xu is our senior vice president of operations and corporate secretary. He has been the SVP of Operations since July 2008. From December
2003 to June 2008, Mr. Xu acted as IT consultant and trainer at A-IT Software Co., Ltd. From January 2003 to December 2003, Mr. Xu served as senior
software developer at Neusoft Group Co., Ltd. From July 2000 to December 2003, he held the position of senior software developer at two software
companies. Mr. Xu holds a Bachelor’s degree in Mechanical and Electronic Engineering from Shenyang University of Technology.
Jin He Shao is an independent director of the Company. From January 2002 to present, Mr. Shao has been a partner at Shanghai Huajin Accounting
& Consulting Professional Services. From August 1995 to December 2001, he served as senior tax manager at Phillips (China) Investment Co., Ltd. Mr. Shao
received a joint MBA degree from Shanghai University of Finance & Economics and The Webster University. Mr. Shao holds the PRC equivalent of the CPA
license. In addition, Mr. Shao attended Shanghai Grain College where he majored in finance and accounting, and STV University where he majored in
auditing.
Kewei Huang is an independent director of the Company. From September 2014 to present, Mr. Huang has held the office of the chief technology
officer at Moxian, Inc. (MOXC), a Nasdaq listed company. In 1995, he received a PhD degree in component based technologies from the University of New
South Wales. In addition, Mr. Huang holds a Bachelor’s degree in English from National University of Singapore and an MBA degree from Preston
University.
Kathryn Amooi is an independent director of the Company. Ms. Amooi has held various positions at Automatic Data Processing (ADP), LLC, a
human capital management company, including as Senior Vice President from May 2011 to December 2014, as Senior Division Vice President from May
2008 to June 2011, and Managing Director/General Manager from June 2005 to June 2008 at Automatic Data Processing (ADP) China, LLC. Ms. Amooi
attended University of Southern California.
None of the events listed in Item 401(f) of Regulation S-K has occurred during the past ten years that is material to the evaluation of the ability or
integrity of any of our directors, director nominees or executive officers.
Limitation on Liability and Other Indemnification Matters
The Companies Law does not limit the extent to which Memorandum and Articles of Association may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Our Memorandum and Articles of Association permit indemnification of
officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty of such
directors or officers willful default of fraud. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a
Delaware corporation.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under
the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
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B.
Compensation
The following table shows the annual compensation paid by us for the years ended June 30, 2018 and June 30, 2017.
Executive Compensation
Name/principal position
Xiao Feng Yang, Chairman and President(1)
Raymond Ming Hui Lin, CEO and Director(2)
Tian van Acken, CFO(3)
Year
2018
2017
2018
2017
2018
2017
$
$
$
$
$
$
Salary
Equity
Compensation
All Other
Compensation
Total
Paid
76,338 $
51,470 $
57,225 $
37,379 $
69,758 $
— $
— $
— $
— $
— $
— $
— $
— $ 76,338
585,402 $ 636,872
— $ 57,225
585,402 $ 622,781
— $ 69,758
—
— $
(1) Appointed Chairman and President effective as of December 9, 2017. All other compensation amounts represent cash dividend payments in 2016 and
2017.
(2) Appointed Chief Executive Officer effective as of December 9, 2017. All other compensation amounts represent cash dividend payments in 2016 and
2017.
(3) Appointed Chief Financial Officer effective as of December 9, 2017.
Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one
month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment
agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are,
however, permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions
or inactions have resulted in a material adverse effect to us.
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any
other entity that has one or more officers serving as a member of our board of directors.
Outstanding Equity Incentive Awards at Fiscal Year-End
We have adopted a 2017 Equity Incentive Plan (the “Plan”). The Plan is a stock-based compensation plan that provides for discretionary grants of,
among others, stock options, stock awards and stock unit awards to key employees and directors of the Company. The purpose of the Plan is to recognize
contributions made to our company and its subsidiaries by such individuals and to provide them with additional incentive to achieve the objectives of our
Company. The Company granted an aggregate of 671,469 restricted shares (“RSUs”) to key employees and directors under the Plan on July 12, 2018. No
grants were made in fiscal 2018. The following is a summary of the Plan and is qualified by the full text of the Plan.
Administration. The Plan will be administered by our board of directors, or, once constituted, the Compensation Committee of the board of
directors (we refer to body administering the Plan as the “Committee”).
Number of Shares of Common Shares. The number of common shares that may be issued under the Plan is 2,210,000. Shares issuable under the
Plan may be authorized but unissued shares or treasury shares. If there is a lapse, forfeiture, expiration, termination or cancellation of any award made under
the Plan for any reason, the shares subject to the award will again be available for issuance. Any shares subject to an award that are delivered to us by a
participant, or withheld by us on behalf of a participant, as payment for an award or payment of withholding taxes due in connection with an award will not
again be available for issuance, and all such shares will count toward the number of shares issued under the Plan. The number of common shares issuable
under the Plan is subject to adjustment, in the event of any reorganization, recapitalization, stock split, stock distribution, merger, consolidation, split-up, spin-
off, combination, subdivision, consolidation or exchange of shares, any change in the capital structure of the company or any similar corporate transaction. In
each case, the Committee has the discretion to make adjustments it deems necessary to preserve the intended benefits under the Plan. No award granted under
the Plan may be transferred, except by will, the laws of descent and distribution.
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Eligibility. All key employees and directors of the Company are eligible to receive awards under the Plan.
Awards to Participants. The Plan provides for discretionary awards of, among others, stock options, stock awards and stock unit awards to
participants. Each award made under the Plan will be evidenced by a written award agreement specifying the terms and conditions of the award as determined
by the Committee in its sole discretion, consistent with the terms of the Plan.
Stock Options. The Committee has the discretion to grant non-qualified stock options or incentive stock options to participants and to set the terms
and conditions applicable to the options, including the type of option, the number of shares subject to the option and the vesting schedule; each option will
expire ten years from the date of grant and no dividend equivalents may be paid with respect to stock options. The aggregate maximum number of shares as to
which a Key Employee may receive Stock Options and Stock Appreciation Rights in any calendar year is 100,000, except that the aggregate maximum
number of shares as to which a Key Employee may receive Stock Options and Stock Appreciation Rights in the calendar year in which such Key Employee
begins employment with the Company or its Subsidiaries is 250,000.
Stock Awards. The Committee has the discretion to grant stock awards to participants. Shares granted under the Plan will be effective and
exercisable as of the Company’s completion of our initial public offering of its securities and other terms, restrictions and qualifications that may be set forth
in the individual grant agreements. Stock awards will consist of common shares granted without any consideration from the participant or shares sold to the
participant for appropriate consideration as determined by the Board. The number of shares awarded to each participant, and the restrictions, terms and
conditions of the award, will be at the discretion of the Committee. Subject to the restrictions, a participant will be a shareholder with respect to the shares
awarded to him or her and will have the rights of a shareholder with respect to the shares, including the right to vote the shares and receive dividends on the
shares; provided that dividends otherwise payable on any performance-based stock award will be held by us and will be paid to the holder of the stock award
only to the extent the restrictions on such stock award lapse, and the Committee in its discretion can accumulate and hold such amounts payable on any other
stock awards until the restrictions on the stock award lapse. The aggregate maximum number of shares that may be used for Stock Awards, Stock Bonus
Awards and or Stock Unit Awards that may be granted to any Key Employee in any calendar year is 250,000, or, in the event the award is settled in cash, an
amount equal to the fair market value of such number of shares on the date on which the award is settled.
Payment for Stock Options and Withholding Taxes. The Committee may make one or more of the following methods available for payment of any
award, including the exercise price of a stock option, and for payment of the minimum required tax obligation associated with an award: (i) cash; (ii) cash
received from a broker-dealer to whom the holder has submitted an exercise notice together with irrevocable instructions to deliver promptly to us the amount
of sales proceeds from the sale of the shares subject to the award to pay the exercise price or withholding tax; (iii) by directing us to withhold common shares
otherwise issuable in connection with the award having a fair market value equal to the amount required to be withheld; and (iv) by delivery of previously
acquired common shares that are acceptable to the Committee and that have an aggregate fair market value on the date of exercise equal to the exercise price
or withholding tax, or certification of ownership by attestation of such previously acquired shares.
Amendment of Award Agreements; Amendment and Termination of the Plan; Term of the Plan. The Committee may amend any award agreement at
any time, provided that no amendment may adversely affect the right of any participant under any agreement in any material way without the written consent
of the participant, unless such amendment is required by applicable law, regulation or stock exchange rule. The Board may terminate, suspend or amend the
Plan, in whole or in part, from time to time, without the approval of the shareholders, unless such approval is required by applicable law, regulation or stock
exchange rule, and provided that no amendment may adversely affect the right of any participant under any outstanding award in any material way without
the written consent of the participant, unless such amendment is required by applicable law, regulation or rule of any stock exchange on which the shares are
listed. Notwithstanding the foregoing, neither the Plan nor any outstanding award agreement can be amended in a way that results in the repricing of a stock
option. Repricing is broadly defined to include reducing the exercise price of a stock option or cancelling a stock option in exchange for cash, other stock
options with a lower exercise price or other stock awards. No awards may be granted under the Plan on or after the tenth anniversary of the effective date of
the Plan.
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On July 12, 2018, the Board of Directors approved, upon a recommendation of the Compensation Committee, several restricted stock grants to the
members of executive management and the Board of the Company pursuant to the terms of the Plan. Specifically, the Company granted an aggregate of
671,469 RSUs to key employees and directors under the Plan. No grants were made in fiscal 2018. RSUs granted to key employees and directors generally
have a term of three years, but are subject to earlier termination in connection with termination of continuous service to the Company. RSUs are valid for a
period of 10 years from July 12, 2018 to July 11, 2028. RSUs vest one-third per year over a three-year period, with the first one third vesting on the grant
date. As at the grant date of July 12, 2018, the weighted-average fair value per share was $12.22 and the estimated total fair value of the restricted shares
granted was $8.2 million.
Director Compensation
All directors hold office until the next annual meeting of shareholders until their successors have been duly elected and qualified. There are no
family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee
directors do not receive any compensation for their services. Non-employee directors are entitled to receive $1,500 per month for serving as directors and may
receive option grants from our company.
Employment Agreements
Xiao Feng Yang Employment Agreement
On December 9, 2017, we entered into an employment agreement with Xiao Feng Yang pursuant to which he agreed to serve as our President. The
agreement provides for an annual base salary of RMB144,000 and HK$566,472 (a total of approximately USD94,100) payable in accordance with the
Company’s ordinary payroll practices. Under the terms of the agreement, commencing with the year ended June 30, 2018, Mr. Yang will be entitled to receive
an annual cash bonus the extent and timing of which are to be determined by the Company’s Compensation Committee; Mr. Yang is also entitled to
reimbursement of reasonable expenses, and vacation, sick leave, health and other benefits customary to the agreements of this nature. The term of the
agreement shall expire on December 8, 2022, which term will automatically extend for additional 12 month periods unless a party to the agreement terminates
it upon 90 days’ notice. If the executive’s employment with the Company is terminated for any reason, the Company will pay to such executive any unpaid
portion of his salary through the date of his termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of his
benefits under the agreement. If his employment is terminated at our election without “cause” (as defined in the agreement), which requires 30 days’
advanced notice, or by him for “good reason” (as defined in the agreement), Mr. Yang shall be entitled to receive severance payments equal to 9 months’ of
his base salary and a pro rata portion of his target annual bonus for the year when termination occurs. Mr. Yang has agreed not to compete with us for 9
months after the termination of his employment; he also executed certain non-solicitation, confidentiality and other covenants customary for agreements of
this nature.
Raymond Ming Hui Lin Employment Agreement
On December 9, 2017, we entered into an employment agreement with Raymond Ming Hui Lin pursuant to which he agreed to serve as our Chief
Executive Officer. The agreement provides for an annual base salary of RMB144,000 and HK$389,880 (a total of approximately USD71,400) payable in
accordance with the Company’s ordinary payroll practices. Under the terms of the agreement, commencing with the year ended June 30, 2018, Raymond
Ming Hui Lin will be entitled to receive an annual cash bonus the extent and timing of which are to be determined by the Company’s Compensation
Committee; he is also entitled to reimbursement of reasonable expenses, and vacation, sick leave, health and other benefits customary to the agreements of
this nature. The term of the agreement shall expire on December 8, 2022, which term will automatically extend for additional 12 month periods unless a party
to the agreement terminates it upon 90 days’ notice. If the executive’s employment with the Company is terminated for any reason, the Company will pay to
such executive any unpaid portion of his salary through the date of his termination, and any unpaid bonus through the date of termination, as well as any
unpaid or unused portions of his benefits under the agreement. If his employment is terminated at our election without “cause” (as defined in the agreement),
which requires 30 days’ advanced notice, or by him for “good reason” (as defined in the agreement), Raymond Ming Hui Lin shall be entitled to receive
severance payments equal to 9 months’ of his base salary and a pro rata portion of his target annual bonus for the year when termination occurs. Raymond
Ming Hui Lin has agreed not to compete with us for 9 months after the termination of his employment; he also executed certain non-solicitation,
confidentiality and other covenants customary for agreements of this nature.
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Tian van Acken Employment Agreement
On December 9, 2017, we entered into an employment agreement with Tian van Acken pursuant to which she agreed to serve as our Chief Financial
Officer. The agreement provides for an annual base salary of RMB144,000 and HK$558,000 (a total of approximately USD93,010) payable in accordance
with the Company’s ordinary payroll practices. Under the terms of the agreement, commencing with the year ended June 30, 2018, Ms. van Acken will be
entitled to receive an annual cash bonus the extent and timing of which are to be determined by the Company’s Compensation Committee; she is also entitled
to reimbursement of reasonable expenses, and vacation, sick leave, health and other benefits customary to the agreements of this nature. The term of the
agreement shall expire on December 8, 2022, which term will automatically extend for additional 12 month periods unless a party to the agreement terminates
it upon 90 days’ notice. If the executive’s employment with the Company is terminated for any reason, the Company will pay to such executive any unpaid
portion of her salary through the date of her termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of
her benefits under the agreement. If her employment is terminated at our election without “cause” (as defined in the agreement), which requires 30 days’
advanced notice, or by her for “good reason” (as defined in the agreement), Tian van Acken shall be entitled to receive severance payments equal to 9
months’ of her base salary and a pro rata portion of her target annual bonus for the year when termination occurs. Tian van Acken has agreed not to compete
with us for 9 months after the termination of her employment; she also executed certain non-solicitation, confidentiality and other covenants customary for
agreements of this nature.
C.
Board Practices
Composition of Board; Risk Oversight
Our Board of Directors presently consists of 5 directors. Pursuant to our Memorandum and Articles of Association, our officers will be elected by
and serve at the discretion of the board. Our directors are not subject to a term of office and hold office until such time as they resign or are removed from
office by resolution of our shareholders. A director will be removed from office automatically if, among other things, the director becomes bankrupt or makes
any arrangement or composition with his creditors, or becomes physically or mentally incapable of acting as director. Except as noted above, there are no
family relationships between any of our executive officers and directors. Officers are elected by, and serve at the discretion of, the board of directors. Our
board of directors shall hold meetings on at least a quarterly basis.
As a smaller reporting company under the NASDAQ rules we are only required to maintain a board of directors comprised of at least 50%
independent directors, and an audit committee of at least two members, comprised solely of independent directors who also meet the requirements of Rule
10A-3 under the Securities Exchange Act of 1934. There are no membership qualifications for directors. Further, there are no share ownership qualifications
for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or
nominated.
There is no formal requirement under the Company’s memorandum and articles of association mandating that we hold an annual meeting of our
shareholders. However, notwithstanding the foregoing, we intend to hold such meetings on our annual meeting to, among other things, elect our directors.
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While it may be deemed a “controlled company” under the NASDAQ Marketplace Rules (specifically, as defined in Rule 5615(c)), the Company
does not intend to avail itself of the corporate governance exemptions afforded to a controlled company under the NASDAQ Marketplace Rules. Similarly,
the Company intends to comply with all applicable NASDAQ corporate governance requirements irrespective of its “foreign private issues” status.
Our board plays a significant role in our risk oversight. The board makes all relevant Company decisions. As such, it is important for us to have our
Chief Executive Officer serve on the board as he plays key roles in the risk oversight or the Company. As a smaller reporting company with a small board of
directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.
Director Independence
Our board has reviewed the independence of our directors, applying the NASDAQ independence standards. Based on this review, the board
determined that each of Kathryn Amooi, Kewei Huang and Jin He Shao are “independent” within the meaning of the NASDAQ rules. In making this
determination, our board considered the relationships that each of these non-employee directors has with us and all other facts and circumstances our board
deemed relevant in determining their independence. As required under applicable NASDAQ rules, we anticipate that our independent directors will meet on a
regular basis as often as necessary to fulfill their responsibilities, including at least annually in executive session without the presence of non-independent
directors and management.
Board Committees
Currently, three committees have been established under the board: the Audit Committee, the Compensation Committee and the Nominating
Committee.
The Audit Committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial
statements of our company, including the appointment, compensation and oversight of the work of our independent auditors. The Compensation Committee
of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of
compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). The
Nominating Committee of the board is responsible for the assessment of the performance of the board, considering and making recommendations to the board
with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and
experience when nominating directors.
Audit Committee
The Audit Committee will be responsible for, among other matters:
● appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm;
● discussing with our independent registered public accounting firm the independence of its members from its management;
● reviewing with our independent registered public accounting firm the scope and results of their audit;
● approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;
● overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim
and annual financial statements that we file with the SEC;
● reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and
regulatory requirements;
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● coordinating the oversight by our board of directors of our code of business conduct and our disclosure controls and procedures
● establishing procedures for the confidential and or anonymous submission of concerns regarding accounting, internal controls or auditing
matters; and
● reviewing and approving related-party transactions.
Our Audit Committee consists of Kathryn Amooi, Kewei Huang and Jin He Shao, with Mr. Shao serving as chair of the Audit Committee. Our board
has affirmatively determined that each of the members of the Audit Committee meets the definition of “independent director” for purposes of serving on an
Audit Committee under Rule 10A-3 of the Exchange Act and NASDAQ rules. In addition, our board has determined that Mr. Shao qualifies as an “audit
committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K and meets the financial sophistication requirements of the
NASDAQ rules.
Compensation Committee
The Compensation Committee will be responsible for, among other matters:
● reviewing and approving, or recommending to the board of directors to approve the compensation of our CEO and other executive officers and
directors;
● reviewing key employee compensation goals, policies, plans and programs;
● administering incentive and equity-based compensation;
● reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and
● appointing and overseeing any compensation consultants or advisors.
Our Compensation Committee consists of Kathryn Amooi, Kewei Huang and Jin He Shao, with Mr. Huang serving as chair of the Compensation
Committee. Our board has affirmatively determined that each of the members of the Compensation Committee meets the definition of “independent director”
for purposes of serving on Compensation Committee under NASDAQ rules.
Nominating Committee
The Nominating Committee will be responsible for, among other matters:
● selecting or recommending for selection candidates for directorships;
● evaluating the independence of directors and director nominees;
● reviewing and making recommendations regarding the structure and composition of our board and the board committees;
● developing and recommending to the board corporate governance principles and practices;
● reviewing and monitoring the Company’s Code of Business Conduct and Ethics; and
● overseeing the evaluation of the Company’s management
Our Nominating Committee consists of consists of Kathryn Amooi, Kewei Huang and Jin He Shao, with Ms. Amooi serving as chair of the
Nominating Committee. Our board has affirmatively determined that each of the members of the Nominating Committee meets the definition of “independent
director” for purposes of serving on a Nominating Committee under NASDAQ rules.
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Duties of Directors
Under Cayman Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a
duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to
us, our directors must ensure compliance with our memorandum and articles of association. 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 mortgages, charges or other encumbrances of the company.
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is
interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we
have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of
the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as
interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special
notice relating to any particular transaction.
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or
prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or
committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The
compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise
all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture
stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
A director is not required to hold shares as a qualification to office.
D.
Employees
The table below provides information as to the total number of employees at the end of the last three fiscal years. We have no contracts or collective
bargaining agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our employees to
be good.
Number of Employees
E.
Share Ownership
See Item 7 below.
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2016
2017
2018
1,055
1,248
1,655
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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major shareholders
The following table sets forth certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially
own more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive officers, and all directors
and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares
indicated. Our major shareholders do not have different voting rights than any other holder of our shares.
We have determined beneficial ownership in accordance with the rules of the SEC. Under such rules, beneficial ownership includes any shares over
which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to subscribe for within 60
days of September 18, 2018 through the exercise of any warrants or other rights. Except as indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named in the table below have sole voting and investment power or the power to receive the
economic benefit with respect to all common shares that they beneficially own, subject to applicable community property laws. None of the stockholders
listed in the table are a broker-dealer or an affiliate of a broker dealer. None of the stockholders listed in the table are located in the United States and none of
the common shares held by them are located in the United States. Applicable percentage ownership is based on 13,813,821 common shares outstanding as of
September 18, 2018. Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o CLPS Incorporation, c/o 2nd Floor,
Building 18, Shanghai Pudong Software Park, 498 Guoshoujing Road, Pudong, Shanghai 201203, People’s Republic of China.
Name of Beneficial Owner
Xiao Feng Yang (2)(7)
Raymond Ming Hui Lin (3)(6)(7)
Tian van Acken (4)(6)
Jin He Shao (5)(7)
Kewei Huang (5)(7)
Kathryn Amooi (5)(7)
All directors and executive officers as a group (6 persons)
Qinrui Ltd. (2)
Qinhui Ltd. (3)
5% or greater beneficial owners as a group
Common
Shares
Ownership%
(1)
5,047,607
5,073,604
73,607
1,000
1,000
1,000
36.54%
36.73%
*
*
*
*
10,197,818
73.82%
4,974,000
4,999,996
36.01%
36.20%
10,121,211
73.27%
Less than 1%.
*
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares
or the power to receive the economic benefit of the common shares.
(2) A British Virgin Islands corporation with the mailing address of c/o Vistra Corporate Services Centre, Wickham’s Cay II, Road Town, Tortola, VG 1110,
British Virgin Islands, with Xiao Feng Yang as its sole shareholder. As such, Mr. Yang is deemed to be the owner of all shares of the Company held by
this entity. Also includes the vested portion of the restricted stock granted dated as of July 12, 2018. The total grant of 220,823 common shares vests in
three equal installments, with the first installment vesting upon grant, and the second and third – on the first and second anniversary of the grant.
(3) A British Virgin Islands corporation with the mailing address of c/o Vistra Corporate Services Centre, Wickham’s Cay II, Road Town, Tortola, VG 1110,
British Virgin Islands, with Raymond Ming Hui Lin as its sole shareholder. As such, Mr. Lin is deemed to be the owner of all shares of the Company held
by this entity. Also includes the vested portion of the restricted stock granted dated as of July 12, 2018. The total grant of 220,823 common shares vests
in three equal installments, with the first installment vesting upon grant, and the second and third – on the first and second anniversary of the grant.
(4) Represents vested portion of the restricted stock granted dated as of July 12, 2018. The total grant of 220,823 common shares vests in three equal
installments, with the first installment vesting upon grant, and the second and third – on the first and second anniversary of the grant.
(5) Represents vested portion of the restricted stock granted dated as of July 12, 2018. The total grant of 3,000 common shares vests in three equal
installments, with the first installment vesting upon grant, and the second and third – on the first and second anniversary of the grant.
(6) Executive officer.
(7) Director.
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As of September 18, 2018, there were 27 holders of record entered in our share register, of which no holders were U.S. residents. The number of
individual holders of record is based exclusively upon our share register and does not address whether a share or shares may be held by the holder of record
on behalf of more than one person or institution who may be deemed to be the beneficial owner of a share or shares in our company. To our knowledge, no
other shareholder beneficially owns more than 5% of our shares. Our company is not owned or controlled directly or indirectly by any government or by any
corporation or by any other natural or legal person severally or jointly. Our major shareholders do not have any special voting rights.
B.
Related Party Transactions
The following is a description of transactions since July 1, 2014, in which the amount involved in the transaction exceeded or will exceed the lesser
of $120,000 or one percent of the average of our total assets as at the year-end for the last two completed fiscal years ended June 30, 2018 and 2017, and to
which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or person
sharing the household with, any of these individuals, had or will have a direct or indirect material interest.
Reorganization agreement with our shareholders
On November 2, 2017, the controlling shareholders transferred their 100% ownership interest in CLPS Shanghai to CLPS QC and Qiner, which are
100% owned by Qinheng and CLPS. On October 31, 2017, the controlling shareholders transferred 100% of their equity interests in Qiner to CLPS. The
considerations for these transfers are at a nominal amount.
Other related party transactions:
The balances due to and due from related parties were as follows:
Due from related parties:
Non-controlling shareholder of CLPS Beijing before acquisition of the remaining 30% equity on June 27, 2018
Non-controlling interest shareholder of Judge China
Total
Due to related parties
Shanghai Qisheng Co., Ltd (“Qisheng”), controlled by the Chairman of the Company
Non-controlling shareholder of JQ
Mr. Raymond Ming Hui Lin, CEO of the Company (i)
Total
As of June 30,
2018
2017
- $
131,321
131,321 $
14,751
103,255
118,006
- $
45,615
162,727
208,342 $
7,080
-
1,722,711
1,729,791
$
$
$
$
(i) Due to related parties mainly represents the unpaid bonus, dividends, wages and other benefit to the Company’s CEO.
