AUC 10-Q
ATIF Holdings Ltd (AUC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ___________ to _____________
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
| (State of Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (ZIP Code) |
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
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. ☒ ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be 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). ☒ ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ YES
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of June 13, 2023, there were
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and our interpretation of what we believe to be significant factors affecting our business, including many assumptions about future events. Such forward-looking statements include statements regarding, among other things:
| ● | our ability to produce, market and generate sales of our services; |
| ● | our ability to develop and/or introduce new products and services; |
| ● | our projected future sales, profitability and other financial metrics; |
| ● | our future financing plans; |
| ● | our anticipated needs for working capital; |
| ● | the anticipated trends in our industry; |
| ● | our ability to expand our sales and marketing capability; |
| ● | acquisitions of other companies or assets that we might undertake in the future; |
| ● | competition existing today or that will likely arise in the future; and |
| ● | other factors discussed elsewhere herein. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations. These statements may be found under Part I, Item 2-“Management’s Discussion And Analysis Of Financial Condition And Results Of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q.
In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur.
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Such statements are presented only as a guide about future possibilities and do not represent assured events, and we anticipate that subsequent events and developments will cause our views to change. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and potential investors are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.
Potential investors should not make an investment decision based solely on our projections, estimates or expectations.
ii
PART I
FINANCIAL INFORMATION
ATIF HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts receivable – a related party | ||||||||
| Deposits | ||||||||
| Investment in trading securities | ||||||||
| Due from a related party | ||||||||
| Due from buyers of Leaping Group Corporation (“LGC”) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Long-term investment | - | |||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right-of- use assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Deferred revenue | ||||||||
| Taxes payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, noncurrent | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments | ||||||||
| EQUITY | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserve | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total ATIF Holdings Limited Stockholders’ equity | ||||||||
| Noncontrolling interest | ( | ) | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
ATIF HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
| For the Three Months Ended April 30, | For the nine months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Income (loss) from investment in trading securities | ( | ) | ||||||||||||||
| Gain from disposal of subsidiaries | ||||||||||||||||
| Total other income (expenses), net | ( | ) | ||||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax provision | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||
| Less: Net income (loss) attributable to non-controlling interests | ( | ) | ||||||||||||||
| Net (loss) income attributable to ATIF Holdings Limited | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Total foreign currency translation adjustment | ||||||||||||||||
| Comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Less: comprehensive income (loss) attributable to non-controlling interests | ( | ) | ||||||||||||||
| Comprehensive (loss) income attributable to ATIF Holdings Limited | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Weighted Average Shares Outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ATIF HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2023 AND 2022
For the Three Months Ended April 30, 2023 and 2022
| Ordinary Share | Additional Paid in | Statutory | Accumulated | Accumulated Other Comprehensive | Noncontrolling | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | deficit | Loss | interests | Total | |||||||||||||||||||||||||
| Balance at January 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Withdrawal of capital from a subsidiary | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Appropriation of investment gain to the limited partner of ATIF LP | - | |||||||||||||||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at April 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Balance at January 31, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
For the nine months Ended April 30, 2023 and 2022
| Ordinary Share | Additional Paid in | Statutory | Accumulated | Accumulated Other Comprehensive | Noncontrolling | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | deficit | Loss | interests | Total | |||||||||||||||||||||||||
| Balance at July 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Issuance of ordinary shares pursuant to exercise of warrants | ||||||||||||||||||||||||||||||||
| Issuance of ordinary shares as fractional shares of reverse stock split | ( | ) | ||||||||||||||||||||||||||||||
| Withdrawal of capital from a subsidiary | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Appropriation of investment gain to the limited partner of ATIF LP | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at April 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Balance at July 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Reclassification of accumulated other comprehensive loss | - | ( | ) | |||||||||||||||||||||||||||||
| Disposal of a subsidiary | - | ( | ) | |||||||||||||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||||||||||
| Balance at April 30, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ATIF HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the nine months Ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| (unaudited) | (unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | |||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision of doubtful debts | ||||||||
| Amortization of right-of-use assets | ||||||||
| Loss from disposal of property and equipment | - | |||||||
| Loss from disposal of a subsidiary | - | |||||||
| (Gain) loss from investment in trading securities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Deposits | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Taxes payable | ||||||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Investment in trading securities | ( | ) | ( | ) | ||||
| Release of investment in equity investees | ||||||||
| Loans made to a related party | ( | ) | ||||||
| Collection of borrowings from a related party | ||||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Withdrawal of capital from a subsidiary | ( | ) | ||||||
| Payment of investment gains to the limited partner of ATIF LP | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest expenses | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of Non-cash investing and financing activities of discontinued operations | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
ATIF Holdings Limited (“ATIF” or the “Company”), formerly known as Eternal Fairy International Limited and Asia Times Holdings Limited, was incorporated under the laws of the British Virgin Islands (“BVI”) on January 5, 2015, as a holding company to develop business opportunities in the People’s Republic of China (the “PRC” or “China”). The Company adopted its current name on March 7, 2019.
On October 6 and October 7, 2022, ATIF Inc., a wholly owned subsidiary of ATIF, established ATIF Business Consulting LLC (“ATIF BC”) and ATIF Business Management LLC (“ATIF BM”) under the laws of the State of California of the United States, respectively. On April 25, 2022, the Company established ATIF Investment Limited (“ATIF Investment”) under the laws of BVI. On December 22, 2021, ATIF Inc. established ATIF BD LLC (“ATIF BD”) under the laws of California of the United States.
On August 1, 2022, the Company entered into a
sales agreement with a third party, pursuant to which the Company sold all of its equity interest in ATIF GP at the cost of $
As of April 30, 2023, the Company’s unaudited condensed consolidated financial statements reflect the operating results of the following entities:
| Name of Entity | Date of Incorporation |
Place of Incorporation |
% of Ownership |
Principal Activities | |||||||||
| Parent company: | |||||||||||||
| ATIF Holdings Limited (“ATIF”) | |||||||||||||
| Wholly owned subsidiaries of ATIF | |||||||||||||
| ATIF Inc. (“ATIF USA”) | |||||||||||||
| ATIF Investment LLC (“ATIF Investment”) | |||||||||||||
| ATIF BD | |||||||||||||
| ATIF BC | |||||||||||||
| ATIF BM |
5
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LIQUIDITY and GOING CONCERN
For the three and nine months ended April 30, 2023, the Company reported a net loss of $
In assessing the Company’s ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments.
