Color Star Technology(ADD) - 2021 Q4 - Annual Report

Part I Key Information This section presents selected financial data for fiscal years 2019-2021, showing significant FY2021 revenue growth alongside persistent net losses, and outlines substantial risks from limited operating history, platform reliance, regulatory uncertainties, and NASDAQ compliance challenges Selected Financial Data The company reported $6.78 million revenue in FY2021 after a business model shift, yet incurred $9.66 million operating losses, while total assets dramatically increased to $81.08 million Summary Consolidated Statements of Operations Data (in USD) | Indicator | 2021 (USD) | 2020 (USD) | 2019 (USD) | | :--- | :--- | :--- | :--- | | Revenue | 6,783,957 | - | - | | Gross Profit | 2,644,706 | - | - | | Loss from operations | (9,655,606) | (5,163,601) | (6,658,029) | | Net loss | (8,238,513) | (11,626,597) | (14,388,530) | Summary Consolidated Balance Sheet Data (as of June 30, in USD) | Indicator | 2021 (USD) | 2020 (USD) | | :--- | :--- | :--- | | Total current assets | 7,642,627 | 3,160,996 | | Total assets | 81,075,167 | 7,119,331 | | Total liabilities | 4,124,666 | 528,833 | | Total shareholders' equity | 76,950,501 | 6,590,498 | Risk Factors The company faces substantial risks from its recent business model transition, including limited operating history, 'Color World' platform success, regulatory uncertainties in China, and NASDAQ listing non-compliance - The company transitioned from a concrete business to its current online entertainment and education model in 2020, creating a limited operating history which makes future prospects difficult to evaluate[20] - The success of the 'Color World' platform, launched in October 2020, is critical. Failure to innovate, attract 'Star Teachers' and subscribers, or compete effectively could adversely affect results[29][34][37] - The company faces significant regulatory risks in China, including the requirement for a License for Online Transmission of Audio-Visual Programs, for which it is not eligible as a non-state-controlled entity. It also faces evolving cybersecurity laws, such as the PRC Data Security Law and draft amendments to Cybersecurity Review Measures, which could impose new compliance burdens and penalties[48][55][56] - The company has faced non-compliance with NASDAQ's minimum bid price and stockholder equity requirements, receiving multiple notices. Failure to maintain compliance could lead to delisting, which would impair liquidity and the ability to raise capital[96][99][102] - As a foreign private issuer, the company is exempt from certain SEC reporting and governance rules applicable to U.S. domestic companies, such as filing quarterly reports on Form 10-Q and certain proxy solicitation rules, resulting in less information and protection for investors[117][118] Information On The Company Color Star Technology transformed by divesting its concrete business and acquiring Color China, pivoting to online entertainment and education via its 'Color World' platform, facing intense competition and complex PRC regulations History and Development of the Company The company significantly evolved from a concrete business, redomiciling to Cayman Islands, disposing of legacy operations, acquiring Color China for online entertainment, and changing its stock ticker to 'CSCW' - The company completed the disposition of its legacy concrete business, BVI-ACM (and its VIE, Xin Ao), on May 6, 2020, due to deteriorating performance and market conditions in China[127][128] - Acquired Color China Entertainment Limited on June 3, 2020, to become an online performance and music education provider, issuing 4,633,333 ordinary shares and agreeing to pay $2 million[129] - Acquired Sunway Kids in February 2020 but disposed of it in June 2020 due to operational difficulties caused by the COVID-19 pandemic[124][130] - Changed its stock ticker to 'CSCW' on October 1, 2020, to represent 'Color Star Color World,' its new business focus[132] Business Overview Color Star operates the 'Color World' online platform, offering celebrity-led courses, concerts, and NFT products, competing in online education by focusing on 'star online + entertainment teaching' and live interaction - The company's primary business is the 'Color World' online cultural entertainment platform, which offers celebrity-led courses, concert videos, and merchandise[134] - The company plans to create and sell digital arts (NFT) products