Color Star Technology(ADD) - 2020 Q4 - Annual Report

PART I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable as per the report - The report states that Item 1, concerning the identity of directors, senior management, and advisers, is not applicable[12] Item 2. Offer Statistics and Expected Timetable This section is not applicable as per the report - The report states that Item 2, concerning offer statistics and the expected timetable, is not applicable[12] Item 3. Key Information This section provides selected financial data and outlines significant risks to the company. Financially, the company reported a net loss of $11.6 million for the fiscal year ended June 30, 2020. Key risks include those related to its new business model in online entertainment and education, the impact of COVID-19, regulatory uncertainties in China, and challenges in maintaining its NASDAQ listing Selected Financial Data The company reported a net loss of $11.6 million in fiscal 2020, an improvement from a $14.4 million net loss in 2019. Total assets decreased significantly to $7.1 million in 2020 from $54.2 million in 2019, primarily due to the disposal of discontinued operations. Total shareholders' equity increased to $6.6 million from $0.5 million over the same period Summary Consolidated Statements of Operations Data (in $) | Indicator | For the Year Ended June 30, 2020 | For the Year Ended June 30, 2019 | For the Year Ended June 30, 2018 | | :--- | :--- | :--- | :--- | | Loss from operations | (5,163,601) | (6,658,029) | (2,307,106) | | Loss from continuing operations | (5,168,642) | (6,659,422) | (2,307,119) | | Loss from discontinued operations | (6,457,955) | (7,729,108) | (5,092,846) | | Net loss | (11,626,597) | (14,388,530) | (7,399,965) | Summary Consolidated Balance Sheet Data (in $) | Indicator | As of June 30, 2020 | As of June 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | 988,696 | 319,514 | | Total assets | 7,119,331 | 54,165,033 | | Total liabilities | (528,833) | (53,644,235) | | Total shareholders' equity | 6,590,498 | 520,798 | Risk Factors The company faces significant risks, including a limited operating history with its new online entertainment and education business model, potential need for additional capital, and adverse effects from the COVID-19 pandemic. It also highlights operational risks such as reliance on the 'Color World' platform, competition, and cybersecurity threats. Regulatory risks in China, particularly concerning licenses for online audio-visual programs, are substantial. Furthermore, ownership risks include potential NASDAQ delisting for failing to meet minimum bid price and stockholder equity requirements, stock price volatility, and implications of being a foreign private issuer - The company transitioned from a concrete business to its current online entertainment and music education model in 2020, resulting in a limited operating history which makes future prospects difficult to evaluate[20] - The COVID-19 pandemic has materially affected operations in both the U.S. and China, causing disruptions and uncertainties that could adversely impact business, financial condition, and results of operations[24][25][26] - The company faces regulatory uncertainty in China regarding the need for a License for Online Transmission of Audio-Visual Programs. As a non-state-owned entity, it is ineligible to apply for such a license, which could lead to penalties if its services are deemed to require one[50][52] - The company has faced non-compliance issues with NASDAQ's minimum bid price and stockholder equity requirements, leading to delisting notices. While compliance was regained at times, the company was under a Panel Monitor and received another non-compliance notice for the bid price requirement in October 2020[93][95][98] - As a foreign private issuer, the company is exempt from certain SEC reporting and governance requirements applicable to U.S. domestic companies, such as filing quarterly reports on Form 10-Q and certain proxy solicitation rules, which may result in less information and protection for investors[116][117][118] Item 4. Information On The Company This section details the company's transformation from a concrete manufacturer to an entertainment and education company. It outlines its history, including key acquisitions and disposals, and describes its current business model centered on the 'Color World' online platform. The company's competitive landscape, growth strategies, operational structure, and the complex regulatory environment in China are also discussed History and Development of the Company Color Star Technology, formerly a concrete business (China Advanced Construction Materials Group), underwent a significant transformation. In 2020, it acquired and then disposed of Sunway Kids (preschool