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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report:
For the transition period from _________ to _____________.
Commission file number: 333-226308
Color Star Technology Co., Ltd.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
80 Broad Street, 5th Floor
New York, NY 10005
(Address of principal executive offices)
Louis Luo
Chief Executive Officer
(929) 317-2699
80 Broad Street, 5th Floor
New York, NY 10005
(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 | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A Ordinary Shares, par value $0.04 | ADD | Nasdaq Capital Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of June 30, 2023, there were 16,191,012 Class A ordinary shares, par value $0.04 per share issued and 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement Item the registrant has elected to follow: ☐ Item 17 ☐ Item 18
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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
COLOR STAR TECHNOLOGY CO., LTD.
FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
INTRODUCTORY NOTE
Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:
| ● | “we,” “us,” “our,” “Color Star,” or “the Company,” refers to Color Star Technology Co., Ltd., a Cayman Islands exempted company, its predecessor entities and its subsidiaries; |
| ● | “Baytao” refers to Baytao LLC; |
| ● | “CACM” refers to CACM Group NY, Inc. |
| ● | “China” or “PRC” refers to People’s Republic of China, and for the purpose of this annual report, excludes Taiwan, Hong Kong and Macau; |
| ● | “Color Metaverse” refers to Color Metaverse Pte. Ltd.; |
| ● | “Color World” refers to the ColorWorld Metaverse platform; |
| ● | “HK$” refers to Hong Kong dollars, the lawful currency of Hong Kong; |
| ● | “Hong Kong” or “HK” or “Hong Kong S.A.R.” refers to the Hong Kong Special Administrative Region of the PRC; |
| ● | “RMB” or “Renminbi” refers to the legal currency of China and “$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States. |
Our financial statements are expressed in U.S. dollars, which is our reporting currency. Certain of our financial data in this annual report on Form 20-F is translated into U.S. dollars solely for the reader’s convenience. We make no representation that any Renminbi, Hong Kong dollars or U.S. dollar amounts could have been, or could be, converted into U.S. dollars, Hong Kong dollars, or Renminbi, as the case may be, at any particular rate, at the rate stated above, or at all.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere in this report.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
3.A. Reserved
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons for the Offer and Use of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary shares. We are a holding company with substantial operations in Singapore and are subject to a legal and regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.
Risks Related to Our Business and Industry
We have a limited operating history with our current business model, which makes it difficult to predict our prospects and our business and financial performance.
We have a short operating history with our current business model focusing on providing online entertainment performances, online education services, and metaverse services and products. We transitioned from a concrete business company to our current business model in 2020, and further began to explore the metaverse industry in January 2022. Our limited history of operating under the current business model may not serve as an adequate basis for evaluating our prospect and operating results, including gross billings, net revenues, cash flows and operating margins. We have encountered, and may continue to encounter in the future, risks, challenges and uncertainties associated with operating in compound industries including entertainment, education and metaverse, such as building and managing reliable and secure IT systems and infrastructure, addressing regulatory compliance and uncertainty, engaging, training and retaining high quality employees such as our teaching staff and IT support staff, and improving and expanding our education content offering. If we do not manage these risks successfully, our operating and financial results may differ materially from our expectations and our business and financial performance may suffer.
We may require additional capital, including to fund potential acquisitions and capital expenditures, which may not be available on terms acceptable to us or at all and which depends on many factors beyond our control.
To support our growing business, we must have sufficient capital to continue to make significant investments in our platform and product offerings. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to those of our common stock, and our existing stockholders may experience dilution. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Any refinancing of our indebtedness could be at significantly higher interest rates, require additional restrictive financial and operational covenants, or require us to incur significant transaction fees, issue warrants or other equity securities, or issue convertible securities. These restrictions and covenants may restrict our ability to finance our operations and engage in, expand, or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default and an acceleration of our obligations under a debt agreement. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or our solutions under development, or grant licenses on terms that are not favorable to us, which could lower the economic value of those programs to us.
We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans and operating performance and the condition of the capital markets at the time we seek financing and to an extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be certain that additional financing will be available to us on favorable terms, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, financial condition and results of operations could be adversely affected.
Our business, results of operations and financial condition may be adversely affected by global public health epidemics, including the strain of coronavirus known as COVID-19.
Our business could be adversely affected by infectious disease outbreaks, such as the COVID-19 pandemic, which has spread rapidly across the globe, resulting in adverse economic conditions and business disruptions. In reaction to this outbreak, governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Since this outbreak, business activities in many countries have been disrupted by a series of emergency quarantine measures taken by the government.
As a result, our operations in the U.S. have been materially affected. New York, where our U.S. operations are based, were affected by COVID-19, which led to measures taken by the New York government trying to contain the spread of COVID-19, such as reduction on the number of people in gathering and travel restrictions. Additional travel and other restrictions may be put in place to further control the outbreak in U.S. Accordingly, our operation and business may be adversely affected as the results of the wide-spread pandemic. Management may have to adjust or change our business plan in response to the prolonged pandemic and change of social behavior. For the fiscal year ended June 30, 2023, our management does not believe the COVID-19 pandemic had materially adversely affected the Company’s financial condition and operating results because our operations were primarily conducted via online platform and App.
The extent to which COVID-19 negatively impacts our future business cannot be accurately predicted. We believe that the coronavirus outbreak and the measures taken to control it may have a negative impact on not only our business, but economic activities globally. These uncertainties may impede our ability to conduct our daily operations and could materially affect our business, financial condition and results of operations, and as a result affect our stock price and create more volatility.
If we are unable to operate Color World as planned, our results of operation will be significantly impacted.
We launched Color World on October 15, 2020. It began as an app that offered celebrity-led courses, online performances and other related products. In January 2022, Color World was transformed into the current version, a metaverse with “artificial intelligence + celebrity entertainment” as its core features. Since transforming into a metaverse platform, Color World has been inviting many global superstar celebrities to join the platform to expand on the celebrity content by creating more celebrity masterclasses, online virtual performances, celebrity merchandise, games and so on. We are keep adding new modules to Color World in order to enrich the metaverse communities. In the future, we plan to add more virtual locations as well as digital products. Due to the change of application scenarios, services provided and business model of Color World, we cannot guarantee to operate the platform as successfully as before and may face difficulties to operate the platform as we expected due to reasons beyond our control, such as user acceptance, future regulations and intense competition. If the current version of Color World cannot be accepted by the market or as profitable as we estimated, there could be a material adverse effect on our business, results of operations and financial condition.
We must also continue to enhance and improve our technology infrastructure. These efforts may require us to develop or license increasingly complex technologies. In addition, new technologies developed and introduced by competitors could render our services and technologies obsolete if we are unable to update or modify our own technology. Developing and integrating new technologies into our existing platform and infrastructure could be expensive and time-consuming. Furthermore, any new features and functions may not achieve market acceptance. We may not succeed in implementing new technologies or may incur substantial costs in doing so. Our platform and services must achieve high levels of market acceptance in order for us to recoup our investments. Our platform and services could fail to attain sufficient market acceptance for many reasons, including:
| ● | we may fail to predict market demand accurately and to provide services that meet this demand in a timely fashion; |
| ● | our marketing efforts may be inefficient and fail to attract the potential users; |
| ● | celebrities that we recruit on our platforms may not like, find useful or agree with any changes; |
| ● | there may be defects, errors or failures on our platform; |
| ● | there may be negative publicity about our platforms’ performance or effectiveness; and |
| ● | there may be competing services or technologies introduced or anticipated to be introduced by our competitors. |
In addition, the size of our user base and our users’ level of engagement across our services are critical to our success. If people do not perceive our services to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. If our platform and services or technologies do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be materially and adversely affected.
Failure to successfully implement our business strategy or effectively respond to changes in market dynamics may cause our future financial results to suffer.
We, from time to time, make significant investments and other decisions in connection with our long-term business development strategy. In order to expand the breadth and depth of our current business, we may enter industries which differ from our current operations and where we have less expertise. If we are not able to successfully implement our business strategies and effectively respond to changes in market dynamics, our future financial results will suffer.
In January 2022, we transformed Color World into the current version, a metaverse with “artificial intelligence + celebrity entertainment” as its core features. We expect this will be a complex, evolving, and long-term initiative that will involve the development of new and emerging technologies, continued investment in privacy, safety, and security efforts, and collaboration with other companies, developers, partners, and other participants. However, the metaverse may not develop in accordance with our expectations, and market acceptance of features or services we build for the metaverse is uncertain. We may be unsuccessful in our research and service development efforts, including if we are unable to develop relationships with key participants in the metaverse or develop services that operate effectively with metaverse technologies, products, systems, networks, or standards. Our metaverse efforts may also divert resources and management attention from other areas of our business. As our metaverse efforts evolve, we may be subject to a variety of existing or new laws and regulations in international jurisdictions, including in the areas of privacy and e-commerce, which may delay or impede the development of our services, increase our operating costs, require significant management time and attention, or otherwise harm our business. As a result of these or other factors, our metaverse strategy and investments may not be successful in the foreseeable future, or at all, which could adversely affect our business, reputation, or financial results.
Our success relies on the continuing efforts of our senior management team and qualified key personnel, and our business may be harmed if we are unable to retain or motivate them.
Our business operations depend on the continued services of our senior management team and qualified key personnel, particularly our executive officers and the senior management of Color Metaverse, our wholly owned subsidiary.
Although we have provided different incentives to our senior management team, we cannot assure you that we can continue to retain their services. One or more of our key executives may be unable or unwilling to continue in their present positions. Meanwhile, we have also provided attractive compensation packages to our qualified key personnel. However, we may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for qualified and skilled personnel have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and resources in training our employees, which increases their value to competitors who may seek to recruit them.
If we are unable to retain the services of our senior management team or qualified key personnel, we may not be able to find suitable replacements or may incur significant expenses in finding such replacements, thus our future growth may be constrained, our business may be severely disrupted and our results of operations and financial condition may be materially and adversely affected. In addition, although we have entered into confidentiality and non-competition agreements with our senior management team and qualified key personnel, there is no assurance that any member of our senior management team or any of our qualified key personnel will not join a competitor. In the event that any dispute arises between us, on one hand, and any of our senior management and qualified key personnel, on the other hand, we may have to incur substantial costs and expenses in order to enforce such agreements, or we may be unable to enforce them at all.
If we are unable to recruit celebrities as planned or if they do not perform according to the agreements we have with them, the operation of our education business will be negatively impacted.
Professional artists and producers that we have begun recruiting as the celebrities, formerly mainly as “star teachers,” help us build and maintain the quality of our education and services, as well as our brand and reputation. Our ability to continue to attract recruit the instructors with the necessary experience and qualifications is a key factor in the success of our operations. We seek to continue hiring experienced and successful professionals in music, film, sports, animation, television, presentations, dance, art and other entertainment industries whom are able to follow our education service protocols and deliver effective instructions based on the agreements we have with them. The market for the recruitment of these professionals is competitive, and we must also provide continued training to ensure that our instructors stay abreast of changes in student demands, teaching methodologies and other necessary changes.
In order to recruit these industry professionals as instructors on our platform, we must provide candidates with competitive compensation packages. Although we have not experienced major difficulties in recruiting or training qualified instructors thus far, we cannot guarantee we will be able to continue to recruit, train and retain a sufficient number of qualified instructors in the future, which may have a material adverse effect on our business, financial condition and results of operations.
If we are unable to reach a critical mass of subscribers, our revenues may not be sufficient to cover the costs of our recruitment of Star Teachers.
We are obligated to pay each of our star teachers on a case-by-case basis depending on the results of our negotiations. Some Star Teachers will accept fixed payments following a predefined schedule, whereas others may instead request a revenue sharing payment model whereby we will need to distribute to the star teachers a percentage of the net income earned from generated sales, licensing or other revenue from their courses on our platform, including a pro rata share of our subscription fees, or a hybrid of the two. If we are unable to generate enough revenue from our subscription fees from our users to cover our star teachers’ recruitment costs, our results of operations and financial condition could be materially and adversely affected.
Our education service revenue model depends on developing a subscriber base of users. If we fail to reach a critical mass of subscribers, our net revenues may not be sufficient, and we may not be able to implement our business plan.
We expect to generate revenue primarily from the fees we collect from our users. It is critical for us to enroll subscribers in a cost-effective manner. Some of the factors, many of which are largely beyond our control, could prevent us from successfully increasing subscriptions in a cost-effective manner, or at all. These factors include, among other things, (i) reduced interest in the products and services we offer; (ii) negative publicity or perceptions regarding us, or electronic education services in general; (iii) the emergence of alternative technologies not offered by us; (iv) the inability of subscribers to pay the fees; (v) increasing market competition, particularly price reductions by competitors that we are unable or unwilling to match; and (vi) adverse changes in relevant government policies or general economic conditions. If one or more of these factors reduce market demand for our services, our subscriber base may not materialize as anticipated or our costs associated with subscriber acquisition and retention could increase, or both, any of which could materially affect our ability to grow our gross billings and net revenues. These developments could also harm our brand and reputation, which would negatively impact our ability to establish or expand our business.
We expect to rely heavily on information and technology to operate our existing and future products and services, and any cybersecurity incident or other disruption to our technology infrastructure could result in the loss of critical confidential information or adversely impact our reputation, business or results of operations.
Our ability to attract and retain customers and to compete effectively depends in part upon the satisfactory performance and reliability of our technology network, including the ability to provide features of services that are important to our customers and to protect our confidential business information and the information provided by our customers. We also rely on our technology to maintain and process various operating and financial data that are essential to the day-to-day operation of our business and formulation of our development strategies. Our business operations and growth prospects depend on our ability to maintain and make timely and cost-effective enhancements and upgrades to our technology system and to introduce innovative additions that can meet changing operational needs in future. Therefore, we expect to continue to invest in advanced information technology and any equipment to enhance operational efficiency and reliability as we grow. Accordingly, any errors, defects, disruptions or other performance problems with our IT infrastructure could damage our reputation, decrease user satisfaction and retention, adversely impact our ability to attract new users and expand our service and product offerings, and materially disrupt our operations. If any of these occur, our business operations, reputation and prospects could be harmed.
If our security measures are breached or fail and result in unauthorized disclosure of data by our employees or our third-party agents, we could lose existing subscribers, fail to attract new subscribers and be exposed to protracted and costly litigation.
Maintaining platform security is of critical importance to our subscribers because the platform stores and transmits proprietary and confidential information, which may include sensitive personally identifiable information that may be subject to stringent legal and regulatory obligations. We face an increasing number of threats to our IT infrastructure, including unauthorized activity and access by our employees or third-party agents, system viruses, worms, malicious code and organized cyber-attacks, which could breach our security and disrupt our business. We hope to introduce data security and confidentiality protocols into the cooperation agreements we enter into with third-party sales agents with whom we share prospective subscribers’ contact information. As we expand, we hope to invest in improving our technology security initiatives, information technology risk management and disaster recovery plans to prevent unauthorized access of confidential or sensitive personal information by our employees and third-party sales agents in the process of engaging prospective subscribers.
These measures, however, may not be as effective as we anticipate. In addition, there is no assurance that our third-party sales agents will comply with contractual and legal requirements with respect to data privacy when they collect data from our prospective customers. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted, potentially over an extended period of time. Any or all of these issues could harm our reputation, adversely affect our ability to attract and enroll prospective subscribers, cause prospective subscribers not to enroll or stay enrolled, or subject us to third-party lawsuits, regulatory fines or other action or liability. Further, any reputational damage resulting from breach of our security measures could create distrust of our company by prospective subscribers or investors. We may be required to expend significant management time and additional resources to protect against the threat of these disruptions and security breaches or to alleviate problems caused by such disruptions or breaches.
Privacy concerns could limit our ability to collect and leverage our user data and disclosure of user data could adversely impact our business and reputation.
In the ordinary course of our business and in particular in connection with conducting sales and marketing activities with our existing and prospective subscribers as well as the utilization of our AI-powered platform programs, we collect and utilize data supplied by our users. We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws that limit our ability to collect, transfer and use data, could have an adverse effect on our business. In addition, if we were to disclose data about our users in a manner that was objectionable to them, our business reputation could be adversely affected, and we could face potential legal claims that could impact our operating results.
Specifically, the Personal Data Protection Act 2012 of Singapore sets out data protection obligations which all organizations are required to comply with in undertaking activities relating to the collection, use or disclosure of personal data. A failure to comply with any of the above can subject an organization to a fine per breach of up to S$1 million (US$739,645) or 10% of the organization’s annual turnover in Singapore, whichever is higher. In the event of a data breach involving any personal data in an organization’s possession or control, the Personal Data Protection Act 2012 requires the organization to reasonably and expeditiously assess the data breach, and notify the Personal Data Protection Commission of the data breach if it is assessed to be one that: (a) is likely to result in significant harm or impact to the individuals to whom the information relates, or (b) involves personal data of 500 or more individuals. In addition to notifying the Personal Data Protection Commission, organizations are also required to notify the affected individuals if the data breach is one that is likely to result in significant harm or impact to the affected individuals.
Although the substantial part of our operations are based in Singapore and the U.S., our app Color World is available to download in China and part of our users are PRC citizens, which may subject us to certain laws and regulations in China, and expose us to legal and operational risks associated with our operations in China. The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of personal information and important data worldwide is rapidly evolving in PRC and is likely to remain uncertain for the foreseeable future. Regulatory authorities in China have implemented and are considering a number of legislative and regulatory proposals concerning data protection. For example, the PRC Cybersecurity Law, which became effective in June 2017, established China’s first national-level data protection for “network operators,” which may include all organizations in China that connect to or provide services over the internet or other information network. The PRC Data Security Law, which was promulgated by the Standing Committee of PRC National People’s Congress, or the SCNPC, on June 10, 2021 and became effective on September 1, 2021, outlines the main system framework of data security protection. For more details regarding PRC regulations applicable to us, please see “Item 4-Information on the Company-Regulations-China.”
As uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that we will comply with such regulations in all respects and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. We may also become subject to fines and/or other sanctions which may have material adverse effect on our business, operations and financial condition.
Internationally, we may become subject to additional and/or more stringent legal obligations concerning our treatment of customer and other personal information, such as laws regarding data localization and/or restrictions on data export. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional expenses.
We face regulatory risks and uncertainties with respect to the licensing requirement for the online transmission of internet audio-visual programs in China.
On December 20, 2007, the National Radio and Television Administration f/k/a known as the State Administration of Press Publication Radio Film and Television, or SAPPRFT, and the Ministry of Industry and Information Technology, or the MIIT, jointly promulgated the Administrative Provisions on Internet Audio Visual Program Services, or the Audio Visual Program Provisions, which became effective on January 31, 2008 and were amended on August 28, 2015. Among other things, the Audio Visual Program Provisions stipulate that no entities or individuals may provide Internet audio-visual program services without a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT or completing the relevant filing with SAPPRFT or its local bureaus, and only state-owned or state-controlled entities are eligible to apply for a License for Online Transmission of Audio Visual Programs. On April 1, 2010, SAPPRFT promulgated the Provisional Implementations of Tentative Categories of Internet Audio Visual Program Services, or the Categories, which clarified the scope of Internet audio-visual programs services, which was amended on March 10, 2017. According to the Categories, there are four categories of Internet audio-visual program services which are further divided into seventeen sub-categories. Sub-category No. 3 to the second category covers the making and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting such content to the general public online. Sub-category No. 5 of the first category and sub-category No. 7 of the second category cover the live broadcasting of important political, martial, economic, social, cultural, sports activities or events or general social or community cultural activities, sports games and other organized activities. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio Visual Program Provisions, in particular, the scope of “internet audio-visual programs.” See “Regulations Relating to Online Transmission of Audio-Visual Programs.”
We plan to deliver our courses in live streaming format worldwide. Our users communicate and interact live with each other via our virtual learning community. The audio and video data will likely be transmitted through the platforms between specific recipients instantly without any further redaction. We believe the nature of the raw data we transmit will distinguish us from general providers of internet audio-visual program services, such as the operator of online video websites, and the provision of the Audio-Visual Program Provisions are not applicable with regard to our offering of the courses. However, we cannot assure you that the competent PRC government authorities will not ultimately take a view contrary to our opinion. In addition, we also plan to offer video recordings of live streaming courses and certain other audio-video contents on our electronic platforms to our students as supplementary course materials on our platforms. If the government authorities determine that our offering of the courses fall within the relevant category of Internet audio-visual program services under the Categories, we may be required to obtain the License for Online Transmission of Audio Visual Programs.
The Categories describe “Internet audio-visual program services” in a very broad, vague manner and are unclear as to whether electronic courses, whether delivered in a live streaming format or through video recordings, fall into the definition of audio-visual programs. We have made inquiries to the relevant bureaus of SAPPRFT and were informed that online educational content provided through live streaming or recorded courses does not fall within the scope of internet audio-visual programs, the transmission of which does not require a License for Online Transmission of Audio-Visual Programs. We cannot assure you that the PRC government will not ultimately take a view that live streaming or recorded courses or any other content offered on our platforms are subject to the Audio Visual Program Provisions. We currently do not hold a license for Online Transmission of Audio Visual Programs, and since we are not a state-owned or state-controlled entity, we are not eligible to apply for such license. If the PRC government determines that our content should be considered as “internet audio- visual programs” for the purpose of the Audio-Visual Program Provisions, we may be required to obtain a license for Online Transmission of Audio Visual Programs. We are, however, not eligible apply for such license since we are not a state-owned or state-controlled entity. If this were to occur, we may be subject to penalties, fines, legal sanctions or an order to suspend the provision of our live streaming courses. As of the date of this annual report, we have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities regarding the lack of a License for Online Transmission of Audio Visual Programs in conducting of our business.
Our failure to obtain and maintain approvals, licenses or permits in China applicable to our business could have a material adverse impact on our business, financial conditions and results of operations in the future.
As we plan to deliver our courses in live streaming format worldwide, including in China, we may be subject to various regulations by a number of PRC regulatory authorities, such as the SAIC, the Cyberspace Administration of China, the MITT, the National Radio and Television Administration, and the State Council Information Office, the Ministry of Civil Affairs, and the Ministry of Human Resources and Social Welfare. We may be required in the future to obtain additional government approvals, licenses and permits in connection with our operations.
By way of example, depending upon regulatory interpretation, under the current PRC laws and regulations, the provision of our educational content through our electronic platform may be considered “online publishing” and may require us to obtain an Internet Publishing License, which we currently do not have.
As of the date of this annual report, we have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities regarding the lack of any the above-mentioned approvals, licenses or permits. However, we cannot guarantee that the government authorities will not impose any penalties or sanctions on us in the future, which may include warnings, fines, mandates to remedy any violations, confiscation of the gains derived from the services for which approvals, licenses or permits are required, and/or an order to cease to provide such services. In addition, we cannot guarantee that the government will not promulgate new laws and regulations that require additional licenses, permits and/or approvals for the operation of any of our existing or future business. If we are unable to obtain such licenses, permits, or approvals in a timely fashion, we could be subject to penalties and operational disruption and our financial condition and results of operations could be adversely affected.
We face intense competition which could adversely affect our results of operations and market share.
We operate in a highly competitive and fragmented industry that is sensitive to price, content (i.e., curriculum) and quality of service. Some of our competitors may have more financial resources, longer operating histories, larger customer bases and greater brand recognition than we do, or they are controlled or subsidized by foreign governments, which enables them to obtain or raise capital and enter into strategic relationships more easily. We also compete with leading domestic supplier companies based on a number of factors including business model, operational capabilities, cost control and service quality, as well as in-house delivery capabilities to serve their logistics needs and compete with us.
We are also subject to other risks and uncertainties that affect many other businesses, including but not limited to:
| ● | Increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits; |
| ● | The increasing costs of compliance with federal, state and foreign governmental agency mandates; |
| ● | Any impacts on our business resulting from new domestic and international government laws and regulation; |
| ● | Market conditions in the childhood education industry or the economy as a whole; |
| ● | Market acceptance of our new service and growth initiatives; |
| ● | Announcements of the introduction of new products and services by our competitors; |
| ● | The impact of technology developments on our operations and on demand for our products and services; |
| ● | Developments concerning current or future strategic collaborations; and |
| ● | Widespread outbreak of an illness or any other communicable disease, or any other public health crisis such as we are currently experiencing with the COVID-19 pandemic. |
If we are unable to respond to these changing market conditions, our business and financial results may be materially affected.
We may be unable to fund any significant up-front and/or guaranteed payment cash requirements associated with our live music streaming rights, which could result in the inability to secure and retain such streaming rights and may limit our operating flexibility, which may adversely affect our business, operating results and financial condition.
In order to secure event and festival live music streaming rights or hold concerts, we may be required to fund significant up-front and/or guaranteed payment cash requirements to artists or festival or event promoters prior to the event or festival taking place. If we do not have sufficient cash on hand or available capacity to advance the necessary cash for any given artist, event or festival, we would not be able to retain the rights for that artist, festival or event, such counter parties may be able to terminate their content acquisition agreements with us, and as a result our business, financial condition and results of operations may be adversely affected.
We may be unsuccessful in developing our original content.
We plan to continue to produce original classes, covering various areas such as singing and dancing, etc. We believe that a positive reputation with users concerning our original content is important in attracting and retaining users. To the extent our content is perceived as low quality, offensive or otherwise not compelling to users, our ability to establish and maintain a positive reputation may be adversely impacted. If the original content we produce does not attract new users, we may not be able to cover our expenses to produce such programs, and our business, financial condition and results of operations may be adversely affected.
As we continue to develop our original content, we will become responsible for higher production costs and other expenses. We may also take on risks associated with production, such as completion and key talent risk. To the extent we do not accurately anticipate costs or mitigate risks, or if we become liable for content we acquire, produce, license and/or distribute, our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability or unforeseen production risks could harm our results of operations. We may not be indemnified against claims or costs of these types and we may not have insurance coverage for these types of claims.
We face competition for users’ attention and time.
The market for entertainment video content is intensively competitive and subject to rapid change. We compete against other entertainment video providers, such as (i) interactive on-demand audio content and pre-recorded entertainment, (ii) broadcast radio providers, including terrestrial and Internet radio providers, (iii) cable, satellite and Internet television and movie content providers, (iv) video gaming providers and (v) other sources of entertainment for our users’ attention and time. These content and service providers pose a competitive threat to the extent existing or potential users choose to consume their content or use their services rather than our content or our services. The online marketplace for live music and music-related content may rapidly evolve and provide users with a number of alternatives or new access models, which could adversely affect our business, financial condition and results of operations.
Our services and software are highly technical and may contain undetected software bugs or vulnerabilities, which could manifest in ways that could seriously harm our reputation and our business.
Our services and software are highly technical and complex. Our services or any other products we may introduce in the future, may contain undetected software bugs, hardware errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our products, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled products. We have a practice of regularly updating our products and some errors in our products may be discovered only after a product has been used by users, and may in some cases be detected only under certain circumstances or after extended use. Any errors, bugs or other vulnerabilities discovered in our code or backend after release could damage our reputation, drive away users, allow third parties to manipulate or exploit our software (including, for example, providing mobile device users a means to suppress advertisements without payment and gain access to features only available to the ad-supported service), lower revenue and expose us to claims for damages, any of which could seriously harm our business. Additionally, errors, bugs, or other vulnerabilities may-either directly or if exploited by third parties-affect our ability to make accurate royalty payments.
We also could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and seriously harm our reputation and our business. In addition, if our liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be seriously harmed.
Our business depends on a strong developing brand, and any failure to create, maintain, protect and enhance our brand would hurt our ability to attract and/ or expand our base of users.
Maintaining, protecting and enhancing our brand is critical to expanding our base of users and star teachers, and will depend largely on our ability to continue to develop and provide an innovative and high-quality experience for our users and to attract more celebrities to work with us, which we may not do successfully. Our brands may be impaired by a number of other factors, including any failure to keep pace with technological advances on our platform or with our services, slower load times for our services, a decline in the quality or quantity of the content available on our services, a failure to protect our intellectual property rights or any alleged violations of law, regulations, or public policy. If we do not successfully maintain a strong brand, our business could be harmed.
We are at risk of attempts at unauthorized access to our services, and failure to effectively prevent and remediate such attempts could have an adverse impact on our business, operating results, and financial condition. Unauthorized access to our services may cause us to misstate key performance indicators, which once discovered, corrected, and disclosed, could undermine investor confidence in the integrity of our key performance indicators and could cause our stock price to drop significantly.
We may be impacted by attempts by third parties to manipulate and exploit our software for the purpose of gaining unauthorized access to our service. For example, there might be instances of third parties seeking to provide mobile device users a means to suppress advertisements without payment and gain access to features only available to the ad-supported services. If in the future we fail to successfully detect and address such issues, it may have artificial effects on our key performance indicators, such as content hours, content hours per MAU (Monthly Active User), and MAUs, which underlie, among other things, our contractual obligations with advertisers, as well as harm our relationship with them. This may impact our results of operations, particularly with respect to margins on our ad-supported segment, by increasing our ad-supported cost of revenue without a corresponding increase to our ad-supported revenue, which could seriously harm our business. Additionally, unlike our ad-supported users, individuals using unauthorized versions of our application are unlikely to convert to premium subscribers. Moreover, once we detect and correct such unauthorized access and any key performance indicators it affects, investor confidence in the integrity of our key performance indicators could be undermined. These could have a material adverse impact on our business, operating results and financial condition.