from artists, offering them exclusively on the Color World platform[135] - The company's competitive strategy focuses on 'star online + entertainment teaching' with live interaction, aiming to connect Western and Asian artists with a global student base[141] - Growth strategy targets the expanding online education market and the 'fan economy' in Asia, leveraging an experienced management team and all-star instructor lineup[142] Operations The company's 'Color World' platform generates revenue from $9.90/month subscriptions with over 500,000 users, hosts online concerts, plans merchandise sales, and relies heavily on a single vendor for 89% of purchases - The 'Color World' platform generates revenue from a $9.90/month subscription fee and had over 500,000 registered users as of the report date[148] - The company has held successful online concerts, including one that attracted over 500,000 viewers and another featuring DJ Steve Aoki[151] - A single vendor accounted for 89% of the company's total purchases for the fiscal year ended June 30, 2021[154] - As of the report date, the company employed 55 full-time and 2 part-time employees[159] Regulations The company's China operations are subject to complex and evolving regulations, including VATS, audio-visual program licensing (for which it is ineligible), internet culture, and stringent data security laws, with potential cybersecurity review for foreign listings - The company's online services may require a Value-added Telecommunications Business Operating License (VATS License) and an ICP License for commercial internet information services in the PRC[161][162] - Providing online audio-visual programs in China requires a specific license that is generally only available to state-owned or state-controlled entities, which the company is not. This poses a significant compliance risk[165] - The company is subject to strict PRC laws on data security and privacy, including the PRC Cyber Security Law and the PRC Data Security Law, which impose obligations on collecting, using, and protecting personal information[51][184] - Draft amendments to the Cybersecurity Review Measures propose that companies holding personal information of more than one million users must file for a cybersecurity review before listing outside China. The company believes it does not currently meet this threshold but acknowledges the uncertainty[48][188] Operating And Financial Review And Prospects FY2021 saw Color Star generate $6.78 million revenue from its new online business, but operating loss widened to $9.66 million due to increased expenses, with liquidity heavily reliant on $67.5 million in equity financing and a $52 million software development prepayment Operating Results FY2021 revenue reached $6.78 million from online subscriptions and concerts, yielding $2.64 million gross profit, but operating loss increased to $9.66 million due to significant increases in SG&A, R&D, and stock compensation expenses FY2021 vs. FY2020 Operating Results (in USD) | Item | FY 2021 (USD) | FY 2020 (USD) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 6,783,957 | - | 6,783,957 | 100% | | Gross Profit | 2,644,706 | - | 2,644,706 | 100% | | SG&A Expenses | (5,664,675) | (1,598,984) | 4,065,691 | 254% | | R&D Expenses | (817,794) | (120,000) | 697,794 | 582% | | Stock Comp. Expense | (5,717,900) | (3,444,617) | 2,273,283 | 66% | | Loss from Operations | (9,655,606) | (5,163,601) | 4,492,005 | 87% | | Net Loss | (8,238,513) | (11,626,597) | (3,388,084) | (29)% | FY2021 Revenue Breakdown (in USD) | Revenue Source | Amount (USD) | | :--- | :--- | | Online music education academy subscription | 4,453,957 | | Online concert subscription | 2,330,000 | | Total Revenue | 6,783,957 | - The increase in SG&A expenses in FY2021 was primarily due to higher salary expenses ($1.3 million), depreciation ($1.5 million), and professional fees ($0.6 million) as the company expanded its new online business[205] Liquidity and Capital Resources As of June 30, 2021, the company held $0.2 million cash, relying on $67.5 million in FY2021 equity financing, with a major $52.0 million prepayment for software development impacting investing activities - As of June 30, 2021, the company had cash and cash equivalents of approximately $0.2 million[220] Summary of Cash Flows (in USD) | Cash Flow Activity | FY 2021 (USD) | FY 2020 (USD) | FY 2019 (USD) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (2,803,980) | (2,738,989) | (1,002,383) | | Net