10-K 1 tm2022289d2_10k.htm FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2020
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38426
SENMIAO TECHNOLOGY LIMITED
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
16F, Shihao Square, Middle Jiannan Blvd., High-Tech Zone
Chengdu, Sichuan, People's Republic of China
(Address of principal executive offices)
35-2600898
(I.R.S. Employer
Identification No.)
610000
(Zip Code)
Registrant's telephone number, including area code: +86 28 61554399
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.0001 per share
Trading Symbol
AIHS
Name of each exchange on which registered:
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer x
Accelerated filer ¨
Smaller reporting company x
Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
The registrant’s common stock trades on the Nasdaq Capital Market under the symbol “AIHS.” The aggregate market value of
the common stock held by non-affiliates computed by reference to the price at which registrant’s common stock was last sold as of
September 30, 2019, was approximately $6,302,929. Common stock held by each officer and director and by each person known to
the registrant who owned 10% or more of the outstanding voting and non-voting common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.
As of July 6, 2020, there were 28,839,803 shares of common stock, par value $0.0001 per share, of the registrant issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-K (e.g.,
Part I, Part II, etc.) into which the document is incorporated: (i) any annual report to security holders; (ii) any proxy or information
statement; and (iii) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the “Securities Act”). The
listed documents should be clearly described for identification purposes (e.g. annual reports to security holders for fiscal year ended
December 24, 1980): None
SENMIAO TECHNOLOGY LIMITED
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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Unless otherwise stated in this Annual Report on Form 10-K (this “Report”), references to:
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“China” or the “PRC” refers to the People's Republic of China, excluding, for the purposes of this Report only, Hong
Kong, Macau and Taiwan;
“Didi” refers to Didi Chuxing Technology Co., Ltd., a major transportation network company in China, operating the
largest ride-hailing platform in China;
“Didi drivers” refer to ride-hailing drivers affiliated with Didi;
“Hunan Ruixi” refers to Hunan Ruixi Financial Leasing Co., Ltd., our majority owned subsidiary in China;
“Jinkailong” refers to Sichuan Jinkailong Automobile Leasing Co., Ltd., our variable interest entity;
“Restructuring” refers to the establishment of a wholly foreign owned entity and the execution of a series of agreements
among the Company, Senmiao Consulting, Sichuan Senmiao and the equity holders of Sichuan Senmiao, pursuant to
which we have gained control of and become the primary beneficiary to Sichuan Senmiao;
“RMB” and “Renminbi” refer to the legal currency of China;
“Ruixi Leasing” refers to Hunan Ruixi Automobile Leasing Co., Ltd., the wholly owned subsidiary of Hunan Ruixi;
“Senmiao,” “we,” “us,” “our company” and “our” refer to Senmiao Technology Limited., its subsidiaries and its
consolidated variable interest entities;
“Senmiao Consulting” refers to Sichuan Senmiao Zecheng Business Consulting Co., Ltd., our wholly owned subsidiary
in China;
“Sichuan Senmiao” refers to Sichuan Senmiao Ronglian Technology Co., Ltd., our variable interest entity;
“US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;
“variable interest entities” or “VIEs” refer to Sichuan Senmiao and Jinkailong; and
“Yicheng” refers to Yicheng Financial Leasing Co., Ltd., our wholly owned subsidiary in China.
We use U.S. dollars as reporting currency in our financial statements and in this Report. Monetary assets and liabilities
denominated in Renminbi are translated into U.S. dollars at the rates of exchange as of the balance sheet date, equity accounts are
translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period.
In other parts of this Report, any Renminbi denominated amounts are accompanied by translations. We make no representation that
the Renminbi or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts or prohibits the conversion of Renminbi
into foreign currency and foreign currency into Renminbi for certain types of transactions.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report, including, without limitation, statements under the heading “Management's Discussion and Analysis of Financial
Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the words
“believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continues,”
or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual
results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our
ability to consummate any acquisition or other business combination and any other statements that are not statements of current or
historical facts. These statements are based on management's current expectations, but actual results may differ materially due to
various factors, including, but not limited to:
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our goals and strategies;
our future business development, financial condition and results of operations;
the impact by public health epidemics, including the COVID-19 pandemic as manifested in China, on the industries
we operate in and our business, results of operations and financial condition;
the growth in China of disposable household income and the availability and cost of credit available to finance car
purchases;
the growth of China's ride-hailing, automobile financing and leasing industries;
taxes and other incentives or disincentives related to car purchases and ownership;
fluctuations in the sales and price of new and used cars and consumer acceptance of financing car purchases;
ride-hailing, transportation networks, and other fundamental changes in transportation pattern;
our expectations regarding demand for and market acceptance of our products and services;
our expectations regarding our customer base;
our plans to invest in our automobile transaction and related services business;
our relationships with our business partners;
competition in our industries;
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· macro-economic and political conditions affecting the global economy generally and the market in China
specifically; and
relevant government policies and regulations relating to our industries.
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The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future
developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated or over
which we may not have any control. These forward-looking statements involve a number of risks, uncertainties (some of which are
beyond our control) and other assumptions that may cause actual results or performance to be materially different from those that
are expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those
factors described under the heading “Risk Factors” in this Report and our other periodic reports filed by us with the SEC. Should
one or more of these risks or unanticipated risks or uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation
to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as
may be required under applicable securities laws. These risks and others described in our periodic reports are not exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future
performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which
we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In
addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate
are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of
results or developments in subsequent periods.
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Item 1.
Business
Overview
PART I
Senmiao Technology Limited (the “Company,” “we,” “us,” “our” or similar terminology) is a U.S. holding company
incorporated in the State of Nevada. We currently facilitate automobile transaction and related services focusing on the ride-hailing
industry in People’s Republic of China (the “PRC” or “China”) through our majority owned subsidiary, Hunan Ruixi Financial
Leasing Co., Ltd., a PRC limited liability company (“Hunan Ruixi”), its wholly owned subsidiary, Hunan Ruixi Automobile
Leasing Co., Ltd. (“Ruixi Leasing”) and variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd.
(“Jinkailong”) (the “Automobile Transaction and Related Services”).
Our Automobile Transaction and Related Services are mainly comprised of (i) facilitation of automobile transaction and
financing where we connect the prospective ride-hailing drivers to financial institutions to buy, or get financing on the purchase of,
cars to be used to provide ride-hailing services (the “auto financing and transaction facilitation”); (ii) automobile sales where we
procure new cars from dealerships and sell them to our customers in the automobile financing facilitation business (the “auto
sales”); (iii) automobile operating lease where we provide car rental services to individual customers to meet their personal needs
with lease term no more than twelve months (the “auto leasing”); and (iv) automobile financing where we provide our customers
with auto finance solutions through financing leases (the “auto financing”).
We previously operated an online peer-to-peer (“P2P”) lending platform through Sichuan Senmiao Ronglian Technology Co.,
Ltd., another VIE of our company (“Sichuan Senmiao”), and in connection therewith facilitated loan transactions between Chinese
investors and individual and small-to-medium-sized enterprise (“SME”) borrowers (our “Online Lending Services”). Our Online
Lending Services were discontinued in October 2019 as we determined that the continued operation of our online lending business
was not viable given that the online peer-to-peer lending industry in China had been experiencing a continuous decline in total
transaction volume and facing an increasingly tighter regulatory environment.
Since we ceased our Online Lending Services, we have reallocated our resources to focus on our Automobile Transaction and
Related Services segment of our business. During the year ended March 31, 2020, we generated revenue of $15.6 million from our
Automobile Transaction and Related Services and $0.11 million from our Online Lending Services.
Our executive offices are located in Chengdu City, Sichuan Province, China. Substantially all of our operations are conducted
in China.
Our Corporate History
We were incorporated in the State of Nevada on June 8, 2017. We established a wholly owned subsidiary, Sichuan Senmiao
Zecheng Business Consulting Co., Ltd. (“Senmiao Consulting”), in China in July 2017. As of the date of this Report, Senmiao
Consulting provides services to Sichuan Senmiao, one of our VIEs, pursuant to the VIE Agreements as defined below.
Sichuan Senmiao was established in China in June 2014. We have entered into a series of contractual arrangements (the “VIE
Agreements”) with Sichuan Senmiao and each of its equity holders through Senmiao Consulting to obtain control and become the
primary beneficiary of Sichuan Senmiao. The contractual arrangements have been in place since the establishment of Senmiao
Consulting (the “Restructuring”).
On September 25, 2016, Sichuan Senmiao acquired a P2P platform (including website, internet content provider (“ICP”)
registration, operating systems, servers, management system, employees and users) from Sichuan Chenghexin Investment and
Asset Management Co., Ltd. (“Chenghexin”), which had established and operated the platform for two years prior to our
acquisition (the “Acquisition”), for a total cash consideration of RMB69,690,000 (approximately US$10.1 million).
Prior to the Acquisition, Sichuan Senmiao was a holding company that owned a 60% equity interest in an equity investment
fund management company. Sichuan Senmiao sold its 60% equity interest for a cash consideration of RMB 60 million
(approximately US$8.9 million) immediately following the Acquisition, in order to focus on the online marketplace lending
business.
On November 21, 2018, we entered into an Investment and Equity Transfer Agreement (the “Investment Agreement”) with
Hunan Ruixi and all the shareholders of Hunan Ruixi, pursuant to which we acquired an aggregate of 60% of the equity interest of
Hunan Ruixi for no consideration. We closed the acquisition on November 22, 2018 and agreed to make a cash contribution of
$6,000,000 to Hunan Ruixi, representing 60% of its registered capital, in accordance with the Investment Agreement. We have
made the full cash contributions (in the aggregate amount of $6,000,000) to Hunan Ruixi.
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Hunan Ruixi has a wholly owned subsidiary, Ruixi Leasing, a PRC limited liability company formed in April 2018 with a
registered capital of RMB 10 million (approximately US$1.5 million). Ruixi Leasing is licensed to engage in automobile sales and
leasing and has not commenced operations as of the date of this Report.
Hunan Ruixi also owns 35% equity interest in Jinkailong and control the remaining 65% equity interest through two voting
agreements with another four shareholders of Jinkailong. Jinkailong is an automobile transaction and related services company in
Chengdu City, Sichuan Province, China, which primarily targets drivers in the ride-hailing service sector and facilitates automobile
sales and financing transactions for its clients and provides relevant after-transaction services to them.
In May 2019, we formed Yicheng Financial Leasing Co., Ltd. (“Yicheng”), a PRC limited liability company and wholly
owned subsidiary of our company, with a registered capital of $50 million in Chengdu City, Sichuan Province, China. Yicheng
obtained its business licenses for automobiles sale and financial leasing and has engaged in the sales of automobiles since June
2019. As of the date of this Report, we have made contributions in the aggregate amount of $4,250,000 to Yicheng.
Our Corporate Structure
The following diagram illustrates our corporate structure, including our subsidiaries and our VIEs as of the date of this Report:
VIE Agreements with Sichuan Senmiao
According to the VIE Agreements, Sichuan Senmiao is obligated to pay Senmiao Consulting service fees equal to its net
income. Sichuan Senmiao’s entire operations are controlled by the Company. There are no unrecognized revenue-producing assets
that are held by Sichuan Senmiao.
Although we discontinued Sichuan Senmiao’s Online Lending Services commencing in October 2019, the VIE Agreements
remain in place, and such agreements are described in detail below:
Equity Interest Pledge Agreement
Senmiao Consulting, Sichuan Senmiao and all the shareholders of Sichuan Senmiao (the “Sichuan Senmiao Shareholders”)
entered into an Equity Interest Pledge Agreement, pursuant to which the Sichuan Senmiao Shareholders pledged all of their equity
interest in Sichuan Senmiao to Senmiao Consulting in order to guarantee the performance of Sichuan Senmiao’s obligations under
the Exclusive Business Cooperation Agreement as described below. During the term of the pledge, Senmiao Consulting is entitled
to receive any dividends declared on the pledged equity interest of Sichuan Senmiao. The Equity Interest Pledge Agreement
terminates when all contractual obligations under the Exclusive Business Cooperation Agreement have been fully performed.
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Exclusive Business Cooperation Agreement
Pursuant to an Exclusive Business Cooperation Agreement entered by and among the Company, WFOE, Sichuan Senmiao and
each of Sichuan Senmiao Shareholders, Senmiao Consulting will provide Sichuan Senmiao with complete technical support,
business support and related consulting services for 10 years ended September 18, 2027. The Sichuan Senmiao Shareholders and
Sichuan Senmiao will not engage any third party for the same or similar consultation services without Senmiao Consulting’s prior
consent. Further, the Sichuan Senmiao Shareholders are entitled to receive an aggregate of 20,250,000 shares of common stock of
the Company under the Exclusive Business Cooperation Agreement. Senmiao Consulting may terminate the Exclusive Business
Cooperation Agreement at any time upon prior written notice to Sichuan Senmiao and the Sichuan Senmiao Shareholders.
Exclusive Option Agreement
Pursuant to an Exclusive Option Agreement entered by and among Senmiao Consulting, Sichuan Senmiao and the Sichuan
Senmiao Shareholders, the Sichuan Senmiao Shareholders have granted Senmiao Consulting an exclusive option to purchase at any
time their equity interests in Sichuan Senmiao at a purchase price equal to the capital paid by the Sichuan Senmiao Shareholders in
whole or at a pro-rated price for any partial purchase. The Exclusive Option Agreement terminates after 10 years ending September
18, 2027 but can be renewed by Senmiao Consulting at its discretion.
Powers of Attorney
Each of the Sichuan Senmiao Shareholders has signed a power of attorney (the “Power of Attorney”), pursuant to which, each
of the Sichuan Senmiao Shareholders has authorized Senmiao Consulting to act as his or her exclusive agent and attorney with
respect to all rights of such individual as a shareholder of Sichuan Senmiao, including but not limited to: (a) attending shareholders’
meetings; (b) exercising all the shareholder’s rights that shareholders are entitled to under PRC laws and the Articles of Association
of Sichuan Senmiao, including but not limited to voting, sale, transfer, pledge and disposition of the equity interests of Sichuan
Senmiao; and (c) designating and appointing the legal representative, chairperson, director, supervisor, chief executive officer and
other senior management members of Sichuan Senmiao. The Power of Attorney has the same term as the Exclusive Option
Agreement.
Timely Report Agreement
The Company and Sichuan Senmiao entered into a Timely Report Agreement, pursuant to which, Sichuan Senmiao agrees to
make its officers and directors available to the Company and promptly provide all information required by the Company so that the
Company can make necessary filings to the U.S. Securities and Exchange Commission (“SEC”) and other regulatory reports in a
timely fashion.
The Company has concluded that it should consolidate the financial statements with Sichuan Senmiao because it is Sichuan
Senmiao’s primary beneficiary based on the Power of Attorney from the Sichuan Senmiao Shareholders, who assigned their rights
as shareholders of Sichuan Senmiao to Senmiao Consulting, the Company’s wholly-owned subsidiary. These rights include, but are
not limited to, attending shareholders’ meetings, voting on matters submitted for shareholder approval and appointing legal
representatives, directors, supervisors and senior management of Sichuan Senmiao. As a result, the Company, through Senmiao
Consulting, is deemed to hold all of the voting equity interests in Sichuan Senmiao. Pursuant to Exclusive Business Cooperation
Agreement, Senmiao Consulting shall provide complete technical support, business support and related consulting services for 10
years. Though not explicit in the VIE Agreements, the Company may provide financial support to Sichuan Senmiao to meet its
working capital requirements and capitalization purposes. The terms of the VIE Agreements and the Company’s plan to provide
financial support to Sichuan Senmiao were considered in determining that the Company is the primary beneficiary of Sichuan
Senmiao. Accordingly, the financial statements of Sichuan Senmiao are consolidated in the Company’s consolidated financial
statements.
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Voting Agreement with Jinkailong’s Other Shareholders
In addition to obtaining a 35% equity interest in Jinkailong, Hunan Ruixi, Jinkailong and another four shareholders of
Jinkailong holding an aggregate of 65% equity interests entered into two voting agreements on August 26, 2018 and February 13,
2020, respectively (as amended, collectively, the “Voting Agreement”), pursuant to which all other Jinkailong’s shareholders will
vote in concert with Hunan Ruixi on numerous corporate matters including all fundamental corporate transactions in the event of a
disagreement, ending on August 25, 2038.
We have consolidated the financial statements of Jinkailong into our financial statements because we are Jinkailong’s primary
beneficiary based on the Voting Agreement. Though not explicit in the business cooperation agreement by and among Jinkailong,
Hunan Ruixi, and other shareholders of Hunan Ruixi, we may provide financial support to Jinkailong to meet its working capital
requirements and required capitalization purposes. The terms of the Voting Agreement and our plan to provide financial support to
Jinkailong were considered in determining that we are the primary beneficiary of Jinkailong. Accordingly, the financial statements
of Jinkailong are consolidated in our consolidated financial statements. Although we are able to consolidate the financial statements
of Jinkailong, we are only entitled to distribution of dividends and assets based on our ownership of 35% of the equity interest of
Jinkailong.
Recent Developments
June 2019 Registered Offering
On June 17, 2019, we entered into a securities purchase agreement with certain accredited investors (the “Investors”) in
connection with a registered direct public offering (the “June 2019 Offering”) of 1,781,361 shares of our common stock at a price
of $3.38 per share (the “Share Purchase Price”) for a purchase price of approximately $6,000,000. On June 21, 2019, we closed the
June 2019 Offering. In connection with the June 2019 Offering, we also issued to the Investors for no consideration, Series A
common stock purchase warrants (the “Series A Warrants”) and for nominal consideration, pre-funded Series B common stock
purchase warrants (the “Series B Warrants”; and together with the Series A Warrants, the “Warrants”).
The shares and warrants sold in the June 2019 Offering were issued pursuant to a prospectus supplement filed with the SEC
on June 20, 2019 to our effective shelf registration statement on Form S-3 (Registration No. 333-230397), which was initially filed
with the SEC on March 19, 2019, and was declared effective on April 15, 2019.
We used all of the proceeds for general corporate purposes, including automobile purchases, the costs of providing leasing and
other automobile transaction services, including financial leasing, costs of developing other types of financing businesses,
investments in other entities, costs of technology development, costs of new hires, capital expenditures, working capital and the
costs of operating as a public company.
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FT Global Capital, Inc. (“FT Global”) acted as the exclusive placement agent for the June 2019 Offering. Pursuant to an
engagement letter between our company and FT Global, FT Global received cash compensation of approximately $480,000 and
warrants which are exercisable into 142,509 shares of common stock at an exercise price of $3.38 per share and will expire on the
four year anniversary of their issuance.
Coronavirus (COVID-19) Update
Beginning in late 2019, an outbreak of a novel strain of coronavirus and related respiratory illness (which we refer to as
COVID-19) was first identified in China and has since spread rapidly globally. The COVID-19 pandemic has resulted in
quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and globally. In March 2020, the
World Health Organization (the “WHO”) declared COVID-19 a pandemic. Given the rapidly expanding nature of the COVID-19
pandemic, and because all of our business operations and our workforce are concentrated in China, our business, results of
operations and financial condition have been and will continue to be adversely affected. The extent of the potential going forward
impact to our results of operations will also depend on future developments and new information that may emerge regarding the
duration and severity of the COVID-19 pandemic (or any recurrences of the pandemic, as have been experienced in China and
elsewhere) and the actions taken by government authorities and other entities to contain COVID-19 or mitigate its impact, almost
all of which are beyond our control.
The impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the
following (for more background information on our business generally, see “Our Automobile Transaction and Related Services”
below):
● We temporally closed our corporate headquarters and other offices to adhere to the lockdown policy in China from
January 19 to February 23, 2020, as required by relevant PRC regulatory authorities. A large number of our employees
were in mandatory self-quarantine and our entire business operations were restricted during such period. We reopened our
offices in both Chengdu and Changsha on February 24, 2020, but only resumed full operations beginning near the end of
March 2020.
● Due to the lockdown policy and travel restrictions, the demand for ride-hailing services has been materially and adversely
impacted in our areas of operation in China, which reduced the demand of our Automobile Transaction and Related
Services. As a result, our revenue and income for the three months ended March 31, 2020 has been negatively impacted to
a significant extent.
● Our ability to collect the monthly installment payments we receive from ride-hailing drivers during February and March
2020 was adversely impacted. As of March 31, 2020, approximately 840 drivers exited the online ride-hailing business
and tendered their automobiles to us for sublease or sales, while approximately 380 drivers postponed their monthly
installment payments. As a result, we recorded bad debt expenses of $3,406,215. This situation may worsen if the COVID-
19 pandemic reoccurs in China. We will continue to closely monitor our collections throughout 2020.
● Our daily cash flow has also been adversely impacted as a result of the unsatisfied collection from the online ride-hailing
drivers and our potential guarantee expenditure pursuant to the financial leasing agreements or the loan agreements (the
“Financing Agreements”) we guaranteed. Our cash flow will continue to be adversely impacted if the online ride-hailing
market in China recovers slower than anticipated. This compromised cash flow situation is likely to continue during our
first and second quarters of the fiscal year ending March 31, 2021 and may worsen if the COVID-19 pandemic reoccurs.
We cannot foresee whether the outbreak of COVID-19 will continue to be effectively contained in China, nor can we predict
the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business
operations and financial condition may continue to be materially and adversely affected as a result of the deteriorating market
outlook, the slowdown in regional and national economic growth in China, weakened liquidity and financial conditions of our
customers or other factors that we may not be able to foresee. Any of these factors and other factors beyond our control could have
an adverse effect on our overall business environment, cause uncertainties in the regions in China where we conduct business,
cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition
and results of operations.
JKL Investment Agreement
On July 4, 2020, Hunan Ruixi, Jinkailong and the other shareholders of Jinkailong entered into an agreement (the “JKL
Investment Agreement”) with Hongyi Industrial Group Co., Ltd. (“Hongyi”), an affiliate of the largest shareholder of Chengdu
Road & Bridge Engineering Co., Ltd., a construction engineering company publicly listed on the A-Share market in China.
Pursuant to the JKL Investment Agreement, Jinkailong agreed to issue and Hongyi agreed to subscribe for a 27.03% equity
interest in Jinkailong in consideration of RMB50 million (approximately $7.0 million) (the “Investment”). The Investment will be
made in two payments: (i) the first payment of RMB10 million (approximately $1.4 million) is due no later than September 30,
2020 and (ii) the remaining RMB40 million (approximately $5.6 million) is due within 30 days after the record-filing of the
Investment has been made with the local PRC government and the other shareholders of Jinkailong having made their respective
capital contributions in full in cash, but no later than December 31, 2020. As a result, Hunan Ruixi will be required to pay RMB3.5
million (approximately $0.5 million) to Jinkailong as a capital contribution. Upon the full payment of the consideration, the
Investment will be deemed to be closed (the “Closing”).
9
As a result of the Investment, the original shareholders’ ownership percentage will be proportionally diluted but Hunan Ruixi
will continue to control Jinkailong pursuant to the Voting Agreements.
The JKL Investment Agreement sets performance targets for Jinkailong during a three-year performance commitment period
following the Closing. During the performance commitment period, Jinkailong has agreed, and its original shareholders have
agreed to cause Jinkailong, to seek to achieve annual revenue for Jinkailong of no less than RMB52 million (approximately $7.4
million), RMB90 million (approximately $12.7 million) and RMB110 million (approximately $15.6 million), respectively, and
annual net profit of no less than RMB10 million (approximately $1.4 million), RMB20 million (approximately $2.8 million) and
RMB25 million (approximately $3.5 million), respectively, during the first, second and third year of the performance commitment
period.
The JKL Investment Agreement also provides Hongyi certain shareholder rights, including, but not limited to, the right to
receive any undistributed dividends, a right of first refusal for any equity transfer from the other shareholders of Jinkailong, a tag-
along right during the performance commitment period, anti-dilution rights, redemption rights, subscription rights and priority in
liquidation or dissolution of Jinkailong. Specifically, pursuant to the redemption right provision in the JKL Investment Agreement,
in the event that Jinkailong (i) fails to become public through an IPO for a valuation of no less than RMB350 million
(approximately $49.5 million) or merge with a public company for a valuation of no less than RMB300 million (approximately
$42.5 million) within the six months following the performance commitment period, (ii) fails to achieve an accumulated net profit
of RMB24 million (approximately $3.4 million) for the first two years of the performance commitment period or a net profit of
RMB20 million (approximately $2.9 million) for the third year of the performance commitment period, or (iii) has any material and
adverse change to its core business, including but not limited to being included in the list of dishonest persons and loss of over one
third of its online ride-hailing taxi operating licenses, as well as bankruptcy, liquidation or cessation of operations, Hongyi shall
have the right to require certain shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in
Jinkailong. Based on a repurchase formula provided for in the JKL Investment Agreement, the maximum repurchase amount that
Hunan Ruixi would be subject to is RMB28,320,000 (approximately $4.0 million).
Under the JKL Investment Agreement, the other shareholders of Jinkailong, except one individual shareholder, are prohibited
from disposing of their equity interest in Jinkailong until six months after the performance commitment period. In addition, all
parties have acknowledged and agreed to comply with relevant U.S. securities regulations on confidentiality of material nonpublic
information regarding the Company that they may receive on account of their ownership of Jinkailong.
The principal use of proceeds from the Investment will be to support Jinkailong’s automobile purchase and finance business,
provided that Hongyi’s prior consent is required if the proceeds are to be used for any automobile business investment that exceeds
RMB1 million (approximately $0.7 million) or for any non-automobile business investment (regardless of the amount). Jinkailong
plans to use the proceeds from the Investment to expand its auto business in Chengdu, China. Specifically, Jinkailong plans to
purchase more automobiles for its car rental business and open additional retail stores to provide auto financing and transaction
facilitation services to ride-hailing drivers in Chengdu.
Our Automobile Transaction and Related Services
We started our auto financing and transaction facilitation business in November 2018. The auto sales business began in
January 2019, and auto leasing business and auto-financing business in March 2019. As of March 31, 2020, we have provided auto
financing and transaction facilitation services for an aggregate of 1,626 automobiles with a total value of approximately $23.2
million, sold an aggregate of 1,388 automobiles with a total value of approximately $13.4 million and delivered 557 automobiles
under operating leases and 97 automobiles under financing leases, respectively, to customers, the vast majority of whom are ride-
hailing drivers. During the fiscal year ended March 31, 2020, our auto financing and transaction facilitation business, auto sales
business and operating leases accounted for 12.3%, 73.7% and 8.3% % of our total revenue from our Automobile Transaction and
Related Services, respectively, for the year ended March 31, 2020 while our auto financial leasing business generated about 1.1% of
our revenue from our Automobile Transaction and Related Services, respectively.
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Auto Financing and Transaction Facilitation
Leveraging the growing popularity of ride-hailing services in China, we facilitate the auto financing transactions between the
ride-hailing drivers and financial institutions. As of the date of this Report, over 95% of the ride-hailing drivers we service are
affiliated Didi Chuxing Technology Co., Ltd., a major transportation company operating the largest ride-hailing platform in China
(“Didi”). Our services simplify the transaction process for both the Didi drivers and the financial institutions. Specifically, our
facilitation services include purchase services and management and guarantee services.
Our purchase services cover a wide range of services provided to Didi drivers during the process of an automobile financing
transaction, including but not limited to (i) credit assessment, (ii) preparation of financing application materials, (iii) assistance with
closing of financing transactions, (iv) license and plate registration, (v) payment of taxes and fees, (vi) purchase of insurance, (vii)
installment of GPS devices, (viii) ride-hailing driver qualification and (ix) other administrative procedures. Our service fees are
based on the sales price of the automobiles and relevant services provided. Our service fees for automobiles purchase services
ranged from $89 to $3,600 per vehicle during the year ended March 31, 2020.
Our management and guarantee services are provided to Didi drivers after the delivery of automobiles, covering (i)
management services including, without limitation, ride-hailing driver training, assisting with purchase of insurances, insurance
claims and after-sale automobile services, handling traffic violations and other consulting services; and (ii) guarantee services for
the obligations of Didi drivers under their financing arrangement with financial institutions. As of March 31, 2020, the maximum
contingent liabilities we would be exposed to was approximately $18.6 million (including approximately $497,400 related to the
discontinued P2P business), assuming all the automobile purchasers were in default, which may cause an increase in guarantee
expense and cash outflow in financing activities. As of March 31, 2020, approximately $1.4million, including interests of $84,000,
due to financial institutions, of all the automobile purchases we serviced were past due because of the COVID-19 epidemic in
China. Our management and guarantee fees are based on the costs of our services and the results of our credit assessment of the
automobile purchasers. Our fees average approximately $583 per automobile for the affiliation period and are paid by the Didi
drivers on a monthly basis during the affiliation period during the year ended March 31, 2020.
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Transaction Process
The following chart illustrates our typical process of auto financing facilitation.
Financing Partners
We have established collaborations with a number of financial institutions in China, including commercial banks, financial
leasing companies as well as online peer-to-peer lending platforms, which finance the purchase of automobiles by our automobile
purchasers through the Financing Agreements. Under our arrangements with our financing partners, we refer prospective
automobile purchasers and are generally responsible for collecting information on such purchasers, conducting credit assessment of
them, registration of the cars as collateral with government and providing guarantee on their payments under the Financing
Agreements. To secure the interests of the financing partners, each automobile is mortgaged in favor of the financing partner which
is registered with relevant local government agencies.
We typically prepay the purchase price and expenses on behalf of the automobile purchasers when we provide purchase
services and collect all the advance payment and relevant services fees from the proceeds disbursed by the financial institutions
upon the closing of the financing and/or when the monthly installment payment made by automobile purchasers during the term of
the Financing Agreements. We are required under our arrangements with the financing partners to make payments on behalf of the
automobile purchasers in the event of default. As of March 31, 2020, the outstanding payments we made on behalf of
approximately 146 defaulted purchasers who remained in the online ride-hailing business even after the COVID-19 epidemic were
approximately $109,000, all of which were due within two months from the default date. For the year ended March 31, 2020, we
recognized estimated provisions loss of approximately $225,000 for the guarantee services we provided to the online ride-hailing
drivers who exited the industry. After we make payments, we request the defaulted purchasers to pay us back. If we are unable to
recover the payments within a certain period of time, we commence a collection process.
During the year ended March 31, 2020, our top three financing partners were Haitong Unitrust International Leasing Co., Ltd.,
Fengbang Financial Leasing (Shanghai) Co., Ltd. and Cherry HuiYin Motor Finance Service Co., Ltd., which collectively financed
an aggregate of 1,118 cars with a total value of approximately $12.1 million, representing approximately 83.8% of the transaction
value financed by our financing partners as of March 31, 2020. All of these financing partners are unaffiliated third parties.
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Partnership with Didi
To capitalize on the large and rapidly expanding fleet of Didi, we have established collaboration with Didi through both
Hunan Ruixi and Jinkailong. Under Jinkailong’s consulting service agreement with Didi, which was renewed in March 2019,
Jinkailong provides automobile financing and leasing solutions and consulting services to Didi drivers in Chengdu City, Sichuan
Province. Hunan Ruixi also entered into cooperation agreements with Didi in December 2018 (which was renewed in December
2019) pursuant to which Hunan Ruixi agreed to source automobiles for and provide automobile financing/leasing solutions to Didi
drivers in Changsha City, Hunan Province. Our relationship with Didi is crucial to our business as it enables us to attract more
automobile purchasers who are interested in working as Didi drivers and becoming affiliated with us.
Auto Transaction Facilitation Services
Through Hunan Ruixi and Jinkailong, we also facilitate automobile purchase transactions between dealers, our cooperative
third party sales teams and the automobile purchasers, primarily Didi drivers. We provide sales venue and vehicle sourcing for the
transactions. We charge third party sales teams and automobile purchasers a facilitation fee based on the type of vehicle and
negotiation with each dealer, third party sales team and purchaser, generally no more than $2,000 per automobile from third party
sales team and $2,160 from the purchaser.
We also provide a series of services for the purchasers throughout the automobile purchase transaction process, including
registration of license plates and permits from the relevant government authorities, insurance facilitation and assistance with
applications to financial institutions to finance the purchase. Our service fees are based on the sales price of the automobiles and
relevant services provided. Our service fees ranged from approximately $89 to $3,600 per vehicle. As of March 31, 2020, we
provided facilitation services for an aggregate of 1,626 automobiles. During the year ended March 31, 2020, we provided
facilitation services for 1,315 automobiles.
Auto Sales
We are also engaged in the sales of automobiles through Hunan Ruixi and Yicheng. As we are targeting to sell cars to Didi
drivers, Hunan Ruixi and Yicheng procure new cars of model and specification acceptable to Didi. Hunan Ruixi and Yicheng
typically sets up periodic procurement plans based on the estimated transaction volume of Hunan Ruixi and Jinkailong and buy in
bulk to obtain better pricing. Hunan Ruixi and Yicheng will then mark up the price and sell the cars to the ride-hailing drivers who
are typically customers in our auto financing facilitation services. All the new cars Ruixi and Yicheng procured are parked in our
warehouses in Chengdu or Changsha City.
Substantially all of the cars are sold through a financing arrangement, under which we will receive a majority of the purchase
price (ranging from approximately 58% to 100%) from the financing proceeds and the remainder from monthly installment
payments of the Didi drivers.
Auto Leasing
We have also generated revenue since March 2019 from operating lease services, where we lease our own automobiles or
sublease automobiles from certain online ride-hailing drivers we served before to other individuals, including new online ride-
hailing drivers. With the authorization from ride-hailing drivers who exited the online ride-hailing business, we sublease their
automobiles to new ride-hailing drivers for a lease term no more than twelve months. Due to the intense competition and the
COVID-19 pandemic, during the year ended March 31, 2020, approximately 840 online ride-hailing drivers (primarily in Chengdu
City) exited the online ride-hailing business. We are authorized to sublease or sell these drivers’ automobiles in order to offset the
repayments those drivers owed to us and the financial institutions. We subleased approximately 540 automobiles from these ride-
hailing drivers and 19 of our own automobiles with an average monthly rental income of $475 per automobile, resulting in a rental
income of $1,303,639 for the year ended March 31, 2020.
Auto Financing
We began offering auto financing services in March 2019. In our self-operated financing, we act as a lessor and a customer
(i.e., Didi driver) acts as a lessee. We offer to the lessee a selection of automobiles that were purchased by us in advance. The lessee
will choose the desirable automobile to be purchased and enter into a financing lease with us. During the term of the financing
lease, the lessee will have use rights with respect to the automobile. We will obtain title to the automobile upfront and retain such
title during the term of the financing lease, as lessor. At the end of the lease term, the lessee will pay a minimal price and obtain full
title to the automobile after the financing lease is repaid in full. In connection with the financing lease, the lessee will enter into a
service agreement with us. Pursuant to this service agreement, the lessee will pay us a service fee ranging from approximately $790
to approximately $1,900 for our services, which covers, among others, payment of purchase taxes and insurance, license and plate
registration, and training of ride-hailing drivers.
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As of March 31, 2020, we have financed the purchase of 97 automobiles with an average financing amount per customer of
approximately $15,000 and lease terms ranging from 36 to 48 months. The interest rates of our auto financing are fixed and range
from 5.5 % to 16.0 % per annum. No down payment is required under our financing leases.
Customers
The significant majority of our customers are Didi drivers. Due to the complexity and difficulty of obtaining registration of
various licenses required for driving a ride-hailing car, our customers choose to become affiliated with us who offer them a
simplified and smooth process to become qualified. Our automobile purchasers, who are mostly Didi drivers, typically become
affiliated with us through affiliation agreements pursuant to which we, as a qualified management company, provide them post-
transaction management services during the affiliation period, which is usually the same as the term of the Financing Agreements.
We acquire customers for our Automobile Transaction and Related Services through the network of third-party sales teams,
referral from Didi and our own efforts including online advertising and billboard advertising. We also send out fliers and participate
in trade shows to advertise our services. Since our acquisition of Hunan Ruixi through the date of this Report, we have serviced
approximately 3,200 customers, including approximately 3,100 Didi drivers.
Risk Management
To mitigate risk associate with our Automobile Transaction and Related Services, we conduct an assessment and
evaluation of prospective Didi drivers or leasees. In our auto financing facilitation business, assessment on a prospective buyer
typically involves three parties: financial institutions, Didi and us. As the financial institution makes the ultimate decision on the
financing application and the financing terms, and Didi determines the outcome of the driver qualification process, we do not
maintain our own a credit grading system. We believe our manual review and verification process is sufficient for the requirements
of our current operations.
We conduct an initial screening when we receive an application from a prospective Didi driver based on credit reports from
People’s Bank of China (“PBOC”) and third party credit rating companies, and personal information including residence, ethnicity
group, driving history and involvement in legal proceeding. An automobile buyer must meet the following preliminary criteria:
·
·
·
·
·
·
·
be between 22-60 years old;
reside in the mainland of China;
have a driving history of at least three years;
not be subject to on-going legal proceedings or enforcement;
not be listed on a national delinquent debtor’s list;
have a demonstrated intention to purchase an automobile; and
the value of purchased automobile matches the income of the candidate.
An automobile leasee must meet the following preliminary criteria:
·
·
·
·
·
be between 22-60 years old;
reside in the mainland of China;
have a driving history of at least three years;
have a demonstrated intention to lease an automobile; and
the value of lease obligations matches the income of the candidate.
Additionally, we arrange a simple in-person interview with the applicant where we gather information on marital/family
status, income, assets, borrowing history and default history, if any. This interview is typically conducted by our risk management
staff who will verify the accuracy of information on the prospective driver by cross-checking information provided by the applicant
with other sources. We will also assess the prospective driver’s potential repayment ability.
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Applicants with any of the follow attributes will be rejected for:
·
·
·
·
engaging in illegal or criminal activities;
involvement in pornography, gambling, drug dealing and gangster activities and experiences;
engaging in usury lending; or
providing fraudulent information.
Once we have completed our risk assessments on the applicant, we recommend qualified applicants to the financial institution
who proactively reviews and makes final credit decisions on the applications we recommend. Specifically, the financial institution
is ultimately responsible for, reviewing applications and verifying applicants’ personal information collected by us through various
procedures.
We also share the driver’s personal information with Didi, who requires all the drivers to be qualified under their own standard
and conduct a background check on each driver applicant. Under Didi’s standards, a qualified driver must meet certain minimum
criteria:
·
·
·
·
·
·
be 21 to 60 years old for males; 21 to 55 years old for females;
have a driving history of at least three years with driving license of (i) A1, A2, A3, B1, B2, C1 and C2 (referring to the
different classes of driver’s license in China based on vehicle types), or (ii) C5 with an online reservation taxi driver's
license and meeting the physical requirements for a driver's license above C2;
must not have committed any hit-and-run accidents;
have no record of dangerous driving, drug use, driving under alcoholic influence, and violent crime;
have no traffic violation of 12 demerit points or more in any year of the past three years; and
have not been investigated or disciplined for unlawfully engaging in taxi services or other passenger transportation
operations in Chengdu City within the past five years.
Our assessment of prospective lessees in our auto financing business is substantially similar.
