QDMI 8-K
QDM International Inc. (QDMI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): October 27, 2020 (October 21, 2020)
QDM International Inc.
(Exact name of registrant as specified in its charter)
| Florida | 000-27251 | 59-3564984 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
Room 715, 7F, The Place Tower C, No. 150 Zunyi Road Changning District, Shanghai, China |
200051 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: +86 (21) 22183083
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation to the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
EXPLANATORY NOTE
This Current Report on Form 8-K (the “Current Report”) being filed in connection with a series of transactions consummated by QDM International Inc. (“we,” “us,” “our,” “QDM,” or the “Company”), and certain related events and actions taken by the Company and its related parties.
This Current Report includes the following items:
| Item 1.01 | Entry into a Material Definitive Agreement. | |
| Item 2.01 | Completion of Acquisition or Disposition of Assets. | |
| Item 3.02 | Unregistered Sales of Equity Securities. | |
| Item 4.01 | Changes in Registrant’s Certifying Accountant. | |
| Item 5.03 | Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. | |
| Item 5.06 | Change in Shell Company Status. | |
| Item 9.01 | Financial Statements and Exhibits. |
Certain Conventions Used in this Current Report
Unless otherwise indicated or the context otherwise requires, references in this Current Report to:
| ● | “24/7 Kid” are to 24/7 Kid Doc, Inc., a Florida corporation and wholly-owned subsidiary of the Company; |
| ● | “BVI” are to the British Virgin Islands; |
| ● | “Common Stock” are to the common stock of the Company, par value $0.0001 per share; |
| ● | “HKD,” “HK$” and “Hong Kong dollars” are to the legal currency of Hong Kong; |
| ● | “QDM BVI” are to QDM Holdings Limited, a BVI company and a wholly-owned subsidiary of the Company; |
| ● | “QDM HK” are to QDM Group Limited, a Hong Kong corporation and a wholly-owned subsidiary of the QDM BVI; |
| ● | “Series C Preferred Shares” are to the Series C Convertible Preferred Stock, par value $0.0001 per share, each convertible into eleven shares of Common Stock initially; |
| ● | the “Group” are to QDM BVI, QDM HK and YeeTah, collectively; |
| ● | “technical representatives” are to licensed individuals who provide advice to an insurance policy holder or potential policy holder on insurance matters on behalf of an insurance agent or broker, or arrange contracts of insurance in or from Hong Kong on behalf of that insurance agent or broker; |
| ● | “US$,” “U.S. dollars,” “$,” and “USD” are to the legal currency of the United States; |
| ● | “we,” “us,” “our,” “QDM,” and the “Company” refer to QDM International Inc. a Florida corporation; and |
| ● | “YeeTah” are to YeeTah Insurance Consultant Limited, a Hong Kong corporation and a wholly-owned subsidiary of the QDM HK. |
The Company and its subsidiaries maintain their books and records in U.S. dollars and in accordance with generally accepted accounting principles of the United States. QDM BVI, QDM HK and YeeTah maintain their books and records either in US$ or Hong Kong dollars. This Current Report also contains translations of Hong Kong dollars into U.S. dollars for the convenience of the reader. The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has effectively been officially linked to the U.S. dollar at the rate of approximately HK$7.80 = US$1.00. However, the market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be influenced by the forces of supply and demand in the foreign exchange market.
Unless otherwise stated, all translations of Hong Kong dollars into U.S. dollars were made at HK$7.8 = US$1.00, which is the prevailing exchange rate as of October 21, 2020. We make no representation that the Hong Kong dollar or U.S. dollar amounts referred to in this Current Report could have been or could be converted into U.S. dollars or Hong Kong dollars, as the case may be, at any particular rate or at all.
Prior to the Share Exchange (as defined below), we were a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act). As a result of the Share Exchange, we have ceased to be a “shell company”. The information contained in this Report constitutes the current “Form 10 information” necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act of 1933, as amended.
1
Item 1.01 Entry into a Material Definitive Agreement
On October 21, 2020, we entered into a share exchange agreement (the “Share Exchange Agreement”) with QDM Holdings Limited, a BVI company (“QDM BVI”), and Huihe Zheng, the sole shareholder of QDM BVI (the “QDM BVI Shareholder”), who is also our principal stockholder and serves as our Chairman and Chief Executive Officer, to acquire all the issued and outstanding capital stock of QDM BVI in exchange for the issuance to the QDM BVI Shareholder 900,000 shares of a newly designated Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Shares”), with each Series C Preferred Share initially being convertible into 11 shares of our common stock, par value $0.0001 per share (the “Common Stock”), subject to certain adjustments and limitations (the “Share Exchange”). The Share Exchange closed on October 21, 2020.
As a result of the consummation of the Share Exchange, we acquired QDM BVI and its indirect subsidiary, YeeTah Insurance Consultant Limited, a Hong Kong corporation (“YeeTah”), an insurance brokerage company primarily engaged in the sales and distribution of insurance products in Hong Kong.
The foregoing descriptions of the Share Exchange Agreement and the transactions contemplated thereby do not purport to be complete and are subject to the more detailed provisions set forth in the agreement, which is attached hereto as Exhibit 2.1 and incorporated herein by reference. All references to the Share Exchange Agreement and other exhibits to this Current Report are qualified, in their entirety, by the text of such exhibits.
Item 2.01 Completion of Acquisition or Disposition of Assets
As described in Item 1.01 above, on October 21, 2020, we acquired all the issued and outstanding capital stock of QDM BVI pursuant to the Share Exchange Agreement and QDM BVI became our wholly owned subsidiary. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein QDM BVI is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of QDM BVI have been brought forward at their book value and no goodwill has been recognized.
Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior to the Share Exchange will be those of QDM BVI and its wholly-owned subsidiary QDM Group Limited, a Hong Kong corporation (“QDM Hong Kong”) and its wholly-owned subsidiary, YeeTah (collectively, the “Group”) and will be recorded at the historical cost basis of the Group, and the consolidated financial statements after completion of the Share Exchange will include the assets and liabilities of the Group, historical operations of the Group, and operations of the Company and its subsidiaries from the closing date of the Share Exchange.
As a result of the acquisition of all the issued and outstanding capital stock of QDM BVI, we have now assumed the business operations of the Group as our own.
2
FORM 10 INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report contains “forward-looking statements” within the meaning of applicable federal securities laws. Forward-looking statements provide our management’s current expectations or forecasts of future events, particularly those related to the Group. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Current Report include, but are not limited to, statements about:
| ● | the impact by public health epidemics, including the COVID-19 pandemic in China, Hong Kong and the rest of the world, on the market the Group operates in and its business, results of operations and financial condition; |
| ● | the market for the Group’s services; |
| ● | the Group’s expansion and other plans and opportunities; |
| ● | the Group’s future financial and operating results, including revenues, income, expenditures, cash balances and other financial items; |
| ● | current and future economic and political conditions in Hong Kong and China; |
| ● | the future growth of the Hong Kong insurance industry as a whole and the professional insurance intermediary sector in particular; |
| ● | the Group’s ability to attract customers, further enhance its brand recognition; |
| ● | the Group’s ability to hire and retain qualified management personnel and key employees in order to enable them to develop its business; |
| ● | changes in applicable laws or regulations in Hong Kong related to or that could impact the Group’s business; |
| ● | our management of the Group’s business through the Company, a U.S. publicly-traded and reporting company; and |
| ● | other assumptions regarding or descriptions of potential future events or circumstances described in this Current Report underlying or relating to any forward-looking statements. |
These forward-looking statements are based on information available as of the date of this Current Report, and current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our management’s views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
In addition, statements that we “believe,” “we expect,” “we anticipate” and similar statements reflect its beliefs and opinions on the relevant subject. These statements are based upon information available to such party as of the date of this Current Report, and while our management believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and these statements should not be read to indicate that our management has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should not place undue reliance on these forward-looking statements. As a result of a number of known and unknown risks and uncertainties, the Group’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements.
3
DESCRIPTION OF BUSINESS
General and Pre-Share Exchange Transactions
The Company was incorporated in Florida in March 2020 and is the successor to 24/7 Kid Doc, Inc. (“24/7 Kid”), which was incorporated in Florida in November 1998. The Company was a telemedicine company that provided Connect-a-Doc telemedicine kits to schools and its services aimed to provide an effective and affordable alternative to schools that desire to provide a higher level of healthcare to their students but are unable to keep a full-time school nurse available. The Company’s principal offices are located at Room 715, 7F, The Place Tower C, No. 150 Zunyi Road, Changning District, Shanghai, China 200051. The Company’s phone number is +86 (21) 22183083.
On March 3, 2020, a stock purchase agreement (the “Purchase Agreement”) was entered into by and between Huihe Zheng, our Chief Executive Officer and Chairman and Tim Shannon, our then controlling stockholder as well as Chief Executive Officer, Chief Financial Officer, President and director. Pursuant to the Purchase Agreement, Mr. Shannon sold to Mr. Zheng (i) 710,000 shares common stock of 24/7 Kid, representing 42.6% of the total issued and outstanding shares of common stock of 24/7 Kid as of March 9, 2020 and (ii) 13,500 shares of Series B Preferred Stock, each entitling the holder to 100 votes on all corporate matters submitted for stockholder approval, in consideration of $500,000 in cash from Mr. Zheng’s personal funds. The shares of common stock and Series B Preferred Stock acquired by Mr. Zheng, in the aggregate, represented 68.3% of the outstanding voting securities of 24/7 Kid as of March 9, 2020, and the acquisition of such shares resulted in a change in control of 24/7 Kid.
On March 11, 2020, the Company was incorporated in Florida as a wholly owned subsidiary of 24/7 Kid and QDM Merger Sub, Inc. (“Merger Sub”) was incorporated in Florida as a wholly owned subsidiary of the Company, for the purposes of effectuating a name change by implementing a reorganization of the corporate structure of 24/7 Kid through a merger (the “Merger”). On March 13, 2020, an Agreement and Plan of Merger (the “Merger Agreement”) was entered into by and among 24/7 Kid, the Company, and the Merger Sub. On April 8, 2020, the Articles of Merger were filed with the State of Florida to effect the Merger as stipulated by the Merger Agreement.
Pursuant to the Merger Agreement, Merger Sub merged with and into 24/7 Kid, with 24/7 Kid being the surviving entity. As a result, the separate corporate existence of Merger Sub ceased and 24/7 Kid became a direct, wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement and as a result of the Merger, all issued and outstanding shares of common stock and Series B Preferred Stock of 24/7 Kid were converted into shares of the Company’s common stock and Series B Preferred Stock, respectively, on a one-for-one basis, with the Company securities having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of the securities of 24/7 Kid being converted. As a result, upon consummation of the Merger, all of the stockholders of 24/7 Kid immediately prior to the Merger became stockholders of the Company and all the directors and officers of 24/7 Kid became the directors and officers of the Company.
Upon consummation of the Merger, the Company became the successor issuer to 24/7 Kid pursuant to 12g-3(a) and as a result shares of the Company’s common stock were deemed to be registered under Section 12(g) of the Exchange Act.
Corporate Structure Following the Share Exchange
As a result of the Share Exchange described in Item 1.01 of this Report and further below, our corporate organization structure is as follows:
4
Overview of Post-Share Exchange Business
Through the Share Exchange, the Company acquired the Group. QDM BVI and QDM HK are holding companies and the Group conducts its business through its wholly owned subsidiary YeeTah. The business of the Group has become the business of the Company and is described below.
YeeTah is a licensed insurance brokerage company headquartered in Hong Kong and sells a wide range of insurance products, consisting of two major categories: (1) life and medical insurance, such as individual life insurance; and (2) general insurance, such as automobile insurance, commercial property insurance, liability insurance and homeowner insurance. In addition, as a Mandatory Provident Fund (“MPF”) Intermediary, YeeTah also provides its customers with assistance on account opening and related services under the MPF and the Occupational Retirement Schemes Ordinance schemes (“ORSO”) in Hong Kong, both of which are retirement protection schemes set up for employees. YeeTah is controlled by Mr. Huihe Zheng, our principal stockholder and Chief Executive Officer and Chairman, through his 100% ownership of QDM BVI, which in turn holds all the outstanding capital stock of YeeTah.
YeeTah sells insurance products underwritten by insurance companies operating in Hong Kong to its individual customers who are either Hong Kong residents or visitors from Mainland China and is compensated for its services by commissions paid by insurance companies, typically based on a percentage of the premium paid by the insured. Commissions generally depend on the type, term of insurance products and the particular insurance company and they are usually paid by the insurance companies the next month after the cooling off period of the policies sold, which is generally 21 days after the earlier of the delivery of the policy or a cooling off notice to the policy holder.
As of the date of this Current Report, YeeTah is a party to agreements with 20 insurance companies in Hong Kong, and offers approximately 520 insurance products to its customers. For the three months ended June 30, 2020 and 2019, an aggregate of 90.8% and 97.6% of YeeTah’s total commissions were attributable to its top three insurance partners, respectively. For its fiscal year ended March 31, 2020, an aggregate of 94.34% of YeeTah’s total commissions was attributable to its top three insurance companies, each accounted for more than 10% of its total commissions. For the fiscal year ended March 31, 2019, an aggregate of 92.1% of its total commissions were attributed to its top two insurance companies, each accounted for more than 10% of its total commissions.
As of June 30, 2020, YeeTah had serviced an aggregate of 594 customers in connection with the purchase of an aggregate of 646 insurance products as well as a total of 33 customers for MPF related services.
As an independent insurance agency, YeeTah offers not only a broad range of insurance products underwritten by multiple insurance companies to address the needs of increasingly sophisticated customers with diverse needs and preferences but also quality services covering the policy application, customer information collection, analysis of policy selection, and after-sale services.
YeeTah focuses on offering long-term life insurance products including endowment life and annuity life insurance and distribute general insurance products including automobile insurance, individual accident insurance, homeowner insurance, liability insurance and travel insurance.
Hong Kong’s independent insurance intermediary market is experiencing rapid growth due to increasing demands for insurance products by the Chinese population, especially the visitors from mainland China. YeeTah intends to grow its business by aggressively recruiting talents to join its professional team and sales force, expanding its distribution network through building more connections with business partners in Hong Kong and mainland China, such as wealth management companies, funds, trust companies, and overseas immigration agencies, and offering premium services.
5
Competitive Advantages
YeeTah believes that the following competitive strengths contribute to its success and differentiate it from its competitors:
| ● | Premium Customer Service Experience. YeeTah believes providing superior customer services to its existing and potential customers is the most important aspect of its business in terms of brand building and product differentiation. It has designed its services to provide personalized customer service throughout the whole insurance purchase process, including in-depth customer needs analysis, product and plan customization, product evaluation and selection, and claim settlement related assistance. |
| ● | Concentrated Product Offerings. Hong Kong's independent insurance intermediary companies generally focus on both life insurance and property insurance, but YeeTah’s strategy has been to focus on life insurance because of generally higher commissions. As of June 2020, YeeTah had distributed more than 600 life and medical insurance policies from 20 insurance companies in Hong Kong. YeeTah believes its ability to offer concentrated products and services makes it an attractive distributor for its insurance company partners, and enables it to provide quality service to its customers. |
| ● | Good Relationships with Insurance Companies. YeeTah maintains good relationships with the leading insurance companies in Hong Kong, including but not limited to, Prudential and AIA International Limited which have very stringent requirements on selection of brokers. YeeTah has been working with them for a few years and is able to pass their annual evaluations and receive favorable commission rates. |
| ● | Experienced Management Team. YeeTah’s responsible officer (Ms. Siu Ping Lo) has more than ten years of experience serving as a senior executive in the insurance industry and is familiar with the insurance intermediary industry and the regulatory environment in Hong Kong. In addition, YeeTah’s administrative manager has more than 20 years of experience in the insurance industry and 6 years of management experience. |
| ● | Strong Commitment to Rigorous Training and Development. Given the rapid development of new insurance products and the heavy reliance on face-to-face sales efforts in Hong Kong’s insurance industry, YeeTah believes that its strong in-house training program, which covers both product knowledge and sales skills, gives it a competitive edge over the other professional insurance intermediaries and helps it retain its sales force and improve its sales. The training also emphasizes inculcating in its technical representatives its corporate culture of customer service and commitment to high ethical standards. |
Growth Strategy
YeeTah’s goal is to further expand its distribution network. To achieve this goal, YeeTah intends to capitalize on the growth potential of China and Hong Kong’s insurance industry and insurance intermediary sector, leverage its competitive strengths and pursue the following strategy:
| ● | Pursue Acquisitions of Other Insurance Intermediaries. YeeTah intends to acquire suitable insurance intermediaries in mainland China in order to achieve the objective of growth and provide an area of expansion that will add to insurance product/service lines in a market that is currently not served by YeeTah. |
| ● | Further Participation in the Growing Life-Insurance Sector in Hong Kong. Life insurance products that require periodic premium payments have the potential to generate sustained revenue over an extended period of time. In order to take advantage of the significant growth potential of Hong Kong’s life issuance market and generate recurring income, YeeTah intends to continue to devote significant resources to growing this business line. YeeTah intends to actively recruit sales and marketing professionals to help increase sales of life insurance products in Hong Kong. YeeTah also intends to improve the productivity of individual technical representatives through rigorous training. In addition, YeeTah plans on leveraging its existing customer base to cross-sell life insurance products to its non-life insurance customers. |
| ● | Further Expand YeeTah’s Distribution Network Through Building Relationships with Strategic Partners. The insurance intermediary sector in Hong Kong is highly competitive. YeeTah plans to grow its distribution network by building relationships with partners in mainland China that have the potential of generating large premium in sales and to build relationships with wealth management companies, high net-worth clients and strategic partners in the Hong Kong market through recruiting and hiring more sales professionals to cover strategic partners which include financial institutes, real estate companies and other public entities. YeeTah believes that expanding its distribution network will help it generate more business and grow its sales. |
6
| ● | Continue to Strengthen YeeTah’s Relationships with Leading Insurance Companies. YeeTah currently establishes and maintains most of its business relationships with insurance companies in Hong Kong. As it plans to expand its distribution network through partners in China in an effort to increase its sales volumes in the future, it hopes to obtain favorable commission rates and exclusive rights to distribute high-margin products or collaborate with its insurance company partners to custom-develop products to suit the needs of its prospective customers. |
Impact of COVID-19
An outbreak of a novel strain of the coronavirus, commonly referred to as COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. This COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to this outbreak, the governments of many countries, states, cities and other geographic regions, including Hong Kong, have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.
With social distancing measures having been implemented to curtail the spread of COVID-19, brokers in Hong Kong, such as YeeTah, which relied primarily on storefront and in-person consultations for new business production faced an immediate slowdown. In addition, Hong Kong has suspended mainland tourists’ free travel and requested those who travel from mainland China and enter Hong Kong to undergo quarantine for 14 days.
Customers from mainland China contributed to a large part of YeeTah’s commissions. Regulations require their physical presence in Hong Kong to complete the policy contract. However, due to the political turmoil and travel restrictions related to the COVID-19 outbreak, mainland Chinese customers have dropped sharply. As a result, YeeTah’s revenue from commissions on new business has decreased significantly. YeeTah’s commissions from renewal premiums have also been materially affected since the mainland Chinese customers have been late in making the renewal payments due to the inability to visit Hong Kong to make the payments. Most of YeeTah’s mainland customers do not have Hong Kong bank account and used to pay their premiums through credit card or in cash in person. See “Management’s Discussion and Analysis of Results of Operations and Financial Conditions” for more information on the impact of COVID-19 on our business operations and financial conditions. YeeTah does not expect a significant improvement over its business and results of operations until the COVID-19 is effectively contained in Hong Kong and China and the mainland visitors are permitted to enter Hong Kong without a quarantine. As such, YeeTah presently focuses on servicing Hong Kong residents.
The extent to which the COVID-19 outbreak affects YeeTah’s business will depend on future developments in Hong Kong and around the world, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain and treat it, among others. Although the extent of the effect of the COVID-19 pandemic on YeeTah’s business and financial results is uncertain, the effects of a continued and prolonged public health crisis such as the COVID-19 pandemic could have a material negative impact on YeeTah’s business, operating results and financial condition. See “Risk Factors—Risks Related to YeeTah’s Business and Industry— YeeTah’s business, financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 outbreak.
The Hong Kong Insurance Market
Hong Kong has one of the most developed insurance markets in Asia, with the per capita insurance premium standing at high levels and has attracted many of the world’s top insurance companies. According to the Statistical Highlights issued by Research Office of the Legislative Council Secretariat on May 10, 2019, the Hong Kong insurance industry has shown a considerable growth in recent years. In 2018, the total gross premiums of the industry were about HK$531.7 billion (approximately $68.17 billion), representing an increase of 78% over 2013, primarily as a result of an increase of 86% in long term business (e.g. life and annuity), which we believe might be indicative of the increasing demand for long term insurance products due to aging population.
7
We believe that Hong Kong’s insurance industry’s accelerating growth is also attributable to increasing demands for insurance products by the Chinese population, especially visitors from mainland China. According to statistics from the Hong Kong Insurance Authority, the number of new policies brought by mainland visitors had been steadily increasing year by year until 2018, while witnessed a 25.6% decrease in 2019.
According to the statistics released by the Hong Kong Insurance Authority, the number of new policies purchased by mainland visitors in 2019 was 345,021, accounting for approximately 23.4% of the total number of new policies for individual insurance business, which typically includes, but not limited to, medical insurance, long-term life insurance, term life insurance, annuity, critical illness insurance and savings insurance. According to the Hong Kong Insurance Authority, the total amount of new premiums for individual insurance in 2019 was HK$172.3 billion (approximately $22.09 billion), which represents an increase of 6.5% compared to 2018 (HK$161.8 billion). Among them, the new policy premiums brought by mainland China visitors were HK$43.4 billion (approximately $5.6 billion), accounting for 25.2% of the total new policy premiums for individual insurance business. The diagram below demonstrates the number and percentage of new policies purchased by the mainland visitors over the years from 2010 to 2019.
Source: Hong Kong Insurance Authority
8
Market Potential and Recent Trends
Hong Kong’s insurance industry is expected to slow down in 2020 as a result of the COVID-19 pandemic and social unrest in the city. GlobalData, a leading data and analytics company, forecast that the industry will grow by 1.46% in 2020, from HKD 552 billion (approximately $70.8 billion) to HKD 560 billion (approximately $71.8 billion), representing one fourth of the sector’s rate of expansion last year. The slowing pace will hit all insurance segments but in particular life insurance, which represents more than 90% of the Hong Kong insurance market. Non-life insurance sectors are now expected to grow by 1% in 2020, in contract with pre-COVID-19 expectation of a growth of 4.4%. However, the firm forecasts a stronger future for the Hong Kong insurance industry beyond 2020, predicting 5.6%, 6.5% and 7.1% annual growth rates in 2021, 2022 and 2023, respectively.
Source: https://www.globaldata.com/
Hong Kong’ containment measures to control the spread of the COVID-19 will further affect its economy and insurance industry, which was already impacted by the recent civil unrest and US-China trade conflict.
Another issue facing Hong Kong life insurers relates to their business from mainland China. Customers from mainland China constitute an important market segment for Hong Kong life insurers. However, regulations require the physical presence of the insured party in Hong Kong to complete the policy contract. Due to the recent riots in Hong Kong and also the COVID-19 outbreak, interest from mainland Chinese customers has dropped sharply. As a result, sales to these Chinese customers has fallen to negligible levels.
Products and Services
YeeTah markets and sells two broad categories of insurance products: (1) life and medical insurance products, and (2) general insurance products. As of the date of this Current Report, insurance products YeeTah sells are underwritten by 20 insurance companies in Hong Kong. In addition, as an MPF Intermediary, YeeTah also assists its customers with their investment through the MPF and the ORSO schemes in Hong Kong. Such services primarily include collection and provision of information on investment products and exclude investment advisory services).
9
Life and Medical Insurance Products
YeeTah’s life and medical insurance products collectively accounted for approximately 95.01%, 94.97% and 97.54% of its net revenues for the three months ended June 30, 2020 and the fiscal years ended March 31, 2020 and 2019, respectively. For life and medical insurance products purchased by its customers, YeeTah generally receives commissions in the range of 2.72% to 110% of the first year premiums and in the range of 0% to 49.5% of renewal premiums.
The sale of life and medical insurance products is, and YeeTah currently expects it to continue to be, the major source of YeeTah’s revenue in the next several years. YeeTah began offering life insurance products in 2015 with a focus on individual life products with periodic payment schedules. The major life and medical insurance products YeeTah sells can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products YeeTah sells combine features of one or more of the categories listed below:
| ● | Individual Health Insurance. The individual health insurance products YeeTah sells primarily consist of critical illness insurance products, which provide guaranteed benefits when the insured is diagnosed with specified serious illnesses, and medical insurance products, which provide conditional reimbursement for medical expenses during the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period. |
| ● | Individual Annuity. The individual annuity products YeeTah sells generally provide annual benefit payments after the insured attains a certain age, or for a fixed time period, and provide a lump sum payment at the end of the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits upon the death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic payments of premiums during a pre-determined accumulation period. |
| ● | Individual Endowment Life Insurance. The individual endowment products YeeTah sells generally provide insurance coverage for the insured for a specified time period and maturity benefits if the insured reaches a specified age. The individual endowment products YeeTah sells also provide to a beneficiary designated by the insured guaranteed benefits upon the death of the insured within the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period. |
We believe due to China and Hong Kong’s rapidly aging population, high national savings rate, sustained economic development, rising household income, strong support from government policies and regulations, and enhanced risk protection awareness, Hong Kong’s life and medical insurance sector will experience faster growth than the other insurance sectors, and currently YeeTah plans to allocate greater resources to develop its life and medical insurance business.
General Insurance Products
YeeTah’s general insurance products, also known as property and casualty insurance products, accounted for approximately 4.6%, 2.74% and 0.86% of its net revenues for the three months ended June 30, 2020 and the fiscal years ended March 31, 2020 and 2019, respectively. For general insurance products purchased by its customers, YeeTah generally receives commissions from the insurance companies in the range of 5.0% - 55.0% of the premiums. The major general insurance products YeeTah offers or facilitates to individual customers can be further classified into the following categories:
| ● | Individual Accident Insurance. The individual accident insurance products YeeTah sells generally provide a guaranteed benefit during the coverage period in the event of death or disability of the insured as a result of an accident, or a reimbursement of medical expenses to the insured in connection with an accident. These products typically require only a single premium payment for each coverage period. Because most of the individual accident insurance products it sells are underwritten by general insurance companies, it classifies individual accident insurance products as general insurance products. |
| ● | Travel Insurance. The travel insurance products YeeTah sells are short-term insurance providing guaranteed benefit in the event of death or disability and covering travel-related emergencies and losses, either within one’s own country, or internationally. These products typically require only a single premium payment for each coverage period. |
| ● | Homeowner Insurance. The homeowner insurance products YeeTah sells primarily cover damages to the insured house, along with furniture and household electrical appliance in the house caused by a number of incidents such as fire, flood and explosion. |
| ● | Auto Insurance. YeeTah facilitates both standard auto insurance policies and supplemental policies, which YeeTah refers to as riders. The standard auto insurance policies it facilitates generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. It also facilitates standard third-party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders it facilitates cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches. |
10
MPF and ORSO Services
The MPF is a compulsory saving scheme (pension fund) for the retirement of residents in Hong Kong. Most employees and their employers are required to contribute monthly to the MPF schemes provided by approved private organizations based on the salary and period of employment of the employee. ORSO schemes are retirement schemes set up voluntarily by employers to provide retirement benefits for their employees. MPF is the mainstream retire plan in Hong Kong. YeeTah introduces customers to the service providers of the MPF and ORSO schemes approved by MPF as trustees to administer the MPF and ORSO schemes. As of August 31, 2020, there were a total 15 approved trustees in Hong Kong, of which, four have signed agreements with YeeTah in connection with its provision of MPF and ORSO related services. YeeTah assists employees who are Hong Kong residents to open personal accounts with a new approved trustee and employers in Hong Kong to set up corporate accounts. YeeTah receives service fees in the range of 1.0% - 5.0% of the total investment transferred by an employee/employer to the new trustee and is paid by the trustee once the transaction is completed. YeeTah assisted an aggregate of 33 customers with account opening and transfer of funds through the MPF scheme since inception.
Distribution Network and Marketing
YeeTah relies on its technical representatives to market and sell insurance products in Hong Kong. As of June 30, 2020, YeeTah had 10 technical representatives in Hong Kong. YeeTah was a party to an agreement with YeeTah Financial Group Company Limited (“YeeTah Financial”), a company controlled by YeeTah’s former officer and director, which referred customers, most of whom are mainland visitors, to YeeTah for the purchase of insurance products in Hong Kong in exchange for certain fees paid by YeeTah out of its commissions earned through the insurance policies purchased by the referred customers. Such agreement with YeeTah Financial was terminated in December 2019 and YeeTah is in the process of identifying new cross-industry marketing partners in various lines of businesses to expand its business.
Customers
For the past three years, YeeTah has seen a steady growth in customers. From March 2017 to June 2020, the total number of its individual customers grew from 329 to 554. By providing premium customer services to its customers, YeeTah also strives to build a loyal customer base that generates referral and cross-selling opportunities, and that becomes returning customers, i.e. a customer who purchases more than one product from YeeTah. During the fiscal year ended March 31, 2020, YeeTah had 26 customers from Hong Kong and one customer from mainland China. During the fiscal year ended March 31, 2019, YeeTah had 22 customers from Hong Kong and 39 customers from mainland China. During the three months ended June 30, 2020, YeeTah had six customers from Hong Kong and no customers from mainland China.
Collaboration with Insurance Companies
As of June 30, 2020, YeeTah had entered into long-term agreements with 20 insurance companies in Hong Kong, pursuant to which it is authorized to market and distribute certain insurance products of those companies to its customers. These agreements establish, among other things, the scope of its authority, the pricing of the insurance products it sells and its commission rates.
For the three months ended June 30, 2020 and 2019 and the fiscal years ended March 31, 2020 and 2019, YeeTah’s top three insurance company partners by commissions are as follows:
| Three
Months Ended June 30, 2019 | Three
Months Ended June 30, 2020 | Fiscal
Year Ended March 31, 2020 | Fiscal
Year Ended March 31, 2019 | |||||||||||||||||||||||||||||
| Name | Commissions (In US$) | Percentage of Revenue | Commissions (In US$) | Percentage of Revenue | Commissions (In US$) | Percentage of Revenue | Commissions (In US$) | Percentage of Revenue | ||||||||||||||||||||||||
| Company A | 11,078 | 21.2 | % | 7,011 | 33.6 | % | 88,163 | 39.8 | % | 251,697 | 56.5 | % | ||||||||||||||||||||
| Company B | 16,614 | 31.8 | % | 8,610 | 41.2 | % | 82,895 | 37.5 | % | 158,407 | 35.6 | % | ||||||||||||||||||||
| Company C | 23,296 | 44.6 | % | 3,352 | 16.0 | % | 38,000 | 17.2 | % | - | - | |||||||||||||||||||||
11
Competition
A number of industry players are involved in the distribution of insurance products in Hong Kong. YeeTah competes for customers on the basis of product offerings, customer services and reputation. Its principal competitors include:
| ● | Professional insurance intermediaries. As of July 31, 2020, there were a total of 2,356 and 828 insurance agencies and insurance broker companies in Hong Kong, respectively. The insurance agencies represent insurance companies, and the insurance broker companies represent customers who purchase insurance products. The rest of the insurance intermediaries are other businesses which sell insurance products, such as commercial banks. With an increasing consolidation expected in the insurance intermediary sector in the coming years, YeeTah expects competition within this sector to intensify. |
| ● | Insurance companies. YeeTah competes against insurance companies that rely on their own sales force to distribute their products. All large insurance companies use both in-house sales force and exclusive sales agents to distribute their own products. YeeTah believes that it can compete effectively with insurance companies because it focuses only on distribution and is able to offer its customers a broader range of insurance products underwritten by multiple insurance companies as well as better insurance premium. |
| ● | Other business entities. In Hong Kong, some business entities may distribute insurance products as an ancillary business; primarily commercial banks. However, the insurance products distributed by these entities are usually confined to those related to their main lines of business. YeeTah believes that it can compete effectively with these business entities because it offers its customers a broader variety of products and professional services. |
Although some of YeeTah’s competitors have operated for a longer period of time than YeeTah, with more market shares and greater brand influence, YeeTah believes that its entrepreneurial attitude and smaller size, as well as its customer service, enable it to better respond and adapt to fast changing insurance market conditions compared to the larger competitors.
Seasonality
The Group’s income is subject to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the net effect of new and lost business. For life insurance, the insurance companies, under pressure to meet their annual sales targets, would increase their sales efforts during the fourth quarter of a year by, for example, offering more incentives for insurance intermediaries to increase sales. As a result, income derived from life insurance products for the fourth quarter of a year is generally the highest among all four quarters. Business activities, including buying and selling insurance, usually slow down during the Chinese New Year festivities, which occur during the first quarter of each year. As a result, income derived from insurance products for the first quarter of a year has generally been the lowest among all four quarters.
Intellectual Property
As of June 30, 2020, the Group had no registered or registration-pending intellectual property.
Employees and Technical Representatives
YeeTah had two full-time employees as of June 30, 2020 and March 31, 2020 and 2019, respectively. YeeTah also had ten, ten and 15 licensed technical representatives as of June 30, 2020, March 31, 2020 and 2019, respectively. Technical representatives are licensed individuals who provide regulated advice to a policy holder or potential policy holder on insurance matters for an insurance agent or broker, or arrange contracts of insurance in or from Hong Kong on behalf of that insurance agent or broker. YeeTah’s affiliated technical representatives are not its employees and are only compensated via commissions on sales of insurance policies. The commissions YeeTah pays its technical representatives vary from 100% to 170% of basic commission rate provided by each insurance company.
Properties
The Group’s headquarters are located at Room 1503, 15/F., Wing Kwok Centre, 182 Woosung Street, Jordan, Kowloon, Hong Kong, where it leases approximately 859 square feet of office space for a monthly rent of HKD22,800 (approximately US$2,923) under a lease which expires in May 2021.
The Company does not lease or own any properties. The principal executive office of the Company is provided by Mr. Huihe Zheng free of charge.
12
Legal Proceedings
There are no pending legal proceedings to which the Company or its subsidiaries are a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of the Company’s voting securities, or security holder is a party adverse to the Company or has a material interest adverse to the Company.
Government Regulation
As a business operating in Hong Kong, the Group is subject to various regulations and rules promulgated by the Hong Kong government. The following is a brief summary of the Hong Kong laws and regulations that currently materially affect the Group’s business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industry in which the Group operates its business.
Regulations Related to Insurance Intermediaries
Effective September 23, 2019, the Insurance Authority of Hong Kong (“IA”) took over the regulation of insurance agents and brokers (collectively, “Insurance Intermediaries”) from the three self-regulatory organizations (i.e., the Insurance Agents Registration Board established under The Hong Kong Federation of Insurers, The Hong Kong Confederation of Insurance Brokers and The Professional Insurance Brokers Association) and becomes the sole regulator to license and supervise all Insurance Intermediaries in Hong Kong. The IA is responsible for supervising Insurance Intermediaries’ compliance with the provisions of Insurance Ordinance (Cap. 41) (“IO”), and the relevant regulations, rules, codes and guidelines issued by the IA. The IA is also responsible for promoting and encouraging proper standards of conduct of Insurance Intermediaries, and has regulatory powers in relation to licensing, inspection, investigation and disciplinary sanctions.
The regulatory regime for Insurance Intermediaries is activity-based. Under section 64G of the IO, a person must not carry on a regulated activity, or must not hold out that the person is carrying on a regulated activity, in the course of business or employment, or for reward unless the person holds an appropriate type of Insurance Intermediary license or is exempt under the IO.
Regulated Activity
Under section 3A(a) of the IO and Schedule 1A to the IO, a person carries on a regulated activity if the person does any of the following:
| ● | negotiating or arranging a contract of insurance; |
| ● | inviting or inducing, or attempting to invite or induce, a person to enter into a contract of insurance; |
| ● | inviting or inducing, or attempting to invite or induce, a person to make a decision in relation to (a) the making of an application or proposal for a contract of insurance; (b) the issuance, continuance or renewal of a contract of insurance; (c) the cancellation, termination, surrender or assignment of a contract of insurance; (d) the exercise of a right under a contract of insurance; (e) the change in any term or condition of a contract of insurance; or (f) the making or settlement of an insurance claim; or |
| ● | giving advice in relation to (a) the making of an application or proposal for a contract of insurance; (b) the issuance, continuance or renewal of a contract of insurance; (c) the cancellation, termination, surrender or assignment of a contract of insurance; (d) the exercise of a right under a contract of insurance; (e) the change in any term or condition of a contract of insurance; or (f) the making or settlement of an insurance claim (such advice is referred to as “Regulated Advice”). |
Types of Licensed Insurance Brokers
The licensing regime under the IO prescribes two types of licensed insurance brokers: licensed insurance broker companies and licensed technical representatives (broker).
| ● | A licensed insurance broker company is a company which is granted an insurance broker company license under section 64ZA of the IO to carry on regulated activities in one or more lines of business, and to perform the act of negotiating or arranging an insurance contract as an agent of any policy holder or potential policy holder. |
| ● | A licensed technical representative (broker) is an individual who is granted a technical representative (broker) license under section 64ZC of the IO to carry on regulated activities in one or more lines of business, as an agent of any licensed insurance broker company. |
13
A license granted under section 64ZA or 64ZC of the IO is valid for 3 years or, if the IA considers it appropriate in a particular case, another period determined by the IA, beginning on the date on which it is granted.
Responsible Officer
Under section 64ZF of the IO, a licensed insurance broker company should appoint a fit and proper person to discharge his or her responsibilities as a responsible officer of the insurance broker company, and should provide sufficient resources and support to that person for discharging his or her responsibilities. Prior approval of the IA is required for appointment of the responsible officer.
Transitional Arrangements for Insurance Brokers
To facilitate a smooth transition, all insurance brokers who were validly registered with The Hong Kong Confederation of Insurance Brokers or Professional Insurance Brokers Association immediately before September 23, 2019 are deemed as licensed insurance brokers under the IO for a period of three years. The incumbent chief executives of the insurance broker companies are also eligible for the transitional arrangements. The IA will, staggered over the three-year transitional period, invite deemed licensees to submit applications to the IA for granting of formal licenses and approvals.
“Fit and Proper” Requirements
Under the IO, a person who is, is applying to be, or is applying for a renewal of a license to be, a licensed insurance broker is required to satisfy the IA that he/she/it is a fit and proper person. In addition, the responsible officer(s), controller(s), and director(s) (where applicable) of a licensed insurance broker company are also required to be fit and proper persons. These “fit and proper” requirements aim at ensuring that the licensed insurance brokers are competent, reliable and financially sound, and have integrity. Pursuant to the IO, in determining whether a person is a fit and proper person, the IA must consider, among others, the following factors:
| ● | the person’s education or other qualifications or experience; |
| ● | the person’s ability to carry on a regulated activity competently, honestly and fairly; |
| ● | the persons’ reputation, character, reliability and integrity; |
| ● | the person’s financial status or solvency; |
| ● | whether any disciplinary action has been taken against the person by the Monetary Authority, the Securities and Futures Commission, the Mandatory Provident Fund Schemes Authority; or any other authority or regulatory organization (in Hong Kong or elsewhere) with functions similar to those of the IA; |
| ● | if the person is a company in a group of companies, any information in the possession of the IA relating to any other company in the group of companies or any controller or director of the person or of such company; |
| ● | the state of affairs of any other business which the person carries on or proposes to carry on; and |
| ● | in respect of an application to be licensed as a licensed insurance broker company or renewal of such license, any information in the possession of the IA relating to (i) any current or prospective employees or affiliates of the person, or any other person acting for or on behalf of the person, in each case, for the purposes of carrying on regulated activities and (ii) the question as to whether the person has established effective internal control procedures and risk management systems to ensure its compliance with the IA. |
The IA also issued the Guideline on “Fit and Proper” Criteria for Licensed Insurance Intermediaries under the Insurance Ordinance (Cap. 41) to further explain the criteria that the IA would adopt in determining whether a person is a fit and proper person. In addition, continuing professional development is part of the fit and proper requirement and the IA issued the Guideline on Continuing Professional Development for Licensed Insurance Intermediaries to provide guidance for complying with the continuing professional development requirements.