If we are forced to cancel or postpone all or part of a scheduled concert, our business may be adversely impacted, and our reputation may be harmed.
We incur a significant amount of up-front costs when we plan and prepare for an online concert. Accordingly, if a planned concert is canceled, we would lose a substantial amount of sunk costs, fail to generate the anticipated revenue and may be forced to issue refunds for tickets sold. If we are forced to postpone a concert or event, we would incur substantial additional costs in connection with our having to stage the event on a new date, may have reduced attendance and revenue and may have to refund money to ticketholders. In addition, any cancellation or postponement could harm both our reputation and the reputation of the particular concert or event. We could be compelled to cancel or postpone all or part of an event or concert for many reasons, including such things as low attendance, adverse weather conditions, technical problems, issues with permitting or government regulation, incidents, injuries or deaths at that event or concert, as well as extraordinary incidents, such as pandemics, terrorist attacks, mass-casualty incidents and natural disasters or similar events.
A deterioration in general economic conditions and its impact on consumer and business spending, particularly by customers in our targeted millennial generation demographic, could adversely affect our revenue and financial results.
Our business and financial results are influenced significantly by general economic conditions, in particular, those conditions affecting discretionary consumer spending and corporate spending. During economic slowdowns and recessions, many consumers could reduce their discretionary spending. An economic downturn can result in reduced ticket revenue and lower customer spending.
We depend on relationships with key event promoters, sponsor and marketing partners, executives, managers and artists, and adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
Our business is particularly dependent upon personal relationships, as promoters and executives within entertainment companies such as ours leverage their network of relationships with artists, agents, managers and sponsor and marketing partners to secure the rights to the performers and events that are critical to our success. Due to the importance of those industry contacts, the loss of any of our officers or other key personnel who have relationships with these artists, agents or managers could adversely affect our venue management and event promotion businesses. While we have hiring policies and procedures and conduct background checks of our promoters, executives, managers and artists, they may engage in or may have in the past engaged in conduct we do not endorse or that is otherwise improper, which may result in reputational harm to us. Also, to the extent artists, agents and managers we have relationships with are replaced with individuals with whom our officers or other key personnel do not have relationships, our competitive position and financial condition could be adversely affected.
We may be accused of infringing upon intellectual property rights of third parties.
From time to time, we may be in the future subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement and other violations of the trademarks, copyrights, patents and other intellectual property or proprietary rights of third parties.
We may not be able to successfully defend against such claims, which may result in a limitation on our ability to use the intellectual property subject to these claims and also might require us to enter into settlement or license agreements, pay costly damage awards or face an injunction prohibiting us from using the affected intellectual property in connection with our services. Defending ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, results in costly litigation and may divert the attention of our management and technical personnel from the rest of our business.
In addition, music, Internet, technology, and media companies are frequently subject to litigation based on allegations of infringement, misappropriation, or other violations of intellectual property rights. Many companies in these industries, including many of our competitors, have substantially larger patent and intellectual property portfolios than we do, which could make us a target for litigation as we may not be able to assert counterclaims against parties that sue us for patent, or other intellectual property infringement. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert claims in order to extract value from technology companies. Further, from time to time we may introduce new products and services, including in territories where we currently do not have an offering, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities. It is difficult to predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business, operating results, and financial condition. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay significant damages, which may be even greater if we are found to have willfully infringed upon a party’s intellectual property; cease exploiting copyrighted content that we have previously had the ability to exploit; cease using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content, or materials; indemnify our partners and other third parties; and/or take other actions that may have material effects on our business, operating results, and financial condition.
Changes in how network operators handle and charge for access to data that travel across their networks could adversely impact our business.
We will rely upon the ability of consumers to access our service through the Internet. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws impacting net neutrality, could decrease the demand for our service and increase our cost of doing business. To the extent that network operators implement usage-based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition and retention could be negatively impacted.
The success of our business and operations depends, in part, on the integrity of our systems and infrastructures, as well as affiliate and third-party computer systems, Wi-Fi and other communication systems. System interruption and the lack of integration and redundancy in these systems and infrastructures may have an adverse impact on our business, financial condition and results of operations.
System interruption and the lack of integration and redundancy in the information systems and infrastructures, both of our own systems and other computer systems and of affiliate and third-party software, Wi-Fi and other communications systems service providers on which we rely, may adversely affect our ability to operate websites, process and fulfill transactions, respond to user inquiries and generally maintain cost-efficient operations. Such interruptions could occur by virtue of natural disaster, malicious actions such as hacking or acts of terrorism or war, or human error. In addition, the loss of some or all of certain key personnel could require us to expend additional resources to continue to maintain our software and systems and could subject us to systems interruptions.
Although we maintain up to date information technology systems and network infrastructures for the operation of our businesses, techniques used to gain unauthorized access to private networks are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to our systems and data.
Privacy concerns could limit our ability to leverage our subscriber data and compliance with privacy regulations could result in significant expense.
In the ordinary course of business and in particular in connection with merchandising our service to our users, we collect and utilize data supplied by our users. We may face certain legal obligations regarding the manner in which we treat such information. Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users’ browsing and other habits. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business. As our business evolves and as we expand internationally, we may become subject to additional and/or more stringent legal obligations concerning our treatment of user information, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur significant expenses.
In addition, we cannot fully control the actions of third parties who may have access to the user data we collect and the user data collected by our third-party vendors. We may be unable to monitor or control such third parties and the third parties having access to our website in their compliance with the terms of our privacy policies, terms of use, and other applicable contracts, and we may be unable to prevent unauthorized access to, or use or disclosure of, user information. Any such misuse could hinder or prevent our efforts with respect to growth opportunities and could expose us to liability or otherwise adversely affect our business. In addition, these third parties may become the victim of security breaches or have practices that may result in a breach, and we could be responsible for those third-party acts or failures to act.
Any failure, or perceived failure, by us or the prior owners of acquired businesses to maintain the privacy of data relating to our users (including disclosing data in a manner that was objectionable to our users), to comply with our posted privacy policies, our predecessors’ posted policies, laws and regulations, rules of self-regulatory organizations, industry standards and contractual provisions to which we or they may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose users, advertisers, revenue and employees.
We do not have insurance coverage that is customary and standard for companies of comparable size in comparable industries
As of the date of this annual report, we have not obtained sufficient insurance coverage that is customary and standard for companies of comparable size in comparable industries, such as any liability insurance and insurance for losses and interruptions caused by terrorist attacks, military conflicts, and wars, which could subject us to significant financial losses. The realization of any of these risks could cause a material adverse effect on our business, financial condition, results of operations, and cash flows.
Risks Related to the Ownership of Our Ordinary Shares
If we fail to comply with the continued listing requirements of Nasdaq, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
On December 22, 2022, the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“Nasdaq”) notified the Company that the minimum bid price per share for its ordinary shares has been below $1.00 for a period of 30 consecutive business days and the Company therefore no longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2). The notification received had no immediate effect on the listing of the Company’s ordinary shares on Nasdaq.
On January 24, 2023, Nasdaq determined that for the last 10 consecutive business days, from December 22, 2022 to January 6, 2023, the closing bid price of the Company’s ordinary shares has been at $1.00 per share or greater. Accordingly, the Company has regained compliance with Listing Rule 5550(a)(2), and considers this matter now closed.
Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. There can be no assurance that the Company will be able to maintain the compliance with the Nasdaq rules. If we fail to comply with the Bid Price Requirement or any other listing rules when required in the future, we could be subject to suspension and delisting proceedings. If our securities lose their status on The Nasdaq Capital Market, our securities would likely trade in the over-the-counter market. If our securities were to trade on the over-the-counter market, selling our securities could be more difficult because smaller quantities of securities would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our securities are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our securities, further limiting the liquidity of our securities. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities. Such delisting from The Nasdaq Capital Market and continued or further declines in our share price could also greatly impair our reputation and ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
The price of our ordinary shares historically has been volatile, which may affect the price at which you could sell the ordinary shares.
Our ordinary shares are listed on the Nasdaq Capital Market under the symbol “ADD.” The market price for the ordinary shares has varied between a high closing price of $5.60 on July 21, 2022 and a low closing price of $0.69 on December 16, 2022 in the 12-month period ended on June 30, 2023. The price herein refers to the closing price after completion of the reverse share split price. This volatility may affect the price at which you could sell the ordinary shares. The ordinary share price are likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the following:
| ● | variations in our revenues, earnings and cash flows; |
| ● | announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; |
| ● | announcements of new offerings, solutions and expansions by us or our competitors; |
| ● | changes in financial estimates by securities analysts; |
| ● | detrimental adverse publicity about us, our services or our industry; |
| ● | announcements of new regulations, rules or policies relevant for our business; |
| ● | additions or departures of key personnel; |
| ● | release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and |
| ● | potential litigation or regulatory investigations. |
Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were to be involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
We do not intend to pay dividends on our ordinary shares for the foreseeable future, but if we intend to do so our holding company structure may limit the payment of dividends to our stockholders.
While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in local currencies, fluctuations in the exchange rate for the conversion of local currencies into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.
The governing legislation for the distribution of dividends in Singapore is the Companies Act 1967 of Singapore, or the Companies Act. Under Section 403 of the Companies Act, a Singapore company is only allowed to pay dividends out of profits and there are certain restrictions on the use of profits for the purposes of dividend declaration. Firstly, any profits of a company applied towards the purchase of its shares pursuant to the share buyback provisions under the Companies Act cannot be payable as dividends to the shareholders. However, the foregoing restriction does not apply to any part of the proceeds received by the company from a sale or disposal of its treasury shares where the sums that were utilized to purchase those treasury shares initially came out of profits in the first place. Finally, any gains derived from the sale of treasury shares cannot be payable as dividends to the shareholders of the company.
We may be subject to penny stock regulations and restrictions and you may have difficulty selling our ordinary shares.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our ordinary shares becomes a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our ordinary shares will qualify for exemption from the Penny Stock Rule. In any event, even if our ordinary shares were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ordinary shares, the market price for the ordinary shares and trading volume could decline.
The trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about our business. If industry or securities analysts decide to cover us and in the future downgrade our ordinary shares, the market price for our ordinary shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ordinary shares to decline.
Techniques employed by short sellers may drive down the market price of our ordinary shares.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.
If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in our ordinary shares could be greatly reduced or even rendered worthless.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
| ● | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; |
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and |
| ● | the selective disclosure rules by issuers of material nonpublic information under Regulation FD. |
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
Because we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.
Nasdaq Listing Rules require listed companies to have, among other things, a majority of their board members be independent. As a foreign private issuer, however, we are permitted to, and we may, follow home country practice in lieu of the above requirements, or we may choose to comply with the Nasdaq requirement within one year of listing. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Since a majority of our board of directors will not consist of independent directors, fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. The Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. However, we may consider following home country practice in lieu of the requirements under Nasdaq listing rules with respect to certain corporate governance standards which may afford less protection to investors.
ITEM 4. INFORMATION ON THE COMPANY
4.A. History and Development of the Company
We are an entertainment technology company with a global network that focuses on the application of technology and artificial intelligence in the entertainment industry, and primarily provide services via our wholly-owned subsidiaries, Color Metaverse and CACM Group NY, Inc.
Color Star Technology Co., Ltd. (formerly known as Huitao Technology Co., Ltd.) was founded as an unincorporated business on September 1, 2005, under the name TJS Wood Flooring, Inc., and became a C-corporation in the State of Delaware on February 15, 2007. On April 29, 2008, we changed our name to China Advanced Construction Materials Group, Inc.
On August 20, 2018, CACM was incorporated in the State of New York and is wholly owned by us. The establishment of CACM was to expand our business in the U.S. CACM has not commenced operations.
On December 27, 2018, we consummated a redomicile merger pursuant to which we merged with and into China Advanced Construction Materials Group, Inc., a newly formed Cayman Islands exempted company and the surviving entity in the merger, pursuant to the terms and conditions of an Agreement and Plan of Merger adopted in July 2018. As a result of the merger, we are now governed by the laws of the Cayman Islands.
By special resolution of shareholders dated 28 June 2019, our name was changed from China Advanced Construction Materials Group, Inc. to Huitao Technology Co., Ltd. On July 12, 2019, our Amended and Restated Memorandum and Articles of Association (“2019 Amended and Restated Memorandum and Articles”) was filed with the Registrar of Companies (Cayman Islands) and a Certificate of Incorporation on Change of Name for Huitao Technology Co. Ltd. was issued.
On December 31, 2019, we entered into a share exchange agreement with Sunway Kids International Education Group Ltd. (“Sunway Kids”) and its shareholders. On February 14, 2020, we consummated the acquisition of Sunway Kids whereby we issued 1,989,262 ordinary shares and $2 million of cash to be paid in exchange for all of the issued and outstanding share capital of Sunway Kids. The $2 million cash consideration is payable in five installments over five years according to an earn-out schedule. Sunway Kids thereby became our wholly-owned subsidiary. Sunway Kids was established on February 29, 2012, under the laws of the British Virgin Islands as an offshore holding company. On August 23, 2018, Sunway Kids established its wholly-owned subsidiary, Brave Millenium Limited (“Brave Millenium”) under the laws of Hong Kong. On December 4, 2019, Brave Millenium established Chengdu Hengshanghui Intelligent Technology Co., Ltd. (“Chengdu Hengshanghui”) in China as a wholly foreign owned limited liability company (the “WFOE”). On December 9, 2019, Chengdu Hengshanghui entered into a series of variable interest entity agreements with Chengdu Hengshanghui Education Consulting Co., Ltd. (“Hengshanghui Education”). Through Sunway Kids and its variable interest entity Hengshanghui Education, we were engaged in providing education and health services to day-care and preschools in China.
On March 10, 2020, CACM entered into a certain joint venture agreement (the “JV Agreement”) with Baydolphin, Inc., a company organized under the laws of New York (“Baydolphin”). Pursuant to the JV Agreement, CACM and Baydolphin established a limited liability company under the laws of New York, Baytao LLC (“Baytao”), which intended to be the 100% owner of one or more operating entities in the U.S. to engage in the business of online and offline after-school education.
Prior to acquisition of Sunway Kids in February 2020, our core business has been the concrete business in China. Our concrete business was negatively affected by the economic cycle and government policies. The concrete industry was influenced by the decline in the macro economy in recent years. The entire concrete industry in the PRC’s Beijing area experienced a slowdown in industry production and economic growth in the last few years as the Beijing government continues to enforce concrete production reformation and tightened environmental laws from late 2017 to date. The reformation causes great uncertainties for local enterprises in the construction market. Since 2017, the pressure on small concrete companies has further increased and many have been shut down. Also, the Beijing government ordered the suspension of construction jobsites during winters to reduce air pollution since 2017. The operations of Xin Ao were also severely affected. As a result of our deteriorating cash position, we defaulted on bank loans and experienced a substantial increase in contingent liabilities. As of December 31, 2019, there was a default on a bank loan of $24,345,129. As of December 31, 2019, Xin Ao was subject to several civil lawsuits for which we estimated that it is more than likely to pay judgments in the amount of approximately $6.8 million (including interest and penalties of $1.6 million). During the six months ended December 31, 2019 and 2018, there were additional estimated claims of approximately $0.3 million and $1.1 million, respectively. We believed it would be very difficult, if not impossible, to turn around the concrete business. As such, we had decided to dispose of the concrete business after the acquisition of Sunway Kids.
On May 6, 2020, we completed the disposition (the “Xin Ao Disposition”) of Xin Ao Construction Materials, Inc. (“BVI-ACM”), after obtaining our shareholders’ approval on April 27, 2020 and satisfaction or waiver of all other closing conditions. Upon the closing of the Xin Ao Disposition, Mr. Xianfu Han and Mr. Weili He became the sole shareholders of BVI-ACM and assumed all assets and liabilities of all the subsidiaries and variable interest entities owned or controlled by BVI-ACM. The proceeds of $600,000 from the Xin Ao Disposition have been used for our working capital and general corporate purposes.
By special resolution of shareholders dated April 27, 2020, our name was changed from Huitao Technology Co., Ltd. to Color Star Technology Co., Ltd. On May 1, 2020, our Amended and Restated Memorandum and Articles of Association (“2020 Amended and Restated Memorandum and Articles”) was filed with the Registrar of Companies (Cayman Islands) and a Certificate of Incorporation on Change of Name to “Color Star Technology Co., Ltd. was issued,
On May 7, 2020, we entered into a Share Exchange Agreement (“2020 Exchange Agreement”) with Color China Entertainment Limited (“Color China”), a Hong Kong limited company, and shareholders of Color China (the “Sellers”), pursuant to which, among other things and subject to the terms and conditions contained therein, we shall acquire all of the outstanding issued shares and other equity interests in Color China from the Sellers (the “Acquisition”). On June 3, 2020, the transaction contemplated by the 2020 Exchange Agreement was consummated when we issued 4,633,333 ordinary shares to the Sellers and the Sellers transferred all of Color China’s issued and outstanding shares to us. Immediately after the Acquisition, we owned 100% of Color China. The Company planned to make Color China an emerging online performance and online education provider with a significant collection of performance specific assets.
On June 25, 2020, we and the former shareholders of Sunway Kids entered into an Amendment No. 2 (“Amendment”) to the Share Exchange Agreement dated December 31, 2019, as amended. Pursuant to the Amendment, we should not make any Earn-out Payment to the former shareholders of Sunway Kids since Sunway Kids had been unable to conduct its normal operations due to the COVID-19 pandemic and management of Sunway Kids believed it would be very difficult to achieve its projected financial results. On the same day, Sunway Kids and Yanliang Han, an unrelated third party, entered into certain share purchase agreement (the “Disposition SPA”). Pursuant to the Disposition SPA, the Purchaser agreed to purchase Sunway Kids for cash consideration of $2.4 million consisting of $400,000 which should be paid within a month of closing, and $2,000,000 to be paid in monthly installments of $200,000 over 10 months. Upon the closing of the transaction contemplated by the Disposition SPA on June 25, 2020, Yanliang Han became the sole shareholder of Sunway Kids and as a result, assumed all assets and liabilities of all the subsidiaries and variable interest entities owned or controlled by Sunway Kids. By disposing Sunway Kids, we exited the business of preschool children online education service.
Effective October 1, 2020, we changed the ticker symbol of our ordinary shares traded on the Nasdaq Capital Market from “HHT” to “CSCW”, representing the abbreviation of “Color Star Color World.” Our online platform “Color Worlds” was the new focus of our business.
On June 18, 2021, Modern Pleasure International Limited, a limited liability company, was incorporated in Hong Kong and is wholly owned by us. As of the date hereof, Modern Pleasure International Limited has not commenced operations.
On June 29, 2021, CACM entered into a share purchase agreement with Baydolphin. Pursuant to the agreement, CACM agreed to sell, and Baydolphin agreed to purchase, 80% of the outstanding equity interest of Baytao for a consideration of $100. Prior to the sale, Baytao LLC had no operation or asset. Upon completion of the sale, Baytao ceased to be our subsidiary.
On September 24, 2021, we and certain institutional investors entered into a share purchase agreement (“September 2021 SPA”), pursuant to which we agreed to sell such institutional investors units with each unit consisting of one ordinary share and one warrant to purchase 0.7 ordinary share, at a purchase price of $0.68 per unit, for gross proceeds approximately $21.5 million before deducting placement agent fees and other estimated offering expenses. An aggregate of 22,137,448 ordinary shares were agreed to be issued to the investors under the September 2021 SPA. Pursuant to a placement agent agreement we entered into with FT Global Capital, Inc. (“FT Global”) dated September 24, 2021 (the “September 2021 PAA”), we issued to FT Global warrants to purchase an aggregate of 948,748 ordinary shares. The sale and offering of the securities described above was effected as a takedown off our shelf registration statement on Form F-3 (File No. 333-236616) that was previously filed with the SEC and declared effective on March 10, 2020.
On January 21, 2022, we and Hou Sing International Business Limited (“Hou Sing”) entered into a securities purchase agreement, pursuant to which we agreed to issue and sell to Hou Sing an aggregate of 16,000,000 shares of common stock at a purchase price of $1.0 per share, for proceeds of $16,000,000.
On February 21, 2022, pursuant to a securities purchase agreement (the “February 2022 SPA”) we entered into with certain institutional investors, we agreed to sell such institutional investors units with each unit consisting of one ordinary share and one warrant to purchase one ordinary share, at a purchase price of $0.4 per unit, for gross proceeds approximately $10.0 million before deducting placement agent fees and other estimated offering expenses. An aggregate of 25,000,000 ordinary shares and warrants to purchase an aggregate of 25,000,000 ordinary shares were agreed to be issued to the investors under the February 2022 SPA. Pursuant to the September 2021 PAA, we issued to FT Global warrants to purchase 545,250 Ordinary Shares. The sale and offering of the securities described above was effected as a takedown off our shelf registration statement on Form F-3 (File No. 333-256508) that was previously filed with the SEC and declared effective on May 26, 2021.
On April 11, 2022, as approved by our shareholders, we amended the 2021 Amended and Restated Memorandum and Articles, which was duly filed with the Cayman Registrar on 29 August 2022 as the Fourth Amended and Restated Memorandum and Articles of Association (the “2022 Amended and Restated Memorandum and Articles”). Our authorized capital was $32,000,000 divided into 800,000,000 ordinary shares with a par value of $0.04 per share.
On September 3, 2022, Color Metaverse Pte. Ltd., our Singapore subsidiary, entered into a phone purchase agreement with Ziaul Haq for a quantity of 10,000 units of smart phones which shall be paid by the following methods: (i) $2,800,000 by cash and (ii) $2,200,000 to be paid with ordinary shares issued by us. The Share Consideration would be paid to Ziaul Haq at the trading price of the trading day immediately prior to the signing date. As of the date of this annual report, such shares have not been issued yet.
On September 14, 2022, we entered into a securities purchase agreement (the “September 2022 SPA”) with certain institutional investors for a registered direct offering of ordinary shares and warrants. Each unit consisted of one ordinary share and one warrant to purchase one ordinary share. The purchase price per unit was $0.08. The gross proceeds from the sale of the securities, before deducting placement agent fees and other estimated offering expenses payable us, was approximately $5.6 million. We issued to the investors an aggregate of 70,000,000 ordinary shares and warrants to purchase an aggregate of 70,000,000 ordinary shares. Pursuant to the September 2021 PAA, we issued to FT Global warrants to purchase 1,725,000 Ordinary Shares. The sale and offering of the securities described above was effected as a takedown off our shelf registration statement on Form F-3 (File No. 333-256508) that was previously filed with the SEC and declared effective on May 26, 2021.
On September 26, 2022, we completed a 40-for-1 reverse share split of our ordinary shares, which was approved by our shareholders on April 11, 2022. As a result of the reverse share split, the number of ordinary shares outstanding was reduced from approximately 261,757,531 to approximately 6,543,938 ordinary shares, subject to rounding up of all fractional shares to the nearest whole share in lieu of such fractional shares. No preference shares were issued and outstanding then and there.
Effective November 1, 2022, we changed the ticker symbol of our ordinary shares traded on the Nasdaq Capital Market from “CSCW” to “ADD”, representing our hope that more and more will people join “Color World” and that our business will keep increasing.
On December 20, 2022, the Company entered into certain securities purchase agreement with a certain “accredited investor” as such term is defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended, pursuant to which the Company agreed to sell 1,200,000 ordinary shares, par value $0.04 per share, at a per share purchase price of $1.25. The gross proceeds to the Company from this offering will be approximately $1.5 million.
On January 11, 2023, the Company, Color Sky Entertainment Limited, a Hong Kong corporation and the Company’s wholly owned subsidiary, and Tian Jie (the “Purchaser”), entered into a certain share purchase agreement (the “Disposition SPA”). Pursuant to the Disposition SPA, the Purchaser agreed to purchase Color Sky in exchange for no consideration. Upon the closing of the transaction contemplated by the Disposition SPA, the Purchaser became the sole shareholder of Color Sky and as a result, assumed all assets and liabilities of Color Sky.
On March 24, 2023, we held our annual meeting of shareholders, pursuant to which the shareholders of the Company approved the proposal to amend the authorized share capital of the Company from US$32,000,000 divided into 800,000,000 Ordinary Shares with a par value of US$0.04 each; to 700,000,000 Class A Ordinary Shares with a par value of $0.04 each and 100,000,000 Class B Ordinary Shares with a par value of US$0.04 each, in each case having the rights and subject to the restrictions set out in the Fifth Amended and Restated Memorandum of Association and Articles of Association of the Company.
On May 19, 2023, the Company entered into a certain concert cooperation agreement (“Agreement”) dated, by and among Rich America Inc., an Ohio corporation, (“Rich America”), Color Star DMCC, a United Arab Emirates corporation (“Color Star”) and the Company. Pursuant to the Agreement, Rich America agreed to have certain music artists represented by Rich America perform at nine concert events organized by Color Star to be held between May 2023 and March 2024 (the “Concerts’) for an aggregate consideration of US$8,000,000, to be paid in 6,400,000 restricted Class A Ordinary Shares, par value $0.04 per share, of the Company.
On July 11, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company issued the Investor an unsecured promissory note on July 11, 2023 in the original principal amount of $1,100,000.00, convertible into Class A ordinary shares, $0.04 par value per share, of the Company, for $1,000,000.00 in gross proceeds. On July 12, 2023, the transaction contemplated by the Purchase Agreement was closed as all the closing conditions of as set forth therein have been satisfied.
On November 8, 2023, the Company entered into a certain securities purchase agreement with Vast Ocean Inc., the largest shareholder of the Company, pursuant to which the Company agreed to sell 1,120,000 Class A ordinary shares, par value $0.04 per share, at a per share purchase price of $0.25 (the “November Offering”). The November Offering was unanimously approved by the audit committee of the board of directors of the Company consisting only of independent directors. The gross proceeds to the Company from the November Offering are $280,000, before deducting any fees or expenses. The Company plans to use the net proceeds from the November Offering for working capital and general corporate purposes. The November Offering closed on November 9, 2023.
4.B. Business Overview
We are an entertainment technology company with a global network that focuses on the application of technology and artificial intelligence in the entertainment industry, and primarily provide services via our wholly-owned subsidiaries, CACM Group NY and Color Star DMCC, Inc. We strive to deliver world-class entertainment experiences and promoting entertainment exchange with our strong resources and deep connections in the industry.
We launched our online cultural entertainment platform, Color World, globally on September 10, 2020. We used to operate Color World by Color Sky Entertainment Limited, our subsidiary in Hong Kong, which was formerly known as Color China Entertainment Limited. After our internal reallocation of resources, since September 2022, we have operated Color World through Color Metaverse, our Singapore subsidiary. It used to be a platform primarily providing celebrity-led education services. The curriculum development created by us includes music, sports, animation, painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment, sports and culture. At present, Color World is operated by Color Star DMCC. We have signed contracts with well-known international artists and more than 50 celebrity teachers have been retained to launch online lectures. In January 2022, Color World was transformed into the current version, a metaverse with “artificial intelligence + celebrity entertainment” as its core features. Since transforming into a metaverse platform, Color World has been inviting many global superstar celebrities to join the platform to expand on the celebrity content by creating more celebrity masterclasses, online virtual performances, celebrity merchandise, games and so on. We are keep adding new modules to Color World to enrich the metaverse community. In the future, we plan to add more virtual locations as well as digital products. As of the date of this report, we do not have any operations in the PRC.
We are committed to the development of entertainment technology and artificial intelligent technology. We strive to create a parallel world of entertainment, allowing more people to realize their dreams in the virtual entertainment world.
Our Competition
The entertainment industry is a highly competitive and fragmented industry that is sensitive to price, content and quality of service. We face intense competition in our online business and compete primarily with online entertainment providers and content sharing platforms who are already very established. Meanwhile, the metaverse industry is rapidly evolving and also competitive. The metaverse market is relatively concentrated with a few large players. We expect competition in this sector to persist and intensify as we compete not only with existing players that have been focused on providing metaverse-related products and services, but also new entrants that include well-established players in the metaverse industry, and players who were not predisposed to this industry in the past. Some of these competitors may also have stronger brand names, greater access to capital, longer histories, longer relationships with their suppliers or customers and more resources than we do.
We differ from various other competitors in our metaverse with “artificial intelligence + celebrity entertainment.” However, some of our existing and potential competitors may have more resources and experiences than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of their services and products and respond more quickly than we can to changes in market demands or new technologies. In addition, we face competition from many different sized entities that focus on some of our targeted markets, which may be able to respond more promptly to changes in users’ preferences in these markets.
Our Growth Strategy
We are committed to enhancing profitability and cash flows through the following strategies:
| ● | We are well positioned to capture market share with an experienced management team and all-star instructor lineup. One of the key services we provided is celebrities’ online education. We strive to offer students professional artists training platform featured by exclusive content and live interaction and are well connected with artists from Asia and U.S., establishing strategic partnerships with top record companies and entertainment agencies. |
Our Operations
We are growing to become the world’s top online celebrity entertainment sharing platform. We provide online entertainment performances and online innovative education through our wholly-owned subsidiaries Color Metaverse and CACM. We strive to offer students professional artist training platform featured by exclusive content and live interaction, with the mission of delivering world-class entertainment learning experiences and promoting entertainment exchange with our strong resources and deep connections in industry.