As of April 30, 2023, the Company had cash of $
Currently, the Company intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from equity financings.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
6
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The interim unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
The unaudited condensed consolidated balance sheets as of April 30, 2023 and for the unaudited condensed consolidated statement of operations and comprehensive loss for the three and nine months ended April 30, 2023 and 2022 have been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended July 31, 2022, which was filed with the SEC on November 2, 2022.
In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are necessary for a fair presentation of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s unaudited condensed consolidated financial statements for the year ended July 31, 2022. The results of operations for the three and nine months ended April 30, 2023 and 2022 are not necessarily indicative of the results for the full years.
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
Noncontrolling Interests
As of July 31, 2022, the non-controlling interest
represent minority shareholders’
On August 1, 2022, the Company entered into a
sales agreement with a third party, pursuant to which the Company sold all of its equity interest in ATIF GP for $
Use of Estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities and realization of deferred tax assets. Actual results could differ from those estimates.
7
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. | |
| ● | Level 3 – inputs to the valuation methodology are unobservable. |
Fair value of investment in trading securities are based on quoted prices in active markets. The carrying amounts of the Company’s other financial instruments including cash and cash equivalents, accounts receivable, deposits, due from a related party, due from buyers of LGC and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their fair values because of the short-term nature of these assets and liabilities. For lease liabilities, fair value approximates their carrying value at the year-end as the interest rates used to discount the host contracts approximate market rates.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 Revenue from Contracts with Customers (“ASC 606”).
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (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 Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange.
The Company currently generates its revenue from the following main sources:
| (1) | Revenue from customer’s initial registration fee |
In order to engage with the Company for various consulting services, a new customer is required to pay an initial non-refundable registration fee to the Company and the Company will then post the customer’s information and profiles on its website, at which point, the Company’s performance obligations are satisfied and such registration fee is recognized as revenue. The Company does not charge additional customer profile maintenance fee after the initial posting is completed as limited effort is required for the Company to maintain such information on an on-going basis. No revenues were generated from customer’s initial registration for the three and nine months ended April 30, 2023 and 2022.
8
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
| (2) | Revenue from consulting services |
The Company provides various consulting services to its customers, especially to those who have the intention to be publicly listed in the stock exchanges in the United States and other countries. The Company categorizes its consulting services into three Phases:
Phase I consulting services primarily include due diligence review, market research and feasibility study, business plan drafting, accounting record review, and business analysis and recommendations. Management estimates that Phase I normally takes about three months to complete based on its past experience.
Phase II consulting services primarily include reorganization, pre-listing education and tutoring, talent search, legal and audit firm recommendation and coordination, VIE contracts and other public-listing related documents review, merger and acquisition planning, investor referral and pre-listing equity financing source identification and recommendations, and independent directors and audit committee candidate’s recommendation. Management estimates that Phase II normally takes about eight months to complete based on its past experience.
Phase III consulting services primarily include shell company identification and recommendation for customers expecting to become publicly listed through reverse merger transaction; assistance in preparation of customers’ public filings for IPO or reverse merger transactions; and assistance in answering comments and questions received from regulatory agencies. Management believes it is very difficult to estimate the timing of this phase of service as the completion of Phase III services is not within the Company’s control.
Each phase of consulting services is stand-alone and fees associated with each phase are clearly identified in service agreements. Revenue from providing Phase I and Phase II consulting services to customers is recognized ratably over the estimated completion period of each phase as the Company’s performance obligations related to these services are carried out over the whole duration of each Phase. Revenue from providing Phase III consulting services to customers is recognized upon completion of the reverse merger transaction or IPO transaction when the Company’s promised services are rendered and the Company’s performance obligations are satisfied. Revenue that has been billed and not yet recognized is reflected as deferred revenue on the balance sheet.
Depending on the complexity of the underlying service arrangement and related terms and conditions, significant judgments, assumptions, and estimates may be required to determine when substantial delivery of contract elements has occurred, whether any significant ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, adjustment may be made to the judgments, assumptions, and estimates regarding contracts executed in any specific period.
The Company recognized revenues from consulting
services of $
9
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized only if
it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest
amount of tax benefit that is greater than
Foreign Currency Translation
The functional currency for ATIF is the U.S Dollar (“US$”). ATIF HK uses Hong Kong dollar as its functional currency, and Huaya uses RMB as its functional currency. For the three and nine months ended April 30, 2022, the Company primarily operates its business through ATIF Inc, ATIF HK and Huaya, and the latter two entities were disposed of on May 31, 2022. For the three and nine months ended April 30, 2023, the Company operates its business through ATIF Inc.
The Company’s unaudited condensed consolidated financial statements have been translated into US$.
Assets and liabilities accounts are translated using the exchange rate at each reporting period end date. Equity accounts are translated at historical rates. Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income (loss). Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
The following table outlines the currency exchange rates that were used in creating the unaudited condensed consolidated financial statements as of and for the nine months ended April 30, 2023 in this report:
| April 30, 2023 | ||||||||
| Foreign currency | Period-end spot rate | Average rate | ||||||
| RMB: 1USD | ||||||||
| HKD: 1USD | ||||||||
Segment reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s CODM is Mr. Liu, the Chairman of the Board of Directors and CEO.
The Company’s organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but not limited to, customer base, homogeneity of service and technology. The Company’s operating segments are based on such organizational structure and information reviewed by the CODM to evaluate the operating segment results. Based on management’s assessment, the management has determined that the Company now operates in one operating segment with one reporting segment as of April 30, 2023 and July 31, 2022, which is the consulting service business.
10
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainty
| (a) | Credit risk |
Financial instruments that potentially subject
the Company to significant concentration of credit risk primarily cash, accounts receivables and due from buyers of LGC. The carrying
amounts of cash represent the maximum exposure to credit risk. As of April 30, 2023 and July 31, 2022, the Company had cash of $
Accounts receivable are typically unsecured and denominated in USD, derived from revenue earned from customers, which are exposed to credit risk. The risk is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances. Refer to major customers and supplying channels below for detail.
The balance of due from buyers of LGC are unsecured and dominated in USD, derived from sales of equity interest in LGC (Note 4) to three buyers which are exposed to credit risk. The risk is mitigated by credit evaluations the Company performs on these buyers and its ongoing monitoring process of outstanding balances.
| (b) | Concentration risk |
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
The Company has a concentration of its revenues
and receivables with specific customers. For the three months ended April 30, 2023,
For the nine months ended April 30, 2023,
As of April 30, 2023,
For the three and nine months ended April 30, 2023 and 2022, substantially all of the Company’s revenues was generated from providing going public related consulting services to customers. The risk is mitigated by the Company’s plan to transition its consulting services from the PRC based customers to more international customers.
| (c) | Other risks and uncertainties |
The Company’s business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations.