14
Financial and Other Requirements for Licensed Insurance Broker Companies
A licensed insurance broker company is required to comply with the Insurance (Financial and Other Requirements for Licensed Insurance Broker Companies) Rules (“Broker Rules”), which set out, inter alia, some of the key requirements in relation to:
| ● | Share Capital and Net Assets |
A licensed insurance broker company must at all times maintain a paid-up share capital of not less than $500,000 and net assets of not less than $500,000, subject to the transitional arrangements mentioned above, pursuant which, the insurance broker company is required to maintain the amount of paid-up share capital and net assets of (i) not less than $100,000 for the period from September 23, 2019 to December 31, 2021 and (ii) not less than $300,000 for the period from January 1, 2022 to December 31, 2023.
| ● | Professional Indemnity Insurance |
A licensed insurance broker company must maintain a professional indemnity insurance policy that provides coverage for claims made against the company for liabilities arising from breaches of duty in the course of carrying on its regulated activities.
| ● | Client Accounts |
A licensed insurance broker company that receives or holds client monies must maintain at least one client account with an authorized institution in the name of the licensed insurance broker company in the title of which the word “client” appears.
| ● | Record Keeping |
A licensed insurance broker company must keep, in relation to its business which constitutes the carrying on of regulated activities, where applicable, sufficient accounting and other records (including records relating to the assets or affairs of the company’s clients).
Licensed insurance broker companies are required to file their audited financial statements and auditor’s compliance reports to the IA annually, which statements and reports are reviewed by the IA annually.. Any issue noted or qualified opinion expressed by the auditor will be followed up and where applicable, further actions will be taken as the IA considers necessary.
The Broker Rules also provide certain exemptions for the broker insurance companies subject to the transitional requirements referenced above during the specified transitional period in complying with the requirements in relation to professional indemnity insurance, client monies reconciliation and audited financial statements.
Conduct Requirements
Licensed insurance brokers are required to comply with the statutory conduct requirements set out in sections 90 and 92 of the IO. The IA also issued the Code of Conduct for Licensed Insurance Brokers (“Code of Conduct”) to set out the general principles, together with the standards and practices relating to each general principle, serving as the minimum standards of professionalism to be met by licensed insurance brokers when carrying on regulated activities.
The general principles that a licensed insurance broker should comply with include:
| ● | acting honestly, ethically, with integrity and in good faith; |
| ● | acting in the best interests of its clients and treating its clients fairly; |
| ● | acting with due care, skill and diligence; |
| ● | possessing appropriate levels of professional knowledge and experience and only carrying on regulated activities in respect of which the broker has the required competence; |
| ● | providing clients with accurate and adequate information to enable them to make informed decisions; |
| ● | providing Regulated Advice suitable for the client taking into account the client’s circumstances; |
| ● | using best endeavors to avoid conflicts of interests and when such conflicts cannot be avoided, and managing them with appropriate disclosure to ensure clients are treated fairly at all times; and |
| ● | having sufficient safeguards in place to protect client assets received by the broker or which are in the broker’s possession. |
15
A licensed insurance broker company is required to have proper controls and procedures in place to ensure that the broker company and its licensed technical representatives (broker) meet the general principles, standards and practices set out in the Code of Conduct.
The Code of Conduct does not have the force of law, in that it is not subsidiary legislation, and should not be interpreted in a way that would override the provision of any law. A failure by a licensed insurance broker to comply with the Code of Conduct shall not by itself render the broker liable to any judicial or other proceedings. However, in any proceedings under the IO before a court, the Code of Conduct is admissible in evidence, and if a provision in the Code of Conduct appears to the court to be relevant to a question arising in the proceedings, the court must, in determining the question, take into account any compliance or non-compliance with the Code of Conduct.
Regulation of Mandatory Provident Fund Intermediaries
With the implementation of the Mandatory Provident Fund Schemes (Amendment) Ordinance 2012, a new statutory regulatory regime for Mandatory Provident Fund (“MPF”) intermediaries has come into operation from 1 November 2012. Under the new statutory regime, only registered MPF intermediaries are allowed to engage in conducting sales and marketing activities and giving advice in relation to MPF schemes.
Under the new statutory regime, the Mandatory Provident Fund Schemes Authority (“MPFA”) is the authority to administer MPF intermediaries, issue guidelines on compliance with statutory requirements applicable to registered MPF intermediaries, and impose disciplinary sanctions. On the other hand, the IA is given the statutory role for monitoring the compliance of the registered MPF intermediaries. As a frontline regulator, the IA supervises the conduct requirements stipulated in the Mandatory Provident Fund Schemes Ordinance (Cap.485) (“MPFSO”). If the IA has reasonable cause to believe that the registered MPF intermediaries may have failed to comply with the statutory conduct requirements, it may exercise the investigation powers under the MPFSO for investigating the suspected non-compliance.
Registered MPF intermediaries must comply with a set of statutory conduct requirements when they engage in conducting sales and marketing activities and giving advice in relation to MPF schemes. The MPFA has issued the Guidelines on Conduct Requirements for Registered Intermediaries to assist the registered MPF intermediaries in understanding how to comply with the conduct requirements.
The minimum standards of conduct that a registered MPF intermediary should adopt include:
| ● | acting honestly, fairly, in the best interests of the client and with integrity; |
| ● | acting with care, skill and diligence; |
| ● | advising on matters within competence; |
| ● | having regard to client’s particulars as is necessary; |
| ● | disclosing necessary information to the client; |
| ● | disclosing conflict of interest; |
| ● | prompt and proper accounting for client assets; |
| ● | keeping records of regulated activities; |
| ● | establishing, maintaining and observing proper controls and procedures for securing compliance by the principal intermediary; and |
| ● | appointing a responsible officer to use his or her best endeavors to carry out specified responsibilities in relation to the principal intermediary. |
Regulation Related to Business Registration
The Business Registration Ordinance (Chapter 310 of the Laws of Hong Kong) requires every person carrying on any business in Hong Kong to make an application to the Commissioner of Inland Revenue in the prescribed manner for the registration of that business, unless it is exempt under the Business Registration Ordinance. The Commissioner of Inland Revenue must register each business for which a business registration application is made and as soon as practicable after the prescribed business registration fee and levy are paid and issue a business registration certificate or branch registration certificate for the relevant business or the relevant branch, as the case may be.
16
Regulation Related to Employment and Labor Protection
Employment Ordinance (Chapter 57 of the Laws of Hong Kong)
The Employment Ordinance (Chapter 57of the Laws of Hong Kong), or the EO, is an ordinance enacted for, amongst other things, the protection of the wages of employees and the regulation of the general conditions of employment and employment agencies. Under the EO, an employee is generally entitled to, amongst other things, notice of termination of his or her employment contract; payment in lieu of notice; maternity protection in the case of a pregnant employee; not less than one rest day in every period of seven days; severance payments or long service payments; sickness allowance; statutory holidays or alternative holidays; and paid annual leave of up to 14 days depending on the period of employment.
Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong)
The Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong), or the ECO, is an ordinance enacted for the purpose of providing for the payment of compensation to employees injured in the course of employment. As stipulated by the ECO, no employer shall employ any employee in any employment unless there is in force in relation to such employee a policy of insurance issued by an insurer for an amount not less than the applicable amount specified in the Fourth Schedule of the ECO in respect of the liability of the employer. According to the Fourth Schedule of the ECO, the insured amount shall be not less than HK$100,000,000 (approximately $12,900,000) per event if a company has no more than 200 employees. Any employer who contravenes this requirement commits a criminal offence and is liable on conviction to a fine of HK$100,000 (approximately $12,900) and imprisonment for two years. An employer who has taken out an insurance policy under the ECO is required to display a prescribed notice of insurance in a conspicuous place on each of its premises where any employee is employed. Any employer who, without reasonable cause, contravenes this requirement commits a criminal offence and is liable on conviction to a fine of HK$10,000 (approximately $1,290). YeeTah believes that it has taken sufficient employee compensation insurance for its employees required under the ECO.
Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong)
The MPFSO is an ordinance enacted for the purposes of providing for the establishment of non-governmental mandatory provident fund schemes, or the MPF Schemes. The MPFSO requires every employer of an employee (other than exempt persons) of 18 years of age or above but under 65 years of age to take all practical steps to ensure the employee becomes a member of a registered MPF Scheme. Subject to the minimum and maximum relevant income levels, it is mandatory for both employers and their employees to contribute 5% of the employee’s relevant income to the MPF Scheme. For a monthly-paid employee, the maximum relevant income level is HK$30,000 (approximately $3,870) per month and the maximum amount of contribution payable by the employer to the MPF Scheme is HK$1,500 (approximately $193). Any employer who, without reasonable cause, contravenes this requirement commits a criminal offence and is liable on conviction to a fine of HK$350,000 (approximately $45,200) and imprisonment for three years, and to a daily penalty of HK$500 (approximately $65) for each day on which the offence is continued. As of the date of this prospectus, the Company believe it has made all contributions required of PAM under the MPFSO. YeeTah believes that it has made all contributions required under the MPFSO.
17
Regulations Related to Hong Kong Taxation
Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong)
Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong), where an employer commences to employ in Hong Kong an individual who is or is likely to be chargeable to tax, or any married person, the employer shall give a written notice to the Commissioner of Inland Revenue not later than three months after the date of commencement of such employment. Where an employer ceases or is about to cease to employ in Hong Kong an individual who is or is likely to be chargeable to tax, or any married person, the employer shall give a written notice to the Commissioner of Inland Revenue not later than one month before such individual ceases to be employed in Hong Kong.
Tax on Dividends
Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by the Company.
Capital Gains and Profit Tax
No tax is imposed in Hong Kong in respect of capital gains from the sale of shares. However, trading gains from the sale of shares by persons carrying on a trade, profession or business in Hong Kong, where such gains are derived from or arise in Hong Kong, will be subject to Hong Kong profits tax which is imposed at the rates of 8.25% on assessable profits up to HK$2,000,000 (approximately US$258,000) and 16.5% on any part of assessable profits over HK$2,000,000 (approximately US$258,000) on corporations from the year of assessment of 2018/2019 onwards. Certain categories of taxpayers (for example, financial institutions, insurance companies and securities dealers) are likely to be regarded as deriving trading gains rather than capital gains unless these taxpayers can prove that the investment securities are held for long-term investment purposes.
Stamp Duty
Hong Kong stamp duty, currently charged at the ad valorem rate of 0.1% on the higher of the consideration for or the market value of the shares, will be payable by the purchaser on every purchase and by the seller on every sale of Hong Kong shares (in other words, a total of 0.2% is currently payable on a typical sale and purchase transaction of Hong Kong shares). In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of Hong Kong shares. Where one of the parties is a resident outside Hong Kong and does not pay the ad valorem duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee. If no stamp duty is paid on or before the due date, a penalty of up to ten times the duty payable may be imposed.
Regulations Related to Anti-Money Laundering and Counter-Terrorist Financing
Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the Laws of Hong Kong)
The AMLO imposes requirements relating to client due diligence and record-keeping and provides regulatory authorities with the powers to supervise compliance with the requirements under the AMLO. In addition, the regulatory authorities are empowered to (i) ensure that proper safeguards exist to prevent contravention of specified provisions in the AMLO; and (ii) mitigate money laundering and terrorist financing risks.
Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong)
The Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong), or the DTROP, contains provisions for the investigation of assets suspected to be derived from drug trafficking activities, the freezing of assets on arrest and the confiscation of the proceeds from drug trafficking activities. It is an offence under the DTROP if a person deals with any property knowing, or having reasonable grounds to believe, it to be the proceeds from drug trafficking. The DTROP requires a person to report to an authorized officer if he/she knows or suspects that any property (directly or indirectly) is the proceeds from drug trafficking or is intended to be used or was used in connection with drug trafficking, and failure to make such disclosure constitutes an offence under the DTROP.
Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong)
The Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong), or the OSCO, empowers officers of the Hong Kong Police Force and the Hong Kong Customs and Excise Department to investigate organized crime and triad activities, and it gives the Hong Kong courts jurisdiction to confiscate the proceeds from organized and serious crimes, to issue restraint orders and charging orders in relation to the property of defendants of specified offences. The OSCO extends the money laundering offence to cover the proceeds of all indictable offences in addition to drug trafficking.
18
United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong)
The United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong), or the UNATMO, provides that it is a criminal offence to: (i) provide or collect funds (by any means, directly or indirectly) with the intention or knowledge that the funds will be used to commit, in whole or in part, one or more terrorist acts; or (ii) make any funds or financial (or related) services available, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, such person is a terrorist or terrorist associate. The UNATMO also requires a person to report his knowledge or suspicion of terrorist property to an authorized officer, and failure to make such disclosure constitutes an offence under the UNATMO.
GL3: Guideline on Anti-Money Laundering and Counter-Terrorist Financing
The Guideline on Anti-Money Laundering and Counter-Terrorist Financing is issued by the IA, and it sets out the relevant anti-money laundering and counter-financing of terrorism (AML/CFT) statutory and regulatory requirements. It also prescribes the AML/CFT standards which authorized insurers and reinsurers carrying on long term business, and licensed individual insurance agents, licensed insurance agencies and licensed insurance broker companies carrying on regulated activities in respect of long term business (hereinafter referred to as “insurance institutions” (“IIs”)), should meet in order to comply with the statutory requirements under the AMLO and the IO. Compliance with this Guideline is enforced through the AMLO and the IO. IIs which fail to comply with this Guideline may be subject to disciplinary or other actions under the AMLO and/or the IO for non-compliance with the relevant requirements.
19
RISK FACTORS
Our business and an investment in our company is subject to significant risk. Some of these risks are described below and you should take these risks into account in making a decision to invest in our Common Stock. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. In that case, the market price of our Common Stock could decline and you could lose all or part of your investment in our Common Stock.
Risks Related to YeeTah’s Business and Industry
YeeTah’s business is subject to concentration risks arising from dependence on a single or limited number of insurance company partners.
YeeTah derives a significant portion of revenues from selling insurance products supplied by its major insurance company partners. For the fiscal year ended March 31, 2020, an aggregate of 94.34% of YeeTah’s total commissions was attributable to its top three insurance companies, each accounted for more than 10% of YeeTah’s total revenue. For the fiscal year ended March 31, 2019, an aggregate of 92.1% of YeeTah’s total revenue were attributed to its top two insurance companies, each accounted for more than 10% of its total commissions.
Because of this concentration in the supply of the insurance products YeeTah sells, YeeTah’s business and operations would be negatively affected if YeeTah experiences a partial or complete loss of any of these insurance partners. In addition, any significant adverse change in YeeTah’s relationship with any of these insurance company partners could result in loss of revenue, increased costs and distribution delays that could harm YeeTah’s business and customer relationships.
YeeTah depended on YeeTah Financial for customer acquisitions and the termination of the relationship with YeeTah Financial may materially adversely impact YeeTah’s revenue, financial conditions and results of operations.
A majority of YeeTah’s customers were referred by YeeTah’s non-insurance-service partner, YeeTah Financial, and approximately 94.97% and 97.54% of YeeTah’s total net revenues were generated from those customers for the fiscal year ended March 31, 2019 and 2020, respectively. YeeTah terminated the referral agreement with YeeTah Financial in December 2019 and is in the process of searching for new referral partners in Hong Kong and China. If YeeTah fails to secure new partners who can make referrals to the same scale as YeeTah Financial, YeeTah will likely experience a loss of revenue and its business and operation will be adversely affected.
YeeTah incurred net losses in the past and may never achieve profitability in the future.
YeeTah had net loss of $25,083 and $67,395 in the fiscal years ended March 31, 2020 and 2019, respectively and had a net loss of $24,849 in the three months ended June 30, 2020 and had a net income of $3,474 in the three months ended June 30, 2019, respectively. There can be no assurance that YeeTah will be able to become profitable in the future. YeeTah anticipates that its operating costs and expenses will increase in the foreseeable future as it continues to grow its business, acquire new clients and further develop its service offering and increase brand recognition. These efforts may prove more costly than YeeTah currently anticipates, and YeeTah may not succeed in increasing its revenue sufficiently to offset these higher expenses. There are other factors that could negatively affect YeeTah’s financial condition. For example, if YeeTah fails to compete successfully with its existing or potential competitors, or if the insurance products it sells are not accepted by the market as it expects, YeeTah will receive lower-than-expected insurance brokerage income, and its financial results will be adversely affected. If regulatory authorities promulgate new laws, regulations and regulatory requirements that limit YeeTah’s business operations, especially with regard to its fee or cost model, its results of operations will suffer. As a result of the foregoing and other factors, YeeTah’s net profit margins may decline or it may continue to incur net losses in the future and may not be able to achieve profitability on a quarterly or annual basis.
20
YeeTah’s business, financial condition and results of operations have been and may continue to be materially adversely affected by the COVID-19 outbreak.
In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. COVID-19 has since spread rapidly to other countries, including the United States, and the World Health Organization formally declared the COVID-19 outbreak a pandemic in March 2020. The outbreak has reached more than 160 countries, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. The Hong Kong government has ordered quarantines, travel restrictions, and the temporary closure of schools, stores, borders and facilities. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses.
YeeTah’s business operations rely heavily on the customers from mainland China and the closure by Hong Kong government of the borders with mainland China, the restriction on travel have significantly reduced YeeTah’s number of new customers. In addition, limited ability of YeeTah’s sales personnel to interact with customers face-to-face as result of the social distance measures has hindered the sales activities of YeeTah’s sales force, which has had a material adverse impact on YeeTah’s operating results of the period from January 2020 to the date of this report and the operating income for the same period was significantly decreased on a year-over-year basis.
The duration of such business disruption and the resulting operational and financial impact on YeeTah cannot be reasonably estimated at this time but may negatively affect YeeTah’s financial results for its fiscal year ending March 31, 2021. The global spread of COVID-19 pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the extent to which it may affect YeeTah’s results of operations will depend on future developments, which are highly uncertain and cannot be predicted. We cannot assure you that the COVID-19 pandemic can be eliminated or contained in the near future, or at all, or a similar outbreak will not occur again. If the COVID-19 pandemic and the resulting disruption to our business were to extend over a prolonged period, it could materially and adversely affect our business, financial condition, and results of operations.
If YeeTah fails to attract and retain productive technical representatives, its business and operating results could be materially and adversely affected.
All of YeeTah’s sales of life and medical insurance products and general insurance products are conducted through its licensed technical representatives. YeeTah has been actively recruiting and will continue to recruit technical representatives to join its distribution and service network. Technical representatives have been instrumental to the development of YeeTah’s life insurance business.
As of August 31, 2020, YeeTah had ten technical representatives. Competition for technical representatives is intense and there can be no assurance that YeeTah will be able to attract and retain such personnel. If YeeTah is unable to attract and retain highly productive technical representatives, its business could be materially and adversely affected.
21
Misconduct of the technical representatives may have a material adverse effect on YeeTah’s business, results of operations or financial condition.
Misconduct of the technical representatives could result in regulatory sanctions, litigation or serious reputational or financial harm to YeeTah.
Misconduct may include:
| ● | the use of methods of solicitation and advertising that are not compatible with the integrity and dignity of the profession of insurance broking; |
| ● | the use of any illustration, circular or memorandum that misrepresents or is incomplete as regards the terms, benefits or advantages of any contract of insurance issued or to be issued to a prospective purchaser of insurance; |
| ● | the use of any incomplete comparison of any policy or contract of insurance for the purpose of inducing an insured to forfeit or replace a policy or contract of insurance; |
| ● | the offer of any payment, allowance or gift as an inducement to any prospective insured to insure through the offeror; and |
| ● | holding out to the public or advertising by means of advertisements, cards, circulars, letters, signs or other methods in an irresponsible or untruthful manner. |
Failure to prevent and detect misconduct may have a material adverse effect on YeeTah’s business, results of operations or financial condition.
YeeTah is subject to extensive regulations for its insurance brokerage business and operations.
YeeTah conducts its business primarily in Hong Kong and its business operations are subject to vigorous regulations in Hong Kong applicable to licensed insurance brokers. Any failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of YeeTah’s license as insurance broker. Even if a sanction imposed against YeeTah or its personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm YeeTah’s reputation and impede its ability to retain customers and develop new customer relationships, which may reduce its revenues.
From time to time, the regulatory landscape in the insurance industry in Hong Kong involves and changes. YeeTah faces the risk of significant intervention by regulatory authorities, including increased registered capital requirements, extended training of the insurance agencies’ personnel, and adoption of costly or restrictive new regulations and judicial or administrative proceedings. If any restrictive or costly new regulations and rules become effective and applicable to YeeTah’s business, these regulations may materially limit its activities and operational profitability.
Failure to obtain, renew, or retain licenses, permits or approvals may affect the ability of YeeTah to conduct or expand its business.
YeeTah is required to obtain applicable licenses, permits and approvals from different Hong Kong regulatory authorities in order to conduct or expand its business. The IA has promulgated various regulations on the insurance business, including regulations requiring an insurance broker license. YeeTah obtained, renewed and maintained its insurance broker license as required by the IA. However, there is no assurance that the IA will not issue new regulations governing the insurance product and service industry that might require YeeTah to obtain additional licenses, permits or approvals for its current or future business operations. YeeTah’s failure to obtain any such additional licenses, permits or approvals may adversely its business operations and financial condition.
22
Competition in YeeTah’s industry is intense and, if YeeTah is unable to compete effectively with both existing and new market participants, it may lose customers and its financial results may be negatively affected.
The insurance intermediary industry in Hong Kong is highly competitive, and YeeTah expects competition to persist and intensify as more insurance broker companies enter the market. In insurance product distribution, YeeTah faces competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, from business entities that distribute insurance products on an ancillary basis, such as commercial banks, as well as from other traditional insurance intermediaries. Many of YeeTah’s competitors, both existing and newly emerging, have greater financial and marketing resources than YeeTah does and may be able to offer products and services that YeeTah does not currently offer and may not offer in the future. If YeeTah is unable to compete effectively against those competitors, YeeTah may lose customers and its financial results may be negatively affected.
Because the commission YeeTah earns on the sale of insurance products is based on premiums and commission rates set by insurance companies, any decrease in these premiums or commission rates may have an adverse effect on its results of operations.
YeeTah is an insurance broker and derives revenues primarily from commissions paid by the insurance companies whose policies its customers purchase. Its commission rates are set by insurance companies and are based on the types and terms of the insurance products. Commission rates and premiums can change based on the prevailing economic, regulatory, taxation-related and competitive factors that affect insurance companies. These factors, which are not within YeeTah’s control, include the ability of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, as well as the tax deductibility of commissions and the consumers themselves.
Because YeeTah does not determine, and cannot predict, the timing or extent of premium or commission rate changes, YeeTah cannot predict the effect any of these changes may have on its operations. Any decrease in premiums or commission rates may significantly affect YeeTah’s profitability.
Quarterly and annual variations in YeeTah’s commission revenue may unexpectedly impact YeeTah’s results of operations.
YeeTah’s commission revenue is subject to both quarterly and annual fluctuations as a result of the seasonality of YeeTah’s business, the timing of policy renewals and the net effect of new and lost business. During any given year, YeeTah’s commission revenue derived from distribution of life and medical insurance products is highest during the fourth quarter and is lowest during the first quarter. This general seasonality trend was further affected by the recent COVID-19 outbreak, which reduced YeeTah’s first year life insurance commission revenue during the first two quarters of 2020. The factors that cause the quarterly and annual variations are not within YeeTah’s control. Specifically, regulatory changes to product design may result in cessation of products from time to time and cause quarterly fluctuation in the results of YeeTah’s operations. In addition, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, quarterly or annual comparisons of YeeTah’s operating results may not be used as an indication of YeeTah’s future performance.
YeeTah’s future success depends on the continuing efforts of YeeTah’s senior management team and other key personnel, and YeeTah’s business may be harmed if YeeTah lose their services.
YeeTah’s future success depends heavily upon the continuing services of the members of YeeTah’s senior management team and other key personnel, in particular, Mr. Huihe Zheng, YeeTah’s Chief Executive Officer and director, and Ms. Siu Ping Lo, YeeTah’s responsible officer, compliance officer, and money laundering reporting officer. If YeeTah’s senior executives or other key personnel, are unable or unwilling to continue in their present positions, YeeTah may not be able to replace them easily, or at all. As such, YeeTah’s business may be disrupted and its financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel in insurance industry is intense because of a number of factors including the limited pool of qualified candidates. YeeTah may not be able to retain the services of YeeTah’s senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. In addition, if any member of YeeTah’s senior management team or any of YeeTah’s other key personnel joins a competitor or forms a competing company, YeeTah may lose customers, sensitive trade information, key professionals and staff members.
23
YeeTah may not be able to ensure the accuracy and completeness of product information and the effectiveness of its recommendation of insurance products.
YeeTah’s customers rely on the insurance product information YeeTah provides through its technical representatives. While YeeTah believes that such information is generally accurate, complete and reliable, there can be no assurance that the accuracy, completeness or reliability of the information can be maintained in the future. If YeeTah’s technical representatives provide any inaccurate or incomplete information due to either their own fault or that of YeeTah’s insurance partners, or YeeTah fails to present accurate or complete information of any insurance products which could lead to its customers’ failure to get the protection or YeeTah being warned or punished by regulatory authorities, YeeTah’s reputation could be harmed and it could experience reduced businesses, which may adversely affect our business and financial performance.
YeeTah may not be able to recommend suitable insurance products to its customers. YeeTah’s technical representatives may not fully understand the customers’ needs and recommend suitable products to them. In addition, because the technical representatives are compensated based on premiums and commission rates, they may be tempted to sell insurance products with higher commissions rather than those required by or suitable to the customers or prospective customers. If YeeTah’s customers are recommended insurance products that do not suit their protection needs, they may lose trust in the company. Meanwhile, YeeTah’s insurance company partners may find its recommendation ineffective. YeeTah’s customers may consequently be reluctant to continue to use YeeTah’s services, and its insurance company partners may be hesitant to continue to partner with YeeTah. As a result, YeeTah’s business, reputation, financial performance and prospects will be materially and adversely affected.
YeeTah may face potential liability, loss of customers and damage to YeeTah’s reputation for any failure to protect the confidential information of its customers.
YeeTah’s customer database holds confidential information concerning YeeTah’s customers. YeeTah may be unable to prevent third parties, such as hackers or criminal organizations, from stealing information provided by YeeTah’s customers. Confidential information of YeeTah’s customers may also be misappropriated or inadvertently disclosed through insurance agents’ misconduct or mistake. YeeTah may also in the future be required to disclose to government authorities certain confidential information concerning its customers. Any compromise of YeeTah’s security could have a material adverse effect on its reputation, business, prospects, financial condition and results of operations.
Though YeeTah has not experienced any material cybersecurity incidents in the past, if its database was compromised by outside sources or if YeeTah is accused of failing to protect the confidential information of its customers, YeeTah may be forced to expend significant financial and managerial resources in remedying the situation, defending against these accusations and YeeTah may face potential liability. Any negative publicity, especially concerning breaches in YeeTah’s cybersecurity systems, may adversely affect its public image and reputation. Though YeeTah takes proactive measures to protect against these risks and believes that its efforts in this area are sufficient for its business, there can be no assurance that such measures will prove effective against all cybersecurity risks.
Risks Related to Doing Business in Hong Kong
Potential political and economic instability in Hong Kong may adversely impact our results of operations.
YeeTah’s operational activities are primarily conducted in Hong Kong. Accordingly, political and economic conditions in Hong Kong and the surrounding region may directly affect its business. Since early 2019, a number of political protests and conflicts have occurred in Hong Kong in connection with proposed legislation that would allow local authorities to detain and extradite people who are wanted in territories that Hong Kong does not have extradition agreements with, including mainland China and Taiwan. The economy of Hong Kong has been negatively impacted, including its retail market, property market, stock market, and tourism, from such protests. As a result, YeeTah experienced a drop in new customers from mainland China beginning in June 2019, which has impacted its revenue for period from June 2019 to the date of this Current Report. It is unclear what (if any) actions the central government of the PRC would take, if Hong Kong’s protests continue, to stabilize Hong Kong’s situation.
Any hostilities involving Hong Kong or the interruption or curtailment of trade or business investments between Hong Kong and mainland China or other regions or countries, or a significant downturn in the economic or financial conditions of Hong Kong, could adversely impact YeeTah’s operations and the Company’s results of operations.
24
The future development of national security laws and regulations in Hong Kong could materially impact YeeTah’s business by possibly triggering sanctions and other measures which can cause economic harm to YeeTah’s business.
On May 28, 2020, the National People’s Congress of the People’s Republic of China approved a proposal to impose a new national security law for Hong Kong and authorized the Standing Committee of the National People’s Congress to proceed to work out details of the legislation to be implemented in Hong Kong (the “Decision”). While the details of the new law are still scarce as of the date of this prospectus, the Decision states that the new law will target secession, subversion of state power, terrorism activities and foreign interference. The stated objective of the Decision is to protect the national security of China as a whole (including Hong Kong and Macau) and is not intended to have a direct commercial bearing on commercial and economic activities. The government believes the new law may bring about more stability to Hong Kong, which in turn may lay the foundation for commercial and economic activities to flourish. On the other hand, YeeTah cannot rule out the possibility that the Decision may trigger sanctions or other forms of penalties by foreign governments, which may cause economic and other hardship for Hong Kong, including companies like them that do business in Hong Kong. As the Decision is new and details of the new law unavailable as of the date of this prospectus, it is difficult to predict the impact, in any, the new law will have on our business, as such impact will depend on future developments, which are highly uncertain and cannot be predicted.
The market price for our securities could be adversely affected by increased tensions between the United States and China.
Recently there have been heightened tensions in the economic and political relations between the United States and China. On June 30, 2020, the Standing Committee of the PRC National People's Congress issued the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region. This law defines the duties and government bodies of Hong Kong for safeguarding national security and four categories of offences—secession, subversion, terrorist activities and collusion with a foreign country or external elements to endanger national security—and their corresponding penalties. On July 14, 2020, U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong's autonomy. On August 7, 2020, the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including Hong Kong chief executive Carrie Lam. The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions such as those provided in the HKAA is in practice discretionary and highly political, especially in a relationship as extensive and complex as that between the United States and China. It is difficult to predict the full impact of the HKAA on Hong Kong and companies like YeeTah. Furthermore, legislative or administrative actions in respect of Sino-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our securities could be adversely affected.
25
Risks Related to Our Company and Securities
The limited public trading market may cause volatility in our stock price.
The quotation of our Common Stock on the OTCQB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our Common Stock is thus and will be subject to significant volatility. Sales of substantial amounts of our Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our Common Stock.
An active and visible trading market for our Common Stock may not develop.
We cannot predict whether an active market for our Common Stock will develop in the future. In the absence of an active trading market:
| ● | Investors may have difficulty buying and selling or obtaining market quotations; |
| ● | Market visibility for our Common Stock may be limited; and |
| ● | A lack of visibility for our Common Stock may have a depressive effect on the market price for our Common Stock. |
The OTCQB is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than Nasdaq Stock Market or the New York Stock Exchange. The trading price of the Common Stock is expected to be subject to significant fluctuations in response to variations in quarterly operating results, changes in analysts’ earnings estimates, announcements of innovations by us or our competitors, general conditions in the industry in which we operate and other factors. These fluctuations, as well as general economic and market conditions, may have a material or adverse effect on the market price of our Common Stock.
If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation.
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. Our operations are primarily conducted in Hong Kong but we have depended, and expect to continue to depend, on visitors from mainland China to generate a majority of our revenues. We also seek to establish collaboration with business partners in mainland China. It is not clear what effect this scrutiny, criticism and negative publicity on China based companies will have on us, our business and our stock price, if any. If we become the subject of any unfavorable allegations due to our dependence on Chinese visitors or relationship with business partners in mainland China, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our business. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our common stock.
Our controlling stockholder may exercise significant influence over us and may be subject to conflicts of interest.
Our Chairman of the Board, Chief Executive Officer and controlling stockholder, Huihe Zheng, owns approximately 92.6% of our outstanding voting power. Mr. Zheng thus has the power, on his own, to determine the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, approval of equity incentive plans, and other significant corporate actions. Mr. Zheng also has the power to prevent or cause a change in control. In addition, without the consent of Mr. Zheng, we could be prevented from entering into transactions that could be beneficial to us. The interests of Mr. Zheng may differ from the interests of our other stockholders, which cause him to be faced with conflicts of interests that may not be resolved in favor of or to the satisfaction of our minority shareholders.
The Series B and Series Convertible Preferred Stock, which are controlled by our Chairman of the Board, Chief Executive Officer, have super voting rights that may adversely affect our holders of common stock.
Except as required by law, holders of Series B and Series C Preferred Stock (which is currently controlled by Huihe Zheng, our Chairman of the Board, Chief Executive Officer) are entitled to super voting rights. Each share of Series B Preferred Stock is entitled to 100 votes and each share of Series C Preferred Stock is initially entitled to eleven votes for each share of common stock into which such share of Series C Preferred Stock could then be converted. Holders of Series B and Series C Preferred Stock will vote together on all matters upon which common stock holders are entitled to vote. The voting rights of holders of our common stock will be diluted as a result of these super voting rights.
Compliance with changing regulation of corporate governance and public disclosure, and our management’s inexperience with such regulations, will result in additional expenses and creates a risk of non-compliance.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. In addition, our management is located in the PRC has little experience with compliance with U.S. laws (including securities laws). This inexperience may cause us to fall out of compliance with applicable regulatory requirements, which could lead to enforcement action against us and a negative impact on our stock price.
Our management has determined that our disclosure controls and procedures are not effective and we have identified material weaknesses in our internal control over financial reporting.
In connection with the preparation of our financial statements for the years ended December 31, 2019 and 2018, our management concluded that our internal control over financial reporting was not effective and we identified several material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In addition, as of December 31, 2019 and September 30, 2018, our management concluded that our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting. The material weaknesses result from the following: (i) lack of proper segregation of duties and risk assessment process; (ii) lack of formal documentation in internal controls over financial reporting; and (iii) lack of independent directors and an audit committee.
Each of the material weaknesses described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. We cannot assure you that any measures we may take in the future will be sufficient to remediate the material weaknesses described above or avoid potential future material weaknesses. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, our stock price could be negatively impacted and we could be subject to, among other things, regulatory or enforcement actions by the Securities and Exchange Commission.
26
Our Common Stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
Our Common Stock, which is currently quoted on OTCQB, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended. Our Common Stock may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our Common Stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our Common Stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.
We do not plan to declare or pay any cash dividends on our shares of Common Stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their Common Stock at or above the price they paid for them.
27
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our Board of Directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.
You may experience additional dilution as a result of future equity offerings.
In order to raise additional capital, we have issued equity securities in the past and may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per unit in this offering. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions, may be lower than the price per share paid by investors in this offering.
Our independent auditor has expressed substantial doubt about our ability to continue as a going concern.
For each of the years ended December 31, 2019 and 2018, our independent auditor included an explanatory paragraph in their audit report emphasizing to the readers of the audit report that there is a substantial doubt about our ability to continue as a going concern based upon our net losses and negative cash flows from operations for the years ended December 31, 2019 and 2018 and our levels of working capital as of December 31, 2019 and 2018. In addition, the independent auditor of the Group also issued an explanatory paragraph in their audit report emphasizing the substantial doubt about the Group’s ability to continue as a going concern based upon its net losses and negative cash flows from operations for the years ended March 31, 2020 and 2019 and its levels of working capital as of March 31, 2020 and 2019. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds to fund our operating expenses through loans and additional sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there can be no assurance that we will be successful in raising any necessary additional capital. If we are not successful in raising additional capital, we may not have enough financial resources to support our business and operations and, as a result, may not be able to continue as a going concern and could be forced to liquidate.
Shares of our Common Stock that have not been registered under federal securities laws are subject to resale restrictions imposed by Rule 144, including those set forth in Rule 144(i) which apply to a former “shell company.”
Prior to the closing of the Share Exchange, we were deemed a “shell company” under applicable SEC rules and regulations because we had no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. Pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), sales of the securities of a former shell company, such as us, under that rule are not permitted (i) until at least 12 months have elapsed from the date on which our Current Report on Form 8-K reflecting our status as a non-shell company, was filed with the SEC; (ii) unless at the time of a proposed sale, we are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and have filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other than Form 8-K reports; or (iii) until the effectiveness of a registration statement under the Securities Act relating to our Common Stock. Therefore, unless we register such shares of Common Stock for sale under the Securities Act, most of our stockholders will be forced to hold their shares of our Common Stock for at least that 12-month period before they are eligible to sell those shares, and even after that period, sales may not be made under Rule 144 unless we and the selling stockholders are in compliance with other requirements of Rule 144. Further, it will be more difficult for us to raise funding to support our operations through the sale of debt or equity securities unless we agree to register such securities under the Securities Act, which could cause us to expend significant time and cash resources. Additionally, our previous status as a shell company could also limit our use of our securities to pay for any acquisitions we may seek to pursue in the future (although none are currently planned). The lack of liquidity of our securities as a result of the inability to sell under Rule 144 for a longer period of time than a non- former shell company could cause the market price of our securities to decline.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE GROUP
The following discussion and analysis of the Group’s financial condition and results of operations should be read in conjunction with the Group’s consolidated financial statements and related notes that appear in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect the Group’s plans, estimates, and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” All amounts in included in the fiscal years ended March 31, 2020 and 2019 and included in the quarterly periods ended June 30,2020 and 2019 are derived from the Group’s audited consolidated financial statements and unaudited condensed consolidated financial statements included elsewhere in this filing. Financial statements of the Group have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP. All financial amounts are expressed in U.S. dollars.
Overview
The Group conducts its business through its wholly owned subsidiary, YeeTah. Headquartered in Hong Kong, China, YeeTah is a licensed insurance brokerage company that sells a wide range of insurance products, consisting of two major categories: (1) life and medical insurance, such as individual life insurance; and (2) general insurance, such as automobile insurance, commercial property insurance, liability insurance, homeowner insurance. In addition, as a MPF Intermediary, YeeTah also assists its customers with their investment through the MPF and the ORSO schemes in Hong Kong, both of which are retirement protection schemes set up for employees.
YeeTah sells insurance products underwritten by insurance companies operating in Hong Kong to its individual customers and is compensated for its services by commissions paid by insurance companies, typically based on a percentage of the premium paid by the insured. Commissions generally depend on the type, term of insurance products and the particular insurance company and they are usually paid by the insurance companies the next month after the cooling off period of the policies sold.
As an independent insurance agency, YeeTah offers not only a broad range of insurance products underwritten by multiple insurance companies to address the needs of increasingly sophisticated customers with diverse needs and preferences but also quality services, which covers the policy application, customer information collection, analysis of policy selection, and after-sale services.