Online Business
Online Education Academy
The core content of “artist online + entertainment teaching” offers a variety of artists and a relatively rich entertainment teaching experience. By registering online, students can select their favorite artist to conduct accurate and efficient learning, and access to exclusive online video classes and tutorials by top artists globally.
The curriculum development created by us includes music, sports, animation, painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment, sports and culture. At present, we have signed contracts with well-known international artists and more than 50 celebrity teachers have been launched. The Color World platform not only has celebrity lectures, but also celebrity concert videos, celebrity peripheral products, and artist interactive communication. The platform focuses on the interactive participation of members and fans, making the platform more entertaining. Fans can interact with their idols, and they can also upload their own works for celebrity tutors and audiences across the network to watch comments. The celebrity live streaming section, which was launched on October 15, 2020, allows more celebrities to communicate and interact with our users through the Internet.
The Color World platform generates revenue primarily through paid fees priced at $9.90 per user per view of star teachers’ video classes. There have been over 300,000 registered users as of the date of this annual report.
We are well connected with artists from Asia to the U.S., and have built strategic partnerships with globally renowned record companies and entertainment agencies, such as Universal Music Group and Sony Music, which enable us to group a number of artists into our Color World platform and secure the rights to the exclusive streaming of online lessons taught by the star teachers. Currently, we have entered into educational licensing and performance agreements with approximately over 50 global artists and professionals in industry for their services as instructors on the Color World platform, and are seeking out and contracting more star teachers in a variety of fields such as music, film, sports, animation, television, presentations, dance, and art to provide our prospective student subscribers with a large repertoire of first-hand exposure to and lessons from professionals in their desired fields.
Online Concert
We established our own music festival brand “Color International Music Festival” and our management has the experiences of holding more than 100 star concerts every year. On September 9, 2020, we broadcasted the Color World Online Concert with ten Eastern and ten Western top artists/celebrities including Grammy-winning jazz guitarist Larry Carlton, R&B singer-songwriter Ashanti, and “Pop Music Queen” Na Ying from mainland China to global audiences via our official platform “Color World” and attracted over half a million viewers from mainland China and all over the world to watch online, reaching over 10 million hits on global social media networks, which we believe is a milestone to the Company. In fiscal 2021, the Company held an online live concert featuring exclusive performance by Luo Dayou, the “Godfather of Asian Music.” The performance has been well received by global audiences and highly recognized by the artist himself. On April 23, 2021, the Company also launched an exclusive electronic music concert of the Top 100 DJ, Steve Aoki. This was our first attempt to provide online electronic music performances globally during the pandemic, and it has received favorable reviews from global music lovers and electronic music audiences.
Offline Business
Music Festival
We may collaborate with multiple well-established music festival brands to co-organize music festivals with different genres over the next five years in different cities across Asia and beyond. The management of the Company will closely monitor the development of the COVID-19 pandemic and adjust our plans of co-organizing the music festivals to protect the safety of our customers and employees and to comply with the applicable laws and regulations.
Artist Concerts and Tours
Live music events have been a staple of the Company since its conception, and it also possesses its own ultra-modern concert stage that is capable of large motions in 3 dimensions and has advanced lighting and sound systems. We may oversee the organization and production of music concerts and concert tours in cities all over the world for internationally well-known artists across different musical genres and with substantial amounts of fans. The Company will claim full ownership of related copyrights and licenses of these concerts and tour projects. According to PwC, live events revenue will grow at a 9.6% CAGR through to 2027, so the Company expects good returns from this sector in the coming years.
The World Boxing Association (“WBA”) Boxing Matches
In the summer of 2023, the Company announced a partnership with the WBA which will allow us to organize WBA-approved boxing competitions. The first match took place in Dubai on the 26th of August 2023, where 6 prolific fighters competed for the WBA gold belt. In addition to the match tickets, the event was also broadcasted on international and local television, and live streamed on various online platforms such as Sina Sports and Tencent QQ Live. According to broadcasters, the competition garnered over 4 million viewers in total.
Our Suppliers and Customers
For the year ended June 30, 2023, we had no purchases. For the year ended June 30, 2022, we had three vendors, whose supplies accounted for 60%, 27%, and 13% of the Company’s total purchases.
For the fiscal year ended June 30, 2023, we had no sales. For the fiscal year ended June 30, 2022, we had no customers, whose sales accounted for more than 10% of our total sales.
Sales and Marketing
Marketing Channels
We market our course offerings and enhance brand awareness through various online and mobile channels. We place advertisements and conduct marketing on mainstream social media platforms. At the same time, regarding our online education services, we also generate sales leads from word-of-mouth referrals by our students and parents of students. We believe our high-quality course offerings and satisfactory student experience will continue to contribute word-of-mouth referrals.
A unique approach for the online concert promotions was adopted by the Company where ticket prices were initially set very low with additional opportunities for purchasers to take part in the distribution of ticket sales in order to receive referral rewards. This indirect ticket sales model, and a large amount of resulting passive income, promises more diversified marketing strategies for online music.
Research and Development
Technology and Infrastructure
Technology is the backbone of our highly scalable business model. Our strong technological capabilities enable us to deliver a superior student experience and improve operational efficiency. Our technology team, coupled with our proprietary artificial intelligence technology and the growing volume of data generated from our operations, has continued to identify opportunities for improvements in our technology infrastructure and applications.
Live Broadcasting Technology
Live broadcasting technology development has been our main focus since our inception. Currently, our proprietary live broadcasting technology makes it possible for as many as 200,000 people to join a live broadcasting activities simultaneously, without compromising video quality.
Intellectual Property
As of the date of this annual report, we have one copyright and one domain name: www.colorstarinternational.com.
Our Labor Force
As of June 30, 2023, we had 47 full-time employees. As required by applicable PRC law, we have entered into employment contracts with all our officers, managers and employees. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff.
Legal Proceedings
As of the date of this annual report, the Company is not a party to any legal action.
Regulations
This section sets forth summarizes the most significant rules and regulations relating to our business activities in Singapore.
Singapore
Regulations on Data Protection and Information Security
Personal Data Protection
The Personal Data Protection Act 2012 of Singapore governs the collection, use and disclosure of the personal data of individuals by organizations, and is administered and enforced by the regulator, the Personal Data Protection Commission. It sets out data protection obligations which all organizations are required to comply with in undertaking activities relating to the collection, use or disclosure of personal data. A failure to comply with any of the above can subject an organization to a fine per breach of up to S$1 million (US$739,645) or 10% of the organization’s annual turnover in Singapore, whichever is higher.
An online game operator or e-commerce company is required to comply with the Personal Data Protection Act. Among other things, such company is required to obtain consent from its customers and inform them of the applicable purposes before collecting, using or disclosing their personal data. Moreover, it is also required to put in place sufficient measures to protect the personal data in its possession or control from unauthorized access, loss or damage.
Pursuant to the Personal Data Protection Commission’s Advisory Guidelines on the Personal Data Protection Act for NRIC and other National Identification Numbers that was issued in August 2018, an organization such as an online game operator or e-commerce company is not permitted to collect, use or disclose an individual’s identification number unless under certain exceptions. The Personal Data Protection Commission has commenced enforcement of these Guidelines from September 2019.
In the event of a data breach involving any personal data in an organization’s possession or control, the Personal Data Protection Act 2012 requires the organization to reasonably and expeditiously assess the data breach, and notify the Personal Data Protection Commission of the data breach if it is assessed to be one that: (a) is likely to result in significant harm or impact to the individuals to whom the information relates, or (b) involves personal data of 500 or more individuals. In addition to notifying the Personal Data Protection Commission, organizations are also required to notify the affected individuals if the data breach is one that is likely to result in significant harm or impact to the affected individuals.
Regulations on Dividend Distributions
The governing legislation for the distribution of dividends in Singapore is the Companies Act 1967 of Singapore, or the Companies Act. Under Section 403 of the Companies Act, a Singapore company is only allowed to pay dividends out of profits and there are certain restrictions on the use of profits for the purposes of dividend declaration. Firstly, any profits of a company applied towards the purchase of its shares pursuant to the share buyback provisions under the Companies Act cannot be payable as dividends to the shareholders. However, the foregoing restriction does not apply to any part of the proceeds received by the company from a sale or disposal of its treasury shares where the sums that were utilized to purchase those treasury shares initially came out of profits in the first place. Finally, any gains derived from the sale of treasury shares cannot be payable as dividends to the shareholders of the company.
In addition to complying with the Companies Act, the payment of dividends must also be in accordance with the company’s constitution and the generally acceptable accounting principles in Singapore.
Regulations on Information Technology
Regulation of Internet Content
The Broadcasting Act 1994 of Singapore prohibits the provision of certain broadcasting services, including internet content, in or from Singapore without a license issued by the Infocomm Media Development Authority. The Infocomm Media Development Authority is the regulator of the information, communications and media sectors in Singapore. The Broadcasting Act 1994 sets out an automatic class licensing scheme for computer online services provided by internet content providers. An internet content provider includes a corporation which provides any program for business purposes on the internet.
Internet content providers are in general mandated to be automatically class licensed without any need to make specific applications to the Infocomm Media Development Authority, and are required to comply with the conditions of the class license and the Internet Code of Practice. As an internet content provider, we are obliged to use our best efforts to ensure that prohibited material (which refers to material that is objectionable on the grounds of public interest, public morality, public security, national harmony, offends good taste or decency, or is otherwise prohibited by applicable Singapore laws) is not broadcast via the internet to users in Singapore, and we are also required to deny access to any prohibited material if directed to do so by the Infocomm Media Development Authority. If we contravene the class license conditions or the Internet Code of Practice, we may face administrative sanctions such as suspension or cancelation of our license, or fines.
In addition, to the extent that our platforms or services enable our users to transmit online content to each other or access third party online content, we would be an internet intermediary under the Protection from Online Falsehoods and Manipulation Act 2019 of Singapore, or POFMA. POFMA empowers any Singapore government minister to direct the POFMA Office to issue certain directions to internet intermediaries whose internet intermediary service had been used to communicate a false statement of fact in Singapore, if the minister is of the opinion that it would be in the public interest to do so. Such directions would include: (a) targeted correction directions, which require the internet intermediary to communicate a correction notice on its service to all end-users in Singapore who accessed the offending false statement of fact after a specified time; and (b) disabling directions, which require the internet intermediary to disable access by end-users in Singapore to the offending false statement of fact being communicated on or through its service. Companies may be fined if they fail to comply with directions issued under POFMA without reasonable excuse.
Regulations on Imported Games and Game Operating
Video Game Classification
Pursuant to the Films Act 1981 of Singapore, the Infocomm Media Development Authority is responsible for classifying films, videos and video games distributed in Singapore. In particular, it administers the video game classification system under the Films Act 1981, which requires businesses importing or distributing physical copies of video games in Singapore to submit the video games to the Infocomm Media Development Authority for rating and classification. However, the video game classification system does not apply to games which are only available via internet download. Since the online games that we offer are available only through online platforms, we in general are not subject to the video game classification system. However, the Infocomm Media Development Authority retains the right to issue a rating and/or classification of any of the online games we offer, should it choose to do so.
Films Regulation
The Films Act 1981 imposes a regulatory requirement for an organization to hold a license for carrying on the business of importing, making, distributing or exhibiting films. A film is defined to include a video recording for use as a game. The Films (Video Games Exemption) Notification 2008 exempts a video game distributor from having to comply with the abovementioned requirement to obtain a license. There remains some uncertainty with respect to whether the exemption covers an online game operator as the words ‘video games’ are neither defined in the Films Act nor in the aforesaid exemption. This is due to the contents of the Films Act and its related regulations not being drafted specifically for the digital age of online games. Further, due to the latter reason, there is uncertainty on whether an online game needs to be submitted to the Board of Film Censors for censorship evaluation prior to distribution. In the opinion of Rajah & Tann Singapore LLP, our counsel as to Singapore law, it is consistent with market practice that we treat our online games as video games and do not apply for the film license or submit our online games for censorship evaluation.
Gambling Regulation
Currently, the Remote Gambling Act 2014 of Singapore prohibits the offering of online games where (i) players play to win money, or (ii) players play to win virtual currency/tokens/credits/items that can be exchanged via in-game facilities for real-world money or merchandise. Online games with chance-based loot boxes do not fall within the ambit of the Remote Gambling Act 2014 if the virtual rewards from such loot boxes cannot be exchanged via in-game facilities for real-world money or merchandise. The Gambling Control Bill, which was passed by the Singapore Parliament on March 11, 2022 and will replace the Remote Gambling Act 2014 once it formally comes into effect, adopts a similar treatment of online games with chance-based loot boxes. Accordingly, as we do not offer any online games which have an in-game facility to convert game credits or tokens or enhancement features (e.g. weapons, skins) to real-world money or merchandise, we do not anticipate that the Singapore laws governing online gambling will apply to our gaming business.
Regulations on E-commerce
Consumer Protection
There are various general consumer protection laws in place in Singapore, which apply generally to all relevant transactions including electronic transactions, but are not specifically targeted at regulating e-commerce operations. One or more of these laws would be relevant in the context of online game operations or e-commerce operations.
The Consumer Protection (Fair Trading) Act 2003 of Singapore sets out a legislative framework to allow consumers aggrieved by unfair practices to have recourse to civil remedies before the Singapore courts. The definition of supplier under the Consumer Protection (Fair Trading) Act 2003 includes persons who promote the use or purchase of goods or services which we do through our digital entertainment and e-commerce platforms. Suppliers may be held liable for engaging in unfair practices in relation to consumer transactions. Unfair practices include, among other things: (i) doing or saying anything which would reasonably deceive or mislead consumers, (ii) making a false claim, (iii) taking unreasonable advantage of a consumer, or (iv) making various forms of misrepresentations to the consumer.
The Consumer Protection (Trade Descriptions and Safety Requirements) Act 1975 of Singapore prohibits the use of false trade descriptions on goods supplied in the course of trade. Trade descriptions include any description, statement or indication that directly or indirectly relates to the fitness for purpose, strength, performance, behavior or accuracy of any goods. This prohibition applies to all persons in the course of business and would be applicable in an e-commerce marketplace. Violations of the Consumer Protection (Trade Descriptions and Safety Requirements) Act 1975 are subject to criminal liability.
While we have, among other things, policies in place which require users of our e-commerce platform not to promote or sell any products which are illegal or prohibited for sale under Singapore law, there remains a residual risk that we may be liable for abetting the sale and distribution of such illegal products in breach of Singapore law if we knew of or had reason to suspect the listing and sale of illegal products on our e-commerce platform but failed to take action to remove such listings.
Regulations on Intellectual Property Rights
The Intellectual Property Office of Singapore administers the intellectual property legislative framework in Singapore, which includes copyrights, trademarks and patents. Singapore is a member of the main international conventions regulating intellectual property matters, and the WTO’s Agreement on Trade Related Aspects of Intellectual Property Rights.
Copyright
Pursuant to the Copyright Act 2021 of Singapore, authors of protected works enjoy various exclusive rights, including the rights of reproduction and communication to the public. Generally, an author will automatically enjoy copyright protection as soon as he creates and expresses an original work in a tangible form. Authors and performers also have a distinct right to be identified whenever their works or performances are used in public unless exceptions apply. For commissioned works, the copyright will be owned by the author by default, unless otherwise agreed by contract. On the other hand, employers by default own the copyright in all content created by their employees in the course of the employees’ employment, unless otherwise agreed by contract.
There is no need to file for registration to obtain copyright protection. Copyright works sent over the internet or stored on web servers are treated in the same manner as copyright material in other media. Online games and computer programs would qualify for such copyright protection, for example, as literary works, artistic works and/or cinematograph films.
Trademarks
Singapore operates a first-to-file system in respect of registered trademarks under the Trade Marks Act 1988 of Singapore, and the registered proprietor is granted a statutory monopoly of the trademark in Singapore in relation to the product or service for which it is registered. In the event of any trademark infringement, the registered proprietor will be able to rely on the registered trademark as proof of his right to the mark, and the infringement of a trademark may give rise to civil and criminal liabilities. Statutory protection of a registered trademark can last indefinitely, as long as the registration is renewed every 10 years.
Patents
The Patents Act 1994 of Singapore confers protection on patentable inventions on a first-to-file basis in Singapore, provided that the invention satisfies the requirements of novelty, having an inventive step and industrial applicability. Patents are valid for 20 years from the date of filing, subject to the payment of annual renewal fees. During the life of the patent, the owner will have the exclusive right to exploit the invention that is the subject of the patent.
Regulations on Anti-money Laundering and Prevention of Terrorism Financing
The primary anti-money laundering legislation in Singapore is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act 1992 of Singapore, or CDSA, provides for the confiscation of benefits derived from, and to combat, corruption, drug dealing and other serious crimes. Generally, the CDSA criminalizes the concealment or transfer of the benefits of criminal conduct as well as the knowing assistance of the concealment, transfer or retention of such benefits.
The Terrorism (Suppression of Financing) Act 2002 of Singapore, or TSOFA, is the primary legislation for the combating of terrorism financing. It was enacted to give effect to the International Convention for the Suppression of the Financing of Terrorism. Besides criminalizing the laundering of proceeds derived from drug dealing and other serious crimes and terrorism financing, the CDSA also requires suspicious transaction reports to be lodged with the Suspicious Transaction Reporting Office and the TSOFA requires information about any property belonging to any terrorist or terrorist entity to be reported to the Commissioner of Police. If any person fails to lodge the requisite reports under the CDSA and the TSOFA, it may be subject to criminal liability.
Regulations on Competition Laws
The Competition Act 2004 (the “Competition Act”) prohibits anti-competitive practices. Specific prohibited activities include agreements that prevent, restrict or distort competition, abuse of dominance and mergers that substantially lessen competition, whether these take place within or outside of Singapore, so long as they have an impact on a market in Singapore. The Competition and Consumer Commission of Singapore (the “CCCS”) is responsible for administering and enforcing the Competition Act, which covers all industries and sectors unless specifically exempted or excluded. Infringements of the Competition Act can result in financial penalties of up to 10 per cent. of the turnover of the business in Singapore for each year of infringement, up to a maximum of three years. The CCCS also has powers to impose directions requiring infringing undertakings to stop or modify the activity or conduct, or in the case of anti-competitive mergers, to remedy, mitigate or eliminate the adverse effects arising from the merger. For mergers, the CCCS may also consider interim measures to prevent merger parties from taking any action that might prejudice the CCCS’s ability to consider the merger situation further and/or to impose appropriate remedies. Such interim measures may include directions that stop the implementation of the merger, or where the merger has already been implemented, require a merger to be dissolved or modified.
Regulations on Safety and Health of Our Employees and Contractors
The Workplace Safety and Health Act 2006 (the “WSHA”) is the principal legislation governing the safety, health and welfare of persons at work in workplaces. Among other things, the WSHA imposes a duty on every employer and every principal (which would include us) to take, so far as is reasonably practicable, such measures as are necessary to ensure the safety and health of its employees, and any contractor, any direct or indirect subcontractor, and any employee employed by such contractor or subcontractor, when at work.
The general penalties for non-compliance with the WSHA include the imposition of fines of up to the amount of S$500,000 in the case of a body corporate. Further or other penalties may apply in the case of repeat offenses or specific offenses under the WSHA or its subsidiary legislation.
4.C. Organizational structure
Below is our organizational structure chart as of the date of this annual report.
4.D. Property, Plants and Equipment
Our U.S. executive offices are located at 80 Broad Street, 5th Floor, New York, NY 10005, where we lease premises of a shared office, with a lease term of one year from October 11, 2023 to October 11, 2024. We lease all of our offices from independent third parties.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.” All amounts in included in the fiscal years ended June 30, 2023, 2022 and 2021 (“Annual Financial Statements”) are derived from our audited consolidated financial statements included elsewhere in this annual report. These Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.
5A. Operating Results
Overview
Summary of Business
We are an entertainment technology company with a global network that focuses on the application of technology and artificial intelligence in the entertainment industry, and primarily provide services via our wholly-owned subsidiaries, Color Star DMCC, Color Metaverse, and CACM Group NY, Inc. We strive to deliver world-class entertainment experiences and promoting entertainment exchange with our strong resources and deep connections in the industry.
We launched our online cultural entertainment platform, Color World, globally on September 10, 2020. We used to operate Color World by Color Sky Entertainment Limited, our subsidiary in Hong Kong, which was formerly known as Color China Entertainment Limited. After our internal reallocation of resources, since September 2022, we have operated Color World through Color DMCC, our United Arab Emirate subsidiary, and Color Metaverse, our Singapore subsidiary. It used to be a platform primarily providing celebrity-led education services. The curriculum development created by us includes music, sports, animation, painting and calligraphy, film and television, life skills, etc., covering plenty of aspects of entertainment, sports and culture. At present, we have signed contracts with well-known international artists and more than 50 celebrity teachers have been retained to launch online lectures. In January 2022, Color World was transformed into the current version, a metaverse with “artificial intelligence + celebrity entertainment” as its core features. Since transforming into a metaverse platform, Color World has been inviting many global superstar celebrities to join the platform to expand on the celebrity content by creating more celebrity masterclasses, online virtual performances, celebrity merchandise, games and so on. We are keep adding new modules to Color World to enrich the metaverse community. In the future, we plan to add more virtual locations as well as digital products. As of the date of this report, we do not have any operations in the PRC.
We are committed to the development of entertainment technology and artificial intelligent technology. We strive to create a parallel world of entertainment, allowing more people to realize their dreams in the virtual entertainment world.
Management’s Plan for the Business
We believe that the online entertainment and education platform built by Color DMCC and Color Metaverse will bring innovative changes to the current state of education and entertainment industry, with the goal to eliminate the boundaries of nationality, region, and cultural differences in the entertainment area. Through the Internet, Color Metaverse can provide professional entertainment and music education globally. We aim to recruit an All-Star Crew to be coaches on the Color Star program, including top-notch professional vocalists, producers, musicians and more.
The past COVID-19 pandemic has claimed hundreds of thousands of lives and caused massive global health and economic crisis, while also causing large-scale social and behavioral changes in societies. Online entertainment and education are experiencing enormous growth which we believe will last long after the pandemic. We believe that these market conditions have created tremendous opportunities for our business plans, and therefore we expect to focus on the expansion of Color Metaverse’s business in light of their great potential for revenue generation and profitability.
Principal Factors Affecting Our Financial Performance
We believe that the following factors will continue to affect our financial performance:
| ● | Experienced Management. Management’s technical knowledge and business relationships give us the ability to collaborate with major record companies, entertainment agencies and teaching experts, which provides us with leverage to expand our recognition, promote our products and attract more students rapidly. If there were to be any significant turnover in our senior management, it could deplete the expertise and knowledge held by our existing senior management team. |
| ● | Innovation Efforts. We strive to produce the most innovative advanced products to the users of our platforms. We entered into technical service contracts with platform developers and program licensees to further improve our products and to better user experience. If our research and development efforts were not sufficient to adapt to the change in technology in the industries, our products might not compete effectively. |
Key Components of Results of Operations
Revenues
We generated revenues from the following services:
Online education academy. We earn revenues from our customers for subscription fees for services to be delivered over a period of time, the receipt is initially recorded as “deferred revenue” on the consolidated balance sheets and revenue is recognized ratably over the membership period as services are rendered, usually one year. Membership services revenue also includes fees earned from subscribing members for on-demand content purchases and early access to premium content.
Online concert. We hold online concerts with our star partners. Sale of online concert via subscription fee is accounted for as a single performance obligation which is satisfied at a point in time on the day of the event. Online concert subscription fees are recognized net of App payment collections agent service fee. All ticket sales are final upon payment.
Research and development
Our expenses include website or app development expenditure costs, salaries and other compensation-related expenses to our research and product development personnel and related expenses for our research and product development team. We expense all costs that are incurred in connection with the planning and implementation phases of development, and costs that are associated with maintenance of the existing website or app for internal use.
Results of Operations
The tables in the following discussion summarize our consolidated statements of operations for the periods indicated. This information should be read together with our unaudited condensed consolidated financial statements included elsewhere in this press release. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| For the Years Ended | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Revenue | $ | - | $ | (16,519,081 | ) | $ | (6,783,957 | ) | ||||
| Cost of Revenue | - | 8,546,840 | 4,139,251 | |||||||||
| Gross Profit | - | 7,972,241 | 2,644,706 | |||||||||
| Selling, general and administrative expenses | (15,017,532 | ) | (13,861,742 | ) | (5,664,675 | ) | ||||||
| Provision for expected credit losses | (9,850,811 | ) | - | - | ||||||||
| Research and development expenses | (121,580 | ) | (68,275,869 | ) | (817,794 | ) | ||||||
| Stock compensation expense | (3,493,563 | ) | (4,732,700 | ) | (5,717,900 | ) | ||||||
| Impairment loss of long-lived assets | (9,357,062 | ) | - | (99,943 | ) | |||||||
| Loss from operations | (37,840,548 | ) | (78,898,070 | ) | (9,655,606 | ) | ||||||
| Other income (expense), net | (9,117 | ) | 1,689,952 | 16,993 | ||||||||
| Loss before provision for income taxes | (37,849,665 | ) | (77,208,118 | ) | (9,638,613 | ) | ||||||
| Provision for income taxes | - | - | - | |||||||||
| Loss from continuing operations | (37,849,665 | ) | (77,208,118 | ) | (9,638,613 | ) | ||||||
| Income from discontinued operations | - | - | 1,400,100 | |||||||||
| Net loss | $ | (37,849,665 | ) | $ | (77,208,118 | ) | $ | (8,238,513 | ) | |||
Fiscal Year Ended June 30, 2023 Compared to Fiscal Year Ended June 30, 2022
| For the years ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| 2023 | 2022 | Change | Change | |||||||||||||
| Revenue | $ | - | $ | 16,519,081 | $ | (16,519,081 | ) | (100 | )% | |||||||
| Cost of revenue | - | 8,546,840 | $ | (8,546,840 | ) | (100 | )% | |||||||||
| Gross profit | - | 7,972,241 | $ | (7,972,241 | ) | (100 | )% | |||||||||
| Selling, general and administrative expenses | (15,017,532 | ) | (13,861,742 | ) | $ | 1,155,790 | 8 | % | ||||||||
| Provision for expected credit losses | (9,850,811 | ) | - | $ | 9,850,811 | 100 | % | |||||||||
| Research and development expenses | (121,580 | ) | (68,275,869 | ) | $ | (68,154,289 | ) | (100 | )% | |||||||
| Stock compensation expense | (3,493,563 | ) | (4,732,700 | ) | $ | (1,239,137 | ) | (26 | )% | |||||||
| Impairment loss of long-lived assets | (9,357,062 | ) | - | $ | 9,357,062 | 100 | % | |||||||||
| Loss from operations | (37,840,548 | ) | (78,898,070 | ) | $ | (41,057,522 | ) | (52 | )% | |||||||
| Total other income (expense), net | (9,117 | ) | 1,689,952 | $ | (1,699,069 | ) | (101 | )% | ||||||||
| Loss before provision for income taxes | (37,849,665 | ) | (77,208,118 | ) | $ | (39,358,453 | ) | (51 | )% | |||||||
| Provision for income taxes | - | - | $ | - | - | % | ||||||||||
| Net loss | $ | (37,849,665 | ) | $ | (77,208,118 | ) | $ | (39,358,453 | ) | (51 | )% | |||||
Revenue. There was no revenue for the year ended June 30, 2023. During the year ended June 30, 2022, we generated approximately $16.5 million online music education academy subscription revenue from our Color World App. Our Color World App officially went live in January 2021 and over 300,000 paid subscribers joined our App from January to June 2021. Our App membership subscription fees will provide our members unlimited access for 1 year to our App except for on-demand contents with additional charge during the period from January 1 to June 30, 2021. In July 2021, we are no longer required our subscribers to pay for the annual subscription fee. We had three on-demand contents going live in during the year ended June 30, 2022, with over 1.3 million subscribers paid for these three on-demand contents.
| For the year ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| Revenue | 2023 | 2022 | Change | Change | ||||||||||||
| Online music education academy subscription | $ | - | $ | 16,519,081 | $ | (16,519,081 | ) | (100 | )% | |||||||
| Total Revenue | $ | - | $ | 16,519,081 | $ | (16,519,081 | ) | (100 | )% | |||||||
Cost of Revenue. There was no cost of revenue for the year ended June 30, 2023. Our online music education academy cost of revenue of approximately $8.5 million for the year ended June 30, 2022 was mainly attributable to the amortization of copyrights of the total payments we made to purchase the online courses that were produced by our paid artists. We amortized the copyrights with limited useful life over their estimated expected useful life using the straight-line method and amortizes the copyrights with unlimited useful life over 5 years, which is the estimated useful life that we expected it will contribute to our App before we are required to renew the contents of such copyrights.
| For the year ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| Cost of Revenue | 2023 | 2022 | Change | Change | ||||||||||||
| Online music education academy subscription | $ | - | $ | 8,546,840 | $ | (8,546,840 | ) | (100 | )% | |||||||
| Total Cost of Revenue | $ | - | $ | 8,546,840 | $ | (8,546,840 | ) | (100 | )% | |||||||
Gross Profit. No gross profit during the year ended June 30, 2023. We had a gross profit of approximately $8.0 million for the online education academy App during the year ended June 30, 2022.