Effective on December 9, 2017, the Board appointed Mr. Xiao Feng Yang as the Company’s Chairman and President, Mr. Raymond Ming Hui Lin as the
Company’s chief executive officer (“CEO”) and director and Ms. Tian van Acken as the Company’s chief financial officer (“CFO”). Their employment
terms are five years each starting on December 9, 2017. Mr. Xiao Feng Yang, Mr. Raymond Ming Hui Lin and Ms. Tian van Acken’s basic annual
compensation was approximately $94,100, $71,400 and $93,010, respectively, with annual bonuses to be determined based on the sole direction of the
Compensation Committee of the Board of Directors in accordance with criteria established by the Compensation Committee of the Board.
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On May 17, 2017, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company
to borrow up to approximately $753,100 (RMB 5,000,000) during the period from May 17, 2017 to May 16, 2018. The CMB Credit Facility is
guaranteed by the CEO and Chairman and President of the Company as joint guarantors. In September, 2017, the Company borrowed the full credit
amount (RMB 5,000,000) and the loans were repaid by May 2018. The credit facility was renewed on June 22, 2018, and the credit line was up to
$1,543,115 (RMB 10,000,000).
On January 3, 2018, the Company entered into an additional credit facility with China Merchants Bank which permits the Company to borrow up to
$1,111,712 (RMB 7,000,000). The Company borrowed $1,111,712 (RMB 7,000,000) with an interest rate at 5.655% per annum on February 9, 2018 and
repaid the loan on July 2, 2018.
In fiscal 2018, the Company borrowed $4,152,377 (RMB 27,000,000) from CMB Credit Facility. As of June 30, 2018, the Company had a balance of
$1,813,483 (RMB 12,000,000) with China Merchants Bank. These loans were repaid in July and August 2018 respectively.
On June 22, 2018, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company
to borrow up to approximately $1,543,115 (RMB 10,000,000) during the period from July 11, 2018 to July 10, 2019. The CMB Credit Facility is
guaranteed by the CEO, the wife of the CEO, Chairman, and the wife of the Chairman of the Company and Shanghai Small and Medium-sized
Enterprises Policy Financing Guarantee Fund Management Centre as joint guarantors.
C.
Interests of Experts and Counsel
Not required.
ITEM 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information.
See Item 18 for our audited consolidated financial statements.
Legal Proceedings
We are currently not involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Dividend Policy
The holders of shares of our common shares are entitled to dividends out of funds legally available when and as declared by our board of directors.
Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to
pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our
operating subsidiary and other holdings and investments. In addition, the operating companies may, from time to time, be subject to restrictions on their
ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common shares are
entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
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.
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ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
The following table sets forth, for the calendar quarters indicated and through June 30, 2018, the quarterly high and low sale prices for our shares, as
reported on NASDAQ Stock Market. The closing price for the Company’s securities on September 20, 2018 was $13.18 per share.
Monthly Highs and Lows
June 2018
July 2018
August 2018
B.
Plan of Distribution
Not Applicable.
C.
Markets
Shares
High
Low
$
$
$
17.35 $
15.98 $
15.6 $
4.7
10.13
12.2
Our shares have been listed on the NASDAQ Stock Market under the symbols CLPS since May 24, 2018 following the completion of our initial
public offering.
D.
Selling Shareholders
Not Applicable.
E.
Dilution
Not Applicable.
F.
Expenses of the Issue
Not Applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not Applicable.
B.
Memorandum and Articles of Association
The information required by Item 10.B of Form 20-F is included in the section titled “Description of Share Capital” in our Registration Statement on
Form F-1 initially filed with the SEC on March 27, 2018, and subsequently updated (File No.: 333-223956), which section is incorporated herein by
reference.
C.
Material Contracts
The information required by Item 10.B of Form 20-F is included in the sections titled “Our Business,” “Directors and Executive Officers,” “Related
Party Transactions,” and “Underwriting” in in our Registration Statement on Form F-1 initially filed with the SEC on March 27, 2018, and subsequently
updated (File No.: 333-223956), which section is incorporated herein by reference.
D.
Exchange controls
Under Cayman Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
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E.
Taxation
The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our common shares is
based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. This summary does not
deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation
in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company levied by the Government of the Cayman Islands
except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is
not party to any double tax treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
Material PRC Income Tax Considerations
Under the new EIT Law and the Implementing Rules, an enterprise established outside of the PRC with “de facto management bodies” within the
PRC is considered as a resident enterprise and will be subject to a PRC income tax on its global income. According to the Implementing Rules, “de facto
management bodies” refer to “establishments that carry out substantial and overall management and control over the manufacturing and business operations,
personnel, accounting, properties, etc. of an enterprise.” Accordingly, our holding company may be considered a resident enterprise and may therefore be
subject to a PRC income tax on our global income. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-
Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22,
2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated
enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises and not those invested in by
individuals or foreign enterprises, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how
the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled
by PRC enterprises or controlled by or invested in by individuals or foreign enterprises. If we are considered a resident enterprise and earn income other than
dividends from our PRC subsidiary, such PRC income tax on our global income could significantly increase our tax burden and materially and adversely
affect our cash flow and profitability.
If the PRC tax authorities determine that CLPS Incorporation or any of our subsidiaries outside of China is a “resident enterprise” for PRC enterprise
income tax purposes, a number of PRC tax consequences could follow. First, CLPS Incorporation or any of our subsidiaries outside of China may be subject
to enterprise income tax at a rate of 25% on our worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT
Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax.
If CLPS Incorporation or any of our subsidiaries outside of China were treated as a PRC “non-resident enterprise” under the EIT Law, then
dividends that it receives from its PRC operating subsidiary (assuming such dividends were considered sourced within the PRC) (1) may be subject to a 5%
PRC withholding tax, if the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “PRC - Hong Kong Tax Treaty”) were applicable, or (2) if such treaty
does not apply (i.e., because the PRC tax authorities may deem the Hong Kong enterprise to be a conduit not entitled to treaty benefits), may be subject to a
10% PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to its shareholders.
Finally, the new “resident enterprise” classification could result in a situation in which a 10% PRC tax is imposed on dividends we pay to its non-
PRC shareholders that are not PRC tax “resident enterprises” and gains derived by them from transferring our common shares or warrants, if such income is
considered PRC-sourced income by the relevant PRC authorities. In such event, we may be required to withhold the 10% PRC tax on any dividends paid to
its non-PRC resident shareholders. Our non-PRC resident shareholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from
the sale or transfer of common shares or warrants in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to
such gain. If any such PRC taxes apply, a non-PRC resident shareholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty
and or a foreign tax credit against such shareholder’s domestic income tax liability (subject to applicable conditions and limitations). Prospective investors
should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available
foreign tax credits.
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General
The following is a summary of the material U.S. federal income tax consequences of owning and disposing of our ordinary shares. The discussion
below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our shares that is for U.S. federal income tax
purposes:
● an individual citizen or resident of the United States;
● a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of Columbia;
● an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
● a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control
all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person.
If a beneficial owner of our shares is not described as a U.S. Holder in one of the four bullet points above and is not an entity treated as a partnership
or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.”
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing Treasury regulations
promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to us or to any particular holder of our shares based
on such holder’s individual circumstances. In particular, this discussion considers only holders that own our shares as capital assets within the meaning of
Section 1221 of the Code. This discussion also does not address the potential application of the alternative minimum tax or the U.S. federal income tax
consequences to holders that are subject to special rules, including:
● financial institutions or financial services entities;
● broker-dealers;
● taxpayers who have elected mark-to-market accounting;
● tax-exempt entities;
● governments or agencies or instrumentalities thereof;
● insurance companies;
● regulated investment companies;
● real estate investment trusts;
● certain expatriates or former long-term residents of the United States;
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● persons that actually or constructively own 5% or more of our voting shares;
● persons that acquired our shares pursuant to the exercise of employee stock options, in connection with employee stock incentive plans or
otherwise as compensation;
● persons that hold our shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or
● persons whose functional currency is not the U.S. dollar.
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws.
Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our securities through such
entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our shares, the U.S. federal
income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also
assumes that any distribution made (or deemed made) in respect of our shares and any consideration received (or deemed received) by a holder in connection
with the sale or other disposition of such shares will be in U.S. dollars.
We have not sought, and will not seek, a ruling from the Internal Revenue Service (or “IRS”), or an opinion of counsel as to any U.S. federal income
tax consequence described herein. The IRS may disagree with one or more aspects of the discussion herein, and its determination may be upheld by a court.
Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the
statements in this discussion.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER
OF OUR SECURITIES MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH HOLDER OF OUR SECURITIES IS URGED TO
CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S.
FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Tax Consequences to U.S. Holders of Common Shares
Taxation of Distributions Paid on Common Shares
Subject to the passive foreign investment company (or “PFIC”), rules discussed below, a U.S. Holder generally will be required to include in gross
income as ordinary income the amount of any cash dividend paid on our common shares. A cash distribution on such shares will be treated as a dividend for
U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal
income tax purposes). Any distributions in excess of such earnings and profits generally will be applied against and reduce the U.S. Holder’s basis in its
common shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such common shares.
With respect to corporate U.S. Holders, dividends on our shares will not be eligible for the dividends-received deduction generally allowed to
domestic corporations in respect of dividends received from other domestic corporations. With respect to non-corporate U.S. Holders, dividends on our shares
may be taxed at the lower applicable long-term capital gains rate provided that (1) our common shares are readily tradable on an established securities market
in the United States or, in the event we are deemed to be a Chinese “resident enterprise” under the EIT Law, we are eligible for the benefits of the Agreement
between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and
the Prevention of Tax Evasion with Respect to Taxes on Income, or the “U.S.-PRC Tax Treaty,” (2) we are not a PFIC, as discussed below, for either the
taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under published IRS
authority, shares are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States only if they are
listed on certain exchanges, which presently include the Nasdaq Stock Market. U.S. Holders should consult their own tax advisors regarding the tax treatment
of any dividends paid with respect to our common shares.
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If PRC taxes apply to dividends paid to a U.S. Holder on our common shares, such U.S. Holder may be entitled to a reduced rate of PRC tax under
the U.S-PRC Tax Treaty. In addition, such PRC taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability
(subject to certain limitations). U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
Taxation on the Disposition of Common Shares
Upon a sale or other taxable disposition of our common shares, and subject to the PFIC rules discussed below, a U.S. Holder should recognize
capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the common shares. Capital
gains recognized by U.S. Holders generally are subject to U.S. federal income tax at the same rate as ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum rate of 20%. Capital gain or loss will constitute
long-term capital gain or loss if the U.S. Holder’s holding period for the common shares exceeds one year. The deductibility of capital losses is subject to
various limitations. If PRC taxes would otherwise apply to any gain from the disposition of our common shares by a U.S. Holder, such U.S. Holder may be
entitled to a reduction in or elimination of such taxes under the U.S.-PRC Tax Treaty. Any PRC taxes that are paid by a U.S. Holder with respect to such gain
may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations that could reduce or
eliminate the available tax credit). U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for
the benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro
rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively, a
foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by
value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain
rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. Based on our current composition
and assets, we do not expect to be treated as a PFIC under the current PFIC rules. Our PFIC status, however, will not be determinable until after the end of
each taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any future taxable year. If we are
determined to be a PFIC and a U.S. Holder did not make either a timely qualified electing fund (or “QEF”), election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) common shares, or a mark-to-market election, as described below, such holder generally will be subject
to special rules with respect to:
● any gain recognized by the U.S. Holder on the sale or other disposition of its common shares; and
● any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that
are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the common shares during the three
preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the common shares).
Under these rules,
● the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the common shares;
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● the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the
period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary income;
● the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest
tax rate in effect for that year and applicable to the U.S. Holder; and
● the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year of the U.S.
Holder.
In general, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our common shares by making a timely QEF election
to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current
basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends. There can be no assurance,
however, that we will pay current dividends or make other distributions sufficient for a U.S. Holder who makes a QEF election to satisfy the tax liability
attributable to income inclusions under the QEF rules, and the U.S. Holder may have to pay the resulting tax from its other assets. A U.S. Holder may make a
separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an
interest charge.
The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder
generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund), to a timely filed U.S. federal income tax return for the tax year to which the election relates. Retroactive QEF elections generally
may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS. In order to comply
with the requirements of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual information statement, in
order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will have timely knowledge of our status as a
PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election with respect to our common shares, and the special tax and interest charge rules do not apply to such
shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares), any gain
recognized on the appreciation of our common shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above,
U.S. Holders of a QEF are currently taxed on their pro rata shares of a PFIC’s earnings and profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend to those U.S. Holders who
made a QEF election. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts
distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S.
Holder is treated under the applicable attribution rules as owning shares in a QEF.
Although a determination as to our PFIC status will be made annually, an initial determination that our company is a PFIC will generally apply for
subsequent years to a U.S. Holder who held common shares while we were a PFIC, whether or not we meet the test for PFIC status in those years. A U.S.
Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) our common
shares, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not
be subject to the QEF inclusion regime with respect to such shares for any taxable year of ours that ends within or with a taxable year of the U.S. Holder and
in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and the U.S. Holder
holds (or is deemed to hold) our common shares, the PFIC rules discussed above will continue to apply to such shares unless the holder makes a purging
election, and pays the tax and interest charge with respect to the gain inherent in such shares attributable to the pre-QEF election period.
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Alternatively, if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder may make
a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year
of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) shares in us and for which we are determined to be a PFIC, such holder generally
will not be subject to the PFIC rules described above in respect to its common shares. Instead, in general, the U.S. Holder will include as ordinary income
each year the excess, if any, of the fair market value of its common shares at the end of its taxable year over the adjusted basis in its common shares. The U.S.
Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its common shares over the fair market value of its
common shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market
election). The U.S. Holder’s basis in its common shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale
or other taxable disposition of the common shares will be treated as ordinary income.
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the SEC, or
on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market
value. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our
common shares under their particular circumstances.
If we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of
the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution
from, or dispose of all or part of our interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder
no later than 90 days after the request the information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC. However,
there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier PFIC to provide the
required information. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs. If a U.S. Holder owns (or is
deemed to own) shares during any year in a PFIC, such holder may have to file an IRS Form 8621 (whether or not a QEF election or mark-to-market election
is made). The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to
those described above. Accordingly, U.S. Holders of our common shares should consult their own tax advisors concerning the application of the PFIC rules to
our common shares under their particular circumstances.
Tax Consequences to Non-U.S. Holders of Common Shares
Dividends paid to a Non-U.S. Holder in respect to its common shares generally will not be subject to U.S. federal income tax, unless the dividends
are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax
treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our
common shares, unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income
tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case,
such gain from United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by
an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in the same
manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an
additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes should apply to distributions made on our common shares within the United
States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of our common shares by a non-corporate U.S. Holder to or
through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to
information reporting in limited circumstances. In addition, backup withholding of United States federal income tax, currently at a rate of 28%, generally will
apply to dividends paid on our common shares to a non-corporate U.S. Holder and the proceeds from sales and other dispositions of shares by a non-corporate
U.S. Holder, in each case who (a) fails to provide an accurate taxpayer identification number; (b) is notified by the IRS that backup withholding is required;
or (c) in certain circumstances, fails to comply with applicable certification requirements. A Non-U.S. Holder generally may eliminate the requirement for
information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS
Form W-8 or by otherwise establishing an exemption.
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Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a
Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to
the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular circumstances.
F.
Dividends and paying agents
Not required.
G.
Statement by experts
Not required.
H.
Documents on display
Documents concerning us that are referred to in this document may be inspected at c/o 2nd Floor, Building 18, Shanghai Pudong Software Park, 498
Guoshoujing Road, Pudong, Shanghai 201203, People’s Republic of China. In addition, we file annual reports and other information with the Securities and
Exchange Commission. We file annual reports on Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are
exempt from the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider
short-swing disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may
be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or
any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms and you can request copies of the documents upon payment of a duplicating fee, by writing to the
Commission. In addition, the Commission maintains a web site that contains reports and other information regarding registrants (including us) that file
electronically with the Commission which can be assessed at http://www.sec.gov.
I.
Subsidiary Information
Not required.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest income generated by excess cash, which is mostly held in interest-bearing bank
deposits. While interest-earning instruments carry a degree of interest rate risk, we have not been exposed, nor do we anticipate being exposed, to material
risks due to changes in market interest rates.
Foreign Currency Risk
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and
liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by
law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other
than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain
supporting documentation in order to affect the remittance.
Our functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB depreciated by 2.0% in fiscal year 2017
and appreciated by 2.4 in fiscal 2018. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the
RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S.
dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are
denominated in RMB.
To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes,
appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if
the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other
business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required.
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ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has been no default of any indebtedness nor is there any arrearage in the payment of dividends.
PART II
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of June 30, 2018. Based on that evaluation, management, including our Chief
Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures as of June 30, 2018 were not effective as discussed
below. Accordingly, our management cannot provide reasonable assurance of achieving the desired control objectives. We are in the process of reviewing
and, where necessary, modifying controls and procedures throughout the Company.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms
and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
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 defined in Rules 13a-15(f) and
15d-15(f) under the Securities and Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of,
our Chief Executive Officer and Chief Financial Officer and effected by our management and other personnel to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that pertain to the maintenance
of records that in reasonable detail accurately reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of
America. and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with our policies and procedures may deteriorate.
In connection with our audited financial statements for the year ended June 30, 2018, our independent registered public accounting firm identified
material weaknesses in the design and operation of our internal controls. As defined in the standards established by the Public Company Accounting
Oversight Board of the United States, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected
on a timely basis. As previously disclosed, the specific material weakness related to the Company’s lack of controls and procedures in place to monitor,
capture, report and disclose certain subsequent events. In order to address the matter as it was identified, we immediately designated a “point” person within
the Company’s accounting and finance reporting structure to whom all information relating to material transactions after the balance sheet closing date was
and continues to be reported to ensure that such information is then properly and timely disclosed in the Company’s financial statements. We determined that
the Company needed to continue to strengthen its accounting staff and to enhance its internal controls function, which monitoring and remedial steps will be
carried out by the Company during our fiscal year 2019.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has concluded that our internal
control over financial reporting was not effective as of June 30, 2018.
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All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention
or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. We cannot be certain that these measures will successfully remediate the material weakness or that
other material weaknesses will not be discovered in the future. If our efforts are not successful or other material weaknesses or control deficiencies occur in
the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results
to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline. In addition, it
could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally,
ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential
delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial
statements from prior periods. Because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent
registered public accountants as to our internal control over financial reporting for the foreseeable future.
Changes in Internal Controls over Financial Reporting
Except as discussed above, during the year ended June 30, 2018, there were no changes in the company’s internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect our company’s internal control over financial reporting. It should be noted that while
our management believes that our disclosure controls and procedures provide a reasonable level of assurance; our management does not expect that our
disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
ITEM 16.
RESERVED
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT.
Our Board of Directors has determined that Jin He Shao is an audit committee financial expert as that term is defined in Item 16A(b) of Form 20-F,
and “independent” as that term is defined in the NASDAQ listing standards.
ITEM 16B.
CODE OF ETHICS.
Our Board has adopted a code of business conduct and ethics that applies to our directors, officers and employees. A copy of this code is available on
our website. We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any waivers of the Code of Business
Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing
similar functions.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table represents the approximate aggregate fees for services rendered by Friedman LLP for the periods indicated:
Audit Fees
Audit Related Fees
Tax Fees
All Other Fees
Total Fees
June 30,
2016
June 30,
2018
June 30,
2017
USD’000 USD’000 USD’000
152
$
-
-
-
152
152 $
25
-
-
177 $
170 $
125
-
295 $
$
Our Audit Committee evaluated and approved in advance the scope and cost of the engagement of an auditor before the auditor rendered its audit
and non-audit services.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
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ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
No purchase of our securities were made by us or our affiliates in 2018.
ITEM 16F.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
None.
ITEM 16G.
CORPORATE GOVERNANCE
None.
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 financial statements are filed as part of this Annual Report beginning on page F-1.
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CLPS INCORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2018, 2017 AND 2016
F-1
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Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CLPS INCORPORATION
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F-2
Page
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TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CLPS Incorporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CLPS Incorporation and Subsidiaries (collectively, the “Company”) as of June 30, 2018
and 2017, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the years
in the three-year period ended June 30, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of CLPS Incorporation and Subsidiaries as of June 30, 2018
and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2018, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 audit to obtain reasonable
assurance about whether the 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 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
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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2017.