The Company’s operations have been affected by the outbreak and spread of the coronavirus disease 2019 (COVID-19), which in March 2020, was declared a pandemic by the World Health Organization. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses. The Company’s businesses have been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent. Some of the Company’s existing customers have experienced financial distress and disruption of business, which resulted in delay or default on their payments.
Nevertheless, the continued uncertainties associated with COVID 19 may cause the Company’s revenue and cash flows to underperform in the next 12 months. A resurgence could negatively affect the execution of the going public consulting service agreements and the collection of the payments from customers. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the financial statement reporting date.
11
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DUE FROM BUYERS OF LEAPING GROUP CORPORATION (“LGC”)
On January 29, 2021, the Company completed a disposition
of
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Principal | $ | $ | ||||||
| Interest | ||||||||
| Total | $ | $ | ||||||
As of the date of this report, the buyers delayed in repayments of outstanding balances to the Company as they were affected by the COVID-19. Assessing the payment ability and payment intension of these buyers, the Company expected to collect the outstanding balances in the next twelve months. However the Company did not accrue interest income for the nine months ended April 30, 2023 until it collected the amount.
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Prepayment for advertising service fee (a) | $ | $ | ||||||
| Due from the buyer of ATIF GP | ||||||||
| Advance to vendors | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| (a) |
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Furniture, fixtures and equipment | $ | $ | ||||||
| Vehicles | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense was $
12
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – INTANGIBLE ASSETS
Net intangible assets consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Financial and news platform | $ | $ | ||||||
| Software | ||||||||
| Total | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets | $ | $ | ||||||
Amortization expense was $
NOTE 8 – INVESTMENTS IN TRADING SECURITIES
As of April 30, 2023 and July 31, 2022, the balance
of investments in trading securities represented certain equity securities of listed companies purchased through various open market transactions
by the Company during the relevant periods. The investments are initially recorded at cost, and subsequently measured at fair value with
the changes in fair value recorded in other income (expenses), net in the unaudited condensed consolidated statement of operations and
comprehensive income (loss). For the three months ended April 30, 2023 and 2022, the Company recorded an increase in fair value of $
Investments in trading securities consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Trading securities invested by ATIF | $ | $ | ||||||
| Trading securities invested by ATIF LP | ||||||||
| $ | $ | |||||||
13
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LONG-TERM INVESTMENT
As of April 30, 2022 and July 31, 2022, the long-term investment represented equity investment without readily determinable fair value measured at measurement alternative and consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Solarever Tecnologia de America S.A. de C.V. (“Solarever”) (a) | $ | $ | ||||||
| Armstrong Logistic Inc. (“Armstrong”) (b) | ||||||||
| $ | $ | |||||||
| (a) | In April 2022, ATIF Investment entered into an equity investment agreement with Solarever, pursuant to which the Company would make investment of $
During the nine months ended April 30, 2023, the Company determined to focus on financial consulting services to its customers and sold the long-term investment to a third party investment company at cost. In return, the Company provided financial consulting services to the investment company for going public of Solarever.
As of April 30, 2023, the Company had no investment in Solarever. |
| (b) | In May 2022, ATIF Investment entered into an equity investment agreement with Armstrong, pursuant to which the Company would make investment of $
During the nine months ended April 30, 2023, the Company determined to focus on financial consulting services to its customers and sold the long-term investment to a third party investment company at cost. In return, the Company provided financial consulting services to the investment company for going public of Armstrong.
As of April 30, 2023, the Company had no investment in Armstrong. |
14
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – OPERATING LEASES
The Company leases offices space under non-cancelable operating leases, with lease terms ranging between 14 months to 60 months. Commencing in August 2022, the Company also subleased one of its office space in Irvine, California under a non-cancellable operating lease that expires in March 2024. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For the three and nine months ended April 2023 and 2022, the lease costs were comprised of the following:
| For the Three Months Ended April 30, | For the nine months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Operating lease expenses | $ | $ | $ | $ | ||||||||||||
| Sublease income | ( | ) | ( | ) | ||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
Effective August 1, 2019, the Company adopted the new lease accounting standard using a modified retrospective transition method, which allows the Company not to recast comparative periods presented in its consolidated financial statements. In addition, the Company elected the package of practical expedients, which allows the Company to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company combines the lease and non-lease components in determining the ROU assets and related lease obligation. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities as disclosed below. ROU assets and related lease obligations are recognized at commencement date based on the present value of remaining lease payments over the lease term.
The following table presents the operating lease related assets and liabilities recorded on the unaudited condensed consolidated balance sheets as of April 30, 2023 and July 31, 2022.
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Right-of- use assets, net | $ | $ | ||||||
| Operating lease liabilities, current | ||||||||
| Operating lease liabilities, noncurrent | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
15
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – OPERATING LEASES (continued)
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of April 30, 2023 and July 31, 2022:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Remaining lease term and discount rate | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
The following is a schedule of maturities of lease liabilities as of April 30, 2023 and July 31, 2022:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| For the three months/twelve months ended July 31, 2023 | $ | $ | ||||||
| For the twelve months ended July 31, 2024 | ||||||||
| For the twelve months ended July 31, 2025 | ||||||||
| For the twelve months ended July 31, 2026 | ||||||||
| For the twelve months ended July 31, 2027 and thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
The following is a schedule of future minimum rentals under noncancellable operating lease arrangement as of April 30, 2023 and July 31, 2022:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| For the three months/twelve months ending July 31, 2023 | $ | $ | ||||||
| For the twelve months ending July 31, 2024 | ||||||||
| Total sublease income | $ | $ | ||||||
16
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| (unaudited) | ||||||||
| Investment securities payable (a) | $ | $ | ||||||
| Due to third parties (b) | ||||||||
| Accrued legal consulting expenses | ||||||||
| Accrued payroll expenses | ||||||||
| Others | ||||||||
| $ | $ | |||||||
| (a) |
| (b) |
During the nine months ended April 30, 2023, the Company sold the long-term investment to a third party. As of April 30, 2023, the balance due to third parties represented the proceeds collected from investees who subscribed for the long-term investments and payable to the third party. |
NOTE 12 – RELATED PARTY TRANSACTIONS
On May 31, 2022, Huaya became a related party
of the Company upon transfer of equity interest in Huaya to Mr. Pishan Chi, who was a former CEO of the Company. In May 2022, Huaya engaged
the Company to provide consulting services for its customers. As of April 30, 2023 and July 31, 2022, the Company had accounts receivable
of $
For the three months ended April 30, 2023, the Company did not enter into related party transactions.