YeeTah focuses on offering long-term life insurance products including endowment life and annuity life insurance and sells general insurance products including automobile insurance, individual accident insurance, homeowner insurance, liability insurance and travel insurance.
Impact of COVID-19 and Protests
An outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. The COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to this outbreak, the governments of many countries, states, cities and other geographic regions, including Hong Kong, have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.
With social distancing measures having been implemented to curtail the spread of COVID-19, brokers in Hong Kong, such as YeeTah, which relied primarily on storefront and in-person consultations for new business production faced an immediate slowdown. In addition, Hong Kong has suspended mainland tourists’ free travel and requested those who travel from the mainland and enter Hong Kong undergo quarantine for 14 days.
Customers from mainland China contributed to a large part of YeeTah’s commissions. Regulations require their physical presence in Hong Kong to complete the policy contract. However, due to the political turmoil and travel restrictions related to the COVID-19 outbreak, mainland Chinese customers have dropped sharply. As a result, YeeTah’s revenue from commissions on new business has decreased significantly. YeeTah’s commissions from renewal premiums have also been materially affected since the mainland Chinese customers have been late in making the renewal payments due to inability to visit Hong Kong to make the payments. Most of YeeTah’s mainland customers do not have Hong Kong bank account and used to pay their premiums through credit card or in cash in person.
As a result of COVID-19 (which arose in Hong Kong in January 2020) and the civilian protests in Hong Kong (which started in March 2019), YeeTah experienced a 50 % decrease in revenue for the year ended March 31, 2020 as compared to the year ended March 31, 2019. Further, YeeTah’s revenue for the three months ended June 30, 2020 experienced a decrease of 60.1% as compared to the same period of last year.
29
Results of Operations
Comparison of the Fiscal Years Ended March 31, 2020 and March 31, 2019
The following table presents an overview of the Group’s results of operations for the years ended March 31, 2020 and 2019:
| For the Year Ended | For the Year Ended | |||||||
| March 31, 2020 | March 31, 2019 | |||||||
| Revenue | 221,289 | 445,234 | ||||||
| Cost of sales | 200,011 | 409,998 | ||||||
| Gross profit | 21,278 | 35,236 | ||||||
| Operating costs and expenses: | ||||||||
| General and administrative expenses | 151,893 | 210,219 | ||||||
| Total operating costs and expenses | 151,893 | 210,219 | ||||||
| Loss from operations | (130,615 | ) | (174,983 | ) | ||||
| Total other income | 105,532 | 107,588 | ||||||
| Loss before provision for income taxes | (25,083 | ) | (67,395 | ) | ||||
| Net loss | (25,083 | ) | (67,395 | ) | ||||
Revenue
Revenue represents commissions earned from insurance companies through sales of insurance products to customers. Revenue decreased by approximately $224,000 or 50.3% for the year ended March 31, 2020 as compared to the same period of 2019. The decrease was mainly due to the economic impacts resulted from the Hong Kong civilian protests and COVID-19 during fiscal 2020.
Costs of sales
Costs of sales represent commissions YeeTah paid to third party individuals or companies who referred customers to YeeTah. Cost of sales decreased by approximately $210,000 or 51.2% for the year ended March 31, 2020 as compared to the same period of 2019. The decrease was in line with the decrease in revenue.
Gross margin
Gross margin was 9.6% for the fiscal year ended March 31, 2020, which was relatively consistent with the gross margin of 7.9% for the fiscal year ended March 31, 2019.
30
General and administrative expenses
General and administrative (“G&A”) expense consist primarily of employee salaries, office rent, insurance costs, general office operating expenses (e.g. utilities, repairs and maintenance) and professional fees. G&A expenses decreased by approximately $58,000 or 27.7% for the year ended March 31, 2020 as compared to the same period of 2019. The decrease was primarily due to (i) a decrease of approximately $24,000 in office rent as a result of the relocation to a cheaper office in 2020 and (ii) a decrease of approximately $15,000 in employee salaries due to reduction in the number of employees in October 2019.
Other income
Other income represents management service fees earned from providing office management services to a related party company. The management service fees were generally fixed and therefore other income for the year ended March 31, 2020 was consistent with that of 2019.
Net loss
As a result of the factors described above, the Group’s net loss for the fiscal year ended March 31, 2020 was $25,083 as compared to a net loss of $67,395 for the same period of 2019.
Comparison of the Three Months Ended June 30, 2020 and 2019
The following table presents an overview of the Group’s results of operations for the three months ended June 30, 2020 and 2019:
| For The Three Months Ended | For The Three Months Ended | |||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Revenue | 20,880 | 52,273 | ||||||
| Cost of sales | 19,578 | 43,916 | ||||||
| Gross profit | 1,302 | 8,357 | ||||||
| Operating costs and expenses: | ||||||||
| General and administrative expenses | 29,612 | 39,307 | ||||||
| Total operating costs and expenses | 29,612 | 39,307 | ||||||
| Loss from operations | (28,310 | ) | (30,950 | ) | ||||
| Total other income | 3,461 | 34,424 | ||||||
| Loss before provision for income taxes | (24,849 | ) | 3,474 | |||||
| Net loss | (24,849 | ) | 3,474 | |||||
Revenue
Revenue decreased by approximately $31,000 or 60.1% for the three months ended June 30, 2020 as compared to the same period of 2019. The decrease was mainly due to the economic impacts resulted from the prolonged Hong Kong civilian protests and COVID -19 during fiscal 2020.
31
Cost of sales
Cost of sales decreased by approximately $24,000 or 55.4% for the three months ended June 30, 2020 as compared to the same period of 2019. The decrease was in line with the decrease of revenue.
Gross margin
Gross margin was 6.2% for the three months ended June 30, 2020 as compared to the 16% of the same period of last year. The decrease was due to revenue in 2020 was largely related to renewals, which generated lower commission incomes.
General and administrative expenses
G&A expenses consist primarily of employee salaries, office rents, insurance costs, general office operating expenses (e.g. utilities, repairs and maintenance) and professional fees. G&A expenses decreased by approximately $10,000 or 24.7% for the three months ended June 30, 2020 as compared to the same period of 2019. The decrease was primarily due to (i) a decrease of approximately $4,000 in repair and maintenance because such expenses were non-routine and did not occur in the three month period of 2020 and (ii) a decrease of approximately $3,000 in employee salaries due to reduction in the number of employees to adjust for the change in business activity in 2020.
Other income
The other income decreased by approximately $31,000 or 89.9% for the three months ended June 30, 2020 as compared to the same period of 2019. The decrease was due to termination of these management services in December 2019.
Net loss
As a result of the factors described above, net loss for the three months ended June 30, 2020 was $24,849, representing an increase of approximately $28,000 or 815% as compared to the same period of 2019.
Foreign Currency Translation
The Group’s reporting currency is the United States dollar (“US$”). The Group’s operations are principally conducted in Hong Kong where the Hong Kong dollar is the functional currency.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currency at the prevailing rates of exchange at the balance date. The resulting exchange differences are reported in the statements of operations and comprehensive income.
The exchanges rate used for translation from Hong Kong dollar to US$ was 7.8000, a pegged rate determined by the linked exchange rate system in Hong Kong. This pegged rate was used to translate Group’s balance sheets, income statement items and cash flow items for both the years ended March 31, 2020 and 2019 and for both the three months ended June 30, 2020 and 2019.
Liquidity and Capital Resources
To date, the Group has financed its operations primarily through cash generated by operating activities, equity financings and advances from its principal shareholder. As of June 30, 2020, March 31, 2020, and 2019, the Group had $82,564, $62,399 and $24,716, respectively, in cash and cash equivalents, which primarily consist of cash deposited in banks.
The Group’s working capital requirements mainly comprise of commissions paid to technical representatives and referral fees, operating lease payments and employee salaries. Historically, the Group’s capital requirements were generally met by cash generated from its operations, equity financings and funding from its principal shareholder. In light of the civilian protest events in Hong Kong and the COVID-19 pandemic, the Group undertook certain cost cutting measures, including but not limited to, relocating to a new office with a much lower rent and reducing the number of employees. Discretionary expenditures are also curtailed or reduced to save costs. In addition to adjusting its operating expenditures, the Group will continue to seek opportunities of equity financings and financial supports from the Group’s principal shareholder. Although historically the Group has been successful in obtaining equity financings through the sales of its ordinary shares and obtaining debt financings from its principal shareholder, the availability of such financings when required is dependent on many factors beyond the Group’s control such as the unforeseeable impacts from COVID-19 and the recovery of the Hong Kong economy following the civilian protests.
32
Years Ended March 31, 2020 and 2019
| March 31, 2020 | March 31, 2019 | |||||||
| Net cash provided by (used in) operating activities | $ | 19,274 | $ | (67,127 | ) | |||
| Net cash provided by investing activities | - | - | ||||||
| Net cash provided by financing activities | 18,409 | 35,898 | ||||||
| Effect of exchange rate changes on cash | - | - | ||||||
| Net increase (decrease) in cash, cash equivalents | 37,683 | (31,229 | ) | |||||
| Cash and cash equivalents at beginning of year | 24,716 | 55,945 | ||||||
| Cash and cash equivalents at end of year | $ | 62,399 | $ | 24,716 | ||||
Operating Activities:
Net cash generated from operating activities was approximately $19,000 for the year ended March 31, 2020, compared to net cash used in operating activities of approximately $67,000 for 2019, representing an increase of approximately $86,000 in the net cash inflow generated from operating activities. The increase in net cash generated from operating activities was primarily due to the following:
| 1) | Change in accounts receivable was approximately $39,000 cash inflow for the year ended March 31, 2020. For 2019, changes in accounts receivable was approximately $39,000 cash outflow, which led to a $78,000 increase in net cash inflow from operating activities. |
| 2) | Change in other receivable provided approximately $38,000 cash inflow for the year ended March 31, 2020. For 2019, change in other receivable was nil, which led to an increase of approximately $38,000 in net cash inflow from operating activities. |
| 3) | Change in due to a related party consumed an approximately $33,000 cash outflow for the year ended March 31, 2020. For 2019, change in due to a related party generated an approximately cash inflow of $42,000, which led to an increase of approximately $74,000 in net cash outflow from operating activities. |
Financing Activities:
Net cash provided by financing activities was approximately $18,000 for the year ended March 31, 2020, which was primarily attributable to the net result of receipt for subscription receivable of approximately $53,000 and repayment of shareholder advances of approximately $35,000.
Net cash provided by financing activities was approximately $36,000 for the year ended March 31, 2019, which was primarily attributable to shareholder advances.
Three Months Ended June 30, 2020 and 2019
| June 30, 2020 | June 30, 2019 | |||||||
| Net cash provided by (used in) operating activities | $ | 9,859 | $ | 29,955 | ||||
| Net cash provided by investing activities | - | - | ||||||
| Net cash provided by (used in) financing activities | 10,306 | (35,769 | ) | |||||
| Effect of exchange rate changes on cash | - | - | ||||||
| Net increase (decrease) in cash, cash equivalents | 20,165 | (5,814 | ) | |||||
| Cash and cash equivalents at beginning of period | 62,399 | 24,716 | ||||||
| Cash and cash equivalents at end of year | $ | 82,564 | $ | 18,902 | ||||
The Group had a balance of cash and cash equivalents of approximately $83,000 as of June 30, 2020, compared with a balance of approximately $62,000 as of March 31, 2020.
33
Operating Activities:
Net cash generated in operating activities was approximately $10,000 for the three months ended June 30, 2020, compared to net cash generated from operating activities of approximately $30,000 for 2019, represented a decrease of approximately $20,000 in the net cash inflow generated from operating activities. The decrease in net cash generated from operating activities was primarily due to the following:
| 1) | Change in accounts receivable resulted in an approximately $5,000 cash inflow for the quarterly period ended June 30, 2020. For the same period of 2019, changes in accounts receivable was an approximately $31,000 cash inflow, which led to an approximately $26,000 decrease in net cash inflow from operating activities. |
| 2) | Change in accounts payable and accrued liabilities generated an approximately $6,000 cash inflow for the quarterly period ended June 30, 2020. For the same period in 2019, change in accounts payable and accrued liabilities generated a cash inflow of approximately $3,000, which led to an approximately $3,000 increase in net cash inflow from operating activities. |
| 3) | Change in due to a related party generated an approximately $27,000 cash inflow for the quarterly period ended June 30, 2020. For the same period in 2019, change in due to a related party consumed a cash outflow of approximately $9,000, which led to an approximately $36,000 increase in net cash inflow from operating activities. |
Financing Activities:
Net cash generated from financing activities was approximately $10,000 for the quarterly period ended June 30, 2020, which was attributable to shareholder advances of approximately $20,000 and repayment of shareholder advances of approximately $10,000.
Net cash used in financing activities was $36,000 for the quarterly period ended June 30, 2019, which was primarily attributable to repayments of shareholder advances.
Lease commitments
The Group had one office lease agreement and its lease commitments as of June 30, 2020 are summarized as follows:
| Payments due by period | ||||||||||||||||
| Total | Less than 1 year | 1-3 years | Over 3 years | |||||||||||||
| Operating lease obligations | $ | 29,231 | $ | 29,231 | $ | - | $ | - | ||||||||
Critical Accounting Policies
Please refer to Note 2 of the Group’ consolidated financial statements included in this report for details of critical accounting policies. There were no areas requiring significant management judgments and estimates for the years ended March 31, 2020 and 2019 and for the three months ended June 30, 2020 and 2019.
Off-balance Sheet Commitments and Arrangements
As of June 30, 2020, the Group did not have any material off-balance sheet arrangements that had or were reasonably likely to have any effect on the registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to the beneficial ownership of Common Stock by (i) each person, entity or group (as that term is used in Section 13(d)(3) of the Exchange Act) known to us to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. The percentage of class is based on 1,668,049 shares of Common Stock issued and outstanding as of October 21, 2020.
| Name of Beneficial Owner | Number of Shares of Common Stock Owned | Percentage of Shares of Common Stock Owned | Number of Shares of Class B Preferred Stock Owned | Percentage of Shares of Class B Preferred Stock Owned | Number of Shares of Class C Preferred Stock Owned | Percentage of Shares of Class C Preferred Stock Owned | Percentage of Aggregate Voting Power | |||||||||||||||||||||
| 5% Stockholders | ||||||||||||||||||||||||||||
| Huihe Zheng | 710,000 | 42.6 | % | 13,500 | 100 | % | 900,000 | 100 | % | 92.6 | %(1)(2) | |||||||||||||||||
| Jie Zhang (3) | 266,120 | 16.0 | % | - | - | - | - | 2.1 | % | |||||||||||||||||||
| Top Team Asia(4) | 276,168 | 16.6 | % | - | - | - | - | 2.1 | % | |||||||||||||||||||
| Directors and Officers | ||||||||||||||||||||||||||||
| Huihe Zheng | 710,000 | 42.6 | % | 13,500 | 100 | % | 900,000 | 100 | % | 92.6 | %(1)(2) | |||||||||||||||||
| Tim Shannon (5) | 834 | * | - | - | - | - | * | |||||||||||||||||||||
| Huili Shen | - | - | - | - | - | - | - | |||||||||||||||||||||
| Timothy Miles | - | - | - | - | - | - | - | |||||||||||||||||||||
| All officers and directors as a group (four persons) | 710,834 | 42.6 | % | 13,500 | 100 | % | 900,000 | 100 | % | 93.2 | % | |||||||||||||||||
*Less than one percent.
| (1) | Each share of Series B Preferred Stock entitles the holder to 100 votes on all corporate matters submitted for stockholder approval. |
| (2) | Each share of Series C Preferred Stock entitles the holder to 11 votes initially on all corporate matters submitted for stockholder approval. |
| (3) | The address for this stockholder is Room 605, Building 1, 569 Changshou Road, Shanghai, China 200040. |
| (4) | The address for this stockholder is Flat/Room 6 3F, Yip Fung Industrial Building, No. 7 Sheung Hei Street, San Po Long, Kowloon, Hong Kong. The Company does not know who has the voting/investment control over Top Team Asia. To the best of the Company’s knowledge, Basilio Zheng (also spelled Basilio Cheng) may be the control person for Top Team Asia and have the voting and dispositive power over the shares of common stock held by this stockholder. |
| (5) | The address for this stockholder is 1197 Fox Chase Drive, Newton, NC 28658. |
35
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages, positions and date appointed of our current board members and executive officers:
| Name | Age | Positions | Date First Appointed | |||
| Huihe Zheng | 39 | Chairman of the Board, Chief Executive Officer and President | April 8, 2020 | |||
| Tim Shannon | 58 | Chief Financial Officer | April 8, 2020 | |||
| Timothy Miles | 55 | Director | April 8, 2020 | |||
| Huili Shen | 37 | Secretary and director | April 8, 2020 |
Biographical Information
Huihe Zheng has more than twenty years of experience in investment and wealth management. Mr. Zheng has served as Chairman of Shanghai Dingchan Industrial Co., Ltd., a company primarily engaged in wholesale and distribution of computer equipment and components since he founded the company in November 2013. Mr. Zheng has served as Chief Executive Officer and Chairman of Shanghai Hewu Investment Management Co., Ltd., an investment company, since he founded the company in January 2016. Mr. Zheng has also served as a director, Chief Executive Officer and President of 24/7 Kid, the Company’s wholly owned subsidiary since March 2020. From 1999 to 2016, Mr. Zheng primarily focused on securities trading in stock markets in China and abroad for his own account. We believe Mr. Zheng’s experience in business management, investment and capital market qualifies him to serve on our board of directors.
Tim Shannon has served as the Chief Financial Officer of 24/7 Kid, the wholly owned subsidiary of the Company, since June 2005 and director of 24/7 Kid from inception until May 2020. Mr. Shannon served as President and Chief Executive Officer of 24/7 Kid from November 1998 until March 2020. From 1990 to 1994, Mr. Shannon was an investment advisor with Great Western Securities and Hearn Financial Services in Orlando, Florida. In 1995, he co-founded Shannon/Rosenbloom Marketing, a marketing and investor relations company, with Brian Rosenbloom, a former director of 24/7 Kid and served as its Vice President July 1995 until November 1998. Mr. Shannon spent six years as a system engineer and marketing representative with IBM after graduating in 1983 from the University of South Florida’s Engineering College with a bachelor’s degree in Computer Science.
Timothy Miles has been the president and owner of Happiness Now Hypnosis, a hypnotherapy company, since 2016. Mr. Miles has also served as a director of 24/7 Kid since January 2020. From 1999 through 2016, Mr. Miles was the president of Littlepond Enterprises, Inc., a business consulting firm. Mr. Miles attended the University of California at Davis, but did not receive a degree. We believe Mr. Miles’ decades’ experience in business management and consulting qualifies him to serve on our board of directors.
Huili Shen has served as the managing graphic designer at Ctrip Travel Network Technology Co., Ltd., a travel services company, since November 2010. From May 2006 to October 2010, Ms. Shen was an assistant graphic designer at Huiguang Technology Co., Ltd, a software company. Ms. Shen worked as a graphic designer at Haotian Technology Shanghai Co., Ltd., a software company, from September 2003 to April 2006. Ms. Shen graduated from Sanda University with a bachelor’s degree in graphic design. We believe Ms. Shen’s experience in management qualified her to serve on our board of directors.
Director Independence
We are not currently listed on a national stock exchange and not required to maintain a majority of independent directors. However, we believe that Timothy Miles qualifies as an independent director as defined under the rules of the OTCQB Marketplace.
36
Family Relationships
There are no family relationships among our directors and executive officers.
Our Board Composition
We do not have any independent directors. We are not required to maintain a majority of independent directors or the foregoing committees under the rules applicable to companies that do not have securities listed or quoted on a national securities exchange. Our board of directors does not maintain a separate audit, nominating, or compensation committee. Functions customarily performed by such committees are performed by our board of directors as a whole.
Involvement in Certain Legal Proceedings
None of our directors and executive officers have been involved in any of the following events during the past ten years:
| ● | any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| ● | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| ● | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; |
| ● | being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| ● | being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| ● | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
37
EXECUTIVE COMPENSATION
The Group
Summary Compensation Table
The following table sets forth the cash and non-cash compensation awarded to or earned by each individual who served as the executive officer or the key employee of the Group during the years ended March 31, 2020 and 2019.
| Name and principal position | Year | Salary ($) | Bonus ($) | Share awards ($) | Option awards ($) | Non-equity incentive plan compensation ($) | Nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Huihe Zheng, Chief | 2020 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Executive Officer and Chairman (1) | 2019 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Siu Ping Lo | 2020 | 55,385 | — | — | — | — | — | — | 55,385 | |||||||||||||||||||||||||||
| Responsible Officer, former Chief Executive, and director of YeeTah (2) | 2019 | 44,872 | — | — | — | — | — | — | 44,872 | |||||||||||||||||||||||||||
| (1) | Mr. Zheng was appointed as Chief Executive Officer and director of YeeTah on December 30, 2019. |
| (2) | Ms. Lo served as Chief Executive and director of YeeTah until December 30, 2019. |
Executive Compensation of the Company
The following table summarizes all compensation paid for services to the Company in all capacities for our fiscal years ended December 31, 2019 and 2018 by (i) each person serving as our principal executive officer, and (ii) each person serving as our principal financial officer.
Summary of Executive Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
Tim Shannon Chief Financial Officer, former Chief Executive Officer and | 2019 | 65,000 | - | 40,000 | (2) | - | - | - | - | 105,000 | ||||||||||||||||||||||||||
| director(1)(3) | 2018 | 55,000 | - | - | - | - | - | - | 55,000 | |||||||||||||||||||||||||||
| (1) | Beginning in October of 2018, we began paying compensation of $5,000 per month to Mr. Shannon. In April of 2019, Mr. Shannon’s compensation was increased to $10,000 per month. |
| (2) | In October of 2018, the Company converted $40,000 of Timothy Shannon’s accrued compensation to 1,000,000 shares of Series A Preferred Stock of 24/7 Kid. |
| (3) | Mr. Shannon also received additional compensation for his services as a director. See “-Director Compensation of the Company.” |
Outstanding Equity Awards at Fiscal Year End
The Company did not have any outstanding equity awards as of December 31, 2019.
38
Director Compensation of the Company
Directors received stock compensation in the fiscal year ended December 31, 2019 in the form of Series B Preferred Stock. All directors are reimbursed for ordinary and necessary expenses incurred in attending any meeting of the board of directors or otherwise incurred in their capacities as directors. The following table shows for the fiscal year ended December 31, 2019, certain information with respect to the stock compensation of our directors:
| Name | Number of Shares | Value ($) | ||||||
| Tim Shannon | 1,000,000 | 50,000 | ||||||
| Ken Scott(1) | 200,000 | 10,000 | ||||||
| Timothy Miles | 100,000 | 5,000 | ||||||
| Tarik Iles(1) | 50,000 | 2,500 | ||||||
| (1) | Former directors of 24/7 Kid, both of whom resigned in March 2020. |
Employment Agreements
The Company presently does not have any employment agreements or other compensation arrangements with its executive officers.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company
During the fourth quarter of 2018 and first quarter of 2019, our wholly owned subsidiary, 24/7 Kid issued convertible promissory notes in the aggregate principal of $241,067 to certain of its stockholders and affiliates of such stockholders. These notes born a simple interest at 12% per annum and had terms ranging from approximately one to two years. These notes were convertible into shares of common stock of 24/7 Kid at the option of the holders at a conversion price of $0.008 per shares, subject to certain adjustments. On January 22, 2020, 24/7 Kid converted these notes with accrued interest in the aggregate amount of $271,642 into 33,955,250 shares of its common stock.
On June 202019, directors of 24/7 Kid received stock compensation an aggregate of 1,350,000 shares of Series B Preferred Stock. The following table shows for the fiscal year ended December 31, 2019, certain information with respect to the stock compensation of these directors:
| Name | Number of Shares | Value ($) | ||||||
| Tim Shannon | 1,000,000 | 50,000 | ||||||
| Ken Scott | 200,000 | 10,000 | ||||||
| Timothy Miles | 100,000 | 5,000 | ||||||
| Tarik Iles | 50,000 | 2,500 | ||||||
In February 2020, 24/7 Kid issued 104,000,000 shares of Common Stock at the equivalent price of $.001 per share in lieu of accrued compensation to Tim Shannon, our Chief Financial Officer. In February 2020, the board of directors of 24/7 Kid approved the cancellation of 33,000,000 shares of its common stock to Mr. Shannon which were issued earlier in the month. This cancellation was necessary to keep 24/7 Kid in compliance with the public float requirement of the OTCQB marketplace.
In February 2020, Timothy Shannon, our Chief Financial Officer, forgave $71,000 of debt owed to him by 24/7 Kid in connection with the change of control.
Reference is made to the disclosure under Item 1.01 of this Current Report regarding the Share Exchange, which is incorporated herein by reference.
40
The Group
During the years ended March 31, 2020 and 2019, the Group generated other income of $107,308 and $107,692, respectively, from providing office management services to YeeTah Financial, a company controlled by Siu Ping Lo, the responsible officer and former Chief Executive and director of YeeTah.
During the years ended March 31, 2020 and 2019, the Group paid $190,496 and $402,041, respectively, to YeeTah Financial for customer referral services.
As of March 31, 2019, the Group had the balance due to Ms. Siu Ping Lo and YeeTah Financial of $14,479 and $57,424, respectively. The balance was unsecured, interest-free and due on demand and was paid in full during the fiscal year 2020. As of March 31, 2019, the Group had the balance due from a principle owner, Mr. Teik Hoe Chng of $53, 205, which represented the purchase price for shares issued to be paid by Mr. Chng. Mr. Chng subsequently transferred the related shares to Ms. Lo in August 2019 and therefore the $53,205 balance was assumed by Ms. Lo. In December 2019, the $53,205 balance was further assumed by Mr. Huihe Zheng as part of the share purchase arrangement between Ms. Lo and himself.
As of March 31, 2020, the Group had due from Mr. Zheng of $20,316, which represented the net result of the amount due from Ms. Lo partially offset by the advances Ms. Lo made to support the Group’s operations. The balance was assumed by Mr. Zheng as part of the purchase price for shares of YeeTah acquired by Mr. Zheng. In addition, as of March 31, 2020, the Group also had $48,718 due from Mr. Zheng, representing the payment due from Mr. Zheng for subscription of shares of QDM BVI. The balance due from Mr. Zheng was unsecured, interest-free and due on demand.
During the three months ended June 30, 2019, the Group received $35,769 for office management services provided to YeeTah Financial. During the three months ended June 30, 2020 and 2019, the Group paid YeeTah Financial $19,578 and $42,273 respectively, for customer referral services.
During the three months ended June 30, 2020, the Group advanced $10,009 to the Company for working capital uses.
As of June 30, 2020, the Group owed Mr. Zheng $18,146, which represented advances made by Mr. Zheng to the Group for working capital purposes and was unsecured, interest-free and due on demand. As of June 30, 2020, the Group was owed of $48,718 form Mr. Zheng, which represented the purchase price payable for shares acquired by Mr. Zheng and was unsecured, interest-free and due on demand. As of June 30, 2020, the Group had the balance due from the Company of $10,009, which was unsecured, interest-free and due on demand.
Reference is made to the disclosure under Items 1.01 and 2.01 of this Current Report regarding the Share Exchange and incorporated herein by reference.
41
LEGAL PROCEEDINGS
We have no material proceedings pending nor are we aware of any pending investigation or threatened litigation by any third party.
42
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our Common Stock is quoted on OTCQB operated by the OTC Markets under the symbol “QDMI.” There has been limited trading in our shares of Common Stock. We cannot assure you that there will be an active market in the future for our Common Stock. On October 21, 2020, the last reported sales price of our Common Stock on the OTCQB, was $0.85. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Stockholders of Record
Based upon information furnished by our transfer agent, as of October 21, 2020, we had approximately 170 stockholders of record.
Dividends
We have never paid or declared any dividends on our Common Stock and do not anticipate paying cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
We currently do not have any equity compensation plans.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
43
RECENT SALES OF UNREGISTERED SECURITIES
In December of 2017, 24/7 Kid issued an aggregate of 17,000 shares of common stock to Dr. Benitez for investing $10,000 (10,000 shares), Tim Shannon for investing $5,000 (5,000 shares) and Ken Scott for investing $2,000 (2,000 shares).
In July of 2018, 24/7 Kid issued 10,000 shares of common stock to Brian Rosenbloom in exchange for a two-year commitment to assist in business development and issued 10,000 shares of common stock to Harold Rosenbloom for investing $5,000.
In September of 2018, 24/7 Kid issued 10,000 shares of preferred stock to its then CEO, Tim Shannon, in exchange for $40,000 of unpaid accrued compensation.
On June 20, 2019, 24/7 Kid issued an aggregate of 13,500 shares Series B Preferred Stock to its directors as compensation for their services rendered.
On January 22, 2020, 24/7 Kid converted its outstanding convertible notes including principal and accrued interest in the aggregate amount of $271,642 into 339,553 shares of common stock at a conversion price of $.8 per share.
On February 11, 2020, 24/7 Kid issued 1,040,000 shares of common stock to Timothy Shannon in lieu of accrued compensation. On February 13, 2020, 24/7 Kid cancelled 330,000 shares of common stock issued to Timothy Shannon.
The securities issued in the above transactions were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act.
On February 11, 2020, 24/7 Kid converted 100,000 shares of Series A Preferred Stock into 100,000 shares of common stock. The issuance was made in reliance upon the exemption from registration under Section 3(a)(9) of the Securities Act.
On April 8, 2020, upon effectiveness of the Merger, the Company issued an aggregate of 1,667,658 shares of common stock and 13,500 shares of Series B Preferred Stock to the stockholders of 24/7 Kid in exchange for shares of common stock and Series B Preferred Stock of 24/7 Kid on a one-for-one basis.
Reference is made to Item 3.02 of this Current Report for a description of the issuance of Series C Preferred Shares, which is incorporated herein by reference.
44
DESCRIPTION OF REGISTRANT’S SECURITIES
The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by reference to our certificate of incorporation and bylaws, as they may be amended from time to time, any certificates of designations through which we may establish the terms and conditions of particular series of preferred stock, other documents governing the terms and conditions of particular securities and applicable provisions of Florida law.
Common Stock
As of the date of this Current Report, we are authorized to issue 200,000,000 shares of Common Stock, par value $0.0001 per share, of which 1,668,049 shares of Common Stock were issued and outstanding. Each share of our common stock is entitled to one vote on all matters submitted to a vote of our stockholders, including the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority of the votes entitled to be cast by all shares of common stock that are present in person or represented by proxy. Holders of common stock representing a majority of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably all dividends, if any, as may be declared from time to time by our Board of Directors out of the funds legally available. Our articles of incorporation do not provide for cumulative voting in the election of directors. Holders of common stock have no pre-emptive or conversion rights and there are no redemption provisions applicable to the common stock.
Preferred Stock
Our Board of Directors has the authority, without action by our stockholders, to designate and issue up to 5,000,000 shares of preferred stock in one or more series or classes and to designate the rights, preferences and privileges of each series or class, which may be greater than the rights of our common stock. Of the 5,000,000 shares of preferred stock, 1,000,000 shares are designed as Series A Preferred Stock, 2,000,000 are designated as Series B Preferred Stock and 900,000 are designated as Series C Convertible Preferred Stock. The rights, preferences and privileges of preferred stock could include dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, the number of shares constituting any class or series and the designation of the class or series. Terms selected by our Board of Directors in the future could decrease the amount of earnings and assets available for distribution to holders of shares of common stock or adversely affect the rights and powers, including voting rights, of the holders of shares of common stock without any further vote or action by the stockholders. As a result, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, and Series C Convertible Preferred Stock or any other preferred stock that may be issued by us in the future, which could have the effect of decreasing the market price of our common stock.
Series A Preferred Stock
We are authorized to issue 1,000,000 shares of Series A Preferred Stock, none of which was outstanding as of the date of this Current Report. Holders of Series A Preferred Stock are not entitled to receive dividends and are subordinated to our Commons Stock and debt obligations. Each share of Series A Preferred Stock is convertible into ten shares of Common Stock after a one-year holding period. In addition, holders of Series A Preferred Stock have the co-sale right and right of first refusal and will not be required to sell their shares of Series A Preferred Stock on the same terms or conditions of a sale by a majority stockholder. However, holders of Series A Preferred Stock do not have any pre-emptive rights or voting rights.
Series B Preferred Stock
We are authorized to issue 2,000,000 shares of Series B Preferred Stock, of which 13,500 shares were outstanding as of the date of this Current Report. Each share of Series B Preferred Stock is entitled to 100 votes on all corporate matters submitted to a vote of the stockholders. Generally, all matters to be voted on by stockholders must be approved by a majority of the shares entitled to vote. Holders of Series B Preferred Stock are not entitled to receive dividends and are subordinated to our Commons Stock and debt obligations. Holders of Series B Preferred Stock have the co-sale right and right of first refusal and will not be required to sell their shares of Series B Preferred Stock on the same terms or conditions of a sale by a majority stockholder. However, holders of Series B Preferred Stock do not have any conversion rights, pre-emptive rights or voting rights.
Series C Preferred Shares
Reference is made to the description of Series C Preferred Shares under Item 5.03 of this Current Report and incorporated herein by reference.
45
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The laws of the Florida permit the indemnification of directors, employees, officers and agents of Florida corporations. Our articles of incorporation and bylaws provide that we shall indemnify to the fullest extent permitted by Florida law any person whom we may indemnify under that law.
The provisions of Florida law that authorize indemnification do not eliminate the duty of care of a director. In appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability for (a) violations of criminal laws, unless the director has reasonable cause to believe that his conduct was lawful or had no reasonable cause to believe his conduct was unlawful, (b) deriving an improper personal benefit from a transaction, (c) voting for or assenting to an unlawful distribution and (d) willful misconduct or conscious disregard for our best interests in a proceeding by or in our right to procure a judgment in its favor or in a proceeding by or in the right of a stockholder. The statute does not affect a director's responsibilities under any other law, such as the federal securities laws.
The effect of the foregoing is to require us to indemnify our officers and directors for any claim arising against such persons in their official capacities if such person acted in good faith and in a manner that he or she reasonably believed to be in or not contrary to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of our company under Florida law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
46
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 9.01 of this Current Report for the financial statements required hereunder.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Reference is made to the disclosure under Item 4.01 of this Current Report, which is incorporated herein by reference.
47
FINANCIAL STATEMENTS AND EXHIBITS
The exhibits are listed and described in Item 9.01 of this Current Report.
Item 3.02 Unregistered Sale of Equity Securities
The information regarding the Share Exchange set forth in Item 1.01 of this Current Report is incorporated by reference into this Item 3.02. The issuance of the Series C Preferred Shares was in reliance upon an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof.
Item 4.01 Changes in Registrant’s Certifying Accountant.
On October 21, 2020, the board of directors of the Company (the “Board”) approved the engagement of ZH CPA, LLC (“ZH CPA”), and dismissal of BF Borgers CPA PC (“BF Borgers”), as the Company’s independent registered public accounting firm.
The report of BF Borgers on the Company’s financial statements for the fiscal years ended December 31, 2019 and 2018 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles. The report did include an explanatory paragraph about the uncertainty as to the Company’s ability to continue as a going concern.
During the period of BF Borgers’ engagement as the Company’s independent registered public accounting firm through October 21, 2020 (the “Engagement Period”), there were no disagreements as defined in Item 304 of Regulation S-K with BF Borgers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BF Borgers, would have caused it to make reference in connection with any opinion to the subject matter of the disagreement. Further, during the Engagement Period, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
During the Company’s two most recent fiscal years ended December 31, 2019 and 2018, and during the subsequent interim period, neither the Company, nor anyone on its behalf, consulted ZH CPA with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report was provided to the Company nor oral advice was provided to the Company that ZH CPA concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing, or financial reporting issue or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
The Company has provided BF Borgers with the disclosures under this Item 4.01, and has requested BF Borgers to furnish the Company with a letter addressed to the SEC stating whether it agrees with the statements made by the Company in this Item 4.01 and, if not, stating the respects in which it does not agree. The letter from BF Borgers is filed as Exhibit 16.1 to this Current Report.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
Amendment to Articles of Incorporation
On October 8, 2020, the Company filed an amendment to its Articles of Incorporation to designate 900,000 shares of its authorized preferred stock as Series C Convertible Preferred Stock pursuant to the Series C Certificate of Designation. Some of the rights, preferences, privileges, and restrictions applicable to the Series C Preferred Shares are described below.
Dividend. The Series C Preferred Shares will be entitled to receive any dividends or distributions paid in respect of the Common Stock on an as-converted basis.
Voting. Except as provided in the Certificate of Designation or as otherwise required by law, holders of Series C Preferred Shares will be entitled to vote, together with the holders of Common Stock, on an as-converted basis on all matters submitted to a vote of the holders of Common Stock.
Conversion. Each Series C Preferred Share is convertible into Common Stock at an initial conversion rate of 1-for-11. The conversion rate is subject to proportionate adjustments for stock splits, reverse stock splits and similar events. However, the Company will not effect any conversion of the Series C Preferred Shares if, after giving effect to such conversion, the Company will fail to maintain a freely traded public float of at least 10% of the total shares issued and outstanding of its Common Stock trading on OTCQB (or a freely traded public float of at least 5% if the Company has a minimum of $2 million in market value of the public float) under the Standards for Continued Eligibility of the OTCQB Standards.
Item 5.06 Change in Shell Company Status.
Prior to the Share Exchange, we were a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act). As a result of the Share Exchange, we have ceased to be a shell company. The information contained in this Report constitutes the current “Form 10 information” necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act.
48
Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series C Preferred Shares are entitled to receive, pari passu with the holders of Common Stock, out of the assets available for distribution to stockholders an amount equal to such amount per share as would have been payable had all shares of Series C Preferred Shares been converted into Common Stock immediately before such liquidation, dissolution or winding up, without giving effect to any limitation on conversion.
The foregoing description of the terms and conditions of the Certificate of Designation is only a summary and is qualified in its entirety by the full text of the Certificate of Designation, which is being filed as Exhibit 3.3 to this Current Report.
Change in Fiscal Year
On October 21, 2020, our board of directors approved a change to our fiscal year end from December 31 to March 31, which is the fiscal year of YeeTah, to align our reporting periods to be more consistent with YeeTah. We will file a transition report on Form 10-K for the transition period from January 1, 2020 to March 31, 2020.
Item 9.01 Financial Statements and Exhibits
| (a) | Financial statements of the business acquired. |
The audited financial statements of QDM BVI as of March 31, 2020 and 2019 and for the years then ended and the unaudited financial statement for the three months as of June 30, 2020 and 2019 and for the quarters then ended and related footnotes are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively and are incorporated herein by reference.
| (b) | Pro forma financial information. |
The pro forma financial statements with respect to the transactions described in Item 2.01 are attached hereto as Exhibit 99.3 and are incorporated herein by reference.
| (b) | Exhibits. |
| + | The exhibits and schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby agrees to furnish a copy of any omitted schedules to the SEC upon request. |
| (1) | Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on May 1, 2020. |
| (2) | Incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on May 1, 2020. |
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
October 27, 2020 |
QDM INTERNATIONAL INC. | ||
| By: | /s/ Huihe Zheng | ||
| Name: | Huihe Zheng | ||
| Title: | President and Chief Executive Officer | ||
50
Exhibit 2.1
SHARE EXCHANGE AGREEMENT
This SHARE EXCHANGE AGREEMENT (this “Agreement”) is entered into as of this 21st day of October, 2020, by and among QDM International Inc., a Florida corporation (“QDM”), QDM Holdings Limited, a British Virgin Islands business company (“QDM BVI”) and Huihe Zheng, the sole shareholder of QDM BVI (the “QDM BVI Shareholder”).