education) and its legacy concrete business (Xin Ao). It then acquired Color China Entertainment in June 2020, pivoting to its current focus on online entertainment and education. The company also changed its name to Color Star Technology and its ticker to 'CSCW' to reflect this new direction - The company disposed of its legacy concrete business, BVI-ACM (and its VIE, Xin Ao), on May 6, 2020, due to deteriorating performance and adverse market conditions in China[130][131] - Acquired Color China Entertainment Limited on June 3, 2020, for 4,633,333 ordinary shares and $2 million, shifting its business focus to online performance and music education[133] - Acquired Sunway Kids in February 2020 but disposed of it on June 25, 2020, as the COVID-19 pandemic prevented normal operations[134] - Changed its name to Color Star Technology Co., Ltd. on April 27, 2020, and its NASDAQ ticker symbol to 'CSCW' on October 1, 2020, to align with its new business focus on the 'Color Star Color World' platform[132][135] Business Overview The company operates as an entertainment and education provider through its 'Color World' online platform, launched in September 2020. This platform offers celebrity-taught courses in music, sports, and culture, along with concert videos and merchandise. It aims to build an entertainment industry chain combining online and offline elements, though offline plans are delayed by COVID-19. The company leverages its management's industry connections to attract international artists and students, positioning itself in the growing online education and 'fan economy' markets - The company launched its online platform 'Color World' on September 10, 2020, which operates in China and features curriculum in music, sports, animation, and more, taught by over 50 contracted celebrity teachers[138] - The 'Color World' platform includes celebrity lectures, concert videos, branded merchandise, and interactive communication, aiming to build a comprehensive cultural and entertainment industry chain[138] - The business model relies on a 'star online + entertainment teaching' concept, differentiating itself from competitors like MasterClass through live interaction and a focus on bridging Asian and Western entertainment markets[146] - The company's growth strategy targets the rapidly expanding online education market (projected to reach over $319 billion by 2025) and the rise of 'fan economies' in Asia[148] Regulations The company's operations in China are subject to a complex web of regulations. Key areas include value-added telecommunications services, which may require an ICP License, and the online transmission of audio-visual programs, which has stringent licensing requirements under SAPPRFT rules that the company may not meet. The company also faces regulations for internet live streaming, production of radio/TV programs, internet culture activities, and online publishing. Furthermore, it must comply with strict laws on internet information security and privacy protection, including the PRC Cyber Security Law - Operations may require a Value-added Telecommunications Business Operating License (VATS License) and an ICP License for commercial internet information services in the PRC[172][173] - The company faces significant regulatory risk regarding the License for Online Transmission of Audio-Visual Programs, as it is generally restricted to state-owned or state-controlled entities. The company believes its educational content does not fall under this requirement but acknowledges the uncertainty[175][52] - Internet live streaming services are regulated by the CAC and SAPPRFT, requiring providers to verify user identities, file with local authorities, and potentially obtain specific licenses for broadcasting certain types of events[180][181] - The company is subject to comprehensive PRC laws on internet security and privacy protection, such as the Cyber Security Law, which mandates user consent for data collection and imposes strict obligations on handling personal information[190][191][194] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance and condition, reflecting its strategic shift to an online entertainment and education business. For fiscal 2020, the company reported a net loss of $11.6 million, a decrease from $14.4 million in 2019, largely due to a gain on the sale of discontinued operations. The company's liquidity has been supported by several equity financings. Management expresses confidence in having sufficient funds for the next twelve months despite the capital-intensive nature of its new business Operating Results For the fiscal year ended June 30, 2020, the company's net loss decreased to $11.6 million from $14.4 million in 2019. The loss from continuing operations was $5.2 million, down from $6.7 million, due to lower SG&A and