New York, New York
September 25, 2018
F-3
TABLE OF CONTENTS
CLPS INCORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Amount due from underwriter on the over-allotment
Prepayments, deposits and other assets, net
Prepaid income tax
Amount due from related parties
Total Current Assets
Property and equipment, net
Intangible assets, net
Goodwill
Escrow receivable
Prepayments, deposits and other assets, net
Long-term investment – equity method
Long-term investment – cost method
Deferred tax assets, net
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term bank loans
Accounts payable and other current liabilities
Tax payables
Deferred revenue
Customer deposits
Salaries and benefits payable
Amounts due to related parties
Total Current Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common share, $0.0001 par value; 100,000,000 shares authorized; 13,590,000 shares issued and outstanding as of June
30, 2018 and 11,290,000 shares issued and outstanding as of June 30, 2017*
Additional paid-in capital
Statuary reserves
Accumulated deficit
Accumulated other comprehensive loss
Total CLPS Incorporation’s Shareholders’ Equity
Non-controlling Interests
Total Shareholders’ Equity
$
$
$
As of June 30,
2018
2017
9,742,886 $
16,267,835
1,472,592
1,231,217
206,361
131,321
29,052,212
333,897
260,059
173,560
200,000
119,372
142,590
151,124
512,097
30,944,911 $
4,814,568
6,644,774
-
578,391
169,557
118,006
12,325,296
273,347
305,464
195,080
-
123,783
-
-
298,953
13,521,923
2,553,989 $
1,454,770
904,850
125,080
200,836
7,341,688
208,342
12,789,555
-
239,165
640,864
110,631
97,740
5,392,434
1,729,791
8,210,625
1,359
17,285,543
1,118,467
(524,618)
(401,677)
1,129
7,120,943
680,671
(2,521,285)
(447,270)
17,479,074
4,834,188
676,282
477,110
18,155,356
5,311,298
Total Liabilities and Shareholders’ Equity
$
30,944,911 $
13,521,923
* The shares and per share data are presented on a retroactive basis to reflect the nominal share issuance.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CLPS INCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
TABLE OF CONTENTS
Revenues
Less: Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Income from operations
Subsidies and other income
Other expense
For the years ended June 30,
2017
2018
2016
$
48,938,593 $
(31,277,255)
17,661,338
31,361,976 $
(18,669,812)
12,692,164
29,024,178
(17,463,416)
11,560,762
2,225,702
7,837,873
5,871,622
15,935,197
1,726,141
960,784
(84,155)
1,206,493
4,232,788
5,647,790
11,087,071
1,605,093
508,187
(10,469)
2,602,770
(112,128)
2,714,898
280,435
2,434,463 $
2,102,811
(118,546)
2,221,357
173,912
2,047,445 $
413,016
5,579,058
4,955,037
10,947,111
613,651
1,446,408
(5,935)
2,054,124
269,153
1,784,971
(41,141)
1,826,112
55,793 $
10,200
45,593 $
(93,177) $
1,732
(94,909) $
(387,100)
(1,471)
(385,629)
2,480,056 $
290,635
2,770,691 $
1,952,536 $
175,644
2,128,180 $
1,440,483
(42,612)
1,397,871
0.21 $
11,517,123
0.21 $
11,636,367
0.18 $
11,290,000
0.18 $
11,290,000
0.16
11,290,000
0.16
11,290,000
$
$
$
$
$
$
$
Income before income tax
(Benefit) provision for income taxes
Net income
Less: Net income (loss) attributable to non-controlling interests
Net income attributable to CLPS Incorporation’s shareholders
Other comprehensive (loss) income
Foreign currency translation gain (loss)
Less: foreign currency translation gain (loss) attributable to Non-controlling interest
Other comprehensive gain (loss) attributable to CLPS Incorporation’s shareholders
Comprehensive income
CLPS Incorporation shareholders
Non-controlling interests
Basic earnings per common share*
Weighted average number of share outstanding – basic
Diluted earnings per common share
Weighted average number of share outstanding – diluted
* The shares and per share data are presented on a retroactive basis to reflect the nominal share issuance.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TABLE OF CONTENTS
CLPS INCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2018, 2017 AND 2016
Additional
Retained
Earnings
Paid-in
Capital
Statutory (Accumulated
Surplus
Deficit)
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
interest
1,129 $
2,696,377 $
540,967 $
2,639,885 $
33,268 $
1,515 $
Common Share
Shares*
11,290,000 $
Amount*
Total
5,913,141
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,377,813
-
-
1,051,952
(551,684)
(500,268)
-
(5,199)
-
-
-
-
-
-
-
-
(6,521,233)
1,826,112
-
429,439
(429,439)
-
-
-
-
-
-
-
-
3,377,813
-
-
46,919
46,919
(1,788)
-
(41,141)
(6,987)
(6,521,233)
1,784,971
-
-
-
-
-
(385,629)
(1,471)
(387,100)
11,290,000 $
1,129 $
7,120,943 $
418,722 $
(2,984,943) $
(352,361) $
4,034 $
4,207,524
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,321,838)
2,047,445
261,949
(261,949)
-
-
-
-
-
6,438
6,438
290,994
-
173,912
290,994
(1,321,838)
2,221,357
-
-
(94,909)
1,732
(93,177)
11,290,000 $
1,129 $
7,120,943 $
680,671 $
(2,521,285) $
(447,270) $
477,110 $
5,311,298
2,000,000
200
9,549,319
300,000
30
1,472,562
(362,925)
-
-
-
-
-
-
-
-
-
-
-
(494,356)
612,223
(612,223)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,434,463
437,796
(437,796)
-
-
-
-
-
-
-
-
9,549,519
-
1,472,592
(362,925)
(91,533)
(585,889)
-
612,223
(612,223)
70
280,435
70
2,714,898
-
-
-
-
45,593
10,200
55,793
13,590,000 $
1,359 $
17,285,543 $
1,118,467 $
(524,618) $
(401,677) $
676,282 $
18,155,356
Balance at July 1, 2015
Shareholder’s
contribution
Recapitalization of
Shanghai CLPS
Non-controlling
shareholders’
contribution
Repurchase of Non-
controlling interest
Dividends declared
Net income for the year
Appropriation of
statutory reserve
Foreign currency
translation
adjustments
Balance at June 30,
2016
Non-controlling
shareholders’
contribution
Non-controlling
interest through
acquisition
Dividend declared
Net income for the year
Appropriation of
statutory reserve
Foreign currency
translation
adjustments
Balance at
June 30, 2017
Net Proceeds from
IPO, net of issuance
costs
Net Proceeds from
over- allotment, net
of issuance costs
IPO issuance costs
Purchase of
subsidiaries’ shares
from non-controlling
interests
Public offering
warrants
Warrant issued in
connection with IPO
NCI shareholder’s
contribution
Net income for the year
Appropriation of
statutory reserve
Foreign currency
translation
adjustments
Balance at June 30,
2018
* The shares and per share data are presented on a retroactive basis to reflect the nominal share issuance.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TABLE OF CONTENTS
CLPS INCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
For the years ended June 30,
2017
2018
2016
$
2,714,898 $
2,221,357 $
1,784,971
Depreciation and amortization
Deferred tax benefit
Loss from equity investment
Provision for doubtful accounts
Loss from disposal of property and equipment
Changes in assets and liabilities
Accounts receivable
Prepayment, deposits and other assets
Prepaid income tax
Accounts payable and other current liabilities
Taxes payable
Deferred revenue
Customer deposits
Salaries and benefits payable
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment
Payment for business acquisition
Cash acquired from acquisition
Disposition (acquisition) of long term investment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term bank loans
Repayment of short-term bank loans
Capital contribution by shareholders
Capital contributions from IPO and over-allotment, net
Escrow receivable
Due from underwriter on the over-allotment
Cash paid for issuance cost of IPO
Non-controlling interest shareholder’s contribution
Purchase of non-controlling interest
Restricted cash
Amounts due from related parties
Amounts due to related parties
Dividend paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash and cash equivalents, at beginning of year
Cash, cash equivalents at the end of the year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax paid
Cash paid for interest
Non-Cash Transactions of Investing and Financing Activities
Dividend payable included in due to related parties
Payable for business acquisition
Payable for investment – cost method
Dividend contributed to capital
Capital contribution from non-controlling shareholders
Prepaid for issuance costs of IPO in the previous year
206,169
(208,051)
8,684
96,904
1,957
(9,753,685)
(613,277)
(33,225)
592,477
251,627
11,945
102,077
1,848,890
(4,772,610)
(231,226)
(107,654)
-
(153,792)
(492,672)
5,659,536
(3,060,456)
-
11,022,111
(200,000)
(1,472,592)
(283,092)
-
-
-
(12,941)
(936,338)
(612,988)
10,103,240
143,626
(221,114)
-
86,463
-
(2,410,155)
(357,761)
(168,825)
52,574
219,672
110,153
48,892
899,462
624,344
(62,518)
(349,617)
266,856
44,061
(101,218)
-
-
-
-
-
-
-
6,438
-
-
-
(102,754)
(736,436)
(832,752)
54,105
(96,713)
-
5,223
-
1,053,207
417,190
-
27,152
208,772
-
51,194
957,167
4,462,268
(327,768)
-
-
(46,580)
(374,348)
-
-
2,135,673
-
-
-
-
46,919
(6,987)
155,267
2,491,794
77,590
(5,279,093)
(378,837)
90,360
(153,002)
(227,771)
4,928,318
4,814,568 $
(462,628)
5,277,196 $
3,481,312
1,795,884
9,742,886 $
4,814,568 $
5,277,196
325,609 $
74,754 $
335,143 $
- $
285,019
-
- $
584,040 $
151,539
- $
70 $
79,833 $
585,402 $
128,371 $
-
- $
- $
- $
-
-
-
1,242,140
-
-
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
TABLE OF CONTENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLPS Incorporation (“CLPS” or the “Company”), is a company that was established under the laws of the Cayman Islands on May 11, 2017 as a holding
company. The Company, through its subsidiaries, designs, builds, and delivers IT services, solutions and product services. The Company customizes its
services to specific industries with customer service teams typically based on-site at the customer locations. The Company’s solutions enable its clients to
meet the changing demands in an increasingly global, internet-driven, and competitive marketplace. Mr. Xiao Feng Yang, the Company’s Chairman of the
Board and President, together with Mr. Raymond Ming Hui Lin, the Company’s Chief Executive Officer (“CEO”) are the controlling shareholders of the
Company (the “controlling shareholder”).
Reorganization
CLPS Incorporation (“CLPS” or the “Company”), is a company that was established under the laws of the Cayman Islands on May 11, 2017 as a holding
company. The Company, through its subsidiaries, designs, builds, and delivers IT services, solutions and product services. The Company customizes its
services to specific industries with customer service teams typically based on-site at the customer locations. The Company’s solutions enable its clients to
meet the changing demands of an increasingly global, Internet-driven, and competitive marketplace. Mr. Xiao Feng Yang, the Company’s Chairman and
President, together with Mr. Raymond Ming Hui Lin, the Company’s Chief Executive Officer (“CEO”) are the controlling shareholders of the Company (the
“Controlling shareholders”).
A reorganization of the legal structure was completed on November 2, 2017. The reorganization involved the incorporation of CLPS, a Cayman Islands
holding company; Qinheng Co., Limited (“Qinheng”) and Qiner Co., Limited (“Qiner”), two holding companies established in Hong Kong, and Shanghai
Qincheng Information Technology Co., Ltd (“CLPS QC” or “WOFE”) established in the People’s Republic of China (“PRC”); and the transfer of ChinaLink
Professional Service Co., Ltd (“CLPS Shanghai”) from the controlling shareholders to CLPS QC.
Prior to the reorganization, CLPS Shanghai’s equity interests were 100% controlled by the same group of the controlling shareholders of CLPS.
CLIVST and FDT-CL are subsidiaries of Qinheng. JQ Technology Co., Limited (“JQ”) and JIALIN Technology Limited (“JL”) are subsidiaries of Qiner
since October 17, 2017. CLPS Dalian Co., Ltd (“CLPS Dalian”), CLPS Ruicheng Co., Ltd (“CLPS RC”), CLPS Beijing Hengtong Co., Ltd (“CLPS
Beijing”), CLPS TECHNOLOGY (SINGAPORE) PTE.LTD (“CLPS SG”), CLPS TECHNOLOGY (AUSTRALIA) PTY LTD (“CLPS AU”), CLPS
Technology (Hong Kong) Co., Limited (“CLPS Hong Kong”), Judge (Shanghai) Co., Ltd (“Judge China”), Judge (Shanghai) Human Resource Co., Ltd
(“Judge HR”), CLPS Shenzhen Co., Ltd (“CLPS Shenzhen”) and CLPS Guangzhou Co., Ltd (“CLPS Guangzhou”) are all subsidiaries of CLPS Shanghai.
On November 2, 2017, the controlling shareholders transferred their 100% ownership interest in CLPS Shanghai to CLPS QC and Qiner, which are 100%
owned by Qinheng and CLPS. On October 31, 2017, the controlling shareholders transferred 100% of their equity interests in Qiner to CLPS. After the
reorganization, CLPS owns 100% equity interests of the entities mentioned above. On December 7, 2017, the Board of Directors approved an amendment of
the article association of CLPS and a nominal share issuance to the existing shareholders. As a result, the existing shareholders own the same percentage of
ownership in CLPS as their ownership interests in CLPS Shanghai prior to the reorganization.
Since the Company and its subsidiaries are effectively controlled by the same group of the shareholders before and after the reorganization, they are
considered under common control. The above mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its
subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning
of the first period presented in the consolidated financial statements.
New Developments
On October 17, 2017, the Company acquired a 55% equity interest in JQ, and its 100% owned subsidiary – JL in Taiwan for cash consideration of
approximately $0.07 million. As of the acquisition date, the assets of JQ were cash and other receivables and JQ and its subsidiary has no significant
operating activities since inception. The estimated fair value of the assets acquired and liabilities assumed at the acquisition date was approximately the
carrying value of the assets and liabilities based on the short-term nature of the assets acquired and liabilities assumed. The Company believes that this
investment could offer new opportunities for operational synergies in the related markets.
On June 5, 2018, the Company incorporated CLPS US to develop business in related areas.
On June 13, 2018, the Company purchased a 2.7% equity interest in Lihong in Shanghai for consideration of $0.15 million (RMB 1,000,000) to develop new
business. The consideration has not been paid for and is recorded as a liability as of June 30, 2018.
Prior to June 2018, the Company held a 70% equity interest of CLPS Beijing which primarily engages in software development. On June 27, 2018, Qiner
entered into a new share purchase agreement and purchased the remaining 30% equity interest of CLPS Beijing for consideration of $0.6 million, holding
100% of CLPS Beijing’s equity interest. The consideration was not paid for and was recorded as a liability by Qiner as of June 30, 2018. The consideration
was paid on July 5, 2018. Prior to June 2018, the remaining 30% equity interest of CLPS Beijing was recorded as a non-controlling interest on the balance
sheet. The Company engaged an independent valuation firm to assist management in assessing the enterprise value of CLPS Beijing. The enterprise value of
CLPS Beijing as of June 27, 2018 was $1.94 million based on the evaluation report.
F-8
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
New Developments (continued)
Details of the subsidiaries of the Company are set out below:
Name of Entity
CLPS Incorporation (“CLPS” or the
“Company”)
Qinheng Co., Limited (“Qinheng”)
Qiner Co., Limited (“Qiner”)
Shanghai Qincheng Information Technology
Co., Ltd (“CLPS QC” or “WOFE”)
ChinaLink Professional Service Co., Ltd
(“CLPS Shanghai”)
CLPS Dalian Co., Ltd (“CLPS Dalian”)
CLPS Ruicheng Co., Ltd (“CLPS RC”)
CLPS Beijing Hengtong Co., Ltd (“CLPS
Beijing”)
CLPS TECHNOLOGY (SINGAPORE)
PTE.LTD (“CLPS SG”)
CLPS TECHNOLOGY (AUSTRALIA) PTY
LTD (“CLPS AU”)
CLPS Technology (Hong Kong) Co., Limited
(“CLPS Hong Kong”)
Judge (Shanghai) Co., Ltd (“Judge China”)
Judge (Shanghai) Human Resource Co., Ltd
(“Judge HR”)
CLPS Shenzhen Co., Ltd (“CLPS
Shenzhen”)
CLPS Guangzhou Co., Ltd (“CLPS
Guangzhou”)
CLIVST Ltd. (“CLIVST”)
FDT-CL Financial Technology Services
Limited (“FDT-CL”)**
JQ Technology Co., Limited(“JQ”)
JIALIN Technology Limited (“JL”)
CLPS Technology (US) Ltd. (“CLPS US”)
Infogain Solutions PTE. Ltd. (“Infogain”) *
Date of
Incorporation/
acquisition
Incorporated on
May 11, 2017
Incorporated on
June 9, 2017
Incorporated on
April 21, 2017
Incorporated on
August 4, 2017
Incorporated on
August 30, 2005
Incorporated on
May 25, 2011
Incorporated on
June 26, 2013
Incorporated on
March 30, 2015
Incorporated
on August 18, 2015
Incorporated
on November 10,
2015
Incorporated on
January 7, 2016
Acquired on
November 9, 2016
Acquired on
November 9, 2016
Incorporated on
April 7, 2017
Incorporated on
September 27, 2017
Incorporated on
July 25, 2017
Incorporated on
October 24, 2017
Acquired on
October 17, 2017
Acquired on
October 17, 2017
Incorporated on
June 5, 2018
Acquired on
August 20, 2018
Place of
Incorporation
Cayman
Islands
Hong Kong,
China
Hong Kong,
China
Shanghai,
China
Shanghai,
China
Dalian, China
Shanghai,
China
Beijing, China
Singapore
Australia
% of Equity Ownership
Parent
100%
100%
100%
100%
100%
100%
70% owned by CLPS Shanghai and 30%
owned by Qiner
100%
100%
Hong Kong,
China
Shanghai,
China
Shanghai,
China
Shenzhen,
China
Guangzhou,
China
British Virgin
Islands
Hong Kong,
China
Hong Kong,
China
Taiwan
Delaware,
USA
Singapore
80% owned by CLPS Shanghai and 20%
owned by unrelated individual shareholders
60% owned by CLPS Shanghai and 40%
owned by an unrelated Company;
70% owned by Judge China and 30% owned
by an unrelated company
70% owned by CLPS Shanghai and 30%
owned by CLPS Hong Kong
100%
100%
52% owned by CLIVST, 48% owned by an
unrelated individual
55% owned by Qiner, 45% owned by an
unrelated individuals
100% owned by JQ
100% owned by Qiner
80% owned by CLPS SG, 20% owned by
unrelated individuals
Principal
Activities
Holding
Company
Holding
Company
Holding
Company
Holding
Company
Software
development
Software
development
Software
development
Software
development
Software
development
Software
development
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Consolidated
subsidiary
Software
development
Software
development
Software
development
Software
development
Software
development
Holding
Company
Software
development
Software
development
Software
development
Network
technology
Software
development
* Entities incorporated or acquired subsequent to June 30, 2018 are not included in the Company’s consolidated financial statements for the years ended June
30, 2018, 2017 and 2016.
** On July 20, 2018, the Company decided to close down FDT-CL.
F-9
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – 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 (“US GAAP”) and pursuant to the rules and requirements of the Securities Exchange Commission (“SEC”).
The accompanying consolidated financial statements include the financial statements of CLPS and its subsidiaries. All inter-company balances and
transactions have been eliminated upon consolidation. Results of subsidiaries and businesses acquired from third parties are consolidated from the date on
which control is transferred to the Company.
Use of Estimates and Assumptions
In preparing the consolidated financial statements in conformity with US 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 consolidated 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, valuation of accounts receivable, prepayments, deposits and other
assets, useful lives of property and equipment, intangible assets, goodwill impairment, the impairment of long-lived assets, provision for contingent liabilities,
revenue recognition, accrued expenses and other current liabilities and realization of deferred tax assets. Actual results could differ from those estimates.
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:
●
●
●
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.
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, other receivables
and other current assets, accounts payable, customer deposits, accrued expenses and other current liabilities approximates their recorded values due to their
short-term maturities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Cash and cash equivalents
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 PRC are not insured by the Federal Deposit
Insurance Corporation or other programs.
Accounts receivable
Accounts receivable are recorded at original invoice. The Company determines the adequacy of a reserve 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 customer exposures, as well
as the historical trends of collections. Delinquent account balances are written-off against the allowance for doubtful accounts after management has
determined that the likelihood of collection is not probable.
Prepayments, deposit and other assets
Prepayment, deposit and other assets primarily consists of advances to suppliers for purchasing goods or services that have not been received or provided and
advances to employees. These advances are interest free, unsecured and short-term in nature and are reviewed periodically to determine whether their
carrying value has become impaired.
Deferred contract costs
Deferred contract costs represent costs incurred in advance of revenue recognition arising from direct and incremental staff costs in respect of the fixed fee
contracts according to the customer’s requirements prior to the delivery of services, and such deferred costs will be recognized upon the recognition of the
related revenue.
Long term investment
The Company holds investments in equity method and cost method investees. Investee companies over which the Company has the ability to exercise
significant influence but does not have a controlling interest and is the primary beneficiary are accounted for using the equity method. Significant influence is
generally considered to exist when the Company has an ownership interest in the voting shares of the investee between 20% and 50%, and other factors, such
as representation in the investee’s Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the
equity method of accounting is appropriate. Under this method of accounting, the Company records its proportionate share of the net earnings or losses of
equity method investees and a corresponding increase or decrease to the investment balances. The Company evaluates its equity method investments for
impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
Investments in entities in which the Company has no control or significant influence and is not the primary beneficiary are accounted for at cost. Cost method
investments are recorded at the lower of cost or fair value. If declines in the value of cost method investments are determined to be other-than temporary, a
loss is recorded in the current period as a component of miscellaneous, net in the consolidated statements of income.
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CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Business combination
Business combinations are recorded using the business acquisition method of accounting. The assets acquired, the liabilities assumed, and any non-controlling
interest of the acquire at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the
total consideration transferred plus the fair value of any non-controlling interest of the acquire, if any, at the acquisition date over the fair values of the
identifiable net assets acquired.
Non-controlling interests
The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-
controlling interests in the results of the Company are presented on the face of the consolidated statement of income and comprehensive income as an
allocation of the total income or loss for the year between non-controlling interest holders and the shareholders of the Company.
Property and Equipment, net
Property and equipment, net, are stated at cost less accumulated depreciation and amortization. The straight-line method is used to compute depreciation and
amortization over the estimated useful lives of the assets, as follows:
Leasehold improvement
Machinery equipment
Transportation vehicles
Office equipment and furniture
Useful life
The shorter of lease terms or the estimated useful lives
5–10 years
5 years
5 years
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 charged to the statement of income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Goodwill
Goodwill represents the excess of the consideration over the fair value of the net assets acquired at the date of acquisition. Goodwill is not amortized but
rather tested for impairment at least annually at the reporting unit level by applying a fair-value based test in accordance with accounting and disclosure
requirements for goodwill and other indefinite-lived intangible assets. This test is performed by management annually or more frequently if the Company
believes impairment indicators are present. There was only one reporting unit (that also represented the operating segment) as of June 30, 2018. Goodwill was
allocated to the one reporting unit as of June 30, 2018.
Impairment of long-lived assets
The Company reviews its long-lived assets, other than goodwill including property and equipment and intangible assets with definite lives for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the
Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the
Company would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition
The Company provides a comprehensive range of IT services and solutions, which primarily are on a time-and-expense basis, or fixed-price basis
Revenue is considered realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has
occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured.
Time-and-expense basis contracts
Revenues from time-and-expense basis contracts are recognized as the related services are rendered assuming all other basic revenue recognition criteria are
met. Under time-and-expense basis contracts, the Company is reimbursed for actual hours incurred at pre-agreed negotiated hourly billing rates. Clients may
terminate the contracts at any time before the work is completed but are obligated to pay the actual service hours incurred through the termination date at the
contract billing rate.
Fixed-price basis contracts
Revenues from fixed-price customized solution contracts require the Company to perform services for systems design, planning and integrating based on
customers’ specific needs which requires significant production and customization. The required customization work period is generally less than one year.
Upon delivery of the services, customer acceptance is generally required. In the same contract, the Company is generally required to provide post-contract
customer support (“PCS’) for a period from three months to one year (“PCS period”) after the customized application is delivered. The type of service for
PCS clause is generally not specified in the contract or stand-ready service on when-and-if-available basis.
The Company determines there are following separated service elements in the fixed-fee customized solution contract:
1. Solution development service and
2. PCS
3. Specific service such as training, if applicable
For multiple-element arrangements that include application customized services and PCS as well as specific service component, if applicable, the Company
allocates contract revenue to all deliverables based on their relative selling prices. The Company uses a hierarchy to determine the selling price to be used for
allocating revenue to the deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of the selling price (“TPE”) and
(iii) best estimate of the selling price (“BESP”). The Company uses VSOE of selling price in the selling price allocation in all instances where it exists. VSOE
of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately.
Otherwise, BESP is used because the Company’s customized application differs substantially from that of competitors, it is difficult to obtain the reliable
standalone competitive pricing necessary to establish TPE. Accordingly, the Company uses its best estimate of selling prices of solution development service
and PCS (and specific service if applicable) as the basis of revenue allocation. In estimating its selling price for solution development service and PCS (and
specific service if applicable), the Company considers the internal estimated cost to provide such services adjusted by reasonable profit margin for similar
arrangements, customer demand, and the historical pricing as significant factors to determine the BESP.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition (continued)
Revenue allocates to solution development service component is recognized using contract accounting in accordance with Accounting Standards Codification
(“ASC”) 605-35-25. The revenue recognition for these contracts varies depending on the terms of the individual contracts, and may be recognized
proportionally over the term of the contract or deferred until the end of the contract term and recognized when our obligations have been fulfilled with the
customer. For contacts with development period within three months, the related revenue is recognized on the completed contract method. Otherwise, revenue
is recognized as the service is performed using the percentage of completion method of accounting, under which the total value of revenue is recognized on
the basis of the percentage that total labor cost to date bears to the total expected labor costs. The Company considers labor time, the input measurement, is
the best available indicator of the pattern and timing in which contract obligations are fulfilled. The Company has a long history of providing these services
resulting in its ability to reasonably estimate the service hours expected to be incurred and the progress toward completion on each fixed-price customized
contract based on the proportion of service hours incurred to date relative to total estimated service hours at completion. Estimated contract costs are based on
the budgeted service hours, which are updated based on the progress toward completion on a monthly basis. Pursuant to the contract terms, the Company has
enforceable right on payments for the work performed. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which
such losses become probable based on the current contract estimates. In instances where substantive acceptance provisions are specified in customer
contracts, revenues are deferred until all acceptance criteria have been met.
The fixed-priced customized solution arrangement provides customers with rights to unspecified PCS, if and when available. These services grant the
customers on line and telephone access to technical support personnel during the term of the service. The revenue allocated to unspecific PCS component is
deferred and recognized on a straight-line basis over the PCS period. Revenue allocates to the specific PCS or other services is recognized as the related
services are rendered.
To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions for estimated losses on such engagements will be
made during the period in which a loss becomes probable and can be reasonably estimated.
Differences between the timing of billings and the recognition of revenue based on various methods of accounting are recorded as deferred revenue.
Revenue includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue. The Company
reports revenues net of value added tax (“VAT”). The Company’s subsidiaries in the PRC are subject to a 6% to 16% value added tax (“VAT”) and related
surcharges on the revenues earned from providing services. The VAT rate is up to 16% since May 1, 2018.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Research and development
Research and development incur in the development of new software modules and products, either as part of internally used software or in conjunction with
anticipated customer projects. Technological feasibility for the Company’s software products is reached before the products are released for sale. To date,
expenditures incurred after technological feasibility was established and prior to completion of software development have not been material, and
accordingly, the Company has expensed all when incurred.
Government subsidies
Government subsidies mainly represent amounts granted by local government authorities as an incentive for companies to promote development of the local
technology industry. The Company receives government subsidies related to government sponsored projects, and records such government subsidies as a
liability when it is received. The Company records government subsidies as other income when there is no further performance obligation.
Advertising expenditures
Advertising expenditures are expensed as incurred and such expenses were minimal for the periods presented. Advertising expenditures have been included
as part of selling and marketing expenses.
Operating leases
A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified by the lessee as an operating lease. All
leases of the Company are currently classified as operating leases. The Company records the total expenses on a straight-line basis over the lease term.
Employee defined contribution plan
Full time employees of the Company in the PRC participate in a government mandated multi-employer defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor
regulations require that the Company make contributions to the government for these benefits based on a certain percentage of the employee’s salaries. The
Company has no legal obligation for the benefits beyond the contributions. The total amount was expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income Taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when
temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. 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 as a benefit 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. No significant penalties or interest relating to income taxes have been incurred during the years ended June 30, 2018, 2017
and 2016. All of the tax returns of the Company’s subsidiaries in China remain subject to examination by the tax authorities for five years from the date of
filing through year 2022.
Value added tax (“VAT”)
Revenue represents the invoiced value of service, net of VAT. The VAT is based on gross sales price and VAT rates range up to 16%, depending on the type of
service provided. 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 tax payable. All of the VAT returns filed by the company’s subsidiaries in China, have been
and remain subject to examination by the tax authorities for five years from the date of filing.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of ordinary shares and potential ordinary shares outstanding during the period, which may include restricted
share units, options, convertible securities and warrants. The computation of diluted earnings per share does not assume conversion, exercise, or contingent
issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts) on earnings per share.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Foreign Currency Translation
The functional currencies of the Company are the local currency of the county in which the subsidiary operates. The Company’s financial statements are
reported using U.S. Dollars. The results of operations and the consolidated statements of cash flows denominated in foreign currencies are translated at the
average rates of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the
applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the
time of capital contributions. Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the
consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation
adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive
income (loss) included in consolidated statements of changes in shareholders’ equity. Gains and losses from foreign currency transactions are included in the
consolidated statement of income and comprehensive income.
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other
comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company not using the U.S. dollar as its functional
currencies.
Concentrations and Risks
- Foreign currency risk
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and
liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by
law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other
than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain
supporting documentation in order to affect the remittance.
Our functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB depreciated by 2.0% in fiscal year 2017 and
appreciated by 2.4% in fiscal 2018. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the
RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S.
dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are
denominated in RMB.
To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes,
appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if
the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other
business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.