Post-Financing Services
Our post financing management department is in charge of monitoring and managing monthly payments by the drivers. We
send text messages and make phone calls as reminders three business days prior to the payment due date. If a driver fails to pay on
the due day, we will pay the financial institution on behalf of the defaulted automobile purchaser but continue to contact the
automobile purchaser and request for payments. If the delinquency continues for more than 15 days, we then seek to repossess the
car. Every car purchased through us has a GPS device installed, which helps us locate the car. After a car is repossessed, we store it
in a warehouse and later dispose of the automobile in accordance with law and relevant financing documents. If we are unable to
repossess collateral from a delinquent automobile purchaser, we may commence a lawsuit against such purchaser.
Competition
The automobile financing industry in China is large and evolving. According to Didi, there were approximately 120
automobile financing and leasing companies that have established business relationships with Didi in Chengdu City as of June
2020. We face significant competition primarily from companies that operate in Chengdu City, such as Chengdu Jingtengjian
Business Consulting Co., Ltd., FAW Huidi Automotive Technology Co., Ltd. and Chengdu Yudeng Automobile Service Co., Ltd.
As of June 2020, there were approximately 80 automobile financing and leasing companies that have established business
relationships with Didi in Changsha City and are engaged in the same business as ours. We face significant competition primarily
from companies that operate in Changsha City, such as Hunan Zuxing Tianxia Automobile Leasing Co., Ltd., and Hunan Qiguang
Automobile Service Co., Ltd.
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Regulations
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China or
the rights of our stockholders to receive dividends and other distributions from us.
Regulations Related to Ride-Hailing Services
In order to manage the rapidly growing ride-hailing service market and control relevant risks, on July 27, 2016, seven
ministries and commissions, including the Ministry of Transport, jointly promulgated the Interim Measures for the Administration
of Online Taxi Booking Business Operations and Services and amended on December 28, 2019, which legalizes ride-hailing
services such as Didi and requires the ride-hailing services to meet the requirements set out by the Interim Measures and obtain
requisite service licenses.
On November 5, 2016, the Municipal Communications Commission of Chengdu City and a number of municipal departments
jointly issued the Implementation Rules for the Administration of Taxi Management Services for Chengdu Network. On August 10,
2017, the Transportation Commission of Chengdu further issued guidelines on compliance requirements for ride-hailing businesses,
including Working Process for the Online Appointment of Taxi Drivers Qualification Examination and Issuance and Online
Appointment Taxi Transportation Certificate Issuance Process. According to these regulations and guidelines, three licenses or
certificates are required for operating the ride-hailing business: (1) the ride-hailing service platform such as Didi is required to
obtain the online reservation taxi operating license; (2) the automobiles used for online ride-hailing are required to obtain the online
reservation taxi transport certificate (the “automobile certificate”); (3) the drivers are required obtain the online reservation taxi
driver's license (the “driver’s license”).
On July 23, 2018, the General Office of Changsha Municipal People's Government issued the “Detailed Rules for the
Administration of Online Booking Taxi Management Services for Changsha.” According to those regulations and guidelines,
licenses, which are online reservation taxi operating license, automobile certificate and driver’s licenses, are required to operate a
ride-hailing business in Changsha, and automobiles used for online ride-hailing services are required to meet certain standards,
including that the sales price (including taxes) of the qualified automobile is over RMB120,000.
Without a requisite automobile certificate or driver’s license, ride-hailing drivers may be suspended from providing ride-
hailing services, their illegal income may be confiscated and they may be subject to fines amounting to RMB5,000 (US$730) to
RMB30,000 (US$4,370) for each offense.
Regulations Related to Financial Leasing
In September 2013, the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) issued the Administration
Measures of Supervision on Financing Lease Enterprises (the “Leasing Measures”), to regulate and administer the business
operations of financial leasing enterprises. According to the Leasing Measures, financial leasing enterprises are allowed to carry out
financial leasing businesses in such forms as direct lease, sublease, sale-and-lease-back, leveraged lease, entrusted lease and joint
lease in accordance with the provisions of relevant laws, regulations and rules. However, the Leasing Measures prohibit financial
leasing enterprises from engaging in financial businesses such as accepting deposits, and providing loans or entrusted loans.
Without the approval from relevant authorities, financial leasing enterprises may not engage in inter-bank borrowing and other
businesses. In addition, financial leasing enterprises are prohibited from carrying out illegal fund-raising activities in the name of
financial leases. The Leasing Measures require financial leasing enterprises to establish and improve their financial and internal risk
control systems, and a financial leasing enterprise’s risk assets may not exceed ten times that of its total net assets.
In April 2018, China Banking and Insurance Regulatory Commission (“CBIRC”) took over the authority over supervision of
financing lease companies from MOFCOM.
On May 26, 2020, CBIRC issued the Interim Measures for Supervision and Administration of Financial Leasing Companies,
which clarified the business scope, the scope of the leased property and the prohibited business or activity of the financial leasing
company, as well as other business-related definitions, such as purchase, registration, retrieval and value management of financial
leasing products. Financial leasing companies may conduct some or all of the following businesses: (1) financial leasing business;
(2) leasing business; (3) purchase, disposal of residual value and repair of leased assets related to financial leasing and leasing
business, consulting of the leasing transaction, receipt of leasing deposit; (4) transfer of financial leases or leased assets or
acceptance of financial leases or leased assets transferred; (5) fixed income securities investment business. The measures have also
discussed certain regulatory standards, including the proportion of financial leasing assets, the proportion of fixed income securities
investment business, business concentration and so on. Financial leasing companies shall not conduct the following businesses or
activities: (1) illegal fund-raising, acceptance or disguised acceptance of deposits; (2) extension of loans or entrusted loans; (3)
placements with or from other financial leasing companies or in disguise; (4) financing or transferring assets through Internet
Lending Information Intermediaries, private equity funds; (5) other businesses or activities prohibited by laws and regulations, the
CBIRC and local financial regulatory authorities in provinces, autonomous regions and municipalities.
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Financial leasing companies are required to comply with the following regulatory indicators: (1) degree of concentration of
single client financing, meaning the balance of all financial leasing business of a financial leasing company to a single lessee shall
not exceed 30% of its net assets; (2) degree of concentration of single group client financing, meaning the balance of all financial
leasing business of a financial leasing company to a single group shall not exceed 50% of its net assets; (3) ratio of a single related
client, meaning the balance of all financial leasing business of a financial leasing company to a related party shall not exceed 30%
of its net assets; (4) ratio of all related parties, meaning the balance of all financial leasing business of a financial leasing company
to all related parties shall not exceed 50% of its net assets, and (5) ratio of a single related shareholder, meaning the financing
balance to a single shareholder and all its related parties shall not exceed the shareholder’s capital contribution in the financial
leasing company, and at the same time meet the provisions of the measures on the ratio of a single related client. The CBIRC may
make adjustments to the above indicators according to regulatory needs.
Financial leasing companies that were established before the implementation of the Interim Measures for the Supervision and
Administration of Financial Leasing Companies are required meet the requirements stipulated in the Measures within the transition
period prescribed by the provincial local financial supervision department. In principle, the transition period shall not exceed three
years. Provincial local financial supervision departments can appropriately extend the transition period arrangement according to
the actual situation of specific industries.
Regulation Related to Financing Guarantee Companies
The State Council of China promulgated the Regulations on the Administration of Financing Guarantee Companies on August
2, 2017, and on April 2, 2018, the CBIRC, together with several other governmental authorities, jointly adopted four supplemental
rules over the Administration of Financing Guarantee Companies: (i) the Administrative Measures for the Financing Guarantee
Business Permit, (ii) Measures for Measuring the Outstanding Amount of Financing Guarantee Liabilities, (iii) Administrative
Measures for the Asset Percentages of Financing Guarantee Companies and (iv) Guidelines on Business Cooperation between
Banking Financial Institutions and Financing Guarantee Companies, or the Four Supporting Measures of the Financing Guarantee
Rules. In addition, the CBIRC, together with several other governmental authorities, jointly issued the Supplementary Provisions on
the Supervision and Administration of Financing Guarantee Companies on October 9, 2019.
According to the above rules on financing guarantee companies, or the Financing Guarantee Rules, “financing guarantee”
refers to the activities that guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing,
including, among other things, the activities whereby a guarantor provides guarantee for loans, online lending, financial leasing,
commercial factoring, bill acceptance, letters of credit or other forms of debt financing. “Financing guarantees companies” refer to
companies legally established and engaged in financing guarantee business. According to those rules, the establishment of a
financing guarantee company is subject to the approval by the competent government authority, and unless otherwise stipulated, no
entity may operate financing guarantee business without such approval. If any entity violates these regulations and operates
financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines
of RMB500,000 to RMB1,000,000, and confiscation of illegal gains, if any. If the violation constitutes a criminal offense, criminal
liability will be imposed in accordance with the law.
In connection with our automotive financing facilitation business, we provide guarantees to our financing partners in
connection with the financing of the purchase of automobiles and such guarantee business is not our principal business. It is
uncertain whether this practice would be deemed as operations in financing guarantee business. See “Risk—Risks Relating to Our
Industry and Business—We are required to obtain certain licenses and permits for our business operations, and we may not be able
to obtain or maintain such licenses or permits.”
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Regulations Related to Value-Added Telecommunication Business Certificates and Foreign Investment Restrictions
PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having
obtained an ICP certificate or engaging in the operation of online data processing and transaction processing (“ODPTP”) without
having obtained an ODPTP certificate. These sanctions include corrective orders and warnings from the PRC communication
administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be
ordered to close. The website used for our previous P2P online lending services business which website continue to contain our
historical information, has not been fully shut down and remains accessible to the public. The PRC regulatory authorities'
enforcement of such regulations in the context of our discontinued business remains unclear.
According to the Provisions on the Administration of Foreign-invested Telecommunication Enterprises, the ratio of investment
by foreign investors in a foreign-invested telecommunication enterprise that engages in the operation of a value-added
telecommunication business shall not exceed 50%. The Circular of Ministry of Industry and Information Technology Concerning
Lifting Restrictions on the Proportion of Foreign Equity in Online Data Processing and Transaction Processing Business (E-
commerce) (the “Circular 196”), which was promulgated on June 19, 2015, provides that foreign investors are permitted to invest
up to 100% of the registered capital in a foreign-invested telecommunication enterprise engaging in the operation of online data
processing and transaction processing (E-commerce). However, foreign investors are only permitted to invest up to 50% of the
registered capital in a foreign-invested telecommunication enterprise that engages in the operation of Internet information services.
Under either circumstance, the largest foreign investor will be required to have a satisfactory business track record and operational
experience in the value-added telecommunications business.
While Circular 196 permits foreign ownership, in whole or in part, of online data and deal processing businesses (E-
commerce), a sub-set of value-added telecommunications services, it is not clear whether our existing online lending website would
be deemed as online data and deal processing. See “Risk Factors — Risks Related to Doing Business in China — We may be
adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our
business and results of operations.”
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Regulations Related to Internet Advertising
The Interim Measures for Administration of Internet Advertising (the “Internet Advertising Measures”), were adopted by the
SAIC and became effective on September 1, 2016. The Internet Advertising Measures regulate Internet advertising activities.
According to the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content of
advertisements. The identity, administrative license, cited information and other certificates that advertisers are required to obtain in
publishing Internet advertisements shall be true and valid. Internet advertisements shall be distinguishable and prominently marked
as “advertisements” in order to enable consumers to identify them as advertisements. Publishing and circulating advertisements
through the Internet shall not affect the normal use of the Internet by users. It is not allowed to induce users to click on the content
of advertisements by any fraudulent means, or to attach advertisements or advertising links in the emails without permission. The
Internet Advertising Measures also impose several restrictions on the forms of advertisements and activities used in advertising.
“Internet advertising” as defined in the Internet Advertising Measures refers to commercial advertisements that directly or indirectly
promote goods or services through websites, web pages, Internet applications or other Internet media in various forms, including
texts, pictures, audio clips and videos. Where Internet advertisements are not identifiable and marked as “advertisements”, a fine of
not more than RMB 100,000 (US$15,378) may be imposed in accordance with Advertising Law. A fine ranging from RMB 5,000
(US$769) to RMB 30,000 (US$4,613) may be imposed for any failure to provide a prominently marked “CLOSE” button to ensure
“one-click closure”. Advertisers who induce users to click on the content of advertisements by fraudulent means or without
permission, attach advertisements or advertising links in the emails shall be imposed a fine ranging from RMB 10,000 (US$1,538)
to RMB 30,000 (US$4,613). Our marketplace is in the process of complying with the new Internet Advertising Measures during
our advertising activities.
Regulations Related to Information Security and Confidentiality of User Information
Internet activities in China are regulated and restricted by the PRC government and are subject to criminal penalties under the
Decision Regarding the Protection of Internet Security.
The MPS has promulgated measures that prohibit use of the Internet in ways that, among other things, result in leaks of
government secrets or the spread of socially destabilizing content. The MPS and its local counterparts have authority to supervise
and inspect domestic websites to carry out its measures. Internet information service providers that violate these measures may
have their licenses revoked and their websites shut down.
On June 22, 2007, the MPS, the State Secrecy Administration and other relevant authorities jointly issued the Administrative
Measures for the Hierarchical Protection of Information Security, which divides information systems into five categories and
requires the operators of information systems ranking above Grade II to file an application with the local Bureau of Public Security
within 30 days of the date of its security protection grade determination or since its operation. The Company completed its
registration with the local Bureau of Public Security in April, 2017.
The PRC government regulates the security and confidentiality of Internet users’ information. The Administrative Measures
on Internet Information Service, the Regulations on Technical Measures of Internet Security Protection and the Provisions on
Protecting Personal Information of Telecommunication and Internet Users, which were issued on July 16, 2013 by the MIIT, set
forth strict requirements to protect personal information of Internet users and require Internet information service providers to
maintain adequate systems to protect the security of such information. Personal information collected must be used only in
connection with the services provided by the Internet information service provider. Moreover, the Rules for Regulating the Order in
the Market for Internet Information Service also protect Internet users’ personal information by (i) prohibiting Internet information
service providers from unauthorized collection, disclosure or use of their users’ personal information and (ii) requiring Internet
information service providers to take measures to safeguard their users' personal information. In December 2012, the Standing
Committee of the National People’s Congress passed the Decision on Strengthening Internet Information Protection, which
provides that all Internet service providers in China, including Internet information service providers, must require that their users
provide identification information before entering into service agreements or providing services.
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On November 7, 2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which
came into effect on June 1, 2017 (“Cyber Security Law”). The Cyber Security Law requires network operators to perform certain
functions related to cyber security protection and the strengthening of network information management. For instance, under the
Cyber Security Law, network operators of key information infrastructure generally shall, during their operations in the PRC, store
the personal information and important data collected and produced within the territory of PRC.
On April 11, 2017, the Cyberspace Administration of China announced the Measures for the Security Assessment of Personal
Information and Important Data to be Transmitted Abroad (consultation draft) (the “Consultation Draft of Security Assessment
Measures”). The Consultation Draft of Security Assessment Measures requires network operators to conduct security assessments
and obtain consents from owners of personal information prior to transmitting personal information and other important data
abroad. Moreover, under the Consultation Draft of Security Assessment Measures, the network operators are required to apply to
the relevant regulatory authorities for security assessments under several circumstances, including but not limited to: (i) if data to be
transmitted abroad contains personal information of more than 500,000 users in aggregate; (ii) if the quantity of the data to be
transmitted abroad is more than 1,000 gigabytes; (iii) if data to be transmitted abroad contains information regarding nuclear
facilities, chemical biology, national defense or military projects, population and health, or relates to large-scale engineering
activities, marine environment issues or sensitive geographic information; (iv) if data to be transmitted abroad contains network
security information regarding system vulnerabilities or security protection of critical information infrastructure; (v) if key
information infrastructure network operators transmit personal information and important data abroad; or (vi) if any other data to be
transmitted abroad contains information that might affect national security or public interest and are required to be assessed as
determined by the relevant regulatory authorities.
On November 28, 2019, the Security Bureau of the Cyberspace Administration of China, the General Office of the MIIT, the
General Office of the Ministry of Public Security and the General Office of the State Market Supervision and Administration (the
“MSA”) jointly issued the Notice on Measures for Determining the Illegal Collection and Use of Personal Information through
Mobile Applications, which aims to provide reference for supervision and administration departments of the PRC government and
provide guidance for mobile applications operators’ self-examination and self-correction and social supervision by avid internet
users (so called “netizens”), and further elaborates the forms of behavior constituting the illegal collection and use of personal
information through mobile applications including: (i) failing to publish the rules on the collection and use of personal information;
(ii) failing to explicitly explain the purposes, methods and scope of the collection and use of personal information; (iii) collecting
and using personal information without the users’ consent; (iv) collecting personal information unrelated to the services the
collector of the information provides and beyond the necessary principle of such services; (v) providing personal information to
others without the users’ consent; (vi) failing to provide the function of deleting or correcting personal information according to
PRC laws or failing to publish information such as ways for internet users to file complaints and reports.
Regulations Related to Company Establishment and Foreign Investment
The establishment, operation and management of corporate entities in China is governed by the Company Law of the PRC
(the “Company Law”). All of our subsidiaries and VIEs in China are subject to the Company Law. According to the Company Law,
companies established in the PRC are either limited liability companies or joint stock limited liability companies. The Company
Law applies to both PRC domestic companies and foreign-invested companies. The establishment procedures, approval procedures,
registered capital requirements, foreign exchange matters, accounting practices, taxation and labor matters of a wholly foreign-
owned enterprise are regulated by the Wholly Foreign-Owned Enterprise Law of the PRC and the Implementation Regulation of the
Wholly Foreign-Owned Enterprise Law. According to these regulations, foreign-invested enterprises in the PRC may only pay
dividends out of their accumulated profit, if any, determined in accordance with PRC accounting standards and regulations. A PRC
company is required to set aside general reserves of at least 10% of its after-tax profit, until the cumulative amount of such reserves
reaches 50% of its registered capital unless the provisions of laws regarding foreign investment provide otherwise. In addition, PRC
companies may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus
funds at their discretion. These reserves and employee welfare and bonus funds are not distributable as cash dividends. A PRC
company may not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal
years may be distributed together with distributable profits from the current fiscal year. In September 2016, the National People's
Congress Standing Committee published its decision to revise the laws relating to wholly foreign-owned enterprises and other
foreign-invested enterprises. Such decision, which became effective on October 1, 2016, changes the “filing or approval” procedure
for foreign investments in China such that foreign investments in business sectors not subject to special administrative measures
will only be required to complete a filing instead of the existing requirements to apply for approval. The special entry management
measures shall be promulgated or approved to be promulgated by the State Council. Pursuant to a notice issued by the National
Development and Reform Commission (“NDRC”) and MOFCOM on October 8, 2016, the special entry management measures
shall be implemented with reference to the relevant regulations as stipulated in the Catalogue of Industries for Guiding Foreign
Investment in relation to the restricted foreign investment industries, prohibited foreign investment industries and encouraged
foreign investment industries. Pursuant to the Provisional Administrative Measures on Establishment and Modifications Filing for
Foreign Investment Enterprises promulgated by MOFCOM on October 8, 2016, establishment and changes of foreign investment
enterprises not subject to the approval under the special entry management measures shall be filed with the relevant commerce
authorities.
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The Provisions on Guiding the Orientation of Foreign Investment and the 2015 revision of the Catalogue of Industries for
Guiding Foreign Investment classify foreign investment projects into four categories: encouraged projects, permitted projects,
restricted projects and prohibited projects. The purpose of these regulations is to direct foreign investment into certain priority
industry sectors and restrict or prohibit investment in other sectors. If the industry sector in which the investment is to occur falls
into the encouraged category, foreign investment can be conducted through the establishment of a wholly foreign-owned enterprise.
If a restricted category, foreign investment may be conducted through the establishment of a wholly foreign-owned enterprise,
provided certain requirements are met, and, in some cases, the establishment of a joint venture enterprise is required with varying
minimum shareholdings for the Chinese party depending on the particular industry. If a prohibited category, foreign investment of
any kind is not allowed. Any industry not falling into any of the encouraged, restricted or prohibited categories is classified as a
permitted industry for foreign investment. Our prior Online Lending Services are classified as permitted foreign investment
projects.
The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version) (the “2018 Negative
List”), which was promulgated jointly by the MOFCOM and the NDRC on June 28, 2018 and became effective on July 28, 2018,
replaced and partly abolished the Guidance Catalogue of Industries for Foreign Investment (2017 Revision) regulating the access of
foreign investors to China. Foreign investors should refrain from making investing in any of prohibited sectors specified in the
2018 Negative List, and foreign investors are required to obtain the permit for access to other sectors that are listed in the 2018
Negative List but not classified as “prohibited.”
On June 30, 2019, the MOFCOM and the NDRC promulgated the Special Administrative Measures for Entrance of Foreign
Investment (Negative List) (2019 Version) which will become effective on July 31, 2019 (the “2019 Negative List”) to replace the
2018 Negative List.
On June 23, 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures for Entrance of Foreign
Investment (Negative List) (2020 Version) which will be effective from July 23, 2020 (the “2020 Negative List”) and will abolish
the 2019 Negative List on the same date. The 2020 Negative List further reduces the scope under the access management of foreign
investment and expands the foreign investment scope.
Our Automobile Transaction and Related Services is not listed in 2018 Negative List, 2019 Negative List or 2020 Negative
List.
According to the PRC Foreign Investment Law, “foreign investment” refers to investment activities directly or indirectly
conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to
as “foreign investor”) within China, and the investment activities include the following situations: (i) a foreign investor,
individually or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor
acquires stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign
investor, individually or collectively with other investors, invests in a new project within China; and (iv) investments in other
means as provided by laws, administrative regulations, or the State Council. Since we are incorporated in Nevada, our activities in
China are subject to the PRC Foreign Investment Law.
According to the PRC Foreign Investment Law, the State Council will publish or approve to publish the “negative list” for
special administrative measures concerning foreign investment. The PRC Foreign Investment Law grants national treatment to
foreign-invested enterprises (“FIEs”), except for those FIEs that operate in industries deemed to be either “restricted” or
“prohibited” in the “negative list”. Because the “negative list” has yet to be published, it is unclear whether it will differ from the
current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The PRC Foreign Investment
Law provides that FIEs operating in foreign restricted or prohibited industries will require market entry clearance and other
approvals from relevant PRC governmental authorities. If a foreign investor is found to invest in any prohibited industry in the
“negative list”, such foreign investor may be required to, among other aspects, cease its investment activities, dispose of its equity
interests or assets within a prescribed time limit and have its income confiscated. If the investment activity of a foreign investor is
in breach of any special administrative measure for restrictive access provided for in the “negative list”, the relevant competent
department shall order the foreign investor to make corrections and take necessary measures to meet the requirements of the special
administrative measure for restrictive access.
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In addition, the PRC government has established a foreign investment information reporting system, according to which
foreign investors or foreign-invested enterprises are required to submit investment information to the competent department for
commerce concerned through the enterprise registration system and the enterprise credit information publicity system, and a
security review system under which the security review shall be conducted for foreign investment affecting or likely affecting the
state security.
Furthermore, the PRC Foreign Investment Law provides that foreign invested enterprises established according to the existing
laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing
of the Foreign Investment Law.
In addition, the PRC Foreign Investment Law provides several protective rules and principles for foreign investors and their
investments in the PRC, including, among others, that a foreign investor may freely transfer into or out of China, in Renminbi or a
foreign currency, its contributions, profits, capital gains, income from disposition of assets, royalties of intellectual property rights,
indemnity or compensation lawfully acquired, and income from liquidation, among others, within China; local governments shall
abide by their commitments to the foreign investors; governments at all levels and their departments shall enact local normative
documents concerning foreign investment in compliance with laws and regulations and shall not impair legitimate rights and
interests, impose additional obligations onto FIEs, set market access restrictions and exit conditions, or intervene with the normal
production and operation activities of FIEs; except for special circumstances, in which case statutory procedures shall be followed
and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign
investors is prohibited; and mandatory technology transfer is prohibited.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, and on December 26, 2019, the
State Council promulgated the Implementing Rules to Further Clarify and Elaborate the Relevant Provisions of the PRC Foreign
Investment Law (the “Implementing Rules”). The PRC Foreign Investment Law and the Implementing Rules both took effect on
January 1, 2020 and replaced three major previous laws on foreign investments in China, namely, the Sino-foreign Equity Joint
Venture Law, the Sino-foreign Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, and their respective
implementing rules. Pursuant to the Foreign Investment Law, “foreign investments” refer to investment activities conducted by
foreign investors (including foreign natural persons, foreign enterprises or other foreign organizations) directly or indirectly in the
PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC
solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar
rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with
other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State
Council. The Implementing Rules introduce a see-through principle and further provide that foreign-invested enterprises that invest
in the PRC are also governed by the PRC Foreign Investment Law and the Implementing Rules.
According to the Implementing Rules, the registration of foreign-invested enterprises is processed by the MSA or its
authorized local counterparts. Where a foreign investor invests in an industry or field subject to licensing in accordance with laws,
the relevant competent government department responsible for granting such license shall review the license application of the
foreign investor in accordance with the same requirements and procedures applicable to PRC domestic investors unless it is
stipulated otherwise by the laws and administrative regulations, and the competent government department may not apply
discriminatory standards to the foreign investor in terms of licensing requirements, application materials, reviewing steps, deadlines
and so on.
Pursuant to the Foreign Investment Law, the Implementing Rules, and the Information Reporting Measures for Foreign
Investment jointly promulgated by the MOFCOM and the MSA, which took effect on January 1, 2020, a foreign investment
information reporting system was established and foreign investors or foreign-invested enterprises must report investment
information to competent commerce departments of the PRC government through the enterprise registration system, the enterprise
credit information publicity system and the foreign investment information reporting system, and the relevant government
authorities shall share such investment information to the competent commerce departments in a timely manner. We are subject to
these regulatory requirements.
Regulations Related to Labor and Social Security
Pursuant to the PRC Labor Law, the PRC Labor Contract Law and the Implementing Regulations of the Employment
Contracts Law, labor relationships between employers and employees must be executed in written form. Wages may not be lower
than the local minimum wage. Employers must establish a system for labor safety and sanitation, strictly abide by state standards
and provide relevant education to its employees. Employees are also required to work in safe and sanitary conditions.
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On December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent
requirements on labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for
equal work, but the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of
employees as determined by the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only
permitted to engage in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated
by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the
number of dispatched workers hired by an employer shall not exceed 10% of the total number of its employees (including both
directly hired employees and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance
with the PRC Labor Contract Law in this regard to reduce the number of its dispatched workers to below 10% of the total number
of its employees prior to March 1, 2016. In addition, an employer is not permitted to hire any new dispatched worker until the
number of its dispatched workers has been reduced to below 10% of the total number of its employees.
Under PRC laws, rules and regulations, including the Social Insurance Law, the Interim Regulations on the Collection and
Payment of Social Security Funds and the Regulations on the Administration of Housing Accumulation Funds, employers are
required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension
insurance, unemployment insurance, basic medical insurance, occupational injury insurance, maternity leave insurance and housing
accumulation funds. These payments are made to local administrative authorities and any employer who fails to contribute may be
fined and ordered to pay the deficit amount. See “Risk Factors — Risks Related to Doing Business in China — Failure to make
adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
Anti-money Laundering Regulation
The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money
laundering requirements applicable to financial institutions, as well as non-financial institutions with anti-money laundering
obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client
identification, retention of clients’ identification information and transactions records, and reports on large transactions and
suspicious transactions. According to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money
Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage
companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of the
non-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other
governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of
financial institutions and certain non-financial institutions, such as payment institutions. However, the State Council has not
promulgated the list of the non-financial institutions with anti-money laundering obligations.
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Regulations on Intellectual Property
The PRC has adopted legislation governing intellectual property rights, including copyrights, trademarks and patents. The
PRC is a signatory to major international conventions on intellectual property rights and is subject to the Agreement on Trade
Related Aspects of Intellectual Property Rights as a result of its accession to the World Trade Organization in December 2001.
The National People's Congress amended the Copyright Law in 2001 and 2010 to widen the scope of works and rights that are
eligible for copyright protection. The amended, the Copyright Law extends copyright protection to Internet activities, products
disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China
Copyright Protection Center. To address copyright infringement related to content posted or transmitted over the Internet, the
National Copyright Administration and former Ministry of Information Industry jointly promulgated the Administrative Measures
for Copyright Protection Related to the Internet in April 2005. These measures became effective in May 2005.
On December 20, 2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from
January 1, 2002, and revised in 2013, which are intended to protect the rights and interests of the computer software copyright
holders and encourage the development of software industry and information economy. In the PRC, software developed by PRC
citizens, legal persons or other organizations is automatically protected immediately after its development, without an application or
approval. Software copyrights may be registered with the designated agency and if registered, the certificate of registration issued
by the software registration agency will be the primary evidence of the ownership of the copyright and other registered matters. On
February 20, 2002, the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright
Registration, which outline the operational procedures for registration of software copyright, as well as registration of software
copyright license and transfer contracts. The Copyright Protection Center of China is mandated as the software registration agency.
The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001, 2013 and 2019, respectively, protects the proprietary
rights to registered trademarks. The Trademark Office under the SAIC handles trademark registrations and may grant a term of ten
years for registered trademarks, which may be extended for another ten years upon request. Trademark license agreements shall be
filed with the Trademark Office for record. In addition, if a registered trademark is recognized as a well-known trademark, the
protection of the proprietary right of the trademark holder may reach beyond the specific class of the relevant products or services.
The Patent Law of the PRC and its Implementation Rules provide for three types of patents: invention, utility model and
design. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent
right.
Regulations Related to Foreign Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations, which were most recently amended in August 2008. Payments of current account items, such as profit distributions
and trade and service-related foreign exchange transactions, can usually be made in foreign currencies without prior approval from
the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. By contrast, approval
from or registration with appropriate PRC authorities or banks authorized by appropriate PRC authorities is required where RMB
capital is to be converted into foreign currency and remitted out of China to pay capital expenses.
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SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign
Exchange Settlement of Capital of Foreign-invested Enterprises (“Circular 19”), effective on June 1, 2015, in replacement of SAFE
Circular 142 (the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises. According to Circular 19, the flow and use of the RMB
capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB
capital may not be used for the issuance of RMB entrusted loans or the repayment of inter-enterprise loans or the repayment of
banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-
denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates
the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be
directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be
used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign
Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account (the “Circular
16”), effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using
RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB
entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular
19 or Circular 16 could result in administrative penalties.
From 2012, SAFE has promulgated several circulars to substantially amend and simplify the current foreign exchange
procedure. Pursuant to these circulars, the opening of various special purpose foreign exchange accounts, the reinvestment of RMB
proceeds by foreign investors in the PRC and remittance of foreign exchange profits and dividends by a foreign-invested enterprise
to its foreign shareholders no longer require the approval or verification of SAFE. In addition, domestic companies are no longer
limited to extend cross-border loans to their offshore subsidiaries but are also allowed to provide loans to their offshore parents and
affiliates and multiple capital accounts for the same entity may be opened in different provinces. SAFE also promulgated the
Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by
Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local
branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process
foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and
its branches. In February 2015, SAFE promulgated SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13
delegates the power to enforce the foreign exchange registration in connection with inbound and outbound direct investments under
relevant SAFE rules from local branches of SAFE to banks, thereby further simplifying the foreign exchange registration
procedures for inbound and outbound direct investments.
On January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of
Authenticity and Compliance to Further Promote Foreign Exchange Control (the “SAFE Circular 3”), which stipulates several
capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i)
under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of
tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses
before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the
sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the
registration procedures in connection with an outbound investment.
Regulations Relating to Offshore Special Purpose Companies Held by PRC Residents
SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles (the “SAFE Circular 37”) in July 2014 that requires PRC residents or entities to
register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the
purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when
the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of
such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of
shares, or mergers or divisions.
SAFE Circular 37 was issued to replace SAFE Circular 75 (the Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles. SAFE
further enacted the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment
(the “SAFE Circular 13”) effective from June 1, 2015, which allows PRC residents or entities to register with qualified banks in
connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37
continue to fall under the jurisdiction of the relevant local branch of SAFE. In the event that a PRC shareholder holding interests in
a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be
prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange
activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries.
Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC
law for evasion of foreign exchange controls.
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See “Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to offshore investment activities by
PRC residents may limit our PRC subsidiaries' ability to increase their registered capital or distribute profits to us or otherwise
expose us or our PRC resident beneficial owners to liability and penalties under PRC law.”
SAFE Regulations Relating to Employee Stock Incentive Plans
On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for
Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies (the “Stock Option Rules”),
which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in
Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28,
2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in a stock incentive
plan in an overseas publicly listed company are required to register with SAFE or its local branches and complete certain other
procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC
subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the
SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must
also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and
sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration
with respect to our share incentive plans if there are any material changes to the share incentive plans, the PRC agent or the
overseas entrusted institution or other material changes. In addition, SAFE Circular 37 provides that PRC residents who participate
in a share incentive plan of an overseas unlisted special purpose company may register with SAFE or its local branches before
exercising rights. See “Risk Factors — Risks Related to Doing Business in China — Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and
other legal or administrative sanctions.”
Regulations Related to Tax
Under the PRC Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008, an enterprise
established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. In
2009, the State Administration of Taxation (the “SAT”) issued the Notice Regarding the Determination of Chinese-Controlled
Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies (the “SAT
Circular 82”), which provides certain specific criteria for determining whether the “de facto management body” of a PRC-
controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, in 2011, the SAT issued the
Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial) (the
“SAT Bulletin 45”) to provide more guidance on the implementation of SAT Circular 82.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group
will be considered a PRC resident enterprise by virtue of having its “de facto management body” in China and will be subject to
PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and
core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and
human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets,
accounting books, company seals, and minutes and files of its board of directors and shareholders' meetings are located or kept in
the PRC; and (d) more than half of the enterprise's directors or senior management with voting rights habitually reside in the PRC.
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Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore-incorporated enterprises controlled by PRC enterprises
or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may
reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident
status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
The State Administration of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition
transactions in recent years, including the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-PRC Resident Enterprises (the “SAT Circular 698”), the Notice on Several Issues Regarding the Income Tax of Non-PRC
Resident Enterprises (the “SAT Circular 24”) and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of
Properties by Non-PRC Resident Enterprises (the “SAT Circular 7”). Pursuant to these rules and notices, if a non-PRC resident
enterprise transfers its equity interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax
authorities at the place where the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%. In
addition, if a non-PRC resident enterprise indirectly transfers so-called PRC Taxable Properties, referring to properties of an
establishment or a place of business in China, real estate properties in China and equity investments in a PRC tax resident
enterprise, by disposition of the equity interests in an overseas non-public holding company without a reasonable commercial
purpose and resulting in the avoidance of PRC enterprise income tax, the transfer will be re-characterized as a direct transfer of the
PRC Taxable Properties and gains derived from the transfer may be subject to a PRC withholding tax of up to 10%. SAT Circular 7
has listed several factors to be taken into consideration by the tax authorities in determining if an indirect transfer has a reasonable
commercial purpose. However, regardless of these factors, an indirect transfer satisfying all the following criteria will be deemed to
lack a reasonable commercial purpose and be taxable in the PRC: (i) 75% or more of the equity value of the intermediary enterprise
being transferred is derived directly or indirectly from PRC Taxable Properties; (ii) at any time during the one year period before
the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or
indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions
performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC
Taxable Properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain
derived from the indirect transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those
assets. On the other hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to
PRC tax. The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties.
Under SAT Circular 7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay
the transfer price to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price.
If they fail to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities. If neither party complies with the
tax payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest
on the seller. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300% of the
unpaid tax on them. The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted the
relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.
In January 2019, the SAT issued Announcement on the Implementation of the Preferential Income Tax Reduction Policy for
Small and Low Profit Enterprises (the “SAT 2019 Circular 2”). Pursuant to SAT 2019 Circular 2, from January 1, 2019 to
December 31, 2021, for small low profit enterprises, (i) the tax rate for the first RMB 1 million the annual income does not exceed
RMB1 million is 20% and the taxable income is 25% of the annual taxable income; (ii) the tax rate for the portion of annual income
that exceeds RMB1 million but does not exceed RMB3 million is 20% and the taxable income is 50% of the annual income. SAT
2019 Circular 2 also defines "small low profit enterprises" as enterprises who are engaged in industries not restricted or prohibited
and meet the three conditions of (i) annual taxable income of RMB3 million or lower, (ii) employees number of 300 or lower; and
(iii) total assets of RMB50 million or lower. During the year ended March 31, 2020, all our subsidiaries and VIEs in China met the
three criteria and enjoyed the preferential tax rates.
Regulations Related to PRC Value-Added Tax
In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully
Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax (“VAT”), which became effective on May 1, 2016.
Pursuant to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries,
including the value-added telecommunication services, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from
the provision of some modern services. Certain small taxpayers under PRC law are subject to reduced value-added tax at a rate of
3%. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT
chargeable on the modern services provided.
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On April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT
Rates, which came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to
VAT rates of 17% and 11% respectively become subject to lower VAT rates of 16% and 10% respectively starting from May 1,
2018. Furthermore, according to the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly
promulgated by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs, which
became effective on April 1, 2019, the taxable goods previously subject to VAT rates of 16% and 10% respectively become subject
to lower VAT rates of 13% and 9% respectively starting from April 1, 2019.
Pursuant to applicable PRC regulations promulgated by the Ministry of Finance of China and the SAT, we are required to pay
a VAT at a rate of 6% for our services and 13% for our automobile sales, operating lease and financial leasing, with respect to
revenues derived from the provision of Automobile Transaction and Related Services. All revenues derived from Online Lending
Services are subject to the rate of 3% as Sichuan Senmiao is a small taxpayer. A taxpayer is allowed to offset the qualified input
VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided.
Regulations Related to Mergers and Acquisitions
On August 8, 2006, six PRC regulatory agencies, including China Securities Regulatory Commission (the “CSRC”),
promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which
became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, require
offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and
controlled by PRC domestic enterprises or individuals to obtain the approval of the CSRC prior to publicly listing their securities on
an overseas stock exchange. On September 21, 2006, the CSRC published a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval.
The M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions established additional
procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and
complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in
which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction
involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a
domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated
by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that
transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM
before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on
Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Circular
6”), which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors.
Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the
Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “MOFCOM Security Review Regulations”), which
became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and
acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign
Investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM
Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a
specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to
security review, it will submit it to the Inter-Ministerial Panel, an authority established under Circular 6 led by the NDRC and
MOFCOM under the leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors
from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through
contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merger or
acquisition of a company engaged in the marketplace lending business requires security review.
Employees
As of the date of this Report, we had a total of 179 full-time employees.
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The following table sets forth the breakdown of our employees by function:
Function
Management
Legal & Risk Management
Operations
Marketing
Drivers & Automobile Management and Services
Technology
Human Resources & Administration
Finance and Accounting
Internal Audit
Total
Number of Employees
4
21
7
59
39
14
17
17
1
179
All of our employees are based in the cities of Chengdu and Changsha, where our operations are located.
