ATIF HOLDINGS LIMITED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with the Company's annual report on Form 10-K for the fiscal year endedJuly 31, 2022 and the audited consolidated financial statements and notes included therein (collectively, the "2022 Annual Report"), as well as the Company's unaudited condensed consolidated financial statements and the related notes included in this report. Pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by theSEC , in preparing this discussion and analysis, the Company has presumed that readers have access to and have read the disclosure under the same heading contained in the 2022 Annual Report. This discussion and analysis contains forward-looking statements. Please see the cautionary note regarding these statements at the beginning of this report.
Business Overview
We offer financial consulting services to small and medium-sized enterprise
customers in
OnJanuary 4, 2021 , we established an office inCalifornia, USA , through our wholly owned subsidiaryATIF Inc. , aCalifornia corporation, and launched, in addition to our business consulting services, additional service models consisting of asset management, investment holding and media services to expand our business with a flexible business concept to achieve a goal of high growth revenue and strong profit growth. Reverse Split OnAugust 12, 2021 , our Board of Directors approved a reverse stock split (the "Reverse Split") of our issued and outstanding ordinary shares, par value$0.001 per share, at a ratio of 5-for-1 so that every five (5) shares issued and outstanding on the date of the Reverse Split was combined into one (1) ordinary share,US$0.005 par value. Shareholders otherwise entitled to receive a fractional share as a result of the reverse stock split will receive a whole share in lieu of such factional share, as relevant. Both before and after completion of the Reverse Split, the Company is and will be authorized to issue 100,000,000,000 ordinary shares ofUS$0.001 par value each. As a result of the Reverse Split, the Company's issued and outstanding ordinary shares was reduced from 45,806,952 ordinary shares ofUS$0.001 par value each to approximately 9,161,390 ordinary shares of par value$0.005 per share. OnAugust 23, 2021 , we amended our Memorandum of Association and Articles of Association in connection with our five-for-one reverse stock split to amend the par value back to$0.001 per ordinary share. Our ordinary shares, as adjusted per the Reverse Split, began trading on the Nasdaq Capital Market onAugust 30, 2021 . 2 Recent Updates
On
OnAugust 1, 2022 ,ATIF USA entered into and closed a Sale and Purchase Agreement (the "Agreement") withAsia Time (HK) International Finance Service Limited (the "Buyer"), pursuant to which the Company sold all of its equity interest in ATIF GP for cash consideration ofUS$50,000 (the "Agreement"). The management believed the disposition does not represent a strategic shift because it is not changing the way it is running its business. The Company has not shifted the nature of its operations. The termination is not accounted as discontinued operations in accordance with ASC 205-20. Upon the closing of the Agreement, ATIF GP is no longer our subsidiary andATIF USA ceased to be the investment manager ofATIF LP .
As of
Our financial consulting services
We launched our consulting services in 2015. Our aim was to assist these Chinese enterprises by filling the gaps and forming a bridge between PRC companies and overseas stock markets and exchanges. We have a team of qualified and experienced personnel with legal, regulatory, and language expertise in several jurisdictions outside theU.S. Our services were designed to help SMEs inChina achieve their goal of becoming public companies. InMay 2022 , we shifted our geographic focus fromChina toNorth America emphasizing on helping mid and small companies inNorth America become public companies on theU.S. capital markets. We would create a going public strategy for each client based on many factors of such client, including our assessment of the client's financial and operational situations, market conditions, and the client's business and financing requirements. Since our inception and up to the date of this report, we have successfully helped three Chinese enterprises to be quoted on theU.S. OTC markets and are currently assisting our other clients in their respective going public efforts. Most of our current and past clients have been Chinese,U.S. and Mexican companies, and we plan to expand our operations to other Asian countries, such asMalaysia ,Vietnam , andSingapore with continuing focus on the North American market in the coming years. For the three months endedOctober 31, 2022 and 2021, we provided consulting services to one and one customer, respectively, which primarily engaged the Company to provide consulting services relating to going public in the US through IPO and reverse merger. The low volume of consulting services was affected by COVID-19 and volatility in US capital market, leading to customer putting off or slowing down their plans forU.S. listings due to these uncertainties. OnMay 31, 2022 , we completed the transfer of our equity interest in ATIF HK and Huaya, through which we provided consulting services to Chinese companies We plan to focus on providing consulting services to customers based inNorth America and other areas and intend to continue cooperating with Huaya in connection with the expansion and provision of our business services inChina . FromApril 2022 through the date of this report, the Company entered into consulting agreements with five customers, among which four are based in theNorth America .
Our total revenue generated from consulting services amounted to
Key Factors that Affect our Business
We believe the following key factors may affect our consulting services:
Our business success depends on our ability to acquire customers effectively.