For the nine months ended April 30, 2023, the
Company make loans of $
17
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
British Virgin Islands
Under the current laws of the British Virgin Islands, the Company and ATIF Investment are not subject to tax on income or capital gains in the British Virgin Islands. Additionally, upon payments of dividends to the shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
ATIF HK is subject to Hong Kong profits tax at
a rate of
PRC
The PRC Corporate Income Tax (“CIT”)
is calculated based on the taxable income determined under the applicable CIT Law and its implementation rules, which became effective
on January 1, 2008. CIT Law imposes a unified income tax rate of
USA
For the US jurisdiction, ATIF Inc., ATIF GP, ATIF
LP, ATIF BD, ATIF BC and ATIF BM are subject to federal and state income taxes on its business operations. The federal tax rate is
For the three and nine months ended April 30,
2023, the Company recorded current income tax expenses of $
18
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
Deferred tax assets
The Company’s deferred tax assets are comprised of the following:
| April 30, 2023 |
July 31, 2022 |
|||||||
| (unaudited) | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful account | $ | $ | ||||||
| Net operating loss carry forwards | ||||||||
| Deferred tax assets before valuation allowance | ||||||||
| Less: valuation allowance | ( |
) | ( |
) | ||||
| Net deferred tax assets | $ | $ | ||||||
The Company follows ASC 740, “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company’s deferred tax assets primarily
derived from the net operating loss (“NOL”) and allowance for doubtful accounts. The Company periodically evaluates the likelihood
of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the
extent it believes a portion or all of the deferred tax assets will not be realized. The Company considers many factors when assessing
the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience, expectation of future
income, the carry forward periods available for tax reporting purposes, and other relevant factors. As of April 30, 2023 and July 31,
2022, management believes that the realization of the deferred tax assets appears to be uncertain and may not be realizable in the near
future. Therefore, a
Uncertain tax positions
The Company accounts for uncertainty in income
taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the
largest amount that is more than
19
ATIF HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – CONTIGENCIES
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.
| Pending Legal Proceeding with Boustead Securities, LLC (“Boustead”) |
On May 14, 2020, Boustead filed a lawsuit against the Company and LGC for breaching the underwriting agreement Boustead had with each of the Company and LGC, in which Boustead was separately engaged as the exclusive financial advisor to provide financial advisory services to the Company and LGC.
In April 2020, the Company acquired
Boustead’s Complaint alleges four causes of action against the Company, including breach of contract; breach of the implied covenant of good faith and fair dealing; tortious interference with business relationships and quantum meruit.
On October 6, 2020, ATIF filed a motion to dismiss Boustead’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). On October 9, 2020, the United States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint by November 10, 2020. Boustead opted to amend its complaint and filed the amended complaint on November 10, 2020. Boustead’s amended complaint asserts the same four causes of action against ATIF and LGC as its original complaint. The Company filed another motion to dismiss Boustead’s amended complaint on December 8, 2020.
On August 25, 2021, the United States District Court for the Southern District of New York granted ATIF’s motion to dismiss Boustead’s first amended complaint. In its order and opinion, the United States District Court for the Southern District of New York allowed Boustead to move for leave to amend its causes of action against ATIF as to breach of contract and tortious interference with business relationships, but not breach of the implied covenant of good faith and fair dealing and quantum meruit. On November 4, 2021, Boustead filed a motion seeking leave to file a second amended complaint to amend its cause of action for Breach of Contract. The Court granted Boustead’s motion for leave and Boustead filed the second amended complaint on December 28, 2021 alleging only breach of contract and dropping all other causes of action alleged in the original complaint. On January 18, 2022, the Company filed a motion to dismiss Boustead’s second amended complaint. Boustead filed its opposition on February 1, 2022 and the Company replied on February 8, 2022.
On July 6, 2022, the Court denied our motion to dismiss the second amended complaint. Thereafter, on August 3, 2022, the Company filed a motion to compel arbitration of Boustead’s claims in California. Briefing on the Company’s motion to compel concluded on August 23, 2022. The Court has yet to rule on that motion. Boustead is also seeking a default judgment against LGC and recently filed an order to show cause for default judgment against LGC. The Court has not ruled on Boustead’s request for entry of default judgment against LGC.
ATIF is currently evaluating how it will respond to Boustead’s motion for leave. In sum, the Boustead litigation is currently in the pleadings stage. Our management believes it is premature to assess and predict the outcome of this pending litigation.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
We offer financial consulting services to small and medium-sized enterprise customers in Asia and North America. Our goal is to become an international financial consulting company with clients and offices throughout Asia. Since our inception in 2015, the focus of our consulting business has been providing comprehensive going public consulting services designed to help SMEs become public companies on suitable markets and exchanges.
On January 4, 2021, we established an office in California, USA, through our wholly owned subsidiary ATIF Inc., a California corporation, and launched, in addition to our business consulting services, additional service models consisting of asset management, investment holding and media services to expand our business with a flexible business concept to achieve a goal of high growth revenue and strong profit growth.
Reverse Split
On August 12, 2021, our Board of Directors approved a reverse stock split (the “Reverse Split”) of our issued and outstanding ordinary shares, par value $0.001 per share, at a ratio of 1 -for-5so that every five (5) shares issued and outstanding on the date of the Reverse Split was combined into one (1) ordinary share, US$0.005 par value. Shareholders otherwise entitled to receive a fractional share as a result of the reverse stock split will receive a whole share in lieu of such factional share, as relevant. Both before and after completion of the Reverse Split, the Company is and will be authorized to issue 100,000,000,000 ordinary shares of US$0.001 par value each. As a result of the Reverse Split, the Company’s issued and outstanding ordinary shares was reduced from 45,806,952 ordinary shares of US$0.001 par value each to approximately 9,161,390 ordinary shares of par value $0.005 per share. On August 23, 2021, we amended our Memorandum of Association and Articles of Association in connection with our one -for- five reverse stock split to amend the par value back to $0.001 per ordinary share. Our ordinary shares, as adjusted per the Reverse Split, began trading on the Nasdaq Capital Market on August 30, 2021.
Recent Updates
On October 6 and October 7, 2022, ATIF Inc., a wholly owned subsidiary of ATIF, established ATIF Business Consulting LLC (“ATIF BC”) and ATIF Business Management LLC (“ATIF BM”) under the laws of California of the United States, respectively.