WHEREAS, QDM is a U.S. publicly reporting company organized under the laws of Florida with no significant operations;
WHEREAS, the QDM BVI Shareholder owns 50,000 ordinary shares, or 100% of the issued and outstanding capital stock, of QDM BVI (the “QDM BVI Shares”);
WHEREAS, QDM BVI owns 100% of the issued and outstanding capital stock of QDM Group Limited, a Hong Kong corporation (“QDM Group Limited”), which, in turn, owns 100% of the issued and outstanding capital stock of YeeTah Insurance Consultant Limited, a Hong Kong corporation (“YeeTah”) (QDM BVI, QDM Group Limited and YeeTah being referred to herein collectively as the “Group”);
WHEREAS, QDM desires to acquire 100% of the issued and outstanding QDM BVI Shares from the QDM BVI Shareholder in exchange (the “Exchange”) for the issuance by QDM to the QDM BVI Shareholder of 900,000 shares of Series C Convertible Preferred Stock (together with any securities into which such shares may be reclassified, the “Series C Preferred Shares”), the certificate of designations for which is in form of which is attached hereto as Exhibit A (the “Certificate of Designation”), and the QDM BVI Shareholder desires to exchange its QDM BVI Shares for such Series C Preferred Shares on the terms described herein; and
WHEREAS, on the Closing Date (as defined below), and as a result of the transactions contemplated hereby, QDM BVI will become a wholly-owned subsidiary of QDM.
NOW THEREFORE, on the basis of the foregoing stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the parties to be derived here from, and intending to be legally bound hereby, it is hereby agreed as follows:
ARTICLE
I
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF QDM BVI
As an inducement to, and to obtain the reliance of QDM, except as set forth in the Schedules of QDM BVI attached hereto (the “QDM BVI Disclosure Schedules”), QDM BVI hereby represents and warrants to QDM as of the Closing Date (as defined below) as follows. As used herein, the term “knowledge of the Group” or similar language refers to the actual knowledge of the executive officers of YeeTah.
1
Section 1.01 Incorporation. Each member of the Group is duly formed or organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being or currently planned by each member of the Group to be conducted. Each member of the Group is in possession of all governmental or third-party approvals necessary to own, lease and operate the properties it purports to own, operate or lease, to carry on its business as it is now being conducted, to consummate the transactions contemplated by this Agreement. No member of the Group is in violation of any of the provisions of their respective charter or organization documents. The ownership records (which have been delivered to QDM) of each Group member’s registered capital are true, complete and accurate records of such ownership as of the date of such records and contain all transfers of such registered capital since the time of their respective organization. No member of the Group is required to qualify to do business as a foreign corporation in any other jurisdiction, except where the failure to so qualify would not have a material adverse effect on: (i) the assets, liabilities, results of operations, condition (financial or otherwise) or business of the Group taken as a whole; or (ii) the ability of QDM BVI to perform its obligations hereunder, but, to the extent applicable, shall exclude any circumstance, change or effect to the extent resulting or arising from: (A) any change in general economic conditions in the industries or markets in which the Group operates so long as the Group is not disproportionately (in a material manner) affected by such changes; (x) national or international political conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack so long as the Group is not disproportionately (in a material manner) affected by such changes; (y) changes in United States generally accepted accounting principles, or the interpretation thereof; or (z) the entry into or announcement of this Agreement, actions contemplated by this Agreement, or the consummation of the transactions contemplated hereby (a “Material Adverse Effect”).
Section 1.02 Authorized Shares. The number of shares which QDM BVI is authorized to issue consists of 50,000 shares of a single class, par value US$ 1.00 per share. There are 50,000 shares currently of QDM BVI issued and outstanding. The issued and outstanding shares of QDM BVI are validly issued, fully paid, and non-assessable and not issued in violation of the preemptive or other rights of any person.
Section 1.03 Subsidiaries. Except as set forth on Schedule 1.03 to the QDM BVI Disclosure Schedules (which sets forth the corporate structure of the Group), QDM BVI does not have any subsidiaries, and does not own, beneficially or of record, any shares of any other entity. QDM Group Limited owns 100% of the issued and outstanding capital stock of YeeTah.
Section 1.04 Financial Statements.
(a) The financial statements of the Group, consisting of (i) the audited balance sheets of the Group as of March 31, 2020 and 2019 and the related audited statements of operations, stockholders’ equity and cash flows for the fiscal years ended March 31, 2020 and 2019 together with the notes to such statements and the opinion of ZH CPA, LLC, independent certified public accountants, and (ii) the unaudited financial statements of the Group for the quarter ended June 30, 2020 (the collectively, “Financial Statements”) have been prepared in accordance with U.S. generally accepted accounting principles (the “U.S. GAAP”) consistently applied throughout the periods involved. The YeeTah Financial Statements are true and accurate and present fairly as of their respective dates the financial condition of YeeTah. As of the date of such balance sheets, except as and to the extent reflected or reserved against therein, YeeTah had no liabilities or obligations (absolute or contingent) which should be reflected in the balance sheets or the notes thereto prepared in accordance with U.S. GAAP, and all assets reflected therein are properly reported and present fairly the value of the assets of YeeTah, in accordance with U.S. GAAP. The Financial Statements reflect fairly the information required to be set forth therein by U.S. GAAP.
Section 1.05 Information. The information concerning the Group set forth in this Agreement and the QDM BVI Disclosure Schedules is complete and accurate in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact required to make the statements made, in light of the circumstances under which they were made, not misleading.
2
Section 1.06 Options or Warrants. There are no existing options, warrants, calls, proxies, voting agreements, or commitments of any character relating to the authorized and unissued stock of any member of the Group.
Section 1.07 Absence of Certain Changes or Events. Except as disclosed in the QDM BVI Disclosure Schedules or the Financial Statements (with respect to subsequent events), since June 30, 2020:
(a) There has not been any material adverse change in the business, operations, properties, assets, or condition (financial or otherwise) of the Group;
(b) No member of the Group has: (i) amended its memorandum of association or articles of association or other organizational documents; (ii) declared or made, or agreed to declare or make, any payment of dividends or distributions of any assets of any kind whatsoever to stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its shares; (iii) made any material change in its method of management, operation or accounting, (iv) entered into any other material transaction other than sales in the ordinary course of its business; or (v) made any increase in or adoption of any profit sharing, bonus, deferred compensation, insurance, pension, retirement, or other employee benefit plan, payment, or arrangement made to, for, or with its officers, directors, or employees; and
(c) No member of the Group has: (i) granted or agreed to grant any options, warrants or other rights for its stocks, bonds or other corporate securities calling for the issuance thereof, (ii) borrowed or agreed to borrow any funds or incurred, or become subject to, any material obligation or liability (absolute or contingent) except as disclosed herein and except liabilities incurred in the ordinary course of business; (iii) sold or transferred, or agreed to sell or transfer, any of its assets, properties, or rights or canceled, or agreed to cancel, any debts or claims; or (iv) issued, delivered, or agreed to issue or deliver any stock, bonds or other corporate securities including debentures (whether authorized and unissued or held as treasury stock) except in connection with this Agreement and the transaction contemplated hereby.
(d) Litigation and Proceedings. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of the Group after reasonable investigation, threatened by or against any member of the Group or affecting the Group, either jointly or severally, or their respective properties, at law or in equity, before any court or other governmental agency or instrumentality, domestic or foreign, or before any arbitrator of any kind. No member of the Group has any knowledge of any default on its part with respect to any judgment, order, injunction, decree, award, rule, or regulation of any court, arbitrator, or governmental agency or instrumentality or of any circumstances which, after reasonable investigation, would result in the discovery of such a default.
3
Section 1.08 Contracts.
(a) All “material” contracts, agreements, franchises, license agreements, debt instruments or other commitments to which any member of the Group is a party or by which it or any of its assets, products, technology, or properties are bound, other than those incurred in the ordinary course of business, are set forth on Schedule 1.08 to the QDM BVI Disclosure Schedules (the “Material Contracts”). Such schedule includes any oral or written: (i) contract for the employment of any officer or employee; (ii) profit sharing, bonus, deferred compensation, stock option, severance pay, pension benefit or retirement plan, (iii) agreement, contract, or indenture relating to the borrowing of money, (iv) guaranty of any obligation; (vi) collective bargaining agreement; or (vii) agreement with any present or former officer or director of members of the Group.
(b) The Material Contracts are valid and enforceable by the applicable members of the Group party thereto in all respects, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
Section 1.09 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of any Material Contract a member of the Group is a party or to which any of their respective assets, properties or operations are subject.
Section 1.10 Compliance With Laws and Regulations. To the best of its knowledge, each member of the Group has complied with all applicable statutes and regulations of any federal, state, or other governmental entity or agency thereof, except to the extent that noncompliance would not have a Material Adverse Effect.
Section 1.11 Approval of Agreement. The Board of Directors of QDM BVI and the QDM BVI Shareholder have authorized the execution and delivery of this Agreement by QDM BVI and have approved this Agreement and the transactions contemplated hereby.
Section 1.12 Valid Obligation. This Agreement and all agreements and other documents executed by QDM BVI and the QDM BVI Shareholder in connection herewith constitute the valid and binding obligation of each of QDM BVI and the QDM BVI Shareholder, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
4
ARTICLE
II
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF QDM
As an inducement to, and to obtain the reliance of QDM BVI and the QDM BVI Shareholder, except as set forth in the Schedules of QDM attached hereto (the “QDM Disclosure Schedules”), QDM hereby represents and warrants to QDM BVI and the QDM BVI Shareholder, as of the date hereof and as of the Closing Date, as follows. As used herein, the term “knowledge of QDM” or similar language refers to the actual knowledge of any individual who has served as a named executive officer or director of QDM during the 36 month period prior to the execution of this Agreement.
Section 2.01 Organization. QDM is a corporation duly organized, validly existing, and in good standing under the laws of Florida and has the corporate power and is duly authorized under all applicable laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. Attached as Schedule 2.01 to the QDM Schedules are complete and correct copies of the certificate of incorporation and bylaws of QDM as in effect on the date hereof. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of QDM’s certificate of incorporation or bylaws. QDM has taken all action required by law, its certificate of incorporation, its bylaws, or otherwise to authorize the execution and delivery of this Agreement, and QDM has full power, authority, and legal right and has taken all action required by law, its certificate of incorporation, bylaws, or otherwise to consummate the transactions herein contemplated.
Section 2.02 Capitalization.
(a) QDM’s authorized capitalization consists of (a) 200,000,000 shares of Common Stock, of which 1,668,049shares are issued and outstanding, and (b) 5,000,000 shares of preferred stock, par value $0.0001 per share, of which 13,500 shares of Series B Preferred Stock are issued and outstanding. All issued and outstanding shares of Common Stock and Series B Preferred Stock are legally issued, fully paid, and non-assessable and not issued in violation of the preemptive or other rights of any person or entity. As of the Closing Date, no shares of Common Stock were reserved for issuance upon the exercise of outstanding options or warrants to purchase the Common Stock or other equity-linked securities of QDM (except with respect to the Series C Preferred Shares) and no shares of preferred stock were reserved for issuance to any party. All outstanding Common Stock and Preferred Stock, including the Series C Preferred Shares, have been issued and granted in compliance with: (i) all applicable securities laws and (in all material respects) other applicable laws and regulations, and (ii) all requirements set forth in any material contracts, agreements, franchises, license agreements, debt instruments or other commitments to which QDM is a party or by which it or any of its assets or properties are bound, all of which are set forth on Schedule 2.02 to the QDM Disclosure Schedules (the “QDM Material Contracts”).
5
(b) There are no equity securities, partnership interests or similar ownership interests of any class of any equity security of QDM, or any securities exchangeable or convertible into or exercisable for such equity securities, partnership interests or similar ownership interests, issued, reserved for issuance or outstanding. Except as contemplated by this Agreement or as set forth in Schedule 2.02 to the QDM Disclosure Schedules, there are no subscriptions, options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character to which QDM is a party or by which it is bound obligating QDM to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or acquisition of, any shares of capital stock, partnership interests or similar ownership interests of QDM or obligating QDM to grant, extend, accelerate the vesting of or enter into any such subscription, option, warrant, equity security, call, right, commitment or agreement. There is no plan or arrangement to issue Common Stock or preferred stock of QDM except as set forth in this Agreement.
(c) There are no registration rights, and there is no voting trust, proxy, rights plan, anti-takeover plan or other agreement or understanding to which QDM is a party or by which it is bound with respect to any equity security of any class of QDM, and there are no agreements to which QDM is a party, or which QDM has knowledge of, which conflict with this Agreement or the transactions contemplated herein or otherwise prohibit the consummation of the transactions contemplated hereunder.
Section 2.03 Subsidiaries and Predecessor Corporations. Except as set forth in Schedule 2.03 to this QDM Disclosure Schedules, QDM does not have any predecessor corporation(s) or subsidiaries, and does not own, beneficially or of record, any shares of any other entity.
Section 2.04 SEC Filings; Financial Statements.
(a) QDM has made available to the QDM BVI Shareholder a correct and complete copy, or there has been available on the EDGAR system maintained by the U.S. Securities and Exchange Commission (the “SEC”), copies of each report, registration statement and definitive proxy statement filed by QDM with the SEC for the 12 months prior to the date of this Agreement (the “QDM SEC Reports”), which, to QDM’s knowledge, are all the forms, reports and documents filed by QDM with the SEC for the 36 months prior to the date of this Agreement. As of their respective dates, to QDM’s knowledge, the QDM SEC Reports: (i) were prepared in accordance and complied in all material respects with the requirements of the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as the case may be, and the rules and regulations of the SEC thereunder applicable to such QDM SEC Reports, and (ii) did not at the time they were filed (and if amended or superseded by a filing prior to the date of this Agreement then on the date of such filing and as so amended or superseded) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
6
(b) Each set of financial statements (including, in each case, any related notes thereto) contained in the QDM SEC Reports comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with U.S.GAAP, applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, do not contain footnotes as permitted by Form 10-Q promulgated under the Exchange Act) and each fairly presents in all material respects the financial position of QDM at the respective dates thereof and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal adjustments which were not or are not expected to have a material adverse effect on: (i) the assets, liabilities, results of operations, condition (financial or otherwise) or business of QDM; or (ii) the ability of QDM to perform its obligations hereunder, but, to the extent applicable, shall exclude any circumstance, change or effect to the extent resulting or arising from: (A) any change in general economic conditions in the industries or markets in which QDM operates so long as QDM is not disproportionately (in a material manner) affected by such changes; (x) national or international political conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack so long as QDM is not disproportionately (in a material manner) affected by such changes; (y) changes in U.S.GAAP, or the interpretation thereof; or (z) the entry into or announcement of this Agreement, actions contemplated by this Agreement, or the consummation of the transactions contemplated hereby (a “QDM Material Adverse Effect”).
(c) As of the date of all balance sheets included in the QDM SEC Reports, except as and to the extent reflected or reserved against therein, QDM had no liabilities or obligations (absolute or contingent) which should be reflected in the balance sheets or the notes thereto prepared in accordance with U.S. GAAP, and all assets reflected therein are properly reported and present fairly the value of the assets of QDM, in accordance with U.S. GAAP. All statements of operations, stockholders’ equity and cash flows included in the QDM SEC Reports reflect fairly the information required to be set forth therein by U.S. GAAP.
(d) QDM has no liabilities with respect to the payment of any federal, state, county, local or other taxes (including any deficiencies, interest or penalties), except for taxes accrued but not yet due and payable.
(e) QDM has filed all state, federal or local income and/or franchise tax returns required to be filed by it during the past three years. Each of such income tax returns reflects the taxes due for the period covered thereby, except for amounts which, in the aggregate, are immaterial.
(f) The books and records, financial and otherwise, of QDM are in all material aspects complete and correct.
Section 2.05 Exchange Act Compliance. QDM is in compliance with, and current in, all of the reporting, filing and other requirements under the Exchange Act, the Common Stock is registered under Section 12(g) of the Exchange Act, and QDM is in compliance with all of the requirements under, and imposed by, Section 12(g) of the Exchange Act.
7
Section 2.06 Information. The information concerning QDM set forth in this Agreement, the QDM Disclosure Schedules and the QDM SEC Reports is complete and accurate in all material respects and does not contain any untrue statements of a material fact or omit to state a material fact required to make the statements made, in light of the circumstances under which they were made, not misleading. In addition, QDM has fully disclosed in writing to the QDM BVI Shareholder (through this Agreement or the QDM Disclosure Schedules) all information relating to matters involving QDM or its assets or its present or past operations or activities which: (i) indicated or may indicate, in the aggregate, the existence of a greater than $1,000 liability, (ii) have led or may lead to a competitive disadvantage on the part of QDM or (iii) either alone or in aggregation with other information covered by this Section, otherwise have led or may lead to QDM Material Adverse Effect, including, but not limited to, information relating to governmental, employee, environmental, litigation and securities matters or proceedings and transactions with affiliates.
Section 2.07 Absence of Certain Changes or Events. Since the date of the most recent QDM balance sheet included in the QDM SEC Reports:
(a) there has not been: (i) any material adverse change in the business, operations, properties, assets or condition of QDM or (ii) any damage, destruction or loss to QDM (whether or not covered by insurance) materially and adversely affecting the business, operations, properties, assets or condition of QDM;
(b) QDM has not: (i) amended its certificate of incorporation or bylaws except as required by this Agreement; (ii) declared or made, or agreed to declare or make any payment of dividends or distributions of any assets of any kind whatsoever to stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock; (iii) waived any rights of value which in the aggregate are outside of the ordinary course of business or material considering the business of QDM; (iv) made any material change in its method of management, operation, or accounting; (v) entered into any transactions or agreements of any kind or nature; (vi) made any accrual or arrangement for or payment of bonuses or special compensation of any kind or any severance or termination pay to any present or former officer or employee; (vii) increased the rate of compensation payable or to become payable by it to any of its officers or directors or any of its salaried employees whose monthly compensation exceed $1,000; or (viii) made any increase in any profit sharing, bonus, deferred compensation, insurance, pension, retirement, or other employee benefit plan, payment, or arrangement, made to, for or with its officers, directors, or employees;
(c) QDM has not: (i) granted or agreed to grant any shares, securities convertible or exercisable to shares, options, warrants, or other rights for its stock, bonds, or other corporate securities calling for the issuance thereof; (ii) borrowed or agreed to borrow any funds or incurred, or become subject to, any material obligation or liability (absolute or contingent); (iii) paid or agreed to pay any material obligations or liabilities (absolute or contingent) other than current liabilities reflected in or shown on the most recent QDM balance sheet and current liabilities incurred since that date in the ordinary course of business and professional and other fees and expenses in connection with the preparation of this Agreement and the consummation of the transaction contemplated hereby; (iv) sold or transferred, or agreed to sell or transfer, any of its assets, properties, or rights, or canceled, or agreed to cancel, any debts or claims; (v) made or permitted any amendment or termination of any contract, agreement, or license to which it is a party if such amendment or termination is material, considering the business of QDM; or (vi) issued, delivered or agreed to issue or deliver, any stock, bonds or other corporate securities including debentures (whether authorized and unissued or held as treasury stock), except in connection with this Agreement; and
8
(d) to its knowledge, QDM has not become subject to any law or regulation which materially and adversely affects, or in the future, may adversely affect, the business, operations, properties, assets or condition of the Group.
Section 2.08 Litigation and Proceedings. There are no actions, suits, proceedings or investigations pending or, to the knowledge of QDM after reasonable investigation, threatened by or against QDM or affecting QDM or its properties, at law or in equity, before any court or other governmental agency or instrumentality, domestic or foreign, or before any arbitrator of any kind except as disclosed in the Schedule 2.08 to the QDM Schedules. QDM has no knowledge of any default on its part with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator, or governmental agency or instrumentality or any circumstance which after reasonable investigation would result in the discovery of such default.
Section 2.09 Contracts. Except for the QDM Material Contracts:
(a) QDM is not a party to, and its assets or properties are not bound by, any contract, franchise, agreement, debt instrument or other commitments whether such agreement is in writing or oral;
(b) QDM is not a party to or bound by, and the properties of QDM are not subject to any contract, agreement, other commitment or instrument; any charter or other corporate restriction; or any judgment, order, writ, injunction, decree, or award; and
(c) QDM is not a party to any oral or written: (i) contract for the employment of any officer or employee; (ii) profit sharing, bonus, deferred compensation, stock option, severance pay, pension benefit or retirement plan, (iii) agreement, contract, or indenture relating to the borrowing of money, (iv) guaranty of any obligation, (vi) collective bargaining agreement; or (vii) agreement with any present or former officer or director of QDM.
Section 2.10 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated hereby will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any QDM Material Contracts or otherwise have a QDM Material Adverse Effect.
Section 2.11 Filings, Consents and Approvals. QDM is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other foreign, federal, state, local or other governmental authority or other person or entity in connection with the execution, delivery and performance by QDM of this Agreement, or any document or instrument contemplated hereby, except as expressly contemplated herein.
9
Section 2.12 Compliance With Laws and Regulations. To the best of its knowledge, QDM has complied with all applicable statutes and regulations of any federal, state, or other applicable governmental entity or agency thereof. This compliance includes, but is not limited to, the filing of all reports to date with federal and state securities authorities.
Section 2.13 Approval of Agreements. The Board of Directors of QDM have duly authorized: the execution and delivery of this Agreement by QDM and the transactions contemplated hereby.
Section 2.14 Material Transactions or Affiliations. Except as disclosed in the QDM SEC Reports or on Schedule 2.14 to the QDM Disclosure Schedules, there exists no contract, agreement or arrangement between QDM and any predecessor and any person or entity who was at the time of such contract, agreement or arrangement an officer, director, or person owning of record or known by QDM to own beneficially, 5% or more of the issued and outstanding Common Stock of QDM and which is to be performed in whole or in part after the date hereof or was entered into not more than two years prior to the date hereof. QDM has no commitment, whether written or oral, to lend any funds to, borrow any money from, or enter into any other transaction with, any such affiliated person.
Section 2.15 Bank Accounts; Power of Attorney. Set forth on Schedule 2.15 to the QDM Disclosure Schedules is a true and complete list of: (a) all accounts with banks, money market mutual funds or securities or other financial institutions maintained by QDM within the past twelve (12) months, the account numbers thereof, and all persons authorized to sign or act on behalf of QDM, (b) all safe deposit boxes and other similar custodial arrangements maintained by QDM within the past twelve (12) months, (c) the check ledger for the last 12 months, and (d) the names of all persons holding powers of attorney from QDM or who are otherwise authorized to act on behalf of QDM with respect to any matter, other than its officers and directors, and a summary of the terms of such powers or authorizations.
Section 2.16 Valid Obligation. This Agreement and all agreements and other documents executed by QDM in connection herewith constitute the valid and binding obligation of QDM, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
Section 2.17 Title to Property. QDM does not own or lease any real property or personal property. There are no options or other contracts under which QDM has a right or obligation to acquire or lease any interest in real property or personal property.
Section 2.18 Solvency. QDM has not: (a) made a general assignment for the benefit of creditors; (b) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (c) suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (d) suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (e) admitted in writing its inability to pay its debts as they come due; or (f) made an offer of settlement, extension or composition to its creditors generally.
10
Section 2.19 Intellectual Property. QDM does not own, license or otherwise have any right, title or interest in any intellectual property.
Section 2.20 Employees; Consultants, etc. Except as disclosed in the QDM SEC Reports, QDM has no other employees, officers, directors, agents or consultants. QDM maintains no employee benefit plans or programs of any kind or nature.
ARTICLE III
Representations and Warranties of
THE QDM BVI SHAREHOLDER
As an inducement to QDM, the QDM BVI Shareholder hereby represents and warrants to QDM as follows.
Section 3.01 QDM BVI Shares. The QDM BVI Shares represent 100% of the issued and outstanding capital stock of QDM BVI. Such QDM BVI Shareholder is the record and beneficial owner, and has good title to, the QDM BVI Shares. Such QDM BVI Shareholder has the right and authority to sell and deliver its QDM BVI Shares, free and clear of all liens, claims, charges, encumbrances, pledges, mortgages, security interests, options, rights to acquire, proxies, voting trusts or similar agreements, restrictions on transfer or adverse claims of any nature whatsoever. Upon delivery of any certificate or certificates duly assigned, representing the QDM BVI Shares as herein contemplated and/or upon registering of QDM as the new owner of the QDM BVI Shares in the share register of QDM BVI, QDM will receive good title to the QDM BVI Shares owned by such QDM BVI Shareholder.
Section 3.02 Power and Authority. The QDM BVI Shareholder has the legal power, capacity and authority to execute and deliver this Agreement to consummate the transactions contemplated by this Agreement, and to perform his obligations under this Agreement. This Agreement constitutes a legal, valid and binding obligation of such QDM BVI Shareholder, enforceable against such QDM BVI Shareholder in accordance with the terms hereof, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
Section 3.03 No Conflicts. The execution and delivery of this Agreement by such QDM BVI Shareholder and the performance by such QDM BVI Shareholder of his obligations hereunder in accordance with the terms hereof: (a) will not require the consent of any third party or governmental entity under any laws; (b) will not violate any laws applicable to such QDM BVI Shareholder and (c) will not violate or breach any contractual obligation to which such QDM BVI Shareholder is a party.
Section 3.04 Purchase Entirely for Own Account. The Exchange Shares (as defined in Section 4.01 herein) proposed to be acquired by such QDM BVI Shareholder pursuant to the terms hereof will be acquired for investment for such QDM BVI Shareholder’s own account, and not with a view to the resale or distribution of any part thereof.
11
Section 3.05 Acquisition of Exchange Shares for Investment.
(a) The QDM BVI Shareholder is acquiring the Exchange Shares for investment purposes and for such QDM BVI Shareholder’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and such QDM BVI Shareholder has no present intention of selling, granting any participation in, or otherwise distributing the same. Such QDM BVI Shareholder further represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Exchange Shares.
(b) The QDM BVI Shareholder represents and warrants that he: (i) can bear the economic risk of his respective investments, and (ii) possesses such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment in QDM and its securities.
(c) The QDM BVI Shareholder is not a “U.S. Person” as defined in Rule 902(k) of Regulation S of the Securities Act (“Regulation S”) and understands that the Exchange Shares are not registered under the Securities Act and that the issuance thereof to such QDM BVI Shareholder is intended to be exempt from registration under the Securities Act pursuant to Regulation S. The QDM BVI Shareholder has no intention of becoming a U.S. Person. At the time of the origination of contact concerning this Agreement and the date of the execution and delivery of this Agreement, the QDM BVI Shareholder was outside of the United States.
(d) The QDM BVI Shareholder acknowledges that neither the SEC, nor the securities regulatory body of any state or other jurisdiction, has received, considered or passed upon the accuracy or adequacy of the information and representations made in this Agreement.
(e) The QDM BVI Shareholder understands that the Exchange Shares may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Exchange Shares or any available exemption from registration under the Securities Act, the Exchange Shares may have to be held indefinitely.
ARTICLE
IV
PLAN OF EXCHANGE
Section 4.01 The Exchange.
(a) On the terms and subject to the conditions set forth in this Agreement, on the Closing Date (as defined in Section 4.03), the QDM BVI Shareholder shall assign, transfer and deliver, free and clear of all liens, pledges, encumbrances, charges, restrictions or known claims of any kind, nature, or description, all of the QDM BVI Shares owned by such QDM BVI Shareholder to QDM, with the objective of such Exchange being the acquisition by QDM of 100% of the issued and outstanding shares of capital stock of QDM BVI.
12
(b) In consideration of the transfer of the QDM BVI Shares to QDM by the QDM BVI Shareholder, QDM shall issue to the QDM BVI Shareholder 900,000 newly issued Series C Preferred Shares (the “Exchange Shares”), which are initially convertible into 9,900,000 shares of Common Stock upon satisfaction of conditions to conversion set forth in the Certificate of Designations.
(c) At the Closing Date, the QDM BVI Shareholder shall, on surrender of its certificate representing the QDM BVI Shares owned by such QDM BVI Shareholder to QDM or its registrar or transfer agent, be entitled to receive the Exchange Shares.
Section 4.02 Closing. The closing of the transactions contemplated by this Agreement (the “Closing,” and the date of the Closing, the “Closing Date”) shall take place at a mutually agreeable time and place, and be conditioned upon all of the conditions to closing set forth herein being met or waived.
Section 4.03 Closing Events. At the Closing, QDM, QDM BVI and the QDM BVI Shareholder shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, opinions, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Agreement to be so delivered at or prior to the Closing, together with such other items as may be reasonably requested by the parties hereto and their respective legal counsel in order to effectuate or evidence the transactions contemplated hereby.
Section 4.04 Termination. This Agreement may be terminated by the parties only in the event that the parties do not meet the conditions precedent set forth in Articles VI and VII. If this Agreement is terminated pursuant to this section, this Agreement shall be of no further force or effect, and no obligation, right or liability shall arise hereunder.
ARTICLE
V
OTHER AGREEMENTS AND COVENANTS
Section 5.01 Legends. The QDM BVI Shareholder acknowledges and agrees that each certificate representing the Exchange Shares shall be endorsed with the following legends, in addition to any other legend required to be placed thereon by applicable federal or state securities laws:
“THE SECURITIES ARE BEING OFFERED TO INVESTORS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT of 1933, AS AMENDED (“SECURITIES ACT”)) AND WITHOUT REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT IN RELIANCE UPON REGULATION S PROMULGATED UNDER THE SECURITIES ACT.”
“TRANSFER OF THESE SECURITIES IS PROHIBITED, EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT TO AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.”
13
Section 5.02 Delivery of Books and Records. At the Closing, QDM shall deliver to the QDM BVI Shareholder or his representatives the originals of the corporate minute books, books of account, contracts, records, and all other books or documents of QDM which are now in the possession of QDM or its representatives.
Section 5.03 Third Party Consents and Certificates. QDM and the QDM BVI Shareholder agree to cooperate with each other in order to obtain any required third-party consents to this Agreement and the transactions herein contemplated.
ARTICLE
VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF QDM
The obligations of QDM under this Agreement are subject to the satisfaction or waiver, at or before the Closing Date, of the following conditions:
Section 6.01 Accuracy of Representations and Performance of Covenants. The representations and warranties made by QDM BVI and the QDM BVI Shareholder in this Agreement were true when made and shall be true at the Closing Date. QDM BVI and the QDM BVI Shareholder shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing.
Section 6.02 Officer’s Certificate. QDM shall have been furnished with a certificate dated the Closing Date and signed by a duly authorized officer of QDM BVI to the effect that no litigation, proceeding, investigation, or inquiry is pending, or to the best knowledge of QDM BVI, threatened, which might result in an action to enjoin or prevent the consummation of the transactions contemplated by this Agreement, or, to the extent not disclosed in the QDM BVI Disclosure Schedules, which might result in any material adverse change in any of the assets, properties, business, or operations of the Group.
Good Standing. QDM shall have received a certificate of good standing from The Registrar of Corporate Affairs of the British Virgin Islands, dated as of no less than fifteen (15) business days prior the Closing Date, certifying that QDM BVI is in good standing as a company in the British Virgin Islands. Section 6.04 No Governmental Prohibition. No order, statute, rule, regulation, executive order, injunction, stay, decree, judgment or restraining order shall have been enacted, entered, promulgated or enforced by any court or governmental or regulatory authority or instrumentality which prohibits the consummation of the transactions contemplated hereby.
Section 6.05 Consents. All consents, approvals, waivers or amendments pursuant to all contracts, licenses, permits, trademarks and other intangibles in connection with the transactions contemplated herein, or for the continued operation of QDM BVI and the Group after the Closing Date on the basis as presently operated shall have been obtained.
14
ARTICLE
VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF
QDM BVI AND THE QDM BVI SHAREHOLDER
The obligations of QDM BVI and the QDM BVI Shareholder under this Agreement are subject to the satisfaction or waiver, at or before the Closing Date, of the following conditions:
Section 7.01 Accuracy of Representations and Performance of Covenants. The representations and warranties made by QDM in this Agreement were true when made and shall be true as of the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date. Additionally, QDM shall have performed and complied with all covenants and conditions required by this Agreement to be performed or complied with by QDM.
Section 7.02 Closing Certificate. The QDM BVI Shareholder shall have been furnished with certificates dated the Closing Date and signed by duly authorized executive officers of QDM, to the effect that no litigation, proceeding, investigation or inquiry is pending, or to the best knowledge of QDM threatened, which might result in an action to enjoin or prevent the consummation of the transactions contemplated by this Agreement or, to the extent not disclosed in the QDM Disclosure Schedules, by or against QDM, which might result in any material adverse change in any of the assets, properties or operations of QDM.
Section 7.03 Officer’s Certificate. The QDM BVI Shareholder shall have been furnished with certificates dated the Closing Date and signed by duly authorized executive officers of QDM, certifying that there are no existing liabilities as of the Closing Date and that each representations and warranties of QDM contained in this Agreement shall be true and correct on and as of the Closing Date.
Section 7.04 Secretary’s Certificate. The QDM BVI Shareholder shall have been furnished with a certificate dated the Closing Date and signed by the secretary of QDM, certifying to the QDM BVI Shareholder the resolutions adopted by the Board of Directors of QDM approving, as applicable, the transactions contemplated by this Agreement and the issuance of the Exchange Shares, certifying the current versions of its certificates of incorporation and bylaws or other organizational documents and certifying as to the signatures and authority of persons signing this Agreement and related documents on its behalf.
Section 7.05 Good Standing. The QDM BVI Shareholder shall have received a certificate of good standing from the Secretary of State of Florida, dated as of a date within ten days prior to the Closing Date, certifying that QDM is in good standing as a corporation in the State of the Florida and has filed all tax returns required to have been filed by it to date and has paid all taxes reported as due thereon.
Section 7.06 No Governmental Prohibition. No order, statute, rule, regulation, executive order, injunction, stay, decree, judgment or restraining order shall have been enacted, entered, promulgated or enforced by any court or governmental or regulatory authority or instrumentality which prohibits the consummation of the transactions contemplated hereby.
15
Section 7.07 Consents. All consents, approvals, waivers or amendments pursuant to all contracts, licenses, permits, trademarks and other intangibles in connection with the transactions contemplated herein, or for the continued operation of QDM after the Closing Date on the basis as presently operated shall have been obtained.
ARTICLE
VIII
MISCELLANEOUS
Section 8.01 Brokers. The parties agree that there were no finders or brokers involved in bringing the parties together or who were instrumental in the negotiation, execution or consummation of this Agreement. QDM and the QDM BVI Shareholder each agree to indemnify the other against any claim by any third person for any commission, brokerage, or finder’s fee arising from the transactions contemplated hereby based on any alleged agreement or understanding between the indemnifying party and such third person, whether express or implied from the actions of the indemnifying party.
Section 8.02 Governing Law; Venue. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, New York for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HERETO (INCLUDING ITS AFFILIATES, AGENTS, OFFICERS, DIRECTORS AND EMPLOYEES) HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 8.03 Notices. All notices, requests, demands and other communications provided in connection with this Agreement shall be in writing and shall be deemed to have been duly given at the time when hand delivered, delivered by express courier, or sent by facsimile (with receipt confirmed by the sender’s transmitting device) in accordance with the contact information provided below or such other contact information as the parties may have duly provided by notice.
16
If to QDM:
Room 715, 7F, The Place Tower C
No. 150 Zunyi Road, Changning District
Shanghai, China 200051
Attention: Huihe Zheng
Email: [email protected]
Fax Number: +86 (21) 52995776
with a copy (which shall not constitute notice) to:
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, NY 10105
Attention: Wei Wang, Esq.
Email: [email protected]
Fax Number: (212) 370-7889
If to QDM BVI or the QDM BVI Shareholder, to:
Huihe Zheng
Room707, SoHoT-1, 1717 Tianshan Road
Changning District, Shanghai, China
Email: [email protected]
with a copy (which shall not constitute notice) to:
The Crone Law Group P.C.
500 Fifth Ave, Suite 938
New York, NY 10110
Attn: Mark E. Crone, Esq.
Email: [email protected]
Fax (818) 688-3130
Any such notice or communication shall be deemed to have been given: (i) upon receipt, if personally delivered, (ii) on the date of transmission, if such notice or communication is delivered via email attachment at the email address set forth above at or prior to 5:30 p.m. (New York City time) on a business day, or the next business day after the date of transmission, if such notice or commission is delivered via email attachment on a day that is not a business day or later than 5:30pm 5:30 p.m. (New York City time) on a business day (iii) on the day after dispatch, if sent by overnight courier, (iii) upon dispatch, if transmitted by facsimile and receipt is confirmed by printed receipt and (iv) three (3) days after mailing, if sent by registered or certified mail.
Section 8.04 Confidentiality. Each party hereto agrees with the other that, unless and until the transactions contemplated by this Agreement have been consummated, it and its representatives will hold in strict confidence all data and information obtained with respect to another party or any subsidiary thereof from any representative, officer, director or employee, or from any books or records or from personal inspection, of such other party, and shall not use such data or information or disclose the same to others, except: (i) to the extent such data or information is published, is a matter of public knowledge, or is required by law to be published; or (ii) to the extent that such data or information must be used or disclosed in order to consummate the transactions contemplated by this Agreement. In the event of the termination of this Agreement, each party shall return to the other party all documents and other materials obtained by it or on its behalf and shall destroy all copies, digests, work papers, abstracts or other materials relating thereto, and each party will continue to comply with the confidentiality provisions set forth herein.
Section 8.05 Schedules; Knowledge. Each party is presumed to have full knowledge of all information set forth in the other party’s schedules delivered pursuant to this Agreement.
17
Section 8.06 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity.
Section 8.07 Entire Agreement. This Agreement represents the entire agreement between the parties relating to the subject matter thereof and supersedes all prior agreements, understandings and negotiations, written or oral, with respect to such subject matter.
Section 8.08 Expenses. Whether or not the Exchange is consummated, each of the parties hereto will bear their own respective expenses, including legal, accounting and professional fees, incurred in connection with the Exchange or any of the other transactions contemplated hereby.
Section 8.09 Survival; Termination. The representations, warranties, and covenants of the respective parties shall survive the Closing Date and the consummation of the transactions herein contemplated for a period of two years.
Section 8.10 Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile or email transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or email signature page were an original thereof.
Section 8.11 Amendment or Waiver. Every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any party of the performance of any obligation by the other shall be construed as a waiver of the same or any other default then, theretofore, or thereafter occurring or existing. At any time prior to the Closing Date, this Agreement may by amended by a writing signed by all parties hereto, with respect to any of the terms contained herein, and any term or condition of this Agreement may be waived or the time for performance may be extended by a writing signed by the party or parties for whose benefit the provision is intended.
Section 8.12 Best Efforts. Subject to the terms and conditions herein provided, each party shall use its best efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that the transactions contemplated hereby shall be consummated as soon as practicable. Each party also agrees that it shall use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective this Agreement and the transactions contemplated herein, both prior to and following the Closing.
18
IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement to be executed by their respective officers, hereunto duly authorized, as of the date first-above written.
| QDM INTERNATIONAL INC. | ||
| By: | /s/ Tim Shannon | |
| Name: Tim Shannon | ||
| Title: Chief Financial Officer | ||
| QDM Holdings Limited | ||
| By: | /s/ Huihe Zheng | |
| Name: Huihe Zheng | ||
| Title: Director | ||
| QDM BVI SHAREHOLDER: | ||
| /s/ Huihe Zheng | ||
| Huihe Zheng | ||
19
Exhibit 3.3
Qdm INTERNATIONAL INC.