Our customer acquisition channels primarily include our sales and marketing campaigns and existing customer referrals. In order to acquire customers, we have made significant efforts in building mutually beneficial long-term relationships with local government, academic institutions, and local business associations. In addition, we also market our consulting services through social media, such as WeChat and Weibo. If any of our current customer acquisition channels becomes less effective, we are unable to continue to use any of these channels or we are not successful in using new channels, we may not be able to attract new customers in a cost-effective manner or convert potential customers into active customers or even lose our existing customers to our competitors. To the extent that our current customer acquisition and retention efforts become less effective, our service revenue may be significantly impacted, which would have a significant adverse effect on our revenues, financial condition, and
results of operations.
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Our consulting business faces strong market competition.
We are currently facing intense market competition. Some of our current or potential competitors have significantly more financial, technical, marketing, and other resources than we do and may be able to devote greater resources to the development, promotion, and support of their customer acquisition and retention channels. In light of the low barriers to entry in the financial consulting industry, we expect more players to enter this market and increase the level of competition. Our ability to differentiate our services from other competitors will have significant impact on our business growth in the future.
Our business depends on our ability to attract and retain key personnel.
We rely heavily on the expertise and leadership of our directors and officers to maintain our core competence. Under their leadership, we have been able to achieve rapid expansion and significant growth since our inception in 2015. As our business scope increases, we expect to continue to invest significant resources in hiring and retaining a deep talent pool of financial consultancy professionals. Our ability to sustain our growth will depend on our ability to attract qualified personnel and retain our current staff. Results of Operations
Comparison of Operation Results for the Three Months ended
The following table summarizes the results of our operations for the three months endedOctober 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods. For the Three Months ended Changes Amount Percentage October 31, October 31, Increase Increase 2022 2021 (Decrease) (Decrease) (unaudited) (unaudited) Revenues - third parties$ 300,000 $ 516,475 $ (216,475 ) (42 )% Operating expenses: Selling expenses 5,000 225,113 (220,113 ) (98 )% General and administrative expenses 562,896 878,155 (315,259 ) (36 )% Total operating expenses 567,896 1,103,268 (535,372 ) (49 )% Loss from operations (267,896 ) (586,793 ) 318,897 (54 )% Other income (expenses): Interest income, net 59,847 27 59,820 221,556 % Other income, net 59,500 26,615 32,885 124 %
Loss from investment in trading securities (20,004 ) (339,374 ) 319,370
(94 )%
Gain from disposal of subsidiaries 56,038 - 56,038 100 %
Total other income (expense), net 155,381 (312,732 ) 468,113 (150 )%
Loss before income taxes (112,515 ) (899,525 ) 787,010 (87 )%
Income tax provision - - - 0 %
Net loss $ (112,515 ) $ (899,525 ) $ 787,010 (87 )%
Revenues. Our total revenue decreased by $0.2 million , or 42%, from $0.5 million
in the quarter ended October 31, 2021 , to $0.3 million in quarter ended October
31, 2022 . During the three months ended October 31, 2022 and 2021, we provided
consulting services to one and one customer, respectively. The higher revenues
in the quarter ended October 31, 2021 was because we provided two phases of
services to one customer in the quarter ended October 31, 2021 , as compared with
one phase to customer in the same period of 2022.
Selling expenses. Selling expenses decreased by $0.2 million , or 98%, from $0.2
million in the quarter ended October 31, 2021 to $5,000 in the quarter ended
October 31, 2022 . Our selling expenses primarily consisted of outsourced service
fees charged by third-party service providers, business development expenses,
potential customer referral commissions, salary and welfare expenses of our
business development team, and business travel expenses. The decrease in our
selling expenses was primarily due to a decrease of $0.2 million in consulting
service fees because we did not engage outsourced professionals to perform due
diligence work on potential customers for the three months ended October 31,
2022 .
As a percentage of sales, our selling expenses were 2% and 44% of our total
revenues for the three months ended
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General and administrative expenses.Our general and administrative expenses decreased by$0.3 million , or 36%, from$0.9 million in the quarter endedOctober 31, 2021 to$0.6 million in the same period of 2022. Our general and administrative expenses primarily consisted of salary and welfare expenses of management and administrative team, office expenses, operating lease expenses, and professional fees such as audit and legal fees. The decrease was mainly because of disposal of ATIF HK and termination of Qianhai VIE Agreement. As a percentage of sales, our general and administrative expenses were 188% and 170% of our total revenues for the three months endedOctober 31, 2022 and
2021, respectively.