On August 1, 2022, ATIF USA entered into and closed a Sale and Purchase Agreement (the “Agreement”) with Asia Time (HK) International Finance Service Limited (the “Buyer”), pursuant to which the Company sold all of its equity interest in ATIF GP for cash consideration of US$50,000 (the “Agreement”). The management believed the disposition does not represent a strategic shift because it is not changing the way it is running its business. The Company has not shifted the nature of its operations. The termination is not accounted as discontinued operations in accordance with ASC 205-20. Upon the closing of the Agreement, ATIF GP is no longer our subsidiary and ATIF USA ceased to be the investment manager of ATIF LP.
As of April 30, 2023, we had one reporting segment, which is the provision of financial consulting services.
21
Our financial consulting services
Currently we provide consulting services to the companies based in North America seeking listing in U.S.. We launched our consulting services in 2015. Our aim was to assist Chinese enterprises by filling the gaps and forming a bridge between PRC companies and overseas stock markets and exchanges. We have a team of qualified and experienced personnel with legal, regulatory, and language expertise in several jurisdictions outside the U.S. Our services were designed to help small and medium-sized enterprises (“SME”) in China achieve their goal of becoming public companies. In May 2022, we shifted our geographic focus from China to North America emphasizing on helping mid and small companies in North America become public companies on the U.S. capital markets. We would create a going public strategy for each client based on many factors of such client, including our assessment of the client’s financial and operational situations, market conditions, and the client’s business and financing requirements. Since our inception and up to the date of this report, we have successfully helped three Chinese enterprises to be quoted on the U.S. OTC markets and are currently assisting our other clients in their respective going public efforts. Most of our current and past clients have been Chinese, U.S. and Mexican companies, and we plan to expand our operations to other Asian countries, such as Malaysia, Vietnam, and Singapore with continuing focus on the North American market in the coming years.
For the nine months ended April 30, 2023 and 2022, we provided consulting services to four and two customers, respectively, which primarily engaged the Company to provide consulting services relating to going public in the US through IPO and reverse merger. On May 31, 2022, we completed the transfer of our equity interest in ATIF HK and Huaya, through which we provided consulting services to Chinese companies We plan to focus on providing consulting services to customers based in North America and other areas and intend to continue cooperating with Huaya in connection with the expansion and provision of our business services in China. From April 2022 through the date of this report, the Company entered into consulting agreements with five customers, among which four are based in the North America.
Our total revenue generated from consulting services amounted to $0.1 million and $0.3 million for the three months ended April 30, 2023 and 2022, respectively. Our total revenue generated from consulting services amounted to $2.3 million and $0.8 million for the nine months ended April 30, 2023 and 2022, respectively.
Key Factors that Affect our Business
We believe the following key factors may affect our consulting services:
Our business success depends on our ability to acquire customers effectively.
Our customer acquisition channels primarily include our sales and marketing campaigns and existing customer referrals. In order to acquire customers, we have made significant efforts in building mutually beneficial long-term relationships with local government, academic institutions, and local business associations. In addition, we also market our consulting services through social media, such as WeChat and Weibo. If any of our current customer acquisition channels becomes less effective, we are unable to continue to use any of these channels or we are not successful in using new channels, we may not be able to attract new customers in a cost-effective manner or convert potential customers into active customers or even lose our existing customers to our competitors. To the extent that our current customer acquisition and retention efforts become less effective, our service revenue may be significantly impacted, which would have a significant adverse effect on our revenues, financial condition, and results of operations.
Our consulting business faces strong market competition.
We are currently facing intense market competition. Some of our current or potential competitors have significantly more financial, technical, marketing, and other resources than we do and may be able to devote greater resources to the development, promotion, and support of their customer acquisition and retention channels. In light of the low barriers to entry in the financial consulting industry, we expect more players to enter this market and increase the level of competition. Our ability to differentiate our services from other competitors will have significant impact on our business growth in the future.
Our business depends on our ability to attract and retain key personnel.
We rely heavily on the expertise and leadership of our directors and officers to maintain our core competence. Under their leadership, we have been able to achieve rapid expansion and significant growth since our inception in 2015. As our business scope increases, we expect to continue to invest significant resources in hiring and retaining a deep talent pool of financial consultancy professionals. Our ability to sustain our growth will depend on our ability to attract qualified personnel and retain our current staff.
22
Results of Operations
Comparison of Operation Results for the Three Months ended April 30, 2023 and 2022
The following table summarizes the results of our operations for the three months ended April 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the Three Months ended | Changes | |||||||||||||||
| April 30, 2023 | April 30, 2022 | Amount Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenues | $ | 100,000 | $ | 261,925 | $ | (161,925 | ) | (62 | )% | |||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | (72,000 | ) | (118,682 | ) | 46,682 | (39 | )% | |||||||||
| General and administrative expenses | (629,934 | ) | (479,938 | ) | (149,996 | ) | 31 | % | ||||||||
| Total operating expenses | (701,934 | ) | (598,620 | ) | (103,314 | ) | 17 | % | ||||||||
| Loss from operations | (601,934 | ) | (336,695 | ) | (265,239 | ) | 79 | % | ||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income, net | - | 296,808 | (296,808 | ) | (100 | )% | ||||||||||
| Other income (expenses), net | 191,998 | (69,819 | ) | 261,817 | (375 | )% | ||||||||||
| Income from investment in trading securities | 82,265 | 370,467 | (288,202 | ) | (78 | )% | ||||||||||
| Total other income, net | 274,263 | 597,456 | (323,193 | ) | (54 | )% | ||||||||||
| (Loss) income before income taxes | (327,671 | ) | 260,761 | (588,432 | ) | (226 | )% | |||||||||
| Income tax provision | (8,099 | ) | - | (8,099 | ) | 100 | % | |||||||||
| Net (loss) income | $ | (335,770 | ) | $ | 260,761 | $ | (596,531 | ) | (229 | )% | ||||||
Revenues. Our total revenue decreased by $0.2 million from $0.3 million in the quarter ended April 30, 2022, to $0.1 million in quarter ended April 30, 2023. During the three months ended April 30, 2023 and 2022, we provided consulting services to one and one customers, and earned consulting fee income of $0.1 million and $0.3 million, respectively. The decrease in consulting fee income was primarily because the Company provided fewer consulting services to the customers in the three months ended April 30, 2023, as compared with the same period of 2022.
Selling expenses. Selling expenses decreased from $0.1 million in the quarter ended April 30, 2022 to $72,000 in the quarter ended April 30, 2023. Our selling expenses primarily consisted of outsourced service fees charged by third-party service providers, business development expenses, potential customer referral commissions, salary and welfare expenses of our business development team, and business travel expenses. The decrease in our selling expenses was primarily due to a decrease in consulting service fees for two consultants and marketing services for three consulting firms incurred during the three months ended April 30, 2022.