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES c CONVERTIBLE PREFERRED STOCK
QDM International Inc. (the “Corporation”), a corporation organized and in good standing under the Florida Business Corporation Act (the “Act”), pursuant to the provisions of Sections 607.0821, 607.0602 and 607.0603 of the Act, does hereby certify that:
1. The name of the Corporation is QDM International Inc.
2. The Corporation is authorized to issue 5,000,000 shares of preferred stock (the “Preferred Stock”). There are currently an aggregate of 3,000,000 shares of Preferred Stock designated as the Series A Preferred Stock and the Series B Preferred Stock of the Corporation.
3. The following resolutions were duly adopted by the board of directors of the Corporation (the “Board of Directors”) on October 7, 2020:
WHEREAS, the certificate of incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, consisting of 5,000,000 shares, $0.0001 par value per share, issuable from time to time in one or more series;
WHEREAS, the Board of Directors is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any series and the designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of the preferred stock, which shall consist of up to 900,000 shares of the preferred stock which the Corporation has the authority to issue, as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of preferred stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:
TERMS OF PREFERRED STOCK
Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.
1
“Alternate Consideration” shall have the meaning set forth in Section 7(d).
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the Corporation’s common stock, par value $0.0001 per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Corporation or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Conversion Date” shall have the meaning set forth in Section 6(a).
“Conversion Ratio” shall initially be equal to eleven (11).
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in accordance with the terms hereof.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Fundamental Transaction” shall have the meaning set forth in Section 7(d).
“Holder” shall have the meaning given such term in Section 2.
“Liquidation” shall have the meaning set forth in Section 5.
“New York Courts” shall have the meaning set forth in Section 8(d).
“Notice of Conversion” shall have the meaning set forth in Section 6(a).
“Original Issue Date” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Preferred Stock” shall have the meaning set forth in Section 2.
“Public Float” shall have the meaning set forth in Section 6(c).
2
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 6(b)(i).
“Share Exchange Agreement” means the Share Exchange Agreement, dated on or about October 21, 2020, by and among the Corporation, QDM Holdings Limited, a British Virgin Islands company and the original Holder, as amended, modified or supplemented from time to time in accordance with its terms.
“Successor Entity” shall have the meaning set forth in Section 7(d).
“Trading Day” means a day on which the principal Trading Market is open for business.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX (or any successors to any of the foregoing).
“Transaction Documents” means this Certificate of Designation and the Share Exchange Agreement, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated pursuant to the Share Exchange Agreement.
Section 2. Designation, Amount and Par Value. The series of preferred stock shall be designated as its Series C Convertible Preferred Stock (the “Preferred Stock”) and the number of shares so designated shall be up to 900,000 (which shall not be subject to increase without the written consent of the holders of a majority of the then outstanding shares of the Preferred Stock (each, a “Holder” and collectively, the “Holders”)). Each share of Preferred Stock shall have a par value of $0.0001 per share.
Section 3. Dividends. Except for stock dividends or distributions for which adjustments are to be made pursuant to Section 7, Holders shall be entitled to receive, and the Corporation shall pay, dividends on shares of Preferred Stock equal (on an as-if-converted-to-Common-Stock basis, disregarding for such purpose any conversion limitations hereunder) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of Preferred Stock. The Corporation shall not pay any dividends on the Common Stock unless the Corporation simultaneously complies with this provision.
Section 4. Voting Rights. Holders of Preferred Stock shall be entitled to vote with holders of outstanding shares of Common Stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration (whether at a meeting of stockholders of the Corporation, by written consent of stockholders in lieu of a meeting to the extent permitted by the Corporation’s bylaws, as may be amended and restated from time to time, or otherwise), except as provided by law or by the provisions hereof. In any such vote, each share of Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which the Preferred Stock is or would be without taking into account any limitations or pre-requisites to convertibility as set forth herein, convertible pursuant to Section 6 herein as of the record date for such vote or written consent or, if there is no specified record date, as of the date of such vote or written consent. Each holder of the Preferred Stock shall be entitled to notice of all stockholder meetings (or requests for written consent) given to the holders of Common Stock in accordance with the Corporation’s bylaws, as may be amended and restated from time to time. In addition, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
3
Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each Holder.
Section 6. Conversion.
a) Conversions at Option of Holder. Each share of Preferred Stock shall be convertible, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof and without the payment of additional consideration by the Holder thereof, into eleven (11) fully paid and non-assessable shares of Common Stock (subject to the limitations set forth in Section 6(d)) (the “Conversion Ratio”). Holders shall effect conversions by providing the Corporation with the form of conversion notice attached hereto as Annex A (a “Notice of Conversion”). Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the applicable Holder delivers by facsimile such Notice of Conversion to the Corporation (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required. The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error. To effect conversions of shares of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing the shares of Preferred Stock to the Corporation unless all of the shares of Preferred Stock represented thereby are so converted, in which case such Holder shall deliver the certificate representing such shares of Preferred Stock promptly following the Conversion Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed in accordance with the terms hereof shall be canceled and shall not be reissued.
b) Mechanics of Conversion
i. Delivery of Conversion Shares Upon Conversion. Not later than the earlier of (i) five (5) Trading Days after each Conversion Date (the “Share Delivery Date”), the Corporation shall deliver, or cause to be delivered, to the converting Holder (A) the number of Conversion Shares being acquired upon the conversion of the Preferred Stock, and (B) a bank check in the amount of accrued and unpaid dividends, if any.
4
ii. Failure to Deliver Conversion Shares. If, in the case of any Notice of Conversion, such Conversion Shares are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such Conversion Shares, to rescind such Conversion, in which event the Corporation shall promptly return to the Holder any original Preferred Stock certificate delivered to the Corporation and the Holder shall promptly return to the Corporation the Conversion Shares issued to such Holder pursuant to the rescinded Notice of Conversion.
iii. Reservation of Shares Issuable Upon Conversion. The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Preferred Stock), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Share Exchange Agreement) be issuable (taking into account the adjustments and restrictions of Section 7) upon the conversion of the then outstanding shares of Preferred Stock. The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.
iv. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred Stock. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall round up to the next whole share.
v. Transfer Taxes and Expenses. The issuance of Conversion Shares on conversion of this Preferred Stock shall be made without charge to any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such Conversion Shares, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such Conversion Shares upon conversion in a name other than that of the Holders of such shares of Preferred Stock and the Corporation shall not be required to issue or deliver such Conversion Shares unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.
c) Conversion Limitation. The Corporation shall not effect any conversion of the Preferred Stock, and a Holder shall not have the right to convert any portion of the Preferred Stock, to the extent that, after giving effect to the conversion set forth on the applicable Notice of Conversion, the Corporation fails to maintain a freely traded Public Float of at least 10% of the total shares issued and outstanding of the class of security trading on OTCQB (or a freely traded Public Float of at least 5% if the Company has a minimum of $2 million in market value of the Public Float) under the Standards for Continued Eligibility of the OTCQB Standards. “Public Float” shall mean the total number of unrestricted shares not held directly or indirectly by an officer, director, any person who is the beneficial owner of more than 10 percent of the total shares of Common Stock outstanding of the Corporation, or any affiliates thereof, or any family members of officers, directors and control persons. Notwithstanding the foregoing, the Corporation shall not issue any share of Common Stock or Common Stock Equivalent so long as shares of Preferred Stock are outstanding, except the Holders of Preferred Stock has consented to such issuance in writing and such issuance will not cause the Corporation to not be in compliance with the Public Float requirement of the OTCQB Market.
5
Section 7. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Corporation, at any time while this Preferred Stock is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon conversion of, or payment of a dividend on, this Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Ratio shall be divided by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 7(a) above, if at any time the Corporation grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred Stock (without regard to any limitations on exercise hereof) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
c) Pro Rata Distributions. During such time as this Preferred Stock is outstanding, if the Corporation declares or makes any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Preferred Stock, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Preferred Stock (without regard to any limitations on conversion hereof) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution.
6
d) Fundamental Transaction. If, at any time while this Preferred Stock is outstanding, (i) the Corporation, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Corporation with or into another Person, (ii) the Corporation (and all of its Subsidiaries, taken as a whole), directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Corporation, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Corporation, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 6(d), the number of shares of Common Stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Preferred Stock is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 6(d) on the conversion of this Preferred Stock). For purposes of any such conversion, the determination of the Conversion Ratio shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving entity in such Fundamental Transaction shall file a new Certificate of Designation with the same terms and conditions and issue to the Holders new preferred stock consistent with the foregoing provisions and evidencing the Holders’ right to convert such preferred stock into Alternate Consideration. The Corporation shall cause any successor entity in a Fundamental Transaction in which the Corporation is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents in accordance with the provisions of this Section 7(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Preferred Stock which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Preferred Stock (without regard to any limitations on the conversion of this Preferred Stock) prior to such Fundamental Transaction, and with a conversion ratio which applies the conversion ratio hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion ratio being for the purpose of protecting the economic value of this Preferred Stock immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designation and the other Transaction Documents referring to the “Corporation” shall refer instead to the Successor Entity), and may exercise every right and power of the Corporation and shall assume all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Corporation herein.
7
e) Calculations. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.
f) Notice to the Holders.
i. Adjustment to Conversion Ratio. Whenever the Conversion Ratio is adjusted pursuant to any provision of this Section 7, the Corporation shall promptly deliver to each Holder by facsimile or email a notice setting forth the Conversion Ratio after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation (and all of its Subsidiaries, taken as a whole), or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to be delivered by facsimile or email to each Holder at its last facsimile number or email address as it shall appear upon the stock books of the Corporation, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Corporation or any of its subsidiaries, the Corporation shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to convert this Preferred Stock (or any part hereof) during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
8
Section 8. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service, addressed to the Corporation, at the address set forth above Attention: Chief Executive Officer, or such other address as the Corporation may specify for such purposes by notice to the Holders delivered in accordance with this Section 8. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Corporation, or if no such facsimile number, e-mail address or address appears on the books of the Corporation, at the principal place of business of such Holder, as set forth in the Share Exchange Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth in this Section 8 prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay liquidated damages, and accrued dividends, as applicable, on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.
c) Lost or Mutilated Preferred Stock Certificate. If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.
9
d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and construed and enforced in accordance with the internal laws of the State of Florida, without regard to the principles of conflict of laws thereof. All legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). The Corporation and each Holder hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. The Corporation and each Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. The Corporation and each Holder hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designation or the transactions contemplated hereby. If the Corporation or any Holder shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
e) Waiver. Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designation or a waiver by any other Holders. The failure of the Corporation or a Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion. Any waiver by the Corporation or a Holder must be in writing.
f) Severability. If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.
g) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or affect any of the provisions hereof.
i) Status of Converted or Redeemed Preferred Stock. If any shares of Preferred Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series C Convertible Preferred Stock.
******************
10
IN WITNESS WHEREOF, the undersigned have executed this Certificate this 7th day of October, 2020.
|
Qdm INTERNATIONAL INC.
By: /s/ Huihe Zheng Name: Huihe Zheng Title: Chief Executive Officer |
11
ANNEX A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert Shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C Convertible Preferred Stock indicated below into shares of common stock, par value $0.0001 per share (the “Common Stock”), of QDM International Inc., a Florida corporation (the “Corporation”), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as may be required by the Corporation in accordance with the Purchase Agreement. No fee will be charged to the Holders for any conversion, except for any such transfer taxes.
Conversion calculations:
|
Date to Effect Conversion: _____________________________________________
| |
|
Number of shares of Preferred Stock owned prior to Conversion: _______________
| |
|
Number of shares of Preferred Stock to be Converted: ________________________
| |
|
Number of shares of Common Stock to be Issued: ___________________________
| |
|
Applicable Conversion Ratio:____________________________________________
| |
|
Number of shares of Preferred Stock subsequent to Conversion: ________________
| |
|
Address for Delivery: ______________________ or DWAC Instructions: Broker no: _________ Account no: ___________ | |
|
By: ___________________________________ Name: Title: | |
12
Exhibit 10.1
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL, AND (ii) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED. REDACTED MATERIAL IS MARKED WITH A [***].
Dated on the 16th day of Nov, 2015
Broker Agreement
between
[***]
and
YeeTah Insurance Consultant Limited
1
THIS AGREEMENT is made and effective on 16 Nov 2015
BETWEEN [***] having its principal place of business at [***] and YeeTah Insurance Consultant Limited (“Broker”) having its principal place of business at Room 1901, 19/F, Wing Kwok Centre, 182 Woosung Street, Jordon, Kowloon.
WHEREAS
| 1. | The Broker carries on business as an insurance broker in the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) and has registered itself as a member of Professional Insurance Brokers Association; |
| 2. | The Broker wishes to become an authorized broker of [***] and submit to [***] applications for life insurance and other business made by the Broker’s clients within the territory of Hong Kong. |
| 3. | [***] agrees to appoint the Broker as one of its authorized brokers in Hong Kong and pay the Broker an agreed remuneration for business accepted by it in accordance with the terms and conditions of this Agreement; |
| 4. | The parties hereby set out their agreement in the terms hereinafter appearing. |
WHEREBY IT IS AGREED THAT:
| 1. | Broker’s Remuneration |
| 1.1 | (a) | (i) | For applications for insurance and other business duly arranged and submitted by the Broker and accepted by [***], the Broker shall, subject to clause l.l(b) below, be entitled to remuneration calculated in accordance with the Remuneration Schedule attached to this Agreement (“Remuneration Schedule”). The remuneration for any other business not specified in the Remuneration Schedule shall be determined by [***] in its absolute discretion from time to time. |
| (ii) | Notwithstanding any contrary provisions in this Agreement, [***] reserves the right to revoke, alter, add, amend or modify any terms of the Remuneration Schedule from time to time in its absolute discretion by serving on the Broker 1 week’s prior notice in writing. This Agreement shall terminate immediately if the Broker refuses to adhere to the latest terms of the Remuneration Schedule. | ||
| (iii) | Notwithstanding any contrary provisions in this Agreement, [***] reserves the absolute right at all times to recover and clawback from the Broker all the remunerations paid under this Agreement in respect of the relevant products sold in any proven case of fraud, money laundering, mis-selling or aggressive selling against the Broker as adjudicated by the professional brokerage body of which the Broker is a member or by the Insurance Authority of Hong Kong from time to time. |
| (b) | At any time while this Agreement is in force, the Broker’s entitlement to its remuneration shall be established by: |
| (i) | the issuance by [***] of a contract of insurance or policy document in respect of and subsequent to its acceptance of an application for insurance endorsed with the name of the Broker; and |
| (ii) | receipt by [***] of the required premiums, monies and all necessary forms and documents to accompany the application for insurance; and |
| (iii) | expiry of the applicable cooling-off period; and |
| (iv) | compliance with the provisions of this Agreement by the Broker in all respects. |
| 1.2 | If, for any reason, any insurance policy or contract issued upon the Broker’s arrangement pursuant to this Agreement is changed or converted to another policy or contract offered by [***], the remuneration on the changed or converted policy or contract shall be determined by the rules of [***] applicable at the time of such change or conversion. The Broker shall not be entitled to any remuneration on the changed or converted policy or contract unless such change or conversion is handled and processed by the Broker on behalf of the policyholder. |
| 1.3 | In case where a new policy is issued either 12 months before or after the termination of a previous policy issued in respect of the same insured, the remuneration on the new policy shall be payable in accordance with the rules of [***] as decided by it in its absolute discretion at the material times. |
2
| 1.4 | No remuneration shall be payable on interim term premiums and, or on any top-up premiums due to underwriting reasons. |
| 1.5 | In case where a policy has lapsed for non-payment of premium but is subsequently reinstated, the remuneration payable on the reinstated policy shall be determined by the rules of [***] applicable at the time of such reinstatement as decided by it in its absolute discretion. |
| 1.6 | The Broker shall have no claim for remuneration on any business unless its name and identification appears on the application. In case more than one broker’s name and identification appear on the application, such application shall not count towards the calculation of remuneration to the Broker unless and until [***] receives a satisfactory clarification from all the named brokers concerned and thereby makes a decision. |
| 1.7 | The Broker shall immediately repay to [***] all or the proportional amount of remuneration received by it in respect of any premiums or other monies refunded by [***] to the policyholder for whatever reasons. |
| 1.8 | [***] has the right at all times to offset against any remuneration or other sum due to the Broker by [***] and/or any parties or entities whose ultimate parent or holding company is [***], and withhold from it, any debt, obligation or liability due or owing by the Broker to [***] and/or any parties or entities whose ultimate parent or holding company is [***]. |
| 1.9 | In case where a policy issued by [***] in respect of an insured is lapsed or surrendered within the first 13 months from the date of issuance of the policy, [***] shall have the right to recover from the Broker such amount of the remuneration paid to the Broker in relation to such policy. |
| 1.10 | For life business, [***] will reimburse the Broker for expenses of any medical examination required by [***] on a life assured which are actually incurred by it, unless: such examinations or tests are (a) not submitted as per [***]’s request (or any agreed extension thereof), (b) conducted by a medical practitioner not authorized by [***], or (c) conducted in respect of a person who is known to the Broker to have been declined, loaded or deferred by any other insurance company or entity. |
| 1.11 | Where the Broker’s commission account with [***] is in debit in any month, the Broker shall pay the amount owing to [***] upon demand. |
| 2. | Obligations of the Broker |
| 2.1 | The Broker shall at all times comply with all laws, legislations, statutory rules, regulations, codes and guidelines of government and regulatory authorities and the rules and regulations of [***] being in force from time to time. |
| 2.2 | The Broker acknowledges that there is no employer-employee relationship, principal and agent relationship, joint-venture or partnership either expressed or implied between [***] and the Broker, and nothing contained in this Agreement shall be construed to create such relationships. The Broker shall not act in a manner which expresses or implies a relationship other than that of independent contracting parties between the Broker and [***] nor seek to bind [***]. |
| 2.3 | The Broker shall not directly or indirectly induce or attempt to induce any client to convert, lapse, forfeit or surrender his ‘her insurance policy or terminate his/her business relationship with [***]. |
| 2.4 | The Broker shall use such forms, documents and materials as may from time to time be supplied to it by [***] without any unauthorized alteration. The Broker shall not create, endeavour to create, use, or endeavor to use any forms, documents and materials which are not prepared by [***] without [***]’s prior written approval. The Broker shall not amend or alter any information and/or documents provided by any insurance applicant or client without obtaining his/her consent, Any application form received by the Broker must be promptly forwarded to [***]. |
3
| 2.5 | During the term of this Agreement, the Broker agrees that it shall: |
| (a) | bear all fees and expenses incurred and reimburse [***] of any fees and expenses incurred in arranging contracts of insurance with [***], unless otherwise specifically agreed to in writing by [***]; |
| (b) | at all times observe and honour the confidential nature of [***]’s business information and trade secrets which had come into the Broker’s knowledge from time to time; |
| (c) | promptly disclose to [***] in writing every fact and information within its knowledge relevant to the acceptance of risk and/or business from the Broker by [***] and shall promptly and accurately set out to [***] in writing every fact disclosed to it by the proposed insured and/or any person relevant to the acceptance of risk or business by [***]; |
| (d) | promptly give notice in writing to [***] whenever it receives notices of loss or claim made or to be made under a policy or a contract, or of any breach of insurance condition, or of any assignment or intention of assignment of a policy or a contract howsoever the Broker has become aware of such matter; |
| (e) | in case the Broker is a limited company, promptly give notice in writing to [***] of any change of ownership or management of the Broker; |
| (f) | ensure any representation made and information provided in arranging contracts of insurance and/other business is accurate and not misleading; |
| (g) | promptly give notice in writing to [***] upon being aware of any disciplinary proceedings being instituted by any regulatory, statutory or professional body against the Broker or any of its owners, directors, chief executive, controllers, and/or technical representatives, or if the Broker or any such person is charged with any criminal offence; |
| (h) | procure compliance with this Agreement by each of its officers, employees, technical representatives, and agents; and |
| (i) | forthwith notify [***] in writing of any situation that could result in any breach of the terms herein, any fraud or any apparent, potential or actual conflict of interest in relation to this Agreement including any situation in which the Broker, its owners, directors, chief executive, technical representatives, employees and/or agents have a private or personal interest sufficient to influence or appear to influence the objective of this Agreement. |
| 2.6 | The Broker agrees that it has no authority to and shall not do the following acts on behalf of [***]: |
| (a) | to accept any risk or business; |
| (b) | to issue any cover note, policy or other contract; |
| (c) | to receive or accept any notice of alternation, cancellation, determination or assignment of any policy or other business, any notice of loss or any other notices; |
| (d) | to waive any term or condition of any policy or other business; |
| (e) | to negotiate terms of settlement, settle or pay any loss or claim or waive or defer payment of premium or other sum; |
| (f) | to incur any liability for or pledge the credit of [***] to any third party; |
| (g) | to give any warranty, representation or promise in respect of any policy, endorsement, supplementary contract or other business, including any misrepresentation or incomplete or inaccurate representation or comparison for the purpose of inducing a person to convert, lapse, forfeit or surrender his insurance or terminate his business relationship with any company; |
| (h) | to issue any receipt (whether interim, conditional or otherwise) for monies received from clients, which are to be delivered to [***]; |
| (i) | at any time disclose to any third party about the terms and conditions of this Agreement or divulge any confidential information concerning the business, affairs and matters of [***], its associates or affiliates. This sub-clause shall survive the termination of this Agreement; and |
the Broker shall not represent to a proposed insured or any other person that it is so authorized and shall not make any representation to a proposed insured or any other person in respect of such matter.
| 2.7 | The Broker shall not display, upload or otherwise use any of [***]’s trademark(s) and/or logo(s) to or on the Broker’s corporate website and/or corporate publications without first having obtained [***]’s prior approval and consent. |
4
| 2.8 | The Broker shall not publish or cause to be published any advertisement concerning the formation and/or details of this Agreement, [***], its businesses in any newspaper, magazine, publication or other media whatsoever without [***]’s prior written approval. The Broker shall not issue, distribute or cause to be issued or distributed any circular or write or cause to be written to any newspaper, magazine, publication or other media whatsoever in respect of the same without [***]’s prior written approval. If any lawsuit shall be brought against [***] in consequence of any unauthorized action or statement of the Broker, the Broker shall be personally liable, for and indemnify and keep [***] indemnified and harmless from, all costs, expenses and damages arising from or incurred as a result of or in connection with such action or statement. |
| 2.9 | The Broker shall not make, or enter into any arrangement with or induce a person to make, any insurance claim of whatever nature which is not a proper and valid claim. |
| 2.10 | The Broker shall not act to put [***] at risk by delivering any policy, endorsement or supplementary contract issued to an applicant whose health or occupation it knows or has reason to suspect has changed since the date of application. The Broker shall not deliver to any person any policy or renewal receipt unless the premium has been received by [***] in full within the period allowed for payment and the person on whose life the policy is issued is at the time in good health. |
| 2.11 | The Broker shall comply with the standards or guidelines regarding the requirements relating to the sale of investment-linked assurance scheme products as issued by the appropriate regulator(s) and professional bodies (including but not limited to the Hong Kong Monetary Authority and the Securities and Futures Commission from time to time. |
| 2.12 | In performing this Agreement, the Broker must: (a) comply with all applicable anti-bribery and anti-corruption laws and regulations, (b) not offer any bribe or facilitation payment to any public official or other person and (c) not do anything that may cause [***] or any of its affiliates to breach any anti-bribery or anti-corruption law. The Broker must promptly notify [***] in writing of any actual or potential breach of this clause. If the Broker breaches or appears to breach this clause, [***] may immediately terminate this Agreement without liability. |
| 2.13 | The Broker shall inform its clients and ensure that the clients understand that the Broker is the clients’ agent and not the agent of [***] in respect of the introduction and referral of the clients to [***], arranging the policies i coverage for the clients and assisting and advising the clients on all insurance matters relating thereto. |
| 2.14 | The Broker undertakes to comply with all applicable laws and regulations in Hong Kong, including, without limitation, the Prevention of Bribery Ordinance (Cap. 201 of the Laws of Hong Kong, the “PBO”). The Broker further undertakes to implement such measures in its dealings with its clients to ensure compliance with Section 9 of the PBO, including, without limitation, the following minimum requirements: |
| (a) | disclose to the client that the Broker will receive a commission from [***] as a result of the client taking up the policy and / or products to be issued arranged by [***]; |
| (b) | if the client specifically asks for the amount of commission received by the Broker, the Broker shall disclose such an amount to, and obtain consent from the client; and |
| (c) | perform such other acts or things as may be necessary for the Broker to comply with the PBO, and any other guidelines, codes or rules that may be issued or promulgated by the Independent Commission Against Corruptions or the Relevant Authorities relating to commission disclosures. |
For the purpose of this clause, “Relevant Authorities” include the Insurance Authority, The Hong Kong Federation of Insurers, Professional Insurance Brokers Association and the Hong Kong Confederation of Insurance Brokers and their respective successors.
5
| 3. | Rights of [***] |
| 3.1 | [***] are not obliged to accept any application for insurance or other business submitted by the Broker and may by notice to the Broker discontinue either permanently or for such period as they shall think fit the acceptance of any application for insurance or other business of any class without reasons. |
| 4. | Warranties by the Broker |
| 4.1 | The Broker warrants and represents that:- |
| (a) | it is an authorized insurance broker within the meaning of section 2 of the Insurance Companies Ordinance (Cap.41 of the Laws of Hong Kong); |
| (b) | should it cease to be an authorized insurance broker, it shall promptly give notice in writing to [***] of such cessation and immediately cease to arrange for any policies or contracts of insurance; |
| (c) | it shall not act or hold itself out as in any way which is inconsistent with its capacity as an authorized insurance broker as stipulated under the relevant laws and regulations; |
| (d) | it shall maintain professional indemnity cover for itself as required under the relevant laws and regulations and in any event shall be wholly responsible for any liabilities arising out of or in connection with its own acts, omissions, professional negligence and misconduct including but not limited to any misrepresentation in arranging contracts of insurance and/or other business; and |
| (e) | it shall disclose the presence of, and obtain consent from clients as to the remuneration it shall receive under this Agreement for the applications for insurance and other business submitted to and accepted by [***]. |
| 5. | Indemnity |
| 5.1 | The Broker shall indemnify and undertake to pay to [***] an amount equivalent to, and hold [***] harmless against, all losses, damages, claims, demands, expenses and other liabilities incurred by [***] as a result of any fraud, dishonesty, misconduct or any breach or non-observance of any of the terms of this Agreement or any negligence in the performance of its obligations under this Agreement, including any representation made or act carried out by the Broker which is not authorized under this Agreement. |
| 6. | Assignment |
| 6.1 | Notwithstanding anything stated in this Agreement, [***] shall have the absolute right to assign any and all of its rights and obligations as specified herein to another party or any entity whose ultimate parent or holding company is [***] plc. However, the Broker shall not assign or purport to assign any right or obligation which the Broker may have in this Agreement without [***]’s prior written approval. |
| 7. | Books and Records |
| 7.1 | The Broker shall keep full and proper books and account and records and other documents for the purpose of showing all transactions, matters and things concerning the business of the Broker pursuant to this Agreement. |
| 7.2 | [***] shall have the right at any time to examine and take copies of relevant part of such books and accounts and records and other documents kept by the Broker pursuant to the Agreement and the Broker shall afford all such facilities for inspection. |
6
| 8. | Suspension |
| 8.1 | If [***] in its opinion suspects any of the events in Clause 9.2 may happen, it may at its absolute discretion by notice suspend the operation of this Agreement without giving any reason. |
| 8.2 | The operation of this Agreement and any business processes contemplated hereunder shall immediately be suspended without the need for any notice to be given by [***] upon the occurrence of an event referred to in Clause 9.2(a). |
| 8.3 | If the operation of this Agreement is suspended: |
| (a) | the Broker shall use its best endeavours to co-operate with [***] in any investigation into any of the events in Clause 9.2 and shall provide all information, documents and assistance for the purpose of such investigation; |
| (b) | the Broker shall not submit any application for insurance or other business to [***] under this Agreement without [***]’s prior written approval; and |
| (c) | [***] may at its absolute discretion withhold part of or all payments of remuneration (whether or not they are accrued). |
| 9. | Termination |
| 9.1 | Either [***] or the Broker may terminate this Agreement at any time without giving any reason for doing so by giving one month’s notice to the other in writing. |
| 9.2 | [***] may terminate this Agreement forthwith by notice to the Broker if: |
| (a) | the Broker’s license, authority or registration with the relevant government, regulatory or supervisory authority is revoked or terminated; or |
| (b) | the Broker goes into liquidation, whether compulsorily or voluntarily (unless such liquidations or forms part of a bona fide scheme for reconstruction or amalgamation which is first approved in writing by [***]) or the Broker has died (where the Broker is a natural person); or |
| (c) | the Broker becomes subject to any insolvency proceedings; or |
| (d) | any judgment against the Broker shall be entered which for a period of 30 days shall neither be paid nor stayed pending appeal; or |
| (e) | any receiver or officer of any court or government authority shall be appointed or take possession or control of any substantial part of the Broker’s assets or property or control over its affairs and obligations; or |
| (f) | the Broker commits any dishonest or fraudulent act which results in the Broker being charged and found guilty of an offence or if the Broker has engaged in any conduct which in the opinion of [***] is prejudicial to the interest of [***] or any of its affiliates or associates; or |
| (g) | the Broker violates any of the terms and conditions of this Agreement, or fails to observe or obey any of the rules and regulations of [***]; or |
| (h) | the Broker does not meet any requirements which may be required under laws, legislation, statutory rules, regulations, codes and guidelines of government and regulatory authorities from time to time. |
| 9.3 | In the event of termination of this Agreement under Clause 9.2, payments of remuneration shall be stopped immediately (whether or not they are accrued). All of the Broker’s rights to such payments accruing prior to termination of this Agreement shall immediately cease upon termination of this Agreement, and die Broker waives all its rights to such payments. |
| 9.4 | On termination of this Agreement, the Broker shall promptly deliver up to [***] all forms, documents, data, materials and computer software programs and any other property belonging to or ought to have belonged to [***] within 7 days from the effective date of termination. |
| 9.5 | Termination of this Agreement shall not affect accrued rights, commitments or provisions intended to survive the termination of this Agreement. For the avoidance of doubt and without limiting the generality of the foregoing, Clauses 1.7, 1.9, 2.6(i), and the relevant provisions of the Remuneration Schedule shall survive the termination of this Agreement. |
7
| 9.6 | Upon termination of this Agreement, [***] will pay the Broker the balance of the commission account where it is in credit and the Broker will pay [***] the relevant amount where it is in debit. Further, the commission account may be set off against any other debit owing by either party to the other at the option of the creditor. |
| 9.7 | In the event that written notice is given by [***] or the Broker to terminate this Agreement under Clause 9.1, [***] may at its absolute discretion by notice to the Broker suspend for such period as it thinks fit the operation of this Agreement. |
| 10 | Ownership of Materials |
| 10.1 | All forms, documents, materials and computer software programs supplied by [***] to the Broker for arranging contracts of insurance and other business with [***] or Other [***] Companies and the copyright and other intellectual property rights of whatever nature in such forms, documents, materials and computer software programs are and shall remain the property of [***] and shall be returned to [***] on termination of this Agreement pursuant to Clause 9 of this Agreement or on [***]’s prior written notice. |
| 10.2 | [***] grants to the Broker a non-exclusive license to use such forms, documents, materials and computer software programs provided that, the Broker shall not tamper, alter or modify such forms, documents, materials and computer software programs. For the avoidance of doubt, the license granted under this Clause 10.2 shall be revoked with immediate effect on termination of this Agreement for any reason or at any time on [***]’s written notice as it may think fit. |
| 11 | Notices |
| 11.1 | Any approval or notice required to be given or sent in this Agreement must be in writing and signed by the Broker or [***] (as the case may be). |
| 11.2 | Notices by either party shall be given in writing and may be delivered personally or sent by letter addressed to the other party at, in the case of [***], its principal place of business in Hong Kong for the time being and, in the case of the Broker, its last known address in Hong Kong. Any such notice given by letter shall be deemed to have been given at the time of delivery if delivered personally and on the day following the date of posting if posted and in proving such service it shall be sufficient to prove that the envelope containing the notice was properly addressed, stamped and posted. |
| 12 | General |
| 12.1 | Waiver of any terms or conditions in this Agreement or waiver of a breach of such term or condition shall not constitute a waiver of any of the other terms and conditions or of any future breach or breaches of any term or condition or operate as a continuing waiver. |
| 12.2 | Save for [***]’s right to revoke, alter, add, amend or modify the Remuneration Schedule or as otherwise expressly provided in this Agreement, all modifications to this Agreement shall have no force or effect unless and except as they are expressed in writing and duly signed by [***] and the Broker. |
| 12.3 | This Agreement represents the entire understanding and constitutes the whole agreement in relation to its subject matter between the Broker and [***] and supersedes any previous agreement or understanding in relation to its subject matter. |
| 12.4 | The headings used in this Agreement are for convenience only and shall not form a part of this Agreement. Any words importing body corporate shall include firms and natural persons and vice-versa. Any words embodying the masculine gender include the feminine and any words indicating the singular case shall include the plural and vice-versa. |
8
| 12.5 | This Agreement shall not create or give rise to, nor shall it be intended to create or give rise to, any third party rights. No third party shall have any right to enforce or rely on any provision of this Agreement which does or may confer any right or benefit on any third party, directly or indirectly, expressly or impliedly. The application of any legislation giving rise to or conferring on third parties contractual or other rights in connection with this Agreement is hereby expressly excluded. |
| 13 | Law |
| 13.1 | This Agreement shall be construed in accordance with the laws of the Hong Kong and both parties irrevocably submit to the exclusive jurisdiction of the courts of Hong Kong. |
| 14 | Severability |
| 14.1 | If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in whole or in part under the law of any jurisdiction, neither the legality, validity and enforceability of the remaining provisions of this Agreement (or in the case of part of a provision being illegal, invalid or unenforceable, the remainder of that provision) under the law of that or any other jurisdiction nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired. |
| 14.2 | If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in whole or in part under any law of any jurisdiction but would have been legal, valid and enforceable if part of the wording had been deleted or the scope or period had been reduced or restricted, such provision shall apply in such jurisdiction with such modification as may be necessary to make it legal, valid and enforceable in that jurisdiction. |
IN WITNESS whereof the parties to this Agreement have signed this Agreement on the date first above written.
For and on behalf of [***]
/s/ [***]
[***]
Chief Partnership Distribution Officer
For and on behalf of
Yeetah Insurance Consultant Limited
Name and Title of Authorized Signatory: Lee Kuan Keung, C.E.
Business Registration No.; 64676899-000-04-15-5
Address: Room 1901, 19/F, Wing Kwok Centre, 182 Woosung Street, Jordon, Kowloon
9
25/10/2016
LEE KWAN KEUNG
YEETAH INSURANCE CONSULTANT LIMITED
RM 1901 19/F
WING KWOK CENTRE
182 WOOSUNG STREET
JORDON KOWLOON
Dear LEE KWAN KEUNG,
Supplement to Broker Agreement
We refer to the Broker Agreement dated 16 November 2015 concluded between your firm and our company (the “Company”). Pursuant to clause 2.1 thereof, we set out below the following internal rules and regulations applicable to insurance applications and other businesses submitted through your firm to us for you to observe and comply as part of the Broker Agreement:
| 1. | You shall ensure that all insurance applications from your customers resident in the People’s Republic of China (“MCV Business”) to the Company are only solicited and handled by those of your technical representatives, consultants and staff members (“Representatives”) who understand the Company’s policies, procedures and requirements on handling MCV Business (“MCV Requirements”) and agree to comply with the MCV Requirements. You agree to (i) inform all the Representatives about the MCV Requirements provided by the Company from time to time (including, without limitation, the MCV Requirements posted on the database (e.g. [***] Information Library, etc.) to which you can gain access) and (ii) request and ensure that such Representatives shall comply with them. You shall, within such reasonable period as notified by the Company, provide an annual declaration signed by your Chief Executive confirming full compliance with this clause. Their solicitation activities shall only be conducted in Hong Kong in compliance with all applicable laws and regulations of the Hong Kong SAR as well as those of the PRC regulatory authorities (including, without limitation, the China Insurance Regulatory Commission and the State Administration of Foreign Exchange). Without prejudice to our right under Clause 3 of the Broker Agreement, we reserve full discretion in rejecting any insurance applications handled by any of your Representatives in breach of the aforesaid requirements. |
| 2. | Where the Company sees fit to investigate into any complaints received from policyholders on business introduced by your firm with allegations of misconduct or breach of trust or integrity of you or the Representatives, you shall cooperate with the Company fully in the investigation, including without limitation providing the Company with all relevant documents and information pertaining to the subject matter of the investigation as reasonably required by the Company. You also agree that the Company may apply its complaint investigation procedures to review any complaints or issues pertaining to the activities or omissions of your firm or the Representatives. |
10
| 3. | If it is found by the Company that your firm or the Representatives have conducted any unlawful solicitation or marketing activities in the PRC, in addition to any actions which the Company may take against you under the Broker Agreement, you shall indemnify the Company for all liabilities, losses, costs and expenses (including legal costs on a solicitor and own client basis) incurred by the Company in connection with your breach of the Broker Agreement. |
You agree that this supplement shall form part of the Broker Agreement between us and shall be construed accordingly. Clauses 13 and 14 of the Broker Agreement shall apply to this supplement as if incorporated herein in full.
We ask that you acknowledge receipt of this supplement and confirm agreement to abide by its terms by signing and returning a duplicate copy of this to our Partnership Distribution Department.
For and on behalf of
[***]
/s/ [***]
Chief Partnership Distribution Officer
We hereby confirm that we have received and fully understand the contents of these terms and regulations and confirm our acceptance and agreement to them.
For and on behalf of
YEETAH INSURANCE CONSULTANT LIMITED (B9820-01893187)
Name: Lee Kwan Keung
Title: CE
Date:25 oct 2016
11
Exhibit 10.2
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL, AND (ii) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED. REDACTED MATERIAL IS MARKED WITH A [***].
Broker's Contract
THIS AGREEMENT is made this October 19, 2015 between [***] (hereinafter called the "Company"), and YEETAH INSURANCE CONSULTANT LIMIID of ROOM 1901, WING KWOK CENTRE, 182 WOOSUNG STREET, JORDAN, KOWLOON (hereinafter called the "Broker").
WITNESSETH: That the Broker may submit to the Company applications for life insurance, group insurance, and annuities made by the Broker's clients within the territory of Hong Kong ("Territory"), wherein the Company has the right to do business, and may collect and pay over to the Company first year and renewal premiums on such business, all subject to the Terms and Conditions attached hereto, which the Broker has read and which form part of this Agreement, as fully as if set forth over the signatures of the parties hereto.
The Company agrees to pay and the Broker agrees to accept as full and complete remuneration for his services under this Agreement while it is in force, commissions as specified in the Schedule of Commissions (attached to and forming a part hereof), which Schedule shall be subject to change or revocation at any time on written notice by the Company in its absolute discretion, and the Broker agrees that such change or revocation (as the case may be) shall be effective and binding upon the Broker.