Gain from disposal of subsidiaries. For the three months endedOctober 31, 2022 , the Company reported a gain of$0.05 million from disposal of ATIF GP. For three months endedOctober 31, 2021 , the Company did not record gain or loss from disposal of subsidiaries. Income taxes. We are incorporated in theBritish Virgin Islands . Under the current laws of theBritish Virgin Islands , we are not subject to tax on income or capital gains in theBritish Virgin Islands . Additionally, upon payments of dividends to the shareholders, noBritish Virgin Islands withholding tax will be imposed. ATIF HK is subject toHong Kong profits tax at a rate of 16.5%. However, ATIF HK did not have any assessable profits arising in or derived fromHong Kong for the fiscal three months endedOctober 31, 2021 , and accordingly no provision forHong Kong profits tax had been made in these periods. Huaya was incorporated in the PRC. Under the Income Tax Laws of the PRC, Huaya is subject to income tax at a rate of 10% under the preferential tax treatment to Smaller-scale Taxpayers.ATIF Inc , ATIF GP,ATIF LP , ATIF BD, ATIF BC and ATIF BM were incorporated in theU.S and are subject to federal and state income taxes on its business operations. The federal tax rate is 21% and state tax rate is 8.84%. We also evaluated the impact from the recent tax reforms inthe United States , including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and Health and Economic Recovery Omnibus Emergency Solutions Act ("HERO Act"), which were both passed in 2020, No material impact on the ATIF US is expected based on our analysis. We will continue to monitor the potential impact going forward.
Income tax expense was $nil and $nil for the three months ended
Net loss. As a result of foregoing, net loss was
Capital Commitments and Contingencies
We had no material capital commitments as of
From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Pending Legal Proceeding with
OnMay 14, 2020 , Boustead filed a lawsuit against the us and LGC for breaching the underwriting agreement Boustead had with each of us and LGC, in which Boustead was separately engaged as the exclusive financial advisor to provide financial advisory services to us and LGC. InApril 2020 , we acquired 51.2% equity interest in LGC after LGC terminated its efforts to launch an IPO on its own. Boustead alleged that the acquisition transaction between us and LGC was entered into during the lockup period of the exclusive agreement between Boustead and LGC, and therefore deprived Boustead of compensation that Boustead would otherwise have been entitled to receive under its exclusive agreement with LGC. Therefore, Boustead is attempting to recover from us an amount equal to a percentage of the value of the transaction it conducted with LGC.
Boustead's Complaint alleges four causes of action against us, including breach of contract; breach of the implied covenant of good faith and fair dealing; tortious interference with business relationships and quantum meruit.
OnOctober 6, 2020 ,ATIF filed a motion to dismiss Boustead's Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(5). OnOctober 9, 2020 , theUnited States District Court for the Southern District of New York directed Boustead to respond to the motion or amend its Complaint byNovember 10, 2020 . Boustead opted to amend its complaint and filed the amended complaint onNovember 10, 2020 . Boustead's amended complaint asserts the same four causes of action againstATIF and LGC as its original complaint. We filed another motion to dismiss Boustead's amended complaint onDecember 8, 2020 . 5 OnAugust 25, 2021 , theUnited States District Court for the Southern District of New York grantedATIF's motion to dismiss Boustead's first amended complaint. In its order and opinion, theUnited States District Court for the Southern District of New York allowed Boustead to move for leave to amend its causes of action againstATIF as to breach of contract and tortious interference with business relationships, but not breach of the implied covenant of good faith and fair dealing and quantum meruit. OnNovember 4, 2021 , Boustead filed a motion seeking leave to file a second amended complaint to amend its cause of action for Breach of Contract. The Court granted Boustead's motion for leave and Boustead filed the second amended complaint onDecember 28, 2021 alleging only breach of contract and dropping all other causes of action alleged in the original complaint. OnJanuary 18, 2022 , we filed a motion to dismiss Boustead's second amended complaint. Boustead filed its opposition onFebruary 1, 2022 and we replied onFebruary 8, 2022 . OnJuly 6, 2022 , the Court denied our motion to dismiss the second amended complaint. Thereafter, onAugust 3, 2022 , we filed a motion to compel arbitration of Boustead's claims inCalifornia . Briefing on our motion to compel concluded onAugust 23, 2022 . The Court has yet to rule on that motion. Boustead is also seeking a default judgment against LGC and recently filed an order to show cause for default judgment against LGC. The Court has not ruled on Boustead's request for entry of default judgment against LGC. We are currently evaluating how it will respond to Boustead's motion for leave. In sum, the Boustead litigation is currently in the pleadings stage. Our management believes it is premature to assess and predict the outcome of this pending litigation.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in product development services with us.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, working capital loans from our major shareholders, proceeds from our initial public offering, and equity financing through public offerings of our securities. We plan to support our future operations primarily from cash generated from our operations and cash on hand. Liquidity and Going concern
For the three months endedOctober 31, 2022 and 2021, the Company reported a net loss of approximately$0.1 million and$0.9 million , respectively, and operating cash inflows of approximately$0.4 million and cash outflows of$0.2 million . In assessing the Company's ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. As ofOctober 31, 2022 , the Company had cash of$1.9 million . On the other hand, the Company had current liabilities of$3.3 million . Currently the Company had three service-in-progress agreements, and expected to collect consulting service fees of$2.5 million for the next 12 months. The Company also had$2.7 million receivable from buyers of LGC in connection with the disposal of LGC which will be due in early 2023. Due to the impact of COVID-19, some of our existing customers may experience financial distress or business disruptions, which could lead to potential delay or default on their payments. Any increased difficulty in collecting accounts receivable, or early termination of our existing consulting service agreements due to deterioration in economic conditions could further negatively impact our cash flows. Given these factors, our potential customers' perception and confidence to go public inthe United States has been negatively impacted and our operating revenue and cash flows may continue to underperform in the near terms. Although we had cash of$1.9 million as ofOctober 31, 2022 , given the above mentioned uncertainties, the management believes that the Company will continue as a going concern in the following 12 months from the date the Company's unaudited condensed consolidated financial statements are issued.