We believe we offer our employees competitive compensation packages and a work environment that encourages initiative
and is based on merit, and as a result, we have generally been able to attract and retain qualified personnel and maintain a stable
core management team. We plan to hire additional employees as we expand our business.
As required by PRC regulations, we participate in various government statutory employee benefit plans, including social
insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related
injury insurance plan and a maternity insurance plan and a housing provident fund. We are required under PRC law to make
contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees,
up to a maximum amount specified by the local government from time to time. We have not made adequate employee benefit
payments, and may be required to make up the contributions for these plans as well as to pay late fees and fines. See “Risk Factors
— Risks Related to Doing Business in China — Failure to make adequate contributions to various employee benefit plans as
required by PRC regulations may subject us to penalties.”
We enter into standard labor and confidentiality agreements with each of our employees. We believe that we maintain a good
working relationship with our employees, and we have not experienced any major labor disputes.
Seasonality
We have observed seasonal trends or patterns in revenues related to our Automobile Transaction and Related Services.
Because of the PRC National Holiday and close to the year end, there is a seasonal decrease in our facilitated new automobiles
during the three months ended December 31 (our third fiscal quarter).
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Research and Development
With an aim to standardize our transaction process and achieve higher operating efficiency, we are developing an integrated
information system for our Automobile Transaction and Related Services. The system comprises modules for procurement,
qualification assessment, delivery and post-transaction management which covers the whole transaction process. We have
completed the development of certain functions such as information entry and delivery which are being tested by us. We launched
the system in March 2020 and we will upgrade the system to support our business expansion, when necessary.
Intellectual Property
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to
our success, and we rely on PRC trademark and trade secret law and confidentiality, invention assignment and non-compete
agreements with our employees and others to protect our proprietary rights. We own 15 software copyrights and eleven trademarks.
We have three trademark applications pending at the PRC Trademark Office. We have also registered numerous domain names,
including www.51ruixi.com, www.jklqc.com, www.ihongsen.com, www.senmiaotech.com and http://senmiaotechir.com/. The
information on our websites is not a part of, or incorporated in, this Report.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our
technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have
taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and diversion of our resources.
In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their
non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to
develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed.
Moreover, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely
affect our results of operations.
See “Risk Factors — Risks Related to Our Business — We may not be able to prevent others from unauthorized use of our
intellectual property, which could harm our business and competitive position.” and “— We may be subject to intellectual property
infringement claims, which may be expensive to defend and may disrupt our business and operations.”
Insurance
We obtain accident insurance and commercial liability insurance, which are mandatory, on all the automobiles we purchase for
sales or financing and pass on the costs of such insurance to our customers in the sale/financing transaction. We provide social
security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for
our employees. We do no maintain any property insurance policies, business interruption insurance or general third-party liability
insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be
sufficient for our business operations in China.
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Item 1A.
Risk Factors
An investment in our company is subject to a high degree of risk. The risk factors described below and similar risk factors we may
face are important to understanding other statements in this Report and should be reviewed carefully. The following information
should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and related notes in Part II, Item 8, “Financial Statements and
Supplementary Data” of this Form 10-K.
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our
actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and
operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition,
operating results and stock price.
Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial
performance should not be considered to be a reliable indicator of future performance, and investors should not use historical
trends to anticipate results or trends in future periods.
Risks Related to Our Business and Industry
We voluntarily assumed all the outstanding loans due to the investors on our online lending platform for our discontinued
Online Lending Services but may not have enough cash to pay for the liabilities.
On October 17, 2019, our Board of Directors approved a plan submitted by management to wind down and discontinue our
online P2P lending business. In connection with the plan, we have ceased facilitation of loan transactions on our online lending
platform and voluntarily assumed all the outstanding loans due to the investors on the platform since October 17, 2019. As of the
date of this Report, the aggregate balance of the loans we assumed was approximately $5.6 million.
There is no regulation or law in China which requires the online lending platform to take the responsibility on behalf of the
borrowers to pay for investors. Pursuant to the Notice on the Risks of Online Lending Industry issued by the Leading Group Office
of Online Lending Risk Response of Sichuan on December 4, 2019, any disputes between investors and a P2P online lending
platform, investors and borrowers, and between borrowers and a P2P online lending platform can be resolved through legal actions,
such as conciliation, application for arbitration and litigation. In common practice, in order to protect the rights of investors and
avoid further conflicts, certain online lending platforms, such as Mintou Financial Service in Shenzhen and Juyouqian in Beijing,
have decided to take responsibility to pay the outstanding balance due to investors.
As of March 31, 2020, we have used cash generated from our Automobile Transaction and Related Services and payments
collected from borrowers in the aggregate of approximately $1.9 million to repay our platform investors. Based on recent
repayments collected from borrowers, we also recognized bad debt expenses of approximately $3.7 million for those receivables.
We expect to make 90% of repayment due to investors by December 31, 2021.
However, if we could not generate enough cash flow to pay investors on time in accordance with the plan, we may incur
additional commitment liabilities before we fully fulfill the commitment. The amount and timing of the actual allowance for bad
debt may change based on collectability of the subject loans during the execution of the plan.
We face intense competition, which may lead to loss of market share, reduced service fees and revenue, increased expenses,
departures of qualified employees, and disputes with competitors.
We face intense competition in the automobile transaction and financing industry. Our competitors may have significantly
more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to
the development and promotion of their services. As a result, they may have deeper relationships with automobile dealers,
automobile financing partners and other third-party service providers than we do. This could allow them to develop new services,
adapt more quickly to changes in technology and to undertake more extensive marketing campaigns, which may render our services
less attractive to consumers and cause us to lose market share. Moreover, intense competition in the markets we operate in may
reduce our service fees and revenue, increase our operating expenses and capital expenditures, and lead to departures of our
qualified employees. We may also be harmed by negative publicity instigated by our competitors, regardless of its validity. We may
in the future continue to encounter disputes with our competitors, including lawsuits involving claims asserted under unfair
competition laws and defamation which may adversely affect our business and reputation. Failure to compete with current and
potential competitors could materially harm our business, financial condition and our results of operations.
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Our relationship with Didi, a leading Chinese ride-hailing service platform, third party sales teams and financing partners is
crucial to our ability to grow our business, results of operations and financial condition.
Our strategic relationship with Didi, a leading ride-hailing service platform in China, is crucial to our business as most of the
cars we provide services to are used as ride-hailing vehicles for Didi. Our cooperative arrangement with Didi is on a non-exclusive
basis, and Didi may have cooperative arrangements with our competitors. If our collaboration with Didi was terminated, we may
not be able to maintain our existing customers or attract new customers who are and will be Didi drivers, which could materially
and adversely affect our business and impede our ability to continue our operations.
We also cooperate with third party sales teams, automobile dealers and financial institutions and others to provide automobile
transaction and financing services. Our ability to acquire consumers depends on our own marketing efforts through online
advertising and billboard advertising, as well as the network of different third party sales teams. Our ability to attract and maintain
customers also depends on whether our financing partners provide timely and sufficient funding to automobile purchase. We intend
to strengthen relationships with existing financing partners and develop new relationships for our automobile transaction and
financing business. If we are not able to attract or retain cooperative third party sales teams or financing partners as new business
partners on acceptable terms, our business growth will be hindered and our results of operations and financial condition will suffer.
Under the terms of the JKL Investment Agreement, we may be required to sell Jinkailong or take it public in the future, and
failing that, or if other redemption triggers occur, we may be required to participate in a repurchase of the investor’s interest in
Jinkailong.
On July 4, 2020, we entered into the JKL Investment Agreement with Jinkailong’s other shareholders and Hongyi, pursuant to
which Hongyi agreed to subscribe a 27.03% equity interest of Jinkailong for a consideration of RMB 50 million (approximately $7
million) with the payments to be made in tranches. The JKL Investment Agreement provides Hongyi certain shareholder rights,
including a redemption right which provides that the other shareholders of Jinkailong may be required to purchase Hongyi’s equity
interest in Jinkailong in the event that Jinkailong (i) fails to become public through an IPO for a valuation of no less than RMB350
million (approximately $49.5 million) or merge with a public company for a valuation of no less than RMB300 million
(approximately $42.5 million) within the six months following the performance commitment period, (ii) fails to achieve an
accumulated net profit of RMB24 million (approximately $3.4 million) for the first two years of the performance commitment
period or a net profit of RMB20 million (approximately $2.9 million) for the third year of the performance commitment period, or
(iii) has any material and adverse change to its core business, including but not limited to being included in the list of dishonest
persons and loss of over one third of its online ride-hailing taxi operating licenses, as well as bankruptcy, liquidation or cessation of
operations, Hongyi shall have the right to require certain shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its
equity interest in Jinkailong. Based on a repurchase formula provided for in the JKL Investment Agreement, the maximum
repurchase amount that Hunan Ruixi would be subject to is RMB28,320,000 (approximately $4.0 million).
There is no assurance that Jinkailong will be able to become listed or merged with a public company with the stipulated
valuation within the timeframe provided in the JKL Investment Agreement, and even if we are forced into such transactions, there
is a risk that such merger or going public event might not be in the interests of our shareholders at that time. Moreover, there is a
risk if such merger or going public event does not occur, or that the other redemption triggers occur, we may be required to
participate in the repurchase Hongyi’s equity interest in the future. We may not have the funds to participate in such redemption at
the required time, which would leave us subject to claims of breach of contract by Hongyi or force to us to raise new funding to
meet our obligations, which funding might not be available to us on commercially reasonable terms or at all.
Moreover, our ability to dispose of our equity interest in Jinkailong is restricted. Specifically, under the JKL Investment
Agreement, we are prohibited from disposing of our equity interest in Jinkailong until six months after the performance
commitment period. These limitations could further prevent us from obtain the funding necessary to meet our redemption
obligations under the JKL Investment Agreement.
Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus
disease (COVID-19).
An outbreak of respiratory illness caused by COVID-19 emerged in China in late 2019 and has expanded within the rest of
China and globally. Our principal operations are located in China. COVID-19 is considered to be highly contagious and poses a
serious public health threat. On March 11, 2020, the WHO declared the outbreak of COVID-19 a pandemic, expanding its
assessment of the threat beyond the global health emergency it had announced in January 2020. The COVID-19 pandemic has
materially and adversely affected the global economy, our markets in China and our business. Restrictions on the movement of
people and goods in certain regions may require us to adjust certain of our service processes in the future. Our offices in Chengdu,
Sichuan and Changsha, Hunan were closed from late January 2020 to late February, 2020, as a result of the COVID-19 outbreak. A
prolonged outbreak of COVID-19 could result in decrease of client demand for our services, restrictions on our travel to support
our clients, and delays in our services. All these factors adversely impacted our results of operations during our fourth fiscal quarter
ended March 31, 2020 and may adversely affect our business and results of operations during 2020 and beyond, although we cannot
quantify the overall impact at this time.
We cannot foresee whether the outbreak of COVID-19 will continue to be effectively contained in China, nor can we predict
the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business
operations and financial condition may continue to be materially and adversely affected as a result of the deteriorating market
outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers and
other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the
overall business environment, cause uncertainties in the regions in China where we conduct business, cause our business to suffer
in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.
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We do not have written agreements in place with certain financing partners and adverse change in our relationship with such
financing partners may materially and adversely impact our business and results of operations.
We rely on a limited number of financing partners to fund automobile transactions for automobile purchasers. However, we do
not have written agreements in place with these financing partners obligating them to provide financing. For example, one of our
top financing partners has been funding the automobile purchases by purchasers referred by us through an agreement with a related
party of Jinkailong. Because such financing partners are not contractually bound by any specific commitment to provide financing,
they may determine not to collaborate with us or limit the funding that is available for financing transactions we facilitate, which
will materially and adversely affect our business, financial condition and results of operations.
Our customers’ failure to fully comply with PRC taxi-related laws may expose us to potential penalties and negatively affect our
operations.
According to the guidelines issued by the Municipal Communications Commission of Chengdu in November 2016, online
reservation taxi operating license, automobile certificate and online reservation taxi driver’s license are required to operate the
online ride-hailing business. Approximately 5% of the automobiles used for online ride-hailing that are affiliated with us do not
have the automobile certificates and approximately 68% of our ride-hailing drivers have not obtained the online reservation taxi
driver’s licenses as of March 31, 2020. We are in the process of assisting the drivers to obtain the required certificate and license.
However, there is no guarantee that all of the drivers affiliated without us would be able to obtain all the certificate and license. Our
ability and method to provide the automobile transaction related services might be affected or restricted if our affiliated drivers or
automobiles do not possess the requisite license. Our business and results of operations will be materially affected if our affiliated
drivers are suspended from providing ride-hailing services or imposed substantial fines.
We advance payments for over 90% of the automobile purchases for our customers and we can provide no assurances that our
current financial resources will be adequate to support this operation.
We prepay all the purchase price and expenses on behalf of the automobile purchasers when we provide purchase services and
collect all the advance payment and relevant services fees from the proceeds disbursed by the financial institutions upon the closing
of the financing and/or when the monthly installment payment made by automobile purchasers during the lease term. As of March
31, 2020, we had advanced payments of approximately RMB12.3 million (approximately $1.7 million) for the automobile
purchases. We funded those advance payments by proceeds of our initial public offering, the June 2019 Offering, loans from
financial institutions and capital contributions from shareholders.
Our liquidity may be negatively impacted as a result of the increases in advance payments for automobile purchases in
addition to general economic and industry factors. We anticipate that, to the extent that we require additional liquidity, it will be
funded through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of
liquidity. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution.
Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include
covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. The covenants under future credit facilities may limit our ability to obtain additional debt financing. We
cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future
could have a negative impact on our financial condition and our ability to pursue our business strategies.
Our failure to raise additional capital and in sufficient amounts may significantly impact our ability to maintain and expand
our business.
Prior consent from financial institutions which provided financing to our online ride-hailing driver customers for the purchase
of automobiles has not been obtained for us to sublease or sell the drivers’ automobiles.
As described in the section titled “Business” above, due to the intense competition and the COVID-19 pandemic, during the
year ended March 31, 2020, certain ride-hailing drivers (primarily in Chengdu, our principal area of operations in China) exited the
online ride-hailing business and tendered their purchased automobile to us for sublease or sales in order to offset monthly payment
owed to us and the financial institutions. Their Financing Agreements with the financial institutions are still valid and in effect.
Pursuant to the Financing Agreements, the right of the automobile collateral to the financial institution belongs to the financial
institution and without their consent, we may not dispose of, use, or take possession of those automobiles. To prevent the default in
payments to the financial institutions and us, the drivers authorized us orally or in writing to sublease or sell the automobiles to
other parties, and use the cash generated from the sublease or sales to cover the monthly installment payments to the financial
institution and the monthly installment service fees as well as the automobile registration related fees that we previously advanced
during the remaining original lease terms to us. As prior consent from the financial institutions have not been obtained, the financial
institutions may require us to stop sublease and return the automobiles immediately. We may also be required to pay penalties to the
financial institutions. Although we have not received any demand from any financial institution to stop the sublease practice, there
is no assurance that future demand to stop such practice may not come along; if so, we may experience economic loss and
reputation damage as a result.
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Jinkailong uses the bank accounts of its related parties for daily operations and inability to use such accounts may have an
adverse impact on our operations.
Jinkailong has been using the bank accounts of its shareholder or companies owned by its shareholders (other than us) to
receive and remit payments during its daily operations. Jinkailong has authorization from these related parties to use the bank
accounts and has designated its own accounting staff to manage such accounts. However, if owners of the bank accounts revoke
their authorization, prohibit or limit Jinkailong’s access to the bank accounts, we may not receive payments timely or at all from
financial institutions or the automobile purchasers, which may adversely affect our operations. Jinkailong may lose all or part of the
funds in the accounts in the event that such accounts are subject to creditor’s claims and frozen or closed by court order.
We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen
circumstances, and financing may not be available on terms acceptable to us, or at all.
We have been financing our Automobile Transaction and Related Services through borrowing from third parties and related
parties and proceeds from our IPO and follow-on public offering. As we intend to continue to make investments to support the
growth of our automobile business, we may require additional capital to pursue our business objectives and respond to business
opportunities, challenges or unforeseen circumstances, including developing new solutions and services, increasing the amount of
financing transactions we facilitate, further enhance our risk management capabilities, increasing our sales and marketing
expenditures to improve brand awareness and engage automobile purchasers through expanded online channels, enhancing our
operating infrastructure and acquiring complementary businesses and technologies. We plan to expand our Automobile Transaction
and Related Services, and we may need to make additional capital contribution as a result. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms
that are acceptable to us, or at all. Repayment of the debts may divert a substantial portion of cash flow to repay principal and
service interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other
general corporate purposes; and we may suffer default and foreclosure on our assets if our operating cash flow is insufficient to
service debt obligations, which could in turn result in acceleration of obligations to repay the indebtedness and limit our sources of
financing.
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Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional
funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common
stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to
continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could
be significantly limited, and our business, financial condition, results of operations and prospects could be adversely affected.
Our automobile financing facilitation services may subject us to regulatory and reputational risks, each of which may have a
material adverse effect on our business, results of operations and financial condition.
We provide automobile financing facilitation services to finance consumers’ car purchases. The PRC laws and regulations
concerning financial services are evolving and the PRC government authorities may promulgate new laws and regulations in the
future. We cannot assure you that our practices would not be deemed to violate any PRC laws or regulations either now or in the
future. The financing products of our financial partners referred by us may be deemed to exceed the stipulated cap on the financing
amount relative to the car purchase price, in which case we may be required to make adjustments to our cooperation arrangements
or cease to cooperate with these financing partners. If we are required to make adjustments to our automobile financing facilitation
referral business model or withdraw, discontinue or change some of our automobile financing facilitation referral services, our
business, financial condition and results of operations would be materially and adversely affected. In addition, if the financing
products referred by us and our cooperation with financing partners were to be deemed as in violation of applicable PRC laws or
regulations, our reputation would suffer.
Moreover, developments in the financial service industry may lead to changes in PRC laws, regulations and policies or in the
interpretation and application of existing laws, regulations and policies, which may limit or restrict consumer financing or related
facilitation services like those we offer. We may, from time to time, be required to adjust our arrangement with third-party financing
partners, which could materially and adversely affect our business, results of operations and financial condition. Furthermore, we
cannot rule out the possibility that the PRC government will institute a new licensing regime covering services we provide in the
future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license
in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our
operations.
We are exposed to credit risk in our auto financing facilitation and auto financing businesses. Our current risk management
system may not be able to accurately assess and mitigate all risks to which we are exposed, including credit risk.
We are exposed to credit risk as we provide automobile financing facilitation to automobile purchasers and are required to
provide guarantees to most of our financing partners on the financing for automobile purchases facilitated by us. As of March 31,
2020, the maximum contingent liabilities we would be exposed to was approximately $18.6 million, assuming all the automobile
purchasers were in default, and for the year ended March 31, 2020, we recognized estimated provisions loss of approximately
$225,000 for the guarantee services as a result of default by the automobile purchasers. Customers may default on their lease/loan
payments for a number of reasons including those outside of their or our control. The credit risk may be exacerbated in automobile
financing due to the relatively limited credit history and other available information of many consumers in China.
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If we are unable to repossess the car collateral for delinquent financing payments of the automobile purchasers referred by us
or do so in a cost-effective manner or if our ability to collect delinquent financing payments is impaired, our business and
results of operations would be materially and adversely affected. We may also be subject to risks relating to third-party debt
collection service providers who we engage for the recovery and collection of loans.
Under most of the Financing agreements between the automobile purchasers and third-party financing partners, we guarantee
the lease/loan payments including principal and the accrued and unpaid interest for the automobile purchase funded by these
financing partners. Therefore, failure to collect lease/loan payments or to repossess the collateral may have a material adverse effect
on our business operations and financial positions. Although the lease/loan payments are secured by the cars, we may not be able to
repossess the car collateral when our customers default. Our measures to track the cars include installing GPS trackers on cars. We
cannot assure you that we will be able to successfully locate and recover the car collateral. We have in the past failed to repossess
one car as the GPS trackers failed to function properly or had been disabled, and we cannot assure you that this incident will not
happen again the future. We also cannot assure you that there will not be regulatory changes that prohibit the installation of GPS
trackers, or the realized value of the repossessed cars will be sufficient to cover our customers' payment obligations. If we cannot
repossess some of these cars or the residual values of the repossessed cars are lower than we expected and not sufficient to cover
the automobile purchaser' payment obligation, our business, results of operations and financial condition may be materially and
adversely affected.
Moreover, the current regulatory regime for debt collection in the PRC remains unclear. We aim to ensure our collection
efforts carried out by our asset management department comply with the relevant laws and regulations in the PRC. However, if our
collection methods are viewed by the automobile purchasers or regulatory authorities as harassments, threats or other illegal means,
we may be subject to risks relating to our collection practice, including lawsuits initiated by the borrowers or prohibition from using
certain collection methods by the regulatory authorities. Any perception that our collection practices are aggressive and not
compliant with the relevant laws and regulations in the PRC may result in harm to our reputation and business, decrease in the
willingness of prospective customers to apply for and utilize our service, or fines and penalties imposed by the relevant regulatory
authorities, any of which may have a material adverse effect on our business, financial condition and results of operations.
We may not be able to enforce our rights against our automobile purchaser clients.
We offer automobile purchasers desiring to enter the ride-hailing business in our areas of operation in China various value-
added services associated with purchasing a car with financing. Such services include, among others, credit assessment, preparation
of financing application materials, assistance with closing of financing transactions, license and plate registration, payment of taxes
and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures.
We charge automobile purchaser fees for such services, but we do not enter into agreements with such automobile purchaser
regarding the provision and payment of the purchase services. In the event a legal dispute arises between the purchaser and us, we
may not be able to enforce our rights against the purchaser, which may materially and adversely affect our business, results of
operation and financial condition.
We are required to obtain certain licenses and permits in China for our business operations, and we may not be able to obtain or
maintain such licenses or permits.
We may be deemed to operate financing guarantee business by the PRC regulatory authorities. Under certain arrangements in
our services, we provide guarantees to our customers who apply for financing with certain of our financing partners. In August,
2017, the PRC State Council promulgated the Regulations on the Administration of Financing Guarantee Companies (the
“Financing Guarantee Rules”), which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing
guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types
of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee
business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies are subject to the
approval by the relevant governmental authority, and unless otherwise stipulated, no entity may operate financing guarantee
business without such approval.
We do not believe that the Financing Guarantee Rules apply to our car financing facilitation business as we provide guarantees
to our financing partners in connection with the financing of the purchase of automobiles and such guarantees are not provided
independently as our principal business. However, due to the lack of further interpretations, the exact definition and scope of
“operating financing guarantee business” under the Financing Guarantee Rules is unclear. It is uncertain whether we would be
deemed to operate financing guarantee business in violation of relevant PRC laws or regulations because of our current
arrangements with certain financial institutions. If the relevant regulatory authorities determine that we are operating financing
guarantee business, we may be required to obtain approval or license for financing guarantee business to continue our collaboration
arrangement with certain financial institutions.
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In addition, based on our current business model, we prepay the purchase price of automobiles and all service related expenses
and collect the advance payment (without any interest) through monthly installment payments from the automobile purchaser.
Pursuant to Provisions on Several Questions Concerning the Application of Law in the Trial of Private Lending Cases released
by the Supreme People's Court in June 2015, private lending refers to the act of financing between natural persons, legal persons
and other organizations and among them. According to the Approval on How to Confirm the Effectiveness of Lending Behavior
between Citizens and Enterprises issued by the PRC Supreme People’s Court in 1999, the private lending refers to the lending
between citizens and non-financial enterprises (hereinafter referred to as enterprises). As long as all parties' declaration of intention
is true, it can be recognized as valid (the “Private Lending Rules”).
We do not believe that the Private Lending Rules apply to our automobile purchase services business as we need to pay in
advance to different suppliers to complete our services such as preparation of financing application materials, assistance with
closing of financing transactions, license and plate registration, payment of taxes and fees, purchase of insurance, installment of
GPS devices, ride-hailing driver qualification and other administrative procedures. We have no intention to lend money to and gain
interest from automobile purchasers. We collect payments in a period longer than 12 months based on current product designs.
However, it is uncertain whether we would be deemed to operate private lending business in violation of relevant PRC laws or
regulations because we prepay on behalf of automobile purchasers and collect payments over a period of more than 12 months. If
the relevant regulatory authorities determine that we are operating private lending business, we may be penalized for engaging in
businesses out of the scope of our business license. Pursuant to the Regulations on the Registration of Enterprise Legal Persons, we
may be given warnings, fined, confiscated of illegal income, required to suspension and rectification, or our business license might
be withheld and revoked by relevant regulatory authorities.
Consequently, we may be required to obtain approval or license for financing business to continue our current collection
method of payments. If we are no longer able to maintain our current collection method of payments, or become subject to
penalties, our business, financial condition, results of operations and prospects could be materially and adversely affected.
Our failure to sell cars that we purchased from dealers may have a material and adverse effect on our business, financial
condition and results of operations.
In January 2019, we started to purchase automobiles from automotive dealers for sales. We primarily purchase automobile
models that are reliable, affordable and based on the preference of Didi, feedback from and market analysis as to perception and
demand for such models, and that will appeal to car buyers in lower-tier cities. We price automobiles based on our automotive
transaction data associated with providing automotive transaction services. We have limited experience in the purchase of
automobiles for sale to purchasers, and there is no assurance that we will be able to do so effectively. Demand for the type of
automobiles that we purchase can change significantly between the time the automobiles are purchased and the date of sale.
Demand may be affected by new automobile launches, changes in the pricing of such automobiles, defects, changes in consumer
preference and other factors, and dealers may not purchase them in the quantities that we expect. We may also need to adopt more
aggressive pricing strategies for these cars than originally anticipated. We also face inventory risk in connection with the
automobiles purchased, including the risk of inventory obsolescence, a decline in values, and significant inventory write-downs or
write-offs. If we were to adopt more aggressive pricing strategies, our profit margin may be negatively affected as well. We may
also face increasing costs associated with the storage of these automobiles. Any of the above may materially and adversely affect
our financial condition and results of operations.
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We assist automobile purchasers in obtaining financing from financing institutions, which may constitute provision of
intermediary service, and our agreements with these financial institutions may be deemed as intermediation contracts under the
PRC Contract Law.
We assist automobile purchasers in obtaining financing from financing institutions, which may constitute an intermediary
service, and such services may be deemed as intermediation contracts under the PRC Contract Law. Under the PRC Contract Law,
an intermediary may not claim for service fee and is liable for damages if it conceals any material fact intentionally or provides
false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests.
Therefore, if we fail to provide material information to financial institutions, or if we fail to identify false information received from
automobile purchasers or others and in turn provide such information to financial institutions, and in either case if we are also found
to be at fault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or
employee supervision, we could be held liable for damage caused to financial institutions as an intermediary pursuant to the PRC
Contract Law. In addition, if we fail to complete our obligations under the agreements entered into with financial institutions, we
could also be held liable for damages caused to financial institutions pursuant to the PRC Contract Law.
If data provided by automobile purchasers and other third-party sources or collected by us are inaccurate, incomplete or
fraudulent, the accuracy of our credit assessment could be compromised, customer trust in us could decline, and our business,
financial position and results of operations would be harmed.
China’s credit infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in
2002 has been the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit
Reference Center only records limited credit information, such as tax payments, civil lawsuits, foreclosures and bankruptcies.
Moreover, this credit database is only accessible to banks and a limited number of market players authorized by the Credit
Reference Center and does not support sophisticated credit scoring and assessment. In 2015, the PBOC announced that it would
open the credit reporting market to private sectors with a view to spurring competition and innovation, but it may be a long-term
process to establish a widely-applicable, reliable and sophisticated credit infrastructure in the market we operate.
For the purpose of credit assessment, we obtain credit information from prospective automobile buyers, and with their
authorization, obtain credit data from external parties to assess applicants’ creditworthiness. We may not be able to source credit
data from such external parties at a reasonable cost or at all. Such credit data may have limitations in measuring prospective
automobile purchasers’ creditworthiness. If there is an adverse change in the economic condition, credit data provided by external
parties may no longer be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk
management capabilities. As a result, our assessment of an automobile purchaser’s credit profile may not reflect that particular car
buyer’s actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information.
To the extent that automobile purchasers provide inaccurate or fraudulent information to us, or the data provided by third-
party sources is outdated, inaccurate or incomplete, our credit evaluation may not accurately reflect the associated credit risks of
automobile purchasers. Among other things, we rely on data from external sources, such as the personal credit report from PBOC.
These checks may fail and fraud may occur as we may fail to discover or reveal fake documents or identities used by fraudulent
automobile purchasers. Additionally, once we have obtained an automobile purchaser's information, the automobile purchaser may
subsequently (i) become delinquent in the payment of an outstanding obligation; (ii) default on a pre-existing debt obligation; (iii)
take on additional debt; or (iv) experience other adverse financial events, making the information we previously obtained
inaccurate. We also collect car collateral location data by installing GPS trackers for lease/loan payment monitoring purposes. The
location data we collected may not be accurate. As a result, our ability to repossess the car collateral could be severely impaired. If
we are unable to collect the lease/loan payments we facilitated or repossess the car collateral due to inaccurate or fraudulent
information, our results of operations and profitability would be harmed.
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We may be subject to product liability claims if people or property are harmed by vehicles purchased through us.
Vehicles purchased through us may be defectively designed or manufactured. As a result, we may be exposed to product
liability claims relating to personal injury or property damage. Third parties subject to such injury or damage may bring claims or
legal proceedings against us because we facilitate the financing/purchase of the product. Although we would have legal recourse
against the automobile manufacturers or dealers under PRC law, attempting to enforce our rights against the automobile
manufacturers or dealers may be expensive, time-consuming and ultimately futile. In addition, we do not currently maintain any
third-party liability insurance or product liability insurance in relation to vehicles purchased through us. As a result, any material
product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of
operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could
have a negative impact on our reputation.
If the ride-hailing drivers engage in, or are subject to, criminal, violent, inappropriate, or dangerous activity that results in
major safety incidents, our ability to attract and retain new customers may be harmed, which could have an adverse impact on
our reputation, business, financial condition, and operating results.
We are not able to control or predict the actions of the ride-hailing drivers and third parties, either during the process of
providing services or otherwise. Such actions may result in injuries, property damage, or loss of life for passengers and third
parties, or business interruption, brand and reputational damage, or significant liabilities for us. Our screen and evaluation of the
drivers may not expose all potentially relevant information and may fail to disclose information that could be relevant to a
determination of eligibility. In addition, we do not independently test drivers’ driving skills.
If the ride-hailing drivers engage in criminal activity, misconduct, or inappropriate conduct, and we may receive negative
press coverage as a result of our business relationship with such drivers, which would adversely impact our brands, reputation, and
business. There have been numerous incidents and allegations of Didi drivers sexually assaulting, abusing, and kidnapping
consumers, or otherwise engaging in criminal activity. If other criminal, inappropriate, or other negative incidents occur due to the
conduct of ride-hailing drivers or third parties, our ability to attract customers may be harmed, and our business and financial
results could be adversely affected.
Further, we may be subject to claims of significant liability based on traffic accidents, deaths, injuries, or other incidents that
are caused by ride-hailing drivers, consumers, or third parties. Our auto liability and general liability insurance policies may not
cover all potential claims to which we are exposed, and may not be adequate to indemnify us for all liabilities. These incidents may
subject us to liability and negative publicity, which would increase our operating costs and adversely affect our business, operating
results, and future prospects. Even if these claims do not result in liability, we will incur significant costs in investigating and
defending against them.
Government policies on automobile purchases and ownership may materially affect our results of operations.
Government policies on automobile purchases and ownership may have a material effect on our business due to their
influence on consumer behaviors. Since 2009, the PRC government has changed the purchase tax on automobiles with 1.6 liter or
smaller engines several times. In addition, in August 2014, several PRC governmental authorities jointly announced that from
September 2014 to December 2017, purchases of new energy automobiles designated on certain catalogs will be exempted from the
purchase taxes. In April 2015, several PRC governmental authorities also jointly announced that from 2016 to 2020, purchasers of
new energy automobiles designated on certain catalogs will enjoy subsidies. In December 2016, relevant PRC governmental
authorities further adjusted the subsidy policy for new energy automobiles. On March 26, 2019, the PRC governmental authorities
updated government subsidy policy for new energy automobiles which raises the threshold for the subsidy and reduces the amount
of subsidies. On April 23, 2020, relevant PRC governmental authorities issue a notice, amongst others, that the subsidy policy for
new energy automobiles will be extended to the end of 2022, while the amount of subsidies will be reduced year by year. We cannot
predict whether government subsidies will remain in the future or whether similar incentives will be introduced, and if they are,
their impact on automobile retail transactions in China. It is possible that automobile retail transactions may decline significantly
upon expiration of the existing government subsidies if consumers have become used to such incentives and delay purchase
decisions in the absence of new incentives. If automobile retail transactions indeed decline, our revenues may fluctuate and our
results of operations may be materially and adversely affected.
39
Some local governmental authorities also issued regulations and relevant implementation rules in order to control urban traffic
and the number of automobiles within particular urban areas. For example, local Beijing governmental authorities adopted
regulations and relevant implementing rules in December 2010 to limit the total number of license plates issued to new automobile
purchases in Beijing each year. Local Guangzhou governmental authorities also announced similar regulations, which came into
effect in July 2013. There are similar policies that restrict the issuance of new automobile license plates in Shanghai, Tianjin,
Hangzhou, Guiyang and Shenzhen. In September 2013, the State Council released a plan for the prevention and remediation of air
pollution, which requires large cities, such as Beijing, Shanghai and Guangzhou, to further restrict the number of motor vehicles. In
March 2018, the Beijing government issued an additional regulation to limit the total number of vehicles in Beijing to no more than
6.1 million, 6.2 million and 6.3 million by the end of 2018, 2019 and 2020, respectively. We cannot assure you that similar
measures will not be adopted in Sichuan and Hunan Provinces. Such regulatory developments, as well as other uncertainties, may
adversely affect the growth prospects of China’s automobile industry, which in turn may have a material adverse impact on our
business.
The ride-hailing service market is still in a relatively early stage of growth with intense competition in metropolitan cities in
China and if such market does not continue to grow, grow more slowly than we expect or fail to grow as large as we expect, our
business, financial condition and results of operations could be adversely affected.
According to the Chinese Academy of Industry Economy Research Institute, the ride-hailing service market in China has
grown rapidly since 2015. However, it is still relatively new, and it is uncertain to what extent market acceptance will continue to
grow, if at all. Our success will depend to a substantial extent on the willingness of people to widely-adopt ride-hailing. If the
public does not perceive ridesharing as beneficial, or chooses not to adopt it as a result of concerns regarding safety, affordability or
for other reasons, whether as a result of incidents on the ride-hailing service platform or otherwise, then the ride-hailing service
market may not further develop, or may develop more slowly than we expect or may not achieve the growth potential we expect,
any of which could adversely affect our business, financial condition and results of operations.
Our business is subject to risks related to China's automobile leasing and financing industry, including industry-wide and
macroeconomic risks.
We operate in China’s automobile leasing and financing industry. We cannot assure you that this market will continue to grow
rapidly in the future. Further, the growth of China’s automobile leasing and financing industry could be affected by many factors,
including:
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general economic conditions in China and around the world;
the growth of disposable household income and the availability and cost of credit available to finance car purchases;
the growth of China's automobile industry;
taxes and other incentives or disincentives related to car purchases and ownership;
environmental concerns and measures taken to address these concerns;
the cost of energy, including gasoline prices, and the cost of car license plates in various cities with license plate lottery
or auction systems in China;
the improvement of the highway system and availability of parking facilities;
other government policies relating to automobile leasing and financing in China;
fluctuations in the sales and price of new and used cars;
consumer acceptance of financing car purchases;
changes in demographics and preferences of car purchasers;
ride sharing, transportation networks, and other fundamental changes in transportation pattern; and
other industry-wide issues, including supply and demand for cars and supply chain challenges.
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Any adverse change to these factors could reduce demand for used cars and hence demand for our services, and our results of
operations and financial condition could be materially and adversely affected.
Fraudulent activity in our Automobile Transaction and Related Services could negatively impact our operating results, brand
and reputation and cause the use of our loan products and services to decrease.
We are subject to the risk of fraudulent activity associated with users and third parties handling user information. Our
resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in
fraudulent activity could negatively impact our brands and reputation, reduce the automobile transactions facilitated through us and
lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead
to regulatory intervention, and may divert our management's attention and cause us to incur additional expenses and costs.
Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we
cannot rule out the possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If any of
the foregoing were to occur, our results of operations and financial conditions could be adversely affected. We have incurred net
losses and may continue to incur net losses in the future.
We have incurred net losses and may continue to incur net losses in the future.
We had net losses of $9,935,802 and $4,542,525 in the years ended March 31, 2020 and 2019, respectively, and may continue
to incur losses in the future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue
to grow our business, attract more customers and further enhance and develop our Automobile Transaction and Related Services.
These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue
sufficiently to offset these higher expenses. Our net revenue growth may slow, our net income margins may decline or we may
incur additional net losses in the future and may not be able to achieve and maintain profitability on a quarterly or annual basis. In
addition, our net revenue growth rate will likely decline as our net revenue grows to higher levels.
We may need additional capital, and financing may not be available on terms acceptable to us, or at all.
In the fiscal years ended March 31, 2020 and 2019, our principal sources of liquidity were proceeds from our IPO, the June
2019 Offering, capital contribution from our stockholders and borrowings from financial institutions. As of March 31, 2020, we had
cash and cash equivalents of $844,027, compared with cash and cash equivalents of approximately $5,020,510 as of March 31,
2019. With the proceeds from our June 2019 Offering and anticipated cash flows from operating activities, we have been able to
meet our anticipated working capital requirements and capital expenditures in the ordinary course of business to the date of the
Report. If we fail to do so due to unexpected situations, we anticipate to receive loans from our stockholders to fund our operations.
However, we cannot assure you this will be the case. We may need additional cash resources in the future if we experience changes
in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to
pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements
exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or
obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our stockholders. The
incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict
our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
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Fluctuations in interest rates could negatively affect our results of operations.
