Color Star Technology(ADD) - 2022 Q4 - Annual Report

PART I Key Information The company faces significant risks from its new metaverse business model, operational execution, and historical stock volatility Risk Factors Key risks include challenges with the new metaverse business model, reliance on the 'Color World' platform, and historical Nasdaq non-compliance - The company has a limited operating history with its current business model, having transitioned from a concrete business in 2020 and pivoting to a metaverse focus in January 2022, making future prospects difficult to predict[25] - The success of the business is heavily dependent on the 'Color World' metaverse platform, and failure to operate it as planned, gain user acceptance, or compete effectively could materially harm the business[32] - The company has a history of non-compliance with Nasdaq's listing requirements, including the minimum bid price and stockholders' equity rules, and failure to maintain compliance could lead to delisting[82][87][88] - The company's operations in China expose it to significant regulatory risks, including complex and evolving licensing for online audio-visual programs and data protection laws[50][52][54] - As a foreign private issuer, the company is exempt from certain SEC reporting and governance requirements applicable to U.S. domestic companies, which may result in less information for investors[104][105] Information on The Company The company has transformed from a concrete business into an entertainment technology firm centered on its 'Color World' metaverse platform History and Development of the Company The company's history details its pivot from concrete to entertainment tech, including name changes and a reverse stock split - The company transitioned from a concrete business to an entertainment technology company, marked by the disposition of its concrete subsidiary in May 2020 and the acquisition of Color China Entertainment in June 2020[113][114][115] - In January 2022, the 'Color World' platform was transformed into a metaverse with 'artificial intelligence + celebrity entertainment' as its core features[138] - The company completed a 40-for-1 reverse share split on September 26, 2022, to regain compliance with Nasdaq's minimum bid price requirement[135] - The company changed its stock ticker symbol from 'CSCW' to 'ADD' effective November 1, 2022[136] Business Overview The business centers on the 'Color World' metaverse platform, which generates revenue from user fees amid intense market competition - The core business is the 'Color World' online platform, which transformed in January 2022 into a metaverse centered on 'artificial intelligence + celebrity entertainment'[138] - Revenue is generated primarily through paid fees on the Color World platform, which had over 300,000 registered users as of the report date[146] - The company faces significant competition in the highly fragmented entertainment industry and the rapidly evolving metaverse market from established players with greater resources[140][141] - Operations are subject to extensive regulations in China and Singapore, covering areas like online audio-visual program transmission, data privacy, and internet content[161][165][204] Organizational Structure The company's corporate structure consists of the parent entity and its wholly-owned subsidiaries - The company's organizational structure is presented in a chart within the report[232] Property, Plants and Equipment The company's principal executive offices are located in leased space in New York City - The company's principal executive offices are leased in New York at 7 World Trade Center under a one-year lease ending June 30, 2023[233] Operating and Financial Review and Prospects A surge in R&D spending drove a significant net loss in FY2022, raising substantial doubt about its going concern status Operating Results Revenue grew significantly in FY2022, but a massive increase in R&D expenses led to a substantially wider net loss Fiscal Year 2022 vs 2021 Operating Results | | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $16,519,081 | $6,783,957 | $9,735,124 | 144% | | Gross Profit | $7,972,241 | $2,644,706 | $5,327,535 | 201% | | Research and development expenses | ($68,275,869) | ($817,794) | $67,458,075 | 8,249% | | Loss from operations | ($78,898,070) | ($9,655,606) | $69,242,464 | 717% | | Net loss | ($77,208,118) | ($8,238,513) | $68,969,605 | 837% | - Revenue from the online music education academy subscription increased by 271% to $16.5 million in FY2022, up from $4.5 million in FY2021[247] - Research and development expenses skyrocketed to $68.3 million in FY2022 from $0.8 million in FY2021, primarily for the development of augmented reality functions in the Color World App[251] Liquidity and Capital Resources The company has a precarious liquidity position and is highly dependent on equity financing to fund its significant operating losses - Management has determined that recurring operating losses, negative cash flows, and an accumulated deficit of $147.4 million raise substantial doubt about the company's ability to continue as a going concern[278][535] - The company is heavily reliant on external funding, having raised net proceeds of approximately $43.9 million from equity financing in FY2022 and an additional $5.6 million in September 2022[277][279] Summary of Cash Flows | | For the Year Ended June 30, 2022 | For the Year Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($29,403,078) | ($2,803,980) | | Net cash used in investing activities | ($14,219,652) | ($66,923,243) | | Net cash provided by financing activities | $44,320,854 | $67,512,616 | Research and Development, Patents and Licenses, etc. R&D spending increased dramatically in FY2022 to develop augmented reality functions for the Color World App - R&D spending was approximately $68.3 million for the year ended June 30, 2022, focused on developing augmented reality functions in the Color World App[293] - As of June 30, 2022, the company held copyrights with a net book value of approximately $25.6 million[294] Critical Accounting Estimates Critical accounting estimates involve the valuation of long-lived assets, stock-based compensation, and deferred tax assets - Key critical accounting estimates include the impairment of long-lived assets, fair value of stock-based compensation, and valuation of deferred tax assets[297] - Long-lived assets are reviewed for impairment when events indicate their carrying value may not be recoverable, based on undiscounted cash flow analysis[299] - Stock-based compensation is measured at fair value on the grant date, requiring management to make assumptions about stock volatility, expected life, and interest rates[302] Directors, Senior Management and Employees This section details executive leadership, compensation, board committee structure, and minimal insider share ownership Compensation Executive compensation in FY2022 comprised salaries and significant stock awards for key officers and fees for directors Executive Compensation for Fiscal Year Ended June 30, 2022 | Name and Principal Position | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Wei Zhang, Chairman | 169,591 | 26,700 | 196,291 | | Lili Jiang, CFO | 180,000 | 238,140 | 418,140 | | Lucas Capetian, Former CEO | 61,905 | 45,900 | 107,805 | | Biao Lu, Chief Artistic Officer | 120,000 | 209,183 | 329,183 | Board Practices The board's three independent committees—Audit, Compensation, and Governance—are all composed of the same three directors - The company has an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee[323] - All three board committees consist of the same three independent directors: Ahmad Khalfan Ahmad Saeed Almansoori, Hung-Jen Kuo, and Long Yi[324][327] Share Ownership Share ownership by directors and executives is minimal, with one principal shareholder holding over 9% of shares - As of November 11, 2022, all directors and officers as a group beneficially owned 0.26% of the company's ordinary shares[333] - Hou Sing International Business Limited is the largest shareholder, with 9.13% beneficial ownership[333] Major Shareholders and Related Party Transactions The company's primary major shareholder is Hou Sing International, with related party transactions consisting mainly of interest-free loans Other Payables – Related Parties as of June 30, 2022 | Name of Related Party | Relationship | Nature | Amount ($) | | :--- | :--- | :--- | :--- | | Weili He | Former CFO | Salary Payable | 10,711 | | Hui Xu | General Manager of CACM | Interest-free loan, due on demand | 350,000 | | Jehan Zeb Khan | Director and Former Co-Acting CEO | Interest-free loan, due on demand | 2,173 | | Total | | | 362,884 | Financial Information The company has never paid dividends and intends to retain all future earnings to finance operations - The company has never declared or paid dividends and does not anticipate paying any in the foreseeable future[339] Additional Information The company is governed by Cayman Islands law and warns U.S. investors of potential adverse tax consequences from its PFIC status - The company is a Cayman Islands exempted company, governed by its Memorandum and Articles of Association and Cayman Islands law, which differs from U.S. corporate law[349][381] - As of November 11, 2022, the authorized share capital is US$32,000,000 divided into 800,000,000 ordinary shares with a par value of US$0.04 each[350] - The company warns that it may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. Holders of its shares[425] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include significant liquidity risk, inflation risk, and interest rate risk - The company is exposed to significant liquidity risk, defined as the risk of being unable to provide sufficient capital to meet commitments and business needs[441] PART II Controls And Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control - Management concluded that as of June 30, 2022, the company's disclosure controls and procedures were not effective[454] - Material weaknesses were identified in internal control over financial reporting, including: (1) personnel lacking requisite knowledge of U.S. GAAP, and (2) ineffective supervision of controls[456] Other Information (Items 16A-16I) This section covers governance topics including the audit committee financial expert, accountant fees, and a change in auditors - The board has identified Long Yi as the audit committee financial expert[458] Principal Accountant Fees | Fee Category | Year Ended June 30, 2022 | Year Ended June 30, 2021 | | :--- | :--- | :--- | | Audit fees | $205,700 | $155,000 | | All other fees | $18,760 | $20,279 | | Total | $224,460 | $175,279 | - On April 7, 2021, the company dismissed Wei, Wei & Co., LLP and appointed Audit Alliance LLP as its new independent registered public accounting firm[465][468] PART III Financial Statements The audited financial statements include a going concern uncertainty warning from the auditor due to recurring losses - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern due to recurring operating losses, negative cash flows, and an accumulated deficit[493][499] - Critical Audit Matters identified by the auditor include the going concern evaluation and the impairment assessment on intangible assets, which were valued at $25.6 million[497][501] Consolidated Balance Sheet Highlights (as of June 30) | | 2022 | 2021 | | :--- | :--- | :--- | | Total current assets | $27,866,008 | $7,642,627 | | Total assets | $53,463,194 | $81,075,167 | | Total current liabilities | $5,019,430 | $4,124,666 | | Total shareholders' equity | $48,443,764 | $76,950,501 | Consolidated Statement of Operations Highlights (Year Ended June 30) | | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $16,519,081 | $6,783,957 | | Gross Profit | $7,972,241 | $2,644,706 | | Loss from Operations | ($78,898,070) | ($9,655,606) | | Net Loss | ($77,208,118) | ($8,238,513) | | Loss per share (basic & diluted) | ($19.90) | ($4.84) | Exhibits This section lists all exhibits filed with the report, including governance documents and material contracts