IN WITNESS WHEREOF, the Company has executed this Agreement in duplicate and the Broker has hereunto set its hand in duplicate the date first above written.
| SIGNED
for and on behalf of YEETAH INSURANCE CONSULTANT |
SIGNED
for and on behalf of [***] LIMITED | |||
 |
||||
| /s/ Lee Kwan Keung | /s/ [***] | |||
| Name: | Lee Kwan Keung | Name: | [***] | |
| Title: | CE | Title: | Head of Partnership Distribution | |
Page 1 of 6
TERMS & CONDITIONS
COMMISSIONS
1. The Broker shall not be entitled to any commission on any insurance unless (a) the application for such insurance is submitted by it; (b) its name appears on the application for such insurance; (c) the relevant premium in respect of the insurance policy in cleared funds has been paid to the Company and such insurance policy has not be cancelled before the end of its cooling-off period; (d) the Broker complies with all terms and conditions of this Agreement; and (e) this Agreement remains in full force and effect.
2. When any policy issued upon the application submitted by the Broker in pursuant to this Agreement is changed or converted to another policy plan, the commission payable upon the changed or converted policy shall be determined by the rules of the Company current at the time of such change or conversion. In any event, the Broker shall not be entitled to any commission on the changed or converted policy unless the change or conversion is effected by the Broker itself.
3. When a new policy is issued, and a previously existing policy on the same life shall terminate within twelve (12) months before or within such lesser time frame as determined by the Company after the issue of the new policy, unless the Company otherwise determines, no first year's commission nor any proportion thereof will be payable on the new policy, except on that portion of the annual premium on the new policy which is in excess of the annual premium on the discontinued policy. Previously existing policies which are converted into paid-up insurance or extended term insurance or are reduced in face amount, shall be deemed to be terminated and the provisions of this clause shall apply.
4. If any policy shall terminate for non-payment of premium and shall be reinstated subsequently, the Broker shall not be entitled- to receive any future commissions payable on such policy unless it effects the reinstatement of the terminated policy within a period of three （3) months from the date of termination of such policy; and during the said period of three (3) months, no other Broker shall be permitted to reinstate such policy unless otherwise agreed to by the policyholder in writing. Notwithstanding the foregoing, no commission shall be paid on any policy which is reinstated after the date of termination of this Agreement.
5. If the Company shall refund the premiums to the policyholder on any policy and cancel the policy for any reason whatsoever, the Broker shall repay the Company on demand the amount of commission received on the premiums so refunded.
6. Benefit, remuneration, privilege or perquisite not expressly set out herein or referred to in the Schedule may be granted to the Broker at the sole discretion of the Company without any binding legal effect on the Company to continue or improve any such benefit, remuneration, privilege or perquisite; and the Company shall have the sole and absolute discretion to modify, change or discontinue forthwith any such benefit, remuneration, privilege or perquisite at any time.
7. The Schedule of Commission is subject to discontinuance or change by the Company in its sole and absolute discretion on notice to the Broker in writing and such discontinuance or change shall apply only to business referred to the Company by the Broker subsequent to the date that such notice is given.
SET-OFF
8. The Company shall have the right at all times to set off against any sum due to the Broker, any debt, obligation or liability due or owing by the Broker to the Company, and such setting off shall not create any cause of action against the Company by the Broker. This clause shall survive termination of this Agreement for a period of 1 year.
TERMS OF CO-OPERATION
9. With effect from the date of execution of this Agreement by both parties hereto, subject to the Broker's duties owed to its clients and all applicable laws, regulations, rules, codes, guidelines or other regulatory requirements, the Broker agrees to introduce the Company's insurance products to its clients where it is in its clients' interests.
10. Notwithstanding any of the terms and conditions in this Agreement, the Company reserves the right in its sole and absolute discretion not to accept any insurance applications submitted by the Broker on any one or more occasions or generally and shall be under no obligation whatsoever to give any reasons for such refusal.
10A. Nothing in this Agreement shall create or constitute any agency, partnership or joint venture relationship between the Company and the Broker, or any employer-employee relationship between the employees of one party and the other party. The Broker shall remain at all times the agent of its clients. Neither party shall have the authority to act for or to incur any obligation on behalf of the other party.
10B. The Company shall have the right to communicate directly or indirectly with the Broker's clients who have taken out insurance policies issued by the Company pursuant to this Agreement when the relevant insurance policies remain in full force and effect for the purpose of administering the relevant insurance policies including but not limited to ensuring that the COD Requirements (as defined in Clause 11E below) have been met. Nothing in this clause shall limit the right of the Company to communicate with any person by using personal data obtained from any source other than the Broker, whether or not such person is also a client of the Broker.
10C. This Agreement shall not be deemed to be exclusive and the parties are free to enter into similar agreements with other third parties.
Page 2 of 6
BROKER'S DUTIES, REPRESENTATIONS & WARRANTIES
11. The Broker shall deliver any policy issued by the Company to its clients without delay.
11A. The Broker shall be solely responsible for obtaining all professional indemnity insurance, licences, permits and approvals for itself or for its chief executive and technical representatives, which arc necessary or required for the performance of its duties hereunder.
11B. The Broker represents, warrants and undertakes that (a) it is and will continue to be an authorized insurance broker in Hong Kong and shall comply with all applicable laws, regulations, rules, codes and guidelines, including, without limitation, the Insurance Companies Ordinance (Cap. 41 of the Laws of Hong Kong, the Personal Data (Privacy) Ordinance (Cap.486 of the Laws of Hong Kong), and any regulations issued by the relevant approved body of insurance brokers of which the Broker is a member (i.e. the Hong Kong Confederation of Insurance Brokers or the Professional Insurance Brokers Association) in connection with the performance of its duties and obligations hereunder; (b) it has full power, authority and legal rights to enter into and engage in the transactions contemplated by this Agreement and has taken and obtained all necessary corporate or other actions and consents, approvals, licences or permits to authorize the execution and the performance of this Agreement; and (c) this Agreement shall constitute legal, valid and binding obligations of the Broker and shall be enforceable in accordance with its terms and conditions.
11C. The Broker warrants that all information supplied by it at any time to the Company relating to itself, its business and the insurance business placed by it to the Company is true and correct in all respects.
11D. The Broker shall promptly notify the Company in writing : (a) of any change of name or address; (b) of any change in its ownership, partners, directors, controllers or chief executive; (c) if the Broker or any of its owner, partner, director, controller or chief executive is charged with any criminal offence or becomes subject to disciplinary action by any governmental, regulatory or professional body; or (d) if any authorizations, approvals, licences and permits which are necessary for the performance of its obligations under this Agreement are altered, suspended or revoked.
11E. The Broker shall perform any anti-money laundering procedures and customer due diligence with respect to its clients to the standard required under the guidance notes issued by the Office of the Commissioner of Insurance from time to time (the "COD Requirements"). The Broker shall also co-operate with the Company and/or the relevant authorities in respect of suspected criminal activities.
11F. The Broker shall upon request and without delay furnish the Company copies of identification data and other relevant documentation pertaining to the identity of any of its clients and/or their beneficial owners pursuant to the COD Requirements.
REPORTS BY BROKER
12. The Broker shall, whenever the Company so requires, furnish to the Company, a detailed report on all the policies, receipts or notes in its possession for delivery to or collection by the policyholders; on policies or receipts returned to it for cancellation by the Company; and on every item of business transacted with the Company by it. The Broker shall also furnish to the Company upon request of the Company a detailed account of all the moneys, properties, or securities in its possession belonging to the Company. All reports and accounts furnished to the Company by the Broker shall be signed by the Broker. If the reports and accounts furnished to the Company disclose that the Broker is holding moneys, properties or securities belonging to the Company the Broker shall immediately pay over such moneys, properties, or securities to the Company upon demand by the Company.
RETURN OF DOCUMENTS BY BROKER
13. The Broker shall upon demand from the Company return to the Company all uncollected policies and premium receipts in its possession for the purpose of transmission to policyholders.
14. Should this Agreement be terminated for any reason whatsoever, the Broker will return to the Company all documents in his custody or possession belonging to the Company.
BROKER'S AUTHORITY
15. The Broker shall not negotiate, enter into contracts and agreements on behalf of the Company and the Company shall not be bound by any contracts and agreements made by the Broker. The Broker shall have no authority to waive any requirement or in any way modify or alter the insurance policy issued by the Company, nor shall the Broker have any power to bind the Company by making any promise or representation.
Page 3 of 6
This clause shall not affect or prejudice the Broker's right to introduce the Company's insurance products to its clients where it is in its clients’ interests and submit applications for life insurance and annuities from its clients for the purposes of concluding insurance contracts between any person and the Company.
16. The Broker is not authorized to hold the monies of its clients on behalf of the Company but the Broker shall not be restricted from holding the monies of its clients and/or paying the premiums transmitted to the Broker by its clients to the Company if it is so authorized by its clients in writing. The Broker shall not on behalf of the Company, extend the time allowed for the payment of any premium.
NO ADVERTISING OR PUBLICATION BY BROKER
17. The Broker shall not print, publish, broadcast or distribute or cause to be printed, published, broadcast or distributed any interview or advertisement or any other printed matter concerning the Company in any. newspaper, magazine publication or any other media whatsoever without the prior written authority of the Company; nor shall he issue, distribute or cause to be issued or distributed any circular or write or cause to be written any letter to any newspaper, magazine. or publication concerning the Company. without first obtaining the prior written approval of the Company. If any lawsuits shall be brought against the Company in consequence of any unauthorised action or statement of the Broker, the Broker shall indemnify and keep the Company indemnified and harmless from all costs and damages arising therefrom or incidental thereto.
BROKER'S DUTY TO DISCLOSE AND INDEMNIFY
18. Subject to the Broker's duties owed to its clients and the consent of its clients, the Broker shall disclose to the Company every fact and circumstance within his knowledge relevant to the acceptance of the risk by the Company, and shall accurately relate to the Company every fact disclosed to him by the proposed insured and or any other person relevant to the Company's acceptance of the risk.
19. The Broker shall indemnify the Company against all losses incurred by the Company arising out of and/or in connection with the Broker's failure to disclose to the Company facts within his knowledge relevant to the Company's acceptance of the risk in accordance with the terms of this Agreement.
20. The Broker shall indemnify the Company and hold it harmless against all losses, claims, demands, expenses, and other liabilities incurred by the Company as a result of any breach of the terms and/ or conditions of this Agreement by the Broker including without prejudice to the generality of foregoing any representation made by the Broker which is not authorised hereunder or otherwise in writing by the Company, and any offence committed by the Broker against any laws, regulations, and statutory requirements.
21. The Broker shall indemnify the Company against all losses, costs, expenses, actions, proceedings suffered by the Company as a result of the Broker's failure to verify and check the proposed insured's and/or owner's particulars shown on his application for insurance.
21A. Clauses 19, 20, 21, 21A and 22 shall survive the termination of this Agreement.
INDEMNITY
22. The Broker shall indemnify the Company against all claims losses expenses actions and proceedings (including legal fees on a full indemnity basis) arising out of and/or in connection with any breach of the terms and/or conditions of this Agreement by the Broker, save and except where the same is caused by any fraud or negligence or wilful default of the Company or its officers, directors, employees, representatives or contractors.
ASSIGNMENT
23. This Agreement shall be assignable, transferable or disposable by the Company in whole or in part to any successor or affiliated company. However, the Broker may not assign or purport to assign, transfer or dispose of any right or interest which the Broker may have herein without the prior written consent of the Company. Such consent by the Company to any assignment, transfer or disposition shall not create or imply any acknowledgement or responsibility on the part of the Company as to the validity, effect or sufficiency of such assignment, transfer or disposition, and such assignment, transfer or disposition shall be filed in writing to the Company.
TERMINATION OF AGREEMENT
24. Upon the occurrence of any of the following events, this Agreement shall forthwith terminate; and all of the Broker's rights hereunder and under any agreements, including the rights to commissions and benefits, and whatever payments on all premiums payable thereafter shall forthwith cease:
(a) The expiration of the 15 days' notice in writing given by one party to the other party to terminate this Agreement without the need for any reason;
(b) The breach by the Broker of any of the terms and/ or conditions of this Agreement including the Schedule, or the failure of the Broker, in any way whether expressly or impliedly, to comply with any such terms and/ or
conditions;
(c) The institution of voluntary or involuntary proceedings by or against the Broker in bankruptcy or under insolvency laws or for receivership, or the composition with creditors by the Broker, or any judgment entered against the Broker which has an adverse effect on any part of its assets, property or business and which for a period of 30 days shall neither be paid nor stayed pending appeal;
Page 4 of 6
(d) The breach by the Broker of any laws, regulations, rules, codes or guidelines to which the Broker is subject;
(e) The withdrawal of business of the Company from the Territory; or
(f) The revocation of any authorizations, licences, permits or approvals required for the conduct of the business of the Broker in Hong Kong.
24A. Termination of this Agreement shall not affect the respective rights or liabilities of either party hereto accrued or incurred prior to such termination, and the coming into force or the continuance in force of any provision of this Agreement which is expressly stated to come into force or continue in force upon or after such termination.
NO ALTERATIONS OF DOCUMENTS
25. The Broker shall, in placing business with the Company, use such forms and documents as may from time to time supplied to it by the Company for the purposes hereof. The Broker shall not make any alterations, additions or erasures on any of the forms and documents supplied by or belonging to the Company or any applicant for insurance or policyholder which may from time to time be in the possession of the Broker.
MODIFICATIONS
26. All modifications to this Agreement shall have no force and effect except that they are expressed in writing, and duly executed by the Company and the Broker, save for the Company's right to change or revoke the Schedule or as otherwise expressly provided herein.
COMPLIANCE WITH AGREEMENT
27. This Agreement together with the Schedule constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all previous agreements, arrangements, negotiations and undertakings, if any, between the Company and the Broker.
28. Any failure or omission on the part of the Company to take any immediate action on the breach of any of the terms and/ or conditions of the Agreement on the part of the Broker shall not be construed as a waiver of the Company's rights to terminate this Agreement forthwith or pursue any other remedies available to it under the laws in force from time to time, or to be construed as consent or permission granted to the Broker not to act in accordance with this Agreement.
29. This Agreement shall, unless the Company otherwise consents in writing, supersede, abrogate, and annul any relation held before by the Broker with the Company, as agent, broker or otherwise.
SEVERABILITY PROVISION
30. The invalidity or unenforceability of any terms and/ or conditions of this Agreement shall not affect any other terms and/ or conditions hereof, and the Agreement shall be construed in all respects as if such invalid or unenforceable terms and/ or conditions were omitted.
SERVICE OF NOTICE
31. Any notice given by either party hereto shall be deemed to have been sufficiently given if sent by facsimile to the party's last known facsimile number or by registered post to the registered office address of the Broker or to the registered office address of the Company's office or such other address as may be notified by the relevant party to the other for this purpose from time to time (as the case may be). A notice shall be deemed to have been received by the party to whom it is addressed in the case of a facsimile, on the date it is successfully sent as evidenced by a transmission control report from the dispatching machine
provided that a signed hard copy of such facsimile will be sent in addition to the facsimile, and in the case of notice by registered post two (2) calendar days after the notice is posted (excluding the date of posting) (if posted to an address in the same country) or seven (7) calendar days after the notice is posted (excluding the date of posting) (if posted to an address in another country) and in proving such service it shall be sufficient to prove that the envelope containing the notice was properly addressed and posted.
GOVERNING LAW
32. This Agreement shall be construed and governed by the laws in force in the Hong Kong Special Administrative Region ("Hong Kong") and the parties hereto irrevocably submits to the non-exclusive jurisdiction of the courts of Hong Kong.
Page 5 of 6
CONFIDENTIALITY
32A. The Broker shall not, at any time whether during or after the termination of this Agreement, divulge or use any information of a confidential nature disclosed by the Company or in relation to the Company's affairs, operations or business or customers or the existence of this Agreement and its terms (collectively, the "Confidential Information") unless with the prior written consent of the Company. Notwithstanding the foregoing, the obligations of this clause does not apply to:
(a) any Confidential Information which the Broker can demonstrate is in, or has come into, the public domain without any breach by its of this Agreement;
(b) any Confidential Information the disclosure of which is required by law or pursuant to a court order or is required by any governmental or regulatory body provided that the Broker shall, if practicable and to the extent not prohibited by laws, notify (where applicable, in advance) the Company of such disclosure or use and supply a copy of the required disclosure to the Company;
(c) any Confidential Information which the Broker can demonstrate is received from a third party other than the Company without any confidentiality obligation;
Of
(d) any Confidential Information which the Broker discloses to its officers, directors and employees provided that such officers, directors and employees shall have been duly informed of the confidential nature of such information and the Recipient shall ensure that such officers, directors and employees shall also comply with the confidentiality obligations of this clause and shall be given access to such information only on a "need to know" basis.
32B. The Broker acknowledges that in the event of a breach or threatened breach of any of the provisions of Clause 32A by the Broker, damages may not be an adequate remedy for the Company and accordingly, the Company shall be entitled to an injunction on the Broker against such breach or threatened breach in addition to any other remedy the Company may be entitled to at law or in equity, and no particular legal or equitable remedy shall be construed as a waiver or limitation of any other legal or equitable remedies in the event of a breach of Clause 32A.
32C. Clauses 32A, 32B and 32C shall survive the termination of this Agreement.
HEADINGS
33. Headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement or have any binding legal effect. Any words embodying the masculine gender include other genders and any words indicating the singular case shall include the plural and vice versa. Any reference to a Clause or a Schedule is a reference to a clause or a schedule of this Agreement.
Page 6 of 6
October 20, 2015
Supplemental
Contract to the Broker's Contract
("Supplemental Contract")
We refer to the Broker's Contract entered into between you and [***] (the "Company"). This is a Supplemental Contract which shall amend, and form part of, your Broker's Contract. The terms used in your Broker's Contract shall, where relevant, also have the same meaning in this Supplemental Contract.
| (a) | Without prejudice to the generality of Clause 24, and our rights under Clause 10, of the Broker's Contract, and in addition to your duties, representations and warranties as set out in Clauses 11 and 11A-F of the Broker's Contract, you further agree that the Company may apply its internal market conduct review and disciplinary process to review any complaints or matters arising out of or relating to the activities or omissions of you or your individual technical representatives, consultants or other employees ("Representative"). Should any of your or your Representative's activities or omissions constitute, in our opinion, negligence, misconduct, fraud or breach of any of our sales guidelines (as communicated to you by the Company from time to time), the Company shall have the absolute discretion to refuse any policy application submitted or insurance business referred to the Company by you or by such Representative. |
| (b) | In the event of any inconsistency between this Supplemental Contract and the Broker's Contract, the provisions of this Supplemental Contract shall prevail. This Agreement shall be construed and governed by the laws of Hong Kong. |
Please confirm your agreement to the foregoing by signing and returning a duplicate copy of this Supplemental Contract to the Partnership Distribution Department of the Company.
| SIGNED for and on behalf of | |
| [***] | |
| /s/ [***] | |
| [***] | |
| Head of Partnership Distribution |
We hereby confirm that we have carefully read through and fully understand the contents of this Supplemental Contract and confirm our acceptance and agreement to this Supplemental Contract.
| SIGNED for and on behalf of | ||
| YEETAH INSURANCE CONSULTANT LIMITED | ||
Code No: [***] | ||
| | ||
| Name: | Lee Kwan Keung | |
| Title | CE | |
ADDENDUM TO BROKER'S CONTRACT
This Addendum to the Broker's Contract (hereinafter collectively called "the Contract") is signed between [***] (hereinafter called "the Company") and YEETAH INSURANCE CONSULTANT LIMITED (hereinafter called "the Broker").
The above parties agree and acknowledge that this Addendum is supplemental to, and forms part of, the terms and conditions of the Contract and that the following clauses under the Contract will be amended on the terms and conditions hereinafter contained.
| 1. | Clause 3 of the Contract which currently reads as: "When a new policy is issued, and a previously existing policy on the same life shall terminate within twelve (12) months before or within such lesser time frame as determined by the Company after the issue of the new policy, unless the Company otherwise determines, no first year's commission nor any proportion thereof will be payable on the new policy, except on that portion of the annual premium on the new policy which is in excess of the annual premium on the discontinued policy. Previously existing policies which are converted into paid-up insurance or extended term insurance or are reduced in face amount, shall be deemed to be terminated and the provisions of this clause shall apply." shall be deleted in its entirety and replaced as follows: |
| “(a) | The Broker shall be entitled to the full first year's Commissions only in the following events: |
| “(1) | the basic plan and/or rider(s) of a new policy and the basic plan and/or rider(s) of a previously existing policy are procured by different brokers or different distribution channels; and |
| (2) | (i) | when the new policy is issued, and the previously existing policy on the same life shall terminate within twelve (12) months before or after the issue of the new policy, the basic plan and/or rider(s) of the new policy and the basic plan and/or rider(s) of the previously existing policy fall within different Product Groups; OR |
| (ii) | when the new policy and the terminated policy (i.e. the previously existing policy on the same life) fall within same specific Product Groups, the basic plan and/or rider(s) of the new policy is issued not within ninety (90) days before or after the termination of the terminated policy, and in case of the latter, such termination shall occur after the surrender charge period of the terminated policy. |
"Product Groups" means the product groups as set out in the Company's website and may be amended from time to time at the Company's absolute discretion and updated in the Company's website. The Broker acknowledges and agrees that it shall check the Company's website on the Product Groups regularly and whenever a new policy is issued as aforesaid mentioned, and that the Company shall not be under any obligations to provide separate notice to it on any amendments to the Product Groups.
In any other circumstances, the Broker shall only be entitled to the portion of the first year's Commissions on the basic plan and/or rider(s) of the new policy in excess of the first year's Commissions on the basic plan and/or rider(s) of the terminated policy in accordance with the FYC Adjustment Rules as adopted by the Company from time to time.
Page 1 of 2
| (b) | A previously existing policy which has lapsed, or been surrendered, or which premium has been reduced due to reduction of the sum assured, reduction of coverage or deletion of riders, or which is converted into paid-up insurance or extended term insurance shall be deemed to be terminated and the provision of this clause shall apply." |
| 2. | This Clause 3 shall take effect retrospectively as of March 1, 2010. |
| 3. | The following paragraph shall be inserted into the Contract as Clause 4 and all subsequent clauses in the Contract shall be renumbered accordingly: |
"The Company and the Broker agree that if there is a change to the Company's policy for calculation of the first year's Commission on a new policy issued ("new FYC Adjustment Rule") which shall take effect retrospectively, and:
| (a) | the first year's Commission that the Broker has received (or deemed received or set off against any amount owed by the Broker to the Company) on a new policy is greater than the amount it is so entitled under the new FYC Adjustment Rule, then the Broker shall forthwith repay to the Company the excess Commission received; and |
| (b) | the first year's Commission that the Broker has received (or deemed received or set off against any amount owed by the Broker to the Company) on a new policy is less than the amount it is so entitled under the new FYC Adjustment Rule, then the Company shall pay the Broker the outstanding amount." |
In case of conflict between the clauses under the Contract aforesaid and this Addendum, this Addendum shall prevail.
Except as provided above, all other terms and conditions of the Contracts shall remain unchanged in all respects.
| SIGNED for and on behalf of | SIGNED for and on behalf of | |||
| YEETAH INSURANCE CONSULTANT LIMITED | [***] | |||
Agent code: [***] |
||||
| |
/s/ [***] | |||
| Name: | Lee Kwan Keung | [***] | ||
| Title: | CE | Head of Partnership Distribution | ||
| Date: | 22 Oct 2015 | Date: October 20, 2015 | ||
Page 2 of 2
Exhibit 10.3
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL, AND (ii) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED. REDACTED MATERIAL IS MARKED WITH A [***].
THIS AGREEMENT is made on [ 6 Nov ] 2017
BETWEEN:
| 1. | [***], of [***] (“ [***]”); and |
| 2. | YeeTah Insurance Consultant Limited, a company incorporated in Hong Kong (registered number: 64676899-000) whose registered office is at Room 1901, Wing Kwok Centre, 182 Woosung Street, Jordan, Kowloon, Hong Kong (the ‘Intermediary”). |
WHEREAS:
| A. | [***] is an insurer authorized by the Insurance Authority under the IO to carry on Long Term Business in or from Hong Kong. |
| B. | The Intermediary carries on business as an independent financial adviser and is an Authorized Insurance Broker. |
| C. | This Agreement sets out the terms on which [***] will pay Commission to the Intermediary for Referral Business. |
| 1. | Definitions |
| 1.1 | In this Agreement the following words and expressions shall have the following meanings: |
| “Anti-Money Laundering Regulations” | (i) the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), (ii) the Organized and Serious Crimes Ordinance (Cap. 455), (iii) the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615), (iv) United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575), (v) the Guideline on Anti-Money Laundering and Counter-Terrorist Financing issued by the Office of the Commissioner of Insurance in Hong Kong as may be amended from time to time, (vi) the Guideline on Anti-Money Laundering and Counter-Terrorist Financing issued by the Securities and Futures Commission in Hong Kong as may be amended from time to time, and (vii) any other applicable ordinances, regulations and guidelines/guidance notes issued by the regulators or authorities relating to anti-money laundering and counter-terrorist financing; | |
| “Applicable Laws and Regulations” | all laws and regulations, whether of Hong Kong or elsewhere, applicable to the business of the intermediary including advising Clients in respect of Products, arranging Products and the Referral Business including the IO, the Securities and Futures Ordinance (Cap. 571), the Prevention of Bribery Ordinance (Cap. 201), the Privacy Ordinance and the Anti-Money Laundering Regulations; | |
| “Authorized Insurance Broker” | an ‘authorized insurance broker’ as defined in the IO; | |
| “Business Day” | a day other than a Saturday or Sunday when banks in Hong Kong are open for normal banking business; | |
| “Clawback” | Commission paid to the Intermediary but repayable to [***] under this Agreement; | |
| “Client” | the person for whom the Intermediary conducts Referral Business; | |
| “Commission” | the commission payable by [***] to the Intermediary under Clause 7, the Commission Schedule, the Commission and Bonus Schedule and any other Schedule in relation to Commission and/or Bonus (if any) (collectively “Commission Schedule”); | |
| “Commission Statement” | the statement issued by [***] to the Intermediary from time to time showing the details of the Commission and Clawback, if any; |
1
| “Group” | the Party in question and its holding companies and any subsidiaries of such holding companies at the date of this Agreement or as the same may vary from time to time; | |
| “Hong Kong dollars” or “HK$” | the lawful currency of Hong Kong; | |
| “IO” | the Insurance Ordinance (Cap. 41); | |
| “Long Term Business” | ‘long term business’ as defined in the IO; | |
| “Losses” | actions, proceedings, losses, damages, liabilities, claims, costs and expenses including fines, penalties and legal and other professional fees; | |
| “Marketing Materials” | advertisements, brochures and other marketing or promotional materials relating to the Products or [***] or both provided to the Intermediary by or on behalf of [***]; | |
| “Parties” | [***] and the Intermediary and “Party” means either of them; | |
| “Policyholder” | a Client who becomes the holder of a Product as a result of Referral Business; | |
| “Premiums” | the premiums payable by a Client for a Product; | |
| “Privacy Ordinance” | the Personal Data (Privacy) Ordinance (Cap. 486); | |
| “Product” | a type of insurance policy offered for sale by [***] via the Intermediary as part of [***]’s Long Term Business; | |
| “Product Information” | information, illustration, forecast, document or summary including Marketing Materials and Product terms and conditions and schedules and premium rates provided to the Intermediary by [***] in connection with the Products; | |
| “Qualifying Policy” | by [***] the Premiums for which are paid to [***] (but which will cease to be a Qualifying Policy if Commission is no longer payable in respect of that insurance policy); | |
| “Referral Business” | the introduction by the Intermediary of Clients to [***] for the purpose of proposal or application for, or effecting or acquiring, a Product; | |
| “Representatives” | representatives, employees, officers, directors and agents of the Intermediary including, without limitation, any company within the Group of the Intermediary who might be involved in the business carried out by the Intermediary or in the provision of services connected with that business including the Referral Business; and the term of this Agreement. | |
| “Term” | an insurance policy issued by [***] in respect of Referral Business accepted |
2
| 2. | Term |
| 2.1 | This Agreement shall commence on 6 November 2017 and continue until terminated by [***] or the Intermediary in accordance with the provisions of Clause 11. |
| 3. | Authority |
| 3.1 | The Intermediary acts as the agent of the Client and not [***]. |
| 3.2 | The Intermediary has no authority to bind or commit [***] to the provision of investment cover or to settle or pay any claim or to bind or commit [***] or incur liabilities on its behalf in any other way and shall not make any statement or do any act or thing which claims or implies it is able to do so. It shall not hold itself out or describe itself or any of its Representatives as the employee, agent or representative of [***] or allow anything to be done to imply that it or any of its Representatives is an employee, agent or representative of [***]. The Intermediary will not pledge the credit of [***] or endorse any cheque payable to [***]. |
| 3.3 | The Intermediary acknowledges that [***]’s name and logo and Product names and other Marketing Materials belong to [***] and are protected by intellectual property rights including copyright and trademark protection. The Intermediary will not use [***]’s name or logo or Product names or logos on its letterhead, business cards or advertisements or otherwise save on Product Information or other material approved in writing in advance by [***]. |
| 3.4 | The Intermediary has no authority to hold Client monies for [***]. If the Intermediary receives Client monies payable to [***], including Premiums, the Intermediary will immediately forward these to [***] in full without deduction or set off and exclusive of bank or other transfer charges which will be payable by the Intermediary and until receipt by [***] the Intermediary holds these Client monies for the Client. |
| 3.5 | No warranty is given by [***] as to the performance or profitability of any Product or its suitability for any Client. |
| 4. | Referral Business |
| 4.1 | During the Term the Intermediary will: |
| (i) | conduct its business, including the Referral Business, with utmost good faith and integrity and with all due care and diligence maintaining a high standard of service for Clients; |
| (ii) | maintain all necessary licenses, consents and approvals required for the conduct of its business, including the Referral Business, in any country in which it operates; |
| (iii) | ensure that its Representatives are suitably trained and qualified in accordance with all Applicable Laws and Regulations and are familiar with and able to fully and properly explain the Products to Clients; |
| (iv) | without prejudice to its other obligations hereunder, ensure that neither it nor any of its Representatives carries on any regulated activity (as set out in Part 1 of Schedule 5 to the Securities and Futures Ordinance (Cap. 571) of Hong Kong including, without limitation, advising on securities) in connection with its business, including the Referral Business, unless the person carrying on that regulated activity has all necessary licences and registrations (including, without limitation, in the case of advising on securities a Type 4 (advising on securities) licence from the Securities and Futures Commission in Hong Kong); |
| (v) | conduct the Referral Business in all respects in accordance with [***]’s business procedures as the same are in force from time to time and are notified to the Intermediary, including proof of where business is conducted; and |
| (vi) | ensure that its Representatives comply with all the terms and conditions of this Agreement in respect of the Referral Business as if they were the Intermediary under this Agreement. |
3
| 4.2 | The Intermediary warrants, undertakes and represents to [***] that in carrying out the Referral Business the Intermediary will not, and will ensure that its Representative will not be breach of any term (express or implied) of any contract or other legal obligation binding on it or any Applicable Laws and Regulations. |
| 4.3 | Subject to Clause 4.4, the Intermediary will immediately pass on all Product Information to the Client. |
| 4.4 | The Intermediary will only use Marketing Materials that have been approved or authorized for distribution to the public in accordance with Applicable Laws and Regulations and which comply with the relevant disclosure requirements in the respective country or jurisdiction in which the Intermediary carries on Referral Business. |
| 4.5 | The Intermediary will not alter any Product Information or make any false or misleading statement regarding the Product Information or waive any requirement of, or modify or alter, any Product Information. |
| 4.6 | The Intermediary will not issue any: |
| (i) | advertisement, statement, leaflet or other marketing materials concerning [***] or its business including the Products; or |
| (ii) | illustration, application form, policy, endorsement, note, receipt or other document on [***]’s behalf other than the Product Information or as otherwise approved in writing by [***]. |
| 4.7 | [***] reserves the right to reject any Referral Business without giving a reason. |
| 4.8 | Premiums shall be paid: |
| (i) | by Client cheque in favour of “[***]”; or |
| (ii) | by direct bank transfer from the Client’s bank account to [***]’s bank account (all bank charges being paid by the Client); or |
| (Hi) | by the Client’s credit or debit card to [***]’s bank account (all bank charges being paid by the Client) or by duly signed authorization permitting the relevant issuer of such credit card or debit card to transfer the relevant amounts to the [***] bank account (all bank charges being paid by the Client). |
| 4.9 | The Intermediary will not pay Premiums for a Client even with the knowledge or consent of the Client. |
| 4.10 | [***] is entitled to communicate directly with Clients who are or may become Policyholders. |
4
| 4.11 | The Intermediary will promptly notify [***] in writing of: |
| (i) | any complaint made to the Intermediary or a Representative about [***] or a Product or the Referral Business; |
| (ii) | any allegation of a third party, including a Client, that the Intermediary or a Representative has breached any Applicable Laws and Regulations, |
together with full details of such complaint or allegation including copies of all relevant documents and will cooperate fully with [***] in any proceedings, suit or action arising out of or in connection with any such complaint or allegation.
| 4.12 | The Intermediary will not unless it is in the Client’s best interests, induce or persuade or attempt to induce or persuade any Client to forfeit, surrender or cancel any insurance policy or part thereof or allow any insurance policy or part thereof to lapse whether for the purpose of replacing the same with another insurance policy or otherwise. |
| 4.13 | The Intermediary will produce to [***] on demand and allow [***] to take copies of such of its books, records and accounts relating to the Referral Business as [***] may reasonably require. |
| 4.14 | The Intermediary may at its own risk deliver to [***] by way of facsimile or electronic mail (a) authorization forms that have been signed by the Client pursuant to Clause 4.8(iii) above; (b) requests from Clients regarding fund switching or other redirection services approved by [***]; and (c) any other instruction or request which [***] deems acceptable to be delivered by way of facsimile or electronic mail from time to time (collectively referred hereinafter as “Documents”). The Intermediary acknowledges that facsimile or electronic mail is not a secure mean of communication, and that it is aware of the risks involved, and that the Documents are only delivered by this method solely for the Intermediary’s convenience. |
| 4.15 | The Intermediary undertakes to secure the signature of the Client or relevant account holder on each and every Document (as applicable) delivered to [***] and to verify the instructions of the Client contained in such Documents and confirm with the Client before delivering it to [***] pursuant to Clause 4.14. The Intermediary acknowledges that [***] shall be under no duty to enquire into the Documents to be delivered pursuant to Clause 4.14 and are entitled to treat such Documents provided by the Intermediary to be genuine and properly executed and to act on such Documents and shall not be liable in any manner whatsoever for acting on such Documents. |
| 4.16 | The Intermediary undertakes to comply with [***]’s business procedures and operational rules for facsimile or electronic mail instructions which may be amended from time to time. The Intermediary acknowledges that [***] will only accept Documents from it under the terms herein and undertakes that it shall not and shall ensure that its Representatives shall not directly or indirectly cause, encourage or facilitate the Clients to fax or email any service forms or instructions (including the Documents) to [***] directly or do anything as a result of which the Clients fax or email any such forms or instructions to [***] directly. |
| 4.17 | The Intermediary warrants, undertakes and represents to [***] that (a) all insurance application forms of the Client submitted to [***] are signed by the Client (irrespective of his/her nationality, residence or citizenship) in Hong Kong and are procured from selling or soliciting activities conducted solely in Hong Kong; and (b) it will not solicit any business outside of Hong Kong for the purpose of performing this Agreement. |
5
| 5. | Anti-Money Laundering Regulations |
| 5.1 | The Intermediary will comply with the requirements of the Anti-Money Laundering Regulations and will not do or omit to do anything that places or may place [***] in breach of the Anti-Money Laundering Regulations. |
| 5.2 | Without limiting its obligations under Clause 5.1, the Intermediary agrees to carry out customer due diligence measures on behalf of [***] and undertakes to obtain, verify, record and maintain evidences of the identity of all Clients, Policyholders, insureds and beneficial owners of Products issued in respect of Referral Business and the source of Premiums/fund/income/wealth for those Products in accordance with the Anti-Money Laundering Regulations and any additional requirements of [***] from time to time. |
| 5.3 | The Intermediary will immediately after it has carried out the customer due diligence measures on behalf of [***] provide [***] with data or information that the Intermediary has obtained in the course of carrying out that measures and will provide without delay a copy of any documents, a record of the data or information and any related evidences that are obtained by the Intermediary in the course of carrying out that measures on behalf of [***] upon request and in circumstances where the Intermediary is about to cease trading or does not act as an intermediary for [***] anymore including without limitation upon the termination of this Agreement. |
| 5.4 | The Intermediary undertakes to keep all underlying customer due diligence information throughout the continuance of [***]’s business relationship with the Client and for at least six years beginning on the date on which the business relationship of the Client with [***] ends or until such time as may be specified by the relevant authority. |
| 5.5 | The Intermediary shall immediately notify [***] in writing if it: |
| (i) | fails to verify the identity of a Client, Policyholder, insured or beneficial owner of a Product or the source of Premiums/fund/income/wealth for that Product; or |
| (ii) | otherwise fails to comply with the Anti-Money Laundering Regulations. |
| 5.6 | The Parties agree that [***] shall be entitled to deal with Clients, Policyholders, insureds and beneficial owners of Products issued in respect of Referral Business on the basis that the Intermediary has complied with the Anti-Money Laundering Regulations and that [***] shall be entitled to rely on the certification of the identity of such Clients, Policyholders, insureds and beneficial owners and the source of Premiums/fund/income/wealth obtained by the Intermediary. |
| 5.7 | The Intermediary undertakes that it has adequate policies and procedures in place to prevent money laundering and terrorist financing and to comply with the Anti-Money Laundering Regulations. The Intermediary agrees that [***] has rights to review and to audit the Intermediary’s anti-money laundering and counter-terrorist financing policies and procedures. |
| 5.8 | The Intermediary agrees that [***] has rights to make enquiries concerning the Intermediary’s stature, eligibility and regulatory track record and the extent to which any group’s anti-money laundering and counter-terrorist financing standards are applied and audited. The Intermediary shall provide [***] with evidences in respect of the Intermediary’s full compliance with the Anti-Money Laundering Regulations as [***] may from time to time reasonably require. |
6
| 6. | Data Privacy |
| 6.1 | The Intermediary undertakes to [***] to comply with all applicable data protection legislation in respect of the Referral Business including the Privacy Ordinance. This includes, without limitation, taking all practicable steps to ensure that: |
| (i) | the personal data of Clients, Policyholders, insureds and the beneficial owners of Products issued in respect of Referral Business is accurate and up to date and is protected against unauthorized or accidental access, processing, erase or other use according to Principle 4 of Schedule 1 in the Personal Data (Privacy) Ordinance (Cap 486) (the “Privacy Ordinance”); |
| (ii) | information is generally available according to Principle 5 of Schedule 1 in the Privacy Ordinance; and |
| (iii) | Clients, Policyholders, insureds and the beneficial owners of Products issued in respect of Referral Business have access to their personal data according to Principle 6 of Schedule 1 in the Privacy Ordinance. |
| 6.2 | The Intermediary will be responsible for obtaining on behalf of [***], the consent in accordance with the Privacy Ordinance for the collection and use of the personal data of all Clients, Policyholders, insureds and beneficial owners of Products issued in respect of Referral Business for the purposes set out in the proposal form for the relevant Product. |
| 6.3 | The Intermediary consents to collection and use by [***] of the Intermediary’s personal data, if any, and that of its Representatives, and the transfer of that personal data within the [***] Group both within and outside Hong Kong, for the purposes of the administration of this Agreement and the Referral Business including carrying out background and credit checks on the Intermediary and the Representatives. |
| 7. | Commission |
| 7.1 | [***] shall, subject to the Intermediary performing its obligations under this Agreement, pay Commission to the Intermediary for Qualifying Policies in accordance with the provisions of this Clause 7 and the Commission Schedule that is subject to amendment by [***] from time to time. |
| 7.2 | Commission is payable in Hong Kong dollars unless otherwise agreed in writing by [***]. |
| 7.3 | Commission will not be paid unless and until it totals more than HK$5,000. |
| 7.4 | Commission payments are inclusive of any applicable value added tax or other sales tax. |
| 7.5 | The Intermediary shall not be entitled to Commission, and shall forthwith repay to [***], on demand by [***], any Commission already paid to the Intermediary in respect of a Qualifying Policy if such Qualifying Policy is rescinded, cancelled (whether during cooling-off period or otherwise) or is void for any reason or Premiums for that Qualifying Policy are repaid or rebated or repayable to the Client for any reason. |
| 7.6 | [***] shall be entitled to require any Clawback to be: |
| (i) | set-off against any future amount payable to the Intermediary, including Commission, (but if that amount is insufficient the Intermediary will forthwith repay the balance of the Clawback to [***]); or |
| (ii) | repaid in full, without deduction or set-off, to [***] within 14 days of a written demand by [***] to the Intermediary. |
7
| 7.7 | If the Intermediary fails to pay any amount payable by it under this Agreement, including Clawback, [***] shall be entitled to charge the Intermediary interest on the overdue amount from the due date up to the date of actual payment, after as well as before judgment, at the rate of 1.5 per cent per annum above the Prime Rate (quoted by the Hong Kong Shanghai Banking Corporation Limited). Such interest shall accrue on a daily basis, shall be compounded quarterly and shall be payable by the Intermediary on demand. |
| 7.8 | The obligations of the Intermediary and the rights of [***] under Clauses 7.6 and 7.7 will survive the termination of this Agreement. |
| 7.9 | [***] may amend the Commission Schedule at any time at its entire discretion by giving a written notice to the Intermediary. In these circumstances, no consent from the Intermediary or written agreement of the Parties is required. The amended Commission Schedule will not affect the rate of Commission payable on Referral Business introduced prior to the effective date of the amended Commission Schedule. |
| 7.10 | The Intermediary will comply with all Applicable Laws and Regulations with regard to the receipt, disclosure and sharing of Commission and will not pay or rebate any of the Commission to the Client, Policyholder, insured, beneficiary or any third party. |
| 7.11 | The Commission Statement will, except in case of manifest error or any question of law, be conclusive evidence against the Intermediary. |
| 7.12 | [***] may, at its entire discretion, cease immediately to pay Commission, or any part thereof, in the event: |
| (i) | the Intermediary ceases to be the agent of the Client purchasing the Qualifying Policy; |
| (ii) | the Intermediary ceases to be an Authorized Insurance Broker; |
| (iii) | the Intermediary acts or fails to act in any way which is a breach of or inconsistent with the Intermediary’s duties to its Clients or its duties or obligations under this Agreement; or |
| (iv) | this Agreement is terminated by [***] other than under Clause 11.1 or by the Intermediary for any reason. |
| 7.13 | The Intermediary’s entitlement to Commission will be subject to the Intermediary’s compliance of the provisions of this Agreement in all respects and all Applicable Laws and Regulations without any act of fraud, mis-selling or misrepresentation in carrying out Referral Business. |
| 7.14 | The Intermediary shall on demand repay [***] Commission which the Intermediary is not entitled in accordance with the terms of this Agreement (including without limitation any Commission which the Intermediary is not entitled pursuant Clause 7.5 and 7.13). |
8
| 8. | Warranties & Representations |
| 8.1 | The Intermediary warrants and represents to [***] that: |
| (i) | it is a limited liability company duly incorporated and validly existing under Hong Kong law; |
| (ii) | it is an Authorized Insurance Broker; |
| (iii) | it maintains, and will continue to maintain in full force and effect during the Term, all authorizations, registrations approvals, consents and licences required in connection with the entry into, performance, validity and enforceability of, and matters and transactions contemplated by, this Agreement; |
| (iv) | it is the holder of such authorizations, registrations, licences, permits and other authorities necessary for advising on and arranging Products on behalf of Clients; |
| (v) | it is not the subject of any regulatory or disciplinary proceeding or investigation in any country in which it carries on business; |
| (vi) | it has the written authority of the Client to refer the relevant Referral Business to [***]. |
| 9. | Indemnity |
| 9.1 | The Intermediary undertakes to indemnify and keep [***] and all other members of its Group and their respective directors, officers, agents and employees (with [***] entering into this Agreement on its own behalf and on behalf of all such persons so that they shall have the benefit of the Intermediary’s obligations under this Clause) indemnified from and against and in respect of all Losses which may be suffered or incurred by any of them arising directly or indirectly out of or in connection with any of the following events: |
| (i) | any breach or non-compliance with any of the terms of this Agreement by the Intermediary; |
| (ii) | the negligence or misconduct of the Intermediary or any of its Representatives in connection with the Referral Business; or |
| (iii) | [***] accepting Documents from the Intermediary under Clause 4 and acting thereon, whether or not the same are confirmed in writing by the Intermediary. |
The provisions of this Clause 9 will survive the termination of this Agreement.