As a percentage of sales, our selling expenses were 72% and 45% of our total revenues for the three months ended April 30, 2023 and 2022, respectively.
23
General and administrative expenses. Our general and administrative expenses increased by $0.1 million, or 31%, from $0.5 million in the quarter ended April 30, 2022 to $0.6 million in the same period of 2023. Our general and administrative expenses primarily consisted of salary and welfare expenses of management and administrative team, office expenses, operating lease expenses, and professional fees such as audit and legal fees. The increase was mainly due that we incurred increasing professional service fees during the three months ended April 30, 2023 for filing of our Form S-3.
As a percentage of sales, our general and administrative expenses were 630% and 183% of our total revenues for the three months ended April 30, 2023 and 2022, respectively.
Gain (loss) from investment in trading securities. Gain (loss) from investments in trading securities represented unrealized gains or losses from investment in trading securities, which was measured at market price. For the three months ended April 30, 2023 and 2022, the Company recorded a gain from investment in trading securities of $82,265 and $0.4 million, respectively.
Income taxes. We are incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, we are not subject to tax on income or capital gains in the British Virgin Islands. Additionally, upon payments of dividends to the shareholders, no British Virgin Islands withholding tax will be imposed.
ATIF HK is subject to Hong Kong profits tax at a rate of 16.5%. However, ATIF HK did not have any assessable profits arising in or derived from Hong Kong for the three months ended April 30, 2023, and accordingly no provision for Hong Kong profits tax had been made in these periods.
Huaya was incorporated in the PRC. Under the Income Tax Laws of the PRC, Huaya is subject to income tax at a rate of 10% under the preferential tax treatment to Smaller-scale Taxpayers.
ATIF Inc, ATIF GP, ATIF LP, ATIF BD, ATIF BC and ATIF BM were established in the U.S and are subject to federal and state income taxes on its business operations. The federal tax rate is 21% and state tax rate is 8.84%. We also evaluated the impact from the recent tax reforms in the United States, including the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and Health and Economic Recovery Omnibus Emergency Solutions Act (“HERO Act”), which were both passed in 2020, No material impact on the ATIF US is expected based on our analysis. We will continue to monitor the potential impact going forward.
Income tax expense was $8,099 for the three months ended April 30, 2023, which arose from net income earned by ATIF BC. Income tax expense was $nil for the three months ended April 30, 2022 due to significant net operating loss in fiscal year 2022 which resulted in taxable losses.
Net loss (income). As a result of foregoing, net loss was $0.3 million for the three months ended April 30, 2023, a change of $0.6 million from net income of $0.3 million for the three months ended April 30, 2022.
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Comparison of Operation Results for the Nine months ended April 30, 2023 and 2022
The following table summarizes the results of our operations for the nine months ended April 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the Nine months ended | Changes | |||||||||||||||
| April 30, 2023 | April 30, 2022 | Amount Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenues | $ | 2,300,000 | $ | 786,080 | $ | 1,513,920 | 193 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | (125,000 | ) | (343,795 | ) | 218,795 | (64 | )% | |||||||||
| General and administrative expenses | (1,710,942 | ) | (2,185,193 | ) | 474,251 | (22 | )% | |||||||||
| Total operating expenses | (1,835,942 | ) | (2,528,988 | ) | 693,046 | (27 | )% | |||||||||
| Income (loss) from operations | 464,058 | (1,742,908 | ) | 2,206,966 | (127 | )% | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income, net | 1,874 | 296,860 | (294,986 | ) | (99 | )% | ||||||||||
| Other income (expenses), net | 314,401 | (123,423 | ) | 437,824 | (355 | )% | ||||||||||
| Income (loss) from investment in trading securities | 101,381 | (423,462 | ) | 524,843 | (124 | )% | ||||||||||
| Gain from disposal of subsidiaries | 56,038 | - | 56,038 | 100 | % | |||||||||||
| Total other income (expenses), net | 473,694 | (250,025 | ) | 723,719 | (289 | )% | ||||||||||
| Income (loss) before income taxes | 937,752 | (1,992,933 | ) | 2,930,685 | (147 | )% | ||||||||||
| Income tax provision | (575,056 | ) | - | (575,056 | ) | 100 | % | |||||||||
| Net income (loss) | $ | 362,696 | $ | (1,992,933 | ) | $ | 2,355,629 | (118 | )% | |||||||
Revenues. Our total revenue increased by $1.5 million from $0.8 million in the nine months ended April 30, 2022, to $2.3 million in nine months ended April 30, 2023. During the nine months ended April 30, 2023 and 2022, we provided consulting services to four and two major customers, respectively, leading to higher consulting service fees earned.
Selling expenses. Selling expenses decreased by $0.2 million, or 64%, from $0.3 million in the nine months ended April 30, 2022 to $0.1 million in the nine months ended April 30, 2023. Our selling expenses primarily consisted of outsourced service fees charged by third-party service providers, business development expenses, potential customer referral commissions, salary and welfare expenses of our business development team, and business travel expenses. The decrease was mainly because of disposal of ATIF HK and termination of Qianhai VIE Agreement.
As a percentage of sales, our absolute amount of selling expenses were 5% and 44% of our total revenues for the nine months ended April 30, 2023 and 2022, respectively.
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General and administrative expenses. Our general and administrative expenses decreased by $0.5 million, or 22%, from $2.2 million in the nine months ended April 30, 2022 to $1.7 million in the same period of 2023. Our general and administrative expenses primarily consisted of salary and welfare expenses of management and administrative team, office expenses, operating lease expenses, and professional fees such as audit and legal fees. The decrease was mainly due to the decrease of expenses as a result of disposal of ATIF HK and termination of Qianhai VIE Agreement.
As a percentage of sales, our general and administrative expenses were 74% and 278% of our total revenues for the nine months ended April 30, 2023 and 2022, respectively.
Income (loss) from investment in trading securities. Income (loss) from investments in trading securities represented unrealized gains or losses from investment in trading securities, which was measured at market price. For the nine months ended April 30, 2023 and 2022, the Company recorded a gain from investment in trading securities of $0.1 million and a loss of $0.4 million, respectively.
Gain from disposal of subsidiaries. For the nine months ended April 30, 2023, the Company reported a gain of $0.06 million from disposal of ATIF GP. For nine months ended April 30, 2022, the Company did not record gain or loss from disposal of subsidiaries.
Income taxes. We are incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, we are not subject to tax on income or capital gains in the British Virgin Islands. Additionally, upon payments of dividends to the shareholders, no British Virgin Islands withholding tax will be imposed.