- Concentration of credit risk
As of June 30, 2018 and 2017, $4,012,088 and $4,199,905 of the Company’s cash and cash equivalents was 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. As
of June 30, 2018, the Company had $81,644, $4,005, $5,568,360 and $76,789 of cash and cash equivalents on deposit at financial institutions in Singapore,
Australia, Hong Kong and Taiwan, respectively. As of June 30, 2017, the Company had $130,614, $130,413 and $353,636 of cash and cash equivalents on
deposit at financial institutions in Singapore, Australia and Hong Kong, respectively.
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CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations and Risks (continued)
- Significant customers
For the years ended June 30, 2018, 2017 and 2016, one customer with its affiliates accounted for 30.8%, 38.6% and 59.2% of the Company’s total revenues,
respectively. For the year ended June 30, 2018, one customer and its affiliates accounted for 35.9% of the Company’s total accounts receivable balance. For
the year ended June 30, 2017, one customer and its affiliates accounted for 39.1% of the Company’s total accounts receivable balance. For the year ended
June 30, 2016, two customers and its affiliates accounted for 47.3% and 10.0% of the Company’s total accounts receivable balance.
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.
Risks and Uncertainties
The significant operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may
be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be
adversely affected by changes in the political, regulatory and social conditions in the PRC. 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, may not be
indicative of future results.
Share-based payment
Share awards issued to non-employees, such as consultants and underwriters, including warrants and options are measured at fair value at the earlier of the
commitment date or the date the service is completed and recognized over the period the service is provided. The Company uses the Black-Scholes pricing
model to estimate the fair value of warrants. The determination of estimated fair value of share-based payment awards on the grant date using a Black-Scholes
option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These
variables include the Company’s expected stock price volatility over the expected term of the awards, actual and projected warrant exercise behaviors, a risk-
free interest rate and any expected dividends.
All share-based awards to employees and directors, including restricted share units (“RSUs”), are measured at the grant date based on the fair value of the
awards. Share-based compensation, net of forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is the vesting
period.
The Company recognizes the estimated compensation cost of service-based restricted share units based on the fair value of its ordinary shares on the date of
the grant. The Company recognizes the compensation cost, net of estimated forfeitures, over a vesting term of generally three years.
Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical
data to estimate pre-vesting restricted share units’ forfeitures and records share-based compensation expense only for those awards that are expected to vest.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it
becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No.
2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods),
which means it will be effective for the Company’s fiscal year beginning July 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus
Agent Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent
considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and
Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the
operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements
and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and
other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a
significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address
implementation and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have
the same effective date as the new revenue standard. In September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public
business entities and other entities were required to adopt ASC Topic 606 for annual reporting. A public business entity and certain other specified entities
adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We
are planning to adopt Topic 606 in the first quarter of our fiscal 2019 using the retrospective transition method, and are continuing to evaluate the impact our
pending adoption of Topic 606 will have on our consolidated financial statements. The Company’s current revenue recognition policies are generally
consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to input measures are not expected to be pervasive to
the majority of the Company’s contracts.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among entities. The
new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional
disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified
retrospective approach to adoption assuming the Company will remain an emerging growth company at that date. Early adoption is permitted. In September
2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public business entities and other entities were required to adopt ASC Topic
842 for annual reporting. A public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include
or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for annual reporting
periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. ASU No.
2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the revised after tax cash flows arising
from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and the recalculated amounts must be
included in income of the year in which the tax law is enacted. In July 2018, the FASB issued ASU No. 2018-10, about improvements to clarify the
Codification or to correct unintended application of guidance in ASU No. 2016-02. The amendments in ASU No. 2018-10 are of a similar nature to the items
typically addressed in the Codification improvements project. The amendments in ASU No. 2018-10 affect narrow aspects of the guidance issued in the
amendments in ASU No.2016-02. In July 2018, the FASB issued ASU No. 2018-11, which to clarify two requirements in the new leases standard: transition
—comparative reporting at adoption and separating components of a contract. The amendments in this Update provide entities with an additional (and
optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the
adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’
requests. ASU No. 2018-11 also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the
associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted
for under the new revenue guidance (Topic 606) and both of the following are met: the timing and pattern of transfer of the nonlease component(s) and
associated lease component are the same, and the lease component, if accounted for separately, would be classified as an operating lease. The effective date
and transition requirements for ASU No 2018-11 related to separating components of a contract are the same as the effective date and transition requirements
in ASU 2016-02. The Company has not early adopted this update and it will become effective on July 1, 2020. The Company is currently evaluating the
impact of this new standard on its consolidated financial statements and related disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements (continued)
In August 2016, the FASB issued a new pronouncement ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The
primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments
add or clarify guidance on eight cash flow issues: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) Contingent consideration
payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life
insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in
securitization transactions; (8) Separately identifiable cash flows and application of the predominance principle. For public business entities, the guidance in
the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years assuming the Company will
remain as emerging growth company at that date. Early adoption is permitted for all entities. Entities must apply the guidance retrospectively to all periods
presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company has not early
adopted this update and it will become effective on July 1, 2018.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this
ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017
and interim periods within those periods assuming the Company will remain an emerging growth company at that date. The Company has not early adopted
this update and it will become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its
consolidated financial statements.
F-21
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements (continued)
In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This
new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying
amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total
amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020 assuming the Company still
remains an emerging growth company at that date. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of
ASU 2017-04 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, to provide guidance to clarify when to account for a change to the
terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective
for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 assuming the Company still remains an
emerging growth company at that date. Early adoption is permitted and application is prospective. The Company has not early adopted this update and it will
become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial
statements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and
Hedging (Topic 815). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial instrument that
reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the
issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial
instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with
Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the
specialized guidance for contingent beneficial conversion features. The amendments also recharacterize the indefinite deferral of certain provisions of Topic
480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The
amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this Update do not
require any transition guidance because those amendments do not have an accounting effect. The Company has not early adopted this update and it will
become effective on July 1, 2020. The Company is currently evaluating the impact of our pending adoption of ASU 2017-11 on its consolidated financial
statements.
In September 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718)”. The amendments affect any entity that changes
the terms or conditions of a share-based payment award. An entity should account for the effects of a modification unless the fair value (or calculated value or
intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value, the vesting conditions of the modified
award are the same as the vesting conditions of the original award, and the classification of the modified award as an equity instrument or a liability
instrument is the same as the classification of the original award. The amendments in this Update are effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for public
business entities for reporting periods for which financial statements have not yet been issued. The Company has not early adopted this update and it will
become effective on July 1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial
statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and
will improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for all entities for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. The Company has not early adopted this update and it will become effective on July 1,
2019. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to
provide guidance to clarify recognition and measurement of financial assets and financial liabilities. The amendments clarify certain aspects of the guidance
issued in ASU No. 2016-01. All entities may early adopt ASU No. 2018-03 for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years, as long as they have adopted Update 2016-01. The Company has not early adopted this update and it will become effective on July
1, 2018. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
F-22
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements (continued)
In June 2018, the FASB issued ASU No 2018-07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment
Accounting. The amendments expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing
model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contracts with Customers. The amendments are effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that fiscal year. The Company has not early adopted this update and it will become effective on
July 1, 2019. The Company is currently evaluating the impact of our pending adoption of ASU 2018-07 on its consolidated financial statements.
In August 2018, the FASB issued ASU No 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value
Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update are
effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently
evaluating the impact of our pending adoption of ASU 2018-07 on its consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting statements, if recently adopted, would have a material effect on the
Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
NOTE 3 – BUSINESS ACQUSITION
Acquisition of Judge China
On November 9, 2016, CLPS Shanghai acquired 60% of Judge China and its 70% owned subsidiary Judge HR from Judge Company Asia Limited (“Judge
Asia”) with the final purchase price of $480,061 (RMB 3.25 million). The Company funded the acquisition with cash and a payable to Judge Asia of
$128,928 (RMB 0.9 million), of which $103,255 was subsequently offset with the Company’s receivables from Judge Asia. The Company believes that the
acquisition will allow it to better manage opportunities and capitalize on the growth potential in the human resource related industries.
The transaction was accounted for as a business combination using the purchase method of accounting. The purchase price allocation of the transaction was
determined by the Company with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquired and liabilities
assumed as of the acquisition date. The purchase price allocation to assets acquired and liabilities assumed as of the date of acquisition was as follows:
Cash acquired
Accounts receivable
Prepayment and other receivable
Property and equipment, net
Intangible – customer relationship, net
Wages payable and accruals
Tax payables
Other payable and other current liabilities
Deferred tax liability
Non-controlling interests
Goodwill
Total consideration
$
Amounts
268,014
325,888
67,570
1,875
339,883
(86,483)
(16,147)
(259,361)
(65,264)
(290,994)
195,080
$
480,061
The intangible assets include customer contacts of $339,883, which was acquired by Judge China in 2013 with an estimated useful life of 10 years. 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, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the
synergy resulting from the acquisition.
F-23
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
Trade accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
As of June 30,
2018
16,419,182 $
(151,347)
16,267,835 $
2017
6,753,891
(109,117)
6,644,774
$
$
Unbilled accounts receivable included in trade accounts receivable above amounted to $934,687 and $263,434 as of June 30, 2018 and 2017, respectively.
Movement of the allowance for doubtful accounts is as follows:
Balance at the beginning of the year
Provision for doubtful accounts
Write off for doubtful account
Foreign currency translation adjustments
Balance at end of year
As of June 30,
2018
2017
109,117 $
134,021
(93,767)
1,976
151,347 $
46,774
62,990
-
(647)
109,117
$
$
NOTE 5 – AMOUNT DUE FROM UNDERWRITER ON THE OVER-ALLOTMENT
On June 8, 2018, CLPS Incorporation (the “Company”) closed on the over-allotment option to purchase an additional 300,000 common shares of the
Company by The Benchmark Company, LLC, at the IPO price of $5.25 per share. As a result, the Company has raised additional gross proceeds of
approximately $1.58 million before underwriting discounts and commissions and offering expenses. Net proceeds from the over-allotment of approximately
$1.47 million were received on July 4, 2018.
NOTE 6 – PREPAYMENTS, DEPOSITS AND OTHER ASSETS, NET
Prepayments, deposits and other assets consisted of the following:
Deferred contract costs
Advances and deposits to suppliers
Prepaid expenses
Note receivable
Advances to employees
Less: allowance for doubtful accounts
Less: Long term portion
Prepayments, deposits and other assets – current portion
Movement of the allowance for doubtful accounts is as follows:
Balance at the beginning of the year
Provision (reversal) for doubtful accounts
Foreign currency translation adjustment
Balance at end of year
F-24
As of June 30,
2018
2017
466,117 $
178,224
29,484
114,979
567,934
(6,149)
1,350,589
(119,372)
1,231,217 $
263,065
231,731
179,384
21,813
47,783
(41,602)
702,174)
(123,783)
578,391
As of June 30,
2018
2017
41,602 $
(37,117)
1,664
6,149 $
18,390
23,473
(261)
41,602
$
$
$
$
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
Equipment
Office Furniture
Automobiles
Leasehold improvement
Total
Less: accumulated depreciation and amortization
Property and equipment, net
As of June 30,
2018
2017
523,553 $
106,576
83,502
77,678
791,309
(457,412)
333,897 $
386,590
100,524
35,706
66,157
588,977
(315,630)
273,347
$
$
Depreciation expense was $152,342, 109,356 and $54,105 for the years ended June 30, 2018, 2017 and 2016, respectively.
NOTE 8 – INTANGIBLE ASSETS, NET
Intangible assets, net consisted of customer contacts acquired by Judge China on June 1, 2013 with an estimated useful life of 10 years. Judge China was
acquired by the Company on November 9, 2016 (Note 3).
Customer contacts
Less: accumulated amortization
Intangible assets, net
As of June 30,
2018
2017
$
$
348,214 $
(88,155)
260,059 $
339,883
(34,419)
305,464
Amortization expense was $53,827, $34,270 and nil for the years ended June 30, 2018, 2017 and 2016. Estimated future amortization expense is as follows:
Year ending June 30,
2019
2020
2021
2022
Remaining
Total
NOTE 9 – GOODWILL
The changes in the carrying amount of goodwill for the year ended June 30, 2018 were as follows:
Balance as of July 1, 2017
Reverse of goodwill arising from acquisition of Judge China
Foreign currency translation adjustment
Amortization
expense
53,827
53,827
53,827
53,827
44,751
260,059
$
For the year
ended
June 30,
2018
$
$
195,080
(26,302)
4,782
173,560
The consideration of Judge China was reduced by $26,302 due to the bad debts for the receivable from Judge Asia as of June 30, 2018.
The Company performed its annual goodwill impairment review for the year ended June 30, 2018 and determined there was no impairment as of June 30,
2018.
F-25
TABLE OF CONTENTS
NOTE 10 – ESCROW RECEIVABLE
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2018, the Company placed $200,000 in an escrow account in connection with the Company’s indemnification as part of their IPO raise. The
escrow shall remain in place for a period of 18 months until November 2019.
NOTE 11 – LONG TERM INVESTMENT
a) Equity Investment
On September 27, 2017, the Company and a non-controlling interest shareholder of CLPS Beijing incorporated Tianjin Huanyu Qinshang Network
Technology Co., Ltd (“Huanyu”). The Company invested funds for a 30% equity interest in Huanyu for $0.15 million (RMB 1,000,000). For the year ended
June 30, 2018, 30% of the loss from Huanyu was $8,684 and was included in other expense.
The investment in Huanyu was accounted for using the equity method with the cost allocated as follows:
Original investment
Loss in equity interest
Foreign currency translation adjustment
b)
Investment at cost
As of June 30,
2018
$
$
151,124
(8,684)
150
142,590
On June 13, 2018, the Company purchased a 2.7% equity interest in Lihong in Shanghai for consideration of $0.15 million (RMB 1,000,000) to develop new
business. The consideration has not been paid for and is recorded as a liability as of June 30, 2018.
NOTE 12 – SHORT TERM LOANS
Outstanding balances of short term bank loans consisted of the following:
Loan from Bank of Communication, with an interest rate of 5.655% per annum due on July 20, 2018
Loan from China Merchants Bank, with an interest rate of 5.655% per annum due in July and August, 2018,
respectively
As of June 30,
2018
2017
$
740,506 $
-
1,813,483
2,553,989 $
$
-
-
On November 6, 2017, the Company entered into a revolving credit facility with Bank of Communication (“BC Credit Facility”) which permits the Company
to borrow up to approximately $753,100 (RMB 5,000,000) during the period from October 9, 2017 to October 9, 2018. The Company borrowed $753,116
(RMB 4,900,000) with an interest rate at 5.655% per annum on November 8, 2017 and repaid the loan on February 8, 2018.
On January 3, 2018, the Company entered into an additional credit facility with China Merchants Bank which permits the Company to borrow up to
$1,111,712 (RMB 7,000,000). The Company borrowed $1,111,712 (RMB 7,000,000) with an interest rate at 5.655% per annum on February 9, 2018 and
repaid the loan on July 2, 2018.
On February 8, 2018, the Company borrowed $740,506 (RMB 4,900,000) from Bank of Communication at an interest rate of 5.655% per annum and due on
July 20, 2018. On July 20, 2018, the Company repaid the loan.
F-26
TABLE OF CONTENTS
NOTE 12 – SHORT TERM LOANS - continued
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2017, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company to
borrow up to approximately $753,100 (RMB 5,000,000) with an interest rate at 5.655% per annum during the period from May 17, 2017 to May 16, 2018.
The CMB Credit Facility is guaranteed by the CEO and Chairman and President of the Company as joint guarantors. In September 2017, the Company
borrowed the full credit amount (RMB 5,000,000) the loans were repaid by May 2018. The credit facility was renewed on June 22, 2018, and the credit line
was up to $1,543,115 (RMB 10,000,000).
During the fiscal year 2018, the Company borrowed $4,152,377 (RMB 27,000,000) from CMB Credit Facility with an interest rate at 5.655% per annum. As
of June 30, 2018, the Company had a balance of $1,813,483 (RMB 12,000,000) with China Merchants Bank. These loans were repaid in July and August
2018 respectively.
On June 22, 2018, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company to
borrow up to approximately $1,543,115 (RMB 10,000,000) for the period from July 11, 2018 to July 10, 2019 with an interest rate at 5.655% per annum. The
CMB Credit Facility is guaranteed by the CEO, the wife of the CEO, Chairman, and the wife of Chairman of the Company, and Shanghai Small and Medium-
sized Enterprises Policy Financing Guarantee Fund Management Centre as joint guarantors. On July 11, 2018, the Company borrowed $1,543,115 due on
July 11, 2019.
On August 8, 2018, the Company borrowed $292,770 (RMB 2,000,000) from Bank of Communication with an interest rate at 5.655% per annum expiring
November 15, 2018.
On August 10, 2018, the Company borrowed $438,629 (RMB 3,000,000) from China Merchants Bank at an interest rate of 5.133% per annum and due on
August 9, 2019.
On August 15, 2018, the Company borrowed $435,692 (RMB 3,000,000) from China Merchants Bank at an interest rate of 5.655% per annum and due on
August 14, 2019.
On September 5, 2018, the Company borrowed $439,457 (RMB 3,000,000) from Bank of Communication at an interest rate of 5.0025% per annum and due
on December 20, 2019.
On September 7, 2018, the Company borrowed $ 293,204 (RMB 2,000,000) from China Merchants Bank at an interest rate of 5.655% per annum and due on
September 6, 2019.
Interest expense was $82,507, Nil and Nil for the years ended June 30, 2018, 2017 and 2016, respectively.
F-27
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – SALARIES AND BENEFITS PAYABLE
Salaries and benefits payable
As of June 30,
2018
7,341,688 $
2017
5,392,434
$
Full time employees of the Company located in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Company accrued for
these benefits based on certain percentages of the employees’ salaries. Salaries and benefits payable included $3,075,391 and $2,349,795 accrued employer
portion of social benefits payable to local governments as of June 30, 2018 and 2017, respectively.
NOTE 14 – RELATED PARTY TRANSACTIONS
The balances due to and due from related parties were as follows:
Due from related parties:
Non-controlling shareholder of CLPS Beijing before acquisition of the remaining 30% equity on June 27, 2018
Non-controlling interest shareholder of Judge China
Total
Due to related parties
Shanghai Qisheng Co., Ltd (“Qisheng”), controlled by the Chairman of the Company
Non-controlling shareholder of JQ
Mr. Raymond Ming Hui Lin, CEO of the Company (i)
Total
As of June 30,
2018
2017
$
$
$
$
- $
131,321
131,321 $
- $
45,615
162,727
208,342 $
14,751
103,255
118,006
7,080
-
1,722,711
1,729,791
(i) Due to related parties mainly represents the unpaid bonus, dividends, wages and other benefit to the Company’s CEO.
Effective on December 9, 2017, the Board appointed Mr. Xiao Feng Yang as the Company’s Chairman and President, Mr. Raymond Ming Hui Lin as the
Company’s chief executive officer (“CEO”) and director and Ms. Tian van Acken as the Company’s chief financial officer (“CFO”). Their employment term
is five years starting on December 9, 2017. Mr. Xiao Feng Yang, Mr. Raymond Ming Hui Lin and Ms. Tian van Acken’s basic annual compensations are
approximately $94,100, $71,400 and $93,010, respectively, with annual bonuses determined based on the sole direction of the Compensation Committee of
the Board of Directors in accordance with criteria established by the Compensation Committee of the Board.
On May 17, 2017, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company to
borrow up to approximately $753,100 (RMB 5,000,000) during the period from May 17, 2017 to May 16, 2018. The CMB Credit Facility is guaranteed by
the CEO and Chairman and President of the Company as joint guarantors. In September, 2017, the Company borrowed the full credit amount (RMB
5,000,000) and the loans were repaid by May 2018. The credit facility was renewed on June 22, 2018, and the credit line was up to $1,543,115 (RMB
10,000,000).
On January 3, 2018, the Company entered into an additional credit facility with China Merchants Bank which permits the Company to borrow up to
$1,111,712 (RMB 7,000,000). The Company borrowed $1,111,712 (RMB 7,000,000) with an interest rate at 5.655% per annum on February 9, 2018 and
repaid the loan on July 2, 2018.
In fiscal 2018, the Company borrowed $4,152,377 (RMB 27,000,000) from CMB Credit Facility. As of June 30, 2018, the Company had a balance of
$1,813,483 (RMB 12,000,000) with China Merchants Bank. These loans were repaid in July and August 2018 respectively.
On June 22, 2018, the Company entered into a revolving credit facility with China Merchants Bank (“CMB Credit Facility”) which permits the Company to
borrow up to approximately $1,543,115 (RMB 10,000,000) during the period from July 11, 2018 to July 10, 2019. The CMB Credit Facility is guaranteed by
the CEO, the wife of the CEO, Chairman, and the wife of Chairman of the Company, and Shanghai Small and Medium-sized Enterprises Policy Financing
Guarantee Fund Management Centre as joint guarantors.
F-28
TABLE OF CONTENTS
NOTE 15 – TAXES
(a)
Corporate Income Taxes (“CIT”)
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLPS was incorporated in the Cayman Islands as an offshore holding company and is not subject to tax on income or capital gain under the laws of Cayman
Islands.
CLPS Hong Kong was established in Hong Kong and is subject to statutory income tax rate at 16.5%. CLPS SG is subject to Singapore income tax at the rate
of 17%. CLPS AU was established in Australia and is subject to corporate income tax at 30%. JL are subject to Taiwan income tax at the rate of 17%.
Under the Enterprise Income Tax (“EIT”) Law of PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified
25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. EIT grants preferential
tax treatment to certain High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of
15%, subject to a requirement that they re-apply for HNTE status every three years. CLPS Shanghai, the Company’s main operating subsidiary in PRC, has
been approved as HNTEs in 2013 and reapproved in 2016. The Company is entitled to a reduced income tax rate of 15% through November 2019.
EIT is typically governed by the local tax authority in China. Each local tax authority at times may grant tax holidays to local enterprises as a way to
encourage entrepreneurship and stimulate local economy. The impact of the tax holidays noted above decreased income taxes by $285,130, $317,488 and
$290,159 for the fiscal year 2018, 2017 and 2016, respectively. The benefit of the tax holidays on net income per share (basic and diluted) was $0.02, 0.03
and $0.03 for the years ended June 30, 2018, 2017 and 2016, respectively.
Income (loss) before income taxes
PRC
Non-PRC
The following table reconciles the statutory rate to the Company’s effective tax rate:
PRC statutory income tax rate
Effect of income tax rate difference in other jurisdictions
Effect of PRC preferential tax rate and tax holidays
R&D credits
Permanent difference and others*
Effective tax rate
* Permanent difference and other primarily represented tax effect on the intercompany transactions.
F-29
For the years ended June 30,
2017
2,516,211 $
(413,400)
2,102,811 $
2018
2,863,419 $
(260,649)
2,602,770 $
2016
2,297,424
(243,300)
2,054,124
$
$
For the years ended June 30,
2017
2016
2018
25%
(1.8)%
(11.0)%
(18.3)%
1.8%
(4.3)%
25%
4.8%
(15.1)%
(14.3)%
(6.0)%
(5.6)%
25%
5.9%
(14.1)%
(11.9)%
8.2%
13.1%
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – TAXES - continued
(a)
Corporate Income Taxes (“CIT”) (continued)
The provision (benefit) for income tax consists of the following:
Current income tax provision
Deferred income tax benefit
Total (benefit) provision for income tax expenses
For the years ended June 30,
2017
2018
2016
$
$
95,923 $
(208,051)
(112,128) $
102,568 $
(221,114)
(118,546) $
365,866
(96,713)
269,153
As of June 30, 2018, the tax years ended December 31, 2012 through December 31, 2017 for the Company’s PRC entities remain open for statutory
examination by PRC tax authorities.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. As of June 30, 2018 and 2017, the Company had net operating loss carry forwards of approximately
$3,752,850 and $1,234,500, respectively, from the Company’s PRC subsidiaries, which will expire by December 31, 2021. As of June 30, 2018, the Company
had net operating loss carry forwards of approximately $458,000, $137,000, $76,000 and $3,000 from its operations in Singapore, Australia, Hong Kong and
Taiwan, respectively. The net operating losses in Singapore, Australia and Hong Kong will be carried forward indefinitely.
The significant components of the deferred tax assets are as follows:
Deferred tax assets:
Net operating loss carry forwards
Accrued expenses and other
Total deferred tax assets
Deferred tax liabilities:
Unbilled accounts receivables
Deferred contract cost
Total deferred tax liabilities
Total deferred tax assets, net
June 30,
2018
June 30,
2017
$
649,766 $
57,965
707,731
423,543
9,611
433,154
(169,266)
(26,368)
(195,634)
(62,855)
(71,346)
(134,201)
$
512,097 $
298,953
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the cumulative earnings and projected future taxable income in making this assessment. Recovery of
substantially all of the group’s deferred tax assets is dependent upon the generation of future income, exclusive of reversing taxable temporary differences.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are recoverable,
management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax
assets as at June 30, 2018 and 2017.
F-30
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – TAXES - continued
(b)
Taxes Payable
The Company’s taxes payable consists of the following:
VAT tax payable
Corporate income tax payable
Withholding tax payable
Disability insurance fund payable
Other taxes payable
Total taxes payable
Uncertain tax positions
June 30,
2018
June 30,
2017
$
$
228,477 $
96,636
257,942
299,645
22,150
904,850 $
182,036
-
274,542
168,650
15,636
640,864
The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure
the unrecognized benefits associated with the tax positions. As of June 30, 2018 and 2017, the Company did not have any significant unrecognized uncertain
tax positions. The Company did not incur any interest and penalties related to potential underpaid income tax expenses for the years ended June 30, 2018 and
2017, respectively, and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next 12 months from June 30, 2018.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
The Company’s subsidiaries lease administrative office space under various operating leases. Rent expense amounted to $730,705 and $565,328 for the years
ended June 30, 2018 and 2017, respectively.