Selling, General and Administrative Expenses. Selling, general and administrative expenses mainly consist of advertising and marketing costs, office rent and expenses, depreciation expense, costs associated with staff and support personnel who manage our business activities, and professional fees paid to third parties. We incurred selling, general and administrative expenses of approximately $15.0 million for the year ended June 30, 2023 as compared to approximately $13.9 million for the year ended June 30, 2022, an increase of approximately $1.1 million.
The increase was primarily due to approximately $5.8 million increase in amortization expense of our intangible assets offset by approximately $1.9 million decrease in advertising expenses, approximately $1.4 million decrease in depreciation expenses as we disposed all of our performance equipment during the year ended June 30, 2022, approximately $1.2 million decrease in professional fees, approximately $0.1 million decrease in travel expenses, and approximately $0.3 million decrease in service charges fee by our App payment collections agent.
Provision for expected credit losses. Provision for expected credit losses were approximately $9.9 million and $0 for the years ended June 30, 2023 and 2022, respectively. The increase was primarily due to approximately $7.5 million increase in provision for expected credit losses expenses on other receivables as cancelled our online concert and one of our live concerts for which we are in the negotiation process with our concert vendors for the potential refunds. The increase also attributes to approximately $2.4 million increase in provision for expected credit losses expenses on accounts receivable as we had more aged account receivables as of June 30, 2023 as compared to June 30, 2022.
Research and Development Expenses. Research and development expenses consist of costs associated with development of our online platforms. During the years ended June 30, 2023 and 2022, we spent approximately $0.1 million and $68.3 million on the development of augmented reality functions in out Color World App and maintaining our online education academy App, Color World internally, respectively.
Stock Compensation Expenses. Stock compensation expenses were approximately $3.5 million for the year ended June 30, 2023 as compared to approximately $4.7 million for the year ended June 30, 2022. The decrease was mainly due to the drop of our stock price which a lower fair value of stock issued as compensation during the year ended June 30, 2023 as compared to the same period in 2022.
Loss from Operations. We incurred losses from operations of approximately $37.8 million and approximately $78.9 million for the years ended June 30, 2023 and 2022, respectively. The decrease of approximately $41.1 million in losses was primarily due to the reasons previously discussed.
Total Other Income (Expense), Net. Our total other income (expense), net, consists of other income, interest income and finance expense. We had a total other expense, net, of approximately $9,000 and other income, net, of approximately $1.7 million during the years ended June 30, 2023 and 2022, respectively. The change was mainly due to one of our vendor is no longer able to execute the pre-arranged artist performance contract and paid us a settlement fee of approximately $1.7 million during the year ended June 30, 2022 and we did not have such transaction during the year ended June 30, 2023.
Provision for Income Taxes. We did not incur income tax expense for the years ended June 30, 2023 and 2022 as we had operating losses.
Net Loss. We incurred a net loss of approximately $37.9 million for the year ended June 30, 2023, as compared to a net loss of approximately $77.2 million for the year ended June 30, 2022. This change was the result of the combination of the changes as discussed above.
Fiscal Year Ended June 30, 2022 Compared to Fiscal Year Ended June 30, 2021
| For the years ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||
| Revenue | $ | 16,519,081 | $ | 6,783,957 | $ | 9,735,124 | 144 | % | ||||||||
| Cost of revenue | 8,546,840 | 4,139,251 | $ | 4,407,589 | 106 | % | ||||||||||
| Gross profit | 7,972,241 | 2,644,706 | $ | 5,327,535 | 201 | % | ||||||||||
| Selling, general and administrative expenses | (13,861,742 | ) | (5,664,675 | ) | $ | 8,197,067 | 145 | % | ||||||||
| Research and development expenses | (68,275,869 | ) | (817,794 | ) | $ | 67,458,075 | 8,249 | % | ||||||||
| Stock compensation expense | (4,732,700 | ) | (5,717,900 | ) | $ | (985,200 | ) | (17 | )% | |||||||
| Impairment loss of long-lived assets | - | (99,943 | ) | $ | (99,943 | ) | (100 | )% | ||||||||
| Loss from operations | (78,898,070 | ) | (9,655,606 | ) | $ | 69,242,464 | 717 | % | ||||||||
| Total other income (expense), net | 1,689,952 | 16,993 | $ | 1,672,959 | 9,845 | % | ||||||||||
| Loss before provision for income taxes | (77,208,118 | ) | (9,638,613 | ) | $ | 67,569,505 | 701 | % | ||||||||
| Provision for income taxes | - | - | $ | - | - | % | ||||||||||
| Net loss from continuing operations | (77,208,118 | ) | (9,638,613 | ) | $ | 67,569,505 | 701 | % | ||||||||
| Income from discontinued operations | - | 1,400,100 | $ | (1,400,100 | ) | (100 | )% | |||||||||
| Net loss | $ | (77,208,118 | ) | $ | (8,238,513 | ) | $ | 68,969,605 | 837 | % | ||||||
Revenue. We generated approximately $16.5 million online music education academy subscription revenue from our Color World App (the “App”) during the year ended June 30, 2022 as compared to approximately $4.5 million during the year ended June 30, 2021. Our Color World App officially went live in January 2021 and over 300,000 paid subscribers joined our App from January to June 2021. Our App membership subscription fees will provide our members unlimited access for one year to our App except for on-demand contents with additional charge during the period from January 1 to June 30, 2021. In July 2021, we no longer required our subscribers to pay for the annual subscription fee. We had three on-demand contents going live in during the year ended June 30, 2022, with over 1.3 million subscribers paid for these three on-demand contents as compared to two on-demand contents going live in during the year ended June 30, 2021 with over 1.5 million subscribers who also paid for these two on-demand contents. In addition, during the year ended June 30, 2021, we generated approximately $2.3 million subscription revenue from the online concert we held on September 10, 2020. Our sale of online concert via subscription fee is accounted for as a single performance obligation which is satisfied at a point in time on the day of the event. The online concert subscription revenue we recognized is net of App payment collections agent service fee.
| For the years ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| Revenue | 2022 | 2021 | Change | Change | ||||||||||||
| Online music education academy subscription | $ | 16,519,081 | $ | 4,453,957 | $ | 12,065,124 | 271 | % | ||||||||
| Online concert subscription | - | 2,330,000 | $ | (2,330,000 | ) | (100 | )% | |||||||||
| Total Revenue | $ | 16,519,081 | $ | 6,783,957 | $ | 9,735,124 | 144 | % | ||||||||
Cost of Revenue. Our online music education academy cost of revenue of approximately $8.5 million for the year ended June 30, 2022 was mainly attributable to the royalty fee that we incurred for the certain contents of the on-demand program and the amortization of copyrights of the total payments we made to purchase the online courses that were produced by our paid artists as compared to approximately $2.2 million for the year ended June 30, 2021. We amortize the copyrights with limited useful life over their estimated expected useful life using the straight-line method and amortize the copyrights with unlimited useful life over 5 years, which is the estimated useful life that we expect will contribute to our App before we are required to renew the contents of such copyrights. The increase of approximately $6.4 million is mainly attribute to the royalty fee that we incurred and the increased of copyrights contents that that we purchased during the year ended June 30, 2022 for amortization. Our online concert cost of revenue of approximately $1.9 million for the year ended June 30, 2021 was the total payments we made to our partners of the online concert we held on September 10, 2020. The partners include artists, artist agents and online concert producers.
| For the Years ended June 30, | ||||||||||||||||
| Percentage | ||||||||||||||||
| Cost of Revenue | 2022 | 2021 | Change | Change | ||||||||||||
| Online music education academy subscription | $ | 8,546,840 | $ | 2,202,731 | $ | 6,344,109 | 288 | % | ||||||||
| Online concert subscription | - | 1,936,520 | $ | (1,936,520 | ) | (100 | )% | |||||||||
| Total Cost of Revenue | $ | 8,546,840 | $ | 4,139,251 | $ | 4,407,589 | 106 | % | ||||||||
Gross Profit. We had a gross profit of approximately $8.0 million for the online education academy App during the year ended June 30, 2022 as compared to approximately $2.3 million during the year ended June 30, 2021. Gross profit percentage was 48.3% and 50.5% for the years ended June 30, 2022 and 2021, respectively, for the online education academy App. The decrease of 2.2% gross profit percentage mainly attributable to the royalty fee that we incurred for the certain contents of the on-demand programs during the year ended June 30, 2022 where we did not incur such fee during the same period in 2021. We had a gross profit of approximately $0.4 million for the online concert business during the year ended June 30, 2021 with gross profit percentage of 39.0%.
Selling, General and Administrative Expenses. Selling, general and administrative expenses mainly consist of advertising and marketing costs, office rent and expenses, depreciation expense, costs associated with staff and support personnel who manage our business activities, and professional fees paid to third parties. We incurred selling, general and administrative expenses of approximately $13.9 million for the year ended June 30, 2022 as compared to approximately $5.7 million for the year ended June 30, 2021, an increase of approximately $8.2 million.
The increase was primarily due to approximately $0.6 million increase in salary expenses as we hired more employees for our online education academy business, approximately $0.2 million increase in service charges fee by our App payment collections agent, approximately $6.4 million increase of advertising expenses on our events and to promote our Color World App, approximately $0.7 million increase in professional fees, which include legal, accounting, and audit fees in connection with our financing in September 2021, January 2022 and February 2022 and approximately $0.3 million increase in office expenses and other miscellaneous selling, general and administrative expenses.
Research and Development Expenses. Research and development expenses consist of costs associated with development of our online platforms. During the year ended June 30, 2022, we spent approximately $68.3 million on the development of augmented reality functions in our Color World App and maintaining our online education academy App, Color World internally. During the year ended June 30, 2021, we incurred approximately $0.8 million of research and development expenses, which consists of approximately $0.5 million on developing our online education academy APP, Color World internally and approximately $0.3 million amortization expense of the online courses patent prior to our Color World App going live in January 2021, and spent $48,000 on developing the online after-school tutoring program of Baytao. We discontinued the online after-school tutoring program as we shifted our focus to our online education academy business and sold our 80% equity interest of Baytao in June 2021.
Stock Compensation Expenses. Stock compensation expenses were approximately $4.7 million for the year ended June 30, 2022 as compared to approximately $5.7 million for the year ended June 30, 2021. The decrease was mainly due to the drop of our stock price which a lower fair value of stock issued as compensation during the year ended June 30, 2022 as compare to the same period in 2021. For the years ended June 30, 2022 and 2021, we recognized approximately $0.6 million and $1.1 million, respectively, compensation expense related to vested restrict shares granted to our officers. For the years ended June 30, 2022 and 2021, we recorded approximately $4.2 million and $4.1 million, respectively, stock compensation expense related to vested ordinary shares granted to our employees. For the year ended June 30, 2021, we also recognized approximately $0.5 million stock compensation expense related to vested ordinary shares granted to our service providers.
Loss from Operations. We incurred losses from operations of approximately $77.2 million and approximately $9.7 million for the years ended June 30, 2022 and 2021, respectively. The increase of approximately $67.6 million in losses was primarily due to the reasons previously discussed.
Total Other Income (Expense), Net. Our total other income (expense), net, consists of other income, interest income and finance expense. We had a total other income, net, of approximately $1.7 million and $17,000 during the years ended June 30, 2022 and 2021, respectively. The change was mainly due to two of our vendors are no longer able to execute the pre-arranged artist performance contract and paid us a total settlement fee of approximately $1.7 million during the year ended June 30, 2022. During the years ended June 30, 2021, we had a debt settled with a vendor resulted in a gain of approximately $25,000 and governmental subsidy of approximately $7,200 offset by bank service charges of approximately $14,000.
Provision for Income Taxes. We did not incur income tax expense for the years ended June 30, 2022 and 2021 as we had operating losses.
Loss from Discontinued Operations. Our income from discontinued operations was approximately $1.4 million for the year ended June 30, 2021, which mainly generated from the proceeds of the sale on Sunway Kids.
Net Loss. We incurred a net loss of approximately $77.2 million for the year ended June 30, 2022, as compared to a net loss of approximately $8.2 million for the year ended June 30, 2021. This change was the result of the combination of the changes as discussed above.
Liquidity and Capital Resources
As of June 30, 2023, we had cash and cash equivalents of $0.2 million, which was held by our consolidated entities in the U.S. and Hong Kong.
In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
We engage in online entertainment performance and online music education services. Our business is capital intensive, and equity financing has been utilized to finance our working capital requirements and capital expenditures. Our working capital was approximately $10.7 million as of June 30, 2023 as compared to approximately $22.8 million as of June 30, 2022.
In addition, due to the nature of online entertainment performance and online education industries, we collect payments in advance so we should have minimal liquidity risk. We also completed a few rounds of equity financing and received net proceeds of approximately $5.0 million from sales of our units and approximately $1.5 million through our private placement offering during the year ended June 30, 2023.
In January 2022, Color World was transformed into the current version, a metaverse with “artificial intelligence + celebrity entertainment” as our core features but we are currently suspending such revenue stream. We are expected to resume generating revenue again in November 2023 because we are planning to transform our Color World App into a paid subscripted fee version for our users. If we are unable to generate sufficient cash flow within the normal operating cycle of a twelve month period to pay for its future payment obligations, we may be required to curtail or cease our operations. Management is trying to alleviate the going concern risk through obtaining additional equity financings to support our working capital, including our recently completed equity financing transaction of approximately $5.0 million on September 14, 2022 and private placement offering of approximately $1.5 million on December 20, 2022. However, there is no assurance that management will be successful in their future plans. Our unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The following table provides summary information about our net cash flow for financial statement periods presented in this report:
| For the Years Ended June 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net cash used in operating activities from continuing operations | $ | (7,878,729 | ) | $ | (29,403,078 | ) | $ | (2,803,980 | ) | |||
| Net cash used in investing activities from continuing operations | - | (14,219,652 | ) | (66,923,243 | ) | |||||||
| Net cash provided by investing activities from discontinued operations | - | - | 1,400,100 | |||||||||
| Net cash provided by financing activities from continuing operations | 7,245,889 | 44,320,854 | 67,512,616 | |||||||||
| Net change in cash and cash equivalents | $ | (632,840 | ) | $ | 698,124 | $ | (814,507 | ) | ||||
Principal demands for liquidity are for working capital and general corporate purposes.
Operating Activities
Net cash used in operating activities totaled approximately $7.9 million for the year ended June 30, 2023, which was mainly due to a net loss of approximately $37.8 million and non-cash adjustments to reconcile the net loss to net cash used in operating activities of approximately $9.9 million of provision for expected credit losses, approximately $3.5 million of stock compensation expense, approximately $13,000 of depreciation expense, approximately $5.8 million of amortization expense, and approximately $9.4 million of impairment loss of long-lived assets. Net cash from changes in operating assets and liabilities resulted in a net cash outflow, which mainly consists of the increase of prepayment of approximately $0.2 million as we prepaid service fees for live concert productions and the decrease of accounts payable of approximately $0.5 million as we paid royalty fee to our on-demand content vendor during the period. The net cash outflow was offset by the decrease in accounts receivable of approximately $0.2 million, the decrease in other receivables of approximately $1.3 million, and the increase in other payables and accrued liabilities of approximately $0.6 million.
Net cash used in operating activities totaled approximately $29.4 million for the year ended June 30, 2022, which was mainly due to a net loss of approximately $77.2 million and non-cash adjustments to reconcile the net loss to net cash used in operating activities of approximately $4.7 million of stock compensation expense, approximately $1.4 million of depreciation expense, and approximately $4.5 million of amortization expense. Net cash from changes in operating assets and liabilities resulted in a net cash outflow, which mainly consists of the increase of prepayment of approximately $16.0 million as we prepaid service fees for both online and live concert productions and the prepayment of advisement fees, and the decrease of deferred revenues of approximately $3.6 million. The net cash outflow was offset by the research and development expense of $52.0 million prepaid in prior period, the decrease of accounts receivable of approximately $0.7 million for the Color World App subscription fees due from App payment collections agent, the increase of accounts payable of approximately $3.8 million as we incurred royalty fee to be paid to our on-demand content vendor and the increase of other payables and accrued liabilities of approximately $0.4 million.
Net cash used in operating activities totaled approximately $2.8 million for the year ended June 30, 2021, which was mainly due to a net loss of approximately $9.6 million and non-cash adjustments to reconcile the net loss to net cash provided by operating activities of approximately $5.7 million of stock compensation expense, approximately $1.5 million of depreciation expense, approximately $2.2 million of amortization expense and approximately $0.1 million on impairment loss of long-lived assets. Net cash from changes in operating assets and liabilities resulted in a net cash outflow, which mainly included cash outflow for increase of accounts receivable of approximately $3.2 million for the Color World App subscription fees due from App payment collections agent, increase of prepayment of $3.2 million as we prepaid service fees for online concert performance and online artists agents. The net cash outflow was offset by the increase of other payables and accrued liabilities of approximately $0.2 million and the increase of deferred revenues of approximately $3.6 million.
Investing Activities
There were no investing activities during the year ended June 30, 2023.
Net cash used in investing activities was approximately $14.2 million for year ended June 30, 2022, which was primarily attributable to the purchase of intangible assets of approximately $15.1 millions and purchase of equipment of 39,602.
Net cash used in investing activities was approximately $66.9 million for the year ended June 30, 2021, which was primarily attributable to the prepayment of $52.0 million to a software development vendor of developing augmented reality functions in our Color World App, the purchase of equipment of approximately $2.0 million and purchase of intangible assets of approximately $12.9 million.
Financing Activities
Net cash provided by financing activities totaled approximately $7.2 million for the year ended June 30, 2023, which was due to the sale of units of approximately $1.5 million through our private placement offering, the sale of units, net of offering costs, of approximately $5.0 million, the borrowings from our related parties of approximately $0.2 million to pay for certain operating expenses and the proceeds from the exercise of warrants from the warrants holders of approximately $0.5 million.
Net cash provided by financing activities totaled approximately $44.3 million for the year ended June 30, 2022, which was due to the sale of ordinary shares of approximately $43.9 million and the borrowings from shareholders of $0.3 million to pay for certain operating expenses.
Net cash provided by financing activities totaled approximately $67.5 million for the year ended June 30, 2021, which was due to the sale of ordinary shares of approximately $62.3 million and the proceeds from the exercise of warrants from the warrants holders of approximately $5.2 million.
Commitments and Contingencies
In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”, we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
Inflation
Inflation in the U.S., Hong Kong and Singapore have not materially affected our results of operations. Although we have not been materially affected by inflation in the past, we may be affected if U.S., Hong Kong and Singapore experience higher rates of inflation in the future.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
5.C. Research and Development, Patents and Licenses, etc.
Research and Development
During the years ended June 30, 2023 and 2022, we spent approximately $0.1 million and $68.3 million, respectively, on developing augmented reality functions in our Color World App and maintaining our online education academy App, Color World internally. During the year ended June 30, 2021, we spent approximately $0.8 million, among which, approximately $0.5 million on developing and maintaining our online education academy App – Color World internally and approximately $0.3 million amortization expense of the online courses patent prior to our Color World App go live in January 2021.
Patents and Licenses, etc.
As of June 30, 2023 and 2022, we held approximately $14.0 million and $25.6 million of copyrights, net of accumulated amortization, respectively.
5.D. Trend Information
Other than as disclosed elsewhere in this annual report and below, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
5.E. Critical Accounting Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting policies that are significant to the preparation of financial statements. These accounting policies are important for an understanding of their financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements included elsewhere in this annual report, but we believe that the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Accounting for long-lived assets
We classify our long-lived assets into: (i) performance equipment, (ii) office equipment and (iii) intangible assets.
Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, we first compares undiscounted cash flows expected to be generated by that asset or asset group to our carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds our fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
If the value of an asset is determined to be impaired, the impairment to be recognized is measured in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs.
Competitive pricing pressures and changes in interest rates could materially and adversely affect our estimates of future net cash flows to be generated by the long-lived assets, and thus could result in future impairment losses.
Stock-based compensation
We record stock-based compensation expense for employees at fair value on the grant date and recognizes the expense over the employee’s requisite service period. Our expected volatility assumption is based on the historical volatility of our stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination rate. The risk-free interest rate for the expected term of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on our current and expected dividend policy.
Income taxes
We account for income taxes in accordance with FASB ASC 740, “Income Taxes,” which requires us to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
| Directors and Executive Officers | Age | Position/Title | ||
| Wei Zhang | 41 | Chairman of the Board and Director | ||
| Louis Luo | 32 | Director and Chief Executive Officer | ||
| Lili Jiang | 32 | Chief Financial Officer | ||
| Ahmed Essa Mohammad Saleh | 26 | Independent Director | ||
| Muhammad Irfan | 44 | Independent Director | ||
| Ahmad Khalfan Ahmad Saeed Almansoori | 32 | Independent Director | ||
| Hung-Jen Kuo | 50 | Independent Director | ||
| Honglei Jiang | 41 | Independent Director |
Biography
Wei Zhang
Ms. Zhang has been serving as our Chairman since August 9, 2022. Ms. Zhang has substantial experience with management and corporate governance. She has assisted and counselled many US listed Chinese companies in various industries and fields for business operations and compliance issues. She graduated from Harbin Institute of Technology with a bachelor’s degree in international economics and Trade in the year of 2007.
Louis Luo
Mr. Louis Luo, has served as the Branch Manager of Beijing Zhongke Jinde Health Management Co. from March 2021 to November 2022. From September 2016 to November 2019, Mr. Luo served as Director of Events of MingAi International Guangzhou. From June 2014 to July 2017, Mr. Luo served as Operations Director of Golden Ocean Travel, Dubai Branch. Mr. Luo obtained his bachelor’s degree in Production Automation Process and Electrical Engineering and Automation from Central South University.
Lili Jiang
Ms. Jiang has been serving as our Chief Financial Officer since March 28, 2019. She previously served as the Manager of the Overseas Medical Business Department of Aolan Health Management Co., Ltd (“Aolan”) from May 2016 to March 28, 2019. Prior to joining Aolan, Ms. Jiang was the Business Executive Assistant at the Australian Embassy in China from July 2011 to April 2016. She is a Certified Public Accountant in Australia. Ms. Jiang has a bachelor’s degree in Accounting and Finance from Sydney Technical University in Australia, and a Master’s degree in Economics in Finance from University of New South Wales in Sydney, Australia.
Ahmed Essa Mohammad Saleh
Mr. Ahmad Essa Mohammed Saleh is the founder of a company specializing in one-stop solution for all desert bike technicalities and he has also served as the managers of a company in the industry of equestrianism since 2015.
Muhammad Irfan
Mr. Muhammed Irfan has established and operated several film production-related companies, and has been serving in a film production company as the managing director for more than ten years.
Ahmad Khalfan Ahmad Saeed Almansoori
Mr. Almansoori has been serving as our independent director since December 27, 2021. Mr. Almansoori received the Mohammed bin Rashid Al Maktoum Award for Tolerance and the Mohammed bin Rashid Al Maktoum Award for World Peace between 2015 to 2016. He also won the “creative government employee” in Dubai government excellence program in 2009. Mr. Almansoori holds a bachelor’s degree in law and economics.
Hung-Jen Kuo
Mr. Kuo has been serving as our independent director since August 12, 2020. He has nearly more than 25 years of experience in the global securities fund investment & business management industry. He is currently the Executive President CEO of Fosun Capital. Before joining Fosun Group, he was the head general manager and director of the China Securities Services Division of Deutsche Bank, China. Mr. Kuo previously served as the chief investment expert of Noah Group, the managing director of Gopher Assets Management. and the general manager of Gopher Public Fund. At the end of 2010, Mr. Kuo represented American Russell Investments and to participate in establishing Ping An Russell (Shanghai) Investment Management Company, one of the first private equity fund management companies in China. Mr. Kuo successfully introduced Russell’s investment MOM model to China, led investment research team building and business development, and issued China’s first MOM product. Mr. Kuo joined Russell Investment’s global Seattle headquarters in 2001, holding important various positions covering on in core departments such as investment management, research, and operations. In 1996, Mr. Kuo joined Aurora Group in Taipei as the assistant to CEO covering on business strategies and IPO project and jointly managing Russell’s investment global assets. Mr. Kuo holds a master’s degree in finance from the University of Colorado and a bachelor’s degree in business administration from Sun Yat-sen University in Taiwan.
Honglei Jiang
Mr. Honglei Jiang, has served as the chairman of the board of Beijing Huaihao Education Consulting Co., Ltd. since 2020. From 2017 to 2020, Mr. Jiang served as chief executive officer of Deyi Financial Leasing Co., Ltd. From February 2015 to December 2016, Mr. Jiang served as executive vice president of Kunsheng Financial Leasing Co., Ltd. Mr. Jiang earned his master’s degree in investment economics from Dongbei University of Finance & Economics in 2008, and obtained his bachelor’s degree in economics from Changchun University of Science and Technology in 2005.
Employment Agreements
We have entered into employment agreements with each of our executive officers, which can be terminated upon both parties’ agreement or by law. We may terminate an executive officer’s employment for cause at any time without advance notice in certain events. We may terminate an executive officer’s employment by giving a prior written notice or by paying certain compensation. An executive officer may terminate his or her employment at any time by giving a prior written notice.
Each executive officer has agreed to hold, unless expressly consented to by us, at all times during and within one year after the termination of his or her employment agreement, in strict confidence and not to use, any of our confidential information or the confidential information of our customers and suppliers.
6.B. Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our principal executive officer and our other most highly paid executive officer (the “named executive officers”) for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000 during the fiscal years ended June 30, 2023 and 2022.
| Name and Principal Position | Year Ended June 30 |
Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation Earnings ($) |
Non- Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total ($) |
|||||||||||||||||||||||||
| Wei Zhang, | 2023 | 172,000 | - | 277,450 | - | - | - | - | 449,450 | |||||||||||||||||||||||||
| Chairman of the Board | 2022 | 169,591 | - | 26,700 | - | - | - | - | 196,291 | |||||||||||||||||||||||||
| Louis Lou, | 2023 | 22,500 | - | 30,675 | - | - | - | - | 53,175 | |||||||||||||||||||||||||
| Chief Executive Officer | 2022 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Farhan Qadir, | 2023 | 63,261 | - | 320,100 | - | - | - | - | 383,361 | |||||||||||||||||||||||||
| Former Chief Executive Officer | 2022 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Lili Jiang, | 2023 | 125,000 | 175,163 | - | - | - | - | 300,663 | ||||||||||||||||||||||||||
| Chief Financial Officer | 2022 | 180,000 | - | 238,140 | - | - | - | - | 418,140 | |||||||||||||||||||||||||
| Lucas Capetian | 2023 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Former CEO | 2022 | 61,905 | - | 45,900 | - | - | - | - | 107,805 | |||||||||||||||||||||||||
| Basil Wilson | 2023 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Former Chairman and CEO | 2022 | 85,000 | - | 154,000 | - | - | - | - | 239,000 | |||||||||||||||||||||||||
| Biao Lu | 2023 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Chief Artistic Officer | 2022 | 120,000 | - | 209,183 | - | - | - | - | 329,183 | |||||||||||||||||||||||||
The executive directors did not to receive any compensation for serving on the Board. The following table represents compensation earned by our non-executive directors in fiscal year ended June 30, 2023.
| Fees Earned or Paid in Cash |
Stock Awards |
Option Awards |
Non-equity incentive plan compensation |
Nonqualified deferred compensation earnings |
All other compensation |
Total | ||||||||||||||||||||||
| Name | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
| Ahmad Khalfan Ahmad Saeed Almansoori | 36,000 | - | - | - | - | - | 36,000 | |||||||||||||||||||||
| Hung-Jen Kuo | 36,000 | - | - | - | - | - | 36,000 | |||||||||||||||||||||
| Ahmad Essa Mohammed Saleh | 21,000 | - | - | - | - | - | 21,000 | |||||||||||||||||||||
| Honglei Jiang | 18,000 | - | - | - | - | - | 18,000 | |||||||||||||||||||||
| Muhammed Irfan | 21,000 | - | - | - | - | - | 21,000 | |||||||||||||||||||||
| Long Yi | 18,409 | - | - | - | - | - | 18,409 | |||||||||||||||||||||
6.C. Board Practices
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the Board and the shareholders voting by ordinary resolution. Our directors are not subject to a set term of office and hold office until the next general meeting called for the election of directors and until their successor is duly elected or such time as they die, resign or are removed from office by a shareholders’ ordinary resolution or the unanimous written resolution of all shareholders A director will be removed from office automatically if, among other things, the director becomes bankrupt or makes any arrangement or composition with his creditors generally or is found to be or becomes of unsound mind.
Duties of Directors
Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.
Committees of the Board of Directors
We have established three fully independent committees under the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee
Ahmad Khalfan Ahmad Saeed Almansoori, Hung-Jen Kuo and Honglei Jiang are members of our Audit Committee, and Honglei Jiang serves as the chairman. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by Nasdaq as such standards apply specifically to members of audit committees.