ATIF HK is subject to Hong Kong profits tax at a rate of 16.5%. However, ATIF HK did not have any assessable profits arising in or derived from Hong Kong for the nine months ended April 30, 2022, and accordingly no provision for Hong Kong profits tax had been made in these periods.
Huaya was incorporated in the PRC. Under the Income Tax Laws of the PRC, Huaya is subject to income tax at a rate of 10% under the preferential tax treatment to Smaller-scale Taxpayers.
ATIF Inc, ATIF GP, ATIF LP, ATIF BD, ATIF BC and ATIF BM were established in the U.S and are subject to federal and state income taxes on its business operations. The federal tax rate is 21% and state tax rate is 8.84%. We also evaluated the impact from the recent tax reforms in the United States, including the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and Health and Economic Recovery Omnibus Emergency Solutions Act (“HERO Act”), which were both passed in 2020, No material impact on the ATIF US is expected based on our analysis. We will continue to monitor the potential impact going forward.
Income tax expense was $0.6 million for the nine months ended April 30, 2023, which arose from net income earned by ATIF BC. Income tax expense was $nil for the nine months ended April 30, 2022 due to significant net operating loss in fiscal year 2022 which resulted in taxable losses.
Net income (loss). As a result of foregoing, net income was $0.4 million for the nine months ended April 30, 2023, a change of $2.4 million from net loss of $2.0 million for the nine months ended April 30, 2022.
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Capital Commitments and Contingencies
We had no material capital commitments as of April 30, 2023.
From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue 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.
Pending Legal Proceeding with Boustead Securities, LLC (“Boustead”)
On May 14, 2020, Boustead filed a lawsuit against the us and LGC for breaching the underwriting agreement Boustead had with each of us and LGC, in which Boustead was separately engaged as the exclusive financial advisor to provide financial advisory services to us and LGC.
In April 2020, we acquired 51.2% equity interest in LGC after LGC terminated its efforts to launch an IPO on its own. Boustead alleged that the acquisition transaction between us and LGC was entered into during the lockup period of the exclusive agreement between Boustead and LGC, and therefore deprived Boustead of compensation that Boustead would otherwise have been entitled to receive under its exclusive agreement with LGC. Therefore, Boustead is attempting to recover from us an amount equal to a percentage of the value of the transaction it conducted with LGC.
Boustead’s Complaint alleges four causes of action against us, including breach of contract; breach of the implied covenant of good faith and fair dealing; tortious interference with business relationships and quantum meruit.
On October 6, 2020, ATIF filed a motion to dismiss Boustead’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). On October 9, 2020, the United States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint by November 10, 2020. Boustead opted to amend its complaint and filed the amended complaint on November 10, 2020. Boustead’s amended complaint asserts the same four causes of action against ATIF and LGC as its original complaint. We filed another motion to dismiss Boustead’s amended complaint on December 8, 2020.
On August 25, 2021, the United States District Court for the Southern District of New York granted ATIF’s motion to dismiss Boustead’s first amended complaint. In its order and opinion, the United States District Court for the Southern District of New York allowed Boustead to move for leave to amend its causes of action against ATIF as to breach of contract and tortious interference with business relationships, but not breach of the implied covenant of good faith and fair dealing and quantum meruit. On November 4, 2021, Boustead filed a motion seeking leave to file a second amended complaint to amend its cause of action for Breach of Contract. The Court granted Boustead’s motion for leave and Boustead filed the second amended complaint on December 28, 2021 alleging only breach of contract and dropping all other causes of action alleged in the original complaint. On January 18, 2022, we filed a motion to dismiss Boustead’s second amended complaint. Boustead filed its opposition on February 1, 2022 and we replied on February 8, 2022.
On July 6, 2022, the Court denied our motion to dismiss the second amended complaint. Thereafter, on August 3, 2022, we filed a motion to compel arbitration of Boustead’s claims in California. Briefing on our motion to compel concluded on August 23, 2022. The Court has yet to rule on that motion. Boustead is also seeking a default judgment against LGC and recently filed an order to show cause for default judgment against LGC. The Court has not ruled on Boustead’s request for entry of default judgment against LGC.
We are currently evaluating how it will respond to Boustead’s motion for leave. In summary, the Boustead litigation is currently in the pleadings stage. Our management believes it is premature to assess and predict the outcome of this pending litigation.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in product development services with us.
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Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, working capital loans from our major shareholders, proceeds from our initial public offering, and equity financing through public offerings of our securities. We plan to support our future operations primarily from cash generated from our operations and cash on hand.
Liquidity and Going concern
For the three and nine months ended April 30, 2023, the Company reported a net loss of $0.3 million and a net income of $0.4 million, respectively. For the three and nine months ended April 30, 2022, the Company reported a net income of $0.3 million and a net loss of $2.0 million, respectively. For the nine months ended April 30, 2023 and 2022, the Company reported operating cash outflows of $1.4 million and $0.3 million, respectively.
In assessing the Company’s ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments.
As of April 30, 2023, the Company had cash of $0.5 million. On the other hand, the Company had current liabilities of $2.6 million. Currently the Company had four service-in-progress agreements, and expected to collect consulting service fees of $3.3 million for the next 12 months. Due to the impact of COVID-19, some of our existing customers may experience financial distress or business disruptions, which could lead to potential delay or default on their payments. Any increased difficulty in collecting accounts receivable, or early termination of our existing consulting service agreements due to deterioration in economic conditions could further negatively impact our cash flows. Given these factors, our potential customers’ perception and confidence to go public in the United States has been negatively impacted and our operating revenue and cash flows may continue to underperform in the near terms. Although we had cash of $0.5 million as of April 30, 2023, given the above mentioned uncertainties, the management believes that the Company will continue as a going concern in the following 12 months from the date the Company’s unaudited condensed consolidated financial statements are issued.
Currently, the Company intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from equity financings. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
We have not declared nor paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our restricted net assets in the near future.
We have limited financial obligations denominated in U.S. dollars, thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on our liquidity, financial condition, and results of operations.