Future minimum lease payments under non-cancelable operating leases are as follows:
Twelve months ending June 30,
2019
2020
2021
Total
F-31
Lease
expense
699,019
235,303
14,217
948,539
$
$
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
Basic earnings per share calculation:
Numerator:
Net income attributable to CLPS
Denominator:
Weighted average ordinary shares outstanding
Basic earnings per share attributable to CLPS
Diluted earnings per share calculation:
Numerator:
For the years ended June 30,
2017
2018
2016
$
2,434,463 $
2,047,445 $
1,826,112
11,517,123
0.21 $
11,290,000
0.18 $
11,290,000
0.16
$
Net income attributable to CLPS for calculating diluted earnings per share
$
2,434,463 $
2,047,445 $
1,826,112
Denominator:
Weighted average ordinary shares outstanding
Weighted average ordinary shares equivalents:
Effects of dilutive securities
Warrants
Shares used in computing diluted earnings per share attributable to CLPS
Diluted earnings per share attributable to CLPS
NOTE 18 – PUBLIC OFFERING WARRANTS
11,517,123
11,290,000
11,290,000
119,244
11,636,367
0.21 $
-
11,290,000
0.18 $
-
11,290,000
0.16
$
In connection with the closing of the Initial Public Offering (“IPO”) on May 24, 2018, the Company issued the following warrants to the placement agents for
the offering.
On May 24, 2018, CLPS completed a private placement of 93,030 warrants to Gear Capital Partners Limited (“Gear Ltd.”), acting as counsel of CLPS. Each
warrant entitles Gear Ltd. to purchase shares at $4.20 per share. The warrants carry a term of five years expiring on May 22, 2023 and shall not be exercisable
for a period of 180 days from May 23, 2018.
On May 24, 2018, CLPS completed a private placement of 107,000 warrants to Ascent Investor Relations LLC. (“Ascent”), acting as investor relations
consultant of CLPS. Each warrant entitles Ascent to purchase shares at $4.20 per share. The warrants carry a term of five years expiring on May 22, 2023 and
shall not be exercisable for a period of 180 days from May 23, 2018.
On May 29, 2018, CLPS completed a private placement of 83,162 warrants to Jay Linde, Cuttone & Co., LLC, THE BENCHMARK COMPANY, LLC, and
Alberleen Group LLC, (together, “Holders”), acting as underwriters of CLPS. Each warrant entitles Holders to purchase shares at $6.30 per share. The
warrants carry a term of five years expiring on May 22, 2023 and shall not be exercisable for a period of 180 days from May 23, 2018.
The Company uses the Black-Scholes option pricing model to estimate the fair value of warrants.
The assumptions used to value the Company’s warrant grants were as follows:
Warrants
Expected term (in years)
Expected volatility
Risk-free interest rate
For the years
ended
June 30,
2018
283,192
2.75
49.39%
2.11%
Expected term represents the weighted average period of time that share-based awards granted are expected to be outstanding giving consideration to
historical exercise patterns. Expected volatilities are based on historical volatilities of the similar public company’s ordinary shares over the respective
expected term of the share-based awards. Risk-free interest rate is based on US Treasury zero-coupon issues with maturity terms similar to the expected term
on the share-based awards.
F-32
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – SHARE-BASED PAYMENT - continued
The following table sets forth the summary of warrants activities:
Outstanding as of July 1, 2017
Granted
Granted
Exercised
Forfeited or expired
Outstanding as of June 30, 2018
Exercisable as of June 30, 2018
Vested as of June 30, 2018
Number of
warrants
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Life
6.3
4.2
4.9 years
4.9 years
-
83,162 $
200,030 $
-
-
283,192
-
283,192
The aggregated fair value of the Public Offering Warrants on May 24, 2018 was $612,223. As of June 30, 2018, 283,192 shares of warrants were issued and
outstanding. No warrants were exercised during the fiscal year 2018 and through the date of this filing.
NOTE 19 – SHAREHOLDERS’ EQUITY
Common shares
CLPS was established under the laws of Cayman Islands on May 11, 2017. The original authorized number of common shares was 1 share with a par value of
$1. After an amendment on December 7, 2017, the authorized number of common shares became 100,000,000 shares with a par value of $0.0001 each.
On November 18, 2017, the Board of Directors (“Board”) approved the 2017 Stock Incentive Plan (“Plan”), subject to approval by the Company’s
shareholders. The Plan is a share-based compensation plan that provides for discretionary grants of, among others, RSU, stock options, stock awards and
stock unit awards to key employees and directors of the Company. The purpose of the Plan is to recognize contributions made to our company and its
subsidiaries by such individuals and to provide them with additional incentive to achieve the objectives of our Company. The Board authorized up to
2,210,000 shares for grants under the terms of the Plan. The grants under the Plan generally have a maximum contractual term of ten years from the date of
grant. Stock awards granted under the plan at the determination of the Board shall be effective and exercisable upon the Company’ completion of an initial
public offering of its securities. The terms of individual agreements for various grants under the Plan will be determined by the Board (or its Compensation
Committee) and might contain both service and performance conditions.
On December 7, 2017, in order to optimize the Company’s share capital structure, the Board of Directors approved a stock split of the Company’s issued and
outstanding shares of common shares at a ratio of 1-10,000. After the stock split, the Company’s issued and outstanding common shares became 10,000
shares with par value of $0.0001. The Board of Directors also approved to amend the articles of association (the “Amendment”) to increase total authorized
number of common shares from 10,000 shares to 100,000,000 shares with par value of $0.0001. In connection with the Amendment, the Board of Directors
further approved to issue 11,280,000 common shares at par value (the “Nominal share issuance”) to the existing shareholders of the Company. As a result, the
existing shareholders of the Company have the same equity interests percentage in the Company as in CLPS shanghai prior to the reorganization. The
Company believes it is appropriate to reflect the stock split, Amendment and the Nominal share issuance on a retroactive basis similar to share split, in
accordance with SEC SAB Topic 4.
Additional paid-in capital
As of June 30, 2018, additional paid-in capital in the consolidated balance sheet represented net proceeds of initial public offering and seasoned equity
offering, and the combined contributed capital of the Company’s subsidiaries.
On July 25, 2017, the Company incorporated CLIVST as a holding company in BVI. On September 27, 2017 and October 24, 2017, the Company
incorporated CLPS Guangzhou in Guangzhou, PRC and FDT-CL in Hong Kong to develop business in the related area.
F-33
TABLE OF CONTENTS
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – SHAREHOLDERS’ EQUITY - continued
Additional paid-in capital (continued)
On May 24, 2018, CLPS consummated its initial public offering, or IPO, of 2,000,000 common shares, $0.0001 par value per share. The units were sold at an
offering price of $5.25 per unit, generating total gross proceeds of $10.5 million. Net proceeds from the IPO were $9.5 million.
On June 8, 2018, CLPS Incorporation (the “Company”) closed on the exercise in full of the over-allotment option to purchase an additional 300,000 common
shares of the Company by The Benchmark Company, LLC, the representative of the underwriters in connection with and the book running manager of the
Company’s U.S. firm commitment underwritten initial public offering (“IPO”) (“Benchmark”), at the IPO price of $5.25 per share. As a result, the Company
has raised gross proceeds of approximately $1.58 million, in addition to the IPO gross proceeds of approximately $10.5 million, or combined gross proceeds
in this IPO of approximately $12.08 million, before underwriting discounts and commissions and offering expenses. The Company’s shares trade on The
Nasdaq Capital Market under the trading symbol “CLPS.”
Statutory reserve
The Company’s subsidiaries located in mainland China 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 Company allocated $437,796, $261,949 and $429,439 to statutory reserves during the years ended June 30, 2018, 2017 and 2016,
respectively in accordance with PRC GAAP.
NOTE 20 – NON-CONTROLLING INTERESTS
Balance as of July 1, 2015
Net loss
Capital contribution from non-controlling
shareholders (i)
Repurchase of non-controlling interest (ii)
Foreign currency translation adjustments
Balance as of June 30, 2016
Net (loss) income
Capital contribution from non-controlling
shareholders (iii) (iv)
Foreign currency translation adjustments
Balance as of June 30, 2017
Net income (loss)
Capital contribution from non-controlling
shareholders (v)
Purchase of subsidiaries’ shares from non-
controlling interests (vi)
Foreign currency translation adjustments
Balance as of June 30, 2018
CLPS
RC
CLPS
Beijing
CLPS
Shenzhen
CLPS
Hong Kong
Judge
China
JQ
Total
$
1,857 $
-
(342) $
(41,141)
- $
-
- $
-
- $
-
- $
-
1,515
(41,141)
-
(1,788)
(69)
-
-
-
-
-
-
-
-
-
- $
46,919
-
(1,402)
4,034
37,267
-
982
42,283
49,064
-
-
-
-
(973)
-
(5)
(978)
(1,579)
-
-
-
-
(20,157)
6,438
71
(13,648)
31,705
-
-
-
-
157,775
290,994
684
449,453
54,651
-
-
-
-
-
-
-
-
146,594
46,919
(1,788)
(1,471)
4,034
173,912
297,432
1,732
477,110
280,435
-
-
-
-
70
70
(91,533)
186
- $
-
5
(2,552) $
-
(16)
18,041 $
-
10,068
514,172 $
-
(43)
146,621 $
(91,533)
10,200
676,282
$
(i) For the year ended June 30, 2016, the non-controlling shareholder of CLPS Beijing contributed $46,919 to CLPS Beijing.
F-34
TABLE OF CONTENTS
NOTE 20 – NON-CONTROLLING INTERESTS - continued
CLPS INCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) For the year ended June 30, 2016, the Company paid $6,987 to acquire a non-controlling interest in CLPS RC. After the acquisition, CLPS RC became a
wholly owned subsidiary of the Company. The payment in excess of carrying value of the non-controlling interest amounted to $5,199, which was charge
to additional paid in capital.
(iii) For the year ended June 30, 2017, the non-controlling shareholder of CLPS Hong Kong contributed $6,438 as capital.
(iv) On November 9, 2016, CLPS Shanghai acquired 60% of Judge China and its 70% owned subsidiary Judge HR from Judge Asia. As a result, the fair
value of non-controlling interests was $290,994.
(v) On October 17, 2017, the Company acquired 55% of JQ and its 100% owned subsidiary – JL. For the year ended June 30, 2018, the non-controlling
shareholder of JQ contributed $70 to JQ.
(vi) On June 27, 2018, Qiner acquired 30% of CLPS Beijing and 70% of its equity was owned by CLPS Shanghai. As a result, the Company controlled 100%
of CLPS Beijing as of June 30, 2018.
NOTE 21 – SEGMENT INFORMATION AND REVENUE ANALYSIS
The Company follows ASC 280, Segment Reporting, which requires that companies to disclose segment data based on how management makes decision
about allocating resources to each segment and evaluating their performances. The Company has one reporting segment. The Company’s chief operating
decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and
assessing performance of the Company. The Company has one operating segment. The Company’s revenue and net income are substantially derived from
enterprise application services and financial industry IT services.
The Company’s operations are primarily based in China, where the Company derives a substantial portion of their revenues. For the year ended June 30,
2018, revenues generated in mainland China, Hong Kong, Australia and Taiwan were $ 47,196,672, $1,414,174, $210,984 and $116,763, respectively. For the
year ended June 30, 2017, revenues generated in mainland China, Hong Kong and Australia were $30,822,390, $362,892 and $176,694, respectively. For year
ended June 30, 2016, all revenues were generated in mainland China.
The following table presents revenues by the service lines for the years ended June 30, 2018, 2017 and 2016.
Fintech IT consulting service
Customized IT solution service
Other
Total
NOTE 22 – SUBSEQUENT EVENTS
For the years ended June 30,
2017
29,146,470 $
1,846,423
369,083
31,361,976 $
2018
47,159,651 $
1,634,100
144,842
48,938,593 $
2016
28,015,173
927,185
81,820
29,024,178
$
$
On July 5, 2018, the Company paid consideration of $0.6 million for the remaining 30% equity interest of CLPS Beijing, which was a liability at June 30,
2018.
On July 12, 2018, the Company granted an aggregate of 671,469 restricted share units (“RSUs”) to key employees and directors under the share incentive
plans. No RSUs were granted to in fiscal 2018. RSUs granted to key employees and directors generally have a term of three years, but are subject to earlier
termination in connection with termination of continuous service to the Company. RSUs are valid for a period of 10 years from July 12, 2018 to July 11,
2028. RSUs vest 33% per year over a three-year period, with the first 33% vesting on the grant date. As at the grant date of July 12, 2018, the weighted-
average fair value per share was $12.22 and the estimated total fair value of the RSUs granted was $8.2 million.
On July 20, 2018, the Company decided to close down FDT-CL.
On August 15, 2018, the shareholders of CLPS SG and CLPS AU were changed to Qiner from CLPS Shanghai pursuant to the shares purchase agreements.
Qiner purchased the 100% equity interest of CLPS SG and CLPS AU from CLPS Shanghai for consideration of $0.6 million (or approximately 850,000
Singapore dollars) and $0.1 million (or approximately 200,000 Australian dollars), respectively. These transactions did not change the holding company’s
ownership of these entities.
On August 20, 2018, CLPS SG acquired an 80% interest in Infogain Solutions PTE. Ltd. (“Infogain”) located in Singapore from Sharma Devendra Prasad
and Deepak Malhotra with the final purchase price of $420,000 (or approximately 576,000 Singapore dollars).
F-35
TABLE OF CONTENTS
ITEM 19.
EXHIBITS
The financial statements are filed as part of this Annual Report beginning on page F-1.
Exhibit No.
Description
1.1
3.1
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
12.1
12.2
13.1
Form of Underwriting Agreement (2).
Memorandum and Articles of Association (1).
Specimen Share Certificate (1).
2017 Equity Incentive Plan (1).
Form Independent Director Agreement (1).
Employment Agreement between the Company and Xiao Feng Yang (1).
Employment Agreement between the Company and Raymond Ming Hui Lin (1).
Employment Agreement between the Company and Tian van Acken (1).
ANZ Global Services and Operations (Chengdu) Company Limited Agreement (1).
Master Lease Agreement - Shanghai Pudong Software Park Co., Ltd. (1).
Form of Framework Contract for Subcontracting (1).
Form Warrant Agreement (2).
Form Lockup Agreement (2).
Escrow Indemnification Agreement (2).
Credit Agreement with China Merchants Bank Co. Ltd.
Credit Agreement with Bank of Communications Co., Ltd.
Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
amended.
Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
amended.
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
14.1
21.1
23.1
99.1
99.2
99.3
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Sarbanes-Oxley Act of 2002.
Code of Conduct and Ethics (1).
List of Subsidiaries of the Registrant (1).
Consent of Friedman LLP.
Charter of the Audit Committee (1).
Charter of the Compensation Committee (1).
Charter of the Nominating Committee (1).
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
(1) Previously filed as part of the registration statement filed with the SEC on March 27, 2018 and incorporated by reference herein.
(2) Previously filed with the SEC as an exhibit to Report on Form 6-K and incorporated by reference herein.
94
TABLE OF CONTENTS
SIGNATURES
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.
September 25, 2018
September 25, 2018
CLPS Incorporation
By:
/s/ Raymond Ming Hui Lin
Name: Raymond Ming Hui Lin
Title: Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Tian van Acken
Name: Tian van Acken
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
95
Exhibit 10.12
China Merchants Bank Co., Ltd.
Shanghai Branch
Credit Granting Agreement
Credit grantor: China Merchants Bank Co., Ltd., Shanghai Century Avenue Branch (hereinafter referred to as “Party A”)
Credit Granting Agreement
Person-in-charge: Chen Siqing
Credit applicant: CLPS Incorporation (hereinafter referred to as “Party B”)
Legal representative/person-in-charge: Yang Xiaofeng
Upon application by Party B, Party A agrees to provide a line of credit (LOC) to Party B. Upon fully consultation, Party A and Party B have reached a
consensus in respect of the following terms and conditions in accordance with the relevant laws and regulations, and hereby enter into this agreement.
1. Line of Credit
1.1 Party A shall grant Party B a LOC of RMB Ten Million yuan (or equivalent amount of other currencies, which shall be translated with the exchange
rate published by Party A on the date when the specific business occurs, the same below), including revolving LOC and/or one-time LOC.
The varieties of credit granting under the LOC includes but is not limited to credit for loan/order-related loan, trade financing, bill discounting,
commercial bill acceptance, guaranteed discount for commercial acceptance bills, international/domestic letter of guarantee, customs duties and dues payment
guarantee, corporate account overdraft, derivative transaction and gold leasing or the combination thereof.
The revolving LOC refers to the maximum amount of total principal balance of the credit for one or more business varieties mentioned in the preceding
paragraph granted by Party A to Party B occurred during the credit period, which can be repeatedly used in a revolving manner.
The one-time LOC means that the cumulative amount of credit for the business varieties mentioned in the preceding paragraph granted by Party A to
Party B occurred during the credit period shall not exceed the one-time LOC approved by Party A. Party B shall not use the one-time LOC in a revolving
manner, and the amount of each credit granting applied by Party B under the LOC shall offset the amount of one-time LOC until the amount of LOC is fully
offset by the accumulated amount of all the credit granting.
“Trade financing” includes but is not limited to international/domestic letters of credit, import bill advance, delivery against bank guarantee, import bill
advance under collection, packaged loans, export bill advance, export negotiation, export bill advance under collection, remittance financing for
import/export, and credit insurance financing, factoring, bill avalization and other business varieties.
1.2 If Party A conducts import factoring or domestic buyer factoring with Party B as the debtor, the account receivable owed by Party B transferred to
Party A in such business shall offset the above-mentioned LOC; if Party B applies for domestic seller factoring or export factoring to Party A, the basic
acquisition price (basic acquisition funds) provided by Party A to Party B using its own funds or other legal funds shall offset the above-mentioned LOC.
1.3 Where Party A, according to the needs of its internal processes, entrusts other branches of China Merchants Bank to issue a subsidiary letter of credit
to the beneficiary after issuing the master letter of credit, the bill advance and delivery against bank guarantee that occurs under such letter of credit shall
offset the above-mentioned LOC;
When the import letter of credit is used, if the import bill advance is actually incurred later under the same letter of credit, the import letter of credit and
import bill advance shall offset the same amount at different stages. That is, when the import bill advance occurs, the amount recovered after the letter of
credit is paid, if re-used for import bill advance, shall be deemed to offset the same amount under the original import license.
1.4 The LOC exclude the amount of credit corresponding to the security deposit or pledge of deposit provided by Party B or a third party for a single
specific transaction under this Agreement, the same below.
1.5 The unsettled balance for business conducted under the (insert the name and No. of agreement) previously entered by Party A (or Party A’s
subsidiary) and Party B are automatically incorporated in this Agreement and shall offset the LOC under this Agreement.
2. Credit Period
The credit period shall be 12 months, from July 11, 2018 to July 10, 2019.Party B shall submit application for using the credit line to Party A during the
credit period, and Party A does not accept the application for using the credit line submitted by Party B after the expiration of the credit period, except as
otherwise provided in this Agreement.
3. Types and Scope of Credit Line
The types of LOC under this Agreement (revolving LOC or one-time LOC), the applicable types of credit granting, the amount of LOC under each type
of credit granting, the transferability of different types of credit granting, and the specific conditions for use, etc. are subject to the approval of Party A. If
Party A makes adjustments to its original approval opinions according to the application of Party B during the credit period, the subsequent approval opinions
issued by Party A constitute supplements and changes to the original approval opinions, and so on.
4. Use of LOC
4.1 The specific business agreement (whether a single agreement/application or a framework agreement) signed by Party A and Party B for each specific
business under the LOC constitutes an integral part of the Credit Granting Agreement and they jointly specify the rights and obligations, etc. related to the
specific business.
Party B must apply for using the LOC on a case-by-case basis and submit the materials requested by Party A. Party A shall examine and approve the
application one by one. Party A has the right to comprehensively consider whether to approve based on its internal management requirements and Party B’s
operation, and has the right to refuse Party B’s application unilaterally, without bearing any form of legal responsibility for Party B. In the event of any
inconsistency between this paragraph and other terms, the agreement in this paragraph shall prevail.
2
The business elements such as the specific amount, interest rate, term, purpose, and expenses of each loan or other credit granting shall be determined by
the specific business agreement, the business certificate confirmed by Party A, and the business record of Party A’s system.
4.2 The using period of each loan or other credit granting under the LOC shall be determined according to Party B’s business needs and Party A’s
business management rules. The expiration date of specific business may be later than the expiration date of credit period (unless otherwise requested by
Party A).
4.3 During the credit period, Party A shall have the right to assess Party B’s operation and financial status on a regular basis every year, and adjust the
LOC available for Party B to use based on the assessment (if this provision is applicable, please place a √ in the ☐).
5. Guarantee Provisions
5.1 All the debts owed by Party B to Party A under this Agreement shall be jointly and severally guaranteed by Lin Minghui, Deng Zhaohui, Yang
Xiaofeng and Pan Yan, and they shall issue a separate letter of guarantee to Party A.
At the same time, the working capital loan limit of RMB Three Million yuan under this Agreement is jointly and severally guaranteed by the Shanghai
Small and Medium-sized Enterprises Policy Financing Guarantee Fund Management Center. The guarantee amount is not less than 70% of the principal
amount of the single loan to Party B, with the specific proportion being subject to the Guarantee Contract signed by Party A and the Shanghai Small and
Medium-sized Enterprises Policy Financing Guarantee Fund Management Center when Party B use the working capital loan limit.
5.2 All debts owed by Party B to Party A under this Agreement shall be pledged by the property it owns or has the right to dispose of according to law,
and the two parties shall sign a guarantee contract separately.
If the guarantor fails to sign the guarantee contract and complete the guarantee procedures in accordance with the provisions of this clause (including the
debtor of account receivable raises a defense before the receivable is pledged), Party A has the right to refuse to provide credit to Party B.
5.3 Under the circumstances that the guarantor provides the guarantee for any debt owed by Party B to Party A under this Agreement using real estate,
Party B shall immediately notify Party A if it knows that the collateral has been or may be included in the government demolition and land expropriation plan,
and press the guarantor to continue to provide guarantees for Party B’s debts in accordance with the guarantee contract using the compensation provided by
the expropriator and complete the corresponding guarantee procedures in a timely manner, or provide other guarantee measures required and approved by
Party A.
Under the circumstances stated in the preceding paragraph, if the guarantee needs to be reset or other guarantee measures are taken, the relevant
expenses incurred shall be borne by the guarantor, with Party B being jointly and severally liable for the expenses. Party A has the right to deduct these fees
directly from Party B’s account.
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6. Rights and Obligations of Party B
6.1 Party B shall have right to:
6.1.1 Request Party A to provide loans or other credits within the LOC in accordance with the conditions specified in this Agreement;
6.1.2 Use the LOC as stipulated in this Agreement;
6.1.3 Request Party A to keep confidential the production, operation, property, account and other information provided by Party B, unless otherwise
required by laws and regulations or otherwise required by the regulatory authority; and
6.1.4 Transfer the debt to a third party after obtaining the consent of Party A.
6.2 Party B shall bear the following obligations:
6.2.1 It shall truthfully provide documents and information required by Party A (including but not limited to providing its true financial books/statements
and annual financial reports in the period required by Party A, major decisions and changes in production, operation and management, withdrawal/use of
funds, information related to guarantee, etc.), and all the bank accounts, account numbers and balance of deposits and loans, as well as cooperate with Party
A’s investigation, review and inspection.
6.2.2 It shall accept the supervision of Party A on its use of credit funds and related production operations and financial activities.
6.2.3 It shall use loans and/or other credits in accordance with the provision of this Agreement and the specific contract and/or promised purposes.
6.2.4 It shall repay the principal, interest and expenses of loans, advances and other debt under credit granting in full and on time in accordance with the
provisions of this Agreement and each specific contract.
6.2.5 It shall obtain Party A’s written consent if transferring all or part of the debts under this Agreement to a third party.
6.2.6 Under the following circumstances, it shall immediately notify Party A and actively cooperate with Party A to implement the guarantee measures
for the safe repayment of principal, interest and expenses of loans, advances and other debt under credit granting:
6.2.6.1 Occurrence of major financial losses, asset losses or other financial crisis;
6.2.6.2 Providing a loan or guarantee for a third party, or providing a collateral (pledge) guarantee with its own property (right);
6.2.6.3 Suspension of business, revocation or cancellation of business license, filing or being filed for bankruptcy, dissolution, etc;
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6.2.6.4 The controlling shareholder and other related companies fall into a major operational or financial crisis, which affects their normal operation;
6.2.6.5 The amount of the related transaction with the controlling shareholder and other related companies exceeds 10% of the net assets of Party B;
6.2.6.6 Occurrence of any litigation, arbitration or criminal or administrative penalty that has a material adverse effect on its business or property status;
and
6.2.6.7 Occurrence of other significant events that may affect its ability to pay its debts.
6.2.7 It shall not neglect to manage and exercise their mature creditor’s right, or dispose of existing primary property improperly or without
consideration.
6.2.8 It shall obtain the written consent of Party A before carrying out major events such as merger (M&A), division, restructuring, joint venture
(cooperation), transfer of property (share) rights, joint-stock reform, foreign investment, and increase of debt financing.