We charge service fees to automobile purchasers for facilitating financing transactions. If prevailing market interest rates
increase, automobile purchasers would be less likely to finance automobile purchases with credit or we may need to reduce our
service fees to mitigate the impact of increased interest rates. If we do not sufficiently lower our service fees and keep our fees
competitive in such instances, automobile purchasers may decide not to utilize our services because of our less competitive service
fees and may take advantage of lower service fees offered by other companies, and our ability to attract prospective automobile
purchasers as well as our competitive position may be severely undermined. On the other hand, if prevailing market interest rates
decline, the operating margins of financial institutions may decrease, which may make the financial institutions less likely to
finance automobile purchases. Under either circumstance, our financial condition and profitability could also be materially and
adversely affected.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics,
may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period
comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results
for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect
the price of our common stock. Factors that may cause fluctuations in our quarterly financial results include:
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our ability to attract new customers and maintain relationships with existing customers;
our ability to maintain existing relationship with existing financing partners and establish new relationships with
additional financial partners for our Automobile Transaction and Related Services;
the amount of automobile financing transactions we facilitate;
overdue ratios of automobile financing transactions/loans we facilitate;
financial institutions’ willingness and ability to fund financing transactions through us on reasonable terms;
changes in our services and introduction of new products and services;
the amount and timing of operating expenses related to acquiring customers and the maintenance and expansion of our
business, operations and infrastructure;
our ability to manage transaction volume growth during the period;
the timing of expenses related to the development or acquisition of technologies or businesses;
network outages or security breaches;
general economic, industry and market conditions;
our emphasis on customer experience instead of near-term growth; and
the timing of expenses related to the development or acquisition of technologies or businesses.
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If we fail to promote and maintain our brands in an effective and cost-efficient way, our business and results of operations may
be harmed.
We believe that developing and maintaining awareness of our brands effectively is critical to attracting new and retaining
existing customers. Successful promotion of our brands and our ability to attract customers depend largely on the effectiveness of
our marketing efforts and the success of the channels we use to promote our services. Our efforts to build our brands have caused us
to incur expenses, and it is likely that our future marketing efforts will require us to incur additional expenses. These efforts may
not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the
expenses incurred. If we fail to successfully promote and maintain our brands while incurring substantial expenses, our results of
operations and financial condition would be adversely affected, which may impair our ability to grow our business.
Any harm to our brands or reputation or any damage to the reputation of our business partners or other third parties, or the
automobile financing or ride-hailing industries in China may materially and adversely affect our business and results of
operations.
Maintaining and enhancing the recognition and reputation of our brands is critical to our business and competitiveness.
Factors that are vital to this objective include but are not limited to our ability to:
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maintain and develop relationships with dealers, ride-hailing platforms and financial institutions;
provide prospective and existing customers with superior experiences;
enhance and improve our credit assessment and decision-making models;
effectively manage and resolve any user complaints of financial institutions or customers; and
effectively protect personal information and privacy of customers.
Any malicious or innocent negative allegation made by the media or other parties about the foregoing or other aspects of our
company, including but not limited to our management, business, compliance with law, financial conditions or prospects, whether
with merit or not, could severely hurt our reputation and harm our business and operating results. As the markets for China's
automobile financing and ride-hailing are new and the regulatory framework for these market is also evolving, negative publicity
about these markets may arise from time to time. Negative publicity about China’s automobile financing and ride-hailing industries
in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate
activities.
In addition, certain factors that may adversely affect our reputation are beyond our control. Negative publicity about our
partners, outsourced service providers or other counterparties, such as negative publicity about any failure by them to adequately
protect the information of users, to comply with applicable laws and regulations or to otherwise meet required quality and service
standards could harm our reputation. Furthermore, any negative development in any of the automobile financing or ride-hailing
industries, such as bankruptcies or failures of other companies in any of this these, and especially a large number of such
bankruptcies or failures, or negative perception of any of the industries as a whole, could compromise our image, undermine the
trust and credibility we have established and impose a negative impact on our ability to attract new clients. Negative developments
in these industries, such as widespread automobile purchaser/borrower defaults, unethical or illegal activities by industry players
and/or the closure of companies providing similar services, may also lead to tightened regulatory scrutiny of these sectors and limit
the scope of permissible business activities that may be conducted by us. If any of the foregoing takes place, our business and
results of operations could be materially and adversely affected.
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Our reputation may be harmed if information supplied by customers is inaccurate, misleading or incomplete.
Our customers supply a variety of information that is in the applications to financing partners. We do not verify all the
information we receive from our customers, and such information may be inaccurate or incomplete. If financing partners provide
funding to the automobile purchasers based on information supplied by automobile purchasers that is inaccurate, misleading or
incomplete, those financing partners may not receive their expected returns and our reputation may be harmed. Moreover,
inaccurate, misleading or incomplete customer information could also potentially subject us to liability as an intermediary under the
PRC Contract Law. See “Business — Regulations.”
Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.
Almost all access to the internet in China is maintained through state-owned telecommunication operators under the
administrative control and regulatory supervision of the MIIT. We primarily rely on a limited number of telecommunication service
providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host
our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with
China's internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With
the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the requirements of
our operations. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be
able to support the demands associated with the continued growth in internet usage.
In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices
we pay for telecommunications and internet services rise significantly, our results of operations may be adversely affected.
Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be
harmed.
Any significant disruption in our IT systems, including events beyond our control, could prevent us from offering our solutions
and services or reduce their attractiveness and result in a loss of car buyers or leases and financial institutions.
In the event of a system outage, malfunction or data loss, our ability to provide services would be materially and adversely
affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are
critical to our operations, user service, reputation and our ability to attract new and retain existing car buyers and financial
institutions. Our IT systems infrastructure is currently deployed, and our data is currently maintained through a customized cloud
computing system. Our servers are housed at third-party data centers, and our operations depend on the service providers’ ability to
protect our systems in their facilities as well as their own systems against damage or interruption from natural disasters, power or
telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems,
criminal acts and similar events, many of which may be beyond our control. Many of our mobile applications are also provided
through third-party app stores and any disruptions to the services of these app stores may negatively affect the delivery of our
mobile applications to users. Moreover, if our arrangement with these service providers are terminated or if there is a lapse of
service or damage to their facilities or if the services are no longer cost-effective to us, we could experience interruptions in our
solutions and service as well as delays and additional expense in arranging new automotive financing solutions for car buyers and
to serve our other platform participants. Our ability to exchange information with financial institutions and obtain credit data from
third parties could also be interrupted.
Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security
breaches, whether accidental or willful, could harm our relationships with car buyers and financial institutions and our reputation.
We may not have sufficient capacity to recover all data and services lost in the event of an outage. These factors could prevent us
from processing credit applications and other business operations, damage our brands and reputation, divert our employees’
attention, reduce our revenue, subject us to liability and cause car buyers and financial institutions to abandon our solutions and
services, any of which could adversely affect our business, financial condition and results of operations.
Misconduct, errors and failure to function by our employees and third-party service providers could harm our business and
reputation.
We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-
party service providers. Our business depends on our employees and third-party service providers to interact with potential
customers, process large numbers of transactions and support the loan/lease payment collection process, all of which involve the
use and disclosure of personal information. We could be materially adversely affected if transactions were redirected,
misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an
operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage
or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal
information and interact with our customers is governed by various PRC laws. It is not always possible to identify and deter
misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity
may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party service providers
take, convert or misuse funds, documents or data or fail to follow protocol when interacting with customers, we could be liable for
damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal
misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.
Aggressive practices or misconduct by any of our third-party service providers in the course of collecting loans could damage our
reputation.
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Furthermore, as we rely on certain third-party service providers, such as third-party payment platforms and custody and
settlement service providers, to conduct our business, if these third-party service providers failed to function properly, we cannot
assure you that we would be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences
could result in our diminished ability to operate our business, potential liability to borrowers and investors, inability to attract
borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our
business, financial condition and results of operations.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and
financial condition.
Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations
and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest
rate environment and unemployment rates, may affect automobile purchasers’ willingness to seek financing and financing partners’
ability and desire to provide financing. Economic conditions in China are sensitive to global economic conditions. The global
financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have
experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and there are new challenges,
including the escalation of the European sovereign debt crisis from 2011 and the slowdown of China's economic growth since 2012
which may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies
adopted by the central banks and financial authorities of some of the world's leading economies, including the United States and
China. In particular, general economic factors and conditions in China or worldwide, including the general interest rate
environment and unemployment rates, may affect consumers’ demand for cars, car buyers’ willingness to seek credit and financial
institutions’ ability and desire to fund financing transactions we facilitate. Economic conditions in China are sensitive to global
economic conditions. The outbreak of COVID-19 coronavirus has resulted in declines in economic activities in China and other
parts of the world and raised concerns about the prospects of the global economy. As of the date of this Report, we are unable to
assess the full impact of the outbreak on our business, results of operations and financial condition. There have also been concerns
over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also
been concerns about the economic effect of the tensions in the relationship between China and the United States. If present Chinese
and global economic uncertainties persist, our business partners may suspend their collaboration or reduce their business with us.
Adverse economic conditions could also reduce the number of customers seeking to utilize our services. Should any of these
situations occur, our transaction volume will decline, and our business and financial conditions will be negatively impacted.
Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to
meet liquidity needs.
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Our ability to protect the confidential information of our customers may be adversely affected by cyber-attacks, computer
viruses, physical or electronic break-ins or similar disruptions.
We collect, store and process certain personal and other sensitive data from our customers, which makes it an attractive target
and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have
taken steps to protect the confidential information that we have access to, our security measures could be breached. Because
techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they
are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Any accidental or willful security breaches or other unauthorized access to our operation systems could cause confidential user
information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could
also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If
security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our
technology infrastructure are exposed and exploited, our relationships with borrowers and investors could be severely damaged, we
could incur significant liability and our business and operations could be adversely affected.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an
effective system of internal control over financial reporting, we may be unable to accurately report our financial results or
prevent fraud.
In connection with the audits of our financial statements for the year ended March 31, 2020, we have identified “material
weaknesses” and other control deficiencies including significant deficiencies in our internal control over financial reporting. As
defined in the standards established by the Public Company Accounting Oversight Board of the United States (the “PCAOB”), a
“material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on
a timely basis.
The material weaknesses that have been identified include: (i)insufficient personnel with appropriate levels of accounting
knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements and
related disclosures under U.S. GAAP; (ii) lack of adequate policies and procedures in internal audit function to ensure that our
policies and procedures have been carried out as planned; (iii) lack of appropriate backup and restoration plan; and (iv) failure to
establish and perform periodic review and security monitoring of unauthorized access to the financial system.
We have implemented, and continue to implement, measures designed to improve our internal control over financial reporting
and remediate the control deficiencies that led to these material weaknesses. We hired Deloitte to help with improvements on our
framework of internal controls, including setting up a risk and control matrix, drawing flowcharts of significant transactions,
evaluating controls effectiveness and preparing manual of internal control. As of March 31, 2020, we improved the communication
to the Board and obtained proper approval for the material transactions and retained an experienced U.S. GAAP consultant to assist
us with the financial reporting and complex accounting issues. We also hired an internal audit staff to start our internal audit work.
We plan to (i) hire additional accounting staffs with comprehensive knowledge of U.S. GAAP and SEC reporting requirements; (ii)
improve our internal audit function, internal control policies and monitoring controls based on the work of our internal audit staff
and (iii) improve our system security environment and conducting regular backup plan and penetration testing to ensure the
network and information security.
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We cannot assure you that the measures we have taken to date, and actions we intend to take in the future, will be sufficient to
remediate material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future
material weaknesses. In addition, neither our management nor an independent registered public accounting firm has performed an
evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no
such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our
internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material
weaknesses may have been identified. If we are unable to successfully remediate our existing or any future material weaknesses in
our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our
financial reporting may be adversely affected, potentially resulting in restatements of our financial statements, we may be unable to
maintain compliance with securities law requirements regarding timely filing of periodic reports and applicable Nasdaq listing
requirements, investors may lose confidence in our financial reporting, and our share price may decline as a result.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and
competitive position.
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to
our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and
non-compete agreements with our employees and others to protect our proprietary rights. We have 15 software copyrights, eleven
trademarks and three trademark applications pending at the PRC Trademark Office. See “Business — Intellectual Property” and
“Business — Regulations — Regulations on Intellectual Property.” Thus, we cannot assure you that any of our intellectual property
rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient to
provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industries, parts of
our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain
licenses and technologies from these third parties on reasonable terms, or at all.
It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are
subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory
interpretation. Confidentiality and non-compete agreements may be breached by counterparties, and there may not be adequate
remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights
or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and
the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to
litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our
managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade
secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our
employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related
know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse
effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business
and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate
trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time
in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be
third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products,
services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce
such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims
are brought against us, we may be forced to divert management's time and other resources from our business and operations to
defend against these claims, regardless of their merits.
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Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for
granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are
uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to
have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be
prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own.
As a result, our business and results of operations may be materially and adversely affected.
Some aspects of our digital operations include open source software, and any failure to comply with the terms of one or more of
these open source licenses could negatively affect our business.
Some aspects of our digital operations include software covered by open source licenses. The terms of various open source
licenses have not been interpreted by PRC courts, and there is a risk that such licenses could be construed in a manner that imposes
unanticipated conditions or restrictions on our online and mobile-based channels. If portions of our proprietary software are
determined to be subject to an open source license, we could be required to publicly release the affected portions of our source
code, re-engineer all or a portion of our technologies if required so by the license, or otherwise be limited in the licensing of our
technologies, each of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to
license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open
source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use
of open source software cannot be eliminated, and could adversely affect our business.
From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require
significant management attention, disrupt our business and adversely affect our financial results.
Although we do not currently have any plans to consummate any acquisitions, we may in the future evaluate and consider
strategic investments, combinations, acquisitions or alliances to further increase the value of our services and better serve our
customers. These transactions could be material to our financial condition and results of operations if consummated. If we are able
to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do
consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:
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difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services
of the acquired business;
inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability,
productivity or other benefits;
difficulties in retaining, training, motivating and integrating key personnel;
diversion of management's time and resources from our normal daily operations;
difficulties in successfully incorporating licensed or acquired technology and rights into our business;
difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
risks of entering markets in which we have limited or no prior experience;
regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-
closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;
assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive
intellectual property rights or increase our risk for liability;
failure to successfully further develop the acquired technology;
liability for activities of the acquired business before the acquisition, including intellectual property infringement claims,
violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;
potential disruptions to our ongoing businesses; and
unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.
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We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not
benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise
result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or
technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced
loan products and services, if developed, will achieve market acceptance or prove to be profitable.
Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or
unwilling to continue in their present positions, our business may be severely disrupted.
Our business operations depend on the continued services of our senior management, particularly the executive officers
named in this Report. While we have provided different incentives to our management, we cannot assure you that we can continue
to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may
not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our
financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to
recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition
agreements with our management, there is no assurance that any member of our management team will not join our competitors or
form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial
costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to
support our business.
We believe our success depends on the efforts and talent of our employees, including risk management, driver and automobile
management, post-financing management, financial and marketing personnel. Our future success depends on our continued ability
to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management
and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels
consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced
employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who
may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their
replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material
adverse effect to our business.
Increases in labor costs in the PRC may adversely affect our business and results of operations.
The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the
PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory
employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance
and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies
may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail
to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs,
including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these
increased labor costs to our customers by increasing the fees of our services, our financial condition and results of operations may
be adversely affected.
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Certain data and information in this Report were obtained from third-party sources and were not independently verified by us.
This Report contains certain data and information that we obtained from various government and private entity publications.
Statistical data in these publications also include projections based on a number of assumptions. If any one or more of the
assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these
assumptions.
We have not independently verified the data and information contained in such third-party publications and reports. Data and
information contained in such third-party publications and reports may be collected using third-party methodologies, which may
differ from the data collection methods used by us. In addition, these industry publications and reports generally indicate that the
information contained therein was believed to be reliable, but do not guarantee the accuracy and completeness of such information.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to
our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages
teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it
difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our
future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on
and pursue our corporate objectives.
We have limited business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in
more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations other
than the accident insurance and commercial liability insurance, which are mandatory, on all the automobiles we purchase for sales
or financing. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such
insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions
may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of
operations and financial condition.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our
operations.
We are vulnerable
loss,
telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions,
breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or
malfunctions of software or hardware as well as adversely affect our ability to provide products and services.
to natural disasters and other calamities. Fire, floods,
typhoons, earthquakes, power
Our business could also be adversely affected by the effects of COVID-19, Ebola virus disease, H1N1 flu, H7N9 flu, avian
flu, Severe Acute Respiratory Syndrome (“SARS”), or other epidemics. Our business operations could be disrupted if any of our
employees is suspected of having COVID-19, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it
could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be
adversely affected to the extent that any of these epidemics harms the Chinese economy in general.
Risks Related to Our Corporate Structure
Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.
On March 15, 2019, the NPC approved the Foreign Investment Law, which has taken effect on January 1, 2020. Since it is
relatively new, uncertainties exist in relation to its interpretation and its implementation rules that are yet to be issued. The PRC
Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual
arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it
has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China
through other means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future
laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign
investment. Therefore, there can be no assurance that our control over Sichuan Senmiao through contractual arrangements will not
be deemed as foreign investment in the future.
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The PRC Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-
invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative
list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from the current Special
Administrative Measures for Market Access of Foreign Investment (Negative List). The PRC Foreign Investment Law provides that
foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals
from relevant PRC government authorities. If our control over Sichuan Senmiao through contractual arrangements are deemed as
foreign investment in the future, and any business of Sichuan Senmiao is “restricted” or “prohibited” from foreign investment under
the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual
arrangements that allow us to have control over Sichuan Senmiao may be deemed as invalid and illegal, and we may be required to
unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect
on our business operation.
Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with
respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a
timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance
challenges could materially and adversely affect our current corporate structure and business operations.
We rely on the Voting Agreement with other shareholders of Jinkailong to operate our automobile transaction and related
services business, and such Voting Agreement is subject to various risks, the realization of which may impact our ability to
control Jinkailong and consolidate its financial statements.
We hold 35% of the equity interest of Jinkailong and control the remaining 65% equity interest through the Voting Agreement
with the other four shareholders of Jinkailong. Although we are the largest shareholder and through the Voting Agreement, control
the corporate matters of Jinkailong including fundamental corporate transactions, the other shareholders of Jinkailong may breach
the Voting Agreement, or act in concert and exert control over Jinkailong through their majority equity ownership, which would
have a material adverse effect on our ability to effectively control Jinkailong and receive economic benefits from it.
Under the Voting Agreement, the other shareholders may not dispose of their equity interest in Jinkailong unless the new
shareholder agrees to be bound by the Voting Agreement. However, as the Voting Agreement is neither registered with any
government authority nor publicly disclosed, a good faith third party purchaser may refuse to recognize the Voting Agreement and
become a party to such agreement, which will impact our ability to control Jinkailong. Likewise, if the equity interest of Jinkailong
held by other shareholders is sold to any third party in satisfaction of the debt of such shareholders, our ability to enforce our rights
under the Voting Agreement may be impaired.
If any of the events occurs, we may not effectively control the operations of Jinkailong and may lose the ability to consolidate
the financial statements of Jinkailong under US GAAP, which will materially and adversely affect our results of operations and
financial conditions.
If the PRC government deems that the contractual arrangements in relation to Sichuan Senmiao do not comply with PRC
regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing
regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those
operations.
Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under
current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a
value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in
providing value-added telecommunications services overseas and maintain a good track record in accordance with the Provisions
on the Administration of Foreign-invested Telecommunication Enterprises, the Special Administrative Measures for Entrance of
Foreign Investment (Negative List) (2018 Version), the Special Administrative Measures for Entrance of Foreign Investment
(Negative List) (2019 Version) and the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020
Version) (which will come into force on July 23, 2020 and replace the 2019 Version).
We are a Nevada corporation and our PRC subsidiaries are considered foreign invested enterprises. To comply with PRC laws
and regulations, we conduct our operations of Online Lending Services in China through a series of contractual arrangements
entered into among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders. As a result of these contractual
arrangements, we exert control over Sichuan Senmiao and consolidate its operating results in our financial statements under U.S.
GAAP. For a detailed description of these contractual arrangements, see “Business — Our Corporate Structure.”
In the opinion of our PRC counsel, Yuan Tai Law Offices, our current ownership structure, the ownership structure of
Senmiao Consulting and Sichuan Senmiao, and the contractual arrangements among Senmiao Consulting, Sichuan Senmiao and the
Sichuan Senmiao Shareholders are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements
are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect.
However, Yuan Tai Law Offices has also advised us that there are substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately
take a view that is consistent with the opinion of our PRC counsel.
51
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or
if adopted, what they would provide. If the ownership structure, contractual arrangements and business of our company, Senmiao
Consulting or Sichuan Senmiao are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain
or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing
with such violation, including levying fines, confiscating our income or the income of Senmiao Consulting or Sichuan Senmiao,
revoking the business licenses or operating licenses of Senmiao Consulting or Sichuan Senmiao, , discontinuing or placing
restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or
prohibiting our use of proceeds from our public offerings to finance our business and operations in China, and taking other
regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to
our business operations and severely damage our reputation, which would in turn materially and adversely affect our business,
financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of Sichuan
Senmiao, and/or our failure to receive economic benefits from Sichuan Senmiao, we may not be able to consolidate its results into
our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements with Sichuan Senmiao, Jinkailong and their respective equity holders for our business
operations, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with Sichuan Senmiao, Jinkailong and their
respective equity holders to a substantial part of our automobile transaction and related services. For a description of these
contractual arrangements, see “Business — Our Corporate Structure.” These contractual arrangements may not be as effective as
direct ownership in providing us with control over Sichuan Senmiao or Jinkailong. For example, Sichuan Senmiao, Jinkailong and
their respective equity holders could breach their contractual arrangements with us by, among other things, failing to conduct its
operations in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of Sichuan Senmiao or own over 50% equity interest of Jinkailong, we would be able to exercise
our rights as an equity holder to effect changes in the board of directors of Sichuan Senmiao or Jinkailong, which in turn could
implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the
current contractual arrangements, we rely on the performance by Sichuan Senmiao, Jinkailong and their respective equity holders
of their obligations under the contracts to exercise control over Sichuan Senmiao or Jinkailong. The equity holders of Sichuan
Senmiao or Jinkailong may not act in the best interests of our company or may not perform their obligations under these contracts.
Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with
Sichuan Senmiao or Jinkailong. If any equity holder of Sichuan Senmiao or Jinkailong is uncooperative or any dispute relating to
these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws
and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system.
Therefore, our contractual arrangements with Sichuan Senmiao or Jinkailong may not be as effective in ensuring our control over
the relevant portion of our business operations as direct ownership would be.
52
Any failure by our VIEs or their equity holders to perform their obligations under our contractual arrangements with them
would have a material adverse effect on our business.
If our VIEs or their equity holders fail to perform their respective obligations under the contractual arrangements, we may
have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal
remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot
assure you will be effective under PRC laws. For example, if the equity holders of Sichuan Senmiao were to refuse to transfer their
equity interest in Sichuan Senmiao to us or our designee if we exercise the purchase option pursuant to these contractual
arrangements, or if the equity holders of Jinkailong refused to perform their obligations under these contractual arrangements, or if
they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their
contractual obligations.
All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes in
China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the
United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements.
Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a
consolidated variable interest entity should be interpreted or enforced under PRC laws. In the event that we are unable to enforce
these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual
arrangements, we may not be able to exert effective control over Sichuan Senmiao, and our ability to conduct our business may be
negatively affected. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties in the interpretation and
enforcement of Chinese laws and regulations could limit the legal protections available to us.”
The equity holders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our
business and financial condition.
The interests of the equity holders in our VIEs may differ from the interests of our company as a whole. These equity holders
may breach, or cause our VIEs to breach, the existing contractual arrangements we have with them and our VIEs, which would
have a material adverse effect on our ability to effectively control our VIEs and receive economic benefits from them. For example,
the equity holders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us. We cannot assure
you that when conflicts of interest arise, any or all of these equity holders will act in the best interests of our company or such
conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these equity holders and our
company, except that we could exercise our purchase option under the exclusive option agreement with the Sichuan Senmiao
Shareholders to request them to transfer all of their equity interests in Sichuan Senmiao to a PRC entity or individual designated by
us, to the extent permitted by PRC laws or in the case of Jinkailong, the other shareholders of Jinkailong (except one minor
shareholder) have committed not to, directly or indirectly, engage in the same business in which the Company engages. If we
cannot resolve any conflict of interest or dispute between us and the Sichuan Senmiao Shareholders, we would have to rely on legal
proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any
such legal proceedings.
53
Contractual arrangements in relation to Sichuan Senmiao may be subject to scrutiny by the PRC tax authorities and they may
determine that we or Sichuan Senmiao owe additional taxes, which could negatively affect our financial condition and the value
of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or
challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The EIT Law
requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its
related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have
identified any related party transactions that are inconsistent with arm's length principles. We may face material and adverse tax
consequences if the PRC tax authorities determine that the contractual arrangements among Senmiao Consulting, Sichuan Senmiao,
and Sichuan Senmiao Shareholders were not entered into on an arm's length basis in such a way as to result in an impermissible
reduction in taxes under applicable PRC laws, rules and regulations, and adjust Sichuan Senmiao’s income in the form of a transfer
pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded
by Sichuan Senmiao for PRC tax purposes, which could in turn increase its tax liabilities without reducing Senmiao Consulting's
tax expenses. In addition, if Senmiao Consulting requests the Sichuan Senmiao Shareholders to transfer their equity interests in
Sichuan Senmiao at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and
subject Senmiao Consulting to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other
penalties on Sichuan Senmiao for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could
be materially and adversely affected if Sichuan Senmiao's tax liabilities increase or if it is required to pay late payment fees and
other penalties.
We may lose the ability to use and enjoy assets held by our VIEs that are material to the operation of our business if the entity
goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
Our VIEs hold certain assets that are material to the operation of our business. Under the contractual arrangements, our VIEs
may not and its equity holders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or
beneficial interests in the business without our prior consent. However, in the event the equity holders of our VIEs breach the these
contractual arrangements and voluntarily liquidate our VIEs, or any of our VIEs declares bankruptcy and all or part of its assets
become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to
continue some or all of our business activities, which could materially and adversely affect our business, financial condition and
results of operations. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, independent third-party
creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could
materially and adversely affect our business, financial condition and results of operations.
54
Risks Related to Doing Business in China
We are required to obtain a value-added telecommunication business certificate and be subject to foreign investment
restrictions.
PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having
obtained an ICP certificate. PRC regulations also impose sanctions for engaging in the operation of online data processing and
transaction processing without having obtained an online data processing and transaction processing, or ODPTP, certificate (ICP
and ODPTP are both sub-sets of value-added telecommunication business certificates). These sanctions include corrective orders
and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of
significant infringements, the websites may be ordered to cease operation. To the extent that the PRC regulatory authorities require
such value-added telecommunication certificate to be obtained or set forth rules that impose additional requirements, and we do not
obtain such certificate, we may be subject to the sanctions described above.
According to the Provisions on the Administration of Foreign-Invested Telecommunication Enterprises, the ratio of
investment by foreign investors in a foreign-invested telecommunication enterprise that engages in the operation of a value-added
telecommunication business shall not exceed 50%. Foreign investors are only permitted to invest up to 50% of the registered capital
in a foreign-invested telecommunication enterprise that engages in the operation of commercial Internet information services or
general online data processing and transaction processing services.
55
As an exception, Circular 196, which was promulgated on June 19, 2015, provides that foreign investors are permitted to
invest up to 100% of the registered capital in a foreign-invested telecommunication enterprise engaging in the operation of online
data processing and transaction processing (E-commerce). While Circular 196 permits foreign ownership, in whole or in part, of
online data processing and transaction processing businesses (E-commerce), a sub-set of value-added telecommunications services,
there is still uncertainty regarding whether foreign investment restrictions may be applied to our business and industry.
Further, under either circumstance, the largest foreign investor will be required to have a satisfactory business track record and
operational experience in the value-added telecommunication business. Any restructuring to meet the requirements may be costly
and may involve interruptions to our business. If we are unable to obtain the telecommunication business certificate in a timely
fashion, our business may be materially and adversely affected.
Changes in China's economic, political or social conditions or government policies could have a material adverse effect on our
business and results of operations.
Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of
operations may be influenced to a significant degree by political, economic and social conditions in China generally and by
continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the amount of
government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the
Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of
state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial
portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a
significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises
significant control over China's economic growth through allocating resources, controlling payment of foreign currency-
denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese
government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These
measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any
prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely
affect our business and results of operations.
Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available
to us.
The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws
and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since
PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual
terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we
enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and
internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may
not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty
over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and
adversely affect our business and impede our ability to continue our operations.
56
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and
companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse
effect on our business and results of operations.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit
requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be
difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For
example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office
(with the involvement of the State Council Information Office, the MIIT, and the MPS). The primary role of this new agency is to
facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in
connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.
The Circular on Strengthening
in and Operation of Value-added
the Administration of Foreign Investment
Telecommunications Business, issued by the MIIT in July 2006, prohibits domestic telecommunication service providers from
leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any
resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According
to this circular, either the holder of a value-added telecommunication services operation permit or its shareholders must directly
own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services.
The circular also requires each license holder to have the necessary facilities, including servers, for its approved business operations
and to maintain such facilities in the regions covered by its license.
Sichuan Senmiao owns the relevant domain names and as of the date of this Report, the website used for our previous P2P
online lending services business (which website continues to contains historical information) has not been fully shut down and
remains accessible to the public. It is not clear whether our existing online lending website would be deemed as operating value-
added telecommunications business. However, if we were deemed to operate telecommunications business without operating
licenses, the relevant governmental authority will order us to rectify the noncompliance, confiscate illegal gains and impose a fine
equal to three to five times of the illegal gains. If no illegal gains or the illegal gain is less than RMB 50,000, a fine of between
RMB 100,000 and RMB 1,000,000 will be imposed. In case of material violation, our business may be suspended and rectification
will be carried out.
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The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or
policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that
we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing
licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or
permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on
the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our
business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business.
Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.
We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing
requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a
material adverse effect on our ability to conduct our business.
We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our
cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our stockholders
and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing
the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require
Senmiao Consulting to adjust its taxable income under the contractual arrangements it currently has in place with Sichuan Senmiao
in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “Risk Factors
— Risks Related to Our Corporate Structure — Contractual arrangements in relation to Sichuan Senmiao may be subject to
scrutiny by the PRC tax authorities and they may determine that we or Sichuan Senmiao owe additional taxes, which could
negatively affect our financial condition and the value of your investment.”
Under PRC laws and regulations, our PRC subsidiaries, as a wholly foreign-owned enterprise in China, may pay dividends
only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and
regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits
each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered
capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting
standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash
dividends.
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Our PRC subsidiaries are currently unable to pay us any dividend given their financial condition. If our PRC subsidiaries’
financial condition improves, the above discussed PRC laws will likely limit their ability to pay dividends or make other
distributions to us. Such limitations could materially and adversely impact our cash flows and limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See
also “Risk Factors — Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for PRC
income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC stockholders.”
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of
currency conversion may delay or prevent us from using the proceeds of from our public offerings to make loans to or make
additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our
ability to fund and expand our business.
Under PRC laws and regulations, we are permitted to utilize the proceeds from our public offerings to fund our PRC
subsidiaries by making loans to or additional capital contributions to our PRC subsidiaries, subject to applicable government
registration and approval requirements.
Any loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC
regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities
cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of
foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the
MOFCOM or its local counterpart and the amount of registered capital of such foreign-invested company.
We have financed and expect to continue to finance our PRC subsidiaries by means of capital contributions. These capital
contributions must be approved by the MOFCOM or its local counterpart. In addition, SAFE issued a circular in September 2008,
SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by
restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign
currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by
the applicable government authority and unless otherwise provided by law, may not be used for equity investments within the PRC.
On July 4, 2014, the SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the
Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36,
which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested
enterprises in certain designated areas from August 4, 2014 and some of the restrictions under SAFE Circular 142 will not apply to
the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the designate areas and such
enterprises are allowed to use its RMB capital converted from foreign exchange capitals to make equity investment. On March 30,
2015, SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142
and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund
converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among
other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing
entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of the flow and
use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB
capital may not be altered without SAFE's approval, and such RMB capital may not in any case be used to repay RMB loans if the
proceeds of such loans have not been used. On June 9, 2016, SAFE issued the Circular on Reforming and Regulating Policies on
the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”), which became effective simultaneously.
Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to RMB on
self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items
(including but not limited to foreign currency capital and foreign debts) on self-discretionary basis which applies to all enterprises
registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a
company may not be directly or indirectly used for purpose beyond its business scope or prohibited by PRC Laws or regulations,
while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular 16 is newly issued and SAFE has
not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain how these rules will be
interpreted and implemented. Violations of these Circulars could result in severe monetary or other penalties. These circulars may
significantly limit our ability to use RMB converted from the net proceeds of our public offerings to fund the establishment of new
entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to
establish new variable interest entities in the PRC.
59
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore
holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the
necessary government approvals on a timely basis, if at all, with respect to future capital contributions or future loans by us to our
PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to
receive from our public offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could
materially and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your
investment.
Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar.
As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB
terms of our U.S. dollar assets and the proceeds from our public offerings. Our reporting currency is the U.S. dollar while the
functional currency for our PRC subsidiaries and consolidated variable interest entities is RMB. Gains and losses from the
remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of
operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations,
and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the
value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when
reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results
of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a
negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the
earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China's
political and economic conditions and China's foreign exchange policies. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S.
dollar over the following three years. However, the People's Bank of China, or the PBOC, regularly intervenes in the foreign
exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and
June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the
RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since
June 2010, the RMB has started to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar
has appreciated against the RMB. On August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the
U.S. dollar. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the
relationship between the RMB and the U.S. dollar may change again.
There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant
appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the
value of, and any dividends payable on, our securities in U.S. dollars. For example, to the extent that we need to convert U.S.
dollars we receive from our public offerings into RMB to pay our operating expenses, appreciation of the RMB against the U.S.
dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant
depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn
could adversely affect the price of our securities.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may
have a material adverse effect on your investment.
60
Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of
your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the
remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate
structure, we rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have.
Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and
service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying
with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without
prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain
procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our
company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies
for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to
satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to
penalties.
We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans,
including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in
amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount
specified by the local government from time to time at locations where we operate our businesses. The requirement of employee
benefit plans has not been implemented consistently by the local governments in China given the different levels of economic
development in different locations. We have not made adequate employee benefit payments. We may be required to make up the
contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid
employee benefits, our financial condition and results of operations may be adversely affected.
The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by
foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules discussed in the preceding risk factor and some other regulations and rules concerning mergers and
acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign
investors more time consuming and complex, including requirements in some instances that the MOFCOM be notified in advance
of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-
Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds
are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that
mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions
through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are
subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by
structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by
acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules
to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from
the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability
to expand our business or maintain our market share.
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries' ability to increase
their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and
penalties under PRC law.
SAFE promulgated the SAFE Circular 37 in July 2014 that requires PRC residents or entities to register with SAFE or its
local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas
investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special
purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or
residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or
divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for
PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.
SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning
Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC
residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or
control of an offshore entity established for the purpose of overseas investment or financing.
If our stockholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may
be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we
may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE
registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
To our knowledge, all of our pre-IPO PRC stockholders who are subject to the registration requirements of Circular 37 have
completed the required foreign exchange registrations.
In addition, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in
our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot
assure you that all of our stockholders or beneficial owners who are PRC residents or entities have complied with, and will in the
future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such stockholders or
beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC
subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC
subsidiaries' ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our
business and prospects.
If the chops of our PRC subsidiaries and consolidated variable interest entities are not kept safely, are stolen or are used by
unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely
compromised.
In China, a company chop or seal serves as the legal representation of the company towards third parties even when
unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be
registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other
chops which can be used for specific purposes. The chops of our PRC subsidiaries and consolidated variable interest entities are
generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent
those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate
governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by
the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority
to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business
operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while
distracting management from our operations.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may
subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in
March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less
than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are
required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed
company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in
connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers
and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and
who are granted options or other awards under our 2018 Equity Incentive Plan will be subject to these regulations. Failure to
complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute
additional capital into our PRC subsidiaries and limit our PRC subsidiaries' ability to distribute dividends to us. We also face
regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and
employees under PRC law. See “Business — Regulations — SAFE Regulations Relating to Employee Stock Incentive Plans.”
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If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable
tax consequences to us and our non-PRC stockholders.
Under the EIT Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management
body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the
rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial
control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In
April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for
determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in
China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those
controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of
Taxation's general position on how the “de facto management body” test should be applied in determining the tax resident status of
all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC
enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be
subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of
the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise's financial and human resource
matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise's primary assets,
accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and
(iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Business —
Regulations — Regulations Related to Tax.” However, the tax resident status of an enterprise is subject to determination by the PRC
tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially
all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC
tax authorities determine that the Company or any of our subsidiaries outside of China is a PRC resident enterprise for PRC
enterprise income tax purposes, then the Company or such subsidiary could be subject to PRC tax at a rate of 25% on its world-
wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax
reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income
tax purposes, gains realized on the sale or other disposition of our securities may be subject to PRC tax, at a rate of 10% in the case
of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax
treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC stockholders of our company would be
able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a
PRC resident enterprise. Any such tax may reduce the returns on your investment in our securities.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential
acquisitions we may pursue in the future.
The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT
Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules
in Circular 698, which became effective in February 2015.
Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a
PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident
enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive
use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be
subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity
interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
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In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has
introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the
offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on
how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase
and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect
transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-
resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to
the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the
existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of
reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise
income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes,
currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-
resident Enterprises, or the SAT Notice 37, which came into effect on December 1, 2017. According to SAT Notice 37, where the
non-resident enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its
tax due within required time limits, and the non-resident enterprise shall declare and pay its tax payable within such time limits
specified by the tax authority. If the non-resident enterprise voluntarily declares and pays its tax payable before the tax authority
orders it to do so, it shall be deemed that such enterprise has paid its tax payable in time.
We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or
other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax
authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding
obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions
may become at risk of being subject to filing obligations or being taxed, under Circular 59, Circular 7 or SAT Notice 37, and may
be required to expend valuable resources to comply with Circular 59, Circular 7 and SAT Notice 37 or to establish that we and our
non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial
condition and results of operations.
The PRC tax authorities have the discretion under SAT Circular 59, Circular 7 and SAT Notice 37 to make adjustments to the
taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment.
Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in
the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the EIT Law and if
the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59, Circular 7 and SAT
Notice 37, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on
our financial condition and results of operations.
Risks Related to Our Securities
Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock.
Our common stock is currently listed for trading on The Nasdaq Capital Market, and the continued listing of our common
stock on The Nasdaq Capital Market is subject to our compliance with a number of listing standards. On September 30, 2019 and
March 31, 2020, we received notices from Nasdaq that because the closing bid price for our common stock had fallen below $1.00
per share for 30 consecutive business days, we no longer complied with the $1.00 minimum bid price requirement for continued
listing on The Nasdaq Capital Market under Rule 5550(a)(2) of the Nasdaq Listing Rules. Pursuant to Nasdaq Listing Rules, as
tolled for the current COVID-19 pandemic, we have until December 11, 2020 to regain compliance with the minimum bid price
requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum
of 10 consecutive business days prior to December 11, 2020.