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The following table sets forth summary of our cash flows for the years indicated:
| For the nine months Ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net cash used in operating activities | $ | (1,361,108 | ) | $ | (283,267 | ) | ||
| Net cash provided by (used in) investing activities | 78,557 | (2,157,457 | ) | |||||
| Net cash used in financing activities | - | (1,960,946 | ) | |||||
| Effect of exchange rate changes on cash | - | 110,968 | ||||||
| Net decrease in cash | (1,282,551 | ) | (4,290,702 | ) | ||||
| Cash, beginning of period | 1,750,137 | 5,596,740 | ||||||
| Cash, end of period | $ | 467,586 | $ | 1,306,038 | ||||
Operating Activities
Net cash used in operating activities was $1.4 million in the nine months ended April 30, 2023. Net cash used in operating activities was primarily comprised of net income of $0.4 million, adjusted for amortization of right of use assets of $0.3 million, and net changes in our operating assets and liabilities, principally comprising of i) an increase of accounts receivable of $1.8 million as we provided financial consulting services to more customers during the nine months ended April 30, 2023, and ii) an increase of income tax payable of $0.6 million arising from net profit generated by one of our subsidiaries.
Net cash used in operating activities was $0.3 million for the nine months ended April 30, 2022. Net cash used in operating activities mainly derived from (i) net loss of $2.0 million for the nine months ended April 30, 2022, adjusted for noncash depreciation and amortization expenses of $0.1 million and loss from investments in trading securities of $0.4 million, and (ii) net changes in our operating assets and liabilities, principally comprising of an increase of $1.1 million in accrued expenses and other current liabilities as we ordered investments in trading securities through security accounts but the broker cleared our accounts in February 2022, and an increase of $0.6 million in prepaid expenses and other current assets as a result of collections.
Investing Activities
Net cash provided by investing activities was $78,557 in the nine months ended April 30, 2023, primarily provided by release of investment in equity investees of $0.3 million, partially offset by loans of $0.1 million to a related party, and investment in trading securities of $0.1 million.
Net cash used in investing activities amounted to $2.2 million for the nine months ended April 30, 2022, which primarily included the investments of $2.4 million in trading securities, partially offset by proceeds of $0.3 million from disposal of two vehicles.
Financing Activities
For the nine months ended April 30, 2023, the Company did not generate cash flows from financing activities.
Net cash used in financing activities was $2.0 million the nine months ended April 30, 2022, attributable to payment of $3.0 million to a limited partner of ATIF LP, as withdrawal of investment and investment gain, partially offset by proceeds of $1.1 million in relation to exercise of warrants by investors who subscribed for ordinary shares offered in registered direct offering which closed in November 2020.
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Critical Accounting Estimate
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the condensed consolidated financial statements as well as the reported amounts of expenses during the reporting period. As a result, management is required to routinely make judgments and estimates about the effects of matters that are inherently uncertain. Actual results may differ from these estimates under different conditions or assumptions. Management determined there were no critical accounting policies or accounting estimates.
Recently Issued Accounting Pronouncements
A list of recently issued accounting pronouncements that are relevant to us is included in note 3 to our unaudited condensed consolidated financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of April 30, 2023. Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of April 30, 2023, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our conclusion is based on the fact that we do not have sufficient full-time accounting and financial reporting personnel with appropriate levels of accounting knowledge and experience to monitor the daily recording of transactions, to address complex U.S. GAAP accounting issues and the related disclosures under U.S. GAAP. In addition, there was a lack of sufficient documented financial closing procedure and a lack of risk assessment in accordance with COSCO 2013 framework. Our management is currently in the process of evaluating the steps necessary to remediate the ineffectiveness, such as (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, and (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, and (iii) establishing an internal audit function and standardizing the Company’s semi-annual and year-end closing and financial reporting processes.
Changes in Internal Control over Financial Reporting
Except as disclosed above, there have been no changes in our internal controls over financial reporting that occurred, during fiscal quarter ended April 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
Pending Legal Proceeding with Boustead Securities, LLC (“Boustead”)
On May 14, 2020, Boustead filed a lawsuit against the Company and LGC for breaching the underwriting agreement Boustead had with each of the Company and LGC, in which Boustead was separately engaged as the exclusive financial advisor to provide financial advisory services to the Company and LGC.
In April 2020, the Company acquired 51.2% equity interest in LGC after LGC terminated its efforts to launch an IPO on its own. Boustead alleged that the acquisition transaction between the Company and LGC was entered into during the lockup period of the exclusive agreement between Boustead and LGC, and therefore deprived Boustead of compensation that Boustead would otherwise have been entitled to receive under its exclusive agreement with LGC. Therefore, Boustead is attempting to recover from the Company an amount equal to a percentage of the value of the transaction it conducted with LGC.
Boustead’s Complaint alleges four causes of action against the Company, including breach of contract; breach of the implied covenant of good faith and fair dealing; tortious interference with business relationships and quantum meruit.
On October 6, 2020, ATIF filed a motion to dismiss Boustead’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). On October 9, 2020, the United States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint by November 10, 2020. Boustead opted to amend its complaint and filed the amended complaint on November 10, 2020. Boustead’s amended complaint asserts the same four causes of action against ATIF and LGC as its original complaint. The Company filed another motion to dismiss Boustead’s amended complaint on December 8, 2020.
On August 25, 2021, the United States District Court for the Southern District of New York granted ATIF’s motion to dismiss Boustead’s first amended complaint. In its order and opinion, the United States District Court for the Southern District of New York allowed Boustead to move for leave to amend its causes of action against ATIF as to breach of contract and tortious interference with business relationships, but not breach of the implied covenant of good faith and fair dealing and quantum meruit. On November 4, 2021, Boustead filed a motion seeking leave to file a second amended complaint to amend its cause of action for Breach of Contract. The Court granted Boustead’s motion for leave and Boustead filed the second amended complaint on December 28, 2021 alleging only breach of contract and dropping all other causes of action alleged in the original complaint. On January 18, 2022, the Company filed a motion to dismiss Boustead’s second amended complaint. Boustead filed its opposition on February 1, 2022 and the Company replied on February 8, 2022.
On July 6, 2022, the Court denied our motion to dismiss the second amended complaint. Thereafter, on August 3, 2022, the Company filed a motion to compel arbitration of Boustead’s claims in California. Briefing on the Company’s motion to compel concluded on August 23, 2022. The Court has yet to rule on that motion. Boustead is also seeking a default judgment against LGC and recently filed an order to show cause for default judgment against LGC. The Court has not ruled on Boustead’s request for entry of default judgment against LGC.
ATIF is currently evaluating how it will respond to Boustead’s motion for leave. In sum, the Boustead litigation is currently in the pleadings stage. Our management believes it is premature to assess and predict the outcome of this pending litigation.
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ITEM 1A. RISK FACTORS
As a smaller reporting company we are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
| Exhibit Number |
Description of Exhibit | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
| 32.1* | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ATIF HOLDINGS LIMITED | ||
| June 14, 2023 | By: | /s/ Jun Liu |
| Jun Liu | ||
| Chief Executive Officer | ||
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