9
| 10. | Confidentiality |
| 10.1 | Each Party recognises that under this Agreement it may receive trade secrets and/or confidential or proprietary information belonging to the other. Subject to the exclusions detailed in Clause 10.3, all such information which is designated as confidential or which is otherwise confidential in nature (and which includes, in the case of the Intermediary, the terms of this Agreement including details of the Commission) constitutes “Confidential Information”. |
| 10.2 | Each Party agrees not to divulge Confidential Information belonging to the other to any third party. |
| 10.3 | The following shall not be Confidential Information for the purposes of this Clause: |
| (i) | information which is in, or which comes into, the public domain otherwise than by reason of a breach of this Agreement or of any other duty of confidentiality relating to that information; |
| (ii) | information obtained from a third party without that third party being under an obligation (express or implied) to keep the information confidential; |
| (iii) | information which is lawfully in the possession of the other Party before the date of this Agreement and in respect of which that Party is not under an existing obligation of confidentiality. |
| 10.4 | Each Party shall be permitted to disclose Confidential Information to the extent that it is required to do so: |
| (i) | to enable the disclosing party to perform its obligations under this Agreement; or |
| (ii) | by any applicable law or by a court, arbitral or administrative tribunal in the course of proceedings before it; or |
| (iii) | by any regulatory body (including any investment exchange) acting in the course of proceedings before it or any regulatory body (including any investment exchange) acting in the course of its duties, or |
| (iv) | in order to give proper instructions to any professional adviser of that Party who also has an obligation to keep any such Confidential Information confidential; |
| 10.5 | Each Party shall be permitted to disclose Confidential Information to the extent that disclosure is authorised in writing by the other Party which authorisation shall not be unreasonably withheld or delayed. |
| 10.6 | The Parties acknowledge and agree that any breach by a Party of Clause 10.2 will cause the other Party irreparable harm for which it would have no adequate remedy at law. The Parties agree that, in the event of any actual or threatened breach by a Party or its employees or representatives of its confidentiality obligations, the other Party will have the right to seek and obtain immediate injunctive relief in addition to any other right it may have under this Agreement or at law, to prohibit any violation or such obligations. |
| 10.7 | The Parties shall ensure that their respective directors, officer, employees and agents comply with the provisions of this Clause 10. |
| 10.8 | The provisions of this Clause 10 will survive the termination of this Agreement for a period of 2 years or, in respect of any particular item of Confidential Information, until such earlier time as that item of Confidential Information reaches the public domain otherwise than by reason of a breach of this Agreement or of any other duty of confidentiality relating to that information. |
10
| 11. | Termination & Effects of Termination |
| 11.1 | Either Party may terminate this Agreement by giving to the other not less than 30 days’ prior written notice or other period as agreed between parties from time to time. |
| 11.2 | [***] may terminate this Agreement with immediate effect from service on the Intermediary by written notice, if the Intermediary: |
| (i) | ceases to be an Authorized Insurance Broker or otherwise ceases to maintain any licence, permit or authorization necessary for it to carry on its business; |
| (ii) | is in breach of any material obligation under this Agreement and, if the breach is capable of remedy, fails to remedy such breach within 14 days of receipt of notice from [***] so to do; or |
| (iii) | enters into any composition or arrangement with its creditors, has a receiver, a receiver and manager or an administrator appointed to it or is the subject of any resolution or petition for winding up (other than for the purpose of amalgamation or reconstruction while solvent), is dissolved or becomes bankrupt or ceases, or threatens to cease, to carry on business or is unable to pay its debts within the meaning of any applicable legislation relating to insolvency or bankruptcy. |
| 11.3 | On termination of this Agreement the Intermediary will immediately return to [***] all materials and documents in the Intermediary’s possession that have been provided to the Intermediary by [***] including all Product Information. |
| 11.4 | Termination of this Agreement howsoever caused shall: |
| (i) | be without prejudice to any obligations or rights of either of the Parties accrued prior to such termination; and |
| (ii) | not affect any provision of this Agreement which is expressly or by implication intended to come into effect on, or to continue in effect after such termination. |
| 12. | Assignment |
| 12.1 | Neither Party may assign any benefit or obligation arising under this Agreement, without the prior written consent of the other Party. |
| 12.2 | Notwithstanding Clause 12.1, [***] may without the prior written consent of the Intermediary: |
| (i) | assign or charge the benefit this Agreement as a whole to a bank or other financial institution as security for its borrowings or the borrowings of its Group; |
| (ii) | assign the benefit and burden of this Agreement as a whole to any other member of its Group. |
| 12.3 | Any purported assignment that does not comply with the terms of this Clause 12 shall, as between the Parties be null and void. |
11
| 13. | General Provisions |
| 13.1 | Waiver |
Any failure to exercise or any delay in exercising a right or remedy provided by this Agreement or at law or in equity shall not constitute a waiver of the right or remedy or a waiver of any other rights or remedies. A waiver of a breach of any of the terms of this Agreement or of a default under this Agreement shall not constitute a waiver of any other breach or default and shall not affect the other terms of this Agreement.
| 13.2 | Remedies |
The rights and remedies provided by this Agreement are cumulative and (subject as otherwise provided in this Agreement) are not exclusive of any rights or remedies provided at law or in equity.
| 13.3 | Variation |
Subject to Clause 7.9, this Agreement may be varied by:
| (i) | written agreement of the Parties; or |
| (ii) | written notification by [***] to the Intermediary provided [***] gives not less than 28 days’ notice of such variation and without prejudice to any accrued rights and liabilities of the Intermediary prior to such variation; or |
| (iii) | written notification by [***] on less than 28 days’ notice if, in [***]’s opinion, changes in legislation or rules of any relevant regulatory authority require it in which case [***] will give notice of the variation as soon as reasonably practicable. |
| 13.4 | Severance |
If any or administrative body of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable, such invalidity or unenforceability shall not affect the other provisions of this Agreement which shall remain in full force and effect, If any such provision would be valid or enforceable if some part of the provision were deleted, the provision in question shall apply with such modification as may be necessary to make it valid.
| 13.5 | Set-Off |
[***] shall be entitled but not obliged at any time or times by giving written notice to the Intermediary to set off any liability of any Intermediary Group Company to any [***] Group Company against any Commission payable to the Intermediary. Any exercise by [***] of its rights under this Clause shall be without prejudice to any other rights or remedies available to [***] under this Agreement or otherwise.
| 13.6 | Entire Agreement |
This Agreement, constitutes the entire agreement and understanding between the Parties in respect of the matters dealt with in it and supersedes, cancels and nullifies any previous written or oral agreement between the Parties relating to such matters notwithstanding the terms of any previous agreement or arrangement expressed to survive termination. The Intermediary and [***] acknowledges and agrees that in entering into this Agreement it does not rely on, and shall have no remedy in respect of, any statement, representation, warranty or understanding (whether negligently or innocently made) of any person (whether a Party or not) other than as expressly set out in this Agreement
| 13.7 | Non-Exclusive |
This Agreement is not and shall not be deemed to be exclusive and the Parties are free to enter into similar agreements with other parties.
| 13.8 | No Partnership or Agency |
Nothing in this Agreement is intended to create a partnership or joint venture of any kind or relationship of employer/employee between the Parties or to authorise either Party to act as agent for the other.
12
| 14. | Notices & Electronic Communications |
| 14.1 | Any notice given under or in relation to this Agreement shall be in writing and signed by or on behalf of the Party giving it and may be delivered personally or by prepaid first class post or fax and in the case of post will be deemed to have been given 2 working days after the date of posting and in the case of fax at the time of transmission. Notices shall be delivered or sent to the addresses or fax number of the Parties set out in Clause 14.2 or to any other address or fax number in both cases in Hong Kong notified in writing by the relevant Party to the other for the purpose of receiving communications and notices after the date of this Agreement. Each Party may specify by notice to the other a particular individual or office holder to whom any communications to it and notices served on it are to be addressed in which event a notice shall not be validly given unless so addressed. |
| 14.2 | Subject to Clause 14.3, all communications in respect of this Agreement will be sent to the Parties as follows: |
| (i) | [***]: |
| Address | : [***] |
| Tel | : [***] |
| Fax | : [***] |
| Attention | : [***] |
| (ii) | the Intermediary |
| Address | : Room 1901, Wing Kwok Centre, 182 Woosung Street, Jordan, Kowloon, Hong Kong |
| Tel | : 2346 1977 |
| Fax | 3020 6137 |
| Attention | : Lee Kwan Keung |
| 14.3 | [***] shall be entitled to communicate with the Intermediary electronically to any email address provided by the Intermediary and to send or supply documents and information including Product Information and the Commission Statement to the Intermediary in electronic form and via [***]’s website. The Intermediary’s use of [***]’s web-site will also be governed by the terms and conditions of use of that web-site. |
| 15. | Interpretation |
| 15.1 | In this Agreement (which expression includes the recitals, the Commission Schedule) reference to: |
| (i) | one gender include all other genders and to the singular includes the plural and vice versa; |
| (ii) | persons shall include bodies corporate, unincorporated associations and partnerships in each case whether or not having a separate legal personality; |
| (iii) | a Party includes the Party’s executors, administrators, successors and permitted assigns; and |
| (iv) | Clauses, recitals, the Commission Schedule are to clauses of and the recitals and schedule(s) to this Agreement; |
| (v) | the word ‘including” or “include” and similar expressions are to be construed without limitation; and |
| (vi) | ordinances are to the Laws of Hong Kong and any ordinance or statutory provisions include a reference to that ordinance or statutory provision as amended, extended, consolidated, modified or replaced from time to time (whether before or after the date of this Agreement) and include any order, regulation, instrument or other subordinate legislation made under the relevant ordinance or statutory provision. |
| 15.2 | The headings in this Agreement are used for convenience only and shall not affect its construction. |
| 15.3 | In this Agreement the expressions “subsidiary” and “holding company” shall have the meaning given to them by sections 13, 14 and 15 of the Companies Ordinance (Cap. 622). |
13
| 16. | Governing Law & Jurisdiction |
| 16.1 | This Agreement is governed by and shall be construed in accordance with the laws of Hong Kong. |
| 16.2 | Each Party irrevocably agrees to submit to the exclusive jurisdiction of the courts of Hong Kong over any claim or matter arising under or in connection with this Agreement or the legal relationships established by this Agreement. |
| 17. | [***] |
| 17.1 | During the Term, [***] will provide the Intermediary located within the Asia Pacific Region with an access right to the [***] (the “[***]’’) on a non-exclusive basis. |
| 17.2 | The Intermediary warrants, undertakes and represents to [***] that: - |
| (i) | it will authorize access to the [***] and the information contained within only to its active employees who are located in the Asia Pacific Region and have a legitimate need to know the information contained within the [***] in order to provide and maintain the Product or the related customer services to the Client (the “Authorized Employees”). |
| (ii) | it and the Authorized Employees will use the [***] only in relation to (a) [***]’s clients, prospects or potential clients; and (b) the selling, promoting and/or dealing with the Products. |
| (iii) | it and the Authorized Employees will not use the [***] and the information contained within the [***] improperly, illegally or beyond the authorization of [***]; |
| (iv) | it and the Authorized Employees will maintain the confidentiality of their password(s) assigned for the [***] and will not reveal such password(s) to any third party or unauthorized person. It will immediately notify [***] of any known or suspected (a) unauthorized use of the Intermediary’s or the Authorized Employees’ account and/or password or the [***]; or (b) breach of security, including loss, theft, or unauthorized disclosure of the password(s) of the Intermediary and the Authorized Employees. |
| (v) | it and the Authorized Employees will not (a) release, disclose or transfer to any third party, except the data subject, any information or data contained within the [***] of any purpose; (b) reproduce, transmit or store in a retrieval system, in any format or by any means, electronic, mechanical, photocopying, recording, or otherwise, the information or data contained within the [***] without the prior written permission of [***]; and (c) use the information or data contained within the [***] in any manner other than in the normal course of distribution activities in furtherance of the interest of the relationship between [***], the Intermediary and its clients. It and the Authorized Employees will return and/or destroy all information, data or material collected from the [***] forthwith upon demand by [***] or at the termination of this Agreement and if requested by [***], produce evidence of compliance with this Clause 17.2(v) to the satisfaction of [***]. |
| (vi) | it has policies and practices on information technology security and data privacy in place to keep the [***] and the information contained within secure and confidential and to protect them from loss and unauthorized or accidental access and processing. It maintains physical, electronic, and procedural safeguards to protect the [***] and the information contained within; |
14
| (vii) | it and the Authorized Employees will comply with (a) any guidelines, rules, policies, manuals, in whatsoever form, in relation to the [***] that are given and/or amended by [***] from time to time, including without limitation, the [***] - Terms of Use and the Business Oriented Support System (B.O.S.S.) for IFA User Guide; and (b) any internal policies and practices of the Intermediary on information technology security and data privacy including those mentioned in Clause 17.2(vi); |
| (viii) | it and the Authorized Employees will be responsible for regularly reviewing the guidelines, rules, policy, manual in relation to the [***] (including any amendments made by [***]) and the Intermediary’s internal policies and practices on information technology security and data privacy mentioned in Clause 17.2(vii); |
| (ix) | it and the Authorized Employees will respect the intellectual property rights of [***] and the suppliers of [***] that contribute to the provision of [***] (the “Suppliers”) and will not use the [***] (including without limitation the fund price enquiry service, fund switching service, investment research and analysis service) in any way that might infringe the propriety interests of [***] and/or the Suppliers; |
| (x) | it will cooperate with and assist [***] on [***]’s system audits or compliance reviews in relation to the use of the [***] by the Intermediary and the Authorized Employees. It will forthwith submit reports and give undertakings to [***] in this regard at the Intermediary’s own cost upon demand; |
| (xi) | it will observe all applicable laws or regulations in Hong Kong and in the jurisdiction that it carries out its business in relation to the use of the [***], including but not limited to data protection legislation, intellectual property legislation and the obligations of not divulging to any third party, except the data subject, any confidential information (including without limitation any Client’s personal data) or proprietary information belonging to [***] or the Suppliers; |
| (xii) | it and the Authorized Employees will, where the information obtained from the [***] is: (a) personal data, comply with the Intermediary’s obligations under Clause 6; and (b) Confidential Information, comply the Intermediary’s obligations under Clause 10; and |
| (xiii) | it will, in addition to the indemnity given under Clause 9, indemnify and keep [***] and all other members of [***] group and their respective directors, officers, agents and employees indemnified from and against and in respect of all losses, damages, liabilities, claims, costs and expenses which may be suffered or incurred by any of them arising directly or indirectly out of or in connection with the use or misuse of [***] by the Intermediary and/or any Authorized Employees, including without limitation, any breach or non-compliance with (a) this Clause 17; or (b) any [***]’s guidelines, rules, policies, manuals, in whatsoever form, in relation to the [***]; or (c) the applicable laws or regulations in Hong Kong and in the jurisdiction that the Intermediary carries out its business in relation to the use of the [***]. |
| 17.3 | Where this Clause 17 makes references to obligations of, or restrictions on, the Authorized Employees, the Intermediary is at ail times responsible for each Authorized Employee’s compliance with those obligations and restrictions. The Intermediary will use its best endeavors to procure each Authorized Employee complies and acts in accordance with those obligations and restrictions. |
| 17.4 | Both Parties recognize that all information, data, material and analysis provided by the [***] (including without limitation the fund price enquiry service, fund switching service, investment research and analysis service) should be used for reference purposes only. [***] makes no guarantee that all information, analysis and the underlying assumption(s) on which any analysis is based on will be accurate, complete and current at all times. All such information, data, material, analysis and the underlying assumption(s) are subject to modification from time to time without notice or cause and should not be taken as advice of any kind. |
15
| 17.5 | [***], all other members of [***] group and their respective directors, officers, agents and employees and the Suppliers make no representations or warranty about the suitability, reliability, availability, timeliness, lack of viruses or other harmful components, compatibility with the Intermediary’s, the Authorized Employees’ or any other equipment/system used to login to the [***] and accuracy of the information, data, material and service contained within the [***] for any purpose. All such information, data, material and service are provided “as is” without warranty of any kind and are to be used at the Intermediary’s and the Authorized Employees’ own risk. [***], all other members of [***] group and their respective directors, officers, agents and employees and the Suppliers disclaim ail warranties and conditions with regard to all such information, data, material, service provided by the [***] including all implied warranties and conditions of merchantability, fitness for a particular purpose, workmanlike effort, title and non-infringement. |
| 17.6 | The Intermediary and the Authorized Employees specifically agree that [***] shall not be responsible for any unauthorized access to, or alternation of, the Intermediary’s and the Authorized Employees’ transmission or data, any material or data sent or received or not sent or received, or any transactions entered into through the [***]. The Intermediary and the Authorized Employees specifically agree that [***] is not responsible or liable for (a) any threatening, defamatory, obscene, offensive or illegal content of the [***]; or (b) any conduct of any other party or any infringement of another’s rights, including intellectual property rights; or (c) any content sent using and/or included in the [***] by any third party. |
| 17.7 | The Intermediary agrees and accepts that its use of the [***] is at its sole risk and will not claim against [***], all other members of [***] group and their respective directors, officers, agents and employees, and the Suppliers for compensations for any losses, damages, liabilities, claims, costs and expenses that may be suffered or incurred by the Intermediary arising directly or indirectly out of or in connection with the use of [***] by the Intermediary and/or the Authorized Employees. In no event shall [***] and/or the Suppliers be liable for any direct, indirect, punitive, incidental, special, consequential damages or any damages whatsoever including, without limitation, damages for loss of use, data or profits, arising out or in any way connected with the use or performance of the WA Portal, with the delay or inability to use the [***] or related services, the provision of or failure to provide services, or for any information, services through the [***], or otherwise arising out of the use of the [***], whether based on contract, tort, negligence, strict liability or otherwise, even if [***] or the Suppliers has been advised of the possibility of damage. For the avoidance of any doubt, [***] and the Suppliers have no responsibility or liability to the Intermediary, the Authorized Employees or any third party in any aspects as to the use or misuse of the [***] and the information contained within by the Intermediary and the Authorized Employees. It the Intermediary is, or the Authorized Employees are, dissatisfied with any services provided by the [***] or with any of the terms of use in relation to the [***], without prejudice to the accrued rights or liabilities of either Party under this Agreement, the sole and exclusive remedy of the Intermediary or the Authorized Employees is to discontinue using the [***]. |
| 17.8 | The Intermediary agrees to (i) ensure and to use its best endeavors to monitor the compliance of itself and the Authorized Employees with this Clause 17, any [***]’s guidelines, rules, policies, manuals, in whatsoever form, in relation to the [***] and the applicable laws or regulations in Hong Kong and in the jurisdiction that the Intermediary carries out its business in relation to the use of the [***]; and (ii) give [***] undertakings of any kind in this regard upon demand. If the Intermediary becomes aware of any breach or non-compliance with (a) this Clause 17; or (b) any [***]’s guidelines, rules, policies, manuals, in whatsoever form, in relation to the [***]; or (c) the applicable laws or regulations in Hong Kong and in the jurisdiction that the Intermediary carries out its business in relation to the use of the WA Portal by itself and/or the Authorized Employees, the Intermediary agrees to take prompt remedial action and report the incidents to [***] forthwith. |
16
| 17.9 | Both Parties agree that [***] has rights to verify the Intermediary’s and the Authorized Employees’ compliance with this Agreement relating to the use of the [***] at all sites and for all environments in which the Intermediary and the Authorized Employees use the [***] for any purpose. [***] may use an independent auditor or [***]’s internal audit/compliance staff to assist with such verification. The Intermediary agrees to create, retain, and provide to [***] and its external or internal auditors or compliance staff written records and information of any kind sufficient to provide auditable verification that use of the [***] complies with this Agreement. [***] will notify the Intermediary in writing if any such verification indicates that the Intermediary is, and/or the Authorized Employees are, not in compliance with this Agreement. |
| 17.10 | [***] reserves the right to terminate or limit or suspend the Intermediary’s and/or the Authorized Employees’ access right to the [***] and/or the availability of the [***] or the related service, in its sole and absolute discretion, at any time without notice and cause. Upon the termination or suspension of the intermediary’s and/or the Authorized Employees’ access right to the [***], [***] shall have no obligation to maintain any content or to forward any unread or unsent messages contained in the [***] to the Intermediary or the Authorized Employees or any third party. |
| 17.11 | [***] reserves the right to release current or past or future [***] user information of the Intermediary and the Authorized Employees if [***] believes that the Intermediary’s [***] account is being used to commit unlawful acts or the information contained within the [***] is subpoenaed and/or [***] deems it necessary and/or appropriate and such release of information is deemed to be a permitted disclosure set out in Clauses 10.4(ii) and 10.4(iii) and does not constitute a breach of [***]’s obligation in relation to confidentiality under Clause 10.2. |
| 17.12 | This Clause 17, except Clause 17.1, will survive the termination of this Agreement for a period of 2 years. |
| 18. | Compliance with Anti-Corruption Laws |
| 18.1 | The Parties to this Agreement shall not commit, authorize or permit any action which would cause the Parties and/or the Parties’ affiliates to be in violation of any applicable anti-bribery laws or regulations. This obligation applies in particular to illegitimate payments to government officials, representatives of public authorities or their associates, families or close friends. |
| 18.2 | Each Party agrees that it will neither offer or give, or agree to give, to any employee, representative or third party acting on behalf of the other Party nor accept, or agree to accept from any employee, representative or third party acting on behalf of the other Party, any gift or benefit, be it monetary or other, that the recipient is not legally entitled to with regard to the negotiation, conclusion or performance of this Agreement. |
| 18.3 | To the extent permitted by law, the Parties shall promptly notify each other, if they become aware of or have specific suspicion of any corruption with regard to the negotiation, conclusion or performance of this Agreement. |
| 18.4 | In case any prohibited payments or gifts are made by one Party as stated above, or if the other Party has reasonable cause to believe that such payments or gifts have been or are being made, subject to Clause 11, the other Party may terminate this Agreement with immediate effect. |
| 19. | Rights of Third Parties |
| 19.1 | A person who is not a party to this Agreement has no right to enforce any terms of this Agreement. The Contracts (Rights of Third Parties) Ordinance does not apply to this Agreement. |
17
IN WITNESS WHEREOF the authorized representatives of the respective Parties have signed this Agreement the day and year first above written.
| SIGNED by [***] | Chief Partnership Distribution Officer | |
| for and on behalf of | ||
| [***] | /s/ [***] | |
| in the presence of: | ||
|
SIGNED by [***] for and on behalf of YeeTah Insurance Consultant Limited in the presence of: |
 | |
| Chief Executive | ||
| Lee Kwan Keung |
18
Exhibit 16.1
 |
5400 W Cedar Ave Lakewood, CO 80226 Telephone: 303.953.1454 Fax: 303.945.7991 |
October 27, 2020
United States Securities and Exchange Commission
Office of the Chief Accountant
100 F Street, N.E.
Washington, D.C. 20549
Re: QDM International Inc.
Ladies and Gentleman:
We have read the statements under item 4.01 in the Form 8-K dated October 27, 2020, of QDM International Inc. (the “Company”) to be filed with the Securities and Exchange Commission and we agree with such statements therein as related to our firm. We have no basis to, and therefore, do not agree or disagree with the other statements made by the Company in the Form 8-K.
Sincerely,
/s/ BF Borgers CPA PC
BF Borgers CPA PC
Certified Public Accountants
Lakewood, CO
Exhibit 99.1
TABLE OF CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
QDM Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying balance sheets of QDM Holdings Limited and the subsidiaries (the “Company”) as of March 31, 2020 and 2019, and the related statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the two years period ended March 31, 2020, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for the two years period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ZH CPA, LLC
We have served as the Company’s auditor since 2020.
Denver, Colorado
October 26, 2020
F-2
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2020, and 2019
(US$, except share data and per share data, or otherwise noted)
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | 62,399 | 24,716 | ||||||
| Accounts receivables, net | 9,865 | 48,713 | ||||||
| Other receivable | - | 38,462 | ||||||
| Prepaid expenses | 13,672 | 19,471 | ||||||
| Due from related parties | 20,316 | - | ||||||
| Total current assets | 106,252 | 131,362 | ||||||
| Non-current assets | ||||||||
| Property and equipment, net | 335 | 2,366 | ||||||
| Total assets | 106,587 | 133,728 | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities: | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | 3,774 | 11,761 | ||||||
| Due to related party | 24,628 | 71,904 | ||||||
| Total current liabilities | 28,402 | 83,665 | ||||||
| Total liabilities | 28,402 | 83,665 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity | ||||||||
| Ordinary shares, US$1.00 par value, 50,000 authorized, 50,000 and 1,282 shares issued and outstanding as of March 31, 2020 and 2019, respectively | 50,000 | 1,282 | ||||||
| Subscription receivable | (48,718 | ) | (53,205 | ) | ||||
| Additional paid-in-capital | 408,974 | 408,974 | ||||||
| Deficit | (332,071 | ) | (306,988 | ) | ||||
| Total shareholders’ equity | 78,185 | 50,063 | ||||||
| Total liabilities and shareholders’ equity | 106,587 | 133,728 | ||||||
The accompanying notes form an integral part of these consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| For The Year Ended | For The Year Ended | |||||||
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Revenues | 221,289 | 445,234 | ||||||
| Cost of sales | 200,011 | 409,998 | ||||||
| Gross profit | 21,278 | 35,236 | ||||||
| Operating costs and expenses: | ||||||||
| General and administrative | 151,893 | 210,219 | ||||||
| Total operating costs and expenses | 151,893 | 210,219 | ||||||
| Loss from operations | (130,615 | ) | (174,983 | ) | ||||
| Other (income) expenses: | ||||||||
| Finance costs | 84 | 109 | ||||||
| Other income, net | (105,616 | ) | (107,697 | ) | ||||
| Total other (income) expenses | (105,532 | ) | (107,588 | ) | ||||
| Loss before provision for income taxes | (25,083 | ) | (67,395 | ) | ||||
| Net loss | (25,083 | ) | (67,395 | ) | ||||
| Comprehensive loss | (25,083 | ) | (67,395 | ) | ||||
| Basic & diluted net loss per share | (0.81 | ) | (55.11 | ) | ||||
| Weighted average number of ordinary shares-basic and diluted | 30,780 | 1,223 | ||||||
The accompanying notes form an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| Ordinary shares | Ordinary shares amount ($) | Additional paid-in-capital ($) | Subscription receivable ($) | Accumulated deficits ($) | Total equity ($) | |||||||||||||||||||
| Balance as of April 1, 2018 | 1,116 | 1,116 | 355,935 | - | (239,593 | ) | 117,458 | |||||||||||||||||
| Net loss | - | - | - | - | (67,395 | ) | (67,395 | ) | ||||||||||||||||
| Share issuance | 166 | 166 | 53,039 | (53,205 | ) | - | - | |||||||||||||||||
| Balance as of March 31, 2019 | 1,282 | 1,282 | 408,974 | (53,205 | ) | (306,988 | ) | 50,063 | ||||||||||||||||
| Net loss | - | - | - | - | (25,083 | ) | (25,083 | ) | ||||||||||||||||
| Cash collected for subscription receivable | - | - | - | 53,205 | - | 53,205 | ||||||||||||||||||
| Share issuance | 48,718 | 48,718 | - | (48,718 | ) | - | - | |||||||||||||||||
| Balance as of March 31, 2020 | 50,000 | 50,000 | 408,974 | (48,718 | ) | (332,071 | ) | 78,185 | ||||||||||||||||
The accompanying notes form an integral part of these consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| For the Year Ended March 31, | For the Year Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| US$ | US$ | |||||||
| Cash Flows in Operating Activities: | ||||||||
| Net loss | (25,083 | ) | (67,395 | ) | ||||
| Adjustments for items not affecting cash: | ||||||||
| Depreciation and amortization | 334 | 2,031 | ||||||
| Net loss from write-off of property and equipment | 1,696 | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | 38,848 | (39,390 | ) | |||||
| Other receivable | 38,462 | - | ||||||
| Prepaid expenses and other assets | 5,799 | - | ||||||
| Accounts payable & accrued liabilities | (7,987 | ) | (3,893 | ) | ||||
| Due to a related party | (32,795 | ) | 41,520 | |||||
| Net cash (used in) provided from operating activities | 19,274 | (67,127 | ) | |||||
| Cash Flows in Financing Activities: | ||||||||
Receipt of subscription receivable from shareholder | 53,205 | - | ||||||
| Proceeds borrowed from related parties | - | 35,898 | ||||||
| Payments to related parties | (34,796 | ) | - | |||||
| Net cash provided from financing activities | 18,409 | 35,898 | ||||||
| Effect of foreign exchange rate changes | - | - | ||||||
| Net (decrease)/increase in cash, cash equivalents and restricted cash | 37,683 | (31,229 | ) | |||||
| Cash and cash equivalents, beginning of year | 24,716 | 55,945 | ||||||
| Cash and cash equivalents, end of year | 62,399 | 24,716 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
| Interest paid | - | - | ||||||
| Income taxes paid | - | - | ||||||
The accompanying notes form an integral part of these consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and principal activities
QDM Holdings Limited (“QDM BVI”) was incorporated in the British Virgin Island on August 23, 2019 and conducts its business through its operating subsidiary in Hong Kong, YeeTah Insurance Consultant Limited (“YeeTah”), YeeTah is a licensed insurance brokerage company that sells a wide range of insurance products, consisting of two major categories: (1) life and medical insurance, such as individual life insurance; and (2) general insurance, such as automobile insurance, commercial property insurance, liability insurance, homeowner insurance. In addition, as a Mandatory Provident Fund (“MPF”) Intermediary, YeeTah also assists its customers with their investment through the MPF and the Occupational Retirement Schemes Ordinance schemes (“ORSO”) in Hong Kong, both of which are retirement protection schemes set up for employees. QDM BVI, QDM Group Limited, a wholly owned subsidiary of QDM BVI, and YeeTah are collectively refer to as the “Group.”
Going concern
The consolidated financial statements have been prepared on a going concern basis which assumes the Group will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Group has incurred a loss since inception (April 24, 2015) resulting in an accumulated deficit of $332,071 as of March 31, 2020. Accordingly, there is substantial doubt about the Group’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Group generating profits in the future and/or to obtain necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months primarily through financings from the Group’s major shareholder.
These consolidated financial statements do not reflect adjustments that would be necessary if the Group were unable to continue as a “going concern.” While management believes that the actions already taken or planned, including adjusting its operating expenditures and obtaining financial supports from its principal shareholder, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Group were unable to continue as a “going concern,” then substantial adjustments would be necessary to the reported amounts of its liabilities, the reported expenses and the consolidated balance sheet classifications used.
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements of the Group are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
F-7
Principal of consolidation
The consolidated financial statements include the financial statements of QDM BVI any and its subsidiaries. All transactions and balances among QDM BVI and its subsidiaries have been eliminated upon consolidation.
| Principal activities | Percentage of ownership | Date of incorporation | Place of incorporation | |||||
| QDM Holdings Limited (“QDM BVI”) | Holding company | — | August 23, 2019 | British Virgin Islands (“BVI”) | ||||
| QDM Group Limited (“QDM HK”) | Holding company | 100% | June 22, 2019 | Hong Kong | ||||
| YeeTah Insurance Consultant Limited (“YeeTah”) | Insurance brokerage services. Licensed under Professional Insurance Broker Association of
Hong Kong (“PIBA”). | 100% | April 24, 2015 | Hong Kong |
Reorganization
On May 20, 2020, the Group executed a corporate reorganization to roll two controlled entities, namely QDM HK and YeeTah into QDM BVI through a share purchase arrangement. QDM BVI purchased all the outstanding shares of QDM HK from QDM HK’s sole shareholder, Huihe Zheng. During the years presented in these consolidated financial statements, the control of the two entities, QDM HK and YeeTah (100% owned by QDM HK) has never changed since they have been always under the control of the sole shareholder of QDM HK. Accordingly, this transaction has been treated as a corporate restructuring (reorganization) of entities under common control and thus the current capital structure of QDM BVI has been retrospectively presented in prior periods as if such structure existed at that time and in accordance with ASC 805-50-45-5. Therefore, the results of the subsidiaries from prior periods before the reorganization are included in the consolidated financial statements.
Use of estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and differences could be material. Changes in estimates are recorded in the period they are identified.
There were no significant estimates for the years ended March 31, 2020 and 2019.
F-8
Foreign currency and foreign currency translation
The Group’s reporting currency is the United States dollar (“US$”). The Group’s operations are principally conducted through Hong Kong where Hong Kong dollar is the functional currency.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currency at the prevailing rates of exchange at the balance date. The resulting exchange differences are reported in the statements of operations and comprehensive loss.
The exchanges rates used for translation from Hong Kong dollar to US$ was 7.8000, a pegged rate determined by the linked exchange rate system in Hong Kong. This pegged rate was used to translate Group’s balance sheets, income statement items and cash flow items for both 2020 and 2019.
Certain risks and concentration
The Group’s consolidated financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash equivalents and receivables, prepayments and other assets. As of March 31, 2020, and 2019, substantially all of the Group’s cash and cash equivalents were held in major financial institutions located in Hong Kong, which management considers to being of high credit quality. During the years ended March 31, 2020 and 2019, the top two insurance companies accounted for 77% and 92.1% of the Group’s total revenue, respectively.
Cash and cash equivalents
Cash and cash equivalents consist of petty cash on hand and cash held in banks, which are highly liquid and have original maturities of three months or less and are unrestricted as to withdrawal or use.
Accounts receivable
Accounts receivable represents trade receivable and are recognized initially at fair value and subsequently adjusted for any allowance for doubtful accounts and impairment.
The Group makes impairment loss for bad and doubtful debts based on assessments of the recoverability of the trade and other receivables based on individual account analysis, including the current creditworthiness and the past collection history of each debtor. Impairments arise when there is an objective evidence indicate that the balances may not be collectible. The identification of bad and doubtful debts, in particular of a loss event, requires the use of judgment and estimates, which involve the estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the statements of income and comprehensive income. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
The Group historically did not have material bad debts in accounts receivable. There were no bad debt expenses for the years ended March 31, 2020 and 2019 and there was no provision for doubtful accounts as of March 31, 2020 and 2019.