If we do not regain compliance with the minimum bid price requirement by December 11, 2020 and the Nasdaq staff
determines that we will not be able to cure the deficiency, or if we are otherwise not eligible for such additional compliance period,
Nasdaq will provide notice that our common stock will be subject to delisting. We would have the right to appeal a determination to
delist our common stock, and the common stock would remain listed on The Nasdaq Capital Market until the completion of the
appeal process. If our common stock were no longer listed on The Nasdaq Capital Market, investors might only be able to trade on
one of the over-the-counter markets. This would impair the liquidity of our common stock not only in the number of shares that
could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing
of transactions and reduction in media coverage. In addition, we could face significant material adverse consequences, including:
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a limited availability of market quotations for our securities;
a limited amount of news and analyst coverage for us; and
a decreased ability to issue additional securities or obtain additional financing in the future.
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We may take actions to restore our compliance with Nasdaq's listing requirements, but we can provide no assurance that any
such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity
of our common stock or prevent future non-compliance with Nasdaq's listing requirements.
The market price for our common stock may be volatile.
The trading prices of our common stock are likely volatile and could fluctuate widely due to factors beyond our control. This
may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the
underperformance or deteriorating financial results of internet or other companies based in China that have listed their securities in
the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial
public offerings, including, in some cases, substantial decline in their trading prices. The trading performances of other Chinese
companies' securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States,
which consequently may impact the trading performance of our common stock, regardless of our actual operating performance. In
addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate
structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese
companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities
markets may from time to time experience significant price and volume fluctuations that are not related to our operating
performance, which may have a material adverse effect on the market price of our common stock.
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In addition to the above factors, the price and trading volume of our common stock may be highly volatile due to multiple
factors, including the following:
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regulatory developments affecting us, our customers, or our industry;
regulatory uncertainties with regard to our variable interest entity arrangements;
announcements of studies and reports relating to our loan products and service offerings or those of our competitors;
changes in the economic performance or market valuations of other online finance marketplaces;
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
conditions in the automobile finance and ride-hailing industries in China;
announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint
ventures or capital commitments;
additions to or departures of our senior management;
detrimental negative publicity about us, our management or our industry;
fluctuations of exchange rates between the RMB and the U.S. dollar;
release or expiry of lock-up or other transfer restrictions on our outstanding shares of common stock; and
sales or perceived potential sales of additional shares of common stock.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the
near future, which could cause the market price of our common stock to drop significantly, even if our business is performing
well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to certain
restrictions described below. These sales, or the perception in the market that holders of a large number of shares intend to sell
shares, could reduce the market price of our common stock. As of July 6, 2020, we had outstanding 28,839,803 shares of common
stock, 7,590,804 of which may be resold in the public market immediately without restriction, other than shares owned by our
affiliates, which may be sold pursuant to Rule 144. We may register all shares of common stock that we may issue under our equity
compensation plans on a Registration Statement on Form S-8. These shares can be freely sold in the public market upon issuance,
subject to volume limitations applicable to affiliates.
We have a significant number of outstanding warrants, some of which contain full-ratchet anti-dilution protection and reset
provisions, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our
common stock and make it more difficult for us to raise funds through future equity offerings.
As more fully described in the section herein titled “Business – Recent Developments—June 2019 Registered Offering,”
pursuant to the June 2019 Offering and the Purchase Agreement, we issued to the Investors Series A Warrants to purchase an
aggregate of 1,336,021 shares of common stock and Series B Warrants to purchase a maximum aggregate of 1,116,320 shares of
common stock.
Among other provisions, the Series A Warrants provide the Investors with full ratchet anti-dilution protection in the event that
we issue any equity or equity-linked securities at a price lower than the exercise price of the Series A Warrants (subject to certain
exceptions) and on the six month anniversary of the initial exercise date of the Series A Warrants, the exercise price of Series A
Warrants was adjusted from $3.72 to $1.50 per share.
The Series B Warrants initially won’t be exercisable for any shares of common stock. In the event that on the 50th day after
the closing date of the June 2019 Offering, the closing price of the common stock is less than the Share Purchase Price, then the
number of shares of common stock issuable upon exercise of the Series B Warrants shall be adjusted (upward or downward, as
applicable) to the greater of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to 50% of the difference of
(A) the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined in the Purchase Agreement) as of the
50th day after the closing date of the June 2019 Offering, less (B) the aggregate number of Shares issued to the Investors at the
closing (as adjusted for share splits, share dividends, share combinations, recapitalizations and similar events).
The issuance of shares of common stock upon the exercise of the Series A Warrants and Series B Warrants would dilute the
percentage ownership interest of all stockholders, might dilute the book value per share of our common stock and would increase
the number of our publicly traded shares, which could depress the market price of our common stock.
In addition, the so-called full-ratchet anti-dilution protections and reset provisions, subject to limited exceptions, would reduce
the exercise price of the warrants in the event that we in the future issue common stock, or securities convertible into or exercisable
to purchase common stock, at a lower price per share.
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In addition to the dilutive effects described above, the perceived risk of dilution as a result of the significant number of
outstanding warrants may cause our common stockholders to be more inclined to sell their shares, which would contribute to a
downward movement in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward
pressure on our common stock price could encourage investors to engage in short sales of our common stock, which could further
contribute to price declines in our common stock. The fact that our stockholders, warrant holders and option holders can sell
substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, as well as the
existence of full-ratchet anti-dilution provisions and reset provisions in a substantial number of our outstanding warrants could
make it more difficult for us to raise additional funds through the sale of equity or equity-related securities in the future at a time
and price that we deem reasonable or appropriate, or at all.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish
rights to our technologies.
We may seek additional capital through a combination of public and private equity offerings, debt financings, collaborations
and licensing arrangements. To the extent that we raise additional capital through the sale of equity or debt securities, your
ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a
stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive
covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual
property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise
additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies or grant licenses on terms unfavorable to us.
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Certain judgments obtained against us by our stockholders may not be enforceable.
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition,
most of our directors and executive officers reside within China, and most of the assets of these persons are located within China.
As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or
to bring an action against us or against these individuals in the United States in the event that you believe your rights have been
infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws
of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Our articles of incorporation and by-laws could deter a change of our management, which could discourage or delay offers to
acquire us.
Certain provisions of our articles of incorporation (the “Articles of Incorporation”) and by-laws could discourage or make it
more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a
substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter
transactions that stockholders may otherwise consider to be in their best interests or in our best interests. These provisions include:
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requiring stockholders who wish to request a special meeting of the stockholders to disclose certain specified
information in such request and to deliver such request in a specific way within a certain timeframe, which may inhibit
or deter stockholders from requesting special meetings of the stockholders;
requiring that stockholders who wish to act by written consent request a record date from us for such action and such
request must include disclosure of certain specified information, which may inhibit or deter stockholders from acting by
written consent;
establishing the board as the sole entity to fill vacancies of the board, which lengthens the time needed to elect a new
majority of the board;
establishing a two-thirds majority vote of the stockholders to remove a director from the board, as opposed to a simple
majority, which lengthens the time needed to elect a new majority of the board; and
establishing that any person who acquires equity in us shall be deemed to have notice and consented to the forum
selection provision of our Bylaws requiring actions to be brought only in Nevada, which may inhibit or deter
stockholders actions (i) on behalf of us; (ii) asserting claims of breach of fiduciary duty by officers or directors of us; or
(iii) arising out of the Nevada Revised Statutes, and establishing more detailed disclosure in any stockholder's advance
notice to nominate a new member of the board, including specified information regarding such nominee, which may
inhibit or deter such nomination and lengthen the time needed to elect a new majority of the board.
We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced
reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
various requirements applicable to other public companies that are not emerging growth companies including, most significantly,
not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as
we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors
may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial
accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting
standards. However, we have elected not to “opt out” of this provision and, as a result, we will comply with new or revised
accounting standards as required when they are adopted for private companies. This decision to take advantage of the extended
transition period under the JOBS Act is irrevocable.
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We will incur increased costs as a result of operating as a smaller reporting public company, and our management will be
required to devote substantial time to new compliance initiatives.
As a smaller reporting public company, and particularly after we are no longer an emerging growth company, we will incur
significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act
and rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including
establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management
and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly.
For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and
officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of
directors.
For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies as described in the preceding
risk factor. We might remain an emerging growth company until March 31, 2023, although if the market value of our common stock
that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of
$1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable
year. We also would cease to be an emerging growth company if we issue more than $1 billion of nonconvertible debt over a three-
year period.
Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial
reporting, including an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report
on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance
with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over
financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources,
potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over
financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning
as documented and implement a continuous reporting and improvement process for internal control over financial reporting.
Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude
within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could
result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
market price for our common stock and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts
publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of
the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the
market price for our common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or
trading volume for our common stock to decline.
Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our common stock
for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and
growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not
rely on an investment in our common stock as a source for any future dividend income.
69
Our board of directors has discretion as to whether to distribute dividends, subject to certain restrictions under Nevada law.
Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will
depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of
distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed
relevant by our board of directors. Accordingly, the return on your investment in our common stock will likely depend entirely upon
any future price appreciation of our common stock.
The exercise of outstanding warrants to acquire shares of our common stock would cause additional dilution, which could
cause the price of our common stock to decline.
In the past, we have issued warrants to acquire shares of our common stock. As of the date of this Report, there were
1,519,602 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.76 per
share, and we may issue additional options, warrants and other types of equity in the future as part of stock-based compensation,
capital raising transactions or other strategic transactions. To the extent these options and warrants are ultimately exercised, existing
holders of our common stock would experience dilution which may cause the price of our common stock to decline.
We may need additional financing while the Warrants from the June 2019 Offering are still outstanding and certain of the terms
of the June 2019 Offering could severely limit the types of financings we can enter into.
Under the terms of the Purchase Agreement we entered into in connection with the June 2019 Offering, we are prohibited
from, among other things, (i) entering into any variable rate transactions so long as any of the Warrants issued in such offering are
still outstanding, (ii) directly or indirectly offering or issuing any securities, or entering into any agreement to offer or issue any
securities, other than customary exception, for a period of ninety (90) days after the closing of the June 2019 Offering. Such
restrictions are severe limitation on the types of financings we can seek should we need it in the near future. In the event we will
require such a financing, we may be required to obtain the consent of the investors in the June 2019 Offering, whom may withhold
such consent at their reasonable discretion. Our inability, under the terms of the June 2019 Offering, to raise additional funds, could
have a material adverse effect on our operations should we need such additional funds. Further, even if the Investors did provide us
with their consent to obtain such additional financing, the terms of the financing may be under terms that are less advantageous due
to the restrictions and protections provided under the terms of the June 2019 Offering.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We currently maintain our principal executive offices at 16F, Shihao Square, Middle Jiannan Blvd., High-Tech Zone,
Chengdu, Sichuan, People’s Republic of China 610000, comprising an aggregate of 964 square meters under lease agreements that
expire in March 2021. The cost for these offices is $9,263 per month in aggregate.
We maintain four offices for our Automobile Transaction and Related Services in the cities of Chengdu and Changsha, China.
The total areas of our Chengdu offices is approximately 2,907 square meters. We lease those offices for a total monthly rent of
approximately $6,700 under two lease agreements that expire in August 2024 and December 2023, respectively. The total area of
the offices in Changsha is 680 square meters. We lease those offices for a total monthly rent of approximately $3,800 under two
lease agreements that expire in October 2023 and July 2021, respectively.
We also lease three parking lots for automobiles in Chengdu and an exhibition hall in Changsha. The monthly rent for these
parking lots and the exhibition hall is approximately $5,750 in the aggregate and approximately $6,160, respectively.
We consider our current facilities adequate for our current operations.
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Item 3.
Legal Proceedings
We are not currently a party to any material legal or administrative proceedings. We may from time to time be subject to legal
or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative
proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our
management’s time and attention. Please see “Risk Factors.”
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information
Our common stock trades on the Nasdaq Capital Market under the symbol “AIHS.” On July 6, 2020, our common stock had a
closing price of $0.87.
Holders
Based upon information furnished by our transfer agent, as of July 6, 2020, the Company had approximately 18 stockholders
of record. Because some of our common stock is held by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid cash dividends on our shares. We do not have any present plan to pay any cash dividends on
our common stock in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future
earnings to operate and grow our business.
Our board of directors will have the discretion to declare and pay dividends in the future as we are a holding company and we
rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including
the funds necessary to pay dividends and other cash distributions to our stockholders and service any debt we may incur. The
Foreign Investment Law, and the Company Law of the PRC (2006), as amended, contain the principal regulations governing
dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay
dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
Additionally, such companies are required to set aside 10% of their after-tax profits of the year, if any, to statutory reserve funds
until such time as the accumulated reserve funds reach and remain above 50% of the registered capital amount. These reserves are
not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. Furthermore,
if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other payments. If we or our subsidiary and affiliates are unable to receive all of the revenues from
our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.
Equity Compensation Plan Information
In September 2018, our board of directors and in November 2018, our stockholders approved, the 2018 Equity Incentive Plan,
pursuant to which a maximum of 2,000,000 shares of common stock were reserved for issuance to our employees, officers,
directors, consultants. The plan permits the grant of nonqualified stock options, incentive stock options, restricted stock, restricted
stock units (“RSUs”), stock appreciation rights, stock bonus awards, and performance compensation awards. As of the date of this
Report, an aggregate of 169,015 RSUs were issued under the plan.
The following table provides information as of March 31, 2020 with respect to the shares of our common stock that may be
issued under our existing equity incentive plan:
Plan category
2018 Equity Incentive Plan
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average exercise
price of outstanding
options, warrants and
rights
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
—
1,830,985
—
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Purchases of Our Equity Securities
None.
Recent Sales of Unregistered Securities
None.
Use of Proceeds
Not applicable.
Item 6.
Selected Financial Data
Not required for smaller reporting companies.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read together with our
consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this
Report. Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the
financial information included in this Report reflect our organizational transactions and have been prepared as if our current
corporate structure had been in place throughout the relevant periods.
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Overview
We are a provider of automobile transaction and related services, connecting auto dealers, financial institutions, and
consumers, who are mostly existing and prospective Didi drivers. We provide automobile transaction and related services through
our majority owned subsidiary, Yicheng, Hunan Ruixi and its VIE, Jinkailong. Substantially all of our operations are conducted in
China.
We previously also operated an online lending platform through our VIE, Sichuan Senmiao, in China, which facilitated loan
transactions between Chinese investors and individual and SME borrowers. As more fully discussed above under “Business –
Overview,” we ceased our online lending services in October 2019 to focus on our automobile transaction and related services.
Our Automobile Transactions and Related Services
Our automobile transaction and related services are mainly comprised of (i) facilitation of automobile transaction and
financing where we connect the prospective ride-hailing drivers to financial institutions to buy, or get financing on the purchase of,
cars to be used to provide ride-hailing services; (ii) automobile sales where we procure new cars from dealerships and sell them to
our customers in the automobile financing facilitation business; (iii) automobile operating lease where we provide car rental
services to individual customers to meet their personal needs with lease term no more than twelve months; and (iv) automobile
financing where we provide our customers with auto finance solutions through financing leases. We started our facilitation services
in November 2018, the sale of automobiles in January 2019, and financial and operating leasing in March 2019.
As of March 31, 2020, we facilitated financing for an aggregate of 1,626 automobiles with a total value of approximately
$23.2 million, sold an aggregate of 1,388 automobiles with a total value of approximately $13.4 million and delivered 557
automobiles under operating leases and 97 automobiles under financing leases, respectively, to customers, the vast majority of
whom are ride-hailing drivers. During the year ended March 31, 2020, we facilitated financing for 1,315 automobiles with a total
value of approximately $19.2 million, sold an aggregate of 1,176 automobiles with a total value of approximately $11.5 million,
delivered 557 automobiles under operating leases with a total value of approximately $5.0 million and 97 automobiles with a total
value of approximately $1.5 million under financing leases to the customers. Our auto financing and transaction facilitation
business, auto sales business and operating leases accounted for 12.3%, 73.7% and 8.3% of our total revenue from our Automobile
Transaction and Related Services, respectively, for the year ended March 31, 2020 while our auto financial leasing business
generated about 1.1% of our revenue from our Automobile Transaction and Related Services.
Key Factors and Risks Affecting Results of Operations of Our Automobile Transactions and Related Services
Ability to Increase the Automobile Purchaser and Leasee Base
Our revenue growth has been largely driven by the expansion of (i) our automobile purchaser base and the corresponding
increase in the amount of automobile transactions facilitated through us, and (ii) our automobile leasee base and the corresponding
revenue generated from operating and financial leasing. We acquire customers for our automobile transaction and related services
through the network of third-party sales teams, referral from Didi and our own efforts including online advertising and billboard
advertising. We also send out flyers and participate in trade shows to advertise our services. We plan to strengthen our partnerships
with existing sales teams by improving the quality and variety of our services. We will also strengthen our marketing efforts
through our own team by employing more experienced staffs and setting up new service centers in the cities of Chengdu and
Changsha in 2020. As of March 31, 2020, we had 29 employees in our own sales department and cooperated with a total of 26
third-party sales teams with about 258 professionals in the aggregate.
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Management of Automobile Rental
Due to the fierce competition of online ride-hailing industry in Chengdu and the adverse impact from COVID-19 pandemic, a
significant number of online ride-hailing drivers who exited the ride-hailing business and tendered their automobiles to us for
sublease or sales in order to generate income/proceeds to cover their payments owed to the financial institutions and us. We recently
have seen an increasing demand for short-term car rentals. The daily management and timely maintenance of those leased
automobiles will have a significant effect on the growth of our income from leasing automobiles in the next twelve months. The
effective management of our automobiles through our proprietary system and experienced auto-management team could provide
qualified automobiles to potential leasees, either for personal use or providing online ride-hailing services. As of March 31, 2020,
we had two parking lots and 15 employees in Chengdu to manage these automobiles. During the year ended March 31, 2020, our
average utilization of the automobiles for operating lease was approximately 64%.
Our Service Offerings and Pricing
The growth of our revenue depends on our ability to improve existing solutions and services provided, continue identifying
evolving business needs, refine our collaboration model with financial institutions and provide value-added services to our
customers. The attraction of new automobile purchasers depends in part on our collaboration with financial institutions to offer
more attractive automobile financing solutions with competitive interest rates to our automobile purchasers. We have also adopted a
stable pricing formula, considering the historical and future expenditure, remaining available leasing months and market price to
determine our rental price for varied rental solutions. Furthermore, our product designs affect the type of automobile purchasers or
leases we attract, which in turn affects our financial performance. Our revenue growth also depends on our abilities to effectively
price our services and the ability to obtain relatively lower expenditure paid to dealers, insurance companies and other service
providers, which enables us to attract more customers and improve our profit margin.
Ability to Retain Existing Financial Institutions and Engage New Financial Institutions
During the year ended March 31, 2020, approximately 97% of the automobile purchasers financed their purchase of
automobiles through financial institutions. The growth of our business is dependent on our ability to retain existing financial
institutions and engage new financial institutions. We have established collaboration with financial institutions and plan to expand
our collaboration with more financial institutions to access lower cost capital and provide more financing sources to our customers.
Our collaborations with financial institutions may be affected by factors beyond our control, such as perception of automobile
financing as an attractive asset, stability of financial institutions, general economic conditions and regulatory environment. To
increase the number of our cooperative financial institutions will enhance the overall stability and sufficiency of funding for
automobile transactions.
Ability to Pay for the Automobile Purchase Price and Expenditure in Advance
We advance the purchase price of automobiles and all service expenses when we provide related services to the purchasers.
Pursuant to the affiliation agreements with automobile purchasers, we collect from them monthly installment payments (including
principal and interest), our management and guarantee services fees and our advance payment for expenses. We also collect part of
our automobile purchase price and purchase services fees from automobile purchasers through monthly installment payments. As of
March 31, 2020, we had accounts receivable of $1.5 million and advanced payments of approximately $1.4 million due from the
automobile purchasers, which will be collected through proceeds disbursed from financial institutions and installment payments on
a monthly basis during the relevant affiliation periods.
The accounts receivable and advance payments may increase our liquidity risk. Jinkailong has borrowed money from financial
institutions, third parties and related parties to fund the advance payments. We have used all of the proceeds from our equity
offerings and plan to seek equity and/or debt financings to pay for the expenditure related to the automobile purchase. To pay for
the expenditure in advance will enhance the stability of our daily operation and lower the liquidity risk, and attract more customers.
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Ability to Collect Payments and Deal with Defaults Effectively
We collect the monthly installment payments from automobile purchasers and repay financial institutions on behalf of the
purchasers every month. We are exposed to credit risk as we are required by certain financial institutions to provide guarantee on
the lease/loan payments (including principal and interests) of the automobile purchasers referred by us. If a default occurs, we are
required to make the monthly payments on behalf of the defaulted purchasers to the financial institution.
We manage the credit risk arising from the default of automobile purchasers by performing credit checks on each automobile
purchaser based on the credit reports from PBOC and third party credit rating companies, and personal information including
residence, ethnicity group, driving history and involvement in legal proceeding. Our post-transaction management department
continuously monitors the payment by each purchaser and send them payment reminders. We also keep close communication with
our purchasers in particular the online ride-hailing drivers so that we can evaluate their financial conditions and provide them with
assistance including the transfer of automobile to a new driver if they are no longer interested in providing ride-hailing services or
are unable to earn enough income to make monthly lease/loan payments.
In addition, automobiles are used as collateral to secure purchasers’ payment obligations under the financing arrangement. In
the event of a default, we can track the automobile through an installed GPS system and repossess and handover the automobile
over to the financial institution so that we can be released from our guarantee liability.
As of March 31, 2020, we had an outstanding balance of installment payments receivable in the aggregate of $109,000 from
approximately 146 automobile purchasers that remained in the online ride-hailing business, of which, all were due within two
months from the default date. Historically, most of the defaulted automobile purchasers would pay the default amounts within one
to three months. However, if the balances are overdue for more than three months or the purchasers decide to exit the online ride-
hailing business and sublease or sell their automobiles, we would fully record allowance against receivables from those purchasers.
For the year ended March 31, 2020, we recognized estimated provisions loss of approximately $225,000 for the guarantee services
and bad debt expenses for doubtful accounts of $3,406,215, respectively, as the drivers exited the online ride-hailing business and
would no longer make the monthly repayments to us. By subleasing those automobiles, we believe we can cope with the defaults
and control the risks.
Further, the automobiles subject to our financing leases are not collateralized by us. As of March 31, 2020, the total value of
non-collateralized automobiles was approximately $1,273,026. We believe our risk exposure of financing leasing is immaterial as
we just commenced the business in late March 2019 and have experienced no default to date.
Actual and Potential Impact of Ongoing Coronavirus (COVID-19) in China on Our Business
Beginning in late 2019, an outbreak of a novel strain of coronavirus and related respiratory illness (which we refer to as
COVID-19) was first identified in China and has since spread rapidly globally. The COVID-19 pandemic has resulted in
quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and globally. In March 2020, the
WHO declared COVID-19 a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because all of our
business operations and our workforce are concentrated in China (where the virus first originated), our business, results of
operations and financial condition have been and will continue to be adversely affected. The extent of the potential going forward
impact to our results of operations will also depend on future developments and new information that may emerge regarding the
duration and severity of the COVID-19 pandemic (or any recurrences of the pandemic, as have been experienced in China and
elsewhere) and the actions taken by government authorities and other entities to contain COVID-19 or mitigate its impact, almost
all of which are beyond our control.
The impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the
following (for more background information on our business generally, see “Business - Our Automobile Transaction and Related
Services”):
Temporary closure of offices and travel restrictions
We temporally closed our corporate headquarters and other offices to adhere to the lockdown policy in China from January 19
to February 23, 2020, as required by relevant PRC regulatory authorities. A large number of our employees was in mandatory self-
quarantine and our entire business operations were restricted during such period. We reopened our offices in both Chengdu and
Changsha on February 24, 2020, but only resumed full operations beginning near the end of March 2020.
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Adverse impact on our financial conditions
Due to the lockdown policy and travel restrictions, the demand for ride-hailing services has been materially and adversely
impacted in our areas of operation in China, which reduced the demand of our Automobile Transaction and Related Services. As a
result, our revenue and income for the three months ended March 31, 2020 has been negatively impacted to a significant extent.
Our ability to collect the monthly installment payments we receive from ride-hailing drivers during February and March 2020
was adversely impacted. Approximately 1,500 drivers delayed their monthly installments of February and March 2020, which
resulted in a decrease in our monthly installment collection by $732,000 during February and March 2020. As of March 31, 2020,
approximately 840 drivers exited the online ride-hailing business and tendered their automobiles to us for sublease or sale while
approximately 380 drivers postponed their monthly installment payments from one to three months. As a result, we recorded bad
debt expenses of $3,406,215. This situation may worsen if the COVID-19 pandemic reoccurs in the second half of 2020. We will
continue to closely monitor our collections throughout 2020.
Our daily cash flow has also been adversely impacted as a result of the unsatisfied collection from the online ride-hailing
drivers and our potential guarantee expenditure pursuant to the Financing Agreements we guaranteed. Our cash flow will continue
to be adversely impacted if the online ride-hailing market in China recovers slower than anticipated. This compromised cash flow
situation is likely to continue during our first and second fiscal quarters of 2020-21 and may worsen if the COVID-19 pandemic
reoccurs.
In an effort to assist with our automobile purchasers, we have been negotiating with the financial institutions we cooperate
with to extend the due dates for monthly payments that may be affected by the epidemic. Certain financial institutions have agreed
to grant a grace period of up to four months from February to May for qualified drivers.
Since April 2020, the COVID-19 epidemic in China has been effectively controlled and the online ride-hailing markets in
Chengdu and Changsha have been in the progress of recovering. However, if the epidemic in China deteriorates during the year
ending March 31, 2021, our automobile purchasers and leasees may be unable to generate sufficient income to pay their monthly
installment payments and the financial institutions may not agree to further extend the due dates, which may create a significant
risk of continuing default form our automobile purchasers. As a result, we may have to repay the defaulted amount as a guarantor.
Meanwhile, the collection of our receivables due from those automobile purchasers may also be further adversely affected, which
may result in additional credit risk. If we experience a widespread default by our automobile purchasers, our cash flow and results
of operations will be materially and adversely affected. As a consequence, we could face shortfalls in liquidity without extra
financing resources for the foreseeable future and we will be unable to grow our business and may be required to reduce or refocus
our operations, which may raise substantial doubts about our ability to continue as a going concern.
Any of these factors related to COVID-19 and other similar or currently unforeseen factors beyond our control could have an
adverse effect on our overall business environment, cause uncertainties in the regions in China where we conduct business, cause
our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and
results of operations.
Ability to Compete Effectively
Our business and results of operations depend on our ability to compete effectively. Overall, our competitive position may be
affected by, among other things, our service quality and our ability to price our solutions and services competitively. We will set up
and continuously optimize our own business system to improve our service quality and user experience. Our competitors may have
more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to
the development and promotion of their services. We will need to continue to introduce new or enhance existing solutions and
services to continue to attract automobile dealers, financial institutions, car buyers and other industry participants. Whether and
how quickly we can do so will have a significant impact on the growth of our business.
Market Opportunity and Government Regulations in China
The demand for our services depends on overall market conditions of the ride-hailing industry in China. The continuous
growth of the urban population places increasing pressure on the urban transportation and the improvement of living standards has
increased the market demand for quality travel in China. Traditional taxi service is limited, and the emerging online ride-hailing
platforms have created good opportunities for the development of the online ride-hailing service market. Based on the monitoring
of China E-Commerce Research Center, the number of online ride-hailing service users had reached 333 million by the end of
2018, representing an increase of 16% from 2017. According to Bain & Company, the transaction value of China's online ride-
hailing market in 2017 was larger than the total of the rest of the world. It is estimated that by 2021, the total transaction value of
China's online ride-hailing market will reach $60 billion. The ride-hailing industry is facing increasing competition in China and is
attracting more capital investment. In 2019, in addition to the traditional online ride-hailing platform, automobile manufacturers,
offline operation service companies and financial and map service providers have built cooperation relationships with each other to
make the online ride-hailing industry a more aggregated industry. In March 2019, T3, a new travel service platform, was established
in Nanjing and subsequently in other cities, including Wuhan and Chongqing, and has accumulated over 1 million registered users
since March 2019. T3 is jointly invested by three large automobile manufacturers, FAW, Dongfeng and Chang’an, and leading
internet, retail and finance companies such as Suning, Tencent and Alibaba and intends to compete with Didi and capitalize on the
great potential of the ride-hailing market. As of December 2019, Alibaba, together with its affiliate, has invested in or acquired
more than 30 enterprises in the fields related to ride-hailing, including Hello Travel, Yongan Travel, Didi, Gaode Software,
Xiaopeng Automobile and others within the ride-hailing industry.
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The online ride-hailing industry may also be affected by, among other factors, the general economic conditions in China. The
interest rates and unemployment rates may affect the demand of ride-hailing services and automobile purchasers’ willingness to
seek credit from financial institutions. Adverse economic conditions could also reduce the number of qualified automobile
purchasers and online ride-hailing drivers seeking credit from the financial institutions, as well as their ability to make payments.
Should any of those negative situations occur, the volume and value of the automobile transactions we service will decline, and our
revenue and financial condition will be negatively impacted.
In order to manage the rapidly growing ride-hailing service market and control relevant risks, on July 27, 2016, seven
ministries and commissions in China, including the Ministry of Transport, jointly promulgated the “Interim Measures for the
Administration of Online Taxi Booking Business Operations and Services”, which legalizes online ride-hailing services such as
Didi and requires the ride-hailing services to meet the requirements set out by the measures and obtain taxi-booking service
licenses.
On November 5, 2016, the Municipal Communications Commission of Chengdu City and a number of municipal departments
jointly issued the “Implementation Rules for the Administration of Online Booking Taxi Management Services for Chengdu.” On
August 10, 2017, the Transportation Commission of Chengdu further issued the detailed guidance “Working Process for the Online
Booking Taxi Drivers Qualification Examination and Issuance” and the “Online Booking Taxi Transportation Certificate Issuance
Process.” According to these regulations and guidelines, three licenses /certificates are required for operating the online ride-hailing
business in Chengdu: (1) the ride-hailing service platform such as Didi should obtain the online booking taxi operating license;
(2) the automobiles used for online ride-hailing should obtain the online booking taxi transportation certificate (“automobile
certificate”); (3) the drivers should obtain the online booking taxi driver's license (“driver’s license”).
On July 23, 2018, the General Office of Changsha Municipal People's Government issued the “Detailed Rules for the
Administration of Online Booking Taxi Management Services for Changsha.” According to those regulations and guidelines,
licenses, which are online reservation taxi operating license, automobile certificate and driver’s licenses, are required to operate a
ride-hailing business in Changsha, and automobiles used for online ride-hailing services are required to meet certain standards,
including that the sales price (including taxes) of the qualified automobile is over RMB120,000. In practice, Hunan Ruixi is also
required to employ a safety administrator for every 50 automobiles used for online ride-hailing services and submit daily operation
information of these automobiles, such as traffic violation, to the Transport Management Office of the Municipal Communications
Commission of Changsha City every month.
Didi, the online ride-hailing platform, with whom we cooperate, obtained the online reservation taxi operating license in
Chengdu and Changsha in March 2017 and July 2018, respectively. However, approximately 5% of the cars used for online ride-
hailing services which we provided management services to did not have the automobile certificate and approximately 68% of our
ride-hailing drivers had not obtained the driver’s license as of March 31, 2020. Without requisite automobile certificate or driver’s
license, these drivers may be suspended from providing ride-hailing services, confiscated their illegal income and subject to fines of
up to 10 times of their illegal income. Starting in August 2019, Didi began limiting customer orders allocated to drivers in Chengdu
if they do not have requisite driver’s license or the automobiles used for ride-hailing services lack the automobile certificate.
Further, in December 2019, Didi began to enforce such limitation on drivers in Chengdu who have a driver’s license but operate
automobiles without the automobile certificate. The limitation will affect the income of the drivers and may cause an increase in
defaults if the drivers fail to generate sufficient income from providing ride-hailing services. We are in the process of assisting the
drivers to obtain the required certificate and license. However, there is no guarantee that all of the drivers affiliated with us would
be able to obtain all the certificate and license. Our business and results of operations will be materially affected if our affiliated
drivers are suspended from providing ride-hailing services or imposed substantial fines.
Our Discontinued Online P2P Lending Services
Through our now discontinued online P2P lending platform, we offered access to credit for borrowers and attractive
investment returns for investors. In September 2016, we acquired our online lending platform which had been in operation for two
years prior to the acquisition.
Our revenues from online lending services were primarily generated from fees charged for our services in matching investors
with borrowers. We charged borrowers transaction fees for the work we performed through our platform and charged our investors
service fees on their actual investment returns.
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The rapid growth of China’s online P2P lending industry attracted a large number of market players. However, business
failures of, or accusations of fraud and unfair dealing against, certain companies in the online P2P lending industry in China have
surfaced in recent years, creating a negative public perception of online individual finance market players. Our business and results
of operations were affected by general factors affecting China’s online P2P lending industry, in particular, the development of
regulatory environment. Unfavorable regulatory changes had affected our business negatively. For example, in February 2019, the
Chengdu financial regulatory authorities required us to gradually reduce our “business scale,” the daily average outstanding balance
of loans facilitated by us. Specifically, the outstanding balance of our facilitated loans as of the end of each month starting in
February 2019, is expected to be lower than that as of the end of prior month.
Furthermore, since April 2019, the financial authorities of serval provinces and cities, such as Yunnan, Shandong, Sichuan,
Shanghai and Shenzhen, have issued lists of online lending companies under their jurisdiction that should exit the P2P lending
industry after outstanding balance of loans is fully paid. On April 29, 2019, the Leading Group Office of Online Lending Risk
Response of Sichuan Province officially issued a circular requiring 38 marketplaces exit the P2P lending industry. In October 2019,
the financial authorities of Hunan and Shandong Provinces announced the failure of local P2P lending platforms to complete
rectification and required that all P2P lending platforms in the province cease operations. Also in this month, Hubei Province
revoked the business licenses of 53 P2P lending platforms. In December 2019, Sichuan Province announced the failure of local P2P
lending platforms to complete rectification and required that all P2P lending platforms in the province cease operations.
As the P2P lending industry in China is experiencing a continuous decline in total transaction volume and facing an
increasingly tighter regulatory environment, we have determined that the continued operation of our online lending business is not
viable. On October 17, 2019, our Board of Directors approved the Plan, to wind down and discontinue our online P2P lending
business. Despite the discontinuation, we expect to receive minimal service fees following the discontinuation as loans having a
term of 36 months remain outstanding. We also think the discontinuation of our online lending business would allow us to focus our
resources on our Automobile Transaction and Related Services. As the revenue from our online lending services only accounted for
0.7% of our total revenue for the year ended March 31, 2020, the discontinuation had no significant impact on our revenue. We plan
to provide technology services through Sichuan Senmiao, which operated the online lending platform in the year of 2020.
In connection with the Plan, we have ceased facilitation of loan transactions on our online lending platform and assumed all
the outstanding loans from investors on the platform since October 17, 2019. The aggregate balance of the loans we assumed was
approximately $5.6 million. As of Mach 31, 2020, we have used cash generated from our Automobile Transaction and Related
Services and payments collected from borrowers in the aggregate of approximately $1.8 million to repay platform investors and we
expect to repay 90% of them by December 31, 2020. However, if we could not generate enough cash flow to pay investors on
time in accordance with the Plan, we may incur additional commitment liabilities in our financial statements during the following
periods before we fully fulfill our Plan. As of March 31, 2020, we treated the online lending business as discontinued operations
and recognized receivables from borrowers and payables to investors of approximately $4.0 million in our financial statements
accordingly. Based on recent repayments collected from borrowers, we also recognized bad debt expenses of approximately $3.7
million for those receivables and $0.3 million for accounts receivable and prepayment for intangible assets related to our online
lending services. However, the amount and timing of the actual allowance for bad debt may change based on evidence of
collectability of the subject loans during the execution of the Plan. As part of the Plan, we have transferred certain employees who
worked on our online lending business, primarily the information technology staff, to provide a new website design and
development service for customers. We may further terminate certain employees of the online lending business by December 31,
2020.
The estimated costs associated with the discontinuation of our online P2P lending business are primarily comprised of
employee severance and benefits expenses and an allowance for bad debt (i.e., debt that cannot be collected for borrowers on our
lending platform, which would be used to repay the investors on the platform). We estimated that we would incur a one-time
personnel-related charges of no more than $20,000 for employee severance and other related termination benefits. Severance
payments are expected to be paid in full by December 31, 2020.
As a result of the discontinuation of our online lending services, we believe we can improve our operating cash flow by
lowering our operating expenses and focusing on maximizing the profitability of our Automobile Transaction and Related Services.
79
Results of Continuing Operations for the Year Ended March 31, 2020 Compared to the Year Ended March 31, 2019
Revenues
Cost of revenues
Gross profit
Operating expenses
Selling, general and administrative expenses
Bad debt expense
Total operating expenses
Loss from operations
Other expenses, net
Interest expense
Interest expense on finance leases
Change in fair value of derivative liabilities
Loss before income taxes
Income tax expenses
Net Loss
Revenues
For the Years Ended
March 31,
2020
$ 15,655,575 $
(12,280,238 )
3,375,337
2019
2,551,107 $
(1,812,187)
738,920
Change
13,104,468
(10,468,051 )
2,636,417
(5,567,939 )
(3,404,336)
(8,972,275 )
(5,596,938 )
(45,347 )
(96,624 )
(373,407)
1,796,724
(4,315,592 )
(33,184)
$ (4,348,776 ) $
(1,776,690 )
(5,077)
(1,781,767 )
(1,042,847 )
(57,145)
(33,878)
-
-
(1,133,870 )
(21,905)
(1,155,775 ) $
(3,791,249 )
(3,399,259)
(7,190,508 )
(4,554,091 )
11,798
(62,746)
(373,407)
1,796,724
(3,181,722 )
(11,279)
(3,193,001)
We started generating revenue from automobile transaction and related services from November 22, 2018, the acquisition date
of Hunan Ruixi. Revenue for the year ended March 31, 2020 generated from our automobile transaction and related services, which
increased by $13,104,468, or 514%, as compared with the period from November 22, 2018, the acquisition date of Hunan Ruixi, to
March 31, 2019. Due to our business expansion in Chengdu and Changsha, our revenue increased as compared with the prior year.
Revenue from our automobile transaction and related services includes sales revenue of automobiles, service fees from
automobile purchase services, facilitation fees from automobile purchase, service fees from automobile management and guarantee
services, interest income from financial leasing, operating lease revenues from automobile rentals and other services fees, which
accounted for 73.7%, 11.0%, 1.3%, 0.9%, 1.1%, 8.3% and 3.7%, respectively, of the total revenue from automobile transaction and
related services during the year ended March 31, 2020.