Our Audit Committee performs several functions, including:
| ● | selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors; |
| ● | reviewing with our independent auditors any audit problems or difficulties and management’s response; |
| ● | reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S- K under the Securities Act of 1933, as amended; |
| ● | discussing the annual audited financial statements with management and our independent auditors; |
| ● | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies; |
| ● | annually reviewing and reassessing the adequacy of our audit committee charter; |
| ● | meeting separately and periodically with management and our independent auditors; |
| ● | reporting to the Board; and |
| ● | such other matters that are specifically delegated to our audit committee by the Board from time to time. |
Compensation Committee
Ahmad Khalfan Ahmad Saeed Almansoori, Hung-Jen Kuo and Honglei Jiang are members of our Compensation Committee, and Ahmad Khalfan Ahmad Saeed Almansoori serves as the chairman. All members of our Compensation Committee are qualified as independent under the current definition promulgated by Nasdaq. The Compensation Committee is responsible for, among other things:
| ● | reviewing and approving the total compensation package for our senior executives; and |
| ● | reviewing periodically, and approving, any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Corporate Governance and Nominating Committee
Ahmad Khalfan Ahmad Saeed Almansoori, Hung-Jen Kuo and Honglei Jiang are members of our Nominating and Corporate Governance Committee, and Hung-Jen Kuo is the chairman. All members of our Nominating and Corporate Governance Committee are qualified as independent under the current definition promulgated by Nasdaq. The Nominating and Corporate Governance Committee is responsible for, among other things:
| ● | identify qualified individuals to become Board members, consistent with criteria approved by the Board, and to recommend that the Board select, the director nominees for the next annual meeting of shareholders; |
| ● | develop and recommend to the Board a set of corporate governance guidelines applicable to the Company; and |
| ● | to oversee the evaluation of the Board and management. |
6.D. Employees
See the section entitled “Our Labor Force” in Item 4 above.
6.E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our Class A ordinary shares and Class B ordinary shares as of November 13, 2023 for:
| ● | each beneficial owner of 5% or more of our outstanding ordinary shares; |
| ● | each of our directors and executive officers; and |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of options that are immediately exercisable or exercisable within 60 days of the date hereof.
Except as otherwise indicated, all of the shares reflected in the table are ordinary shares and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
Except as otherwise indicated in the table below, addresses of our directors, executive officers and named beneficial owners are in care of Color Star Technology Co., Ltd.,
80 Broad Street, 5th Floor
New York, NY 10005.
| Total Ordinary Shares (As-Converted Basis) Beneficially Owned |
||||||||
| Name of Beneficial Owners | Number | %(1) | ||||||
| Directors and Executive Officers: | ||||||||
| Wei Zhang | 202,500 | 0.85 | % | |||||
| Louis Luo | 50,000 | 0.21 | % | |||||
| Lili Jiang | 123,000 | 0.52 | % | |||||
| Ahmed Essa Mohammad Saleh | - | - | ||||||
| Muhammad Irfan | - | - | ||||||
| Ahmad Khalfan Ahmad Saeed Almansoori | - | - | ||||||
| Hung-Jen Kuo | - | - | ||||||
| Honglei Jiang | - | - | ||||||
| Principal Shareholders: | ||||||||
| Vast Ocean, Inc. | 2,320,000 | 9.78 | % | |||||
| * | Less than 1% |
| (1) | Applicable percentage of ownership is based on 22,511,012 Class A Ordinary Shares Ordinary Shares and 1,200,000 Class B Ordinary Shares outstanding as of November 13, 2023, for each shareholder. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
See “Item 6.E. Share Ownership,” for a description of our major shareholders.
7.B. Related Party Transactions
Except as discussed below, since the beginning of fiscal year 2021, there have not been any transactions, nor is there any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).
Other payables - related parties
Other payables - related party consisted of the following:
| Name of Related Party | Relationship | Nature | June 30, 2023 |
June
30, |
||||||||
| Weili He | Former Chief Financial Officer (“CFO”) of the Company who held less than 5% of the Company ordinary shares currently | Salary Payable | $ | - | $ | 10,711 | ||||||
| Hui Xu | General Manager of CACM | Interest-free loan, due on demand | 580,000 | 350,000 | ||||||||
| Jehan Zeb Khan | Director and Former Co-Acting CEO of the Company | Interest-free loan, due on demand | - | 2,173 | ||||||||
| Total | $ | 580,000 | $ | 362,884 | ||||||||
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the end of this Annual Report on 20-F, beginning on page F-1.
Legal Proceedings
See “Item 4. Information on the Company - B. Business Overview - Legal Proceedings.”
Dividends
We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future. We currently intend to retain all future earnings to finance our operations and to expand our business.
8.B. Significant Changes
Except as disclosed elsewhere in this annual report, no other significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM 9. THE OFFER AND LISTING
9.A. Offer and Listing Details
Our Class A ordinary shares are listed for trading on the Nasdaq Capital Market under the symbol “ADD.” The shares began trading on February 25, 2013 on the Nasdaq Capital Market.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our Class A ordinary shares are currently traded on the Nasdaq Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our 2023 Amended and Restated Memorandum and Articles, the Companies Act (As Revised) of the Cayman Islands, the common law of the Cayman Islands, our corporate governance documents and rules and regulations of the stock exchange on which are shares are traded.
As of the date hereof, the authorized share capital of the Company is USD$32,000,000.00 divided into 700,000,000.00 Class A Ordinary shares with a nominal or par value of USD$0.04 and 100,000,000 Class B Ordinary shares (the “Ordinary Shares”). The increase of the authorized share capital was approved by the special resolution of Shareholders passed on March 24, 2023. As of November 13, 2023, 22,511,012 Class A Ordinary Shares are issued and outstanding and 1,200,000 Class B Ordinary Shares are issued and outstanding. All of our issued and outstanding Ordinary Shares are fully paid.
Ordinary Shares
The following are summaries of material provisions of our 2023 Amended and Restated Memorandum and Articles, corporate governance policies and the Companies Act (As Revised) of the Cayman Islands insofar as they relate to the material terms of our Ordinary Shares.
Objects of Our Company
Under our 2023 Amended and Restated Memorandum and Articles, the objects of our Company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Share Capital
The holders of our Ordinary Shares are entitled to one vote for each such share held and shall be entitled to notice of any shareholders’ meeting, and, subject to the terms of the 2023 Amended and Restated Memorandum and Articles, to vote thereat.
Dividends
The holders of our Ordinary Shares are entitled to such dividends as may be declared by our Board of Directors subject to the Companies Act (As Revised) of the Cayman Islands and to our 2023 Amended and Restated Memorandum and Articles.
Voting Rights
In respect of all matters subject to a shareholders’ vote, each Ordinary Share is entitled to one vote. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded by the chairman or persons holding certain amounts of shares as set forth in the 2023 Amended and Restated Memorandum and Articles. Actions that may be taken at a general meeting also may be taken by a unanimous resolution of the shareholders in writing.
No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business; two members present in person or by proxy shall be a quorum provided always that if the Company has one member of record the quorum shall be that one member present in person or by proxy. An ordinary resolution to be passed at a general meeting requires the affirmative vote of a simple majority of the votes cast.
A special resolution of members is required to change the name of the Company, approve a merger, wind up the Company, amend the 2023 Amended and Restated Memorandum and Articles and reduce the share capital.
Transfer of Ordinary Shares
Subject to the restrictions set out below, any of our shareholders may transfer all or any of his, its or her Ordinary Shares by an instrument of transfer in the usual or common form or any other form approved by our Board of Directors or in a form prescribed by the stock exchange on which our shares are then listed.
Our Board of Directors may, in its sole discretion, decline to register any transfer of Ordinary Shares whether or not it is fully paid up to the total consideration paid for such shares. Our directors may also decline to register any transfer of Ordinary Shares if (a) the instrument of transfer is not accompanied by the certificate covering the shares to which it relates or any other evidence as our Board of Directors may reasonably require to prove the title of the transferor to, or his/her right to transfer the shares; or (b) the instrument of transfer is in respect of more than one class of shares.
If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal.
The registration of transfers may be suspended and the register closed at such times and for such periods as our Board of Directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Winding-Up/Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), a liquidator may be appointed to determine how to distribute the assets among the holders of the Ordinary Shares. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately; a similar basis will be employed if the assets are more than sufficient to repay the whole of the capital at the commencement of the winding up.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our Board of Directors may from time to time make calls upon shareholders for any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares
We may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our Board of Directors.
Inspection of Books and Records
Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of members not being Directors and no member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by Companies Act (As Revised) of the Cayman Islands or authorized by the Directors or by the Company in a general meeting. However, the Directors shall from time to time cause to be prepared and to be laid before the Company in a general meeting, profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by Companies Act (As Revised) of the Cayman Islands. (See “Where You Can Find More Information”)
Issuance of Additional Shares
Our 2023 Amended and Restated Memorandum and Articles authorize our Board of Directors to issue additional Ordinary Shares from time to time as our Board of Directors shall determine, to the extent there are available authorized but unissued shares.
Our 2023 Amended and Restated Memorandum and Articles also authorizes our Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject to compliance with the variation of rights of shares provision in the 2023 Amended and Restated Memorandum and Articles, with respect to any series of preferred shares, the terms and rights of that series, including:
| ● | the designation of the series; |
| ● | the number of shares of the series; |
| ● | the dividend rights, dividend rates, conversion rights, voting rights; and |
| ● | the rights and terms of redemption and liquidation preferences. |
Our Board of Directors may, issue preferred shares without action by our shareholders to the extent such preferred shares have already been authorized and created under the Company’s memorandum and articles of association but unissued shares available.
Anti-Takeover Provisions
Some provisions of our 2023 Amended and Restated Memorandum and Articles may discourage, delay or prevent a change of control of our Company or management that shareholders may consider favorable, including provisions that:
| ● | authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders (subject to variation of rights of shares provisions in our 2023 Amended and Restated Memorandum and Articles); and |
| ● | limit the ability of shareholders to requisition and convene general meetings of shareholders. Our 2023 Amended and Restated Memorandum and Articles allow our shareholders holding shares representing in aggregate not less than one-fourth (twenty-five percent) of our paid up share capital (as to the total consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. |
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our 2023 Amended and Restated Memorandum and Articles for a proper purpose and for what they believe in good faith to be in the best interests of our Company.
General Meetings of Shareholders and Shareholder Proposals
Our shareholders’ general meetings may be held in such place within or outside the Cayman Islands as our Board of Directors considers appropriate.
As a Cayman Islands exempted company, we are not obliged by the Companies Act (As Revised) of the Cayman Islands to call shareholders’ annual general meetings. The directors may, whenever they think fit, convene an extraordinary general meeting.
Shareholders’ general meetings and any other general meetings of our shareholders may be convened by a majority of our Board of Directors. Our Board of Directors shall give not less than seven days’ written notice of a shareholders’ meeting to those persons whose names appear as members in our register of members on the date the notice is given (or on any other date determined by our directors to be the record date for such meeting) and who are entitled to vote at the meeting.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our 2023 Amended and Restated Memorandum and Articles allow our shareholders holding shares representing in aggregate not less than one-fourth (twenty-five percent) of our paid up share capital (as to the total consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; otherwise, our 2023 Amended and Restated Memorandum and Articles do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.
Exempted Company
We are an exempted company with limited liability under the Companies Act (As Revised) of the Cayman Islands. The Companies Act (As Revised) of the Cayman Islands distinguishes between ordinary resident companies and exempted companies. A Cayman Islands exempted company:
| ● | is a company that conducts its business mainly outside of the Cayman Islands; |
| ● | is exempted from certain requirements of the Companies Act (As Revised) of the Cayman Islands, including the filing an annual return of its shareholders with the Registrar of Companies; |
| ● | does not have to make its register of members open for inspection; |
| ● | does not have to hold an annual general meeting; |
| ● | may issue negotiable or bearer shares or shares with no par value (subject to the provisions of the Companies Act (As Revised) of the Cayman Islands); |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); and |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Register of Members
Under Cayman Islands law, we must keep a register of members and there should be entered therein:
| ● | the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member; | |
| ● | the date on which the name of any person was entered on the register as a member; and | |
| ● | the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of members of our Company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Once our register of members has been updated, the shareholders recorded in the register of members are deemed to have legal title to the shares set against their name.
If the name of any person is incorrectly entered in, or omitted from, our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our Company, the person or member aggrieved (or any member of our Company or our Company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s Amended and Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our 2023 Amended and Restated Memorandum and Articles require us to indemnify our officers and directors for actions, proceedings, claims, losses, damages, costs, liabilities and expenses (“Indemnified Losses”) incurred in their capacities as such unless such Indemnified Losses arise from dishonesty of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Material Differences between U.S. Corporate Law and Cayman Islands Corporate Law
The Companies Act (As Revised) of the Cayman Islands is modeled after that of English law but does not follow many recent English law statutory enactments. In addition, the Companies Act (As Revised) of the Cayman Islands differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act (As Revised) of the Cayman Islands applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements. A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a special resolution of the shareholders and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman Islands parent company and its Cayman Islands subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman Islands subsidiary if a copy of the plan of merger is given to every member of that Cayman Islands subsidiary to be merged unless that member agrees otherwise. For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| ● | the statutory provisions as to the required majority vote have been met; |
| ● | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
| ● | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and |
| ● | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act (As Revised) of the Cayman Islands. |
When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
| ● | a company acts or proposes to act illegally or ultra vires; |
| ● | the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and |
| ● | those who control the company are perpetrating a “fraud on the minority.” |
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s Amended and Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our current 2023 Amended and Restated Memorandum and permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in the 2023 Amended and Restated Memorandum and Articles.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he or she owes the following duties to the company - a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our current 2023 Amended and Restated Memorandum and Articles provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law does not provide shareholders any right to put proposals before a meeting or requisition a general meeting. However, these rights may be provided in articles of association. Our current articles of association allow our shareholders holding not less than one-third of all voting power of our share capital in issue to requisition a shareholder’s meeting. Other than this right to requisition a shareholders’ meeting, 2023 Amended and Restated Memorandum and Articles do not provide our shareholders other right to put proposal before a meeting. As a Cayman Islands exempted company, we are not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands, but the 2023 Amended and Restated Memorandum and Articles does not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under the 2023 Amended and Restated Memorandum and Articles, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the Companies Act (As Revised) of the Cayman Islands and the 2023 Amended and Restated Memorandum and Articles, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and the 2023 Amended and Restated Memorandum and Articles, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by not less than three-fourths of such holders of the shares of that class as may be present at a general meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our current 2023 Amended and Restated Memorandum and Articles may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders. There are no limitations imposed by our 2023 Amended and Restated Memorandum and Articles on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in the 2023 Amended and Restated Memorandum and Articles governing the ownership threshold above which shareholder ownership must be disclosed.
10.C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D. Exchange Controls
Cayman Islands
There are currently no exchange control regulations in the Cayman Islands applicable to us or our shareholders.
The PRC
See “Item 4. Information on the Company-B. Business Overview-Regulation-Regulations on Foreign Currency Exchange.”
10.E. Taxation
The following summary of the material Cayman Islands, the PRC, Hong Kong and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local, and other tax laws. Investors should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of our ordinary shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes or stamp duties levied by the Government of the Cayman Islands that are likely to be material to holders of ordinary shares or ordinary shares. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the EIT Law, an enterprise established outside the PRC with a “de facto management body” within the PRC is considered a PRC resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income as well as tax reporting obligations. Under the Implementation Rules, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if all of the following conditions are met: (a) senior management personnel and core management departments in charge of the daily operations of the enterprises have their presence mainly in the PRC; (b) their financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) major assets, accounting books and company seals of the enterprises, and minutes and files of their board’s and shareholders’ meetings are located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior management personnel with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details of determination on PRC resident enterprise status and administration on post-determination matters. If the PRC tax authorities determine that Color Star Technology Co., Ltd. is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ordinary shares and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with respect to gains derived by our non-PRC individual shareholders from transferring our shares or ordinary shares.
It is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. See “Risk Factors - Risk Factors Relating to Doing Business in China -If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders”.
The SAT issued SAT Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT Circular 59 and SAT Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise. Under SAT Circular 698, where a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, and the overseas holding company is located in a tax jurisdiction that: (1) has an effective tax rate of less than 12.5% or (2) does not impose tax on foreign income of its residents, the non-PRC resident enterprise, being the transferor, must report to the relevant tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. Although it appears that SAT Circular 698 was not intended to apply to share transfers of publicly traded companies, there is uncertainty as to the application of SAT Circular 698 and we and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Circular 698 and we may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698.
Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Tax Arrangement, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at least 25% of a PRC enterprise, the withholding tax rate in respect of the payment of dividends by such PRC enterprise to such Hong Kong resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a resident enterprise of the counter-party to such Tax Arrangement should meet the following conditions, among others, in order to enjoy the reduced withholding tax under the Tax Arrangement: (i) it must directly own the required percentage of equity interests and voting rights in such PRC resident enterprise; and (ii) it should directly own such percentage in the PRC resident enterprise anytime in the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), or the Administrative Measures, which became effective in October 2009, requires that the non-resident enterprises must obtain the approval from the relevant tax authority in order to enjoy the reduced withholding tax rate under the tax treaties. There are also other conditions for enjoying such reduced withholding tax rate according to other relevant tax rules and regulations. According to Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
Hong Kong Taxation
Entities incorporated in Hong Kong are subject to profits tax in Hong Kong at the rate of 16.5%. According to Tax (Amendment) (No. 3) Ordinance 2018 published by Hong Kong government, effective April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first HK$2 million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations.
United States Federal Income Taxation
The following is a discussion of United States federal income tax considerations relating to the acquisition, ownership, and disposition of our ordinary shares by a U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, including investors subject to special tax rules (such as, for example, certain financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders, investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not address any tax laws other than the United States federal income tax laws, including any state, local, alternative minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors regarding an investment in our ordinary shares.
The discussion set forth below is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our ordinary shares.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the ordinary shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the ordinary shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and the Cayman Islands, clause (1) above can be satisfied only if the ordinary shares are readily tradable on an established securities market in the United States. Under U.S. Internal Revenue Service authority, ordinary shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on Nasdaq. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ordinary shares, including the effects of any change in law after the date of this report.
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ordinary shares for more than one year, you may be eligible for reduced tax rates on any such capital gains. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company
A non-U.S. corporation is considered a PFIC for any taxable year if either:
| ● | at least 75% of its gross income for such taxable year is passive income; or |
| ● | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we hold will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined based on the market value of our ordinary shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised in any offering) on any particular quarterly testing date for purposes of the asset test.
We must make a separate determination each year as to whether we are a PFIC. Depending on the amount of cash we hold, together with any other assets held for the production of passive income, it is possible that, for our 2018 taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held for the production of passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated affiliated entities, as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our ordinary shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of our ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our assets will depend upon material facts (including the market price of our ordinary shares from time to time that may not be within our control. If we are a PFIC for any year during which you hold ordinary shares, we will continue to be treated as a PFIC for all succeeding years during which you hold ordinary shares. However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the ordinary shares.
If we are a PFIC for your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated ratably over your holding period for the ordinary shares; |
| ● | the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
| ● | the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital, even if you hold the ordinary shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “- Taxation of Dividends and Other Distributions on our ordinary shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including Nasdaq. If the ordinary shares are regularly traded on Nasdaq and if you are a holder of ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold ordinary shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such ordinary shares, including regarding distributions received on the ordinary shares and any gain realized on the disposition of the ordinary shares.
If you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such ordinary shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the fair market value of the ordinary shares on the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your ordinary shares for tax purposes.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our ordinary shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders. However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding), and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our ordinary shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ordinary shares.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the World Wide Web at http://www.colorstarinternational.com/. However, information contained on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Liquidity risk
We are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Inflation risk
Inflationary factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if our revenues do not increase with such increased costs.
Interest rate risk
Our exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase in interest rates, however, may raise the cost of any debt we incur in the future.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A. Debt Securities
Not applicable.
12.B. Warrants and Rights
Not applicable.
12.C. Other Securities
Not applicable.
12.D. American Depositary Shares
We do not have any American Depositary Shares.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On September 26, 2018, we filed a definitive proxy statement to change our place of incorporation from Nevada to the Cayman Islands. The re-domicile involved the Company’s merger with a newly formed subsidiary, as a result of which we became a wholly owned subsidiary of a Cayman Islands holding company (“CADC Cayman”). Each outstanding share of common stock of the Company was converted into the right to receive one ordinary share of CADC Cayman, which was issued by CADC Cayman in connection with the merger pursuant to a registered offering. There were no material modifications to the rights of our shareholders during the year ended June 30, 2022.
ITEM 15. CONTROLS AND PROCEDURES
| (a) | 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 our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based on that evaluation, we concluded that as of June 30, 2023, due to the material weaknesses in our internal control over financial reporting discussed below, our disclosure controls and procedures were not effective.
| (b) | Management’s Annual Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements or external purposes in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 because the degree of compliance with policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2023. The assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of June 30, 2023, we did not maintain effective internal control over financial reporting due to the existence of the following significant deficiencies and material weaknesses:
| ● | The personnel primarily responsible for the preparation of our financial statements do not have requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements; |
| ● | Ineffective supervision of the Company’s internal and disclosure controls over financial reporting; |
Management is in the process of re-assessing the design of certain control activities and developing its remediation plan for the above identified weaknesses. The Company’s actions are subject to ongoing senior management review, as well as Audit Committee oversight. The Company has implemented or will implement following remedial measures within its resources as soon as practicable:
| ● | Establishing an internal audit function or engage an external consulting firm, to assist with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal controls; |
| (c) | Attestation Report of the Registered Public Accounting Firm |
Not applicable.
| (d) | Changes in Internal Control over Financial Reporting |
The management is committed to improving the internal controls over financial reporting and will undertake consistent improvements or enhancements on an ongoing basis. Except as described above, there were no changes in our internal controls over financial reporting during our fiscal year ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee consists of Honglei Jiang, Ahmad Khalfan Ahmad Saeed Almansoori and Hung-Jen Kuo. Our board of directors has determined Honglei Jiang, Ahmad Khalfan Ahmad Saeed Almansoori and Hung-Jen Kuo are “independent directors” within the meaning of Nasdaq Stock Market Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A−3(b) of the Exchange Act. Honglei Jiang meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC.
ITEM 16B. CODE OF ETHICS
The Board has adopted a Code of Conduct and Ethics that applies to the Company’s directors, officers and employees. A copy of this policy is available via our website at www.colorstarinternational.com. Printed copies of our Code of Ethics may be obtained, without charge, by contacting the Corporate Secretary, Color Star Technology Co., Ltd., located at
80 Broad Street, 5th Floor
New York, NY 10005.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal external auditors, for the periods indicated.
| Year Ended June 30, 2023 |
Year Ended June 30, 2022 |
|||||||
| Audit fees(1) | $ | 279,000 | 205,700 | |||||
| Audit related fees(2) | - | - | ||||||
| Tax fees(3) | - | - | ||||||
| All other fees(4) | 14,230 | 18,760 | ||||||
| Total | $ | 293,230 | 224,460 | |||||
| (1) | “Audit fees” means the aggregate fees billed for each of the fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. |
| (2) | “Audit related fees” means the aggregate fees billed in each of the fiscal years for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.” |
| (3) | “Tax Fees” represents the aggregate fees billed in each of the fiscal years for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning. |
| (4) | “All Other Fees” represents the aggregate fees billed in each of the fiscal years listed for products and services provided by our principal accountant other than services reported under “Audit fees,” “Audit-related fees” and “Tax fees.” |
The policy of our audit committee and our board of directors is to pre-approve all audit and non-audit services provided by our principal auditors, including audit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the audit committee or our board of directors prior to the completion of the services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not Applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
(a) Resignation of Previous Independent Registered Public Accounting Firm
On April 7, 2021, our Audit Committee dismissed Wei, Wei & Co., LLP (“Wei Wei”) as the Company’s independent registered public accounting firm, effective immediately. The audit reports of Wei Wei on the consolidated financial statements of us for each of the fiscal years ended June 30, 2020 and 2019 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During our fiscal years ended June 30, 2020 and 2019, there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K) between Wei Wei and us on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreement(s), if not resolved to Wei Wei’s satisfaction, would have caused Wei Wei to make reference to the subject matter of the disagreements in its reports on the our consolidated financial statements for such periods. During the fiscal years ended June 30, 2020 and 2019, except with respect to the material weaknesses described below, there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(iv) of Form 20-F. The following material weaknesses have been identified and included in management’s assessment: (1) the personnel primarily responsible for the preparation of our financial statements do not have requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements, and (2) ineffective supervision of our internal and disclosure controls over financial reporting, which resulted in a number of internal control deficiencies that were identified as being significant.
We furnished a copy of this disclosure to Wei Wei and have requested that Wei Wei furnish us with a letter addressed to the SEC stating whether such firm agrees with the above statements or, if not, stating the respects in which it does not agree. We have received the requested letter from Wei Wei, and a copy of their letter is filed with the Securities and Exchange Commission on April 13, 2021 in our Current Report on Form 6-K as Exhibit 16.1.
(b) Engagement of New Independent Registered Public Accounting Firm
On April 7, 2021, our Audit Committee approved the appointment of Audit Alliance LLP (“Audit Alliance”) as the Company’s independent registered public accounting firm to perform independent audit services for the year ended June 30, 2021.
During the two most recent fiscal years and through the subsequent interim period to April 6, 2021, neither the Company nor anyone on its behalf consulted Audit Alliance regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided that WWC concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
ITEM 16G. CORPORATE GOVERNANCE
Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the Nasdaq Capital Market. Nasdaq Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the Nasdaq Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20% or more of the company’s common stock or voting power for less than the greater of market or book value (ii) resulting in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, Nasdaq Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval requirements. The Cayman Islands do not require shareholder approval prior to any of the foregoing types of issuances. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above. The Board of Directors of the Company has elected to follow the Company’s home country rules as to such issuances and will not be required to seek shareholder approval prior to entering into such a transaction.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements and related notes required by this item are contained on pages F-1 through F-30.
ITEM 19. EXHIBITS
| 11.1 | Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 11.1 of the Company’s Report on Form 20-F filed with the SEC on November 15, 2019) | |
| 12.1* | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 12.2* | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 13.1* | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 13.2* | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 15.1* | Consent of Audit Alliance LLP | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
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.
| COLOR STAR TECHNOLOGY CO., LTD. | ||
| /s/ Louis Luo | ||
| Name: | Louis Luo | |
| Title: | Chief Executive Officer | |
| Date: November 14, 2023 | ||
COLOR STAR TECHNOLOGY CO., LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2022 AND 2023
F-
Report of Independent Registered Public Accounting Firm
To the shareholders and board of directors of Color Star Technology Co., Ltd.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Color Star Technology Co., Ltd. and subsidiaries (the Company) as of June 30, 2023 and 2022, and the related statements of operations and shareholders' equity, and cash flows for each of the three years in the peiord ended ended June 30, 2023, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements).. In our opinion, the financial statements present fairly, in all material respects, the financial positions of the Company as of June 30, 2023 and 2022, and the results of its operations and cash flows for each of the three years in the period ended June 30, 2023, in conformity with U.S. generally accepted accounting principles..
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring operating losses and negative cash flows from operating activities and has an accumulated deficits, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-
Going concern evaluation
Description of the Matter
As reflected in the financial statements, the Company has a history of operating losses and negative operating cash flows and has no revenue for the year ended June 30, 2023. Accordingly, the Company has determined that these factors raise substantial doubt as to the its ability to continue as a going concern for a period of one year from the issuance of this financial statements. Management intends to transform the Color World App into a fee subscription version, and fund its business by way of private placements as may be required. However, the Company has not concluded that these plans alleviate the substantial doubt related to its ability to continue as a going concern.
This significant unusual situation is a critical audit matter as it relates to a material disclosure of going concern and involved complex estimation by management.
The procedures we performed to address this critical audit matter, among others, included:
| ● | Obtaining an understanding, and evaluating management’s assessment on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time; |
| ● | Assessing the management’s plans and forecast, and obtaining sufficient appropriate audit evidence to determine whether the substantial doubt can be alleviated or still exists; |
| ● | Reviewing the relevant disclosures to the consolidated financial statements.. |
Impairment assessment on intangible assets
Description of the Matter
As reflected in the financial statements, at June 30, 2023, the Company’s intangible assets was $13.97 million. As disclosed in Note 2 to thefinancial statements, long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable.
Auditing management’s impairment tests of long-lived assets was complex and judgmental due to the significant measurement uncertainty in determining the fair values of long-lived assets. In particular, the fair value estimates require management to make significant estimates and assumptions related to forecasts of future revenues and operating margins and discount rates. Changes in these assumptions could have a significant impact on the fair value estimates for long-lived assets.
The procedures we performed to address this critical audit matter, among others, included:
| ● | Testing the effectiveness of controls relating to management’s impairment tests, including controls over the determination of the fair value of long-lived assets; |
| ● | We assess the historical accuracy of management’s estimate by comparing past projections to actual performance. |
/s/ Audit Alliance LLP
Singapore, November 14, 2023
PCAOB ID Number 3487
We have served as the Company’s auditor since 2021.