F-9
Revenue recognition
The Group generates revenue primarily by providing insurance brokerage services. The Group sells insurance products underwritten by insurance companies operating in Hong Kong to its individual customers and is compensated for its services by commissions paid by insurance companies, typically based on a percentage of the premium paid by the insured. The Group adopted ASC 606 for its fiscal year beginning on April 1, 2019 using the modified retrospective approach. There were no material unfinished contracts with customers on the adoption date of ASC 606.
Prior to the adoption of ASC 606, under ASC 605, the basic criteria necessary for revenue recognition were:
| (i) | Persuasive evidence of an arrangement exists, |
| (ii) | Delivery has occurred or services have been rendered |
| (iii) | The selling price is fixed or determinable, and |
| (iv) | Collectability is reasonably assured. |
Revenue is recognized when the brokerage services are rendered under ASC 605.
ASC 606 develops a five-step model for recognizing revenue from contacts with customers and these five steps include:
| (i) | Identify the contract |
| (ii) | Identify performance obligations |
| (iii) | Determine transaction price |
| (iv) | Allocate transaction price |
| (v) | Recognize revenue |
The Group enters into written agreements with insurance companies for brokerage services. Performance obligation for these insurance brokerage contracts is to help insurance companies, promote, coordinate and complete subscriptions of insurance policies offered by these insurance companies who partnered with the Group.
Under ASC 606, revenue is recognized when the customer obtains control of a good or service. A customer obtains control of a good or service if it has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The transfer of control of the Group’s brokerage services generally occurs at a point in time on the effective date of the associated insurance contract when the policy transfers to the customer. The insurance policy entered between the insurance company and the insured customer generally contains a cool-off period of one to two months. When the cool-off period elapses and the insured customer does not withdraw from the insurance policy, the policy becomes effective. Once the transfer of control of a service occurs, the Group has satisfied its insurance brokerage performance obligation and recognizes revenue.
Revenue recognition under ASC 606 has not had material differences than revenue recognition under the legacy ASC 605 for the Group.
F-10
Cost of sales
Cost of sales represent commissions paid to third-party agents or sub-brokers who help introduce or refer insurance customers to the Group.
Fair value measurement
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value as follows:
| Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||
| Level 2: | Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities. | ||
| Level 3: | Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. | ||
The Group’s consolidated financial instruments include cash and cash equivalents, accounts receivable, other receivables, due from related parties, accounts payable and accrued liabilities, and due to related party. The carrying amounts of these financial instruments approximate their fair values due to the short-term nature of these instruments.
The Group noted no transfers between levels during any of the periods presented. The Group did not have any instruments that were measured at fair value on a recurring nor non-recurring basis as of March 31, 2020 and 2019.
Property and equipment
Property and equipment are recorded at cost, less accumulated depreciation and impairment. Depreciation of property and equipment is calculated on a straight-line basis, after consideration of expected useful lives and estimated residual values. The estimated annual deprecation rate of these assets are generally as follows:
| Category | Depreciation rate | Estimated residual value | ||
| Office equipment | 20% | Nil | ||
| Leasehold improvements | Shorter of lease term or 20% | Nil |
Expenditures for maintenance and repairs are expensed as incurred. Gains and losses on disposals are the differences between net sales proceeds and carrying amount of the relevant assets and are recognized in the statements of operations and comprehensive loss.
Impairment of long-lived assets
The Group evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected discounted cash flows arising from those assets.
There were no impairment losses for the years ended March 31, 2020 and 2019.
F-11
Leases
A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified by the lessee as an operating lease. When a lease contains rent holidays, the Group records the total expenses on a straight-line basis over the lease term.
Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as capital leases. At the commencement of the lease term, a capital lease is capitalized at the lower of the fair value of the leased asset and the present value of the minimum lease payments, each determined at the inception of the lease.
The corresponding liability to the lessor is included in the balance sheets as capital lease obligation. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Assets under capital leases are depreciated the same as owned assets over the shorter of the lease term and their estimated useful lives.
Taxation
Current income taxes are provided on the basis of net profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carryforwards and credits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in which temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations comprehensive income in the period of the enactment of the change.
The Group considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Group has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry.
F-12
The Group recognizes a tax benefit associated with an uncertain tax position when, in its judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the Group initially and subsequently measures the tax benefit as the largest amount that the Group judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Group’s liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Group’s effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Group classifies interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
Earnings per share
Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share in the losses. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
Defined contribution plans
The Group contributes to defined contribution retirement schemes which are available to all employees. Contributions to the schemes by the Group and employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to profit or loss represents contributions payable by the Group to the funds.
Segment information
The Group operates under one segment, being the insurance brokerage segment. Insurance brokerage revenue is generated from operations in Hong Kong, China.
F-13
Recently issued accounting standards
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities not under the fair value option is largely unchanged. The standard is effective for public business entities for annual periods (and interim periods within those annual periods) beginning after December 15, 2017. For all other entities, it is effective for fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019. The Group adopted the guidance from its fiscal year beginning on April 1, 2019 and the adoption of the standard did not have significant impact on the Group’s consolidated financial statements.
In February 2016, FASB issued ASU No. 2016–02, “Leases (Topic 842)”, ASC 842, and subsequently amended the guidance relating largely to transition considerations under the standard in July 2018. The new guidance, which creates new accounting and reporting guidelines for leasing arrangements, requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for public business entities for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which further clarifies the determination of fair value of the underlying asset by lessors that are not manufacturers or dealers and modifies transition disclosure requirements for changes in accounting principles and other technical updates. The amendments in ASU 2019-01 amend Topic 842 and the effective date of those amendments is for fiscal years beginning December 15, 2019, and interim periods within those fiscal years for public business entities. For all other entities, ASC 842 is effective for annual periods beginning after December 15, 2020. The Group is currently evaluating the impact of the new pronouncement on its consolidated financial statements but does not expect it to have a significant impact.
In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a Group recognizes an allowance based on the estimate of expected credit loss. For public business entities that meet the definition of an U.S. Securities and Exchange (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the amendments is permitted. The Group is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS and cash flows.
F-14
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The ASU provides guidance on eight specific cash flow issues:
| i. | Debt Prepayment or Debt Extinguishment Costs; |
| ii. | Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; |
| iii. | Contingent Consideration Payments Made after a Business Combination; |
| iv. | Proceeds from the Settlement of Insurance Claims; |
| v. | Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; |
| vi. | Distributions Received from Equity Method Investees; |
| vii. | Beneficial Interests in Securitization Transactions; and |
| viii. | Separately Identifiable Cash Flows and Application of the Predominance Principle |
ASU 2016-15 is effective for public entities for interim and annual periods beginning after December 15, 2017, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Group adopted ASU 2016-15 in the fiscal year ended March 31, 2020 and concluded that the guidance does not have impact on the Group’s consolidated financial statements since the Group does not have any of the eight cash flow issues outlined in ASU 2016-15.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). This ASU affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update will become effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and early adoption is permitted in any interim or annual period. The Group adopted the standard from its fiscal year beginning on April 1, 2019 and the adoption does not have impact to the Group’s consolidated statement of cash flows for the years ended March 31, 2020 and 2019 since the Group does not have restricted cash or restricted cash equivalents.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13 - Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Group will evaluate the impact of the new standards in the fiscal year when it becomes effective.
F-15
3. Accounts Receivable
Accounts receivable consists of the following:
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Accounts receivable | 9,865 | 48,713 | ||||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Total | 9,865 | 48,713 | ||||||
4. Prepaid Expenses
Prepaid expenses primarily relate to rent and utility deposits paid by the Group for its office lease and utilities.
5. Property and Equipment, Net
Property and equipment, net, consists of the following:
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Office equipment | 1,673 | 1,673 | ||||||
| Leasehold improvements | - | 8,483 | ||||||
| Total | 1,673 | 10,156 | ||||||
| Less: Accumulated depreciation | (1,338 | ) | (7,790 | ) | ||||
| Property and equipment, net | 335 | 2,366 | ||||||
Depreciation expenses were recorded in general and administrative expense. The Group recorded depreciation expenses of US$334 and US$2,031 for the year ended March 31, 2020 and 2019, respectively.
During the year ended March 31, 2020 and 2019, the Group recorded an impairment on leasehold improvements of $1,696 and nil, respectively, due to the change of office. The impairment loss was recognized in the other expenses on the Statements of Operations and Comprehensive Loss.
F-16
6. Income Taxes
Under the current Hong Kong Inland Revenue Ordinance, the Group’s Hong Kong subsidiaries are subject to a 16.5% income tax on their taxable income generated from operations in Hong Kong. On December 29, 2017, Hong Kong government announced a two-tiered profit tax rate regime. Under the two-tiered tax rate regime, the first HK$2.0 million assessable profits will be subject to a lower tax rate of 8.25% and the excessive taxable income will continue to be taxed at the existing 16.5% tax rate. The two-tiered tax regime becomes effective from the assessment year of 2018/2019, which was on or after April 1, 2018. The application of the two-tiered rates is restricted to only one nominated enterprise among connected entities.
The Group did not have current income tax expenses for the years ended March 31, 2020 and 2019 since it did not have taxable incomes in these two years.
As of March 31, 2020, and 2019, there were tax loss carryforward of US$18,785 and US$11,859, respectively, unrecognized since full valuation allowances were provided since it was determined that the associated deferred income tax assets could not meet the more-likely-than-not threshold.
Uncertain tax positions
The Group evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of March 31, 2020, and 2019, the Group did not have any significant unrecognized uncertain tax positions.
7. Ordinary Shares
The Group is authorized to issue 50,000 ordinary shares, par value US$1.00 per share. 50,000 and 1,282 shares had been issued and outstanding as of March 31, 2020 and 2019, respectively.
8. Additional Paid-In-Capital
Additional paid-in capital represents the original share capital of YeeTah. As a result of the reorganization, the portion of YeeTah’s original share capital that exceeded its par value based on the Group’s US$1.00 per share was reclassified into additional paid-in-capital. During the year ended March 31, 2019, 415,000 shares were issued for 415,000 Hong Kong dollar (US$53,205) for YeeTah. The amount has not been paid up yet as of March 31, 2019 and therefore was recorded under “Subscription receivable”. No additional shares were issued during the year ended March 31, 2020.
9. Loss Per Share
Basic and diluted net loss per share for each of the years presented are calculated as follows:
Basic loss per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period.
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Numerator: | ||||||||
| Net loss attributable to ordinary shareholders—basic and diluted | (25,083 | ) | (67,395 | ) | ||||
| Denominator: | ||||||||
| Weighted average number of ordinary shares outstanding—basic and diluted | 30,780 | 1,223 | ||||||
| Loss per share attributable to ordinary shareholders —basic and diluted | (0.81) | (55.11) | ||||||
F-17
10. Commitments and Contingencies
Operating leases
The Group has entered into a non-cancellable office operating lease. The future aggregate minimum lease payments under this non-cancellable operating lease are as follows:
| Payments due by period | ||||||||||||||||
| Total | Less than 1 year | 1-3 years | Over 3 years | |||||||||||||
| Operating lease obligations (US$) | 38,000 | 35,077 | 2,923 | - | ||||||||||||
The Group recorded rent expenses of US$38,570 and US$62,949 in general and administrative expenses in the statements of operations and comprehensive loss during the years ended March 31, 2020 and 2019, respectively.
Other commitments
The Group did not have other significant commitments, long-term obligations, or guarantees as of March 31, 2020 and 2019.
Contingencies
The Group is subject to legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Group does not anticipate that the final outcome arising out of any such matter will have a material adverse effect on our business, financial position, cash flows or results of operations taken as a whole. As of March 31, 2020, the Group is not a party to any material legal or administrative proceedings.
11. Related Party Transactions and Balances
Related parties
| Name of related parties | Relationship with the Group | |
| Siu Ping Lo | Former director (resigned on December 31, 2019) and responsible officer | |
| Huihe Zheng | Principal shareholder & director (appointed on December 31, 2019) | |
| YeeTah Financial Group Co., Ltd. | A company controlled by Siu Ping Lo |
Related party transactions
The Group had the following related party transactions:
| (i) | During the years ended March 31, 2020 and 2019, the Group generated other income of US$107,308 and US$107,692, respectively, from providing office management services to YeeTah Financial Group Co., Ltd. (“YeeTah Financial”). |
| (ii) | During the years ended March 31, 2020 and 2019, the Group paid US$190,496 and US$402,041, respectively, to YeeTah Financial for customer referral services. |
F-18
Due from related party balance
The Group’s due from related party balance as of March 31, 2020 and 2019 is as follows:
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | 20,316 | - | ||||||
The due from related party balance as of March 31, 2020 is unsecured, interest-free and due on demand. This amount has been subsequently settled in May 2020.
Due to related party balance
The Group’s due to related party balances as of March 31, 2020 and 2019 are as follows:
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Siu Ping Lo | - | 14,479 | ||||||
| YeeTah Financial | 24,628 | 57,425 | ||||||
| Total | 24,628 | 71,904 | ||||||
The due to related party balances as of March 31, 2020 and 2019 were unsecured, interest-free and due on demand.
Subscription receivable due from shareholder
The Group’s due from a shareholder balances as of March 31, 2020 and 2019 are as follows:
| March 31, 2020 | March 31, 2019 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | 48,718 | - | ||||||
Teik Hoe Chng | - | 53,205 | ||||||
The subscription receivable due from shareholder balances as of March 31, 2020 and 2019 represent the purchase price for shares issued to be paid up by the respective shareholders. These due from shareholder balances as of March 31, 2020 and 2019 are unsecured, interest-free and due on demand. The March 31, 2019 due from Teik Hoe Chng was subsequently assumed by Siu Ping Lo in August 2019 as a result of Mr. Chng’s transfer of the related common shares to Ms. Lo. In December 2019, the $53,205 balance was further assumed by Huihe Zheng as part of the share purchase arrangement between Huihe Zheng and Siu Ping Lo.
12. Subsequent Events
The Group has evaluated the impact of events that have occurred subsequent to March 31, 2020, through the date the consolidated financial statements were available to issue, and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the financial statements.
F-19
Exhibit 99.2
TABLE OF CONTENTS
F-1
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30 AND MARCH 31, 2020
(US$, except share data and per share data, or otherwise noted)
| June 30, 2020 | March 31, 2020 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | 82,564 | 62,399 | ||||||
| Accounts receivables, net | 5,278 | 9,865 | ||||||
| Prepaid expenses | 16,238 | 13,672 | ||||||
| Due from related parties | 10,009 | 20,316 | ||||||
| Total current assets | 114,089 | 106,252 | ||||||
| Non-current assets | ||||||||
| Property and equipment, net | 251 | 335 | ||||||
| Total assets | 114,340 | 106,587 | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities: | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | 19,114 | 3,774 | ||||||
| Due to related party | 41,890 | 24,628 | ||||||
| Total current liabilities | 61,004 | 28,402 | ||||||
| Total liabilities | 61,004 | 28,402 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity | ||||||||
| Ordinary shares, US$1.00 par value, 50,000 authorized, 50,000 and 50,000 shares issued and outstanding, respectively | 50,000 | 50,000 | ||||||
| Additional paid-in-capital | 408,974 | 408,974 | ||||||
| Subscription receivable | (48,718 | ) | (48,718 | ) | ||||
| Deficit | (356,920 | ) | (332,071 | ) | ||||
| Total shareholders’ equity | 53,336 | 78,185 | ||||||
| Total liabilities and shareholders’ equity | 114,340 | 106,587 | ||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| For The Three Months Ended | For The Three Months Ended | |||||||
| June 30, 2020 | June 30, 2019 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenues | 20,880 | 52,273 | ||||||
| Cost of sales | 19,578 | 43,916 | ||||||
| Gross profit | 1,302 | 8,357 | ||||||
| Operating costs and expenses: | ||||||||
| General and administrative | 29,612 | 39,307 | ||||||
| Total operating costs and expenses | 29,612 | 39,307 | ||||||
| Loss from operations | (28,310 | ) | (30,950 | ) | ||||
| Other (income) expenses: | ||||||||
| Finance costs | 77 | 103 | ||||||
Other (income), net | (3,538 | ) | (34,527 | ) | ||||
| Total other (income) expenses | (3,461 | ) | (34,424 | ) | ||||
| Income (loss) before provision for income taxes | (24,849 | ) | 3,474 | |||||
| Net income (loss) | (24,849 | ) | 3,474 | |||||
| Comprehensive loss | (24,849 | ) | 3,474 | |||||
| Basic & diluted net loss per share | (0.50 | ) | 2.71 | |||||
| Weighted average number of ordinary shares-basic and diluted | 50,000 | 1,282 | ||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
F-3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| Ordinary shares | Ordinary shares amount ($) | Additional paid-in-capital ($) | Subscription receivable ($) | Accumulated deficits ($) | Total equity ($) | |||||||||||||||||||
| Balance as of April 1, 2019 | 1,282 | 1,282 | 408,974 | (53,205 | ) | (306,988 | ) | 50,063 | ||||||||||||||||
Net loss (Unaudited) | - | - | - | 3,474 | 3,474 | |||||||||||||||||||
| Balance as of June 30, 2019 (Unaudited) | 1,282 | 1,282 | 408,974 | (53,205 | ) | (303,514 | ) | 53,537 | ||||||||||||||||
| Ordinary shares | Ordinary shares amount ($) | Additional paid-in-capital ($) | Subscription receivable ($) | Accumulated deficits ($) | Total equity ($) | |||||||||||||||||||
| Balance as of April 1, 2020 | 50,000 | 50,000 | 408,974 | (48,718 | ) | (332,071 | ) | 78,185 | ||||||||||||||||
Net loss (Unaudited) | - | - | - | (24,849 | ) | (24,849 | ) | |||||||||||||||||
| Balance as of June 30, 2020 (Unaudited) | 50,000 | 50,000 | 408,974 | (48,718 | ) | (356,920 | ) | 53,336 | ||||||||||||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019
(US$, except share data and per share data, or otherwise noted)
| For the Three Months Ended June 30, | For the Three Months Ended June 30, | |||||||
| 2020 | 2019 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash Flows in Operating Activities: | ||||||||
| Net loss | (24,849 | ) | 3,474 | |||||
| Adjustments for items not affecting cash: | ||||||||
| Depreciation and amortization | 84 | 84 | ||||||
| Net loss from write-off of property and equipment | - | 1,696 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | 4,587 | 31,016 | ||||||
| Prepaid expenses | (2,566 | ) | - | |||||
| Accounts payable & accrued liabilities | 5,777 | 3,022 | ||||||
| Due to a related party | 26,826 | (9,337 | ) | |||||
| Net cash (used in) provided from operating activities | 9,859 | 29,955 | ||||||
| Cash Flows in Financing Activities: | ||||||||
| Proceeds borrowed from related parties | 20,315 | - | ||||||
| Payment to related parties | (10,009 | ) | (35,769 | ) | ||||
| Net cash (used in) provided from financing activities | 10,306 | (35,769 | ) | |||||
| Effect of foreign exchange rate changes | - | - | ||||||
| Net (decrease)/increase in cash, cash equivalents and restricted cash | 20,165 | (5,814 | ) | |||||
| Cash and cash equivalents, beginning of year | 62,399 | 24,716 | ||||||
| Cash and cash equivalents, end of year | 82,564 | 18,902 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
| Interest paid | - | - | ||||||
| Income taxes paid | - | - | ||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
F-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and principal activities
QDM Holdings Limited (the “Company” or “QDM Holdings” was incorporated in the British Virgin Island on August 23, 2019. The Company, through its operating subsidiary YeeTah Insurance Consultant Limited (“YeeTah”) located in Hong Kong, China, is a licensed insurance brokerage company that sells a wide range of insurance products, consisting of two major categories: (1) life and medical insurance, such as individual life insurance; and (2) general insurance, such as automobile insurance, commercial property insurance, liability insurance, homeowner insurance. In addition, as a Mandatory Provident Fund (“MPF”) Intermediary, YeeTah also assists its customers with their investment through the MPF and the Occupational Retirement Schemes Ordinance schemes (“ORSO”) in Hong Kong, both of which are retirement protection schemes set up for employees.
Going concern
The condensed unaudited consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred a loss since inception (April 24, 2015) resulting in an accumulated deficit of $356,920 as of June 30, 2020. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profits in the future and/or to obtain necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months primarily through financings from the Company’s major shareholder.
These condensed unaudited consolidated financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern.” While management believes that the actions already taken or planned, including adjusting its operating expenditures and obtaining financial supports from its principal shareholder, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the reported amounts of its liabilities, the reported expenses and the consolidated balance sheet classifications used.
2. Summary of significant accounting policies
Basis of presentation
The unaudited condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in equity for the interim periods presented. These unaudited condensed financial statements do not include certain information and footnote disclosures as required by the U.S. GAAP for complete annual financial statements. Therefore, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s current report on Form 8-K for the year ended March 31, 2020.
F-6
Use of estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and differences could be material. Changes in estimates are recorded in the period they are identified.
There were no significant estimates for the three months ended June 30, 2020 and 2019.
Foreign currency and foreign currency translation
The Company’s reporting currency is the United States dollar (“US$”). The Company’s operations are principally conducted through the Hong Kong where Hong Kong dollar is the functional currency.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currency at the prevailing rates of exchange at the balance date. The resulting exchange differences are reported in the statements of operations and comprehensive loss.
The exchanges rates used for translation from Hong Kong dollar to US$ was 7.8000, a pegged rate determined by the linked exchange rate system in Hong Kong. This pegged rate was used to translate Company’s balance sheets, income statement items and cash flow items for both 2020 and 2019.
Certain risks and concentration
The Company’s consolidated financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and receivables, prepayments and other assets. As of June 30, 2020, substantially all of the Company’s cash and cash equivalents were held in major financial institutions located in Hong Kong, which management considers to being of high credit quality.
Cash and cash equivalents
Cash and cash equivalents consist of petty cash on hand and cash held in banks, which are highly liquid and have original maturities of three months or less and are unrestricted as to withdrawal or use.
Accounts receivable
Accounts receivable represents trade receivable and are recognized initially at fair value and subsequently adjusted for any allowance for doubtful accounts and impairment.
The Company makes impairment loss for bad and doubtful debts based on assessments of the recoverability of the trade and other receivables based on individual account analysis, including the current creditworthiness and the past collection history of each debtor. Impairments arise when there is an objective evidence indicate that the balances may not be collectible. The identification of bad and doubtful debts, in particular of a loss event, requires the use of judgment and estimates, which involve the estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the statements of income and comprehensive income. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
F-7
The Company historically did not have material bad debts in accounts receivable. There were no bad debt expenses for the period ended June 30, 2020 and 2019 and there was no provision for doubtful accounts as of June 30, 2020 and March 31, 2020.
Revenue recognition
The Company generates revenue primarily by providing insurance brokerage services. The Company sells insurance products underwritten by insurance companies operating in Hong Kong to its individual customers and is compensated for its services by commissions paid by insurance companies, typically based on a percentage of the premium paid by the insured. The Company adopted ASC 606 for its fiscal year beginning on April 1, 2019 using the modified retrospective approach. There were no material unfinished contracts with customers on the adoption date of ASC 606.
Prior to the adoption of ASC 606, under ASC 605, the basic criteria necessary for revenue recognition were:
| (i) | Persuasive evidence of an arrangement exists, |
| (ii) | Delivery has occurred or services have been rendered |
| (iii) | The selling price is fixed or determinable, and |
| (iv) | Collectability is reasonably assured. |
Revenue is recognized when the brokerage services are rendered under ASC 605.
ASC 606 develops a five-step model for recognizing revenue from contracts with customers and these five steps include:
| (i) | Identify the contract |
| (ii) | Identify performance obligations |
| (iii) | Determine transaction price |
| (iv) | Allocate transaction price |
| (v) | Recognize revenue |
We enter into contracts with our customers primarily through written contracts. Performance obligation for these insurance brokerage contracts is to help our customers, which are insurance companies, to promote, coordinate and complete subscriptions of insurance policies offered by our customers for sales of our products to our customers.
Under ASC 606, revenue is recognized when the customer obtains control of a good or service. A customer obtains control of a good or service if it has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The transfer of control of the Group’s brokerage services generally occurs at a point in time on the effective date of the associated insurance contract when the policy transfers to the customer. The insurance policy entered between the insurance company and the insured customer generally contains a cool-off period of one to two months. When the cool-off period elapses and the insured customer does not withdraw from the insurance policy, the policy becomes effective. Once the transfer of control of a service occurs, the Group has satisfied its insurance brokerage performance obligation and recognizes revenue.
Revenue recognition under ASC 606 has not had material differences than revenue recognition under the legacy ASC 605 for the Company.
F-8
Fair value measurement
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value as follows:
| Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||
| Level 2: | Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities. | ||
| Level 3: | Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. | ||
The Company’s consolidated financial instruments include cash and cash equivalents, accounts receivable, other receivables, due from related parties, accounts payable and accrued liabilities, and due to related party. The carrying amounts of these financial instruments approximate their fair values due to the short-term nature of these instruments.
The Company noted no transfers between levels during any of the periods presented. The Company did not have any instruments that were measured at fair value on a recurring nor non-recurring basis as of June 30, 2020.
Property and equipment
Property and equipment are recorded at cost, less accumulated depreciation and impairment. Depreciation of property and equipment is calculated on a straight-line basis, after consideration of expected useful lives and estimated residual values. The estimated annual deprecation rate of these assets are generally as follows:
| Category | Depreciation rate | Estimated residual value | ||
| Office equipment | 20% | Nil | ||
| Leasehold improvements | Shorter of lease term or 20% | Nil |
Expenditures for maintenance and repairs are expensed as incurred. Gains and losses on disposals are the differences between net sales proceeds and carrying amount of the relevant assets and are recognized in the statements of operations and comprehensive loss.
Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected discounted cash flows arising from those assets.
There were no impairment losses for the periods ended June 30, 2020 and 2019.
F-9
Leases
A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified by the lessee as an operating lease. When a lease contains rent holidays, the Company records the total expenses on a straight-line basis over the lease term.
Leases that substantially transfer to the Company all the risks and rewards of ownership of assets are accounted for as capital leases. At the commencement of the lease term, a capital lease is capitalized at the lower of the fair value of the leased asset and the present value of the minimum lease payments, each determined at the inception of the lease.
The corresponding liability to the lessor is included in the balance sheets as capital lease obligation. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Assets under capital leases are depreciated the same as owned assets over the shorter of the lease term and their estimated useful lives.
Taxation
Current income taxes are provided on the basis of net profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carryforwards and credits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in which temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations and comprehensive income in the period of the enactment of the change.
The Company considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Company has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry.
F-10
The Company recognizes a tax benefit associated with an uncertain tax position when, in its judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax benefit as the largest amount that the Company judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Company’s liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Company’s effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Company classifies interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
Earnings per share
Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share in the losses. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
Defined contribution plans
The Company contributes to defined contribution retirement schemes which are available to all employees. Contributions to the schemes by the Company and employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to profit or loss represents contributions payable by the Company to the funds.
F-11
Recently issued accounting standards
The Company has reviewed all the recent accounting pronouncements issued to date of the issuance of these financial statements, and does not believe any of these pronouncements will have a material impact on the Company.
3. Property and Equipment, net
Property and equipment, net consist of the following:
| June 30, 2020 | March 31, 2020 | |||||||
| US$ | US$ | |||||||
| Office equipment | 1,673 | 1,673 | ||||||
| Total | 1,673 | 1,673 | ||||||
| Less: Accumulated depreciation | (1,422 | ) | (1,338 | ) | ||||
| Property and equipment, net | 251 | 335 | ||||||
Depreciation expenses were recorded in general and administrative expense. The Company recorded depreciation expenses of US$84 and US$84 for the periods ended June 30, 2020 and 2019, respectively.
During the period ended June 30, 2019, the Company recorded an impairment on leasehold improvements of $1,696 due to the change of office. The impairment loss was recognized in the other expenses on the Statements of Operations and Comprehensive Loss.
4. Ordinary Shares
The Company is authorized to issue 50,000 ordinary shares, par value US$1.00 per share. 50,000 shares had been issued and outstanding as of June 30, 2020 and March 31 2020.
5. Earnings (Loss) per share
Basic and diluted net earnings (loss) per share for each of the years presented are calculated as follows:
Basic earnings (loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period.
| June 30, 2020 | June 30, 2019 | |||||||
| US$ | US$ | |||||||
| Numerator: | ||||||||
| Net earnings (loss) attributable to ordinary shareholders—basic and diluted | (24,849 | ) | 3,474 | |||||
| Denominator: | ||||||||
| Weighted average number of ordinary shares outstanding—basic and diluted | 50,000 | 1,282 | ||||||
| Loss per share attributable to ordinary shareholders —basic and diluted | (0.50) | 2.71 | ||||||
F-12
6. Commitments and Contingencies
Operating leases
The Company has entered into a non-cancellable office operating lease. The future aggregate minimum lease payments under this non-cancellable operating lease are as follows:
| Payments due by period | ||||||||||||||||
| Total | Less than 1 year | 1-3 years | Over 3 years | |||||||||||||
| Operating lease obligations (US$) | 29,231 | 29,231 | - | - | ||||||||||||
The Company recorded rent expenses of US$10,388 and US$10,060 in general and administrative expenses in the statements of operations and comprehensive loss during the periods ended June 30, 2020 and 2019, respectively.
Other commitments
The Company did not have other significant commitments, long-term obligations, or guarantees as of June 30 31, 2020.
Contingencies
The Company is subject to legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome arising out of any such matter will have a material adverse effect on our business, financial position, cash flows or results of operations taken as a whole. As of June 30, 2020, the Company is not a party to any material legal or administrative proceedings.
11. Related Party Transactions and Balances
Related Parties
| Name of related parties | Relationship with the Company | |
| Siu Ping Lo | Former director (resigned on December 31, 2019) and responsible officer | |
| Huihe Zheng | Principal shareholder & director (appointed on December 31, 2019) | |
| YeeTah Financial Group Co., Ltd | A company controlled by Siu Ping Lo | |
| QDM International Inc. | A company controlled by Huihe Zheng |
Related Party transactions
The Company had the following related party transactions:
| (i) | During the period ended June 30, 2020, the Company generated US$ nil (2019: US$35,769) other income from providing management services to YeeTah Financial Group Co., Ltd. (“YeeTah Financial”). |
| (ii) | During the period ended June 30, 2020, the Company transferred amount of US$19,578 (2019: US$42,273) to YeeTah Financial who, on behalf of the Company, used these funds to pay commissions for insurance referral services rendered by other third-party individuals and companies. |
| (ii) | During the period ended June 30, 2020, the Company transferred amount of US$10,009 (2019: US $nil) to QDM International Inc. for working capital uses. |
F-13
Due from related party balance
The Company’s due from related party balance as of June 30 and March 31, 2020 is as follows:
| June 30, 2020 | March 31, 2020 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | - | 20,316 | ||||||
| QDM International Inc. | 10,009 | - | ||||||
The related party balances as of June 30, 2020 and March 31, 2020 are unsecured, interest-free and due on demand.
Due to related party balance
The Company’s due to related party balance as of June 30 and March 31, 2020 is as follows:
| June 30, 2020 | March 31, 2020 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | 18,146 | - | ||||||
| YeeTah Financial | 23,744 | 24,628 | ||||||
| Total | 41,890 | 24,628 | ||||||
The due to related party balance is unsecured, interest-free and due on demand.
Subscription receivable due from a shareholder
The Company’s subscription receivable due from a shareholder balances as of June 30, 2020 and March 31, 2020 and 2019 are as follows:
| June 30, 2020 | March 31, 2020 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | 48,718 | 48,718 | ||||||
The due from shareholder balances represent the share issuance proceeds to be paid up by the respective shareholder. These due from shareholder balances at of the balance sheet dates are unsecured, interest-free and due on demand.
12. Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to June 30, 2020, through the date the consolidated financial statements were available to issue, and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.
F-14
Exhibit 99.3
Unaudited pro forma condensed combined financial statements
The following unaudited pro forma condensed combined financial statements give effect to the reverse acquisition between QDM International Inc. (“QDM”) and QDM Holdings Limited (“QDM BVI”).
qdm INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 2020
(UNAUDITED)
(US$, except share data and per share data, or otherwise noted)
| QDM International Inc. | QDM Holdings Limited | Pro Forma Adjustments |
Notes | Combined | ||||||||||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||
| Cash and cash equivalents | 282 | 82,564 | 82,846 | |||||||||||||||||||||
| Accounts receivables, net | - | 5,278 | 5,278 | |||||||||||||||||||||
| Prepaid expenses | 21,000 | 16,238 | 37,238 | |||||||||||||||||||||
| Due from related parties | - | 10,009 | (10,009 | ) | 3 | (a) | - | |||||||||||||||||
| Total current assets | 21,282 | 114,089 | 125,362 | |||||||||||||||||||||
| Non-current assets | ||||||||||||||||||||||||
| Property and equipment, net | - | 251 | 251 | |||||||||||||||||||||
| Total assets | 21,282 | 114,340 | 125,613 | |||||||||||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
| Accounts payable and accrued liabilities | 16,748 | 19,114 | 35,861 | |||||||||||||||||||||
| Due to related parties | 67,224 | 41,890 | (10,009 | ) | 3 | (a) | 99,105 | |||||||||||||||||
| Total current liabilities | 83,972 | 61,004 | 134,967 | |||||||||||||||||||||
| Total liabilities | 83,972 | 61,004 | 134,967 | |||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||||||||
| Common stock | 167 | 50,000 | (50,000 | ) | 3 | (b) | 167 | |||||||||||||||||
| Preferred stock | 135 | - | 90 | 3 | (b) | 225 | ||||||||||||||||||
| Treasury stock | (60,395 | ) | - | (60,395 | ) | |||||||||||||||||||
| Subscriptions receivable | - | (48,718 | ) | (48,718 | ) | |||||||||||||||||||
| Additional paid-in-capital | 9,049,699 | 408,974 | 49,910 | (9,052,296 | ) | 3 | (b) | 456,287 | ||||||||||||||||
| Deficit | (9,052,296 | ) | (356,920 | ) | 9,052,296 | 3 | (b) | (356,920 | ) | |||||||||||||||
| Total shareholders’ equity | (62,690 | ) | 53,336 | (9,354 | ) | |||||||||||||||||||
| Total liabilities and shareholders’ equity | 21,282 | 114,340 | 125,613 | |||||||||||||||||||||
F-1
qdm INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
(UNAUDITED)
(US$, except share data and per share data, or otherwise noted)
| QDM International Inc. | QDM Holdings Limited | Pro Forma Adjustments |
Notes | Combined | ||||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||||
| Revenue | - | 64,454 | 64,454 | |||||||||||||||
| Costs of sales | - | 61,070 | 61,954 | |||||||||||||||
| Gross profit | - | 3,384 | 3,384 | |||||||||||||||
| Operating costs and expenses | ||||||||||||||||||
| General and administrative | 121,187 | 60,727 | 181,914 | |||||||||||||||
| Total operating costs and expenses | 121,187 | 60,727 | 181,914 | |||||||||||||||
| Loss from operations | (121,187 | ) | (57,343 | ) | (178,530 | ) | ||||||||||||
| Other (income) expenses: | ||||||||||||||||||
| Finance costs | 2,365 | 77 | 2,442 | |||||||||||||||
| Other expense (income), net | 17 | (3,596 | ) | (3,579 | ) | |||||||||||||
| Total other (income) expenses | 2,382 | (3,519 | ) | (1,137 | ) | |||||||||||||
| Loss before provision for income taxes | (123,569 | ) | (53,824 | ) | (177,393 | ) | ||||||||||||
| Net income (loss) | ||||||||||||||||||
| Basic & diluted net loss per share | (0.09 | ) | - | (0.14 | ) | |||||||||||||
| Weighted average number of ordinary shares-basic and diluted | 1,312,996 | - | 1,312,996 | |||||||||||||||
F-2
qdm INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR FISCAL YEAR PERIODS
(UNAUDITED)
(US$, except share data and per share data, or otherwise noted)
QDM International Inc. (Fiscal year ended December 31, 2019) | QDM Holdings Limited (Fiscal year ended March 31, 2020) | Pro Forma Adjustments |
Notes | Combined | ||||||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||||||
| Revenue | - | 221,289 | 221,289 | |||||||||||||||||
| Costs of sales | - | 200,011 | 200,011 | |||||||||||||||||
| Gross profit | - | 21,278 | 21,278 | |||||||||||||||||
| Operating costs and expenses | ||||||||||||||||||||
| General and administrative | 440,165 | 151,893 | 592,058 | |||||||||||||||||
| Total operating costs and expenses | 440,165 | 151,893 | 592,058 | |||||||||||||||||
| Loss from operations | (440,165 | ) | (130,615 | ) | (570,780 | ) | ||||||||||||||
| Other (income) expenses: | ||||||||||||||||||||
| Finance costs | 27,069 | 84 | 27,153 | |||||||||||||||||
| Other expense (income), net | - | (105,616 | ) | (105,616 | ) | |||||||||||||||
| Total other (income) expenses | 27,069 | (105,532 | ) | (78,463 | ) | |||||||||||||||
| Loss before provision for income taxes | (467,234 | ) | (25,083 | ) | (492,317 | ) | ||||||||||||||
| Net income (loss) | ||||||||||||||||||||
| Basic & diluted net loss per share | (0.91 | ) | - | (0.96 | ) | |||||||||||||||
| Weighted average number of ordinary shares-basic and diluted | 513,251 | - | 513,251 | |||||||||||||||||
F-3
qdm Internatonal INc.
NOTES TO PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Share exchange transaction
On October 21, 2020, QDM, a Florida corporation, entered into a share exchange agreement (the “Share Exchange Agreement”) with QDM BVI, a private operating corporation, and Huihe Zheng, the sole shareholder and director of QDM BVI, to acquire all the issued and outstanding capital stock of QDM BVI in exchange for 900,000 shares of a newly designated Series C Convertible Preferred Stock, par value $0.0001 per share, of QDM.
2. Basis of presentation
The acquisition was accounted for as a reverse acquisition effected by the Share Exchange Agreement, wherein QDM BVI is considered the acquirer and QDM is considered the acquiree for accounting purposes. The acquisition is of a private operating company (QDM BVI) by a corporation (QDM) resulted in the owners and management of the private company having actual or effective voting and operating control of the combined company. Therefore, the reverse acquisition is deemed to be a capital transaction in substance, rather than a business combination. Accordingly, the assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill or other intangible assets have been recognized.
The pro forma condensed combined financial statements are based on QDM’s historical financial statements and QDM BVI’s historical consolidated financial statements as adjusted to give effect to the reverse acquisition. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2020 and the 12 months ended December 31, 2020 for QDM and 12 months ended March 31, 2020 for QDM BVI give effect to these transactions as if they had occurred on the first date the above respective periods. The unaudited pro forma condensed combined balance sheets as of June 30, 2020 give effect to these transactions as if they had occurred on June 30, 2020.
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the reverse acquisition, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the reverse acquisition.
The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein.
The pro forma condensed financial statements should be read in conjunction with a reading of the historical financial statements and accompanying notes of the QDM included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and of QDM BVI’s consolidated financial statements for the year ended March 31, 2020 included in this Form 8-K.
3. Pro forma adjustments
The adjustments included in the pro forma combined balance sheets are as follows:
| (a) | The elimination of intercompany receivable and payable between QDM and QDM BVI; and |
| (b) | The elimination of historical equity of QDM BVI of $50,000 common stock and issuance of 900,000 preferred shares of QDM at par value of $0.0001 per share to the shareholder of QDM BVI as a result of the reverse acquisition; and ii) the elimination of QDM’s accumulated deficit before the reverse acquisition. |
F-4