In light of the measures and restrictions to combat the nationwide epidemic in China, although we believe there is huge
market opportunity and rapid development of the ride-hailing service market in China, we have experienced a decrease in our
revenue from automobile transaction and related services for the three months ended March 31, 2020 as compared with the same
period in the prior year. The income of most of our customers, who are online ride-hailing drivers, in February and March 2020 has
been significantly affected by the pandemic as a result of less demand due to the public travel restrictions. In order to gain enough
working capital and develop a new income resource, we are shifting our business focus on automobile rental from facilitation of
automobile transaction and financing. However, we expect our revenue from sales of automobiles and rental income from
automobile rental to account for a majority of our revenues for the next twelve months; therefore, our business will remain
vulnerable during the pendency of the COVID-19 epidemic. As the ride-hailing markets in Chengdu and Changsha are gradually
recovering from the impact of COVID-19, we expect to see a decrease in the number of automobiles tendered to us by the ride-
hailing drivers exiting the business in the second half of 2020. In addition, we will focus more on our automobile rental business to
capitalize on the increasing demand for short-term automobile rentals. Consequently, we expect our business to improve in the
second half of 2020.
80
The following table sets forth the breakdown of revenues by revenue source for the years ended March 31, 2020 and 2019:
Revenue from automobile transactions and related services
- Revenues from sales of automobiles
- Service fees from automobile purchase services
- Facilitation fees from automobile transactions
- Service fees from automobile management and guarantee services
- Financing revenues
- Operating lease revenues from automobile rentals
- Other service fees
Total Revenue
Sales of automobiles
For the Years Ended
March 31,
2020
2019
$
$
11,536,691
1,726,717
197,815
141,527
164,391
1,303,639
584,795
1,815,425
407,632
142,615
60,011
-
-
125,424
$
15,655,575
$
2,551,107
We generate revenues from sales of automobiles to the customers of Jinkailong, Hunan Ruixi and Chengdu Mashangchuxing
Automobile Leasing Co., Ltd. (“Mashang Chuxing”). Sales of automobiles during the year ended March 31, 2020 increased by
$9,721,266 as compared to the same period in 2019, mainly due to the increase in the number of new automobile purchases. We
sold an aggregate of 1,176 automobiles for $11.5 million to the customers of Jinkailong, Hunan Ruixi and Mashang Chuxing during
the year ended March 31, 2020, and 212 automobiles for $1.8 million to the customers of Jinkailong during the year ended March
31, 2019.
Service fees from automobile purchase services
We generate revenues from providing a series of automobile purchase services throughout the automobile purchase transaction
process. The amount of these fees is based on the sales price of the automobiles and relevant services provided. Service fees from
automobile purchase services increased by $1,319,085 as compared with the prior year, mainly due to the increase in the number of
facilitated new automobile purchases. We serviced 1,315 new automobile purchases with service fees ranging from $89 to $3,600
per automobile during the year ended March 31, 2020 while we serviced 311 new automobile purchases with service fees ranging
from $243 to $2,300 per automobile during the year ended March 31, 2019.
Facilitation fees from automobile transactions
We also generate revenues from fees charged to third-party sales teams or the automobile purchasers for the facilitation of
sales of automobiles. The amount of facilitation fee is based on the type of automobile and negotiation with each sales team or
automobile purchaser. The fees charged to third-party sales teams or automobile purchasers are paid when the transactions are
consummated. These fees are non-refundable upon the delivery of automobiles. Facilitation fees from automobile transaction
increased by $55,200 as compared with the prior year mainly due to the increase in the number of facilitated new automobiles
purchases, but partly offset by the decreased average facilitation fee per automobile. We facilitated 1,315 and 311 new automobile
purchases during the year ended March 31, 2020 and 2019, respectively. The average facilitation fee we charged decreased from
$456 per automobile during the year ended March 31, 2019 to $140 during the year ended March 31, 2020. In order to attract more
customers during the COVID-19 epidemic period in the fourth quarter of this fiscal year, we further decreased the facilitation fee to
zero in Chengdu. We expect the revenue from facilitation fees from automobile transactions to account for a smaller portion of our
total revenue due to the low service fee and the increase in other revenue from the expansion of our Automobile Transaction and
Related Services.
81
Service fees from automobile management and guarantee services
The vast majority of our customers are ride-hailing drivers of Didi on-line network, who enter into affiliation service
agreements with us pursuant to which we provide them post-transaction management services and guarantee services. The increase
of $81,516 in service fees from automobile management and guarantee services was attributed to the increase in the number of
automobiles we serviced, partially offset by the decrease of our average service fee per automobile. We provided management and
guarantee services for over 2,400 and 1,200 automobiles during the years ended March 31, 2020 and 2019, respectively. Our fees
decreased from an average of $792 per automobile for the affiliation period during the year ended March 31, 2019 to $583 during
the year ended March 31, 2020.
Interest income from financial leasing
We started our financial leasing in March 2019 and generate interest income from providing financial leasing services to ride-
hailing drivers in April 2019. We also charge the customers of our automobile financing facilitation services interest on their
monthly payments which cover purchase price of automobile and our services fees and facilitation fees for terms of 36 or 48
months. During the year ended March 31, 2020, we recognized a total interest income of $164,391.
Operating lease revenues from automobile rentals
We generate revenues from leasing our own automobiles or sub-leasing automobiles tendered by online ride-hailing drivers
with their authorization for a lease term of no more than twelve months. Due to the fierce competition and the COVID-19
pandemic, during the year ended March 31, 2020, approximately 840 online ride-hailing drivers exited the online ride-hailing
business because of decreased income. We have leased approximately 540 of them and 19 our own automobiles with an average
monthly rental income of $475 per automobile, resulting in a rental income of $1,303,639, for the year ended March 31, 2020.
Other service fees
We generate other revenues from the commissions from insurance companies and other miscellaneous service fees charged to
the automobile purchasers, which accounted for 79.9%, and 20.1% of revenues from other service fees during the year ended
March 31, 2020, respectively. The increase of $459,371 was attributed to the increase in the number of automobiles we serviced
during the year ended March 31, 2020.
Cost of Revenues
Cost of revenues represents the costs of automobiles sold of $11,310,469 and amortization expense of leased automobiles
from certain online ride-hailing drivers of $969,769. Cost of revenues increased by $10,468,051, or 578% during the year ended
March 31, 2020 as compared with the same period in 2019 was attributed to the increase in the number of automobiles sold
increased from 212 to 1,176 and we had incur operating lease in the year ended March 31, 2020 .
Gross Profit
Gross profit from our Automobile Transaction and Related Services increased by $2,636,417 or 357% during the year ended
March 31, 2020 as compared with the same period in 2019 mainly due to our business expansion. The gross profit generated from
sales of automobiles increased by $222,984 due to the increase in the number of automobiles sold from 212 for the year ended
March 31, 2019 to 1,176 for the year ended March 31, 2020. The gross profit generated from operating lease revenues from
automobile rentals increased by $333,870 due to the fact that we started to focus on our operating lease as a means of mitigating the
impact of the intense competition in the online ride-hailing market in Chengdu and the COVID-19 pandemic. Other revenues with
no cost of revenues increased by $2,079,593 due to the significant increase in the number of facilitated new automobiles purchases
and management in the year ended March 31, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel
expenses, and other costs. Selling, general and administrative expenses increased from $1,776,690 for the year ended March 31,
2019 to $5,567,939 for the year ended March 31, 2020, representing an increase of $3,791,249. The increase was attributable to the
selling, general and administrative expenses of our Automobile Transaction and Related Services since we commenced this
business in November 2018 and significantly expanded the business operations in the year ended March 31, 2020. The increase
mainly consists of an increase of $1,474,295 in salary and employee benefits, $322,889 in advertising and promotion, $409,882 in
rental and other office expenses, $333,098 in insurance, transportation and maintenances fees, $791,624 in amortization of
automobiles which were tendered to us but have not been sub-leased or sold, $225,468 of guarantee expense and $233,993 of other
miscellaneous expenses.
82
Bad Debt Expense
Considering the fierce competition in the online ride-hailing markets in Chengdu and the negative impact of the COVID-19,
approximately 840 online ride-hailing drivers we serviced have tendered their automobiles to us for sublease or sale and
approximately 380 drivers postponed their monthly installment payments. We evaluated the possibility of collection of unsettled
balances from those drivers and concluded the possibility of collection was low and recognized bad debt expenses of $3,404,336
for those receivables.
Interest Expense
Interest expense for the year ended March 31, 2020 was $96,624, resulting from the borrowings of Jinkailong from a financial
institution, third parties and related parties for its working capital requirements. The increase of $62,746 was because we acquired
the control of Jinkailong on November 22, 2018.
Interest Expense on Finance Leases
Interest expense on finance leases for the year ended March 31, 2020 was $373,407, representing the interest expenses on the
leased automobiles tendered to us for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business. We
were authorized to sublease or sell the automobiles to generate income/proceeds to pay for the amounts owed to the financial
institutions and us.
Change in Fair Value of Derivative Liabilities
Warrants issued in our June 2019 Offering were classified as liabilities under the caption “Derivative Liabilities” in the
consolidated balance sheet and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation
model. In August and October 2019, we issued an aggregate of 1,113,187 shares of common stock to certain investors in the
June 2019 Offering upon exercise of the pre-funded Series B warrants for a total consideration of $111. The change in fair value of
derivative liabilities for the year ended March 31, 2020 derived from change of the fair value between March 31, 2020 and June 20,
2019, the date of issuance, resulted in a gain of $1,796,724.
Income Tax Expense
Generally, our subsidiaries and consolidated VIEs in China are subject to enterprise income tax on their taxable income in
China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax
laws and accounting standards. Income tax expense of $33,184 for the year ended March 31, 2020 mainly represented the provision
of enterprise income tax resulting from the taxable income of $26,036 from Hunan Ruixi, $84,108 from Jinkailong and $22,592
from Yicheng.
Other subsidiaries and consolidated VIE in China incurred cumulative losses and no tax expense were recorded. However,
companies operating within China are required to adjust their net operating losses according to the Enterprise Income Tax Law of
China which can be carried forward to offset operating income for five years.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the “Tax Act”). The Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign
subsidiaries, and future foreign earnings are subject to U.S. taxation. The Tax Act also stablished the Global Intangible Low-Taxed
Income (GILTI), a new inclusion rule affecting non-routine income earned by foreign subsidiaries. For the year ended March 31,
2020 and March 31, 2019, our foreign subsidiaries in China cumulatively were operating at loss which resulted in no GILTI tax.
Net Loss
As a result of the foregoing, net loss from our Automobile Transaction and Related Services for the year ended March 31,
2020 was $4,348,776, representing an increase of $3,193,001 from net loss of $1,155,775 for the year ended March 31, 2019.
83
Results of Discontinued Operations for the Year Ended March 31, 2020 Compared to the Year Ended March 31, 2019
Revenues
Operating expenses
Selling, general and administrative expenses
Amortization of intangible assets
Impairments of intangible assets and goodwill
Bad debt expense
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Income tax expenses
Net loss
Revenue
For the Years Ended
March 31,
2020
2019
$
112,440
$
369,956
(1,365,733)
(32,401)
(265,525)
(4,048,210)
(5,711,869)
(5,599,429)
12,402
(5,587,027)
-
(2,242,905)
(308,043)
(1,225,073)
-
(3,776,021)
(3,406,065)
19,315
(3,386,750)
-
$
(5,587,027) $
(3,386,750)
For the year ended March 31, 2020, we charged borrowers transaction fees ranging from 0.19% to 3% of the loan amount,
which fees were paid upon (i) disbursement of the proceeds for loans which accrue interest on a monthly basis or (ii) full payment
of principal and interest of loans which accrue interest on a daily basis. We also charged our investors a service fee of 8.00% of the
interest that investors receive and the service fees were paid when the investors received interest payments. As the online P2P
lending industry in China experienced a continuous decline in total transaction volume and was facing an increasingly tighter
regulatory environment in 2019, we determined that the continued operation of our online lending business was not viable. We have
discontinued our online lending business since October 2019 but expect to continue to receive service fees following the
discontinuation as loans with a term of 36 months remain outstanding.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our online lending services was $1,365,733 for the year ended March 31,
2020, a decrease of $877,172 compared to the year ended March 31, 2019. The decrease mainly consisted of the decrease of
$324,466 in salary and employee benefits due to our termination and transfer of employees from our Online Lending Services to
our Automobile Transaction and Related Services, and $465,477 in advertising and marketing expenses as we discontinued our
online lending business since October 2019 and did not engage advertising and marketing firms to increase our publicity as we did
following our IPO in March 2018.
Amortization of Intangible Assets
Intangible asset amortization for the year ended March 31, 2020 was $32,401 as compared to $308,043 for the year ended
March 31, 2019, representing a decrease of $275,642. The decrease was mainly attributable to the decrease in net book value of our
online lending platform and related software as a result of the impairment charges of $265,525 and $1,225,073 recorded against for
the fiscal year ended March 31, 2020 and 2019, respectively.
Impairments of Intangible Assets
For the year ended March 31, 2020, we recognized the impairment loss of $265,525 on customer relationship of our online
lending business as we decided to discontinue the online lending business in October 2019. For the year ended March 31, 2019, we
did not recognize any impairment loss.
Bad Debt Expense
We have discontinued our online lending business since October 2019 and recognized receivables from borrowers and
payables to investors of approximately $4.0 million. Based on historical repayments collected from borrowers, we concluded that
the possibility of collection from the borrowers was low and recognized bad debt expenses of $4,048,210 for those receivables.
84
Net Loss
As a result of the foregoing, net loss from our discontinued operations for the year ended March 31, 2020 was $5,587,027,
representing an increase of $2,200,277 from $3,386,750 for the year ended March 31, 2019.
Liquidity and Capital Resources
We have financed our operations primarily through proceeds from our equity offerings, stockholder loans, and cash flow from
operations.
We had cash and cash equivalents of $833,888 as of March 31, 2020 as compared to $3,967,980 as of March 31, 2019 for our
continuing operations. We had cash and cash equivalents of $10,139 as of March 31, 2020 as compared to $1,052,530 as of
March 31, 2019 for our discontinued operations. We primarily hold our excess unrestricted cash in short-term interest-bearing
bank accounts at financial institutions.
In December 2017, Sichuan Senmiao entered into loan agreements with its two stockholders, who agreed to grant lines of
credit of approximating $955,000 and $159,000, respectively, to Sichuan Senmiao for five years. The lines of credit are non-interest
bearing, effective from January 2017. During the year ended March 31, 2020, we repaid them in the aggregate amount of $931,905.
As of March 31, 2020, the outstanding balances were $108,711 and $73,384, respectively.
On March 16, 2018, we closed our IPO of 3,000,000 shares of common stock at $4.00 per share. On March 28, 2018, we sold
additional 379,400 shares of common stock upon exercise of the underwriter’s over-allotment option. The total gross proceeds from
the offering were approximately $13.5 million. After deducting underwriting discounts and commissions and offering expenses
payable by us, the aggregate net proceeds totaled approximately $12.2 million.
On June 21, 2019, we closed a registered direct offering of common stock and warrants pursuant to our registration statement
on Form S-3, as supplemented, for total gross proceeds of $6.0 million. The offering price of the shares sold in the offering was
$3.38 per share. After deducting placement agent fees and offering expenses payable by us, the aggregate net proceeds totaled
approximately $5.1 million.
We plan to use anticipated cash flows from operating activities and obtain loans from our bank credit facility and additional
equity financing to expand our automobile transaction and related services business. We have considered whether there is
substantial doubt about our ability to continue as a going concern due to (1) our recurring losses from operations, including
approximately $3.1 million and $5.6 million net loss attributable to the our stockholders from continuing operations and
discontinued operations, respectively, for the year ended March 31, 2020; (2) our accumulated deficit of approximately $23.7
million as of March 31, 2020; (3) our working capital deficit of $4.5 million; and (4) the fact that we had negative operating cash
flows of approximately $4.5 million and $2.0 million from continuing operations and discontinued operations, respectively, for the
year ended March 31, 2020.
We have determined there is substantial doubt about our ability to continue as a going concern. We are trying to alleviate the
going concern risk through the following sources:
•
•
cash and cash equivalents generated from operations; and
other equity financing to support our working capital.
As described in “Business - Recent Developments - JKL Investment Agreement”, pursuant to the JKL Investment Agreement
signed on July 4, 2020, Hongyi agreed to make a capital contribution of RMB 50 million (approximately $7.0 million) in
consideration of a 27.03% equity interest in Jinkailong. The initial investment by Hongyi of approximately RMB10 million ($1.4
million) shall be paid no later than September 30, 2020. At the same time such initial investment is made, all the original
shareholders of Jinkailong shall fully pay their investment funds in accordance with their respective equity interests in Jinkailong.
Within 30 days from the date of completion of the industrial and commercial registration procedures required to accommodate this
transaction but no later than December 31, 2020, Hongyi will pay the remaining investment of RMB 40 million (approximately
$5.6 million).
However, if Jinkailong fails to meet the criteria set in the JKL Investment Agreement, Hongyi may require certain
shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in Jinkailong. Based on a repurchase
formula provided for in the JKL Investment Agreement, the maximum repurchase amount that Hunan Ruixi would be subject to is
RMB28,320,000 (approximately $4.0 million).
If we are unable to generate significant operating cash flows or secure additional debt and equity financing, we may be
required to cease or curtail our operations. Our consolidated financial statements do not include adjustments that might result from
the outcome of these uncertainties.
85
Net Cash Used in Operating Activities
Net Cash Used in Investing Activities
Net Cash Provided by Financing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Less: Cash and cash equivalents from discontinued operations
Cash and cash equivalents from continuing operations, end of Year
86
For the Year Ended
December 31,
2020
2019
$ (6,447,664) $ (6,256,226)
(532,625)
701,207
(33,412)
11,141,566
5,020,510
(1,052,530)
3,967,980
(963,416)
3,431,797
(197,200)
5,020,510
844,027
(10,139)
833,888
$
$
Cash Flow in Operating Activities
For the year ended March 31, 2020, net cash used in operating activities was $6,447,664, which consists of the net cash used
in operating activities of $4,530,293 from continuing operations and $1,917,371 from discontinued operations. The total net cash
used in operating activities primarily comprised of salary and employee surcharge of $2,519,541, other operating costs of
$2,331,318, costs of $1,185,031 on automobiles used for financial lease to be collected within the lease terms, and payment of
$11,872,377 for purchase of automobiles and related transactions, partially offset by revenue received of $11,460,604. The net cash
outflow was mainly due to (1) net loss of $9,935,802; (2) the changes in fair value of derivative liabilities of $1,796,723; (3) the
increase in receivables due from automobile purchasers of $356,381 due to our Automobile Transaction and Related Services
expansion; (4) the increase in financing lease receivables of $1,185,031; offset by (5) the increase in the accrued expense and other
liabilities of $4,903,882, of which, mainly resulted from the outstanding loans from investors on the online lending platform, which
was assumed by us in connection with the Plan to discontinue our online lending services business; (6) the amortization of the right
- of - used assets of $1,762,276 ; and (7) the decrease in inventories of $437,012 as we sold more automobiles during the year
without purchasing more automobiles.
For the year ended March 31, 2019, we had net cash used in operating activities of $6,256,226, which consisted of the net
cash used in operating activities of $4,552,979 from continuing operations and $1,703,247 from discontinued operations. The total
net cash used in operating activities was primarily comprised salary and employee surcharge of $1,265,970, other operating costs of
$1,344,048, and net advance payment for automobile purchase transactions of $6,280,086, partially offset by revenue received of
$2,633,878.
Cash Flow in Investing Activities
For the year ended March 31, 2020, we had net cash used in investing activities of $963,416, which consisted of the net cash
used in investing activities of $965,241 from continuing operations, partially offset by the net cash provided by of $1,825 from
discontinued operations. The total net cash used in investing activities primarily consisted of: (1) the payment of $181,116,
$262,763 and $49,537 for the purchases of leasehold improvements, vehicles and office equipment, respectively, and (2) the
payment of $470,000 for the development of software used in our automobile transaction and related services.
For the year ended March 31, 2019, we had net cash used in investing activities of $314,434 from continuing operations and
$218,191 from discontinued operations. The total net cash used in investing activities primarily consisted of the payment of
$28,870 for the purchases of office equipment, the payment of $471,555 for the development of software to be used in our previous
online lending platform and our automobile transaction and financing services; and the investments in principal of finance lease of
$32,200.
Cash Flow in Financing Activities
For the year ended March 31, 2020, we had net cash provided by financing activities of $3,431,797, which consisted of the net
cash provided by financing activities of $4,080,202 from continuing operations and the net cash of $648,405 from discontinued
operations. The total net cash provided by financing activities primarily consisted of: (1) gross proceeds from our June 2019
Offering of $5.1 million; (2) release of escrow receivable of $600,000; (3) net proceeds from short-term borrowings from related
parties and affiliates of $177,266 for the daily operation of Jinkailong, partially offset by (4) payments of finance lease liabilities to
financial institutions of $975,958; (5) repayments of borrowings from financial institutions and third parties of $749,610; and (6)
repayment of borrowings from stockholders of $817,294.
For the year ended March 31, 2019, we had net cash used in financing activities of $1,272,272 from continuing operations,
offset by net cash provided by of $1,973,479 from discontinued operations. The total net cash provided by financing activities was
mainly consisted of: (1) the release of the deposit of $600,000 from escrow account; (2) cash acquired from the acquisition of
Hunan Ruixi and Jinkailong of $218,816; (3) repayments of borrowings from financial institutions, related parties and affiliates of
$662,696, partially offset by short-term borrowings from third parties of $471,608 for the daily operation of Jinkailong after the
acquisition; and (4) proceeds from stockholders loans of $1,973,479, partially offset by repayments to stockholders of $1,900,000.
87
Off-Balance Sheet Arrangements
As of the date of this Report, we have the following off-balance sheet arrangements that are likely to have a future effect on
our financial condition, revenues or expenses, results of operations and liquidity:
·
Contingent Liabilities
We are exposed to credit risk as we are required by certain financial institutions to provide guarantee on the lease/loan
payments (including principal and interests) of the automobile purchasers referred by us. As of March 31, 2020, the maximum
contingent liabilities we would be exposed to was approximately $18,627,000 (including approximately $497,400 related to the
discontinued P2P business), assuming all the automobile purchasers were in default, which may cause an increase in guarantee
expense and cash outflow in financing activities. As of March 31, 2020, approximately $1,431,000, including interests of $84,000,
due to financial institutions, of all the automobile purchases we serviced were past due because of the COVID-19 epidemic in
China.
·
Purchase Commitments
As of March 31, 2020, we had a purchase commitment of 50 automobiles for a total purchase price of approximately
$699,000. These purchase transactions will be completed by the end of 2020, which will lead to an increase in our inventory and
cash outflow in operating activities.
Inflation
We do not believe our business and operations have been materially affected by inflation.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S GAAP. These accounting principles require us to
make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and
the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates
based on our past experience, knowledge and assessments of current business and other conditions, our expectations regarding the
future based on available information and assumptions.
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies
and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when
reviewing our financial statements. We believe the following accounting policies involve the most significant assumptions and
estimates used in the preparation of our consolidated financial statements.
(a) Use of estimates
In presenting the consolidated financial statements in accordance with U.S. GAAP, management make estimates and
assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgement and
available information. Accordingly, actual results could differ from those estimates. On an ongoing basis, management reviews
these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the
Company to revise its estimates. we base our estimates on past experience and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates
are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, lease
classification and liabilities, finance lease receivables, inventory obsolescence, right-of-use assets, determinations of the useful lives
and valuation of long-lived assets, estimates of allowances for doubtful accounts and prepayments, estimates of impairment of
intangible assets, valuation of deferred tax assets, estimated fair value used in business acquisitions, valuation of derivative
liabilities and other provisions and contingencies.
88
(b) Fair values of financial instruments
Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value
information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of us. The three levels of
valuation hierarchy are defined as follows:
Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value.
(c) Property and equipment
Property and equipment primarily consists of computer equipment, which is stated at cost less accumulated depreciation less
any provision required for impairment in value. Depreciation is computed using the straight-line method with no residual value
based on the estimated useful life.
(d) Derivative liabilities
A contract is designated as an asset or a liability and is carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in a company’s results of operations. We then determine which options, warrants and embedded features require
liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in
the accompanying consolidated statements of operations and comprehensive loss as “change in fair value of derivative liabilities”.
(e) Revenue recognition
We have adopted ASC 606 on April 1, 2018 using the modified retrospective approach. ASC 606 establishes principles for
reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts
to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods
or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those
goods or services recognized as performance obligations are satisfied. It also requires us to identify contractual performance
obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods
and services transfers to a customer.
To achieve that core principle, we apply the five steps defined under ASC 606: (i) identify the contract(s) with a customer, (ii)
identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We account for a contract with a customer when the contract is committed in writing, the rights of the parties, including
payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.
We have assessed the impact of the guidance by reviewing our existing customer contracts and current accounting policies and
practices to identify differences that will result from applying the new requirements, including the evaluation of its performance
obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the
assessment, we concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams
in scope of ASC 606 and therefore there was no material changes to our consolidated financial statements upon adoption of ASC
606.
89
Automobile Transaction and Related Services
Sales of automobiles – We generate revenue from sales of automobiles to the customers of Jinkailong, Hunan Ruixi and
Mashang Chuxing. The control over the automobile is transferred to the purchaser along with the delivery of automobile. The
amount of the revenue is based on the sale price agreed by Hunan Ruixi or Yicheng and the counterparties, including Jinkailong and
Mashang Chuxing, who act on behalf of their customers. We recognize revenues when the automobile is delivered and control is
transferred to the purchaser at a point in time.
Service fees from automobile purchase services – Services fees from automobile purchase services are paid by automobile
purchasers for a series of the services provided to them throughout the purchase process such as credit assessment, preparation of
financing application materials, assistance with closing of financing transactions, license and plate registration, payment of taxes
and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures.
The amount of these fees is based on the sales price of the automobiles and relevant services provided. We recognize revenue when
all the services are completed and the automobile is delivered to the purchaser at a point in time.
Facilitation fees from automobile transactions – Facilitation fees from automobile purchase transactions are paid by our
customers including third-party sales teams or the automobile purchasers for the facilitation of the sales and financing of
automobiles. We attract automobile purchasers through third-party sales teams or its own sales department. For the sales facilitated
between third-party sales teams and automobile purchasers, we charge the fees to the third-party sales teams, which derived from
the commission paid by the automobile purchasers to the third-party sales teams. Relating to sales facilitated between automobile
purchasers and dealers, we charge the fees to the automobile purchasers. We recognize revenue from facilitation fees when the titles
are transferred to the purchasers at a point in time. The amount of fees is based on the type of automobile and negotiation with each
sales team or automobile purchaser. The fees charged to third-party sales teams or automobile purchasers are paid before the
automobile purchase transactions are consummated. These fees are non-refundable upon the delivery of automobiles.
Service fees from management and guarantee services – Over 95% of our customers are drivers of Didi, the largest ride-
hailing service platform in China. The drivers sign affiliation agreements with us, pursuant to which we provide them with
management and guarantee services during the affiliation period. Service fees for management and guarantee services are paid by
such automobile purchasers on a monthly basis for the management and guarantee services provided during the affiliation period.
We recognize revenue over the affiliation period when performance obligations are completed.
Financing revenues – Interest income from the lease arising from our sales-type leases and bundled lease arrangements are
recognized in financing revenues over the lease term based on the effective rate of interest in the lease.
Operating lease revenues from automobile rentals – We generate revenue from sub-leasing automobiles from some online
ride-hailing drivers or leasing our own automobiles. We recognize revenue wherein the automobile is transferred to the leasee and
the leasee has the ability to control the asset, is accounted for under ASC Topic 842. Rental transactions are satisfied over the rental
period. Rental periods are short term in nature, generally are twelve months or less.
Leases
On April 1, 2019, we adopted ASC Topic 842. This update, as well as additional amendments and targeted improvements
issued in 2018 and early 2019, supersedes existing lease accounting guidance found under ASC 840. The accounting for lessors
does not fundamentally change with this update except for changes to conform and align guidance to the lessee guidance, as well as
to the revenue recognition guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). Some of these
conforming changes, such as those related to the definition of lease term and minimum lease payments, resulted in certain lease
arrangements, that would have been previously accounted for as operating leases, to be classified and accounted for as sales-type
leases with a corresponding up-front recognition of automobile sales revenue when the lessee obtained control over the automobile.
The two primary accounting provisions we use to classify transactions as sales-type or operating leases are: (i) a review of the
lease term to determine if it is for the major part of the economic life of the underlying equipment (defined as greater than 75%);
and (ii) a review of the present value of the lease payments to determine if they are equal to or greater than substantially all of the
fair market value of the equipment at the inception of the lease (defined as greater than 90%). Automobile included in arrangements
meeting these conditions are accounted for as sales-type leases. For sales-type leases, we recognize sales equal to the present value
of the minimum lease payments discounted using the implicit interest rate in the lease and cost of sales equal to carrying amount of
the asset being leased and any initial direct costs incurred, less the present value of the unguaranteed residual. Interest income from
the lease is recognized in financing revenues over the lease term. Automobile included in arrangements that do not meet these
conditions are accounted for as operating leases and revenue is recognized over the term of the lease.
90
We exclude from the measurement of our lease revenues any tax assessed by a governmental authority that is both imposed on
and concurrent with a specific revenue-producing transaction and collected from a customer.
We consider the economic life of most of automobile to be three to four years, since this represents the most frequent
contractual lease term for its automobile and the automobile will be used for Didi driving services. We believe three to four years is
representative of the period during which the automobile is expected to be economically usable, with normal service, for the
purpose for which it is intended.
A portion of our direct sales of automobile to end customers are made through bundled lease arrangements which typically
include automobile, services (automobile purchase services, facilitation fees, and management and guarantee services) and
financing components where the customer pays a single negotiated fixed minimum monthly payment for all elements over the
contractual lease term. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling
prices of the lease and non-lease deliverables included in the bundled arrangement and the financing components. Lease
deliverables include the automobile and financing, while the non-lease deliverables generally consist of the services and repayment
of advanced fees made on behalf of its customers. We consider the fixed payments for purposes of allocation to the lease elements
of the contract. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the
total fixed lease payments that the customer is obligated to make over the lease term. Amounts allocated to the automobile and
financing elements are then subjected to the accounting estimates under ASC 842 to ensure the values reflect standalone selling
prices. The remainder of any fixed payments are allocated to non-lease elements (automobile purchase services, facilitation fees,
and management and guarantee services), for which these revenues are recognized in a manner consistent with the guidance for
service fees from automobile purchase services, facilitation fees from automobile transactions, and service fees from management
and guarantee services as discussed above.
91
Our lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are
developed based upon the local prevailing rates in the marketplace where its customer will be able to obtain an automobile loan
under similar terms from the bank. We reassess our pricing interest rates quarterly based on changes in the local prevailing rates in
the marketplace. As of December 31, 2019, our pricing interest rate is 6.0% per annum.
Online Discontinued P2P Lending Services (Discontinued Operations)
Transaction fees – Prior to our P2P lending business being discontinued on October 17, 2019, transaction fees were paid by
borrowers to us for the work we perform through its platform. The amount of these fees was based upon the loan amount and the
maturity date of the loan. The fees charged to borrowers were paid upon (i) disbursement of the proceeds for loans which accrued
interest on a monthly basis or (ii) full payment of principal and interest of loans which accrue interest on a daily basis. These fees
were non-refundable upon the issuance of loan. We recognized the revenue when loans were disbursed to borrowers or borrowers
repaid their principal or interest of loans.
Service fees - We charged investors service fees on their actual investment payments. We generally received the service fees
upon the investors’ receipt of their investment returns. We recognized the revenue when loans were repaid and investor received
their investment income.
Website development revenues - Revenue allocated to website development services is recognized as the service is performed
over time using our efforts or inputs to the satisfaction of a performance obligation using an input measure method, under which the
total value of revenue is recognized on the basis of the percentage that total cost to date bears to the total expected costs. We
consider labor costs and related outsource labor costs for the input measurement as the best available indicator of the progress,
pattern and timing in which contract obligations are fulfilled.
Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become
probable based on the current contract estimates. In instances where substantive acceptance provisions are specified in customer
contracts, revenues are deferred until all acceptance criteria have been met. To date, we have not incurred a material loss on any
contracts. However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss
becomes probable and can be reasonably estimated.
We generally do not enter into arrangements with multiple deliverables for website development services contracts. If the
deliverables have standalone value at contract inception, we account for each deliverable separately.
(f) Leases
Prior to March 31, 2019, leases are classified as either capital or operating leases as lessee. Leases that transfer substantially
all the benefits and risks incidental to the ownership of assets are accounted for as if there was an acquisition of an asset and
incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases and are included in
the consolidated statements of operations on a straight-line basis over the term of the leases. Leases are classified as either
operating lease, sales-type lease, or direct finance leases as lessor.
On April 1, 2019, we adopted ASC Topic 842. This update supersedes existing lease accounting guidance found under ASC
840 and requires the recognition of right-of-use (“ROU”) assets and lease obligations (“lease liabilities”) by lessees for those leases
currently classified as operating leases under existing lease guidance. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition. Short term leases with a term of 12 months or less are not required to be
recognized. Lessor accounting is generally the same under ASC 842 as compared to ASC 840 except with an additional requirement
to assess collectability to support classification as a direct financing lease. Also, in order to derecognize the asset and record
revenue, collection of payments due must be probable for sales-type leases and the lessees of sales-type leases will need to obtain
control over the leased asset.
We adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease a single lease
component. The impact of the adoption of the ASC 842, as of April 1, 2019, we recognized approximately $246,227 ROU assets
and approximately $247,325 lease liabilities, primarily related to leases of facilities. The adoption of this standard resulted in the
recording of operating lease assets and operating lease liabilities as of April 1, 2019, with no related impact on our statement of
changes in stockholders' equity or consolidated statements of operations and comprehensive loss.
During the year ended March 31, 2020, we entered into certain agreements as a lessor under which we leased automobiles to
short-term (usually under 12 months) car service drivers. We also enter into certain agreements as a lessee to rent automobiles and
to conduct our automobiles rental operations. If any of the following criteria are met, we classify the lease as a finance lease (as a
lessee) or as a direct financing or sales-type lease (both as a lessor):
92
·
·
·
·
·
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
The lease grants the lessee an option to purchase the underlying asset that we are reasonably certain to exercise;
The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date
falls within the last 25% of the economic life of the underlying asset;
The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of
the lease term.
Leases that do not meet any of the above criteria are accounted for as operating leases.
We combine lease and non-lease components in its contracts under Topic 842, when permissible.
Finance and operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present
value of lease payments over the lease term. Since the implicit rate for our leases is not readily determinable, we use our
incremental borrowing rate based on the information available at the commencement date in determining the present value of lease
payments. The incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an
amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or
terminate the lease, as we do not have reasonable certainty at lease inception that these options will be exercised. We generally
consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. We have
elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of
twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease
incentives. Lease expense is recognized on a straight-line basis over the lease term.
We review the impairment of our ROU assets consistent with the approach applied for our other long-lived assets. We review
the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the
asset from the expected undiscounted future pre-tax cash flows of the related operations. We have elected to include the carrying
amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the
undiscounted future pre-tax cash flows.
93
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 8.
Financial Statements and Supplementary Data
The financial statements required by this item begin on page F-1 hereof.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets as of March 31, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended March 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended March 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Senmiao Technology Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Senmiao Technology Limited and Subsidiaries (collectively, the
“Company”) as of March 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss,
changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended March 31, 2020, and the related
notes (collectively referred to as the financial statements). In our opinion, the consolidated 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 each of the years in the two-year period ended March 31, 2020, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Consideration of the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
As discussed in Note 2 to the financial statements, the Company had incurred significant working capital deficiency, recurring
losses from operations and accumulated deficit at March 31, 2020. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. These financial
statements do not include any adjustments that might result from the outcome of these uncertainties. If the Company is unable to
successfully obtain the necessary additional financial support as specified in Note 2, there could be a material adverse effect on the
Company.
/s/ Friedman LLP
We have served as the Company’s auditor since 2018.
New York, New York
July 9, 2020
F-1
SENMIAO TECHNOLOGY LIMITED
CONSOLIDATED BALANCE SHEETS
As of March 31, 2020 and 2019
(Expressed in U.S. dollar, except for the number of shares)
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net, current portion
Inventories
Finance lease receivables, net, current portion
Prepayments, other receivables and other assets, net
Escrow receivable due within one year
Due from related parties
Current assets - discontinued operations
Total Current Assets
Property and equipment, net
Property and equipment, net
Property and equipment, net - discontinued operations
Total Property and equipment, net
Other Assets
Operating lease right-of-use assets, net
Operating lease right-of-use assets, net, related parties
Financing lease right-of-use assets, net
Intangible assets, net
Prepayment for intangible assets
Accounts receivable, net, noncurrent
Finance lease receivables, net, noncurrent portion
Other assets - discontinued operations
Total Other Assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities
Borrowings from financial institutions
Borrowings from third parties
Accounts payable
Advance from customers
Income tax payable
Accrued expenses and other liabilities
Due to related parties and affiliates
Operating lease liabilities
Operating lease liabilities - related parties
Financing lease liabilities
Derivative liabilities
Current liabilities - discontinued operations
Total Current Liabilities
Other Liabilities
Borrowings from financial institutions, noncurrent
Operating lease liabilities, noncurrent
Operating lease liabilities, noncurrent - related parties
Financing lease liabilities, noncurrent
Total Other Liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity
March 31,
2020
March 31,
2019
$
833,888
660,645
1,000,675
459,110
2,798,780
-
26,461
826,580
6,606,139
469,201
11,206
480,407
473,661
236,305
5,440,362
777,621
-
882,078
734,145
-
8,544,172
$
3,967,980
199,909
1,508,244
10,254
3,787,254
600,000
140,498
1,185,016
11,399,155
100,680
25,205
125,885
-
-
-
1,627
280,000
-
22,298
485,170
789,095
$
15,630,718
$
12,314,135
$
$
226,753
-
4,065
90,349
16,267
2,008,391
152,679
149,582
151,655
3,473,967
342,530
4,516,292
11,132,530
64,221
297,167
88,349
2,576,094
3,025,831
219,157
476,765
-
31,776
21,905
962,291
415,931
-
-
-
-
1,625,779
3,753,604
177,789
-
-
-
177,789
14,158,361
3,931,393
2,901
2,595
Common stock (par value $0.0001 per share, 100,000,000 shares authorized; 29,008,818
and 25,945,255 shares issued and outstanding at March 31, 2020 and 2019,
respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total Senmiao Technology Limited Stockholders' Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of the consolidated financial statements.