F-
COLOR STAR TECHNOLOGY CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, | June 30, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 239,473 | $ | 872,313 | ||||
| Accounts receivable, net | 2,507,981 | |||||||
| Other receivables, net | 5,500,332 | 6,819,050 | ||||||
| Prepayments | 10,307,226 | 17,666,664 | ||||||
| Total current assets | 16,047,031 | 27,866,008 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Plant and equipment, net | 17,028 | 30,228 | ||||||
| Intangible assets, net | 13,966,083 | 25,566,958 | ||||||
| Prepayments - non-current | 12,061 | |||||||
| Total non-current assets | 13,995,172 | 25,597,186 | ||||||
| Total assets | $ | 30,042,203 | $ | 53,463,194 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 3,270,945 | $ | 3,770,945 | ||||
| Other payables and accrued liabilities | 1,474,823 | 885,601 | ||||||
| Other payables - related parties | 580,000 | 362,884 | ||||||
| Total current liabilities | 5,325,768 | 5,019,430 | ||||||
| Total liabilities | 5,325,768 | 5,019,430 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Class A ordinary shares, $0.04 par value, 700,000,000 shares authorized, 14,991,012 and 2,758,920 shares issued and outstanding as of June 30, 2023 and 2022, respectively* | 599,640 | 192,788 | ||||||
| Class B ordinary shares, $0.04 par value, 100,000,000 shares authorized, 1,200,000 and 0 shares issued and outstanding as of June 30, 2023 and 2022, respectively* | 48,000 | |||||||
| Additional paid-in-capital | 213,146,190 | 195,654,317 | ||||||
| Deferred stock compensation | (3,857,367 | ) | (32,978 | ) | ||||
| Accumulated deficit | (185,220,028 | ) | (147,370,363 | ) | ||||
| Total shareholders’ equity | 24,716,435 | 48,443,764 | ||||||
| Total liabilities and shareholders’ equity | $ | 30,042,203 | $ | 53,463,194 | ||||
| * | Giving retroactive effect to the 40-for-1 reverse share split on September 26, 2022 and the alteration of the authorized issued share capital from ordinary shares into Class A and Class B ordinary shares on March 24, 2023 |
The accompanying notes are an integral part of these consolidated financial statements.
F-
COLOR STAR TECHNOLOGY CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended June 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| REVENUE | $ | $ | 16,519,081 | $ | 6,783,957 | |||||||
| COST OF REVENUE | 8,546,840 | 4,139,251 | ||||||||||
| GROSS PROFIT | 7,972,241 | 2,644,706 | ||||||||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (15,017,532 | ) | (13,861,742 | ) | (5,664,675 | ) | ||||||
| PROVISION FOR EXPECTED CREDIT LOSSES | (9,850,811 | ) | ||||||||||
| RESEARCH AND DEVELOPMENT EXPENSES | (121,580 | ) | (68,275,869 | ) | (817,794 | ) | ||||||
| STOCK COMPENSATION EXPENSE | (3,493,563 | ) | (4,732,700 | ) | (5,717,900 | ) | ||||||
| IMPAIRMENT LOSS OF LONG-LIVED ASSETS | (9,357,062 | ) | (99,943 | ) | ||||||||
| LOSS FROM OPERATIONS | (37,840,548 | ) | (78,898,070 | ) | (9,655,606 | ) | ||||||
| OTHER INCOME (EXPENSE), NET | ||||||||||||
| Other (expense) income, net | (2,844 | ) | 1,696,984 | 31,083 | ||||||||
| Interest income | 1 | 136 | ||||||||||
| Finance expense | (6,273 | ) | (7,033 | ) | (14,226 | ) | ||||||
| TOTAL OTHER INCOME (EXPENSE), NET | (9,117 | ) | 1,689,952 | 16,993 | ||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (37,849,665 | ) | (77,208,118 | ) | (9,638,613 | ) | ||||||
| PROVISION FOR INCOME TAXES | ||||||||||||
| LOSS FROM CONTINUING OPERATIONS | (37,849,665 | ) | (77,208,118 | ) | (9,638,613 | ) | ||||||
| DISCONTINUED OPERATIONS: | ||||||||||||
| Net gain on sale of discontinued operations, net of applicable income taxes | 1,400,100 | |||||||||||
| NET LOSS | $ | (37,849,665 | ) | $ | (77,208,118 | ) | $ | (8,238,513 | ) | |||
| LOSS PER CLASS A and CLASS B ORDINARY SHARE | ||||||||||||
| Weighted average number of shares* | ||||||||||||
| 9,167,238 | 3,880,561 | 1,702,387 | ||||||||||
| Loss per share - basic and diluted* | ||||||||||||
| Continuing operations | $ | (4.13 | ) | $ | (19.90 | ) | $ | (5.66 | ) | |||
| Discontinued operations | $ | $ | $ | 0.82 | ||||||||
| Total | $ | (4.13 | ) | $ | (19.90 | ) | $ | (4.84 | ) | |||
| * | Giving retroactive effect to the 40-for-1 reverse share split on September 26, 2022 and the alteration of the authorized issued share capital from ordinary shares into Class A and Class B ordinary shares on March 24, 2023 |
The accompanying notes are an integral part of these consolidated financial statements.
F-
COLOR STAR TECHNOLOGY CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Class A Ordinary shares* |
Class B Ordinary shares* |
Additional | Deferred | |||||||||||||||||||||||||||||
| Number of | Par | Number of | Par | paid-in | share | Accumulated | ||||||||||||||||||||||||||
| shares | amount | shares | amount | capital | compensation | deficit | Total | |||||||||||||||||||||||||
| BALANCE, June 30, 2020 | 640,599 | $ | 25,624 | $ | 69,689,789 | $ | (1,201,183 | ) | $ | (61,923,732 | ) | $ | 6,590,498 | |||||||||||||||||||
| Sale of ordinary shares | 1,431,260 | 57,250 | - | 62,283,775 | 62,341,025 | |||||||||||||||||||||||||||
| Ordinary shares issued for exercise of warrants | 341,432 | 13,657 | - | 5,157,934 | 5,171,591 | |||||||||||||||||||||||||||
| Ordinary shares issued for acquisition of equipment | 151,508 | 6,061 | - | 3,811,939 | 3,818,000 | |||||||||||||||||||||||||||
| Ordinary shares issued for acquisition of intangible assets | 45,371 | 1,815 | - | 1,548,185 | 1,550,000 | |||||||||||||||||||||||||||
| Ordinary shares issued for services | 17,500 | 700 | - | 440,300 | 441,000 | |||||||||||||||||||||||||||
| Ordinary shares issued for compensation | 128,250 | 5,130 | - | 4,091,370 | 4,096,500 | |||||||||||||||||||||||||||
| Unvested restricted ordinary shares issued to officer | 3,000 | 120 | - | 969,880 | (970,000 | ) | ||||||||||||||||||||||||||
| Forfeiture of unvested restricted ordinary shares | - | - | (308,400 | ) | 308,400 | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | 1,180,400 | 1,180,400 | ||||||||||||||||||||||||||||
| Net loss | - | - | (8,238,513 | ) | (8,238,513 | ) | ||||||||||||||||||||||||||
| BALANCE, June 30, 2021 | 2,758,920 | 110,357 | 147,684,772 | (682,383 | ) | (70,162,245 | ) | 76,950,501 | ||||||||||||||||||||||||
| Sale of ordinary shares | 1,815,624 | 72,625 | - | 43,864,577 | 43,937,202 | |||||||||||||||||||||||||||
| Ordinary shares issued for compensation | 215,625 | 8,625 | - | 4,242,670 | (86,260 | ) | 4,165,035 | |||||||||||||||||||||||||
| Ordinary shares issued for exercise of warrants | 3,775 | 151 | - | 31,328 | 31,479 | |||||||||||||||||||||||||||
| Forfeiture of unvested restricted ordinary shares | - | - | (168,000 | ) | 168,000 | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | 567,665 | 567,665 | ||||||||||||||||||||||||||||
| Net loss | - | - | (77,208,118 | ) | (77,208,118 | ) | ||||||||||||||||||||||||||
| Additional ordinary shares of round up adjustment due to retroactive effect of the 40-for-1 reverse share | 25,756 | 1,030 | - | (1,030 | ) | |||||||||||||||||||||||||||
| BALANCE, June 30, 2022 | 4,819,700 | 192,788 | 195,654,317 | (32,978 | ) | (147,370,363 | ) | 48,443,764 | ||||||||||||||||||||||||
| Sale of units | 1,750,000 | 70,000 | - | 4,948,985 | 5,018,985 | |||||||||||||||||||||||||||
| Sale of ordinary shares | 1,200,000 | 48,000 | - | 1,452,000 | 1,500,000 | |||||||||||||||||||||||||||
| Ordinary shares issued for acquisition of intangible assets | 2,400,000 | 96,000 | - | 3,504,000 | 3,600,000 | |||||||||||||||||||||||||||
| Ordinary shares issued for services | 3,300,000 | 132,000 | - | 4,245,000 | (3,800,125 | ) | 576,875 | |||||||||||||||||||||||||
| Ordinary shares issued for compensation | 2,300,000 | 92,000 | - | 2,861,410 | (123,290 | ) | 2,830,120 | |||||||||||||||||||||||||
| Ordinary shares issued for exercise of warrants | 421,312 | 16,852 | - | 492,936 | 509,788 | |||||||||||||||||||||||||||
| Conversion of Class A ordinary shares into Class B shares | (1,200,000 | ) | (48,000 | ) | 1,200,000 | 48,000 | ||||||||||||||||||||||||||
| Forfeiture of unvested restricted ordinary shares | - | - | (12,458 | ) | 12,458 | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | 86,568 | 86,568 | ||||||||||||||||||||||||||||
| Net loss | - | - | (37,849,665 | ) | (37,849,665 | ) | ||||||||||||||||||||||||||
| BALANCE, June 30, 2023 | 14,991,012 | $ | 599,640 | 1,200,000 | $ | 48,000 | $ | 213,146,190 | $ | (3,857,367 | ) | $ | (185,220,028 | ) | $ | 24,716,435 | ||||||||||||||||
| * | Giving retroactive effect to the 40-for-1 reverse share split on September 26, 2022 and the alteration of the authorized issued share capital from ordinary shares into Class A and Class B ordinary shares on March 24, 2023 |
The accompanying notes are an integral part of these consolidated financial statements.
F-
COLOR STAR TECHNOLOGY CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended June 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (37,849,665 | ) | $ | (77,208,118 | ) | $ | (8,238,513 | ) | |||
| Net income (loss) from discontinued operations | 1,400,100 | |||||||||||
| Net loss from continuing operations | (37,849,665 | ) | (77,208,118 | ) | (9,638,613 | ) | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Provision for expected credit losses | 9,850,811 | |||||||||||
| Depreciation | 13,200 | 1,445,573 | 1,536,178 | |||||||||
| Amortization | 5,843,813 | 4,450,895 | 2,180,917 | |||||||||
| Research and development expenses | 52,000,000 | |||||||||||
| Stock compensation expense | 3,493,563 | 4,732,700 | 5,717,900 | |||||||||
| Impairment loss of long-lived assets | 9,357,062 | 99,943 | ||||||||||
| Gain on disposal of equipment | (94,984 | ) | ||||||||||
| Gain on debt settlement | (25,092 | ) | ||||||||||
| Changes in operating assets and liabilities | ||||||||||||
| Accounts receivable | 157,170 | 683,730 | (3,191,711 | ) | ||||||||
| Other receivables | 1,318,718 | 8,900 | (6,600 | ) | ||||||||
| Prepayments | (152,623 | ) | (15,964,364 | ) | (3,247,827 | ) | ||||||
| Accounts payable | (500,000 | ) | 3,770,945 | |||||||||
| Other payables and accrued liabilities | 589,222 | 368,466 | 174,104 | |||||||||
| Deferred revenue | (3,596,821 | ) | 3,596,821 | |||||||||
| Net cash used in operating activities | (7,878,729 | ) | (29,403,078 | ) | (2,803,980 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Prepayments for intangible assets | (52,000,000 | ) | ||||||||||
| Purchase of equipment | (39,602 | ) | (2,020,000 | ) | ||||||||
| Purchase of intangible assets | (15,180,000 | ) | (12,903,243 | ) | ||||||||
| Proceeds from sales of equipment | 999,950 | |||||||||||
| Net cash used in investing activities from continuing operations | (14,219,652 | ) | (66,923,243 | ) | ||||||||
| Net cash provided by investing activities from discontinued operations | 1,400,100 | |||||||||||
| Net cash used in investing activities | (14,219,652 | ) | (65,523,143 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Borrowings from related parties | 217,116 | 352,173 | ||||||||||
| Proceeds from sale of units, net of offering costs | 5,018,985 | |||||||||||
| Proceeds from sale of ordinary shares, net of offering costs | 1,500,000 | 43,937,202 | 62,341,025 | |||||||||
| Proceeds from exercise of warrants | 509,788 | 31,479 | 5,171,591 | |||||||||
| Net cash provided by financing activities | 7,245,889 | 44,320,854 | 67,512,616 | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (632,840 | ) | 698,124 | (814,507 | ) | |||||||
| CASH AND CASH EQUIVALENTS, beginning of year | 872,313 | 174,189 | 988,696 | |||||||||
| CASH AND CASH EQUIVALENTS, end of year | $ | 239,473 | $ | 872,313 | $ | 174,189 | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
| Cash paid for interest expense | $ | $ | $ | |||||||||
| Cash paid for income tax | $ | $ | $ | |||||||||
| NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
| Ordinary shares issued for acquisition of equipment | $ | $ | $ | 3,818,000 | ||||||||
| Ordinary shares issued for acquisition of intangible assets | $ | 3,600,000 | $ | $ | 1,550,000 | |||||||
| Transfer of prepayments to intangible assets | $ | $ | 2,565,527 | $ | ||||||||
| Unpaid receivable from disposal of equipment | $ | $ | 6,819,050 | $ | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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COLOR STAR TECHNOLOGY CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and description of business
Color Star Technology Co., Ltd. (the “Company” or “Color Star”) is an entertainment and education company which provides online entertainment performances and online music education services via its wholly-owned subsidiary, Color Star DMCC (“DMCC”).
The Company was founded as an unincorporated business on September 1, 2005, under the name TJS Wood Flooring, Inc., and became a C-corporation in the State of Delaware on February 15, 2007. On April 29, 2008, TJS Wood Flooring, Inc. changed its name to China Advanced Construction Materials Group, Inc. (“CADC Delaware”). On August 1, 2013, CADC Delaware consummated a reincorporation merger with its newly formed wholly-owned subsidiary, China Advanced Construction Materials Group, Inc. (“CADC Nevada”), a Nevada corporation, with CADC Delaware merging into CADC Nevada and CADC Nevada being the surviving company, for the purpose of changing CADC Delaware’s state of incorporation from Delaware to Nevada. On December 27, 2018, CADC Nevada was merged with and into China Advanced Construction Materials Group, Inc. (“CADC Cayman”), a Cayman Islands corporation, whereupon the separate existence of CADC Nevada ceased and CADC Cayman continued as the surviving entity. As a result of the reincorporation, the Company is governed by the laws of the Cayman Islands.
On November 22, 2021, Color China changed its name from “Color China Entertainment Limited” to “Color Sky Entertainment Limited.”
CACM Group NY, Inc.
On August 20, 2018, CACM Group NY, Inc. (“CACM”) was incorporated in the State of New York and is 100% owned by the Company. Prior to September 2023, the Company is using CACM as its headquarters and as a holding company in the United States of America. Starting in September 2023, CACM has begun to provide construction management consulting services.
Baytao LLC (“Baytao”)
On March 10, 2020, CACM entered into a joint venture agreement (the “JV Agreement”) with Baydolphin, Inc. (“Baydolphin”), a company organized under the laws of New York. Pursuant to the JV Agreement,
| ● | CACM and Baydolphin established a limited liability company under the laws of New York, Baytao, which will be the 100% owner of one or more operating entities in the U.S. to engage in the business of online and offline after-school education. |
| ● | The business of Baytao shall be managed by the Board of Managers of Baytao. |
| ● | CACM shall appoint three designees to the Board of Managers of Baytao and Baydolphin shall appoint two designees. The General Manager of Baytao shall be appointed by CACM and report to the Board of Managers. |
| ● | CACM shall contribute necessary capital for the operating entities to fund their operations and obtain the right to use the software platform and other technologies from Color Star, which will be provided to the JV and its operating entities for no charge to facilitate their operations and provide online classes to their registered students, and Baydolphin shall be responsible for managing these entities with its expertise in after-school education, including but not limited to recruiting and training personnel and implementing all promotional and marketing activities. |
| ● | Eighty percent (80%) of the net profits or net loss of the joint venture will be distributed to or assigned to CACM and the remaining twenty percent (20%) to Baydolphin. |
On June 29, 2021, CACM (the “Seller”) entered into a share purchase agreement (the “Agreement”) with Baydolphin (the “Buyer”). Pursuant to the Agreement, the Seller agreed to sell, and the Buyer agreed to purchase 80% of the outstanding equity interest of Baytao for a consideration of $100. Prior to the sale, Baytao had no operation or asset. Upon completion of the sale, Baytao ceased to be a subsidiary of the Company.
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Color Sky
The ongoing COVID-19 pandemic has claimed hundreds of thousands of lives and caused massive global health and economic crisis, while also causing large-scale social and behavioral changes in societies. Online entertainment and online education are experiencing enormous growth which the Company believes will last long after the pandemic. In order to expand the Company’s global reach and to enter into an online business, on May 7, 2020, the Company entered into a Share Exchange Agreement (“Exchange Agreement”) with Color Sky Entertainment Limited (“Color Sky”), a Hong Kong limited company, and shareholders of Color Sky (the “Sellers”), pursuant to which, among other things and subject to the terms and conditions contained therein, the Company acquired all of the outstanding issued shares in Color Sky from the sellers (the “Acquisition”). Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Color Sky, the Company agreed to issue 115,834 ordinary shares of the Company and paid an aggregate of $2,000,000 to the Sellers. On June 3, 2020, the Acquisition was consummated and the Company issued 115,834 ordinary shares of the Company to the Sellers and closed on the same date. Since Color Sky had no business operations other than holding a significant collection of music performance specific equipment, the transaction has been treated as an acquisition of assets, as it did not meet the definition of a business. The Company plans to make Color Sky an emerging online performance and online music education provider with a significant collection of performance specific assets -- leveraging professional experience of the Company’s new Chief Executive Officer (“CEO”) who has established good relationships with major record companies, renowned artists and entertainment agencies around the world. Color Sky is in the process of building an online entertainment and music education platform featuring artists and professional producers as its lead instructors. Color Sky officially launched its online cultural entertainment platform, Color World, globally on September 10, 2020. The Color World platform (or online education academy App) has not only celebrity lectures, but also celebrity concert videos, celebrity peripheral products, such as celebrity branded merchandise, and artist interactive communication.
On January 11, 2023, the Company, Color Sky, and Tian Jie (the “Purchaser”), entered into a certain share purchase agreement (the “Disposition SPA”). Pursuant to the Disposition SPA, the Purchaser agreed to purchase Color Sky in exchange for no consideration. Upon the closing of the transaction (the “Disposition”) contemplated by the Disposition SPA, the Purchaser will become the sole shareholder of Color Sky and as a result, assume all assets and liabilities of Color Sky. The Disposition closed on February 3, 2023 after the satisfaction of all closing conditions. The Disposition resulted in the recognition of a loss of $2,844 that is recorded in the accompanying consolidated statements of operations and comprehensive income (loss) in the caption of “other (expense) income, net” during the year ended June 30, 2023. The purpose of the Disposition was to transfer its Color Sky’s existing business from Hong Kong to United Arab Emirates under Color Star DMCC (“DMCC”). As DMCC has significant continuing involvement in its online cultural entertainment platform and the music industry business, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Color Sky were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Modern Pleasure International Limited
On June 18, 2021, Modern Pleasure International Limited (“Modern Pleasure”), a limited liability company, was incorporated in Hong Kong and is wholly established and owned by the Company. On December 16, 2022, Modern Pleasure was dissolved.
Color Metaverse Pte. Ltd.
On February 21, 2022, Color Metaverse Pte. Ltd. (“Color Metaverse”), a private company limited by shares, was incorporated in Singapore and is wholly established and owned by the Company. As of the date of this report, Color Metaverse has not commenced operations.
Color Star Technology Ohio Inc.
On August 11, 2022, Color Star Technology Ohio Inc. (“Color Star Ohio”) was incorporated in the State of Ohio and is 100% owned by the Company. As of the date of this report, Color Star Ohio has not commenced operations.
Color Star DMCC
On January 23, 2023, DMCC was incorporated in the United Arab Emirates with share capital of AED 50,000 divided into 50 Shares of AED 1,000 nominal value and is 100% owned by the Company. DMCC was established to carry out the music industry business in Color Sky after the Disposition.
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Model Queen Limited
On August 9, 2023, Model Queen Limited (“Model Queen”) was incorporated in Hong Kong Special Administrative Region and is 100% owned by the Company. As of the date of this report, Model Queen has not commenced operations.
Hainan Yuhai Entertainment Co. Ltd.
On September 14, 2023, Hainan Yuhai Entertainment Co. Ltd. (“Color Star Hainan”) was incorporated in the Hainan Province of the People’s Republic of China (PRC) with registered capital of RMB 5.0 million and is 100% owned by Model Queen. Color Star Hainan was established to carry out the entertainment industry business in PRC. As of the date of this report, Color Star Hainan has not commenced operations.
Note 2 – Summary of significant accounting policies
Going concern uncertainty
The Company had an accumulated deficit of approximately $185.2 million as June 30, 2023 and had a net loss of approximately $37.8 million for the year ended June 30, 2023. In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” the Company has incurred recurring operating losses and negative cash flows from operating activities and has an accumulated deficit, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to generate sufficient cash flow within the normal operating cycle of a twelve month period to pay for its future payment obligations, the Company may be required to curtail or cease its operations. Management is trying to alleviate the going concern risk through obtaining additional equity financings to support its working capital. However, there is no assurance that management will be successful in their future plans. The consolidated financial statements does not include any adjustments that might result from the outcome of this uncertainty.
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 regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements include the accounts of all the directly and indirectly owned subsidiaries listed below. All intercompany transactions and balances have been eliminated in consolidation.
Principles of consolidation
The consolidated financial statements reflect the activities of the following subsidiaries. All material intercompany transactions and balances have been eliminated.
| Subsidiaries | Place incorporated | Ownership percentage |
||||
| CACM | New York, USA | 100 | % | |||
| Color Sky (1) | Hong Kong | 100 | % | |||
| Modern Pleasure (2) | Hong Kong | 100 | % | |||
| Color Metaverse | Singapore | 100 | % | |||
| Color Star Ohio | Ohio, USA | 100 | % | |||
| DMCC | United Arab Emirates | 100 | % | |||
| (1) | Disposed on February 3, 2023 |
| (2) | Dissolved on December 16, 2022 |
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Use of estimates and assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s consolidated financial statements include the allowance for credit losses of accounts receivable and other receivables, allowance for doubtful accounts on prepayments and advances and deferred income taxes, stock-based compensation, and fair value and useful lives of property, plant and equipment and intangibles assets. Actual results could be materially different from those estimates.
Revenue recognition
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) to recognize its revenue for all period presented. The core principle underlying this ASU is that the Company recognizes its revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams to be recognized at a point in time comprise principally of music performance performed or education services provided. The Company’s revenue streams to be recognized over a period of time comprise of its platform subscribed membership fees which is recognized over the subscription period.
The ASU requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no material differences in the pattern of revenue recognition.
The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.
The Company offered the following services:
| (a) | Online education academy |
For the years ended June 30, 2022 and 2021, the Company earns its online education academy revenues from its customers for subscription for services to be delivered over a period of time, the receipt is initially recorded as “deferred revenue” on the consolidated balance sheets and revenue is recognized ratably over the membership period as services are rendered, usually one year. Membership services revenue also includes fees earned from subscribing members for on-demand content purchases and early access to premium content. The Company is principal in its relationships where its partners, including artist agents, mobile operators, internet service providers and online payment agencies, provide access to the membership services or payment processing services as the Company retains control over its service delivery to its subscribing members. Typically, payments made to its partners, are recorded as cost of revenues and as research and development expenses prior to any revenues being generated in this revenue stream. In July 2021, the Company no longer required its subscribers to pay for the annual subscription fee. Revenues in connection with the on-demand contents are recognized at a point in time when the subscription fee was paid to stream the on-demand contents.
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| (b) | Online concert |
For the year ended June 30, 2021, the Company holds online concerts with its star partners. Sale of online concert via subscription fee is accounted for as a single performance obligation which is satisfied at a point in time on the day of the event. Online concert subscription fees are recognized net of App payment collections agent service fee. All ticket sales are final upon payment.
As a practical expedient, the Company elects to record the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Disaggregated information of revenues by services are as follows:
| For the Years Ended June 30, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Online music education academy subscription | $ | $ | 16,519,081 | $ | 4,453,957 | |||||||
| Online concert subscription | 2,330,000 | |||||||||||
| Total revenue | $ | $ | 16,519,081 | $ | 6,783,957 | |||||||
Financial instruments
US GAAP specifies a hierarchy of valuation techniques for determining the fair value of financial instruments and related fair value measurements based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). The valuation hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with FASB ASC 820, the following summarizes the fair value hierarchy:
The three levels of inputs are defined 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, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; |
| Level 3 | inputs to the valuation methodology are unobservable. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Cash and cash equivalents
The Company considers all highly liquid investments with the original maturity of three months or less at the date of purchase to be cash equivalents.
Accounts receivable, net
Accounts receivable include receivables from Color World platform subscription fees due from App payment collections agent, net of an allowance for credit losses. Accounts receivable are recorded at subscription fees amount received from the Company’s customers and do not bear interest. Allowance for credit losses for accounts receivables is established based on various factors including historical payments and current economic trends. The Company reviews its allowance for accounts receivable by assessing individual accounts receivable over a specific aging and amount. All other balances are pooled based on historical collection experience. The estimate of expected credit losses is based on information about past events, current economic conditions, and forecasts of future economic conditions that affect collectability. Accounts receivable are written-off on a case by case basis after exhaustive efforts at collection are made, net of any amounts that may be collected.
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Other receivables
Other receivables primarily include security deposit and receivables resulted from sale of equipment, net of an allowance for credit losses. Allowance for credit losses for other receivables is established based on various factors including historical payments and current economic trends. The Company reviews its allowance for other receivables by assessing individual other receivables over a specific aging and amount. All other balances are pooled based on historical collection experience. The estimate of expected credit losses is based on information about past events, current economic conditions, and forecasts of future economic conditions that affect collectability. Other receivables are written-off on a case by case basis after exhaustive efforts at collection are made, net of any amounts that may be collected.
Prepayments, current
Prepayments, current include funds deposited or advanced to outside vendors for future performance obligations, program license fees and service fees. As a standard practice in the music performance industry, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. The Company has legally binding contracts with its vendors, the prepayments will be used to offset performance fees, program license fees, purchase price or service fees, and the amounts are refundable and bear no interest if outside vendors breach the contracts.
Prepayments, non-current
Prepayments, non-current represent cash deposited or advanced for software development expenditure.
Property, plant and equipment
Property, plant and equipment are stated at cost or at fair value of the identifiable assets acquired on the acquisition date less accumulated depreciation and impairment loss. Expenditures for maintenance and repairs are charged to operations as incurred while additions, renewals and improvements are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method with 0%-5% residual value.
The estimated useful lives of assets are as follows:
| Useful life | |||
| Office equipment | 5 years |
Intangible assets, net
Intangible assets are stated at cost, less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets. The Company has obtained copyrights to use the online education academy courses for 3 years to unlimited years. The Company amortizes the copyrights with limited useful life over their useful life using the straight-line method and amortizes the copyrights with unlimited useful life over 5 years, which the copyrights are expected to contribute to the revenue of the Company’s online education academy App.
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Accounting for long-lived assets
The Company classifies its long-lived assets into: (i) office equipment and (ii) intangible assets.
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
If the value of an asset is determined to be impaired, the impairment to be recognized is measured in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs.
There were no impairment charges for the year ended June 30, 2022. Impairment charges amounted to $9,357,062 and $99,943 for the years ended June 30, 2023 and 2021, respectively.
Competitive pricing pressures and changes in interest rates could materially and adversely affect the Company’s estimates of future net cash flows to be generated by the long-lived assets, and thus could result in future impairment losses.
Accounts payable
Accounts payable represents royal fees payable to the Company’s vendor which was incurred from the revenues generated of its on-demand contents in the Color World Platform.
Leases
The Company accounts for leases in accordance with ASC 842 “Leases”. Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The Company generally considers the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet as operating lease ROU assets and lease liabilities.
The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.
As of June 30, 2023 and 2022, the Company does not have any lease with an initial term of more than 12 months.
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Research and development
Research and development expenses include website or app development expenditure costs, salaries and other compensation-related expenses to the Company’s research and product development personnel and related expenses for the Company’s research and product development team. The Company expenses all costs that are incurred in connection with the planning and implementation phases of development, and costs that are associated with maintenance of the existing website or app for internal use.
Stock-based compensation
The Company records stock-based compensation expense for employees at fair value on the grant date and recognizes the expense over the employee’s requisite service period. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination rate. The risk-free interest rate for the expected term of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s current and expected dividend policy.