6.2.9 In accordance with Party A’s request, it shall: (place a “√” in ☐)
● Effect insurance for its core assets and designate Party A as the first-order beneficiary;
● Not sell or use as collateral the / assets designated by Party A before the settlement of the debt under the credit granting;
● Impose the following restrictions on the dividends paid to its shareholders as required by Party A before the settlement of the debt under the credit
granting: / ;
● Others: / .
6.2.10 In the event of dynamic pledge of accounts receivable, it shall guarantee that the LOC balance at any point during the credit period is lower than
/ % of the balance of pledged accounts receivable, otherwise must provide new accounts receivable recognized by Party A for pledge or pay a security
deposit until the balance of the accounts receivable pledged ×/ % + valid security deposit > LOC balance.
6.2.11 In the event that Party B provides a security deposit for pledge, it shall be obliged to add the corresponding amount of security deposit or provide
other guarantee in accordance with Party A’s request if the balance of the security deposit falls short of _/_% of the specific business amount due to exchange
rate fluctuations.
6.2.12 It shall ensure that the payment for goods under the import transaction are collected through the account designated by Party A; in the event of
export negotiation, transfer the notes and/or documents under the letter of credit to Party A.
7. Rights and Obligations of Party A
7.1 Party A shall have:
7.1.1 Right to request Party B to repay the principal, interest and expenses of the loan, advance and other debt under the credit granting under this
Agreement and the specific contract in full and on time;
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7.1.2 Right to request Party B to provide information related to the use of the LOC;
7.1.3 Right to know the production and operation and financial activities of Party B;
7.1.4 Right to supervise Party B’s use of loans and/or other credits for the purposes specified in this Agreement and each specific contract; directly
suspend or limit the corporate online banking function of Party B’s account when the business needs it (including but not limited to closing the online
banking, presetting the list of payment targets/single payment limit/phased payment limit, etc.), restrict the sale of settlement documents, or restrict telephone
banking, mobile banking and other non-counter payment and universal cash withdrawing functions of Party B’s account;
7.1.5 Right to entrust other agencies of China Merchants Bank located at the place where the beneficiary is located to issue subsidiary letter of credit to
the beneficiary, according to the needs of its internal processes, after accepting Party B’s application for the opening of letter of credit;
7.1.6 Right to deduct directly from the account opened by Party B at any branch of China Merchants Bank to repay the debts owed by Party B under this
Agreement and each specific contract (when the debt under the credit granting is not in RMB, it has the right to deduct directly from the RMB account of
Party B and purchase foreign exchange at the exchange rate published by Party A to repay the principal, interest and expenses under the credit granting);
7.1.7 Right to transfer its creditor’s rights owed by Party B and notify Party B of the transfer and collect the debt in such manner as it deems appropriate,
including but not limited to by fax, posts, personal delivery, and announcement in public media;
7.1.8 Right to supervise the account of Party B and entrust other agencies of China Merchants Bank other than Party A to supervise Party B’s account,
and control the payment of loan funds according to the loan purpose and payment scope agreed by both parties; and
7.1.9 Other rights set out in this Agreement.
7.2 Party A shall bear the following obligations:
7.2.1 It shall grant loans or other credits to Party B within the LOC in accordance with the conditions stipulated in this Agreement and each specific
contract; and
7.2.2 It shall keep confidential the information of assets, finance, production and operation of Party B, except as otherwise provided by laws and
regulations or otherwise required by the regulatory authority.
8. Party B specifically undertakes:
8.1 That it is a legal person duly incorporated and validly existing under the laws of PRC and have full civil capacity to sign and perform this
Agreement, and its registration and annual report publicity procedures are true, legal and valid;
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8.2 That it has been fully authorized by the Board of Directors or any other authorized body to sign and fulfill this Agreement;
8.3 That the documents, information, and vouchers provided by it regarding Party B, the guarantor, the mortgagor (pledgor), and the collateral (pledged
property) are true, accurate, complete, and valid, without any significant errors that are inconsistent with the facts or omissions of any significant facts;
8.4 To strictly abide by covenants set out in the specific business agreements and various letters and related documents issued to Party A;
8.5 That at the time of signing this Agreement, there was no litigation, arbitration or criminal or administrative punishment that may have significant
adverse consequences for Party B or Party B’s major property, and such litigation, arbitration or criminal or administrative penalties will not occur during the
execution of this Agreement; in the event of occurrence, Party B shall immediately notify Party A;
8.6 To strictly abide by the national laws and regulations in business activities, carry out various business in strict accordance with the business scope
stipulated by the business license of Party B or approved according to law, and go through the formalities for registration, annual inspection, and the extension
of term of business operation, etc. on time;
8.7 To maintain or enhance the management level, ensure the value preservation and appreciation of existing assets, and not to waive any mature claims
or dispose of existing major assets improperly or without consideration;
8.8 That without the permission of Party A, it shall not pay off other long-term debts in advance, , and ;
8.9 That at the signing and during the performance of this Agreement, no other significant events occur to Party B that affect the performance of its
obligations under this Agreement;
8.10 That, during the validity period of this Agreement, if Party B’s annual main business revenue falls short of RMB 300 million yuan, the funds
withdrawn under this Agreement shall not exceed RMB 8 million yuan;
8.11 That, during the validity period of this Agreement, it shall notify Party A in writing in advance of the profit distribution, and its undistributed profit
shall not be less than 2 times of the balance of LOC under this Agreement (excluding the conversion of profit into registered capital).
8.12 / .
9. Other expenses
In the event that this agreement needs to be notarized (excluding mandatory notarization) or other services provided by a third party, the relevant
expenses shall be borne by the party as the client in the commission. If the two parties jointly act as the client, they shall each bear 50%.
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In the event that Party B cannot repay the debts owed to Party A under this Agreement, Party B shall bear attorney fees, legal fees, travel expenses,
announcement fees, delivery fees and all other expenses incurred by Party A to realize the creditor’s rights. Party B authorizes Party A to directly deduct such
expenses from Party B’s bank account in Party A. If there are any shortfalls, Party B undertakes to repay the amount after receiving the notice from Party A,
and Party A does not need to provide any proof.
10. Event of Default and the Settlement
10.1 It shall be deemed an event of default if:
10.1.1 Party B fails to perform or breaches the obligations set out in this Agreement;
10.1.2 The information in the representations or undertakings made by Party B under this Agreement is untrue or incomplete, or Party B breaches the
requirement and does not make correction as required by Party A;
10.1.3 Party B commits a significant breach of a legally valid contract signed with other creditors and fails to satisfactorily resolve it within three months
from the date of breach;
The aforesaid significant breach of contract means that due to Party B’s breach, its creditors have the right to claim compensation of more than
RMB/ from Party B;
10.1.4 Party B encounters significant obstacles in listing its shares on the New Third Board or suspends its listing application; Party B is subject to
warning letter, ordered corrections, restrictions on securities account trading and other self-regulatory measures for more than three times or subject to
disciplinary punishment, termination of listing, etc; or
10.1.5 Other events occurs that, in the opinion of Party A, damage its legitimate rights and interests.
10.2 If one of the following circumstances occurs to the guarantor, Party A believes that it may affect the guarantor’s guarantee capacity, and requires
the guarantor to eliminate the adverse effects caused by it, or requires Party B to increase or replace the guarantee, but the guarantor and Party B fail to
cooperate, it shall be deemed an event of default:
10.2.1 A circumstance similar to those described in Clause 6.2.6 of this Agreement occurs, or the consent of Party A is not obtained when the
circumstances described in Clause 6.2.8 occur;
10.2.2 When the irrevocable letter of guarantee is issued, the actual guarantee capacity is concealed, or the authorization of relevant authority is not
obtained;
10.2.3 Failure to go through formalities for the annual inspection registration and the extension of term of business operation; or
10.2.4 Neglect to manage and exercise their mature creditor’s right, or disposal of existing primary property improperly or without consideration.
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10.3 If one of the following circumstances occurs to the mortgagor (or pledgor), Party A believes that it may result in the invalidity of the mortgage (or
pledge) or the shortfall in the value of collateral (pledged property), and requires the mortgagor (or pledgor) to eliminate the adverse effects caused by it, or
requires Party B to increase or replace the mortgage (or pledge), but the mortgagor (or pledgor) and Party B fail to cooperate, it shall be deemed an event of
default:
10.3.1 The mortgagor (or pledgor) does not own or has no right to dispose of the collateral (or pledged property), or there is dispute over the ownership;
10.3.2 The collateral (or pledged property) has been rented, seized, detained, supervised, or is subject to legal right of priority (including but not limited
to priority of construction project), and / or such circumstances are concealed;
10.3.3 The mortgagor transfers, leases, re-collateralizes the collateral or dispose of it in any other improper manner without the written consent of Party
A, or although the disposal of the collateral is consented to by Party A, the proceeds from the disposal are not used to repay the debt owed by Party B to Party
A as required by Party A;
10.3.4 The mortgagor does not properly keep, maintain and repair the collateral, and thus the value of the collateral is obviously impaired; or the
mortgagor’s acts directly jeopardize the collateral, resulting in a decrease in the value of the collateral; or the mortgagor does not effect insurance for the
collateral during the mortgage period according to Party A’s requirements;
10.3.5 The collateral has been or may be included in the scope of government demolition and expropriation, and the mortgagor fails to immediately
inform Party A and fulfill the relevant obligations as stipulated in the mortgage contract; or
10.3.6 Where the mortgagor uses its real estate mortgaged to China Merchants Bank to provide the residual value mortgage for the business under this
Agreement, the mortgagor settles the personal mortgage loan in advance without the consent of Party A before Party B pays off the debt under this
Agreement.
10.4 When the guarantee under this Agreement includes the pledge of accounts receivable, if the debtor of the accounts receivable obviously deteriorates
in operation, transfers property/withdraws funds to avoid debts, colludes with the pledgor to change path for the payment of receivables, causing that the
collected funds are not transferred to the account designated for receivable collection, loses business reputation, loses or may lose the ability to perform
contract, or other significant events affecting the debtor’s solvency occurs, Party A has the right to request Party B to provide corresponding guarantee or
provide new valid receivables for pledge; if Party B fails to provide, it shall be deemed an event of default.
10.5 In the event of any of the above default, Party A shall have the right to adopt the following measures, separately or simultaneously:
10.5.1 Reducing the LOC under this agreement, or stop the use of remaining LOC balance;
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10.5.2 Recovering in advance the principal, interest and related expenses of loans issued within the LOC;
10.5.3 For bills that have been accepted by Party A during the credit period, or letter of credit (including subsidiary letter of credit issued by branches
entrusted by Party A), letter of guarantee, and letter of delivery against bank guarantee, etc. that have been issued by Party A , Party A may request Party B to
increase the amount of the security deposit (regardless of whether Party A has made advance payment), or transfer the funds in other accounts opened by
Party B at Party A into its security deposit account as a security deposit for the settlement of Party A’s advances under this Agreement, or hand over the
corresponding funds to a third party as a security deposit for Party A’s advance payment for Party B;
10.5.4 For the unpaid accounts receivable transferred from Party B to Party A under factoring, Party A has the right to request Party B to immediately
fulfill repurchase obligations and take other recovery measures in accordance with the specific business agreements; for the accounts receivable transferred
from Party B to Party A under factoring, Party A has the right to seek recourse from Party B.
10.5.5 Party A may directly request Party B to provide other property accepted by Party A as a new guarantee, and if Party B fails to provide new
guarantee as required, a penalty shall be levied against it at a rate of / % of the LOC amount under this Agreement.
10.5.6 Directly freezing/deducting deposits from any settlement account and/or other accounts opened by Party B at China Merchants Bank; and
10.5.7 Seeking recourse in accordance with this Agreement.
10.6 For the funds obtained by Party A through seeking recourse, the repayment sequence shall be from the earliest to latest according to the actual
maturity date of each credit. For each credit, the repayment sequence shall be from expenses, penalty, compounded interest, penalty interest, interest, to the
principal of credit, until all the principal, interests and related expenses are paid off.
Party A has the right to unilaterally adjust the above repayment sequence, unless otherwise required by laws and regulations.
11. Change and Rescission of Contract
This Agreement may be changed and rescinded upon negotiation and conclusion of a written agreement by the Parties hereto. This Agreement shall still
be valid before the conclusion of the written agreement. Any Party shall not change, amend or rescind this Agreement unilaterally.
12. Miscellaneous
12.1 During the term of this Agreement, any tolerance, grace period granted by Party A for Party B’s breach of contract or delay of performance, or any
delay of Party A in performing any rights or interests under this Contract shall not damage, affect, or limit any rights and interests of Party A as a creditor
vested by relevant laws and this Agreement, and shall neither be deemed as Party A’s consent or approval to any breach of this Agreement by Party B, nor be
deemed as Party A’s waiver of right to take action against any existing or future default.
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12.2 In the event that this Agreement or any part thereof becomes null and void for any reason, Party B shall still be liable for repaying all the debt owed
to Party A under this Agreement. Under the above-mentioned circumstances, Party A shall have the right to terminate this Agreement and promptly claim for
the repayment of all the debt owed by Party B under this Agreement. In the event that any change in the applicable laws and policy requirements causes the
increase of costs for Party A to perform the obligations under the Agreement, Party B shall compensate Party A for the new costs as required by Party A.
12.3 Notices, requests or other documents related to this Agreement between Party A and Party B shall be sent in writing (including but not limited to by
letters, faxes, e-mails, Party A’s online banking, SMS or WeChat).
12.3.1 For the delivery by hand (including but not limited to delivery by lawyer/notary, express, etc.), the instrument shall be deemed to have been
served when the addressee signs the receipt (in the event of rejection by the addressee, it shall be deemed to have been served on the date of rejection/return
or the 7th day after mailing ( whichever is earlier)); for the delivery by mail, the instrument shall be deemed to have been served at the 7th day after mailing;
for the delivery by fax, email, Party A’s online banking notice, SMS, WeChat or other electronic means, the instrument shall be deemed to have been served at
the date when the sender’s corresponding system displays that the transmission is successful.
For the notice to Party B regarding the transfer of the creditor’s right or dunning published by Party A on mass media, it shall be deemed to have been
served on the date of publishing.
Any Party that changes the contact address, email address, fax number, mobile number or WeChat account number shall notify the other party of the
change within five working days from the date of the change, otherwise the other party shall have the right to deliver the instrument according to the original
contact address or information If the instrument is not successfully delivered due to the change of contact address, the date of return or the 7th day after
delivery (whichever is earlier) shall be deemed to be the date of service. The party making the change is responsible for the losses that may arise therefrom,
and the legal effect of delivery shall not be affected.
12.3.2 The above-mentioned contact address, email address, fax number, mobile number, and WeChat account number are also used as their respective
address for service of notary instruments and judicial instruments (including but not limited to bill of complaint/arbitration applications, evidence, subpoenas,
notice of responding to action, notice to produce evidence, notice of court session, notice of hearing, judgment/arbitration award, verdict, conciliation
statement, notice for performance within a time limit and other instruments in the hearing and execution stages). The instruments shall be deemed to be
served effectively if the court or notary office accepting the case delivers them in writing to such address in accordance with this Agreement (the specific
criteria for service shall be implemented by reference to the provisions of paragraphs 12.3.1).
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12.4 The parties hereto agree that for each business application under the trade financing, Party B shall affix the seal according to the Letter of
Authorization for Reserved Specimen Seal provided by Party B to Party A, and both parties shall recognize the validity of such seal.
12.5 When Party B submits various applications under the credit granting through Party A’s online banking system, Party B’s digital signature generated
in the form of digital certificate is a valid signature for the application. Party A has the right to fill out relevant business documents according to the
application information sent online, and the authenticity, accuracy and legitimacy of the information shall be confirmed by Party B.
12.6 The supplementary written agreements entered into, upon negotiation, by the parties hereto for the matters that are not covered in this Agreement or
are subject to change, and the specific contracts under this Agreement shall be regarded as annexes to this Agreement and constitute an integral part thereof.
12.7 In order to facilitate business processing, the letters or documents related to Party A’s operations involving transactions under this Agreement
(including but not limited to acceptance of applications, data review, lending, transaction confirmation, withholding of funds, inquiry, receipt printing,
dunning, payment deduction, etc. and various notifications) may be generated or issued at any business outlet of Party A. The operations of and letters or
documents issued by Party A’s business outlets shall be deemed to be the acts of Party A and binding upon Party B.
12.8 The annexes to this Agreement shall constitute an integral part of this Agreement and are automatically applicable to the specific business that
actually occurs between the parties hereto.
12.9 / .
13. Governing Laws and Settlement of Dispute
13.1 The conclusion, interpretation, and dispute settlement of this Agreement shall all be governed by the laws of the PRC (excluding Hong Kong,
Macao and Taiwan laws), which protect the rights of both parties.
13.2 Any dispute arising from the performance of this Agreement shall be settled through friendly negotiation by the parties hereto. If the negotiation
fails, any party may (please place a √ in ☐ for selection
● 13.2.1 file a suit at the people’s court in the place where this Agreement is signed
● 13.2.2 file a suit at the people’s court in the place where Party A is located
● 13.2.3 refer the dispute to / (insert the name of specific arbitrator) for arbitration, with the arbitration venue being at/ .
13.3 If the parties hereto have this Agreement and related contracts notarized for legal enforcement, then Party A may directly apply to the people’s
court with jurisdiction for enforcement to collect the debt that Party B owes under this Agreement and related contracts.
14. Effectiveness of Agreement
This Agreement shall become effective after being signed (or sealed) by the legal representatives/person in charge or the authorized signatories of both
parties and being affixed with the company seal/special seal for contract of both parties, and shall automatically terminate upon expiration of the credit period
or full repayment of the debt and other related fees under this Agreement owed by Party B to Party A (whichever comes later).
15. Supplementary Provisions
This Agreement shall be made in copies, with Party A, Party B, and each holding one copy, which have the same legal effect.
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Annex I Special Provisions regarding Online Customs Clearance (Customs Duties and Dues Payment Guarantee)
Annex II: Special Provisions regarding Buyer / Import Factoring
Annex III: Special Provisions regarding Order-related Loan
Annex IV: Special Provisions regarding Guaranteed Discount for Commercial Acceptance Bills
Annex V: Special Provisions regarding Derivative Transactions
Annex VI: Special Provisions regarding Gold Leasing
Annex VII: Special Provisions regarding Cross-border linkage Trade financing
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Annex I Special Provisions regarding Online Customs Clearance (Customs Duties and Dues Payment Guarantee)
1.
If Party B applies to Party A for customs duties and dues payment guarantee within the LOC, Party B shall login to electronic port system /
www.easipay.net to send Party A the online payment bank guarantee order; Party A provides guarantee to Party B, within the LOC, for its payment of tax
payable to the customs in the form of electronic payment guarantee letter through electronic port system / www.easipay.net (guaranteeing that the tax
payable by Party B will be paid to the state treasury when the tax payable is due, and the guarantee will be reflected in the system by the information of
“Payment is Successful” sent by Party A to electronic port system / www.easipay.net), realizing that the formalities for goods customs clearance are gone
through at first, and the relevant import and export duties and dues are paid later within the time limit stipulated by the customs.
Party A’s advance payment (regardless of whether made during the credit period) under the payment guarantee and related interest and expenses shall
directly constitute debts owed by Party B to Party A and be included in the scope of the LOC.
2. Party B shall deposit a certain amount of funds in Party A as the security deposit according to the requirements of Party A (the account number shall be
subject to the account automatically generated or entered when the funds are deposited), and provide counter-guarantee for Party A’s tax payment
guarantee.
3. Party A issues an electronic payment guarantee instrument to the customs in its capacity as the guarantor; Party B is aware and confirms that the
electronic payment guarantee has the nature of independent guarantee, and the guarantee liability assumed by A to the customs is an independent demand
guarantee.
4. Party B shall send a withholding order to Party A through electronic port system / www.easipay.net, and Party A shall issue a payment guarantee to the
customs according to the withholding order sent by Party B; Party B shall grant Party A the right to deduct the principal and interest of the guarantee
amount from its security deposit accounts concerned and the right to fill out relevant business documents according to the withholding order issued
online.
The specific time, amount, etc. of each payment guarantee provided by Party A within the LOC shall be subject to Party B’s online payment bank
guarantee order (payment guarantee withholding order) received by Party A and stored in the online system. Party B must send the payment guarantee
withholding order to Party A within the credit period, and Party A will not accept such order sent beyond the credit period.
Party A shall determine the expiration date of the single payment guarantee according to the “time limit for payment” (i.e. “date when tax payable is
due”) specified by the actual deduction order sent to Party A by electronic port system / www.easipay.net.
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5.
If Party B does not use the LOC for the customs duties and dues payment guarantee for consecutive months, Party A has the right to refuse to
conduct such business for Party B.
6. Party B authorizes Party A to directly deduct funds from Party B’s account (including security deposit account) to pay tax to customs when the tax
payable by Party B is due, without notifying Party B or obtaining Party B’s consent If the account amount is insufficient to pay, Party B guarantees that
all the shortfall amount will be transferred into the account designated for tax payment within 3 days before the date when the tax payable is due, making
preparation for the payment due. If Party B fails to make up the shortfall in time, Party A shall have the right to seek recourse from Party B after making
advance payment to state treasury due to the obligation under the payment guarantee, and shall have the right to levy a penalty against Party B at an
annual rate of % of the advance amount according to the actual days counted from the date when the advance payment is made.
7. Party A shall charge a guarantee fee quarterly at an annual rate of % of the actual transaction amount under the online payment bank guarantee.
8.
If Party B fails to fulfill its obligations under the Credit Granting Agreement or this Annex, or if any statement, undertakings or guarantee made by it is
untrue, Party A shall have the right to take any remedy measures set out in the Credit Granting Agreement, and to require a security deposit from Party B
equal to 100% of the total amount of the payment guarantee provided by Party A under which no claim has occurred.
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Annex II: Special Provisions regarding Buyer / Import Factoring
1. Definition
1.1 The buyer/import factoring means that Party A, as the buyer/import factor, provides approved payment, accounts receivable dunning and management
and other comprehensive factoring services for seller/export factor after the seller/export factor transfers to it the accounts receivable (under a business
contract) of which Party B is the debtor.
Under the buyer/import factoring, if the buyer’s credit risk occurs, Party A shall be liable to seller/export factor for approved payment; if a dispute arises
during the performance of the business contract, Party A shall have the right to re-transfer to the seller/export factor the accounts receivable transferred to
it.
1.2 The seller/export factor is the party that signs a factoring agreement with the supplier/service provider (creditor of an account receivable) under the
business contract and to which the account receivable held by the creditor thereof is transferred. Party A may act both as a buyer/import factor and as a
seller/export factor.
1.3 The dispute refers to the defense, counter claim, offset or other similar acts filed by Party B in respect of the accounts receivable transferred to Party A
due to any dispute related to the goods, services, invoices or any other commercial contracts related matters between the creditor of the accounts
receivable and Party B, and the acts of a third-party to make a claim on or apply for the freezing of the accounts receivable under this Agreement. If the
accounts receivable transferred to Party A cannot be recovered in full or in part due to non-buyer’s credit risk, it shall be deemed to be a dispute.
1.4 Business contract: refers to the transaction contract signed between Party B and the creditors of the accounts receivable for the purpose of commodity
trading and/or service trading, with sale on credit as the settlement method.
1.5 Approved payment / guaranteed payment means that after the occurrence of buyer’s credit risk, Party A shall pay the corresponding amount of the
account receivable to the seller/export factor within a certain period after the account receivable is mature.
2. Upon application by Party B, Party A agrees to conduct buyer/import factoring for it within the LOC. the funds and related expenses paid by Party A as
the buyer/import factor for performing the obligations of the approved payment shall be deemed as the credit granted by Party A to Party B under the
Credit Granting Agreement.
As long as an account receivable is transferred to Party A during the credit period, Party A shall have the right to seek recourse from Party B in
accordance with the provisions of the Credit Granting Agreement and the business contracts, even if it performs the obligations of the approved payment
beyond the credit period.
3. Commission fees of buyer/import factoring
Commission fees of factoring: mean the business management fee that should be charged by Party A for the buyer/import factoring services, which shall
be charged by Party A from Party B according to a certain percentage of the amount of accounts receivable at the time of transfer, with the specific rate
being reasonably determined by Party A in accordance with its business rules.
4. Party B shall waive the right to raise an objection based on disputes arising during the performance of the business contract. In view of this, regardless of
whether there are other agreements, if Party B fails to make payment in accordance with the provision of the business contract, it shall be deemed as the
occurrence of the buyer’s credit risk; Party A will make the approved payment, and Party B will raise no objection.
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Annex III: Special Provisions regarding Order-related Loan
1. The order-related loan means the loan lent by Party A to Party B based on the business contract (or engineering contract) signed between Party B and its
downstream customers, used for the performance of the business contract (or the engineering contract) for the business unit, with the proceeds from the
business contract (or engineering contract) being the first source for the repayment of the loan.
2. Party B shall open a special account at Party A for the collection of proceeds under the business contract (or engineering contract). All sales under the
business contract (or engineering contract) based on which the order-related loan is applied must be directly paid to the special account; without the
approval of Party A, the funds may not be used and the special account may not be changed. Party B shall notify the payer that the account is the only
account for the payment of sales proceeds. Party A has the right to deduct the funds from the special account for the repayment of the principal and
interest, penalty interest and other related expenses of the order-related loan.