Currently, the Company intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from equity financings.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. We have not declared nor paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our restricted net assets as ofOctober 31, 2022 .
We have limited financial obligations denominated in
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The following table sets forth summary of our cash flows for the years
indicated:
For the Three Months Ended
October 31,
2022 2021
(unaudited) (unaudited)
Net cash provided by (used in) operating activities $ 363,709 $ (153,135 )
Net cash (used in) provided by investing activities (242,837 ) 433,770
Net cash provided by financing activities - 68,203
Effect of exchange rate changes on cash - 11,558 Net increase in cash 120,872 360,396 Cash, beginning of period 1,750,137 5,596,740 Cash, end of period$ 1,871,009 $ 5,957,136 Operating Activities
Net cash provided operating activities was$0.4 million in the three months endedOctober 31, 2022 . Net cash used in operating activities was primarily comprised of net loss of$0.1 million , adjusted for amortization of right of use assets of$0.1 million , and net changes in our operating assets and liabilities, principally comprising of an increase of accounts receivable of$0.1 million due from a customer, and an increase of accrued expenses and other current liabilities of$0.4 million . Net cash used in operating activities was$0.2 million in the three months endedOctober 31, 2021 . Net cash used in operating activities was primarily comprised of net loss of$0.9 million , adjusted for loss from investment in trading securities of$0.3 million and net changes in our operating assets and liabilities, principally comprising of an increase of accrued expenses and other current liabilities of$0.4 million . Investing Activities
Net cash used in investing activities was$0.2 million in the three months endedOctober 31, 2022 , primarily used in investment of$0.1 million in one equity investee and loans of$0.1 million to a related party, and investment in trading securities of$44,903 . Net cash provided by investing activities was$0.4 million in the three months endedOctober 31, 2021 , primarily provided by proceeds of$0.3 million from disposal of property and equipment, and proceeds of$0.2 million from redemption of short-term investments. Financing Activities
For the three months ended
Net cash provided by financing activities was$0.1 million in the three months endedOctober 31, 2021 , primarily provided by proceeds of$1.1 million in relation to exercise of warrants by investors who subscribed for ordinary shares offered in registered direct offering which closed inNovember 2020 , and withdrawal of capital of$1.0 million from a subsidiary by certain shareholders. 7
Critical Accounting Estimate
We prepare our unaudited condensed consolidated financial statements in accordance withU.S. GAAP, which requires our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis. Our expectations regarding the future are based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. When reading our unaudited condensed consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions.
Valuation allowance for deferred tax assets
We account for income taxes using the liability method in accordance with ASC
740, Income Taxes ("ASC 740"). Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities using enacted tax rates that
will be in effect when the differences are expected to reverse. Changes in
deferred tax assets and liabilities are recorded in earnings. Deferred tax
assets are reduced by a valuation allowance through a charge to income tax
expense when, in the opinion of management, it is more-likely-than-not that a
portion of or all of the deferred tax assets will not be realized.
We operate through our subsidiaries. The valuation allowance is considered on an
individual entity basis. As of October 31, 2022 and July 31, 2022 , valuation
allowances on deferred tax assets are provided because we believe that it is
more-likely-than-not that certain of the subsidiaries will not be able to
generate sufficient taxable income in the near future, to realize the deferred
tax assets carried-forwards.
As of
Uncertain tax position
In order to assess uncertain tax positions, we apply a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. we recognize interest and penalties, if any, under accrued expenses and other current liabilities on our consolidated balance sheet and under other expenses in its consolidated statement of comprehensive loss. As ofOctober 31, 2022 andJuly 31, 2022 , we did not have any significant unrecognized uncertain tax positions. 8
Fair value of trading securities
We measured our trading securities, which consisted of certain publicly-listed equity securities through various open market transactions, at market value. We reported a loss of$20,004 and$339,374 from investment in trading securities for the three months endedOctober 31, 2022 and 2021.
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