cash used in investing activities | (66,923,243) | (1,394,728) | - | | Net cash provided by financing activities | 67,512,616 | 4,802,901 | 950,000 | - In FY2021, the company raised net proceeds of approximately $62.3 million from sales of ordinary shares and $5.2 million from the exercise of warrants[221] - A major cash outflow in FY2021 was a $52.0 million prepayment to a vendor for the development of augmented reality functions in the Color World App[228] Directors, Senior Management And Employees This section outlines the company's leadership, including CEO Basil Wilson, executive compensation with significant stock awards, the independent board committees, and major shareholder Hou Sing International Business Limited - Key leadership includes Basil Wilson (CEO and Chairman), Lili Jiang (CFO), and Biao Lu (Chief Artistic Officer)[240] FY2021 Compensation for Named Executive Officers (in USD) | Name and Principal Position | Salary (USD) | Stock Awards (USD) | Total (USD) | | :--- | :--- | :--- | :--- | | Basil Wilson, Chairman and CEO | 15,000 | 14,000 | 29,000 | | Lili Jiang, CFO | 180,000 | 308,400 | 488,400 | | Biao Lu, Chief Artistic Officer | 198,000 | 509,917 | 707,917 | - The Board's Audit, Compensation, and Nominating committees are each composed of the three independent directors: Long Yi, Hung-Jen Kuo, and Yingxian Xiang[259][262] - As of October 27, 2021, Hou Sing International Business Limited was the only major shareholder with 5.47% ownership. All directors and officers as a group beneficially owned less than 1% of outstanding shares[265][266] Major Shareholders And Related Party Transactions Major shareholder information is in Item 6.E; significant related party transactions include the $600,000 disposition of BVI-ACM to former officers and Hou Sing's $300,000 loan and $4.3 million debt settlement for shares - The company sold its subsidiary BVI-ACM to two former officers, Xianfu Han and Weili He, for $600,000. The transaction was completed on May 6, 2020[269] - During FY2020, shareholder Hou Sing lent the company $300,000 for operating expenses, which was subsequently repaid with ordinary shares[272] - Shareholder Hou Sing settled a debt of approximately $4.3 million owed by the company's former entity to employees and received 2,911,000 ordinary shares in exchange[273] Additional Information This section details the company's Cayman Islands corporate structure, including 200 million authorized shares and anti-takeover provisions, outlines differences in corporate law, and addresses PRC exchange controls and U.S. tax risks like PRC resident enterprise and PFIC classification - The company is a Cayman Islands exempted company. Its authorized share capital is $200,000 divided into 200,000,000 ordinary shares with a par value of $0.001 each[280] - The company's articles contain anti-takeover provisions, such as authorizing the Board to issue preferred shares without shareholder approval[295] - There is a risk that the company could be classified as a 'PRC resident enterprise' for tax purposes, which could subject it to a 25% tax on worldwide income and impose withholding taxes on dividends paid to non-PRC shareholders[335] - The company may be considered a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which would result in adverse tax consequences for U.S. Holders of its shares, such as special tax rules on 'excess distributions' and gains from sale[349][352] Part II Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2021, due to material weaknesses in internal control over financial reporting, including insufficient U.S. GAAP knowledge and ineffective supervision, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021[368] - Material weaknesses in internal control over financial reporting were identified, including: - Personnel lacking requisite knowledge and training in U.S. GAAP - Ineffective supervision of the company's internal and disclosure controls[368] - Remediation plans include establishing an internal audit function or engaging an external consulting firm to assist with Sarbanes-Oxley compliance and improve internal controls[368] Corporate Governance and Other Matters This section details corporate governance, including Long Yi's qualification as an audit committee financial expert, the adoption of a Code of Conduct, the auditor change to Audit Alliance LLP, and the company's adherence to Cayman Islands home country practice as a foreign private issuer - The board has determined that Long Yi is an 'audit committee financial expert' as defined by SEC rules[371] Principal Accountant Fees (in USD) | Fee Category | Year Ended June 30, 2021 (USD) | Year Ended June 30, 2020 (USD) | | :--- | :--- | :--- | | Audit fees | 155,000 | 165,000 | | All other fees | 20,279 | 14,500 | | TOTAL | 175,279 | 179,500 | - On April 7, 2021, the company dismissed its independent registered public accounting firm, Wei, Wei & Co., LLP, and engaged Audit Alliance LLP[377][379] - As a foreign private issuer, the company follows Cayman Islands home country practice, which exempts it from certain NASDAQ shareholder approval rules for equity issuances, such as those involving 20% or more of the company's stock[381] Part III Financial Statements This section presents audited consolidated financial statements for FY2019-2021, with Audit Alliance LLP identifying long-lived asset valuation as a critical audit matter, detailing the company's transition, significant asset growth to $81.1 million, reliance on equity financing, and material internal control weaknesses Report of Independent Registered Public Accounting Firm Audit Alliance LLP issued an unqualified opinion on FY2021 financial statements, identifying 'Valuation of long-lived assets' ($9 million PPE, $12 million intangibles) as a Critical Audit Matter due to estimation complexity from the new business model - The auditor, Audit Alliance LLP, issued an unqualified opinion on the FY2021 financial statements[399] - A Critical Audit Matter was identified regarding the valuation of long-lived assets (property, plant, and equipment of $9 million and intangible assets of $12 million), due to significant management judgment and estimation uncertainty in forecasting future revenues and discount rates for the new business model[402] Consolidated Financial Statements The June 30, 2021, consolidated balance sheet shows total assets surged to $81.1 million from $7.1 million in 2020, driven by a $52 million prepayment, while FY2021 operations reported $6.8 million revenue and an $8.2 million net loss Consolidated Balance Sheet Highlights (as of June 30, in USD) | Account | 2021 (USD) | 2020 (USD) | | :--- | :--- | :--- | | Cash and cash equivalents | 174,189 | 988,696 | | Total current assets | 7,642,627 | 3,160,996 | | Prepayments, non-current | 52,000,000 | - | | Property, plant and equipment, net | 9,160,214 | 3,958,335 | | Intangible assets, net | 12,272,326 | - | | Total assets | 81,075,167 | 7,119,331 | | Total liabilities | 4,124,666 | 528,833 | | Total shareholders' equity | 76,950,501 | 6,590,498 | Consolidated Statement of Operations Highlights (Year ended June 30, in USD) | Account | 2021 (USD) | 2020 (USD) | 2019 (USD) | | :--- | :--- | :--- | :--- | | Revenue | 6,783,957 | - | - | | Gross Profit | 2,644,706 | - | - | | Loss from Continuing Operations | (9,638,613) | (5,168,642) | (6,659,422) | | Gain/(Loss) from Discontinued Operations | 1,400,100 | (6,457,955) | (7,729,108) | | Net Loss | (8,238,513) | (11,626,597) | (14,388,530) | Notes to the Consolidated Financial Statements The notes detail the company's transformation, including discontinued operations, new revenue recognition from online services, reliance on $67 million in equity financing, a $76.5 million software development commitment with $52 million prepaid, and significant NOLs with full valuation allowances - The company's business now consists of online entertainment and education services through its subsidiary Color China, following the disposition of its legacy concrete business (BVI-ACM) and the Sunway Kids education unit in 2020[427][438][439] - Revenue is generated from online education academy subscriptions (recognized ratably over the membership period) and online concerts (recognized at a point in time on the day of the event)[457][460] - The company entered into a software development agreement for its Color World platform for a total consideration of $76.5 million and has made prepayments of $52 million as of the report date[444] - In FY2021, the company raised approximately $62.3 million from the sale of 57.3 million ordinary shares and approximately $5.2 million from the exercise of 13.7 million warrants[443][564] - The company has significant net operating loss carryforwards in the U.S. ($0.9 million) and Hong Kong ($0.6 million) but has recorded a full valuation allowance against the related deferred tax assets due to uncertainty of realization[530][531]