3. Under any of the following circumstances, Party A may immediately stop the use of remaining LOC balance under the Credit Granting Agreement, and
take remedy measures in accordance with the Credit Granting Agreement:
3.1 The downstream customers of Party B have delayed in payment for three consecutive periods, and Party A has reasonably judged that their financial
status has deteriorated, which is not conducive to protecting Party A’s creditor’s rights; and
3.2 Party B’s supplier qualification is canceled by its downstream customers, Party B’s supply to the downstream customers is not timely, the product quality
is unstable, Party B fails to make progress in construction as scheduled in the engineering contract, which is not recognized by the downstream
customers, the industry practice qualification of Party B has been lowered, which results in its failure to meet the requirements of downstream customers,
Party A has reasonably judged that Party B is difficult to operate and its financial status deteriorates, the funds collected from downstream customers is
less than the monthly total repayment amount of financing contracts under the credit granting for three consecutive months, or the downstream customers
fail to pay the installments as agreed in the engineering contract for two consecutive period.
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Annex IV: Special Provisions regarding Guaranteed Discount for Commercial Acceptance Bills
1. The guaranteed discount for commercial acceptance bills is a service that Party A undertakes to discount the commercial acceptance bills accepted by
Party B or allows the bill holder to apply for discount to any branch of China Merchants Bank (hereinafter referred to as “other discount acceptance
banks”). The holder (hereinafter referred to as the “discount applicant”) may apply to Party A or other discount acceptance banks for discounting such
commercial acceptance bills. Such discount services shall offset the LOC under this Agreement.
In view that the guaranteed discount for commercial acceptance bills provided by Party A for Party B is the prerequisite for other discount acceptance
banks to accept the bill holder’s application for discounting, other discount acceptance banks have the right to transfer the discounted bills to Party A
after the discounting, and Party A is obliged to accept the transfer. For the commercial acceptance bills transferred from other discount acceptance banks
to Party A, Party B undertakes to pay the bills unconditionally on the maturity date, and the parties hereto have no objection.
2. The commercial acceptance bills mentioned in this clause include both paper commercial acceptance bills and electronic commercial acceptance bills
(hereinafter referred to as “electronic bills”); both commercial acceptance bills with discount interest being paid by discount applicant and commercial
acceptance bills with discount interest being paid by buyer.
The discount of commercial acceptance bills with discount interest being paid by buyer means bill discount that the discount interest is paid by Party B
when the commercial acceptance bills issued and accepted by it are discounted.
3. During the credit period, Party B shall open a commercial acceptance bill security deposit account in Party A (the account number shall be subject to the
account automatically generated or entered when the security deposit are deposited), and deposit a certain amount of funds in the security deposit account
according to the requirements of Party A before the discount guarantee is issued for each commercial bill, which shall be used as the security deposit for
the payment of commercial acceptance bill accepted by Party B that Party A undertakes to discount.
Party B shall deposit the full amount of the bill payable in the security deposit account opened at Party A before the maturity of each commercial
acceptance bill, making preparation for the payment of bills due.
4. During the credit period, the discount applicant may apply directly to Party A for discounting the commercial acceptance bill accepted by Party B, or
apply to other discount acceptance banks for discounting. Party A or other discount acceptance banks have the right to examine the qualification of
discount applicants, and have the right to request Party B to confirm upon review, and determine on its own whether to conduct the discount.
After conducting discount, the other discount acceptance banks shall have the right to transfer the discounted commercial acceptance bills to Party A in
accordance with the relevant rules of China Merchants Bank. When Party A require Party B to pay a commercial acceptance bill after discounting the
commercial acceptance bill or receiving the commercial acceptance bill discounted by other discount acceptance banks, Party B shall unconditionally,
fully and timely pay Party A the amount of bill payable.
5. The issuing and discounting of each electronic bill shall be subject to the business information stored in the PBOC electronic bill system, or the business
records such as customer statements filled or printed according to it. The business records of Party A shall constitute an integral part of this Agreement
and have the same legal effect as this Agreement: Party B acknowledges the accuracy, authenticity and legality of such records.
6.
If any dispute arises from the underlying contract of the commercial acceptance bill that Party A undertakes to discount within the LOC, Party B shall
settle the dispute with the relevant parties themselves; before the maturity of each bill, Party B shall still be obliged to fully and timely deposit the
security deposit and the bill amount according to the foregoing agreement.
7. Where Party A has discounted the commercial acceptance bill accepted by Party B or has received the commercial acceptance bill accepted by Party B
from other discount acceptance banks, Party A shall have the right to deduct funds from any account opened by Party B at Party A for the payment of bill
amount if Party B fails to provide full amount of the bill payable before the maturity date of the commercial acceptance bill. For the advance payment
made by Party A due to the insufficiency of amount provided by Party B and the insufficient balance of its account, Party A shall have the right to levy a
penalty against Party B at a rate of ‱ of the amount of advance payment in accordance with the relevant provisions of the Measures for Payment and
Settlement.
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Annex V: Special Provisions regarding Derivative Transactions
1. A derivative transaction for which Party A accepts the application of Party B may offset the LOC according to a certain percentage of the nominal
principal/transaction amount of the transaction, or when floating loss occurs to the derivative transaction, Party A may offset additional amount of LOC
granted to Party B according to the specific agreement between the parties (the additional amount being offset shall be determined by Party A according
to the type, duration and risk of the derivative, as well as the risk coefficient of the business corresponding to the offset LOC at the occurrence of each
specific trading). The amount of LOC being actually offset shall be subject to the notice of amount of LOC being offset issued by Party A and/or trading
confirmation letter/certificate and other trading documents.
2. Where there is a derivative transaction with a balance or loss during the credit period, it shall offset the LOC in accordance with the provisions of the
preceding clauses, regardless of whether the transaction occurs within the credit period.
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Annex VI: Special Provisions regarding Gold Leasing
1. The gold leasing service means that Party A leases the physical gold to Party B, and Party B will return the same amount of gold with the same quality
after the expiration of the lease, and pay a lease fee to Party A by installment.
2. Party A may provide gold leasing service during the credit period and within the LOC according to the application of Party B. The physical gold leased
out by Party A shall offset the LOC according to the value agreed in the gold lease agreement signed by both parties, and constitute debts owed by Party
B to Party A.
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Annex VII: Special Provisions regarding Cross-border linkage Trade financing
1. Cross-border linkage trade financing service refers to the cross-border trade financing service jointly provided by Party B and the foreign branches of
China Merchants Bank (hereinafter referred to as “linkage platform”) upon application of Party B based on the real cross-border trading between Party B
and foreign companies.
2. The specific varieties of cross-border linkage trade financing include, but are not limited to, back-to-back letter of credit, issuance of letter of credit by
mandate, offshore financing by mandate, bill avalization, overseas credit granting by letter of guarantee and cross-border trade financing through train.
The specific meanings and business rules, etc. of various services are set out by specific business agreements.
3. Under the back-to-back letter of credit, the master letter of credit of which Party B applies to Party A for the issuance shall directly offset the LOC under
this Agreement, and the bill advance or advance payment made by Party A for fulfilling the obligations of issuing bank under the master letter of credit
(regardless of whether made within the credit period) and related interest and expenses shall constitute the financing debts owed by Party B to Party A
and be included in the scope of LOC.
Under the issuance of letter of credit by mandate/offshore financing by mandate, the letter of credit issued by and trade financing provided by the linkage
platform to an overseas company (upon accepting the application by the overseas company) according to entrust by Party A based on the application of
Party B shall offset LOC under this Agreement. If Party A grants the funds of import bill advance under collection or advance payment to Party B for
overseas payment under the import collection, the funds of bill advance or advance payment (regardless of whether occurs within the credit period) and
related interest and expenses shall directly constitute the financing debts owed by Party B to Party A and be included in the scope of LOC.
Under the bill avalization, the bill accepted by Party B avalized by Party A according to Party B’s application shall directly offset the LOC under this
Agreement. If Party B fails to pay the full amount of the bill on time, Party A has the right to make advances directly for the avalized bill. Such advances
(regardless of whether occur during the credit period) and related interest and expenses are included in the scope of LOC.
Under the overseas credit granting by letter of guarantee, the letter of guarantee/standby letter of credit issued by Party A according to the application of
Party B shall directly offset the LOC under this Agreement. After the overseas company transfers the collection right (non-claim right) under the letter of
guarantee to the linkage platform, if the linkage platform claims to Party A according to the letter of guarantee/standby letter of credit, the advances made
by Party A (regardless of whether made during the credit period), and related interest and expenses shall directly constitute the financing debts owed by
Party B to Party A and be included in the scope of LOC.
Under the cross-border trade financing through train, after Party A approves Party B’s trade financing according to its application, the trade financing
provided directly by linkage platform to Party B shall offset the LOC under this Agreement. If Party B fails to timely repay the amount of trade financing
to the linkage platform in full, Party A has the right to repay it by way of bill advance or advance payment. The bill advance or advance payment
(regardless of whether made during the credit period) and related interest and expenses shall directly constitute the financing debts owed by Party B to
Party A and be included in the scope of LOC.
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Special Notes:
All terms & conditions of this Agreement (including annexes) are fully negotiated by the parties hereto. The Bank has brought to the attention of other
parties hereto the terms of exemption or restriction of bank liability, unilateral possession of certain rights by bank, addition of liability of other parties hereto
or restriction on the rights of other parties hereto, as well as having a comprehensive and accurate understanding of them. The Bank has provided
corresponding explanation on the above terms & conditions at the request of other parties hereto. The parties hereto have a unanimous understanding of the
terms & conditions of this Agreement.
(The content hereinafter contains no main text)
(This page is the signature page for the (Credit Granting Agreement) numbered
(5202180601))
Party A:
Person in charge or authorized signatory:
(signature/seal):
(China Merchants Bank Co., Ltd., Shanghai Century Avenue Branch)
Party B:
Legal representative/person in charge or the authorized signatory
(seal)
(seal)
(signature/seal):
CLPS Incorporation
Signed on: June 22, 2018
Signed in: Pudong New Area, Shanghai
Exhibit 10.13
Current Fund Loan Contract
(Applicable to 531)
Bank of Communications Co., Ltd.
Current Fund Loan Contract
Important Notes
Please read the full text of this contract carefully, especially those articles marked with ▲▲. Please inquire
the loaner in case of any question.
No.
Whereas, the borrower applies to the loaner for the line of credit of current fund, both parties hereby enter into this contract through negotiations to
clarify the obligations of each party.
Article 1. Definition
“Line of credit” refers to the maximum amount of balance of loan (under the revolving line of credit) or total loan (under the one-time line of credit) that
the loaner may issue to the borrower according to this contract. Such line of credit may be revolving or one-time (to be used for one or several times) in
accordance with this contract.
“Revolving line of credit” refers to the line of credit within which the borrower may apply for the loan for several times according to this contract.
“Balance of loan” refers to the sum of principal of the outstanding loan that the borrower obtains under this contract.
“Balance of line of credit” refers to the balance of the line of credit deducted with the balance of loan (under the revolving line of credit) or total loan
(under the one-time line of credit).
“Period of line of credit” refers to the period for the loaner to issue the loan to the borrower according to the application by the borrower and this
contract that it is in relation to the occurrence of loan but not the loan itself.
“Period of loan” refers to the period of each loan that both parties determine in the corresponding Application for Use of Line of Credit of Bank of
Communications (hereinafter referred to as Application for Use of Line of Credit).
“Business day of bank” and “business day” refer to the day on which banks at the place of the loaner operate the corporation business, excluding legal
holidays and rest days (excluding those adjusted to be business days). If any issuance, repayment, interest payment or maturity of loan lies at any non-
business day, it should be postponed to the next business day.
Terms including affiliate, affiliate transaction and major investor should contain the same meaning with those contained in the Accounting Standards for
Business Enterprises No.36 – Disclosure of Affiliates (CK [2006] No.3) published by the Ministry of Finance, as well as its subsequent revisions.
Article 2. Use of Line of Credit
2.1 Each time when needing to use the line of credit, the borrower should submit the application to the loaner at least 5 business days in advance. The
borrower should fill in the Application for Use of Line of Credit to obtain the approval by the loaner before using the line of credit.
▲▲2.2 Use of the line of credit must meeting following conditions:
(1) Balance of loan (under the revolving line of credit) or total loan (under the one-time line of credit) is within the line of credit;
(2) Amount of applied loan is within the balance of line of credit;
(3) Application date and issuance date are within the period of line of credit;
(4) Period of loan and maturity date of loan comply with this contract;
(5) Guarantee contract (if any) under this contract is effective and surviving, and while the guarantee contract is in the form of mortgage contract and/or
pledge contract, the secured real right is already set and surviving;
(6) The borrower has handled procedures to obtain licenses, approvals and registrations from the government necessary for the application for the loan,
and such licenses, approvals or registrations are surviving;
(7) No serious adverse change occurs in the operation status or financial status of the borrower after this contract takes effect;
(8) Application by the borrower meets relevant rules and regulations of the loaner;
(9) The borrower does not violate this contract;
(10) Payment mode of the loan meets this contract and if the loaner is entrusted to make the payment, the loaner should agree with the payment;
(11) If the loan is provided in any foreign currency, the borrower should provide the certificate providing that the loan meets relevant policies on the
management of foreign currency, including but not limited to the valid purpose certificate or registration document of foreign currency;
(12) The borrower has appointed the dedicated fund withdrawal account as required by the loaner and has signed the account management agreement.
▲▲2.3 If the loaner agrees to issue the loan, the final issuance information should be subject to the column of Application for Use of Line of Credit
printed by the bank. Application for Use of Line of Credit should be regarded as the Loan Certificate.
▲▲2.4 If the currency of the Application for Use of Line of Credit is different from that of the line of credit, it should be converted at the exchange rate
published by Bank of Communications Co., Ltd. in the beginning of each day only for the purpose of recognizing the balance of line of credit. If there is no
available exchange rate, it should be converted by the exchange rate reasonably determined by Bank of Communications Co., Ltd.
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▲▲2.5 After the borrower becomes the shareholder of the guarantor or the “actual controller” defined by the Company Law, the loaner may suspend or
cancel the line of credit not used by the borrower until the guarantor provides the resolution made by its Board of Shareholders (General Meeting) about
securing the borrower that is acceptable to the loaner.
Article 3. Interest Rate and Payment of Interest
3.1 Basic regulations on determining the interest rate
3.1.1 The interest rate should be agreed by both parties in the Application for Use of Line of Credit through negotiations in each use of the line of credit.
Unless any specific interest rate is agreed by both parties in the Application for Use of Line of Credit, the specific interest rate of each loan should be
determined in accordance with the type of benchmark interest rate, applicable date of benchmark interest rate, fluctuation extent/increase (decrease) value of
interest rate, interest rate fluctuation rules, interest rate fluctuation cycle, interest rate fluctuation cycle unit and specific beginning date of fluctuation (if
necessary) agreed in the corresponding Application for Use of Line of Credit.
3.1.2 Type and definition of “benchmark interest rate”: (1) “Benchmark interest rate of the People’s Bank” refers to the benchmark interest rate of RMB
loan of financial institutions published by the People’s Bank of China; (2) LPR quotation of Bank of Communications refers to the quotation for benchmark
interest rate of loan published by Bank of Communications Co., Ltd. on its official website; (3) LPR mean interest rate refers to the benchmark interest rate of
loan published by the National Inter-bank Funding Center.
3.1.3 If the currency is RMB, daily interest rate = monthly interest rate/30, monthly interest rate = annual interest rate/12; if the currency is HKD, GBP
and AUD, daily interest rate = annual interest rate/365; if the currency is USD, Euro, JPN and other foreign currencies accepted by the loaner, daily interest
rate = annual interest rate/360.
▲▲3.2 Interest rate of loan
The interest rate of each loan at the time of issuance should be determined in accordance with the fluctuation extent/increase (decrease) value on the
basis of the benchmark interest rate. If the “applicable date of benchmark interest rate” is set as T Day, then the benchmark interest rate to calculate the
specific interest rate of the loan at the time of issuance should be determined by following rules:
If the benchmark interest rate of the People’s Bank applies, the benchmark interest rate should be the benchmark interest rate of the People’s Bank on T
Day;
If LPR quotation of Bank of Communications applies, the benchmark interest rate should be the LPR value published on the latest business day before T
Day, and, if no LPR is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the former
business day before that day;
If LPR mean interest rate applies, the benchmark interest rate should be the LPR value published on the latest business day before T Day, and, if no LPR
is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the former business day before that
day.
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3.3 Adjustment of interest rate
3.3.1 Once the interest rate is recorded in the Application for Use of Line of Credit as fixed, such interest rate should apply to the loan within the period
of loan.
▲ ▲ 3.3.2 Once the interest rate is recorded in the Application for Use of Line of Credit as fluctuating, the interest rate adjustment date should be
determined according to the interest rate fluctuation rules, interest rate fluctuation cycle, interest rate fluctuation cycle unit and specific beginning date of
fluctuation (if necessary) agreed in the Application for Use of Line of Credit, and the adjusted interest rate should apply since the interest rate adjustment date.
3.3.2.1 If the benchmark interest rate is adjusted within the period of loan, the adjustment cycle of interest rate should be calculated by choosing
“fluctuating at bookkeeping date” or “fluctuating at specific date” in the “interest rate fluctuation rules” since the “bookkeeping date” or “specific date”. The
column of interest rate fluctuation cycle should be filled with the quantity of interest rate fluctuation cycles, the column of interest rate fluctuation cycle unit
may be filled with day or month. If the quantity of interest rate fluctuation cycle is “1” while the interest rate fluctuation unit is “day”, then the adjustment
date of benchmark interest rate should be the adjustment date of loan interest rate; if the quantity of interest rate fluctuation cycle is “3” while the interest rate
fluctuation unit is “day”, then the adjustment date of loan interest rate should be every third day since the “bookkeeping date” or “specific date”; if the
quantity of interest rate fluctuation cycle is “1” while the interest rate fluctuation unit is “month”, then the adjustment date of loan interest rate should be the
end of every month since the “bookkeeping date” or “specific date”; if the quantity of interest rate fluctuation cycle is “3” while the interest rate fluctuation
unit is “month”, then the adjustment date of loan interest rate should be the end of every third month since the “bookkeeping date” or “specific date”, the
same below.
3.3.2.2 Loan interest rate at the adjustment date of loan interest rate should be determined according to the benchmark interest rate at the adjustment date
of loan interest while the interest rate fluctuation/increase (decrease) value is kept unchanged (unless negotiated by both parties to be adjusted). If the
“adjustment date of loan interest rate” is set as T Day, then the benchmark interest rate of adjusted loan interest rate should be determined by following rules:
If the benchmark interest rate of the People’s Bank applies, the benchmark interest rate should be the benchmark interest rate of the People’s Bank on T
Day;
If LPR quotation of Bank of Communications applies, the benchmark interest rate should be the LPR value published on the latest business day before T
Day, and, if no LPR is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the former
business day before that day;
If LPR mean interest rate applies, the benchmark interest rate should be the LPR value published on the latest business day before T Day, and, if no LPR
is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the former business day before that
day.
4
▲▲3.3.3 If the “benchmark interest rate of the People’s Bank” is applied as the benchmark interest rate and the benchmark interest rate of the People’s
Bank is adjusted to be fluctuating interest rate or cancelled, both parties should adjust the interest rate of the loan through separate negotiations but the
adjusted interest rate should be no lower than the prevailing interest rate; if both parties fail to reach a common sense on the adjustment of interest rate within
one month since the adjustment date of the People’s Bank, the loaner may announce the earlier maturity of the loan.
If the “LPR quotation of Bank of Communications” or “LPR mean interest rate” is applied as the benchmark interest rate and the relevant benchmark
interest rate is cancelled according to the regulation requirement or suspended by the issuer according to the regulation requirement, both parties should adjust
the interest rate of the loan through separate negotiations but the adjusted interest rate should be no lower than the prevailing interest rate; if both parties fail
to reach a common sense on the adjustment of interest rate within one month since the relevant benchmark interest rate is cancelled or suspended, the loaner
may announce the earlier maturity of the loan.
▲▲3.3.4 Both parties may adjust the fluctuation extent or increase (decrease) value of the corresponding loan interest rate through negotiation at each
adjustment date of loan interest rate.
3.4 If the currency is RMB, default interest of the overdue loan should be fluctuated upwards by 50% on the basis of the interest rate specified in this
contract, and that of the embezzled loan should be fluctuated upwards by 100% on the basis of the interest rate specified in this contract. If the benchmark
interest rate is adjusted, the loaner may adjust the rate of default interest of each loan and apply the new rate of default interest since the adjustment date of
loan interest rate specified in the Application for Use of Line of Credit.
3.5 Calculation of interest
3.5.1 Normal interest = interest rate specified in this contract X issued loan X days of occupation.
Days of occupation begins from the issuance date (included) and ends at the maturity date (excluded), and may be postponed if the maturity date is not a
business day while the postponed period should be accounted into the occupation and charged with the interest according to this contract.
3.5.2 The default interest of overdue loan and embezzled loan should be calculated according to the overdue or embezzled amount and the actual days
(since the date of overdue or embezzlement (included) to the repayment date of principal and interest (excluded)).
3.5.3 If there are too many numbers after the decimal point of the calculated interest/default interest, the loaner may round off the result to two numbers
after the decimal point.
▲▲3.6 If the borrower repays the loan in advance or the loaner withdraws the loan in advance according to this contract, the corresponding interest rate
shall still be subject to that specified in this contract.
5
3.7 If the loan is in any foreign currency, the determination of interest rate, adjustment of interest rate, default interest rate of overdue and embezzlement
should be subject to Article 17 of this contract.
Article 4. Payment of Loan
4.1 If the issuance account appointed by the borrower is the dedicated loan issuance account opened at the loaner, the issuance and payment of loan
should be handled through the account, which may only be used to issue and externally pay the loan fund and only sell the certificate of “Application for
Settlement Business” but may not be used to handle any check, draft, bank acceptance or any other settlement. When handling the allocation of loan fund
independently, the borrower must handle procedures at the counter of the bank of deposit. The deposit interest of the account should be accounted into the
repayment account of the borrower.
4.2 When drawing the loan according to this contract, the borrower should clarify the payment mode (entrusted payment by loaner or independent
payment by borrower) and only one mode is applicable in each time of drawing.
4.3 In the mode of entrusted payment by loaner, the loaner will, after receiving the payment entrustment from the borrower and issuing the loan
according to this contract, pay the loan fund directly to the counterparty of the borrower meeting the purpose specified in this contract through the account of
the borrower.
If the amount of a single payment is beyond the limit of the independent payment or any condition specified in Article 19.3, the mode of entrusted
payment should apply.
When choosing the mode of entrusted payment by the loaner, the borrower should submit the loaner with the Application for Use of Line of Credit,
corresponding payment entrustment and other materials required by the loaner (including but not limited to the commercial contract, invoice and receipt) to
clarify the amount of loan and the receiver and amount of payment, while the amount of drawn loan should equal to that of the payment.
▲▲ If the payment planned by the borrower does not comply with this contract or the corresponding commercial contract, or contains any other defect,
the loaner may refuse to make the payment and return the payment entrustment submitted by the borrower.
▲ ▲ If the loaner agrees but fails to make the payment or the payment is returned due to any incorrect information provided by the borrower, the
borrower should submit relevant documents and materials containing the correct information within the period regulated by the loaner, and the loaner should
be expected from any liability for any delay or failure of payment.
4.4 In the mode of independent payment by the borrower, after the loaner issues the loan fund to the account of the loaner according to this contract, the
borrower pays the fund to the counterparty of the borrower meeting the purpose specified in this contract independently.
When choosing the mode of independent payment by the borrower, the borrower should submit the loaner with the Application for Use of Line of Credit,
description of fund usage and other materials required by the loaner. The borrower should report the payment situation of the loan fund to the loaner. The
loaner may check whether the loan is paid for the regulated purpose by analyzing the account, verifying the certificate and conducting the on-site survey, and
the borrower shall cooperate with such verification by the loaner.
6
Article 5. Repayment of Loan
5.1 The borrower should make the repayment according to the date and amount specified in the corresponding Application for Use of Line of Credit.
▲▲5.2 Without the written consent from the loaner, the borrower may not repay the loan in advance.
▲▲5.3 The repayment schedule of principal and interest agreed by the borrower and the loaner in the Application for Use of Line of Credit is the true
intention of both parties through negotiations on a voluntary basis. Under the repayment arrangement chosen by both parties, the principal should prior to the
interest in the repayment without influencing the repayment liability of the borrower for the payable interest, and the borrower may not set up any plea against
the repayment of payable interest. The borrower should be responsible for repaying all the principal and interest under any repayment arrangement.
▲▲5.4 When the amount repaid by the borrower is insufficient to cover all the debt of the borrower:
(1) It should be firstly used to repay the overdue amount. If the principal and interest are overdue for less than 90 days, the balance after such repayment
should be firstly used to repay the outstanding interest, default interest or compound interest before any overdue principal; if the principal and interest are
overdue for more than 90 days, the balance after such repayment should be firstly used to repay the outstanding principal and then the overdue interest,
default interest or compound interest;
(2) If there are several debts of the borrower (including debts of the borrower owed to the loaner under any other contract), the loaner may determine the
repayment sequence of each debt, only if such sequence does not violate any applicable law, rule, regulation, system or any compulsory regulatory provision
of the loaner. The loaner should inform the borrower of the repayment result, unless otherwise regulated.
Article 6. Representation and Guarantee of Borrower
6.1 The borrower is legally incorporated and surviving, possesses all the necessary capacities, perform obligations under this contract it its own name
and assumes civil liabilities.