stock compensation expenses. The loss from discontinued operations decreased to $6.4 million from $7.7 million, primarily because of a $6.6 million gain on the sale of the BVI-ACM concrete business, which offset operational losses and a loss on the sale of Sunway Kids Comparison of Operating Results (FY2020 vs. FY2019) | Item | 2020 ($) | 2019 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Selling, general and administrative expenses | (1,598,984) | (2,065,829) | (466,845) | (23)% | | Stock compensation expense | (3,444,617) | (4,592,200) | (1,147,583) | (25)% | | Loss from continuing operations | (5,168,642) | (6,659,422) | (1,490,780) | (22)% | | Loss from discontinued operations | (6,457,955) | (7,729,108) | (1,271,153) | (16)% | | Net loss | (11,626,597) | (14,388,530) | (2,761,933) | (19)% | - The decrease in loss from discontinued operations was mainly due to a gain on the sale of BVI-ACM of approximately $6.6 million, which was partially offset by a loss on the sale of Sunway Kids of approximately $0.8 million[217] Liquidity and Capital Resources As of June 30, 2020, the company had approximately $1.0 million in cash and cash equivalents and working capital of $2.6 million. Its liquidity has been significantly bolstered by equity financing, raising $4.5 million during fiscal 2020 and an additional $11.8 million subsequent to the fiscal year-end. Net cash used in continuing operating activities was $2.7 million. Management believes these funds are sufficient to meet working capital requirements for the next twelve months - As of June 30, 2020, the company had cash and cash equivalents of approximately $1.0 million and working capital of approximately $2.6 million[226][227] - The company raised approximately $4.5 million from the sale of ordinary shares during the year ended June 30, 2020, and an additional $11.8 million through three more equity financing rounds subsequent to the fiscal year-end[228] Summary of Net Cash Flow (in $) | Activity | For the Year Ended June 30, 2020 | For the Year Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities from continuing operations | (2,738,989) | (1,002,383) | | Net cash used in investing activities from continuing operations | (1,394,728) | - | | Net cash provided by financing activities from continuing operations | 4,802,901 | 950,000 | Item 6. Directors, Senior Management and Employees This section provides details on the company's leadership and governance. As of the report date, Biao (Luke) Lu served as CEO and Chairman. Compensation for executives includes both salary and significant stock-based awards. The board consists of five members, with three independent directors forming the Audit, Compensation, and Nominating Committees. Share ownership information reveals several major shareholders holding over 5% of ordinary shares - Biao (Luke) Lu, an experienced veteran in the Chinese entertainment industry, was appointed CEO and Chairman on July 17, 2020[243][244] Executive Compensation for Fiscal Year 2020 | Name and Principal Position | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Yang (Sean) Liu, VP of Technology (former CEO) | 30,000 | 329,550 | 359,550 | | Lili Jiang, Director and CFO | 30,000 | 308,400 | 338,400 | Major Shareholders (as of Nov 11, 2020) | Name of Beneficial Owners | Shares Beneficially Owned | % Ownership | | :--- | :--- | :--- | | Jie Yang | 3,000,000 | 5.54% | | Hou Sing International Business Limited | 3,825,395 | 7.06% | | Liang Li | 4,170,000 | 7.70% | Item 7. Major Shareholders and Related Party Transactions This section details transactions with related parties. The most significant transaction was the sale of the company's former subsidiary, BVI-ACM, to two former officers, Mr. Xianfu Han and Mr. Weili He, for $600,000 in May 2020. Other transactions include outstanding salary payables to these former officers and loans from a major shareholder, Hou Sing, which were subsequently converted into equity - On May 6, 2020, the Company completed the disposition of its subsidiary BVI-ACM to two former officers, Xianfu Han and Weili He, for cash consideration of $600,000[274] - During fiscal 2020, shareholder Hou Sing lent the company $300,000 for operating expenses, which was later repaid through the issuance of ordinary shares[278] - Debts owed to employees Na Wang and Wei Zhang, totaling approximately $4.3 million, were assumed by shareholder Hou Sing and converted into 2,911,000 ordinary shares in March 2020[523][280] Item 10. Additional Information This section covers corporate and legal matters. As a Cayman Islands exempted company, its governance is dictated by its Memorandum and Articles, which differ from U.S. corporate law, particularly in areas like shareholder rights and merger approvals. The company is not subject to exchange controls in the Cayman