F-2
27,013,137
(23,704,863)
(507,478)
2,803,697
23,833,112
(15,031,538)
(428,771)
8,375,398
(1,331,340)
7,344
1,472,357
8,382,742
$
15,630,718
$
12,314,135
SENMIAO TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Expressed in U.S. dollar, except for the number of shares)
Revenues
Cost of revenues
Gross profit
Operating expenses
Selling, general and administrative expenses
Bad debt expense
Total operating expenses
Loss from operations
Other income (expense)
Other expense, net
Interest expense
Interest expense on finance leases
Change in fair value of derivative liabilities
Total other income (expense), net
Loss before income taxes
Income tax expenses
Net loss from continuing operations
For the Years Ended March 31,
$
2020
15,655,575
(12,280,238)
3,375,337
$
2019
2,551,107
(1,812,187)
738,920
(5,567,939)
(3,404,336)
(8,972,275)
(1,776,690)
(5,077)
(1,781,767)
(5,596,938)
(1,042,847)
(45,347)
(96,624)
(373,407)
1,796,724
1,281,346
(57,145)
(33,878)
-
-
(91,023)
(4,315,592)
(1,133,870)
(33,184)
(21,905)
(4,348,776)
(1,155,775)
Net loss from discontinued operations, net of applicable income taxes
(5,587,027)
(3,386,750)
Net loss
(9,935,803)
(4,542,525)
Net loss (income) attributable to noncontrolling interests from continuing operations
1,262,478
(7,344)
Net loss attributable to stockholders
Net loss
Other comprehensive loss
Foreign currency translation adjustment
Comprehensive loss
$
$
(8,673,325) $
(4,549,869)
(9,935,803) $
(4,542,525)
(154,913)
(175,010)
(10,090,716)
(4,717,535)
Total comprehensive loss (income) attributable to noncontrolling interests
1,338,684
(7,344)
Total comprehensive loss attributable to stockholders
$
(8,752,032) $
(4,724,879)
Weighted average number of common stock
Basic and diluted
Loss per share - basic and diluted
Continuing operations
Discontinued operations
28,023,498
25,882,287
$
$
(0.11) $
(0.20) $
(0.05)
(0.13)
The accompanying notes are an integral part of the consolidated financial statements.
F-3
SENMIAO TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended March 31, 2020 and 2019
(Expressed in U.S. dollar, except for the number of shares)
Balance as of March 31, 2018
Capital contribution from noncontrolling
interests of the subsidiary acquired
Gain from acquisition of variable interest
entities
Issuance of common stock pursuant to
exercise of underwriter's warrants granted
in IPO
Net (loss) income
Foreign currency translation adjustment
Balance as of March 31, 2019
Net loss
Issuance of common stock in registered direct
offering net of issuance costs
Exercise of Series B warrants into common
stock
Issuance of restricted stock units
Foreign currency translation adjustment
Balance as of March 31, 2020
Common stock
Additional
paid-in
Accumulated
other
Accumulated comprehensive Non-controlling
Shares
25,879,400
Par value
2,588
$
capital
$23,611,512
deficit
$ (10,481,669) $
loss
(253,761) $
interest
-
-
-
-
157,642
63,965
-
-
-
-
Total
equity
$12,878,670
157,642
63,965
-
-
-
65,855
-
-
25,945,255
-
7
-
-
2,595
-
(7)
-
-
23,833,112
-
-
(4,549,869)
-
(15,031,538)
(8,673,325)
-
-
(175,010)
(428,771)
-
-
7,344
-
7,344
(1,262,478)
-
(4,542,525)
(175,010)
8,382,742
(9,935,803)
1,781,360
178
1,991,940
1,113,188
169,015
-
29,008,818
$
111
17
-
2,901
1,010,752
177,333
-
$27,013,137
-
-
-
-
$ (23,704,863) $
-
-
1,992,118
-
-
(78,707)
(507,478) $
-
-
(76,206)
1,010,863
177,350
(154,913)
(1,331,340) $ 1,472,357
The accompanying notes are an integral part of the consolidated financial statements.
F-4
SENMIAO TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollar, except for the number of shares)
Cash Flows from Operating Activities:
Net loss
Net loss from discontinued operations
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment
Stock compensation expense
Amortization of right-of-use assets
Amortization of intangible assets
Bad debt expense
Impairment loss of right-of-use assets
Loss on disposal of equipment
Change in fair value of derivative liabilities
Change in operating assets and liabilities
Accounts receivable
Inventories
Prepayments, other receivables and other assets
Finance lease receivables
Accounts payable
Advances from customers
Income tax payable
Accrued expenses and other liabilities
Operating lease liabilities
Operating lease liabilities - related parties
Net cash used in operating activities from continuing operations
Net cash used in operating activities from discontinued operations
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Purchases of property and equipment
Purchase of intangible assets
Addition in finance lease receivable
Net cash used in investing activities from continuing operations
Net cash provided by (used in) investing activities from discontinued operations
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock in registered direct offering
Net proceeds from issuance of common stock upon warrants exercised
Borrowings from financial institutions
Repayments to stockholders
Repayments to third parties
Repayments from related parties
Borrowings from related parties and affiliates
Repayments to related parties and affiliates
Repayments of current borrowings from financial institutions
Repayments of noncurrent borrowings from financial institutions
Release of escrow receivable
Principal payments of finance lease liabilities
Cash acquired from acquisition
Net cash provided by (used in) financing activities from continuing operations
Net cash (used in) provided by financing activities from discontinued operations
Net Cash Provided by Financing Activities
For the Years Ended March 31,
2020
2019
$
(9,935,803) $
(5,587,027)
(4,348,776)
(4,542,525)
(3,386,750)
(1,155,775)
103,009
133,150
1,553,523
283
3,404,336
70,984
3,608
(1,796,724)
(3,047,955)
437,012
(964,889)
(1,185,031)
4,144
61,409
(4,582)
1,138,316
(94,235)
2,125
(4,530,293)
(1,917,371)
(6,447,664)
(495,241)
(470,000)
-
(965,241)
1,825
(963,416)
5,142,124
111
55,159
-
(604,562)
108,566
1,305,166
(1,405,356)
(145,048)
-
600,000
(975,958)
-
4,080,202
(648,405)
3,431,797
12,247
44,200
-
-
5,077
-
-
-
(148,249)
(1,491,928)
(1,952,696)
-
-
12,725
21,905
99,515
-
-
(4,552,979)
(1,703,247)
(6,256,226)
(1,365)
(280,869)
(32,200)
(314,434)
(218,191)
(532,625)
-
-
-
(1,900,000)
-
-
471,608
(487,115)
-
(175,581)
600,000
-
218,816
(1,272,272)
1,973,479
701,207
Effect of exchange rate changes on cash and cash equivalents
(197,200)
(33,412)
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(4,176,483)
5,020,510
844,027
(6,121,056)
11,141,566
5,020,510
Less: Cash and cash equivalents from discontinued operations
(10,139)
(1,052,530)
Cash and cash equivalents from continuing operations, end period
Supplemental Cash Flow Information
Cash paid for interest expense
Cash paid for income tax
Non-cash Transaction in Investing and Financing Activities
IPO expenses paid by the Company’s stockholders
Assume of net liabilities of Ruixi, excluding cash and cash equivalents
Prepayment in exchange of intangible assets
Right-of-use assets obtained in exchange of lease liabilities
Right-of-use assets obtained in exchange of lease liabilities - related parties
Allocation of fair value of derivative liabilities for issuance of common stock proceeds
Allocation of fair value of derivative liabilities to additional paid in capital upon
warrants exercised
Issuance of restricted stock units from accrued expenses and other liabilities
The accompanying notes are an integral part of the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
833,888
$
3,967,980
96,624
-
-
-
280,000
549,679
343,819
3,150,006
1,010,752
44,200
$
$
$
$
$
$
$
$
$
$
33,878
-
70,687
149,680
-
-
-
-
-
-
F-5
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTITIVIES
Senmiao Technology Limited (the “Company”) is a U.S. holding Company incorporated in the State of Nevada on June 8, 2017.
The Company provides automobile transaction and related services focusing on the ride-hailing industry in the People’s Republic of
China (“PRC” or “China”) through its majority owned subsidiary, Hunan Ruixi Financial Leasing Co., Ltd. (“Hunan Ruixi”), a
PRC limited liability Company, its wholly owned subsidiary, Hunan Ruixi Automobile Leasing Co., Ltd. (“Ruixi Leasing”), and its
variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”). The Company operated an online
lending platform in China through its VIE, Sichuan Senmiao Ronglian Technology Co., Ltd. (“Sichuan Senmiao”), which
facilitated peer-to-peer (“P2P”) loan transactions between Chinese investors and individual and small-to-medium-sized enterprise
borrowers. The Company ceased its online lending services business in October 2019 and commenced a process of winding down
such business.
On September 25, 2016, Sichuan Senmiao acquired a P2P platform (including website, internet content provider license, operating
systems, servers, and management system) from Sichuan Chenghexin Investment and Asset Management Co., Ltd. On July 28,
2017, the Company established a wholly-owned subsidiary, Sichuan Senmiao Zecheng Business Consulting Co., Ltd. (“Senmiao
Consulting”) in China. Sichuan Senmiao was established in China in June 2014. On September 18, 2017, the Company, through
Senmiao Consulting, entered into a series of agreements (“VIE Agreements”) with Sichuan Senmiao and its equity holders (the
“Sichuan Senmiao Shareholders”) to obtain control and became the primary beneficiary of Sichuan Senmiao (the “Restructuring”).
In connection with the Restructuring, as partial consideration for the Sichuan Senmiao Shareholders’ commitment to perform their
obligations under the VIE Agreements, the Company issued an aggregate of 45,000,000 shares of its common stock to the Sichuan
Senmiao Shareholders pursuant to certain subscription agreements dated September 18, 2017. The Company conducted its P2P
business transactions through the Sichuan Senmiao, the VIE. The P2P business was discontinued on October 17, 2019.
On October 17, 2019, the Board of Directors of the Company (the “Board”) approved a plan (the “Plan”) prepared by the
Company’s executive officers for the Company to discontinue and wind down its online P2P lending services business. In
connection with the Plan, the Company ceased facilitation of loan transactions on its online lending platform and assumed all the
outstanding loans from investors on the platform. The decision and action taken by the Company to discontinue the online P2P
lending services business represents a major shift that will have a material effect on the Company’s operations and financial results,
which triggers discontinued operations accounting in accordance with ASC 205-20-45. See Note 4 – discontinued operations.
On November 21, 2018, as part of its entry into the automobile transaction business, the Company entered into an Investment and
Equity Transfer Agreement (the “Investment Agreement”) with Hunan Ruixi and all the shareholders of Hunan Ruixi (“Hunan
Ruixi Shareholders”), pursuant to which the Company acquired from the Hunan Ruixi Shareholders an aggregate of 60% of the
equity interest of Hunan Ruixi. The Company closed the acquisition on November 22, 2018 and agreed to make a cash contribution
of $6,000,000 to Hunan Ruixi, representing 60% of its registered capital, in accordance with the Investment Agreement (Note 3). In
June 30, 2019, the Company made the full cash contributions in the aggregate amount of $6,000,000 to Hunan Ruixi.
Hunan Ruixi holds a business license for automobile sales and financial leasing and has been engaged in automobile financial
leasing services and automobile sales since January 2019. Hunan Ruixi also controls Jinkailong through its 35% equity interest and
voting agreements with Jinkailong’s other shareholders. Jinkailong facilitates automobile sales and financing transactions for its
clients, who are primarily ride-hailing drivers and provides them relevant after-transaction services. In March 2019, Hunan Ruixi
began its financing leasing operation.
In May 2019, the Company formed a wholly owned subsidiary, Yicheng Financial Leasing Co., Ltd. (“Yicheng”), with a registered
capital of $50 million in Chengdu City, Sichuan Province. Yicheng obtained its business licenses for automobiles sale and financial
leasing on May 5, 2019. Yicheng has been engaged in automobile sales since June 2019.
F-6
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 5, 2019, Yicheng entered into an Investment and Equity Transfer Agreement with Chengdu Mashangchuxing Automobile
Leasing Co., Ltd. (“Mashang Chuxing”), Chengdu Yunche Chixun Business Consulting Co., Ltd. (“Yunche Chixun”), Mr. Zhiqiu
Xia and all the shareholders of Mashang Chuxing (“Mashang Chuxing Shareholders”), pursuant to which, Yicheng, Yunche Chixun,
Mr. Zhiqiu Xia acquired from the Mashang Chuxing Shareholders 49%, 5% and 46% of the equity interests of Mashang Chuxing
for no consideration, respectively. On March 18, 2020, Yicheng, Yunche Chixun, Mr. Zhiqiu Xia entered into equity transfer
agreements with Sichuan Dinghengxin Automobile Service Co., Ltd (“Dinghengxin”), respectively, pursuant to which, Yicheng,
Yunche Chixun, Mr. Zhiqiu Xia transferred all the equity interests of Mashang Chuxing to Dinghengxin with no consideration. As
of the date of the financial statements, none of the shareholders of Mashang Chuxing made capital contribution. Mashang Chuxing
commenced providing ride-hailing services in August 2019 and has suffered loss of approximately $4,400 due to limited
operations.
The following diagram illustrates the Company’s corporate structure, including its subsidiaries, and VIEs, as of the date of these
financial statements:
VIE Agreements with Sichuan Senmiao
According to the VIE Agreements, Sichuan Senmiao is obligated to pay Senmiao Consulting service fees equal to its net income.
Sichuan Senmiao’s entire operations are controlled by the Company. Although the Company discontinued Sichuan Senmiao’s
online P2P lending services business commencing in October 2019, the VIE Agreements remain in place, and such agreements are
described in detail below:
Equity Interest Pledge Agreement
Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders entered into an Equity Interest Pledge Agreement,
pursuant to which the Sichuan Senmiao Shareholders pledged all of their equity interest in Sichuan Senmiao to Senmiao Consulting
in order to guarantee the performance of Sichuan Senmiao’s obligations under the Exclusive Business Cooperation Agreement as
described below. During the term of the pledge, Senmiao Consulting is entitled to receive any dividends declared on the pledged
equity interest of Sichuan Senmiao. The Equity Interest Pledge Agreement terminates when all contractual obligations under the
Exclusive Business Cooperation Agreement have been fully performed.
Exclusive Business Cooperation Agreement
Pursuant to an Exclusive Business Cooperation Agreement entered by and among the Company, Senmiao Consulting, Sichuan
Senmiao and each of Sichuan Senmiao Shareholders, Senmiao Consulting will provide Sichuan Senmiao with complete technical
support, business support and related consulting services for 10 years ended September 18, 2027. The Sichuan Senmiao
Shareholders and Sichuan Senmiao will not engage any third party for the same or similar consultation services without Senmiao
Consulting’s prior consent. Further, the Sichuan Senmiao Shareholders are entitled to receive an aggregate of 20,250,000 shares of
common stock of the Company under the Exclusive Business Cooperation Agreement. Senmiao Consulting may terminate the
Exclusive Business Cooperation Agreement at any time upon prior written notice to Sichuan Senmiao and the Sichuan Senmiao
Shareholders.
F-7
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exclusive Option Agreement
Pursuant to an Exclusive Option Agreement entered by and among Senmiao Consulting, Sichuan Senmiao and the Sichuan
Senmiao Shareholders, the Sichuan Senmiao Shareholders have granted Senmiao Consulting an exclusive option to purchase at any
time their equity interests in Sichuan Senmiao at a purchase price equal to the capital paid by the Sichuan Senmiao Shareholders in
whole or at a pro-rated price for any partial purchase. The Exclusive Option Agreement terminates after 10 years ending
September 18, 2027 but can be renewed by Senmiao Consulting at its discretion.
Powers of Attorney
Each of the Sichuan Senmiao Shareholders has signed a power of attorney (the “Power of Attorney”), pursuant to which, each of
the Sichuan Senmiao Shareholders has authorized Senmiao Consulting to act as his or her exclusive agent and attorney with respect
to all rights of such individual as a shareholder of Sichuan Senmiao, including but not limited to: (a) attending shareholders’
meetings; (b) exercising all the shareholder’s rights that shareholders are entitled to under PRC laws and the Articles of Association
of Sichuan Senmiao, including but not limited to voting, sale, transfer, pledge and disposition of the equity interests of Sichuan
Senmiao; and (c) designating and appointing the legal representative, chairperson, director, supervisor, chief executive officer and
other senior management members of Sichuan Senmiao. The Power of Attorney has the same term as the Exclusive Option
Agreement.
Timely Report Agreement
The Company and Sichuan Senmiao entered into a Timely Report Agreement, pursuant to which, Sichuan Senmiao agrees to make
its officers and directors available to the Company and promptly provide all information required by the Company so that the
Company can make necessary filings to the U.S. Securities and Exchange Commission (“SEC”) and other regulatory reports in a
timely fashion.
The Company has concluded that it should consolidate the financial statements with Sichuan Senmiao because it is Sichuan
Senmiao’s primary beneficiary based on the Power of Attorney from the Sichuan Senmiao Shareholders, who assigned their rights
as shareholders of Sichuan Senmiao to Senmiao Consulting, the Company’s wholly-owned subsidiary. These rights include, but are
not limited to, attending shareholders’ meetings, voting on matters submitted for shareholder approval and appointing legal
representatives, directors, supervisors and senior management of Sichuan Senmiao. As a result, the Company, through Senmiao
Consulting, is deemed to hold all of the voting equity interests in Sichuan Senmiao. Pursuant to Exclusive Business Cooperation
Agreement, Senmiao Consulting shall provide complete technical support, business support and related consulting services for 10
years. Though not explicit in the VIE Agreements, the Company may provide financial support to Sichuan Senmiao to meet its
working capital requirements and capitalization purposes. The terms of the VIE Agreements and the Company’s plan to provide
financial support to Sichuan Senmiao were considered in determining that the Company is the primary beneficiary of Sichuan
Senmiao. Accordingly, the financial statements of Sichuan Senmiao are consolidated in the accompanying consolidated financial
statements.
Voting Agreement with Jinkailong’s Other Shareholders
Hunan Ruixi entered into two voting agreements signed in August 2018 and February 2020, respectively, as amended (the “Voting
Agreement”), with Jinkailong and other Jinkailong’s shareholders holding an aggregate of 65% equity interests and obtained 35%
equity interests in Jinkailong. Pursuant to the Voting Agreements, all other Jinkailong’s shareholders will vote in concert with
Hunan Ruixi on all fundamental corporate transactions in the event of a disagreement for periods of 20 years and 18 years,
respectively, ending on August 25, 2038.
F-8
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has concluded that it should consolidate the financial statements with Jinkailong because it is Jinkailong’s primary
beneficiary based on the Voting Agreement. Though not explicit in the Voting Agreement by and among Jinkailong, Hunan Ruixi,
and other shareholders of Hunan Ruixi, the Company may provide financial support to Jinkailong to meet its working capital
requirements and capitalization purposes. The terms of the Voting Agreement and the Company’s plan to provide financial support
to Jinkailong were considered in determining that the Company is the primary beneficiary of Jinkailong. Accordingly, management
has determined that Jinkailong is a VIE and the financial statements of Jinkailong are consolidated in the Company’s consolidated
financial statements.
Total assets and total liabilities of the Company’s VIEs included in the Company’s consolidated financial statements as of
March 31, 2020 and 2019 are as follows:
Total assets from continuing operations
Total assets from discontinued operations (1)
Total assets
Total liabilities from continuing operations
Total liabilities from discontinued operations (2)
Total liabilities
$
March 31,
2020
8,639,858
1,418,080
$ 10,057,938
$ 13,629,449
7,598,981
$ 21,228,430
March 31,
2019
4,130,435
1,083,579
5,214,014
6,456,098
396,671
6,852,769
$
$
$
$
(1) Includes intercompany receivables of $543,446 and $613,730 as of March 31, 2020 and 2019, respectively.
(2) Includes intercompany payables of $402,406 and $0 as of March 31, 2020 and 2019, respectively
Net revenue, loss from operations and net loss of the VIEs that were included in the Company's consolidated financial statements
for the years ended March 31, 2020 and 2019 are as follows:
Net revenue from continuing operations
Net revenue from discontinued operations
Loss from operations from continuing operations
Loss from operations from discontinued operations
Net income (loss) from continuing operations attributable to
stockholders
Net loss from discontinued operations attributable to
stockholders
Net loss attributable to stockholders
2. GOING CONCERN
For the Years Ended
March 31,
2020
2019
308,102 $
$ 3,483,078 $ 1,087,207
$
369,956
$(4,514,195) $ (152,804)
$ (822,470) $(2,444,991)
(3,786,057)
63,702
(4,692,725)
(2,442,908)
$(8,478,782) $(2,379,206)
In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital
expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and
capital expenditure obligations. Debt financing from financial institutions and equity financings have been utilized to finance the
working capital requirements of the Company.
Since January 2020, all provinces across the mainland China have confirmed thousands of infection cases of the novel coronavirus
(COVID-19). The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business
facilities in China, which has significantly impacted the Chinese economy. In March 2020, the World Health Organization declared
the COVID-19 as a pandemic.
F-9
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Given the rapidly expanding nature of the COVID-19 pandemic, the Company’s business, results of operations, and financial
condition will be adversely affected. The extent of such impact will depend largely on future developments, which are highly
uncertain, including the severity of the outbreak and future government measures in response to the outbreak, among other things.
As a result, there can be no assurance that the Company will be able to successfully implement its growth strategies.
The Company’s management has considered whether there is substantial doubt about its ability to continue as a going concern due
to the Company’s (1) recurring losses from operations, including approximately $3.1 million and $5.6 million net loss attributable
to the Company’s stockholders from continuing operations and discontinued operations, respectively, for the year ended March 31,
2020, (2) accumulated deficit of approximately $23.7 million as of March 31, 2020; (3) the negative working capital of $4.5 million
and (4) negative operating cash flows of approximately $4.5 million and $2.0 million from continuing operations and discontinued
operations, respectively, for the year ended March 31, 2020.
Management has determined there is substantial doubt about its ability to continue as a going concern. Management is trying to
alleviate the going concern risk through the following sources:
·
·
cash and cash equivalents generated from operations; and
the Company will continuously seek equity financing to support its working capital.
If the Company is unable to generate significant operating cash flows or secure additional debt and equity financing, the Company
may be required to cease or curtail its operations. The Company’s consolidated financial statements do not include adjustments that
might result from the outcome of these uncertainties.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The accompanying consolidated financial statements of the Company has been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
(b) Basis of consolidation
The consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and
expenses of the subsidiaries and VIEs. All inter-Company accounts and transactions have been eliminated in consolidation.
(c)
Foreign currency translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the
exchange rates prevailing on the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency using the applicable exchange rates on the date of the balance sheet.
The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company and its subsidiaries and VIEs is U.S. dollars (“US$”) and the accompanying consolidated
financial statements have been expressed in US$. However, the Company maintains the books and records in its functional
currency, Chinese Renminbi (“RMB”), being the functional currency of the economic environment in which its operations are
conducted.
F-10
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In general, for consolidation purposes, assets and liabilities of the Company and its subsidiaries whose functional currency is not
the US$, are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at
average rates prevailing during the period. The gains and losses resulting from translation of financial statements of the Company
and its subsidiaries and VIEs are recorded as a separate component of accumulated other comprehensive income within the
statement of stockholders’ equity.
Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:
Balance sheet items, except for equity accounts
Items in the statements of operations and comprehensive loss, and statements of cash flows
(d) Use of estimates
March 31,
2020
March 31,
2019
7.0824
6.7119
For the Years Ended
March 31,
2020
6.9472
2019
6.7008
In presenting the consolidated financial statements in accordance with U.S. GAAP, management make estimates and assumptions
that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgement and available
information. Accordingly, actual results could differ from those estimates. On an ongoing basis, management reviews these
estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company
to revise its estimates. The Company bases its estimates on past experience and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The inputs
into our judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant
accounting estimates. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition,
residual values, lease classification and liabilities, finance lease receivables, inventory obsolescence, right-of-use assets,
determinations of the useful lives and valuation of long-lived assets, estimates of allowances for doubtful accounts and
prepayments, estimates of impairment of intangible assets, valuation of deferred tax assets, estimated fair value used in business
acquisitions, valuation of derivative liabilities, allocation of fair value of derivative liabilities issuance of common stock and
warrants exercised and other provisions and contingencies.
(e) Fair values of financial instruments
Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value
information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The three levels
of valuation hierarchy are defined as follows:
Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value.
F-11
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at
fair value on a recurring basis as of March 31, 2020:
Derivative liabilities
$
342,530 $
- $
- $
Carrying Value at
March 31, 2020
Fair Value Measurement at
March 31, 2020
Level 2
Level 1
Level 3
342,530
The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a
recurring basis for the year ended March 31, 2020:
Beginning balance
Derivative liabilities recognized at grant date on June 20, 2019
Change in fair value of derivative liabilities
Fair value of Series B warrants exercised
Ending balance
March 31,
2020
$
$
-
3,150,006
(1,796,724)
(1,010,752)
342,530
On June 21, 2019, the Company closed a registered direct offering of an aggregate of 1,781,361 shares of common stock, and in
connection therewith, issued to the investors (i) for no additional consideration, Series A warrants to purchase up to an aggregate of
1,336,021 shares of common stock, (ii) for nominal additional consideration, Series B warrants to purchase up to a maximum
aggregate of 1,116,320 shares of common stock and (iii) placement agent warrants to purchase up to 142,509 shares of common
stock.
The strike price of the Company’s Series A and Series B warrants and the placement agent warrants are denominated in US$ and
the Company’s functional currency is RMB, therefore, those warrant shares are not considered indexed to the Company’s own stock
which should be classified as derivative liability.
The Company’s Series A and Series B warrants and the placement agent warrants are not traded in an active securities market;
therefore, the Company estimates the fair value to those warrants using the Black-Scholes valuation model on June 20, 2019 (the
grant date) and March 31, 2020.
# of shares exercisable
Valuation date
Exercise price
Stock price
Expected term (year)
Risk-free interest rate
Expected volatility
# of shares exercisable
Valuation date
Exercise price
Stock price
Expected term (year)
Risk-free interest rate
Expected volatility
June 20, 2019
Series A
Warrants
Series B
Warrants
1,336,021
6/20/2019
3.72
2.80
4.00
1.77%
86%
$
$
1,116,320
6/20/2019
3.72
2.80
1.00
1.91%
91%
March 31, 2020
Series A
Warrants
Series B
Warrants
1,336,021
3/31/2020
1.50
0.44
3.22
0.30%
122%
$
$
3,132
3/31/2020
0.0001
0.44
0.22
0.11%
127%
$
$
$
$
Placement
Agent
Warrants
142,509
6/20/2019
3.38
2.80
4.00
1.77%
86%
Placement
Agent
Warrants
142,509
3/31/2020
3.38
0.44
3.22
0.30%
122%
$
$
$
$
F-12
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020 and 2019, financial instruments of the Company comprised primarily current assets and current liabilities
including cash and cash equivalents, accounts receivable, finance lease receivables, prepayments, other receivables and other assets,
escrow receivables, due from related parties, borrowings from financial institutions and third parties, accounts payable, advance
from customers, lease liabilities, accrued expenses and other liabilities, due to stockholders and due to related parties and affiliates,
which approximate their fair values because of the short-term nature of these instruments, and noncurrent liabilities of borrowings
from financial institutions, which approximate their fair values because of the stated loan interest rate to the rate charged by similar
financial institutions.
The noncurrent portion of accounts receivables, finance lease receivables, and lease liabilities were recorded at gross adjusted for
the deferred interest income using the effective interest rate method. The Company believes that the effective interest rates
underlying these instruments approximate their fair values because of the Company used its incremental borrowing rate to
recognize the present value of these instruments as of March 31, 2020 and 2019.
Other than as listed above, the Company did not identify any assets or liabilities that are required to be presented on the balance
sheet at fair value.
(f) Business combinations and noncontrolling interests
The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805
"Business Combinations." The cost of an acquisition is measured as the aggregate of the acquisition date fair value of the assets
transferred to the sellers and liabilities incurred by the Company and equity instruments issued. Transaction costs directly
attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured
separately at their fair values as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of
(i) the total costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held
equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost
of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the
consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the
Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the
conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are recorded to the consolidated income statements.
For the Company's non-wholly owned subsidiaries, a noncontrolling interest is recognized to reflect portion of equity that is not
attributable, directly or indirectly, to the Company. The cumulative results of operations attributable to noncontrolling interests are
also recorded as noncontrolling interests in the Company's consolidated balance sheets and consolidated statements of operations
and comprehensive loss. Cash flows related to transactions with noncontrolling interests are presented under financing activities in
the consolidated statements of cash flows.
(g) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker
(the “CODM”), which is comprised of certain members of the Company's management team. Historically, the Company had one
single operating and reportable segment, namely the provision of an online lending services. During the year ended March 31,
2019, the Company acquired Hunan Ruixi and Jinkailong and evaluated how the CODM manages the businesses of the Company
to maximize efficiency in allocating resources and assessing performance. Consequently, the Company presents two operating and
reportable segments as set forth in Note 2(p). The Company has discontinued the online P2P lending services segment and has only
one segment in the period after October 17, 2019.
F-13
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Cash and cash equivalents
Cash and cash equivalents primarily consist of bank deposits with original maturities of three months or less, which are unrestricted
as to withdrawal and use. Cash and cash equivalents also consist of funds received from automobile purchasers as payment for
automobiles, related insurances and taxes to be paid on behalf of the automobile purchasers, which funds were held at the third
party platforms’ fund accounts and which are unrestricted and immediately available for withdrawal and use.
(i) Accounts receivable, net
Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest,
and are due on demand. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using
historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial
condition, credit history and the current economic conditions to make adjustments in the allowance when necessary. Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. As of March 31, 2020 and 2019, allowance for doubtful accounts amounted to $379,689 and $0, respectively.
(j)
Inventories
Inventories consist of automobiles which are held primarily for sale and for leasing purposes, and are stated at lower of cost or net
realizable value, as determined using the weighted average cost method. Management compares the cost of inventories with the net
realizable value and if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost.
On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories
which equals the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future
demand and market conditions. When inventories are written-down to the lower of cost or net realizable value, it is not marked up
subsequently based on changes in underlying facts and circumstances.
(k) Finance lease receivables, net
Finance lease receivables, which result from sales-type leases, are measured at discounted present value of (i) future minimum lease
payments, (ii) any residual value not subject to a bargain purchase option as a finance lease receivables on its balance sheet and
(iii) accrued interest on the balance of the finance lease receivables based on the interest rate inherent in the applicable lease over
the term of the lease. Management also periodically evaluates individual customer’s financial condition, credit history and the
current economic conditions to make adjustments in the allowance when necessary. Finance lease receivables is charged off against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of March
31, 2020 and 2019, the Company determined no allowance for doubtful accounts was necessary for finance lease receivables.
As of March 31, 2020 and 2019, finance lease receivables consisted of the following:
Gross minimum lease payments receivable
Less: Amounts representing estimated executory costs
Minimum lease payments receivable
Less Allowance for uncollectible minimum lease payments receivable
Net minimum lease payments receivable
Less: Unearned interest
Financing lease receivables, net
Finance lease receivables, net, current portion
Finance lease receivables, net, noncurrent portion
F-14
March 31,
2020
March 31,
2019
$
$
$
$
1,606,230
-
1,606,230
-
1,606,230
(412,975)
1,193,255
459,110
734,145
$
$
$
$
40,023
-
40,023
-
40,023
(7,471)
32,552
10,254
22,298
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future scheduled minimum lease payments for investments in sales-type leases as of March 31, 2020 are as follows:
Year ending March 31, 2021
Year ending March 31, 2022
Year ending March 31, 2023
Year ending March 31, 2024
Total
(l) Property and equipment, net
Minimum future
payments receivable
607,718
$
570,944
341,389
86,179
1,606,230
$
Property and equipment primarily consists of computer equipment, which is stated at cost less accumulated depreciation less any
provision required for impairment in value. Depreciation is computed using the straight-line method with no residual value based
on the estimated useful life. The useful life of property and equipment is summarized as follows:
Categories
Leasehold improvements
Computer equipment
Office equipment
Automobiles
Useful life
Shorter of the remaining lease terms or estimated useful lives
2 - 5 years
3 - 5 years
3 - 4 years
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net
undiscounted cash flows that the asset is expected to generate. If such asset is considered to be impaired, the impairment recognized
is the amount by which the carrying amount of the asset, if any, exceeds its fair value determined using a discounted cash flow
model. For the years ended March 31, 2020 and 2019, there was no impairment of property and equipment.
Costs of repairs and maintenance are expensed as incurred and asset improvements are capitalized. The cost and related
accumulated depreciation of assets disposed of or retired are removed from the accounts, and any resulting gain or loss is reflected
in the consolidated income statements.
(m) Intangible assets, net
Purchased intangible assets are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that
have determinable lives continue to be amortized over their estimated useful lives using the straight-line method as follows:
Categories
Platform
Customer relationship
Software
Useful life
7 years
10 years
5-10 years
Separately identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any
impairment loss for identifiable intangible assets is based on the amount by which the carrying amount of the assets exceeds the fair
value of the assets. For the years ended March 31, 2020 and 2019, there was a $265,525 and $0 impairment, respectively, on
customer relationship from Sichuan Senmiao as a result of the Company’s decision to discontinue the P2P lending business in
October 2019.
F-15
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(n) Loss per share
Basic loss per share is computed by dividing net loss attributable to stockholders by the weighted average number of outstanding
shares of common stock, adjusted for outstanding shares of common stock that are subject to repurchase.
For the calculation of diluted loss per share, net loss attributable to stockholders for basic earnings loss per share is adjusted by the
effect of dilutive securities, including share-based awards, under the treasury stock method. Potentially dilutive securities, of which
the amounts are insignificant, have been excluded from the computation of diluted net loss per share if their inclusion is anti-
dilutive.
(o) Derivative liabilities
A contract is designated as an asset or a liability and is carried at fair value on the Company’s balance sheet, with any changes in
fair value recorded in the Company’s results of operations. The Company then determines which options, warrants and embedded
features require liability accounting and records the fair value as a derivative liability. The changes in the values of these
instruments are shown in the accompanying consolidated statements of operations and comprehensive loss as “change in fair value
of derivative liabilities”.
(p) Revenue recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) on April 1, 2018 using the modified
retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty
of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires
an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
It also requires the Company to identify contractual performance obligations and determine whether revenue should be recognized
at a point in time or over time, based on when control of goods and services transfers to a customer.
To achieve that core principle, the Company applies the five steps defined under ASC 606: (i) identify the contract(s) with a
customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction
price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation.
The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including
payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.
The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies
and practices to identify differences that will result from applying the new requirements, including the evaluation of its
performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based
on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current
revenue streams in scope of ASC 606 and therefore there was no material changes to the Company's consolidated financial
statements upon adoption of ASC 606.
As of March 31, 2020, the Company had outstanding contracts for automobile transaction and related services amounting to
$590,509, of which $387,345 is expected to be completed within twelve months after March 31, 2020, and $203,164 is expected to
be completed after March 31, 2021.
F-16
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated information of revenues by business lines are as follows:
For the Years
Ended March 31,
2020
2019
Automobile Transaction and Related Services (Continuing Operations)
- Revenues from sales of automobiles
- Service fees from automobile purchase services
- Facilitation fees from automobile transactions
- Service fees from management and guarantee services
- Financing revenues
- Operating lease revenues from automobile rentals
- Other service fees
Total revenues from Automobile Transaction and Related Services (Continuing Operations)
$
$ 11,536,691
1,726,717
197,815
141,527
164,391
1,303,639
584,795
15,655,575
Online Lending Services (Discontinued Operations)
- Transaction fees
- Service fees
- Website development revenue
Total revenues from Online Lending Services (Discontinued Operations)
73,341
23,833
15,266
112,440
1,815,425
407,632
142,615
60,011
-
-
125,424
2,551,107
331,960
37,996
-
369,956
Total revenues
$ 15,768,015
$
2,921,063
Automobile transaction and related services
Sales of automobiles – The Company generates revenue from sales of automobiles to the customers of Jinkailong, Hunan Ruixi and
Mashang Chuxing. The control over the automobile is transferred to the purchaser along with the delivery of automobile. The
amount of the revenue is based on the sale price agreed by Hunan Ruixi or Yicheng and the counterparties, including Jinkailong and
Mashang Chuxing, who acts on behalf of its customers. The Company recognizes revenues when the automobile is delivered and
control is transferred to the purchaser at a point in time.
Service fees from automobile purchase services – Services fees from automobile purchase services are paid by automobile
purchasers for a series of the services provided to them throughout the purchase process such as credit assessment, preparation of
financing application materials, assistance with closing of financing transactions, license and plate registration, payment of taxes
and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures.
The amount of these fees is based on the sales price of the automobiles and relevant services provided. The Company recognizes
revenue when all the services are completed and the automobile is delivered to the purchaser at a point in time.
Facilitation fees from automobile transactions – Facilitation fees from automobile purchase transactions are paid by the Company’s
customers including third-party sales teams or the automobile purchasers for the facilitation of the sales and financing of
automobiles. The Company attracts automobile purchasers through third-party sales teams or its own sales department. For the
sales facilitated between third-party sales teams and automobile purchasers, the Company charges the fees to the third-party sales
teams, which derived from the commission paid by the automobile purchasers to the third-party sales teams. Relating to sales
facilitated between automobile purchasers and dealers, the Company charges the fees to the automobile purchasers. The Company
recognizes revenue from facilitation fees when the titles are transferred to the purchasers at a point in time. The amount of fees is
based on the type of automobile and negotiation with each sales team or automobile purchaser. The fees charged to third-party sales
teams or automobile purchasers are paid before the automobile purchase transactions are consummated. These fees are non-
refundable upon the delivery of automobiles.
Service fees from management and guarantee services – Over 95% of the Company’s customers are drivers of Didi Chuxing
Technology Co., Ltd., the largest ride-hailing service platform in China. The drivers sign affiliation agreements with the Company,
pursuant to which the Company provides them with management and guarantee services during the affiliation period. Service fees
for management and guarantee services are paid by such automobile purchasers on a monthly basis for the management and
guarantee services provided during the affiliation period. The Company recognizes revenue over the affiliation period when
performance obligations are completed.
F-17
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing revenues – Interest income from the lease arising from the Company’s sales-type leases and bundled lease arrangements
are recognized as financing revenues over the lease term based on the effective rate of interest in the lease.
Operating lease revenues from automobile rentals –The Company generates revenue from sub-leasing automobiles from some
online ride-hailing drivers or leasing its own automobiles. The Company recognizes revenue wherein the automobile is transferred
to the leasee and the leasee has the ability to control the asset, is accounted for under ASC Topic 842. Rental transactions are
satisfied over the rental period. Rental periods are short term in nature, generally are twelve months or less.
Lease
On April 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update, as well as additional amendments
and targeted improvements issued in 2018 and early 2019, supersedes existing lease accounting guidance found under ASC
840, Leases (“ASC 840”). The accounting for lessors does not fundamentally change with this update except for changes to
conform and align guidance to the lessee guidance, as well as to the revenue recognition guidance in ASU 2014-09, Revenue from
Contracts with Customers (ASC Topic 606). Some of these conforming changes, such as those related to the definition of lease term
and minimum lease payments, resulted in certain lease arrangements, that would have been previously accounted for as operating
leases, to be classified and accounted for as sales-type leases with a corresponding up-front recognition of automobile sales revenue
when the lessee obtained control over the automobile.