The Company records stock-based compensation expense for non-employees at fair value on the grant date and recognizes the expense over the service provider’s requisite service period.
Income taxes
The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes,” which requires the Company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns for the years of 2020 to 2022 are subject to examination by any applicable tax authorities.
Loss per share
The Company reports earnings (loss) per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings per share.
Basic loss per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the year using the two-class method. Using the two class method, net loss is allocated between ordinary shares and other participating securities (i.e. preference shares) based on their participating rights.
Diluted loss per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants, options, restricted stock-based grants and convertible preferred stock, to issue ordinary shares were exercised and converted into ordinary shares. Ordinary share equivalents having an anti-dilutive effect on loss per share are excluded from the calculation of diluted loss per share.
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Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase ordinary shares at the average market price during the period. When the Company has a loss, no potential dilutive items are included since they would be antidilutive.
Stock dividends or stock splits are accounted for retroactively if the stock dividends or stock splits occur during the period, or retroactively if the stock dividends or stock splits occur after the end of the period but before the release of the financial statements, by considering it effective as of the beginning of the earliest period presented.
Recent Accounting Pronouncements
In January 2020, the FASB issued ASU 2020-01 to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
Note 3 – Discontinued Operations
Disposal of Sunway Kids
On June 25, 2020, the Company, Sunway Kids and Mr. Yanliang Han (the “SK Purchaser”), an unrelated third party, entered into a share purchase agreement (the “Disposition SPA”). Pursuant to the Disposition SPA, the SK Purchaser agreed to purchase Sunway Kids in exchange for cash consideration of $2.4 million. Upon closing of the transaction, the SK Purchaser became the sole shareholder of Sunway Kids and as a result, assumed all assets and liabilities of all the subsidiaries and variable interest entities (the “VIE”) owned or controlled by Sunway Kids. The SK Purchaser settled $1.0 million of its payment obligation in November 2020 through a tri-party settlement agreement executed on September 29, 2020 among the Company, SK Purchaser and the Asset Seller. Although the SK Purchaser is current with its installment payment, the Company recognized the remaining installment payment on a cash basis as collectability of the remaining $1.4 million cannot be reasonably assured during the year ended June 30, 2020. During the year ended June 30, 2021, the Company received the remaining $1.4 million. As a result, the disposition of Sunway Kids resulted in the recognition of a gain of approximately $1.4 million that is recorded in the accompanying consolidated statements of operations in the caption of “net gain on sale of discontinued operations, net of applicable income taxes” during the year ended June 30, 2021.
Note 4 – Accounts receivable, net
Accounts receivable consisted of the following:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Color World platform subscription fees due from App payment collections agent | $ | 2,350,811 | $ | 2,507,981 | ||||
| Allowance for credit losses | (2,350,811 | ) | ||||||
| Accounts receivable, net | $ | $ | 2,507,981 | |||||
For the year ended June 30, 2023, the Company recognized $2,350,811 on provision for allowance on credit losses. No provision for allowance on credit losses was recognized for the years ended June 30, 2022 and 2021.
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Note 5 – Other receivables, net
Other receivables consisted of the following:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Others | $ | 332 | $ | |||||
| Receivables from vendors upon cancellation of concerts | 13,000,000 | |||||||
| Receivable from sale of equipment | 6,819,050 | |||||||
| Other receivables | 13,000,332 | 6,819,050 | ||||||
| Allowance for credit losses | (7,500,000 | ) | ||||||
| Other receivables, net | $ | 5,500,332 | $ | 6,819,050 | ||||
For the year ended June 30, 2023, the Company recognized $7,500,000 on provision for allowance on credit losses. No provision for allowance on credit losses was recognized for the years ended June 30, 2022 and 2021.
Note 6 – Prepayments
Prepayments, current, consisted of the following:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Prepayment for live concert productions | $ | 10,286,550 | $ | 8,000,000 | ||||
| Prepayment for online concert productions | 5,000,000 | |||||||
| Prepayment for advertisement | 4,666,664 | |||||||
| Prepayment for transportation services | 20,676 | |||||||
| Prepayments and advances | $ | 10,307,226 | $ | 17,666,664 | ||||
Prepayments, non-current, consisted of the following:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Prepayment for transportation services | $ | 12,061 | $ | |||||
Note 7 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
| June 30, 2022 |
June 30, 2022 |
|||||||
| Office equipment | $ | 39,602 | $ | 39,602 | ||||
| Less: Accumulated depreciation | (22,574 | ) | (9,374 | ) | ||||
| Property, plant and equipment, net | $ | 17,028 | $ | 30,228 | ||||
Depreciation expense was $13,200, $1,445,573 and $1,536,178 for the years ended June 30, 2023, 2022 and 2021, respectively.
During the year ended June 30, 2022, the Company disposed all of its performance equipment which resulted in a gain on disposal of $94,984. Due the epidemic has resulted in quarantines and travel and event restrictions throughout the world, the Company did not successfully host any live concerts since 2020. As a result, the Company decided to dispose its performance equipment by utilizing the cash to be realized from the equipment disposal as operating cash flows.
F-
Note 8 – Intangible assets, net
Intangible assets consist of the following:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Copyrights of online education academy courses | $ | 16,600,000 | $ | 32,198,770 | ||||
| Less: Accumulated amortization | (2,633,917 | ) | (6,631,812 | ) | ||||
| Intangible assets, net | $ | 13,966,083 | $ | 25,566,958 | ||||
Amortization expense was $5,843,813, $4,450,895, and $2,180,917 for the years ended June 30, 2023, 2022 and 2021, respectively.
Note 9 – Related party transactions
Other payables – related parties
Other payables – related party consisted of the following:
| Name of Related Party | Relationship | Nature | June 30, 2023 |
June 30, 2022 |
||||||||
| Weili He | Former Chief Financial Officer (“CFO”) of the Company who held less than 5% of the Company ordinary shares currently | Salary Payable | $ | $ | 10,711 | |||||||
| Hui Xu | General Manager of CACM | Interest-free loan, due on demand | 580,000 | 350,000 | ||||||||
| Jehan Zeb Khan | Director and Former Co-Acting CEO of the Company | Interest-free loan, due on demand | 2,173 | |||||||||
| Total | $ | 580,000 | $ | 362,884 | ||||||||
Note 10 – Accounts payable
| June 30, 2023 |
June 30, 2022 |
|||||||
| Royal fees payable | $ | 3,270,945 | $ | 3,770,945 | ||||
Note 11 – Leases
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty.
The Company has a lease agreement for office space in New York from June 1, 2020 through May 31, 2021, with annual payments of $46,896 and converted to month to month lease in June 2021 and terminated the month to month lease on October 2021. The Company has a new lease agreement for office space in New York from July 1, 2021 through June 30, 2022, with a rental fee of $3,300 per month. In May 2022, the Company entered another lease agreement for office space in New York from July 1, 2022 through June 30, 2023, with a rental fee of $2,886 per month. The Company ended the lease on June 30, 2023.
F-
In June 2022, the Company entered another lease agreement for office space in Dubai, United Arab Emirates from July 15, 2022 through July 14, 2023, with a rental fee of $7,829 per month. The Company ended the lease on July 14, 2023. The Company did not recognize the operating lease ROU assets and lease liabilities on the balance sheet as this lease has an initial term of 12 months or less.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The leases generally do not contain options to extend at the time of expiration.
The one-year maturity of the Company’s lease obligations is presented below:
| Year Ending June 30, | Operating Lease Amount |
|||
| 2023 | $ | 3,915 | ||
| Total lease payments | $ | 3,915 | ||
Operating lease expenses are included in general and administrative expenses. Total operating lease expenses were approximately $77,751, $65,580 and $71,000 for the years ended June 30, 2023, 2022 and 2021, respectively.
Note 12 – Income taxes
(a) Corporate income tax
Color Star
Under the current laws of the Cayman Islands, Color Star is not subject to tax on income or capital gains. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.
CACM
CACM is organized in the New York State in the United States. CACM had no taxable income for the U.S. income tax purposes for the years ended June 30, 2023, 2022 and 2021. The applicable tax rate is 21.0% for federal and 7.3% for New York State with an effective tax rate of 26.8%.
Color Sky and Modern Pleasure
Color Sky and Modern Pleasure are organized in Hong Kong and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong Profits Tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, Color Sky is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
Color Metaverse
Color Metaverse are incorporated in Singapore and is subject to Singapore Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Singapore tax laws. The applicable tax rate is 17% in Singapore, with 75% of approximately the first $8,000 (SGD 10,000) taxable income and 50% of the next approximately $0.1 million (SGD 190,000) taxable income are exempted from income tax.
Color DMCC
Color DMCC are incorporated in United Arab Dirham and is subject to United Arab Dirham Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant United Arab Dirham tax laws. The applicable tax rate is 9% in the amount of taxable income above approximately $0.1 million (AED 375,000) and taxable income below approximately $0.1 million (AED 375,000) are exempted from income tax.
F-
Income (loss) before provision for income taxes consisted of:
| For the year ended June 30, 2023 |
For the year ended June 30, 2022 |
For the year ended June 30, 2021 |
||||||||||
| Cayman | $ | (7,186,161 | ) | $ | (8,837,141 | ) | $ | (7,120,310 | ) | |||
| United States | (527,712 | ) | (617,057 | ) | (541,744 | ) | ||||||
| Hong Kong | (9,114,811 | ) | (67,753,920 | ) | (576,459 | ) | ||||||
| Dubai | (21,020,981 | ) | ||||||||||
| Loss before provision for income taxes | $ | (37,849,665 | ) | $ | (77,208,118 | ) | $ | (8,238,513 | ) | |||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended June 30, 2023, 2022 and 2021:
| For the year ended June 30, 2023 |
For the year ended June 30, 2022 |
For the year ended June 30, 2021 |
||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State statutory rate | 5.8 | % | 5.6 | % | 5.6 | % | ||||||
| Valuation allowance | (5.4 | )% | (26.6 | )% | (26.6 | )% | ||||||
| Removal of valuation allowance in disposed subsidiary | 29.8 | % | - | % | - | % | ||||||
| Others (1) | (21.4 | )% | - | % | - | % | ||||||
| Effective tax rate | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| (1) | These items represent expenses incurred in Cayman and it is not deductible in U.S. federal and state tax returns. |
Significant components of deferred tax assets were as follows:
| June 30, 2023 |
June 30, 2022 |
|||||||
| Deferred tax assets | ||||||||
| Net operating loss carryforward in the U.S. | 576,046 | 442,051 | ||||||
| Net operating loss carryforward in the United Arab Emirates | 1,891,888 | |||||||
| Net operating loss carryforward in Hong Kong | 11,274,650 | |||||||
| Valuation allowance | (2,467,934 | ) | (11,716,701 | ) | ||||
| Total net deferred tax assets | $ | $ | ||||||
As of June 30, 2023 and 2022, CACM and Color Star Ohio’s net operating loss carry forward for the U.S. income taxes was approximately $2.1 million and $1.5 million, receptively. The net operating loss carry forwards are available to reduce future years’ taxable income for unlimited years but limited to 80% use per year. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the U.S. If the Company is unable to generate taxable income in its United States operations, it is more likely than not that it will not have sufficient income to utilize its deferred tax assets. Accordingly, the Company has provided a 100% valuation allowance on its net deferred tax assets of approximately $576,000 and $442,000 related to its U.S. operations as of June 30, 2023 and 2022, respectively.
As of June 30, 2023 and 2022, Color Sky and Modern Pleasure’s net operating loss carry forward for the Hong Kong income taxes was $0 and approximately $68.3 million, receptively. The net operating loss carry forwards are available to reduce future years’ taxable income for unlimited years. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in Hong Kong. If the Company is unable to generate taxable income in its Hong Kong operations, it is more likely than not that it will not have sufficient income to utilize its deferred tax assets. Accordingly, the Company has provided a 100% valuation allowance on its net deferred tax assets of $0 and approximately $11.3 million related to its Hong Kong operations as of June 30, 2023 and 2022, respectively.
F-
As of June 30, 2023 and 2022, Color Star DMCC’s net operating loss carry forward for the United Arab Emirates income taxes was approximately $21.0 million and $0, receptively. The net operating loss carry forwards are available to reduce future years’ taxable income for unlimited years. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in United Arab Emirates. If the Company is unable to generate taxable income in its United Arab Emirates operations, it is more likely than not that it will not have sufficient income to utilize its deferred tax assets. Accordingly, the Company has provided a 100% valuation allowance on its net deferred tax assets of approximately $1.9 million and $0 related to its United Arab Emirates operations as of June 30, 2023 and 2022, respectively.
Changes in the valuation allowance for deferred tax assets decreased by $9,248,767 from $11,716,701 on June 30, 2022 to $2,467,934 on June 30, 2023. Changes in the valuation allowance for deferred tax assets increased by $11,342,917 from $373,784 on June 30, 2021 to $11,716,701 on June 30, 2022.
(b) Uncertain tax positions
There were no uncertain tax positions as of June 30, 2023 and 2022, and management does not anticipate any potential future adjustments which would result in a material change to its tax positions. For the years ended June 30, 2023, 2022 and 2021, the Company did not incur any tax related interest or penalties.
Note 13 – Shareholders’ equity
Increase in Authorized Shares and Shares Reverse Split
On November 18, 2020, the Company’s shareholders approved to the authorized share capital of the Company be increased from US$75,000 divided into 75,000,000 ordinary shares of a par value of US$0.001 each to US$200,000 divided into 200,000,000 ordinary shares of a par value of US$0.001 each by the creation of an additional 125,000,000 ordinary shares of a par value of US$0.001 each to rank pari passu in all respects with the existing ordinary shares. On December 1, 2021, the Company’s shareholders approved to the authorized share capital of the Company be increased from US$200,000 divided into 200,000,000 ordinary shares of a par value of US$0.001 each to US$800,000 divided into 800,000,000 ordinary shares of a par value of US$0.001 each by the creation of an additional 600,000,000 ordinary shares of a par value of US$0.001 each to rank pari passu in all respects with the existing ordinary shares.
On March 10, 2022, the Board of Directors of the Company approved the 40-for-1 reverse share split of its ordinary shares in accordance with Cayman law and on April 11, 2022, the Company’s shareholders approved the proposal to implement a reverse share split of the Company’s ordinary shares, par value US$0.001 per share, including the Company’s ordinary shares reserved for issuance (the “Original Ordinary Shares”), at a ratio of forty (40)-for-one and at a time during the following six months to be determined by further action of our Board of Directors (or not at all in the determination of the Board of Directors during the same period), such that each 40 Original Ordinary Shares shall be consolidated into one ordinary share of the Company, par value US$0.04 (the “Adjusted Ordinary Shares”), and that the authorized share capital of the Company is consolidated from US$800,000 divided into 800,000,000 Original Ordinary Shares to US$800,000 divided into 20,000,000 Adjusted Ordinary Shares. The Company’s shareholders also approved the proposal to increase the authorized share capital of the Company at a time during the following six months to be determined by further action of the Company’s Board of Directors (or not at all in the determination of the Board of Directors during the same period) from US$800,000 divided into 20,000,000 Adjusted Ordinary Shares to US$32,000,000 divided into 800,000,000 Adjusted Ordinary Shares by the creation of an additional 780,000,000 Adjusted Ordinary Shares to rank pari passu in all respects with the Adjusted Ordinary Shares existing upon approval of the Reverse Split Proposal. The increase in authorized shares and shares reverse split became effective on September 26, 2022. All share amounts have been retroactively restated to reflect increase in authorized shares and shares reverse split. Upon execution of the 40-for-1 reverse share stock split, the Company recognized additional 25,756 ordinary shares due to round up adjustment.
F-
Share Capital Amendment
On March 24, 2023, the Shareholders of the Company approved the alteration of the authorized issued share capital of the Company from (i) US$32,000,000 divided into 800,000,000 Ordinary Shares with a par value of US$0.04 each; to (ii) 700,000,000 Class A Ordinary Shares with a par value of $0.04 each and 100,000,000 Class B Ordinary Shares with a par value of US$0.04 each, in each case having the rights and subject to the restrictions set out in the Fifth Amended and Restated Memorandum of Association and Articles of Association of the Company and (ii) reconversion of the 1,200,000 Class A Ordinary Shares into Class B Ordinary Shares. All share amounts have been retroactively restated to reflect the alteration of the authorized issued share capital of the Company.
The holders of Class A ordinary Shares and Class B ordinary shares shall have the same rights except for voting and conversion rights. The holders of Class A ordinary shares shall have one vote in respect of each Class A ordinary share held and the holders of Class B ordinary shares shall have ten vote in respect of each Class B ordinary share held. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Sale of Class A Ordinary Shares
In January 2020, the Company sold 50,000 Class A ordinary shares at $40.00 per share for total proceeds of $2.0 million to a third-party. The issuance was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
In July 2020, the Company sold 80,625 Class A ordinary shares and warrants to purchase up to 52,407 Class A ordinary shares with an exercise price of $52.00 for total proceeds of approximately $3.8 million, net of offering cost of approximately $0.4 million to certain institutional investors. The purchase price for each share and the corresponding warrant is $60.00. The issuance was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
In September 2020, the Company entered into an agreement to sell a Purchaser an aggregate of up to 79,366 Class A ordinary shares for gross proceeds of up to approximately $2 million. The shares shall be issued in four separate installments. The first installment of $500,000 worth of shares, or 19,842 shares to be issued at $25.20 per share, was closed on September 9, 2020. The Company also agreed to issue 794 Class A ordinary shares to the Purchaser as additional consideration for the purchase of the shares on September 9, 2020. The Company received total proceeds of $460,000, net of offering cost of $40,000 for the first installment. The issuance was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. As of the date of this report, the Company is not certain that the Purchaser will proceed with the remaining three installments.
In September 2020, the Company sold 330,000 Class A ordinary shares and warrants to purchase up to Class A 297,000 ordinary shares with an exercise price of $20.00 for total proceeds of approximately $6.0 million, net of offering cost of approximately $0.6 million to certain institutional investors. The purchase price for each share and the corresponding warrant is $22.00. The issuance was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On February 18, 2021, the Company entered into certain securities purchase agreement (the “SPA”) with certain non-U.S. Persons (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell an aggregate of 500,000 units. Each unit consists of one restrictive Class A ordinary share of the Company, par value $0.04 per share and a warrant to purchase one share with an initial exercise price of $53.60 per share, at a price of $52.00 per unit, for an aggregate purchase price of $26,000,000 (the “Offering”). The warrants are exercisable immediately upon the date of issuance at an initial exercise price of $1.34 per share, for cash (the “Warrant Shares”). The warrants may also be exercised cashlessly if at any time after the three-month anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares. The Warrants shall expire three years from its date of issuance. The warrants are subject to customary anti-dilution provisions reflecting stock dividends and splits or other similar transactions. The net proceeds of the Offering were used to upgrade the Company’s software application, or Color Star APP, with artificial intelligence, augmented reality, and mixed reality technologies.
F-
On March 25, 2021, the Company entered into a Securities Purchase Agreement (the “First Purchase Agreement”) with Wang MinYe (the “First Purchaser”), pursuant to which the Company agreed to sell to the First Purchaser in a private placement 75,500 Class A ordinary shares (the “Wang Shares”) of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $3,900,000 (the “First Private Placement”). The First Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On March 25, 2021, the Company entered into a Securities Purchase Agreement (the “Second Purchase Agreement”) with Lin YiHan (the “Second Purchaser”), pursuant to which the Company agreed to sell to the Second Purchaser in a private placement 87,500 Class A ordinary shares (the “Lin Shares”) of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $4,550,000 (the “Second Private Placement”). The Second Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On March 27, 2021, the Company entered into a Securities Purchase Agreement (the “Third Purchase Agreement”) with Zubair Ahsan (the “Third Purchaser”), pursuant to which the Company agreed to sell to the First Purchaser in a private placement 75,000 Class A ordinary shares of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $3,900,000 (the “Third Private Placement”). The Third Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On March 27, 2021, the Company entered into a Securities Purchase Agreement (the “Fourth Purchase Agreement”) with Ullah Sabar (the “Fourth Purchaser”), pursuant to which the Company agreed to sell to the Second Purchaser in a private placement 87,500 Class A ordinary shares of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $4,550,000 (the “Fourth Private Placement”). The Fourth Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On March 27, 2021, the Company entered into a Securities Purchase Agreement (the “Fifth Purchase Agreement”) with Li Yan (the “Fifth Purchaser”), pursuant to which the Company agreed to sell to the Fifth Purchaser in a private placement 87,500 Class A ordinary shares of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $4,550,000 (the “Fifth Private Placement”). The Fifth Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On March 27, 2021, the Company entered into a Securities Purchase Agreement (the “Sixth Purchase Agreement”) with Ahmed Muhammad Abrar (the “Sixth Purchaser”), pursuant to which the Company agreed to sell to the Sixth Purchaser in a private placement 87,500 Class A ordinary shares of the Company, par value $0.04 per share, at a purchase price of $52.00 per share for an aggregate offering price of $4,550,000 (the “Sixth Private Placement”). The Sixth Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On September 24, 2021, the Company and certain institutional investors entered into a securities purchase agreement (“SPA 1”), pursuant to which the Company agreed to sell such institutional investors units with each unit consisting of one Class A ordinary share and one warrant to purchase 0.7 Class A ordinary share, at a purchase price of $27.20 per unit, for net proceeds of approximately $19.2 million (the “Offering”). An aggregate of 790,624 Class A ordinary shares and warrants to purchase an aggregate of 553,437 Class A ordinary shares (the “Investor Warrants”) were agreed to be issued to the investors under the SPA 1. The Offering closed on September 28, 2021.
On January 21, 2022, the Company and Hou Sing International Business Limited (“Hou Sing”) entered into a securities purchase agreement, pursuant to which the Company agreed to issue and sell to Hou Sing an aggregate of 400,000 Class A ordinary shares at a purchase price of $40.00 per share, for proceeds of $16.0 million.
On February 21, 2022, the Company and certain institutional investors entered into a securities purchase agreement (“SPA 2”), pursuant to which the Company agreed to sell such institutional investors units with each unit consisting of one Class A ordinary share and one warrant to purchase one Class A ordinary share, at a purchase price of $16.00 per unit, for net proceeds of approximately $8.7 million (the “Offering”). An aggregate of 625,000 Class A ordinary shares and warrants to purchase an aggregate of 625,000 Class A ordinary shares (the “Investor Warrants”) were agreed to be issued to the investors under the SPA 2. The Offering closed on February 24, 2022.
F-
On September 14, 2022, the Company entered into a securities purchase agreement (the “SPA 3”) with certain institutional investors for a registered direct offering of Class A ordinary shares and warrants. Each unit consists of one Class A ordinary share and one warrant to purchase one Class A ordinary share. The purchase price per unit is $3.20. The gross proceeds from the sale of the securities, before deducting placement agent fees and other estimated offering expenses payable by the Company, was approximately $5.6 million. The Company issued to the investors an aggregate of 1,750,000 Class A ordinary shares and warrants to purchase an aggregate of 1,750,000 Class A ordinary shares. The Investor Warrants are initially exercisable at $3.20 per Class A Ordinary Share and expire 5.0 years from the date of issuance. Pursuant to a placement agent agreement entered into between the Company and FT Global Capital, Inc. (“FT Global”) dated September 24, 2021 (the “September 2021 PAA”), the Company issued to FT Global warrants (the “Tail Fee Warrants”) to purchase 43,125 Class A Ordinary Shares on substantially the same terms as the Investor Warrants sold in SPA 3, except that the Tail Fee Warrants shall not be exercisable for a period of six months and shall expire 36 months after issuance, and shall have no anti-dilution protection other than adjustments based on stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The net proceeds from this offering will be used for general corporate and working capital purposes. The Offering closed on September 19, 2022.
On December 20, 2022, the Company entered into certain securities purchase agreement (the “SPA 4”) with a certain “accredited investor” (the “Purchaser”) as such term is defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended, pursuant to which the Company agreed to sell 1,200,000 Class A ordinary shares, (the “Shares”) par value $0.04 per share (the “Class A Ordinary Shares”), at a per share purchase price of $1.25 (the “Offering”). The gross proceeds to the Company from this offering was $1.5 million. The issuance and sale of the Shares is exempted from the registration requirements of the Securities Act pursuant to Regulation D promulgated thereunder and will be issued as restricted securities. The Offering closed on January 22, 2023.
Restricted Stock Grants
Restricted stock grants are measured based on the market price on the grant date. The Company has granted restricted Class A ordinary shares to the members of the board of directors (the “Board”), senior management and consultants.
In May 2020, the Board granted 4,500 restricted Class A ordinary shares, which were issued with a fair value of $84,600 to the Company’s former CEO/Vice President of Technology. The Board approved that these shares were all vested in October 2020 when the Company’s former CEO/Vice President of Technology left the Company.
In July 2020, the Board granted an aggregate of 7,500 restricted Class A ordinary shares, which were issued with a fair value of $522,000 to the current Co-Acting CEO (“Co-Acting CEO”) of the Company. These shares will vest quarterly over the required service period of one year starting from July 17, 2020 to July 16, 2021.
In June 2021, the Board granted an aggregate of 10,000 restricted Class A ordinary shares, which were issued with a fair value of $11,200 to Mr. Basil Wilson, the former CEO, and to Mr. Biao Lu, the current Co-Acting CEO, of the Company. These shares will vest quarterly over the required service period of one year starting from June 16, 2021 to June 15, 2022. On December 13, 2021, Basil Wilson resigned from his positions as the CEO and chairman of the board of directors. As a result, he had forfeited 3,750 unvested restricted Class A ordinary shares with an initial fair value of $168,000.
In December 2021, the Board granted an aggregate of 2,500 restricted Class A ordinary shares, which were issued with a fair value of $45,900 to Sir Lucas Capetian, the former CEO. These shares will vest quarterly over the required service period of one year starting from December 13, 2021 to December 12, 2022. In March 2022, all of these shares were deemed fully vested upon the approval by the Compensation Committee of the Board of Directors of the Company.
F-
In April 2022, the Company granted an aggregate of 3,000 restricted Class A ordinary shares, which were issued with a fair value of $27,360 to Ms. Lili Jiang, the Company’s CFO, pursuant to her employment contract. These shares will vest quarterly over the required service period of one year starting from April 1, 2022 to March 31, 2023.
In June 2022, the Company granted an aggregate of 2,500 restricted Class A ordinary shares, which were issued with a fair value of $13,000 to Mr. Biao Lu, the Company’s CAO, pursuant to his employment contract. These shares will vest quarterly over the required service period of one year starting from June 16, 2022 to June 15, 2023.
In August 2022, the Board granted an aggregate of 7,500 restricted Class A ordinary shares, which were issued with a fair value of $36,000 to Ms. Wei Zhang, the Company’s charwoman and Mr. Farhan Qadir, the Company’s former CEO, pursuant to their employment contract. These shares will vest quarterly over the required service period of one year starting from August 9, 2022 to August 8, 2023. The Board approved that these shares were all vested in February 2023 when the Company’s former CEO resigned from the Company.
In February 2023, the Company granted an aggregate of 50,000 restricted Class A ordinary shares, which were issued with a fair value of $81,800 to Mr. Louis Luo, the Company’s CEO, pursuant to his employment contract. These shares will vest quarterly over the required service period of one year starting from February 14, 2023 to February 13, 2024.
In April 2023, the Company granted an aggregate of 3,000 restricted Class A ordinary shares, which were issued with a fair value of $5,490 to Ms. Lili Jiang, the Company’s CFO, pursuant to her employment contract. These shares will vest quarterly over the required service period of one year starting from April 1, 2023 to March 31, 2024.
For the years ended June 30, 2023, 2022 and 2021, the Company recognized approximately $0.1 million, $0.6 million and $1.1 million compensation expense related to restricted stock grants, respectively.
Following is a summary of the restricted stock grants:
| Restricted stock grants | Shares | Weighted Average Grant Date Fair Value Per Share |
Aggregate Intrinsic Value |
|||||||||
| Unvested as of June 30, 2020 | 13,875 | $ | 82.40 | $ | ||||||||
| Forfeited | (3,000 | ) | $ | 2.57 | ||||||||
| Granted | 17,500 | $ | 55.60 | |||||||||
| Vested | (16,229 | ) | $ | 74.80 | ||||||||
| Unvested as of June 30, 2021 | 12,146 | $ | 56.00 | |||||||||
| Forfeited | (3,750 | ) | $ | 44.80 | ||||||||
| Granted | 8,000 | $ | 10.80 | |||||||||
| Vested | (11,750 | ) | $ | 48.40 | ||||||||
| Unvested as of June 30, 2022 | 4,646 | $ | 7.20 | |||||||||
| Forfeited | (2,396 | ) | $ | 5.20 | - | |||||||
| Granted | 60,500 | $ | 2.04 | |||||||||
| Vested | (28,833 | ) | $ | 3.00 | ||||||||
| Unvested as of June 30, 2023 | 33,917 | $ | 1.69 | |||||||||
F-
Class A Ordinary Shares Issued for Compensation
In December 2020, the Board granted an aggregate of 39,750 Class A ordinary shares, which were issued with a fair value of $1,128,900, determined using the closing price of $28.40 on December 24, 2020, to thirteen employees under the 2019 Plan. These shares vested immediately upon grant.