Islands but faces significant currency controls in the PRC. Tax considerations highlight the risk of being classified as a PRC resident enterprise and a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, both of which could have adverse consequences for shareholders - The company is a Cayman Islands exempted company, which provides for different corporate governance and shareholder rights compared to a U.S. (Delaware) corporation, particularly regarding shareholder proposals, mergers, and director duties[284][319] - The company is at risk of being classified as a PRC resident enterprise for tax purposes, which could subject its global income to a 25% PRC enterprise income tax and impose withholding taxes on dividends paid to non-PRC shareholders[351] - For U.S. federal income tax purposes, the company may be classified as a Passive Foreign Investment Company (PFIC), which could result in adverse tax consequences for U.S. Holders, including punitive tax rates on certain distributions and gains[365][368][369] PART II Item 15. Controls and Procedures Management concluded that as of June 30, 2020, the company's disclosure controls and procedures were not effective. This was due to material weaknesses in internal control over financial reporting, specifically a lack of personnel with sufficient knowledge of U.S. GAAP and ineffective supervision. The company is developing a remediation plan, which includes establishing an internal audit function or engaging an external firm - Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to material weaknesses in internal control over financial reporting[387] - Identified material weaknesses include: (1) personnel lacking requisite knowledge and training in U.S. GAAP, and (2) ineffective supervision of internal and disclosure controls[387] - Remedial measures being considered include establishing an internal audit function or engaging an external consulting firm to assist with Sarbanes-Oxley compliance and improve internal controls[389] Item 16. Other Information This section covers various governance and compliance topics. The audit committee is composed of three independent directors, with Xiaoyuan Zhang identified as the financial expert. The company has adopted a code of ethics. A change in certifying accountant occurred in October 2018, with Wei, Wei & Co., LLP replacing Friedman LLP. The company also notes it follows its home country (Cayman Islands) corporate governance practices for certain security issuances, which differ from NASDAQ standards for domestic companies - The Board has determined that Xiaoyuan Zhang qualifies as an 'audit committee financial expert' under SEC rules[391] Principal Accountant Fees ($) | Fee Category | Year Ended June 30, 2020 | Year Ended June 30, 2019 | | :--- | :--- | :--- | | Audit fees | 165,000 | 387,529 | | All other fees | 14,500 | 6,000 | | TOTAL | 179,500 | 393,529 | - In October 2018, the company's independent registered public accounting firm, Friedman LLP, resigned and was replaced by Wei, Wei & Co., LLP[397][402] - The company follows its home country (Cayman Islands) practice regarding shareholder approval for certain equity issuances, which is an exemption from NASDAQ Listing Rule 5635 applicable to domestic issuers[404] PART III Item 18. Financial Statements This section contains the audited consolidated financial statements for the fiscal years ended June 30, 2020, 2019, and 2018, and the accompanying notes. Key notes detail the significant business transformation through acquisitions and disposals, including the asset acquisition of Color China and the disposal of the legacy concrete business (BVI-ACM) and the short-lived Sunway Kids venture. The notes also highlight significant subsequent events, including multiple large equity financings and asset purchases after the fiscal year-end, which have substantially impacted the company's capital structure and liquidity - The acquisition of Color China in June 2020 was accounted for as an asset acquisition, as it did not meet the definition of a business. The total consideration was approximately $4.0 million, consisting of shares and cash[439][503] - The disposal of the legacy concrete business (BVI-ACM) on May 6, 2020, resulted in a recognized gain on sale of approximately $6.6 million[446][513] - The disposal of Sunway Kids on June 25, 2020, resulted in a recognized loss on sale of approximately $0.8 million[442][515][516] - Subsequent to June 30, 2020, the company raised significant capital through multiple offerings, including approximately $4.2 million in July 2020 and $6.6 million in September 2020[448][449][577][579] - On August 21, 2020, the company acquired stage performance machinery and equipment for a total price of $6.8 million, paid with $3.0 million in cash and 6,060,318 ordinary shares[450][580]