6.2 Signing and performing this contract are the true intention of the borrower that they must obtain all the necessary approvals, permissions and
authorizations to contain no legal defect.
6.3 The borrower conducts production and operation in compliance with laws and regulations, possesses the constant operation capability and legal
repayment source, involves no serious environmental or social risk, possesses no serious adverse credit record and no officer of the borrower possesses any
adverse record.
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6.4 All the documents, statements, materials and information provided by the borrower to the loaner when signing and performing this contract are
authentic, accurate, complete and valid. The borrower does not conceal any information that may affect its financial status and solvency, and there is no
serious adverse change to the financial status of the borrower since the issuance of the latest financial statement.
▲▲6.5 Neither the borrower nor any of its affiliate belongs to the enterprise or individual sanctioned by the UN, EU or US, or is located in any country
or area sanctioned by the UN, EU or US.
Article 7. Rights and Obligations of Loaner
7.1 The loaner may withdraw the principal and interest (including compound interest and default interest of overdue and embezzled loan) of the loan
according to this contract, collect the payable expense from the borrower, withdraw the loan in advance at its own discretion depending on the fund status of
the borrower, and may exercise other rights under laws, regulations or this contract.
▲▲7.2 The loaner only conducts the formal examination of materials provided by the borrower during the performance of this contract that the loaner
should be exempted from any liability for the failure to complete entrusted payment if the borrower provides any false, inaccurate or uncomplete material or
the borrower makes the payment in violation to this contract.
▲▲7.3 The loaner should issue the loan and make the payment according to this contract. The loaner should be exempted from the liability if the loaner
fails to issue the loan or make the payment due to any cause below, but the loaner should send a notice to the borrower in time: the issuance account
appointed by the borrower is frozen, the account of the receiver is frozen, there is any force majeure, communicaiton or network fault, or the system fault of
the loaner, unless otherwise regulated in this contract.
Article 8. Obligations of Borrower
8.1 The borrower should repay the principal and interest of loan under this contract according to the time, amount, currency and interest rate specified in
this contract and the corresponding Application for Use of Line of Credit.
The fund collection account appointed by the borrower should be used to collect the corresponding sales income or planned repayment fund. If the
corresponding sales income is not settled in cash, the borrower should ensure to allocate it to the fund collection account upon receiving it. The borrower
should provide the cash flow of the fund collection upon the request from the loaner.
8.2 The borrower should use the line of credit for the purpose specified in this contract and use the loan for the purpose specified in the corresponding
Application for Use of Line of Credit but may not embezzle the loan for any other purpose, or the investment in fixed assets, equity or any production or
operation prohibited by the government.
The borrower should draw the loan fund in the mode agreed by both parties but not avoid the entrusted payment by the loaner by breaking up the whole
into parts; in the mode of independent payment by the borrower, the borrower should use the loan within the reasonable period required by the regulatory
authority of the loaner, and the payment of loan fund should meeting this contract.
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▲ ▲ 8.3 The borrower should assume the settlement expense (if any) of the payment of loan fund (including entrusted payment by the loaner and
independent payment by the borrower), and the special charge standard is subject to laws, rules, regulations, regulatory provisions and the prevailing Charge
List of Services of Bank of Communications published by the loaner.
If the issuance account is dedicated for the issuance of loan and the collection account is not opened at Bank of Communications in the payment of loan
fund (including entrusted payment by the loaner and independent payment by the borrower), the fund may be processed by the payment system or local
clearing system of the People’s Bank.
If the issuance account is not dedicated for the issuance of loan and the collection account is not local or opened at Bank of Communications in the
payment of loan fund (including entrusted payment by the loaner and independent payment by the borrower), the fund should be processed by the payment
system of the People’s Bank.
▲▲8.4 The borrower should cooperate with the loaner in the management of loan payment and the supervision and inspection of the use of loan and
operation situation of the borrower, provide the financial statement, use record and material of the loan fund, information of affiliate and affiliate transaction,
environmental and social risk report, other materials and information necessary for the after-loan risk management required by the loaner, and shall ensure the
authenticity, integrity and accuracy of such documents, materials and information.
▲▲8.5 Under either circumstance below, the borrower should send a written notice to the loaner at least 30 days in advance and take no action before
repaying the principal and interest under this contract or providing the repayment plan or guarantee recognized by the loaner:
(1) The borrower sells, presents, leases, lends, transfers, mortgages, pledges or disposes in any other manner all or a large part of the assets or important
assets;
(2) The operation mechanism or ownership organization of the borrower suffers from any great change, including but not limited to the contracting,
lease, association, corporate system transformation, joint stock cooperation system transformation, sales, combination (merger), joint venture (cooperation),
separation of enterprise, establishing of subsidiary, equity transfer, ownership transfer, and decrease of capital.
(3) The external investment or increase of debt financing of the borrower exceeds the agreed limit.
▲▲8.6 The borrower should send a written notice to the loaner within 7 days since the occurrence or possible occurrence of any circumstance below:
(1) The borrower or its affiliate revises the Memorandum of Association, changes the name, legal representative (responsible person), domicile, mailing
address or business scope of the enterprise, or makes any decision that affects the finance or human resource greatly;
9
(2) The borrower, its affiliate or guarantor plans to apply for bankruptcy or may be or has been applied by the creditor for bankruptcy;
(3) The borrower or its affiliate is involved in any serious lawsuit, arbitration or administrative measure, or its major assets or the guarantee under this
contract is executed with the property preservation or any other compulsory measure, or the security of its major assets or the guarantee under this contract is
or may be affected or the value is or may be decreased;
(4) The borrower or its affiliate provides any guarantee to any third party to affect its economic status, financial status or capability in performing
obligations under this contract significantly;
(5) The borrower or its affiliate enters into any contract with significant influence on its operation and financial status;
(6) The borrower repays the immature debt in advance or repay other mature debt firstly, or increases any form of guarantee for any other existing debt,
or makes any arrangement with the similar effect or enters into any relevant document;
(7) The borrower, its affiliate or guarantor is shut down, closed, dissolved, suspended, cancelled, or the business license is withdrawn;
(8) The borrower or its affiliate, major investor of the borrower or its affiliate, legal representative (responsible person), director or officer of the
borrower or its affiliate is missing or involved in any violation, to any law, regulation or rule of stock exchange, or suffers from any abnormal change;
(9) The borrower or its affiliate suffers from serious difficulty or deterioration of financial status in the operation, or there is any other event with adverse
influence on the operation, financial status, solvency or economic status of the borrower or its affiliate;
(10) There is any affiliated transaction and its amount reaches or exceeds 10% of the latest audited net assets;
(11) Before repaying all the debts under this contract, the borrower becomes or may become the shareholder or the “actual controller” defined by the
Company Law of the guarantor;
(12) The borrower or its affiliate causes any liability accident or is made public by the media by violating any law, rule, regulation, national policy or
industrial standard;
(13) The borrower or its affiliate encounters any safety or environment protection accident;
(14) The relationship between the affiliate and the borrower is changed;
(15) The borrower or its affiliate encounters any significant equity change;
(16) The opinion issued by the external audit of the borrower on its financial statements is not the standard unreserved opinion;
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(17) The borrower is or may be investigated, punished or taken with other similar measures by the competent authority as it violates the law or rule
and/or regulatory requirement;
(18) The borrower or its affiliate is listed to be sanctioned by the UN, EU or US, or the country or area where the borrower or its affiliate resides in is
listed to be sanctioned by the UN, EU or US;
(19) There is any other event with serious adverse influence on the solvency of the borrower or its affiliate.
▲▲8.7 In case of any change of guarantee under this contract that is adverse to the creditor’s right of the loaner, the borrower should provide other
guarantee recognized by the loaner in time.
The “change” specified here includes but not limited to: merger, separation, shutdown, dissolution, suspension, cancellation, withdrawal of business
license, and applying or being applied for bankruptcy of the guarantor; significant change of the operation or financial status of the guarantor; the guarantor is
involved in any serious lawsuit, arbitration or administrative measures, or the major assets is taken with property preservation or other compulsory measure;
the security of the guarantee is or may be affected; the value of the guarantee is or may be decreased, or taken with measures of property preservation, such as
sealing; the guarantor or its legal representative (responsible person) or officer violates any law, regulation or applicable rules of stock exchange; the
guarantor (when it is an individual) is missing or dead (announced to be dead); the guarantor breaches the guarantee contract; there is any dispute between the
guarantor and the borrower; the guarantor requires cancelling the guarantee contract; the guarantee contract does not take effect, or is invalid or cancelled; the
secured real right is not set up or take effect; any other event affecting the security of the creditor’s right of the loaner.
▲▲8.8 The borrower promises: during the period since the signing date of this contract to the date at which the principal, interest and relevant expenses
of the loan under this contract are paid off, the financial index, external rating, as well as production and operation qualification/license of the borrower will
always comply with this contract, and such production and operation qualification/license will pass the annual inspection if necessary.
8.9 The borrower guarantees to obey laws, rules and relevant policies about the anti-money laundering of the government that it will not conduct any
activity involving money laundering or terrorism financing, cooperate with the loaner in identifying the customer, keeping the transaction record, and
reporting the large-amount and suspected transaction.
8.10 The borrower guarantees that the borrower, together with any of its employee or agent will not offer, present, require or receive any form of
material interest not included in this contract to or from the loaner or its employee (including but not limited to cash, physical card, tour, etc.) or any other
non-material interest; or use the fund or service provided by the loaner to any activity in relation to the corruption or bribery in any manner, whether directly
or indirectly; once becoming aware of any circumstance breaching this article, the borrower should provide clues and relevant information to the loaner on an
authentic, complete and accurate basis and offer the cooperation required by the loaner.
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▲▲Article 9. Adjustment of Line of Credit, Acceleration of Maturity and Repricing of Risk
9.1 Any event below should be deemed as the “early maturity event” of this contract:
(1) The borrower does not repay the principal or interest of the loan according to the Application for Use of Line of Credit under this contract;
(2) The borrower makes any false representation or guarantee under this contract;
(3) Any event that should be notified as specified in Article 8.6 occurs and influences or may influence the security of the creditor’s right of the loaner;
(4) Any law, rule or regulatory policy is changed to the extent that the loaner will or may violate the law or rule if it issues the loan according to this
contract;
(5) While performing the contract with the loaner or any third party, the borrower conducts any breach or the debt may be or has been announced to be
mature in advance;
(6) The borrower breaches any other article of this contract.
9.2 In case of any “early maturity event”, the loaner may take any one, several or all measures below:
(1) To lower, suspend or cancel the line of credit under this contract;
(2) To stop issuing the loan unused by the borrower;
(3) To stop paying the loan unused but already withdrawn by the borrower;
(4) To require the borrower to supplement the issuance and payment conditions of loan to the loaner with the regulated period;
(5) To require the borrower to change the payment mode as required by the loaner;
(6) To reprice against the risk in executing the loan according to Article 9.3;
(7) To announce that the principal of loan already issued under this contract becomes mature and require the borrower to repay the principal and interest
of all the mature loan immediately.
9.3 In view of the production and operation situation of the borrower when signing this contract, both parties have determined the interest rate and its
adjustment through negotiations. The borrower agrees that in case of any “early maturity event”, the loaner may reprice against the risk in executing the loan
according to this article.
9.3.1 The repricing mentioned above consists of two modes, including repricing and directly raising the loan interest rate. The specific mode is agreed
by both parties in Article 21.
9.3.2 “Negotiated reprice” means that the loaner may require the borrower to negotiate with the loaner within the regulated period to raise the loan
interest rate and both parties will determine the “repricing date” and relevant interest rate in the form of supplemental agreement.
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9.3.3 “Direct raise of loan interest rate” means that the loaner may directly raise the loan interest rate according to this article and Article 21.
9.3.3.1 Since the loan sends a notice of “repricing date” to the borrower, the loan interest rate should be applied to each loan that the borrower has not
repaid by the “repricing date”.
9.3.3.2 If the loan currency is RMB and the type of benchmark interest rate of each loan is kept unchanged, then the raised loan interest rate should be
determined by the fluctuating extent/increase (decrease) value specified in Article 21 on the basis of the benchmark interest rate of “repricing date”.
If the “repricing date” is set as T Day, then the benchmark interest rate to calculate the raised loan interest rate should be determined by following rules
① If the benchmark interest rate of the People’s Bank applies, the benchmark interest rate should be the benchmark interest rate of the People’s Bank on
T Day;
② If LPR quotation of Bank of Communications applies, the benchmark interest rate should be the LPR value published on the latest business day
before T Day, and, if no LPR is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the
former business day before that day;
③ If LPR mean interest rate applies, the benchmark interest rate should be the LPR value published on the latest business day before T Day, and, if no
LPR is published on the latest business day before T Day, the benchmark interest rate should be the LPR value published on the former business day before
that day.
9.3.3.3 If the loan is in any foreign currency, the raised loan interest rate should be determined according to Article 21.
9.3.4 After the loaner reprices against the risk according to the article mentioned above, the new interest rate should be applied since the “repricing
date”. Regulations on the fluctuation is still subject to that mentioned in Article 3 of this contract, and if both parties negotiate to change the relevant
regulation, the changed regulation shall be applied. If the loan becomes overdue (including the circumstance that the borrower fails to make the repayment in
time or the loan is announced by the loaner to be mature in advance) or embezzled, the overdue and embezzlement default interest rate should be determined
on the basis of the new interest rate (including the interest rate adjusted according to regulations on fluctuation of this contract) while the compound interest
rate should also be correspondingly adjusted.
9.3.5 Execution of the “repricing against risk” should not be deemed or construed as that the loaner waives any other right under any law, rule or this
contract. The loaner may take other protective measures for the creditor’s right according to laws, rules and this contract, including but not limited to
measures specified in Article 9.2 of this contract.
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▲▲Article 10. Breach
10.1 If the borrower does not repay the principle or interest of the loan in time or uses the loan for any purpose not included in this contract, the loaner
will collect the interest at the default interest rate of overdue or embezzled loan, and collect the compound interest of the outstanding interest. If the default
interest rate is adjusted according to this contract, the compound interest rate should also be adjusted correspondingly.
10.2 If the borrower does not repay the principle or interest of the loan in time, it should assume the calling expense, lawsuit expense (or arbitration
expense), preservation expense, announcement expense, execution expense, attorney’s fee, travel expense and other expenses of the loaner in realizing the
creditor’s right.
▲▲Article 11. Deduction
11.1 The borrower authorizes that in case of any payable principal, interest, default interest, compound interest or any other expense of the loan, the
loaner may deduct the fund in any account of the borrower opened at any branch of Bank of Communications Co., Ltd. to repay the amount mentioned above.
11.2 After such deduction, the loaner should inform the borrower of relevant account number, contract number, number of Application for Use of Line of
Credit, deduction amount and remaining debt.
11.3 If the deducted fund is insufficient to repay all the debt of the borrower, the debt to be repaid by such fund should be determined according to this
contract.
11.4 If the currency of the deducted fund is different from that of the debt to be repaid, the deducted fund should be converted at the exchange rate
published by Bank of Communications Co., Ltd. at the time of deduction. If any settlement, sales or exchange procedure of foreign currency is necessary, the
borrower is obliged to assist the loaner and assume the risk in exchange rate.
Article 12. Notice
12.1 Contact details provided by the borrower in this contract (including mailing address, telephone number and fax number) are all authentic and valid.
In case of any change of any contact detail, the borrower should send/deliver such change to the mailing address offered by the loaner in this contract
immediately. Such change should take effect when the loaner receives the notice of change.
12.2 Unless otherwise specified in this contract, the loaner may send a notice to the borrower in any manner below. The loaner may choose the manner it
thinks fit but is relieved from any liability for the error, omission or delay caused by the postal service, fax, telephone or any other communication system. If
the loaner chooses several manners, the one delivering the notice to the borrower, the fastest should prevail.
(1) If the loaner chooses the announcement, the date at which the loaner publishes the announcement on its website, online bank, telephone bank or
outlet should be deemed as the delivery date;
(2) If the loaner chooses the personal delivery, the date at which the borrower signs to confirm the reception should be deemed as the delivery date;
(3) If the loaner chooses the postal service (including express delivery, ordinary mail and registered mail) to send the notice to the latest mailing address
of the borrower that the loaner knows, the third day (in the same city)/the fifth day (in different cities) since the sending date should be deemed as the delivery
date;
14
(4) If the loaner chooses the fax, SMS or other electronic communication means to deliver the notice to the latest fax number of the borrower that the
loaner knows, the mobile telephone number or e-mail appointed by the borrower, the sending date should be deemed as the delivery date.
12.3 The borrower agrees that unless the loaner receives the written notice about changing the mailing address from the borrower, the mailing address
provided by the borrower in this contract is the address for the court to send the judicial instrument and other written documents. During the process of
dispute solution, if the court sends the judicial instrument or other written documents to the latest mailing address of the borrower that the loaner knows
through the postal service (including express delivery, ordinary mail and registered mail), the date at which the borrower signs on the receipt should be
regarded as the delivery date; if the borrower does not sign on the receipt, the third day (in the same city)/the fifth day (in different cities) since the sending
date should be deemed as the delivery date;
Except for the written judgment, written verdict or mediation agreement, the court may send any notice to the borrower by any communication means
specified in Article 12.2. The court may choose the communication means it thinks fit but is relieved from any liability for the error, omission or delay caused
by the postal service, fax, telephone or any other communication system. If the court chooses several manners, the one delivering the notice to the borrower,
the fastest should prevail.
▲▲Article 13. Disclosure and Confidentiality
13.1 With respect to the information and materials of the borrower obtained in the signing and performance of this contract, the loaner may not violate
any law, rule or regulatory requirement to use such information and materials. It should assume the confidentiality liability but not disclose such information
and materials to any third party, except for under following circumstances:
(1) The law or rule requires such disclosure;
(2) The judicial department or regulatory authority requires such disclosure;
(3) When the borrower does not repay the principal and/or interest of the loan in time, the loaner has to make the disclosure to the external professional
advisor for the purpose of realizing the creditor’s right under this contract but such external professional advisor must assume the confidentiality obligation;
(4) The borrower agrees or authorizes the loaner to make the disclosure.
13.2 The borrower confirms that it has signed the Credit Information Inquiry and Provision Authorization. The loaner may inquire, use and keep the
credit information of the borrower within the scope regulated by the authorization.
13.3 Besides the circumstance specified in Article 13.1 and Article 13.2, the borrower further agrees Bank of Communications Co., Ltd. to use or
disclose the information and materials of the borrower under following circumstances, including but not limited to the basic information, credit transaction
information, adverse information and other relevant information and materials of the borrower, and is willing to assume all the consequences thereof:
Bank of Communications Co., Ltd. may disclose such information and materials on a confidentiality basis to the business outsourcing institution, third
party service provider, other financial institutions and other institutions or individuals that the loaner deems necessary, including but not limited to other
branches or wholly-owned subsidiaries of Bank of Communications Co., Ltd. for the purpose below: ① It conducts the line of credit business or any relevant
business, such as promoting the line of credit business of Bank of Communications Co., Ltd., calling for the debt from the borrower and transferring the
creditor’s right of the line of credit business; ② The loaner provides or may provide the borrower with the new product or service, or further provides the
service.
Whether Article 13.3 is applicable should be subject to Article 24 of this contract.
15
Article 14. Applicable Laws and Dispute Solution
Laws of the People’s Republic of China (for the purpose of this contract, excluding laws of Hong Kong, Macau and Taiwan) apply to this contract. Any
dispute under this contact should be brought to the competent court at the place of the loaner, unless otherwise regulated in this contract. Both parties should
continue to perform those articles not involved in the dispute during the period of dispute solution.
Article 15. Effectiveness and Constitution of Contract
15.1 This contract takes effect with the signature of the legal representative (responsible person) or the authorized representative (or seal) and the
common seal of the borrower, as well as the signature of the responsible person or the authorized representative (or seal) and the common seal of the loaner.
15.2 The Application for Use of Line of Credit and other relevant documents and materials signed under this contract are indispensable parts of this
contract.
15.3 Application for Use of Line of Credit is the supplement to this contract. Unless otherwise regulated in the Application for Use of Line of Credit,
rights, obligations and other matters of the borrower and the loaner should still be subject to this contract.
Article 16. Specific Content of Line of Credit
16.1 Currency of line of credit: RMB; Amount in words: five million yuan; Available for √ RMB ☐ (foreign currency); Belonging to √ Revolving line
of credit ☐ One-time line of credit (used for several time) ☐ One-time line of credit (used for only once).
16.2 Purpose of line of credit: operation turnover .
16.3 Period of line of credit is October 9, 2017 to October 9, 2018.
Article 17. Interest Rate
If the loan is in any foreign currency, the determination and adjustment of interest rate, and the default interest rate of overdue and embezzled loan are
regulated as follows:
________________________________/________________________________________
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Article 18. Account
18.1 The borrower appoints the following account to be the issuance account. The account □is √is not the dedicated loan issuance account opened at the
loaner. If both parties otherwise regulate in the Application for Use of Line of Credit, such Application for Use of Line of Credit should prevail.
Article 19. Issuance, Payment and Repayment of Loan
19.1 The period of each loan withdrawn under this contract should be no longer than 12√ months ☐ days, and the maturity date of all the loan should be
no later than April 9, 2019.
19.2 The limit of independent payment under this contract should be RMB0.
19.3 The entrusted payment by loaner is compulsory once any condition below is met:
19.4 In the mode of independent payment by the borrower, the borrower should report the payment of loan fund to the loaner within 15 days since the
issuance of loan.
Article 20. Financial Restriction, External Rating, Production and Operation Qualification/License
20.1 Limit on the external investment by the borrower is RMB10,000,000,000; limit on the increase of debt financing is RMB10,000,000,000.
20.2 Specific regulations on the financial indexes of the borrower:
(1) ________________________________ / _______________________________________________
(2) ________________________________________________________________________________
(3) ________________________________________________________________________________
20.3 Specific regulations on the external rating:
(1) ________________________________ / _______________________________________________
(2) ________________________________________________________________________________
20.4 Specific regulations on the production and operation qualification/license of the borrower:
(1) ________________________________ / _______________________________________________
(2) ________________________________________________________________________________
▲▲Article 21. Repricing of Risk
21.1 This contract adopts the first repricing mode below: (1) Repricing through negotiations; (2) Direct raising the loan interest rate.
21.2 Once the “direct raising the loan interest rate” is adopted:
17
21.2.1 If the loan currency is RMB, the fluctuation extent/increase (decrease) value of the raised loan: ☐ Benchmark interest rate (without
fluctuation/increase or decrease) ☐ Fluctuated upwards by __/ % ☐ Fluctuated downwards by / % ☐ Increased by / % ☐ Decreased by / %. If any
specific regulation is reached in a certain loan, the fluctuation extent/increase (decrease) value of the raised interest rate should be subject to the applicable
Application for Use of Line of Credit.
21.2.2 If the loan currency is a foreign currency, interest rate of the raised loan is:
___ /_____________
Article 22. Contact Details
Contact details of the borrower to receive the notice specified in Article 12:
Article 23. Counterparts
This contract is made with four copies. Both parties and the guarantor (if any) holds ____ copy(ies) respectively.
Article 24. Miscellaneous
24.1 Both parties agree that Article 13.3 √ applies ☐ does not apply to this contract.
24.2 The loaner will issue the legal VAT invoice according to laws, rules and regulations, while the specific time and mode should be determined by both
parties through negotiations.
24.3 The payment mode of loan under this contract should be subject to the Application for Use of Line of Credit signed by the loaner.
The borrower has read this contract and the loaner has made detailed descriptions as required by the
borrower. The borrower possesses no objection or doubt when signing this contract and understands all the
articles, especially the meaning and legal consequence of those marked with ▲▲.
(No text below in this page)
Borrower: (Seal)
Loaner: (Seal)
(Seal: CLPS)
(Seal: Line of Credit Business Contract Seal of Shanghai Xinqu Sub-branch
of Bank of Communications Co., Ltd.)
Legal representative (responsible person) or authorized representative
Legal representative (responsible person) or authorized representative
(Signature or seal)
Date: November 6, 2017
(Signature or seal)
Date: November 6, 2017
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
Exhibit 12.1
I, Raymond Ming Hui Lin, certify that:
1.
I have reviewed this annual report on Form 20-F of CLPS Incorporation;
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(s) 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(s) 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: September 25, 2018
By:
/s/ Raymond Ming Hui Lin
Name: Raymond Ming Hui Lin
Title: Chief Executive Officer
(Principal Executive Officer)
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
Exhibit 12.2
I, Tian van Acken, certify that:
1.
I have reviewed this annual report on Form 20-F of CLPS Incorporation;
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(s) 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(s) 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: September 25, 2018
By:
/s/ Tian van Acken
Name: Tian van Acken
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Certification
Pursuant to 18 U.S.C. Section 1350
Exhibit 13.1
Pursuant to U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code),
each of the undersigned officers of CLPS Incorporation (the "Company"), does hereby certify, to such officer's knowledge, that the Annual Report on Form
20-F for the year ended June 30, 2018 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
September 25, 2018
September 25, 2018
CLPS Incorporation
By:
/s/ Raymond Ming Hui Lin
Name: Raymond Ming Hui Lin
Title: Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Tian van Acken
Name: Tian van Acken
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-226110) and Form F-1 (No. 333-223956) of CLPS
Incorporation (the “Company”) as of our report dated September 25, 2018, relating to our audit of the consolidated financial statements, which appears in this
Annual Report on Form 20-F of the Company for the year ended June 30, 2018.
/s/ Friedman LLP
New York, New York
September 25, 2018