In January 2021, the Board granted an aggregate of 54,000 Class A ordinary shares, which were issued with a fair value of $1,836,000, determined using the closing price of $34.00 on January 28, 2021, to thirteen employees under the 2019 Plan. These shares vested immediately upon grant.
In March 2021, the Board granted an aggregate of 34,500 Class A ordinary shares, which were issued with a fair value of $1,131,600, determined using the closing price of $32.80 on March 16, 2021, to nine employees under the 2019 Plan. These shares vested immediately upon grant.
In August 2021, the Board granted an aggregate of 93,875 Class A ordinary shares, which were issued with a fair value of $3,030,285, determined using the closing price of $32.28 on August 9, 2021, to twenty-one employees under the 2021 Plan. These shares vested immediately upon grant.
In March 2022, the Board granted an aggregate of 106,250 Class A ordinary shares, which were issued with a fair value of $1,134,750, determined using the closing price of $10.68 on March 18, 2022, to twenty employees under the 2021 Plan. These shares vested immediately upon grant.
In November 2022, the Board granted an aggregate of 300,000 Class A ordinary shares, which were issued with a fair value of $240,000, determined using the closing price of $0.80 on November 29, 2022, to seven employees under the 2021 Plan. These shares vested immediately upon grant.
In May 2023, the Board granted an aggregate of 197,500 Class A ordinary shares, which were issued with a fair value of $308,100, determined using the closing price of $1.56 on May 1, 2023, to a former management under the 2023 Plan. These shares vested immediately upon grant.
In May 2023, the Board granted an aggregate of 1,742,000 Class A ordinary shares, which were issued with a fair value of $2,282,020, determined using the closing price of $1.31 on May 31, 2023, to nine managements and employees under the 2023 Plan. These shares vested immediately upon grant.
For the years ended June 30, 2023, 2022 and 2021, the Company recorded approximately $2.8 million, $4.2 million and $4.1 million stock compensation expense related to Class A ordinary shares grants, respectively.
Class A Ordinary Shares Issued for Services
In October 2020, the Board granted an aggregate of 17,500 Class A ordinary shares with a fair value of $441,000, determined using the closing price of $25.20 on October 15, 2020, to two service providers. The value of these shares is being amortized over the service from October 15, 2020 to February 10, 2021.
In December 2022, the Board granted an aggregate of 1,500,000 Class A ordinary shares with a fair value of $1,065,000, determined using the closing price of $0.71 on December 19, 2022, to four service providers. The value of these shares is being amortized over the service from December 19, 2022 to December 18, 2023.
In March 2023, the Board granted an aggregate of 1,800,000 Class A ordinary shares with a fair value of $3,312,000, determined using the closing price of $1.84 on March 27, 2023, to four service providers. The value of these shares has certain vesting conditions to be performed by the service providers. As of June 30, 2023, the vesting conditions have not been met.
For the years ended June 30, 2023, 2022 and 2021, the Company amortized approximately $6 million, $0 and $0.5 million stock compensation expense related to services, respectively.
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Class A Ordinary Shares Issued for Acquisitions
In August 2020, the Company issued 151,508 Class A ordinary shares to a third party to purchase certain machinery and equipment for stage performance and the Class A ordinary shares were valued using the closing price of the Company’s Class A ordinary shares on August 20, 2020 at $25.20 per share.
In February 2021, the Company issued 45,371 Class A ordinary shares to a third party to purchase certain copyrights to be used in the Company’s Color World platform and the Class A ordinary shares were valued using the closing price of the Company’s Class A ordinary shares on January 29, 2021, last trading day prior to the acquisition at $34.00 per share.
In March 2023, the Company issued 2,400,000 Class A ordinary shares to a third party to purchase certain copyrights to be used in the Company’s Color World platform and the Class A ordinary shares were valued using the fair value of the copyrights obtained.
Conversion of Warrants into Class A Ordinary Shares
During the year ended June 30, 2021, the Company’s warrants holders converted a total of 341,432 warrants into a total of 341,432 Class A ordinary shares at a weighted exercise price of $15.2 per share for gross proceeds of approximately $5.2 million.
During the year ended June 30, 2022, the Company’s warrants holders converted a total of 3,775 warrants into a total of 3,775 Class A ordinary shares at a weighted exercise price of $8.34 per share for gross proceeds of approximately $31,000.
During the year ended June 30, 2023, the Company’s warrants holders converted a total of 421,312 warrants into a total of 421,312 Class A ordinary shares at a weighted exercise price of $1.21 per share for gross proceeds of approximately $510,000.
Warrants
In a connection with the direct offering in March 2020 with the sales of 68,182 Class A ordinary shares, the Company also sold warrants (“Direct Offering Warrants”) to purchase an aggregate of up to an aggregate of 68,182 Class A ordinary shares to certain institutional investors on April 2, 2020. The warrants are exercisable immediately, at an exercise price of $22.00 per Class A Ordinary Share and expire 5.5 years from the date of issuance. The fair value of this Direct Offering Warrants was $916,334, which was considered a direct cost of the direct offering and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $16.40, risk free rate of 0.43%; expected term of 5.5 years; exercise price of the warrants of $22.00, volatility of 120%; and expected future dividends of 0%. In June 2020, the exercise price of the warrants was amended and changed to $1.60 per Class A Ordinary Share as a result of the May 13, 2020 direct offering.
In a connection with the private placement in May 2020 for the sale of 65,000 Class A ordinary shares, the Company also sold warrants (“Direct Offering Warrants”) to purchase an aggregate of up to an aggregate of 65,000 Class A ordinary shares to certain institutional investors on May 11, 2020. The warrants are exercisable immediately, at an exercise price of $22.00 per Class A Ordinary Share and expire 5.5 years from the date of issuance. The fair value of this Direct Offering Warrants was $860,826, which was considered a direct cost of the direct offering and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $16.0, risk free rate of 0.36%; expected term of 5.5 years; exercise price of the warrants of $22.00, volatility of 123%; and expected future dividends of 0%. In August 2020, the exercise price of the warrants was amended and changed to $7.40 per Class A Ordinary Share as a result of the July 20, 2020 direct offering.
In a connection with the private placement in July 2020 for the sale of 80,625 Class A ordinary shares, the Company also sold warrants (“Direct Offering Warrants”) to purchase an aggregate of up to an aggregate of 52,406 Class A ordinary shares to certain institutional investors on July 20, 2020. The warrants are exercisable immediately, at an exercise price of $60.00 per Class A Ordinary Share and expire 5.5 years from the date of issuance. The fair value of this Direct Offering Warrants was $2,901,119, which was considered a direct cost of the direct offering and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $63.60, risk free rate of 0.34%; expected term of 5.5 years; exercise price of the warrants of $60.00, volatility of 128%; and expected future dividends of 0%.
F-
In a connection with the private placement in September 2020 for the sale of 330,000 Class A ordinary shares, the Company also sold warrants (“Direct Offering Warrants”) to purchase an aggregate of up to an aggregate of 297,000 Class A ordinary shares to certain institutional investors on September 15, 2020. The warrants are exercisable immediately, at an exercise price of $22.00 per Class A Ordinary Share and expire 5.5 years from the date of issuance. The fair value of this Direct Offering Warrants was $8,403,557, which was considered a direct cost of the direct offering and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $31.60, risk free rate of 0.32%; expected term of 5.5 years; exercise price of the warrants of $22.00, volatility of 130%; and expected future dividends of 0%.
On February 18, 2021, the Company entered into certain securities purchase agreement (the “SPA”) with certain non-U.S. Persons (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell an aggregate of 500,000 units. Each unit consists of one restrictive Class A ordinary share of the Company and a warrant (“SPA Warrants”) to purchase one share with an initial exercise price of $53.60 per share. The SPA Warrants are exercisable immediately upon the date of issuance at an initial exercise price of $53.60 per Share, for cash (the “Warrant Shares”). The SPA Warrants may also be exercised cashlessly if at any time after the three-month anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares. The SPA Warrants shall expire three years from its date of issuance. The SPA Warrants are subject to customary anti-dilution provisions reflecting stock dividends and splits or other similar transactions. The SPA Warrants are exercisable immediately, at an exercise price of $53.60 per Class A Ordinary Share and expire 3.0 years from the date of issuance. The fair value of the SPA Warrants was $15,898,047, which was considered a direct cost of the sale of SPA and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $42.40, risk free rate of 0.21%; expected term of 3.0 years; exercise price of the warrants of $53.60, volatility of 141%; and expected future dividends of 0%.
On September 24, 2021, the Company and certain institutional investors entered into a SPA 1, pursuant to which the Company agreed to sell such institutional investors units with each unit consisting of one Class A ordinary share and one warrant to purchase 0.7 Class A ordinary share, at a purchase price of $27.20 per unit, for net proceeds of approximately $19.2 million (the “Offering”). An aggregate of 790,624 Class A ordinary shares and warrants to purchase an aggregate of 553,437 Class A ordinary shares (the “Investor Warrants”) were agreed to be issued to the investors under the SPA 1. The Company issued a warrant to purchase 23,719 Class A ordinary shares to the placement agent (the “Placement Agent Warrants”). The Investor Warrants and Placement Agent Warrants are initially exercisable at $40.00 per Class A Ordinary Share and expire 3.0 years from the date of issuance. The fair value of the Investor Warrants and Placement Agent Warrants were $9,123,701, which was considered a direct cost of the sale of SPA and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $22.40, risk free rate of 0.55%; expected term of 3.0 years; exercise price of the warrants of $40.00, volatility of 140%; and expected future dividends of 0%.
On February 21, 2022, the Company and certain institutional investors entered into a SPA 2, pursuant to which the Company agreed to sell such institutional investors units with each unit consisting of one Class A ordinary share and one warrant to purchase one Class A ordinary share, at a purchase price of $16.00 per unit, for net proceeds of approximately $8.7 million (the “Offering”) before deducting placement agent fees and other estimated offering expenses. An aggregate of 625,000 Class A ordinary shares and warrants to purchase an aggregate of 625,000 Class A ordinary shares (the “Investor Warrants”) were agreed to be issued to the investors under the SPA 2. The Investor Warrants are initially exercisable at $16.00 per Class A Ordinary Share and expire 5.0 years from the date of issuance. Pursuant to a placement agent agreement entered into between the Company and FT Global Capital, Inc. (“FT Global”) dated September 24, 2021 (the “September 2021 PAA”), the Company issued to FT Global warrants (the “Tail Fee Warrants”) to purchase 13,632 Class A Ordinary Shares on substantially the same terms as the Investor Warrants sold in SPA 2, except that the Tail Fee Warrants shall not be exercisable for a period of six months and shall expire 36 months after issuance, and shall have no anti-dilution protection other than adjustments based on stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The fair value of the Investor Warrants were $5,008,524, which was considered a direct cost of the sale of SPA and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $9.20, risk free rate of 1.84%; expected term of 5.0 years; exercise price of the warrants of $16.00, volatility of 146%; and expected future dividends of 0%. The fair value of the Tail Fee Warrants were $92,251, which was considered a direct cost of the sale of SPA and included in additional paid-in capital. The fair value has been estimated using the Black-Scholes pricing model with the following assumptions: market value of underlying share of $9.20, risk free rate of 1.73%; expected term of 3.0 years; exercise price of the warrants of $16.00, volatility of 145%; and expected future dividends of 0%.
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The summary of warrant activity is as follows:
| Warrants Outstanding |
Weighted Average Exercise Price |
Average Remaining Contractual Life |
||||||||||
| June 30, 2020 | 133,182 | $ | 11.60 | 5.31 | ||||||||
| Granted | 849,407 | $ | 42.80 | 3.48 | ||||||||
| Forfeited | $ | |||||||||||
| Exercised | (341,432 | ) | $ | 15.20 | ||||||||
| June 30, 2021 | 641,157 | $ | 49.60 | 3.08 | ||||||||
| Granted | 1,215,788 | $ | 52.00 | 4.02 | ||||||||
| Forfeited | $ | |||||||||||
| Exercised | (3,775 |
) | $ | 22.00 | ||||||||
| June 30, 2022 | 1,853,170 | $ | 35.20 | 3.00 | ||||||||
| Granted | 1,793,125 | $ | 3.20 | 4.95 | ||||||||
| Forfeited | $ | |||||||||||
| Exercised | (421,312 | ) | $ | 1.21 | ||||||||
| June 30, 2023 | 3,224,983 | $ | 16.75 | 3.30 | ||||||||
Note 14 – Loss per shares
The Company computes loss per share of Class A ordinary shares and Class B ordinary shares using the two-class method. The rights, including the liquidation and dividend rights, of the holders of Class A ordinary shares and Class B ordinary shares are identical. As a result, the undistributed earnings (loss) for each year are allocated based on the contractual participation rights of the Class A ordinary shares and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed loss are allocated on a proportionate basis.
The following tables set forth the computation of basic and diluted loss per share of Class A ordinary shares and Class B ordinary shares:
| For the Year Ended June 30, 2023 |
For the Year Ended June 30, 2022 |
For the Year Ended June 30, 2021 |
||||||||||||||
| Class A Ordinary Shares |
Class B Ordinary Shares |
Class A Ordinary Shares |
Class A Ordinary Shares |
|||||||||||||
| Basic and diluted loss per share: | ||||||||||||||||
| Numerator | ||||||||||||||||
| Allocation of undistributed loss | $ | (36,519,400 | ) | $ | (1,330,265 | ) | $ | (77,208,118 | ) | $ | (8,238,513 | ) | ||||
| Denominator | ||||||||||||||||
| Number of shares used in per share computation | 8,845,046 | 322,192 | 3,880,561 | 1,702,387 | ||||||||||||
| $ | (4.13 | ) | $ | (4.13 | ) | $ | (19.90 | ) | $ | (4.84 | ) | |||||
For the years ended June 30, 2023, 2022 and 2021, the Company had dilutive securities from the outstanding warrants that are convertible into 3,224,983, 1,856,945 and 641,157 of the Company’s Class A ordinary shares, respectively, were not included in the computation of dilutive loss per share because the inclusion of such warrants would be anti-dilutive.
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Note 15 – Commitments and contingencies
Contingencies
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.
Note 16 – Concentrations of risk
Credit Risk
The Company is exposed to credit risk from its cash in banks and advances on performance obligations.
As of June 30, 2023 and 2022, $0 and approximately $0.3 million was deposit with a bank located in the US or Hong Kong subject to credit risk. In the US, the insurance coverage of each bank is USD $250,000. In Hong Kong, the insurance coverage of each bank is HKD 500,000 (approximately $64,000).
Prepayments and advances are subject to credit evaluation. An allowance will be made for credit losses on estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.
Vendor Concentration Risk
As of June 30, 2023 and 2022, one vendor accounted for 100% of the Company’s accounts payable.
There were no purchases for the year ended June 30, 2023. For the year ended June 30, 2022, three vendors accounted for 60%, 27% and 13% of the Company’s total purchases. For the year ended June 30, 2021, one vendor accounted for 89% of the Company’s total purchases.
Note 17 – Subsequent events
Lease
In July 2023, the Company entered another lease agreement for office space in Dubai, United Arab Emirates from August 4, 2023 through August 3, 2025, with a rental fee of approximately $8,600 per month.
Issuance of Class A ordinary shares for Services
On July 20, 2023, the Company issued 6,400,000 of restricted Class A ordinary shares to a vendor in exchange for Artist’s personal services with respect to the event of Color Star Music Season concert. The shares were valued at $1.25 per Class A ordinary shares with total consideration of $8,000,000.
Sale of Class A Ordinary Shares
On November 8, 2023, the Company entered into a certain securities purchase agreement with Vast Ocean Inc., the largest shareholder of the Company, pursuant to which the Company agreed to sell 1,120,000 Class A ordinary shares, par value $0.04 per share, at a per share purchase price of $0.25 (the “Offering”). This Offering was unanimously approved by the audit committee of the board of directors of the Company consisting only of independent directors. The gross proceeds to the Company from this Offering are $280,000, before deducting any fees or expenses. The Company plans to use the net proceeds from this Offering for working capital and general corporate purposes. The Offering closed on November 9, 2023.
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Exhibit 2.1
Description of Securities
Registered under Section 12 of the Securities Exchange Act of 1934
As of June 30, 2023, Color Star Technology Co., Ltd. (the “Company,” “we,” “us,” and “our”) had one class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, as follows:
| Title of each class | Symbol | Name of each exchange on which registered | ||
| Class A Ordinary Shares, par value $0.04 | ADD | Nasdaq Capital Market |
As of the date of this report, we are authorized to issue up to 800,000,000 ordinary shares of a par value of US$0.04 each, consisting of 700,000,000 Class A Ordinary Shares of a par value of US$0.04 each (“Class A Ordinary Shares”) and 100,000,000 Class B Ordinary Shares of a par value of US$0.04 each (“Class B Ordinary Shares” and together with the Class A Ordinary Shares, the “Ordinary Shares”).
Ordinary Shares
The following are summaries of material provisions of our 2023 Amended and Restated Memorandum and Articles, corporate governance policies and the Companies Law insofar as they relate to the material terms of our Ordinary Shares.
Objects of Our Company
Under our 2023 Amended and Restated Memorandum and Articles, the objects of our Company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Share Capital
The holders of our Class A Ordinary Shares are entitled to one vote for each such share held and shall be entitled to notice of any shareholders’ meeting, and, subject to the terms of 2023 Amended and Restated Memorandum and Articles, to vote thereat.
The holders of our Class B Ordinary Shares are entitled to twenty votes for each such share held and shall be entitled to notice of any shareholders’ meeting, and, subject to the terms of 2023 Amended and Restated Memorandum and Articles, to vote thereat.
Dividends
The holders of our Ordinary Shares are entitled to such dividends as may be declared by our Board of Directors subject to the Companies Law and to our 2023 Amended and Restated Memorandum and Articles.
Voting Rights
In respect of all matters subject to a shareholders’ vote, each Class A Ordinary Share is entitled to one vote and each Class B Ordinary Share is entitled to twenty votes. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded by the chairman or persons holding certain amounts of shares as set forth in the 2023 Amended and Restated Memorandum and Articles. Actions that may be taken at a general meeting also may be taken by a unanimous resolution of the shareholders in writing.
No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business; two members present in person or by proxy shall be a quorum provided always that if the Company has one member of record the quorum shall be that one member present in person or by proxy. An ordinary resolution to be passed at a general meeting requires the affirmative vote of a simple majority of the votes cast.
A special resolution of members is required to change the name of the Company, approve a merger, wind up the Company, amend the 2023 Amended and Restated Memorandum and Articles and reduce the share capital.
Transfer of Ordinary Shares
Subject to the restrictions set out below, any of our shareholders may transfer all or any of his, its or her Ordinary Shares by an instrument of transfer in the usual or common form or any other form approved by our Board of Directors or in a form prescribed by the stock exchange on which our shares are then listed.
Our Board of Directors may, in its sole discretion, decline to register any transfer of Ordinary Shares whether or not it is fully paid up to the total consideration paid for such shares. Our directors may also decline to register any transfer of Ordinary Shares if (a) the instrument of transfer is not accompanied by the certificate covering the shares to which it relates or any other evidence as our Board of Directors may reasonably require to prove the title of the transferor to, or his/her right to transfer the shares; or (b) the instrument of transfer is in respect of more than one class of shares.
If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal.
The registration of transfers may be suspended and the register closed at such times and for such periods as our Board of Directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Winding-Up/Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), a liquidator may be appointed to determine how to distribute the assets among the holders of the Ordinary Shares. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately; a similar basis will be employed if the assets are more than sufficient to repay the whole of the capital at the commencement of the winding up.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our Board of Directors may from time to time make calls upon shareholders for any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares
We may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our Board of Directors.
Inspection of Books and Records
Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of members not being Directors and no member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by Companies Law or authorized by the Directors or by the Company in a general meeting. However, the Directors shall from time to time cause to be prepared and to be laid before the Company in a general meeting, profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by Companies Law. (See “Where You Can Find More Information”)
Issuance of Additional Shares
Our 2023 Amended and Restated Memorandum and Articles authorize our Board of Directors to issue additional Ordinary Shares from time to time as our Board of Directors shall determine, to the extent there are available authorized but unissued shares.
Our 2023 Amended and Restated Memorandum and Articles also authorizes our Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject to compliance with the variation of rights of shares provision in the 2023 Amended and Restated Memorandum and Articles, with respect to any series of preferred shares, the terms and rights of that series, including:
| ● | the designation of the series; | |
| ● | the number of shares of the series; | |
| ● | the dividend rights, dividend rates, conversion rights, voting rights; and | |
| ● | the rights and terms of redemption and liquidation preferences. |
Our Board of Directors may, issue preferred shares without action by our shareholders to the extent there are authorized but unissued shares available.
Anti-Takeover Provisions
Some provisions of our 2023 Amended and Restated Memorandum and Articles may discourage, delay or prevent a change of control of our Company or management that shareholders may consider favorable, including provisions that:
| ● | authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders (subject to variation of rights of shares provisions in our 2023 Amended and Restated Memorandum and Articles); and | |
| ● | limit the ability of shareholders to requisition and convene general meetings of shareholders. Our 2023 Amended and Restated Memorandum and Articles allow our shareholders holding shares representing in aggregate not less than twenty percent of our paid up share capital (as to the total consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. |
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our 2023 Amended and Restated Memorandum and Articles for a proper purpose and for what they believe in good faith to be in the best interests of our Company.
General Meetings of Shareholders and Shareholder Proposals
Our shareholders’ general meetings may be held in such place within or outside the Cayman Islands as our Board of Directors considers appropriate.
As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. The directors may, whenever they think fit, convene an extraordinary general meeting.
Shareholders’ general meetings and any other general meetings of our shareholders may be convened by a majority of our Board of Directors. Our Board of Directors shall give not less than seven days’ written notice of a shareholders’ meeting to those persons whose names appear as members in our register of members on the date the notice is given (or on any other date determined by our directors to be the record date for such meeting) and who are entitled to vote at the meeting.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our 2023 Amended and Restated Memorandum and Articles allow our shareholders holding shares representing in aggregate not less than ten percent of our paid up share capital (as to the total consideration paid for such shares) in issue to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; otherwise, our 2023 Amended and Restated Memorandum and Articles do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.
Exempted Company
We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. A Cayman Islands exempted company:
| ● | is a company that conducts its business mainly outside of the Cayman Islands; | |
| ● | is exempted from certain requirements of the Companies Law, including the filing an annual return of its shareholders with the Registrar of Companies or the Immigration Board; | |
| ● | does not have to make its register of members open for inspection; |
| ● | does not have to hold an annual general meeting; | |
| ● | may issue negotiable or bearer shares or shares with no par value (subject to the provisions of the Companies Law); | |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); and | |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Register of Members
Under Cayman Islands law, we must keep a register of members and there should be entered therein:
| ● | the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member; | |
| ● | the date on which the name of any person was entered on the register as a member; and | |
| ● | the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of members of our Company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Once our register of members has been updated, the shareholders recorded in the register of members are deemed to have legal title to the shares set against their name.
If the name of any person is incorrectly entered in, or omitted from, our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our Company, the person or member aggrieved (or any member of our Company or our Company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s Amended and Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our 2023 Amended and Restated Memorandum and Articles require us to indemnify our officers and directors for actions, proceedings, claims, losses, damages, costs, liabilities and expenses (“Indemnified Losses”) incurred in their capacities as such unless such Indemnified Losses arise from dishonesty of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Material Differences between U.S. Corporate Law and Cayman Islands Corporate Law
The Companies Law is modeled after that of English law but does not follow many recent English law statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements. A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a special resolution of the shareholders and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman Islands parent company and its Cayman Islands subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman Islands subsidiary if a copy of the plan of merger is given to every member of that Cayman Islands subsidiary to be merged unless that member agrees otherwise. For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| ● | the statutory provisions as to the required majority vote have been met; |
| ● | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
| ● | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and |
| ● | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
| ● | a company acts or proposes to act illegally or ultra vires; |
| ● | the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and |
| ● | those who control the company are perpetrating a “fraud on the minority.” |
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s Amended and Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our current 2023 Amended and Restated Memorandum and Articles permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our current 2023 Amended and Restated Memorandum and Articles.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he or she owes the following duties to the company — a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our current 2023 Amended and Restated Memorandum and Articles provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law does not provide shareholders any right to put proposals before a meeting or requisition a general meeting. However, these rights may be provided in articles of association. Our current articles of association allow our shareholders holding not less than one-third of all voting power of our share capital in issue to requisition a shareholder’s meeting. Other than this right to requisition a shareholders’ meeting, our current 2023 Amended and Restated Memorandum and Articles does not provide our shareholders other right to put proposal before a meeting. As a Cayman Islands exempted company, we are not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands, but the 2023 Amended and Restated Memorandum and Articles does not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our current 2023 Amended and Restated Memorandum and Articles, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the Companies Law and the 2023 Amended and Restated Memorandum and Articles, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and the 2023 Amended and Restated Memorandum and Articles, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by not less than three-fourths of such holders of the shares of that class as may be present at a general meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our current 2023 Amended and Restated Memorandum and Articles may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders. There are no limitations imposed by our 2023 Amended and Restated Memorandum and Articles on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our current 2023 Amended and Restated Memorandum and Articles governing the ownership threshold above which shareholder ownership must be disclosed.
Warrants
As of June 30, 2023, we had 3,224,983 warrants issued and outstanding. Our warrants are exercisable to purchase ordinary shares at a weighted average exercise price of $16.75 per share as of June 30, 2023. Our warrants generally have a term of 3 to 5.5 years from the date of issuance.
We may issue warrants to purchase our ordinary shares, preferred shares, debt securities or any combination thereof. Warrants may be issued independently or together with any other securities that may be sold by us pursuant to a prospectus or any combination of the foregoing and may be attached to, or separate from, such securities. To the extent warrants that we issue are to be publicly-traded, each series of such warrants will be issued under a separate warrant agreement to be entered into between us and a warrant agent.
Each warrant will entitle the holder of warrants to purchase the number of ordinary shares, preferred shares or debt securities of the relevant class or series at the exercise price stated or determinable in the prospectus for the warrants. Warrants may be exercised at any time up to the close of business on the expiration date shown in the applicable prospectus, unless otherwise specified in such prospectus. After the close of business on the expiration date, if applicable, unexercised warrants will become void. Warrants may be exercised in the manner described in the applicable prospectus. When the warrant holder makes the payment and properly completes and signs the warrant certificate at the corporate trust office of the warrant agent, if any, or any other office indicated in the prospectus, we will, as soon as possible, forward the securities or other rights that the warrant holder has purchased. If the warrant holder exercises less than all of the warrants represented by the warrant certificate, we will issue a new warrant certificate for the remaining warrants. If we so indicate in the applicable prospectus, holders of the warrants may surrender securities as all or part of the exercise price for warrants.
Prior to the exercise of any warrants to purchase ordinary shares or preferred shares of the relevant class or series, holders of the warrants will not have any of the rights of holders of Ordinary Shares or preferred shares purchasable upon exercise, including the right to vote or to receive any payments of dividends or payments upon our liquidation, dissolution or winding up on the Ordinary Shares or preferred shares purchasable upon exercise, if any.
8
Exhibit 8.1
List of Subsidiaries
| Name | Place of Incorporation | |
| CACM Group NY, Inc. | New York, United States | |
| Color Star Technology Ohio Inc. | Ohio, Untied States | |
| Color Metaverse Pte. Ltd. | Singapore | |
| Color Star DMCC | Dubai | |
| Model Queen Limited | Hong Kong | |
| Hainan Yuhai Entertainment Co. Ltd. | People’s Republic of China |
Exhibit 12.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Louis Luo, certify that:
(1) I have reviewed this annual report on Form 20-F of Color Star Technology Co., Ltd.;
(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 registrant as of, and for, the periods presented in this report;
(4) The registrant’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 registrant 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.
| Date: November 14, 2023 | /s/ Louis Luo |
| Louis Luo | |
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 12.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Lili Jiang, certify that:
(1) I have reviewed this annual report on Form 20-F of Color Star Technology Co., Ltd.;
(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 registrant as of, and for, the periods presented in this report;
(4) The registrant’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 registrant 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.
| Date: November 14, 2023 | /s/ Lili Jiang |
| Lili Jiang | |
| Chief Financial Officer (Principal Financial Officer) |
Exhibit 13.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Color Star Technology Co., Ltd. (the “Registrant”) on Form 20-F for the year ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: November 14, 2023
| /s/ Louis Luo | |
| Louis Luo | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 13.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Color Star Technology Co., Ltd. (the “Registrant”) on Form 20-F for the year ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: November 14, 2023
| /s/ Lili Jiang | |
| Lili Jiang | |
| Chief Financial Officer | |
| (Principal Accounting Officer) |
Exhibit 15.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements on Form F-3 (File No. 333-256508 and 333-272844) and Form S-8 (File No. 333-257918) of our report dated November 14, 2023, relating to the consolidated financial statements of Color Star Technology Co., Ltd. and subsidiaries, which appears in this Annual Report on Form 20-F. Our report contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.
We also consent to the reference to us under the heading “Expert” in such Registration Statements.
Very truly yours,
/s/ AUDIT ALLIANCE LLP
Singapore, November 14, 2023