The two primary accounting provisions the Company uses to classify transactions as sales-type or operating leases are: (i) a review
of the lease term to determine if it is for the major part of the economic life of the underlying equipment (defined as greater than
75%); and (ii) a review of the present value of the lease payments to determine if they are equal to or greater than substantially all
of the fair market value of the equipment at the inception of the lease (defined as greater than 90%). Automobile included in
arrangements meeting these conditions are accounted for as sales-type leases. Interest income from the lease is recognized in
financing revenues over the lease term. Automobile included in arrangements that do not meet these conditions are accounted for as
operating leases and revenue is recognized over the term of the lease.
The Company excludes from the measurement of its lease revenues any tax assessed by a governmental authority that is both
imposed on and concurrent with a specific revenue-producing transaction and collected from a customer.
The Company considers the economic life of most of the automobiles to be three to four years, since this represents the most
common lease term for its automobiles and the automobiles will be used for ride-hailing services. The Company believes three to
four years is representative of the period during which an automobile is expected to be economically usable, with normal service,
for the purpose for which it is intended.
A portion of the Company’s direct sales of automobile to end customers are made through bundled lease arrangements which
typically include automobile, services (automobile purchase services, facilitation services, and management and guarantee services)
and financing components where the customer pays a single negotiated fixed minimum monthly payment for all elements over the
contractual lease term. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling
prices of the lease and non-lease deliverables included in the bundled arrangement and the financing components. Lease
deliverables include the automobile and financing, while the non-lease deliverables generally consist of the services and repayment
of advanced fees made on behalf of its customers. The Company considers the fixed payments for purposes of allocation to the
lease elements of the contract. The fixed minimum monthly payments are multiplied by the number of months in the contract term
to arrive at the total fixed lease payments that the customer is obligated to make over the lease term. Amounts allocated to the
automobile and financing elements are then subjected to the accounting estimates under ASC 842 to ensure the values reflect
standalone selling prices. The remainder of any fixed payments are allocated to non-lease elements (automobile purchase services,
facilitation fees, and management and guarantee services), for which these revenues are recognized in a manner consistent with the
guidance for service fees from automobile purchase services, facilitation fees from automobile transactions, and service fees from
management and guarantee services as discussed above.
F-18
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are
developed based upon the local prevailing rates in the marketplace where its customer will be able to obtain an automobile loan
under similar terms from the bank. The Company reassesses its pricing interest rates quarterly based on changes in the local
prevailing rates in the marketplace. As of March 31, 2020, the Company's pricing interest rate was 6.0% per annum.
Online P2P Lending Services (Discontinued Operations)
Transaction fees – Prior to the Company’s P2P lending business being discontinued on October 17, 2019, transaction fees were paid
by borrowers to the Company for the work the Company performed through its platform. The amount of these fees was based upon
the loan amount and the maturity date of the loan. The fees charged to borrowers were paid upon (i) disbursement of the proceeds
for loans which accrued interest on a monthly basis or (ii) full payment of principal and interest of loans which accrued interest on a
daily basis. These fees were non-refundable upon the issuance of loan. The Company recognized revenue when loan proceeds were
disbursed to borrowers or borrowers paid their principal and interest on loans.
Service fees – The Company charged investors service fees on their actual return of investment (interest income). The Company
generally received the service fees upon the investors’ receipt of their investment returns. The Company recognized revenue when
loans were repaid and investors received their investment income.
Website development revenues – Revenue allocated to website development services is recognized as the service is performed over
time using the Company’s efforts or inputs to the satisfaction of a performance obligation using an input measure method, under
which the total value of revenue is recognized on the basis of the percentage that total cost to date bears to the total expected costs.
The Company considers labor costs and related outsource labor costs for the input measurement as the best available indicator of
the progress, pattern and timing in which contract obligations are fulfilled.
Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable
based on the current contract estimates. In instances where substantive acceptance provisions are specified in customer contracts,
revenues are deferred until all acceptance criteria have been met. To date, the Company has not incurred a material loss on any
contracts. However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss
becomes probable and can be reasonably estimated.
The Company generally does not enter into arrangements with multiple deliverables for website development services contracts. If
the deliverables have standalone value at contract inception, the Company accounts for each deliverable separately.
(q) Income taxes
Deferred income tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between
the income tax basis and financial reporting basis of assets and liabilities. Provisions or benefits for income taxes consists of tax
estimated from taxable income plus or minus deferred tax expenses (benefits) if applicable.
Deferred tax is calculated using the balance sheet liability method in respect of temporary differences arising from differences
between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets
are recognized to the extent that it is probable that taxable income will be utilized with prior net operating loss carried forwards
using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or charged directly to equity. 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 utilized. Current income taxes are provided for in accordance with the laws of the relevant tax
authorities.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a
tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the period incurred. The Company did not have any significant unrecognized uncertain tax
positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of March 31, 2020 and
2019. As of March 31, 2020, the calendar years ended December 31, 2015 through 2019 for the Company’s PRC entities remain
open for statutory examination by PRC tax authorities.
F-19
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(r) Comprehensive loss
Comprehensive loss includes net loss and foreign currency adjustments. Comprehensive loss is reported in the consolidated
statements of operations and comprehensive loss. Accumulated other comprehensive loss, as presented on the consolidated balance
sheets are the cumulative foreign currency translation adjustments.
(s) Share-based awards
Share-based awards granted to the Company’s employees are measured at fair value on grant date and share-based compensation
expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution
method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with
reference to the fair value of the underlying shares.
At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of
various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the
fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to
consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair
value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from
that recorded in the current reporting period.
(t) Leases
Prior to March 31, 2019, leases are classified as either capital or operating leases as lessee. Leases that transfer substantially all the
benefits and risks incidental to the ownership of assets are accounted for as if there was an acquisition of an asset and incurrence of
an obligation at the inception of the lease. All other leases are accounted for as operating leases and are included in the consolidated
statements of operations on a straight-line basis over the term of the leases. Leases are classified as either operating lease, sales-type
lease, or direct finance leases as lessor.
On April 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update supersedes existing lease accounting
guidance found under ASC 840, Leases (“ASC 840”) and requires the recognition of right-of-use (“ROU”) assets and lease
obligations (“lease liabilities”) by lessees for those leases currently classified as operating leases under existing lease guidance.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Short term
leases with a term of twelve months or less are not required to be recognized. Lessor accounting is generally the same under ASC
842 as compared to ASC 840 except with an additional requirement to assess collectability to support classification as a direct
financing lease. Also, in order to derecognize the asset and record revenue, collection of payments due must be probable for sales-
type leases and the lessees of sales-type leases will need to obtain control over the leased asset.
The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease a single
lease component. The impact of the adoption of the ASC 842, as of April 1, 2019, the Company recognized $246,227 ROU assets
and $247,325 lease liabilities, primarily related to operating leases of facilities. The adoption of this standard resulted in the
recording of operating lease assets and operating lease liabilities as of April 1, 2019, with no related impact on the Company's
consolidated statement of changes in stockholders' equity or consolidated statements of operations and comprehensive loss.
During the year ended March 31, 2020, the Company entered into certain agreements as a lessor under which it leased automobiles
to short-term (usually under 12 months) car service drivers. The Company also entered into certain agreements as a lessee to lease
automobiles and to conduct its automobiles rental operations. If any of the following criteria are met, the Company classifies the
lease as a finance lease (as a lessee) or as a direct financing or sales-type lease (both as a lessor):
F-20
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
·
·
·
·
·
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;
The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date
falls within the last 25% of the economic life of the underlying asset;
The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of
the lease term.
Leases that do not meet any of the above criteria are accounted for as operating leases.
The Company combines lease and non-lease components in its contracts under Topic 842, when permissible.
Finance and operating lease ROU assets and lease liabilities are recognized at the adoption date of April 1, 2019 or the
commencement date, whichever is earlier, based on the present value of lease payments over the lease term. Since the implicit rate
for the Company’s leases is not readily determinable, the Company use its incremental borrowing rate based on the information
available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate
of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a
similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or
terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The
Company generally consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar
owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not
include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The finance or
operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term
for operating lease. Meanwhile, the Company recognizes the finance leases ROU assets and interest on an amortized cost basis. The
amortization of finance ROU assets is recognized on an accretion basis as amortization expense, while the lease liability is
increased to reflect interest on the liability and decreased to reflect the lease payments made during the period. Interest expense on
the lease liability is determined each period during the lease term as the amount that results in a constant periodic interest rate of the
automobile loans on the remaining balance of the liability.
The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The
Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the
carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the
carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has
elected to include the carrying amount of finance and operating lease liabilities in any tested asset group and include the associated
lease payments in the undiscounted future pre-tax cash flows. For the years ended March 31, 2020 and 2019, the Company
recognized an impairment loss of $70,984 and $0, respectively, on its finance lease ROU assets.
(u) Significant risks and uncertainties
1) Credit risk
a. Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash
equivalents. The maximum exposure of these assets to credit risk is their carrying amount as of the balance sheet dates.
On March 31, 2020 and 2019, approximately $2,600 and $1,950,000, respectively, was deposited with a bank in the United
States which is insured by the U.S. government up to $250,000. On March 31, 2020 and 2019, approximately $820,000 and
$3,070,000, respectively, were deposited in financial institutions located in mainland China, which were insured by the
government authority. Under the Deposit Insurance System in China, an enterprise’s deposits at one bank is insured for a
maximum of approximately $70,000 (RMB500,000). To limit exposure to credit risk relating to deposits, the Company
primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.
F-21
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s operations are carried out in mainland China. Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in government policies with
respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of
taxation and other factors.
b.
In measuring the credit risk of accounts receivables due from the automobile purchasers (the “customers”), the Company
mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial
position of the customer and the risk exposures to the customer and its likely future development. However, as the Company
only commenced the automobile transaction and related services since November 2018, there was limited historic default data
and other information to make an estimate on the expected credit losses. Historically, most of the automobile purchasers would
pay the Company their previously defaulted amounts within one to three months. As a result, the Company would provide full
provisions on accounts receivable if the customers default on repayments for over three months. As of March 31, 2020, the
Company provided an allowance for doubtful accounts of $379,689 and wrote off accounts receivables of $1,410,736, which
represents due from automobile purchasers.
In measuring the credit risk of accounts receivables due from the borrowers and investors (the “P2P customers”), the Company
mainly reflects the “probability of default” by the P2P customer on its contractual obligations and considers the current
financial position of the P2P customer and the risk exposures to the P2P customer and its likely future development.
Historically, most of the borrowers would pay the transaction fee within one year upon (i) disbursement of the proceeds for
loans or (ii) full payment of principal and interest of loan. Most of investors would pay the service fee within one year upon
receipt of their investment returns. On October 17, 2019, the Board approved the Plan for the Company to discontinue and
wind down its online lending services business. As a result, the Company re-evaluated its accounts receivables from the P2P
customers and wrote off accounts receivable of $143,668 that has not been received as of March 31, 2020.
2) Foreign currency risk
As of March 31, 2020 and March 31, 2019, substantially all of the Company’s operating activities and major assets and liabilities,
except for the cash deposit of approximately $818,000 and $3,070,000, respectively, in U.S. dollars, are denominated in RMB,
which are not freely convertible into foreign currencies. All foreign exchange transactions take place through either the Peoples’
Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign
currency payments by the PBOC or other regulatory institutions requires a payment application together with invoices and signed
contracts. The value of RMB is subject to change in central government policies and international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading System market. When there is a significant
change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be
significant affected. As of March 31, 2020, RMB were depreciated from 6.71 RMB into US$1.00 at March 31, 2019 to 7.08 RMB
into US$1.00 at March 31, 2020.
3) VIE risk
The Company believes that the VIE Agreements and the Voting Agreement are in compliance with PRC law and are legally
enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual
arrangements.
F-22
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The shareholders of Sichuan Senmiao are also shareholders of the Company and therefore have no current interest in seeking to act
contrary to the contractual arrangements. However, if the shareholders of Sichuan Senmiao were to reduce their interest in the
Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to
act contrary to the contractual terms. However, the other shareholders of Jinkailong are not shareholders of the Company and there
is a risk they may act in contrary to the interests of the shareholders of the Company.
The Company cannot assure that when conflicts of interest arise, the shareholders of Sichuan Senmiao or the other shareholders of
Jinkailong will act in the best interests of the Company or that conflicts of interests will be resolved in the Company’s favor. In
addition, the Company’s ability to control Sichuan Senmiao and Jinkailong via the VIE Agreements and Voting Agreement may not
be as effective as direct equity ownership.
Further, the VIE Agreements or the Voting Agreement may not be enforced in China if the PRC government or courts consider
those contracts contravene PRC laws and regulations or otherwise not enforceable for public policy reasons. If the VIE Agreements
or the Voting Agreement were found to be in violation of any existing PRC laws and regulations, the PRC government could:
·
·
·
·
·
·
·
revoke the Company’s business and operating licenses;
require the Company to discontinue or restrict operations;
restrict the Company’s right to collect revenues;
block the Company’s websites;
require the Company to restructure the operations in such a way as to compel the Company to establish a new enterprise,
re-apply for the necessary licenses or relocate our businesses, staff and assets;
impose additional conditions or requirements with which the Company may not be able to comply; or
take other regulatory or enforcement actions against the Company that could be harmful to the Company’s business.
(v) Recently issued accounting standards
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for
Variable Interest Entities. ASU 2018-17 eliminates the requirement that entities consider indirect interests held through related
parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the
reporting entity will consider such indirect interests on a proportionate basis. The amendments are effective for fiscal years ending
after December 15, 2019. Early adoption is permitted. The adoption on April 1, 2019 did not have a material effect on the
Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated
guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or
modified disclosures. The adoption on April 1, 2019 did not have a material effect on the Company’s consolidated financial
statements.
In June 2016, the FASB issued new accounting guidance ASU 2016-13 for recognition of credit losses on financial instruments,
which is effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit
reserving model known as the Current Expected Credit Loss (“CECL”) model, which is based on expected losses, and differs
significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only
based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating
forward-looking information and will likely result in earlier recognition of credit reserves. In November 2019, the FASB issued
ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and
certain smaller reporting companies applying for credit losses standard. The new effective date for these preparers is for fiscal
years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not early adopted
this update and it will become effective on January 1, 2023 assuming the Company will remain eligible to be smaller reporting
company. The Company is currently evaluating the impact of this new standard on Company’s consolidated financial statements
and related disclosures.
F-23
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CECL adoption will have broad impact on the financial statements of financial services firms, which will affect key profitability
and solvency measures. Some of the more notable expected changes include:
- Higher allowance on financial guarantee reserve and finance lease receivable levels and related deferred tax assets. While different
asset types will be impacted differently, the expectation is that reserve levels will generally increase across the board for all
financial firms.
- Increased reserve levels may lead to a reduction in capital levels.
- As a result of higher reserving levels, the expectation is that CECL will reduce cyclicality in financial firms’ results, as higher
reserving in “good times” will mean that less dramatic reserve increases will be loan related income (which will continue to be
recognized on a periodic basis based on the effective interest method) and the related credit losses (which will be recognized up
front at origination). This will make periods of loan expansion seem less profitable due to the immediate recognition of expected
credit losses. Periods of stable or declining loan levels will look comparatively profitable as the income trickles in for loans, where
losses had been previously recognized.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”.
The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles
in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying
and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods
for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not
yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any
adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early
adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this new standard
on Company’s consolidated financial statements and related disclosures.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the consolidated financial position, statements of operations and cash flows of the Company.
4. ACQUISITION OF HUNAN RUIXI AND ITS VIE
On November 21, 2018, the Company entered into the Investment Agreement with Hunan Ruixi and the Hunan Ruixi Shareholders.
Pursuant to the Investment Agreement, among other things, the Company acquired from the Hunan Ruixi Shareholders an
aggregate of 60% of the outstanding equity interest in Hunan Ruixi for no consideration. The Company closed the acquisition on
November 22, 2018 and agreed to make a capital contribution of $6,000,000 to Hunan Ruixi, representing 60% of its registered
capital, in accordance with the Investment Agreement. As of June 30, 2019, the Company made the full cash contributions totaling
$6,000,000 to Hunan Ruixi. The Company is entitled to vote and receive profits based on its equity interest ownership in Hunan
Ruixi and has a right of first refusal for any issuance of new equity of Hunan Ruixi.
The acquisition had been accounted for as a business combination and the results of operations of Hunan Ruixi have been included
in the Company's consolidated financial statements from the acquisition date. The Company made estimates and judgments in
determining the fair value of acquired assets and liabilities, based on an independent valuation report and management's
experiences with similar assets and liabilities. The following table summarizes the fair values for major classes of assets acquired
and liabilities assumed at the date of acquisition:
F-24
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net assets acquired (i)
Gain from acquisition of Hunan Ruixi and its subsidiary and VIE
Noncontrolling interests (ii)
Total purchase consideration
Fair value
$
$
63,965
-
-
-
(i)Net assets acquired primarily include cash and cash equivalents of $213,645, other current assets of $1,813,821, property and
equipment of $107,865, other current liabilities of $711,303 and borrowings from related parties and affiliates of $785,231, and
borrowings from financial institutions of $554,802.
(ii)Fair value of the noncontrolling interests is estimated with reference to the purchase price per share as of the acquisition date.
5. DISCONTIUED OPERATIONS
On October 17, 2019, the Board approved the Plan under which the Company has discontinued and is winding down its online P2P
lending services business. The Company determined that the continued operation of its online P2P lending services business was
not viable in light of the recently tightened regulations on online peer-to-peer lending in China generally and the unofficial request
from local regulator to reduce the Company’s online peer-to-peer lending transaction volume on a monthly basis. The Company
also determined that the discontinuation of its online P2P lending services business would allow the Company to focus its resources
on its automobile financing facilitation and transaction business. In connection with the Plan, the Company ceased facilitation of
loan transactions on its online lending platform and assumed all the outstanding loans from investors on the platform. The decision
and action taken by the Company of discontinuing the online lending services business represented a major shift that will have a
major effect on the Company’s operations and financial results, which triggers discontinued operations accounting in accordance
with ASC 205-20-45.
The fair value of discontinued operations, determined as of October 17, 2019, includes estimated consideration expected to be
received, less costs to sell. After consideration of the determination of fair value of the discontinued operations including the
assumption of all the outstanding loans from investors on the platform, $143,668 of accounts receivable, $3,760,599 of other
receivables, and $143,943 of prepayments for impaired intangible assets were indicated as of Board approval date of winding down
its online P2P lending services business on October 17, 2019 and the Company recognized $4,048,210 provision for doubtful
accounts for the year ended March 31, 2020, in related to the Company’s online lending services business.
The following table sets forth the reconciliation of the carrying amounts of major classes of assets and liabilities from discontinued
operations in the consolidated balance sheets as of March 31, 2020.
Carrying amounts of major classes of assets included as part of discontinued operations:
Current Assets
Cash and cash equivalents
Accounts receivable, net
Prepayments, other receivables and other assets, net
Total Current Assets
Property and equipment, net
Other Assets
Intangible assets, net
Prepayment for intangible assets
Total Other Assets
Total Assets
F-25
March 31,
2020
March 31,
2019
$
$
10,139
-
816,441
826,580
1,052,530
126,272
6,214
1,185,016
11,206
25,205
-
-
-
294,464
190,706
485,170
$
837,786
$
1,695,391
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carrying amounts of major classes of liabilities included as part of discontinued operations:
Current Liabilities
Advance from customers
Accrued expenses and other liabilities
Due to stockholders
Due to related parties and affiliates
Lease liabilities
Total Current Liabilities
Total liabilities
March 31,
2020
March 31,
2019
$
$
-
4,204,012
182,095
76,286
53,899
4,516,292
7,220
538,512
1,080,047
-
-
1,625,779
$
4,516,292
$
1,625,779
The following table sets forth the reconciliation of the amounts of major classes of income and losses from discontinued operations
in the consolidated statements of operations and comprehensive loss for year ended March 31, 2020.
Revenues
Operating expenses
Selling, general and administrative expenses
Bad debt expense
Amortization of intangible assets
Impairments of intangible assets and goodwill
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Income tax expenses
For the Years Ended
March 31,
2020
112,440 $
2019
369,956
$
(1,365,733)
(4,048,210)
(32,401)
(265,525)
(5,711,869)
(2,242,905)
-
(308,043)
(1,225,073)
(3,776,021)
(5,599,429)
(3,406,065)
12,402
19,315
(5,587,027)
(3,386,750)
-
-
Net loss attributable to stockholders
$(5,587,027) $(3,386,750)
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable include a portion of bundled lease arrangements on fixed minimum monthly payments to be paid by the
automobile purchasers arising from automobile sales and services fees, net of unearned interest income, discounted using the
Company’s lease pricing interest rates.
F-26
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020 and 2019, accounts receivable were comprised of the following:
Receivables of transaction fees due from borrowers
Receivables of automobile sales due from automobile purchasers
Receivables of services fees due from automobile purchasers
Less: Unearned interest
Less: Allowance for doubtful accounts
Accounts receivable, net
Accounts receivable, net, - discontinued operations
Accounts receivable, net, - continuing operations
Accounts receivable, net, current portion
Accounts receivable, net, noncurrent portion
Movement of allowance for doubtful accounts is as follows:
Beginning balance
Addition
Write off
Translation adjustment
Ending balance
7.
INVENTORIES
Automobiles (i)
March 31,
2020
March 31
2019
$
$
$
$
$
-
1,172,765
854,730
(105,083)
(379,689)
1,542,723
-
1,542,723
660,645
882,078
$
$
$
$
$
126,272
-
199,909
-
-
326,181
(126,272)
199,909
199,909
-
March 31,
2020
March 31,
2019
$
$
- $
1,797,816
(1,410,736)
(7,391)
379,689 $
-
-
-
-
March 31,
2020
1,000,675
$
March 31,
2019
1,508,244
$
(i)As of March 31, 2020, the Company owned 70 automobiles with a total value of $850,533 for sale, and 11 automobiles with a
total value of $150,142 for either leasing or sale.
As of March 31, 2020 and 2019, management compared the cost of automobiles with their net realizable value and determined no
inventory write-down was necessary for these automobiles.
8. PREPAYMENTS, OTHER RECEIVABLES AND OTHER ASSETS
As of March 31, 2020 and 2019, the prepayments, receivables and other assets were comprised of the following:
Receivables from borrowers of online lending platform, net (i)
Due from automobile purchasers, net (ii)
Prepayments for automobiles (iii)
Deposits
Value added tax (“VAT”) recoverable
Deferred issuance costs
Prepaid expenses
Employee advances
Others
Total prepayments, receivables and other assets
Total prepayments, receivables and other assets - discontinued operations
Total prepayments, receivables and other assets - continuing operations
F-27
March 31,
2020
March 31,
2019
$
$
811,504
1,385,352
365,932
489,638
146,964
-
331,319
11,937
72,575
3,615,221
(816,441)
2,798,780
$
$
-
2,564,834
394,821
294,986
228,196
149,696
112,147
-
48,788
3,793,468
(6,214)
3,787,254
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i)Receivables from borrowers of online lending platform, net
The balance of receivables from borrowers of online lending platform represented the outstanding loans the Company assumed
from investors on the platform, which will be collected from related borrowers. As of March 31, 2020, the Company recorded
allowance of $3,688,800 against doubtful receivables.
(ii)Due from automobile purchasers, net
The balance due from automobile purchasers represented the payment of automobiles and related insurances and taxes made on
behalf of the automobile purchasers. The balance is expected to be collected from the automobile purchasers in installments. As
of March 31, 2020 and 2019, the Company recorded allowance of $347,954 and $2,995, respectively, against doubtful
receivables. During the year ended March 31, 2020, the Company wrote off balance due from automobile purchasers of
$1,227,894.
(iii)Prepayments for automobiles
The balance represented amounts advanced to dealers for automobiles and to other third parties for automobiles related taxes
and insurances.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
Leasehold improvements
Electronic devices
Office equipment, fixtures and furniture
Vehicles
Subtotal
Less: accumulated depreciation and amortization
Total property and equipment, net
Total property and equipment, net - discontinued operations
Total property and equipment, net - continuing operations
March 31,
2020
March 31,
2019
$
$
177,659
40,720
79,271
320,949
618,599
(138,192)
480,407
(11,206)
469,201
$
$
-
28,305
48,157
81,523
157,985
(32,100)
125,885
(25,205)
100,680
Depreciation and amortization expense from continuing operations for the years ended March 31, 2020 and 2019 amounted to
$103,009 and $12,247, respectively. Depreciation and amortization expense from discontinued operations for the years ended
March 31, 2020 and 2019 amounted to $10,846 and $10,604, respectively.
F-28
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following:
Customer relationship
Platform
Software
Subtotal
Less: Accumulated amortization
Total intangible assets, net
Total intangible assets, net - discontinued operations
Total intangible assets, net - continuing operations
March 31,
2020
March 31,
2019
$
$
-
1,100,549
815,315
1,915,864
(1,138,243)
777,621
-
777,621
$
$
392,618
1,161,267
27,205
1,581,090
(1,284,999)
296,091
(294,464)
1,627
Amortization expense from continuing operations totaled $283 and $0 for the years ended March 31, 2020 and 2019, respectively.
Amortization expense from discontinued operations totaled $32,401 and $308,043 for the years ended March 31, 2020 and 2019,
respectively.
The following table sets forth the Company’s amortization expense for the next five years ending:
Twelve months ending March 31, 2021
Twelve months ending March 31, 2022
Twelve months ending March 31, 2023
Twelve months ending March 31, 2024
Thereafter
Total
11. PREPAYMENTS FOR INTANGIBLE ASSETS
Amortization
expenses
$
$
158,243
158,243
158,243
152,863
150,029
777,621
As of March 31 2019, the balance of prepayments for intangible assets of $280,000 represented the advance payments to a third
party for the development of software to be used in the Company’s automobile transaction and related services. As of March 31,
2020, the prepayments for the software with amount of $750,000 has been transferred to intangible assets and will be amortized
over the estimated useful life of 10 years.
As of March 31, 2019, the balance of prepayments for intangible assets of $190,706 represented the advance payments for the
development of software to be used in the Company’s online P2P lending services business. On October 17, 2019, the Board
approved the Plan under which the Company discontinued and is winding down its online P2P lending services business. As a
result, the Company re-evaluated its prepayments for intangible assets to be used in the Company’s online P2P lending platform
and determined that it would no longer be using such software. As a result, the Company wrote off all those prepayments of
$143,943 for intangible assets for the year ended March 31, 2020.
12. BORROWINGS FROM FINANCIAL INSTITUTIONS, CURRENT AND NONCURRENT
Borrowings from Financial institutions
The borrowings from certain financial institutions represented the difference between the actual proceeds disbursed by the financial
institutions to Jinkailong and the total principal to be responsible for and repaid by the automobile purchasers. Such borrowings
totaled $290,974 and $396,946 bearing interest rates ranging between 6.2% and 8.1% per annum as of March 31, 2020 and 2019,
respectively, of which $64,221 and $177,789, respectively, is to be repaid over a period of 13 to 24 months.
The interest expense for the years ended March 31, 2020 and 2019 was $49,422 and $12,799, respectively.
F-29
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BORROWINGS FROM THIRD PARTIES
Borrowings from third parties
March 31,
2020
March 31,
2019
$
- $
476,765
The borrowings from third parties were fully repaid in July 2019. The interest expense for the years ended March 31, 2020 and
2019 was $17,258 and $7,590, respectively.
14. ACCRUED EXPENSES AND OTHER LIABILITIES
Payables to investors of online lending platform (i)
Accrued payroll and welfare
Other payable (ii)
Loan repayments received on behalf of financial institutions (iii)
Payables for expenditures on automobile transaction and related services
Accrued expenses
Deposits
Other taxes payable
Total accrued expenses and other liabilities
Total accrued expenses and other liabilities - discontinued operations
Total accrued expenses and other liabilities - continuing operations
March 31,
2020
3,668,957
890,912
83,810
374,535
373,026
104,264
543,843
173,056
6,212,403
(4,204,012)
2,008,391
$
$
$
$
March 31,
2019
-
614,765
247,335
169,657
157,382
198,456
82,232
30,976
1,500,803
(538,512)
962,291
(i)The balance of payables to investors of online lending platform represented the outstanding loans from investors on the platform,
which was assumed by the Company in connection with the Plan to discontinue its online lending services business.
(ii)The balance of other payable represented amount due to suppliers and vendors for operation purposes.
(iii)The balance of loan repayments received on behalf of financial institutions represented the loan repayments made by the
automobile purchasers to financial institutions through the Company, which has not been paid to the financial institutions.
15. EMPLOYEE BENEFIT PLAN
The Company has made employee benefit plan in accordance with relevant PRC regulations, including retirement insurance,
unemployment insurance, medical insurance, housing fund, work injury insurance and maternity insurance.
The contributions made by the Company were $204,245 and $22,258 for the years ended March 31, 2020 and 2019, respectively,
for continuing operations of the Company. The contributions made by the Company were $158,523 and $84,043 for the years ended
March 31, 2020 and 2019, respectively, for the Company’s discontinued operations.
As of March 31, 2020 and 2019, the Company did not make adequate employee benefit contributions in the amount of $170,856
and $65,826, respectively, for continuing operations of the Company. As of March 31, 2020 and 2019, the Company did not make
adequate employee benefit contributions in the amount of $454,151 and $337,820, respectively, for discontinued operations of the
Company. The Company accrued the amount in accrued payroll and welfare.
F-30
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EQUITY
Warrants
IPO Warrants
The registration statement relating to the Company’s IPO also included the underwriters’ common stock purchase warrants to
purchase 337,940 shares of common stock (“Underwriter’s Warrants”). Each five-year warrant entitles warrant holder to purchase
one share of the Company’s common stock at the price of $4.80 per share and is not exercisable for a period of 180 days from
March 16, 2018. On March 15, 2019, the underwriters elected to exercise 300,000 Purchase Warrants on a cashless basis in
exchange for common stock. On April 5, 2019, the Company issued a total of 65,855 shares of common stock to the underwriters as
a result of the cashless exercise of 300,000 Underwriter’s Warrants. As the date of March 31, 2020, there were 37,940
Underwriter’s Warrants outstanding.
Registered Direct Offering Warrants
The Company adopted the provisions of ASC 815 on determining what types of instruments or embedded features in an instrument
held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope
exception in ASC 815. Warrants issued in connection with the direct equity offering with exercise prices denominated in US dollars
are no longer considered indexed to the Company’s stock, as their exercise price is not in the Company’s functional currency
(RMB), and therefore no longer qualify for the scope exception and must be accounted for as a derivative. These warrants are
classified as liabilities under the caption “Derivative liabilities” in the consolidated statements of balance sheets and recorded at
estimated fair value at each reporting date, computed using the Black-Scholes valuation model. Changes in the liability from period
to period are recorded in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value
of derivative liabilities.”
The Company allocated the proceeds received between the common stock and warrants first to warrants based on the fair value on
the date the proceeds were received with the balance to common stock. The value of the warrants was determined using the Black-
Scholes valuation model using the following assumptions: volatility 86%; risk free interest rate 1.77%; dividend yield of 0% and
expected term of 4 years of the Investor Series A Warrants, 1 year of the Series B Warrants, and 4 years of the Placement Warrants.
The volatility of the Company’s common stock was estimated by management based on the historical volatility of its common
stock, the risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods
applicable to the expected life of the warrants. The expected dividend yield was based on the Company’s current and expected
dividend policy and the expected term is equal to the contractual life of the warrants. The value of the warrants was based on the
Company’s common stock closing price of $2.80 on the date the warrants were issued. Net proceeds were allocated as the follows:
Warrants
Common stock
Total net proceeds
$
$
3,150,006
1,992,118
5,142,124
Subsequent to the initial recording, the change in the fair value of the warrants, determined under the Black-Scholes valuation
model, at each reporting date will result in either an increase or decrease the amount recorded as liability, based on the fluctuations
with the Company’s stock price with a corresponding adjustment to other income (or expense). During the year ended March 31,
2020, the change of fair value was a gain of $1,796,724, recognized in the accompanying consolidated statements of operations and
comprehensive loss based on the decrease in fair value of the liabilities since granted. The fair value of derivative instrument of
$1,010,752 was allocated to additional paid-in-capital upon exercise of warrants as of the exercise date. At March 31, 2020, the fair
value of the derivative instrument totaled $342,530.
F-31
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has outstanding warrants as following:
Balance, March 31, 2018
Granted
Forfeited
Exercised
Balance, March 31, 2019
Granted
Forfeited
Exercised
Balance, March 31, 2020
Restricted Stock Units
Warrants
Outstanding
337,940
-
-
(300,000)
37,940
2,594,850
-
(1,113,188)
1,519,602
Warrants
Exercisable
337,940 $
-
-
(300,000) $
37,940 $
2,594,850 $
-
(1,113,188)
1,519,602 $
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Life
4.80
-
-
4.80
4.80
3.70
-
-
1.76
4.96
-
-
-
3.96
4.00
-
-
3.21
On July 31, 2018, the Board approved the issuance of 5,000 restricted stock units (“RSUs”) to each of the five directors as stock
compensation for their services for the Company’s fiscal year ending March 31, 2019. Total RSUs granted to the five directors were
25,000 for an aggregate fair value of $117,750. Pursuant to the Restricted Stock Unit Award Agreements (“Award Agreements”) on
August 3, 2018, the RSUs vest in four equal quarterly installments on August 3, 2018, April 1, 2019, July 1, 2019 and October 1,
2019 or in full upon the occurrence of a change in control of the Company, subject to the terms and conditions set forth in the
Award Agreements, provided that the director remains in service as a director through the applicable vesting date. The RSUs will be
settled by the Company’s issuance of shares of common stock in certificated or uncertificated form upon the earlier of (i) a change
in control and (ii) the director’s cessation as a director of the Company due to a “separation of service” within the meaning of
Section 409A of the Internal Revenue Code of 1986, as amended, or the director’s death or disability.
As of March 31, 2019, the first installment of 6,250 RSUs vested. The fair value of the vested RSUs is calculated at the grant date
market price of the Company’s common stock multiplying by the number of vested shares.
On December 11, 2019, the Board approved the issuance of 30,303 RSUs to each of the Company’s five directors as stock
compensation for their services for the Company’s fiscal year ending March 31, 2020.
As of March 31, 2020, the Company issued a total of 169,015 RSUs and accounted for as expenses and charged to common stock.
A summary of RSU activity for the year ended March 31, 2020 and 2019 is as follows:
Balance of RSUs outstanding at March 31, 2018
Grants of RSUs
Vested RSUs
Forfeited RSUs
Balance of unvested RSUs at March 31, 2019
Grants of RSUs
Vested RSUs
Forfeited RSUs
Balance of unvested RSUs at March 31, 2020
Weighted-
Average
Grant
Date Fair
Value
-
4.42
4.42
4.42
4.42
0.66
0.92
-
-
Number of
Shares
- $
25,000 $
(6,250) $
(7,500) $
11,250 $
151,515
(162,765) $
-
- $
Total compensation expense for the years ended March 31, 2020 and 2019 was $133,150 and $44,200, respectively.
Two directors ceased to serve on the board since November 8, 2018, and as a result 7,500 RSUs were forfeited during the year
ended March 31, 2019.
F-32
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Incentive Plan
At the 2018 Annual Meeting of Stockholders of the Company held on November 8, 2018, the Company’s stockholders approved
the Company’s 2018 Equity Incentive Plan for employees, officers, directors and consultants of the Company and its affiliates. A
committee consisting of at least two independent directors appointed by the Board or in the absence of such a committee, the board
of directors, will be responsible for the general administration of the Equity Incentive Plan. All awards granted under the Equity
Incentive Plan will be governed by separate award agreements between the Company and the participants. As of March 31, 2020,
no awards have been granted under the plan.
Registered Direct Offering
On April 15, 2019, the SEC declared effective the Company’s Registration Statement on Form S-3, pursuant to which, along with
the accompanying prospectus, the Company registered up to $80,000,000 in aggregate principal amount of its common stock,
preferred stock, debt securities, warrants, rights and/or units. On June 21, 2019, the Company closed a registered direct offering of
an aggregate of 1,781,361 shares of its common stock, and in connection therewith, issued to the investors (i) for no additional
consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock and (iii) for nominal
additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of common stock. The
Company sold the shares of common stock at a price of $3.38 per share (the “Share Purchase Price”). The Company received gross
proceeds from the offering, before deducting estimated offering expenses payable by the Company, of approximately $6,000,000.
The Series A warrants are exercisable immediately upon issuance at an exercise price of $3.72 per share and will expire on the
fourth (4th) anniversary of the original issue date. In the event that on December 20, 2019, the exercise price is greater than the Six
Month Adjustment Price as defined below, on the trading day immediately following December 20, 2019 (the “Six Month
Measuring Date”), the exercise price shall automatically adjust to the Six Month Adjustment Price (as adjusted for stock splits,
stock dividends, stock combinations, recapitalizations and similar events). Six Month Adjustment Price means the greater of
(x) $1.50 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) and (y) 100% of
the quotient of (I) the sum of the five lowest VWAPs of the common stock during the ten consecutive trading day period ending and
including the Six Month Measuring Date, divided by (II) five. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination, reclassification or similar transaction during such period. The exercise price of the
Series A warrant was adjusted from $3.72 to $1.50 per share on December 20, 2019. The Company used the adjusted exercise price
to value its derivative liability on its December 31, 2019 financial statements and reporting periods onwards with changes in fair
value of warrant liabilities from period to period are recorded in the consolidated statements of operations and comprehensive loss
under the caption “Change in fair value of derivative liabilities”.
The Series B warrants are pre-funded warrants and were issued as a true-up with respect to the shares of common stock. The
maximum aggregate number of shares of common stock issuable upon exercise of the Series B warrants is 1,116,320. Initially, the
Series B warrants shall not be exercisable for any shares of common stock. In the event that on the fiftieth (50th) day after the
closing date (the “Adjustment Measuring Time”), the closing price of the common stock is less than the Share Purchase Price, then
the number of shares of common stock issuable upon exercise of the Series B warrants shall be adjusted (upward or downward, as
applicable) to the greater of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to fifty percent (50%) of
the difference of (A) the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined in Purchase
Agreement) as of the Adjustment Measuring Time, less (B) the aggregate number of shares of common stock issued to the investors
at the closing (as adjusted for share splits, share dividends, share combinations, recapitalizations and similar events). The exercise
price of the Series B warrant was adjusted from $3.72 to $0.0001 per share on August 12, 2019. The Company used the adjusted
exercise price to value its derivative liability on its September, 2019 financial statements and reporting period onwards with
changes in fair value of warrant liabilities from period to period are recorded in the consolidated statements of operations and
comprehensive loss under the caption “Change in fair value of derivative liabilities. During the year ended March 31, 2020, the
Company issued an aggregate of 1,113,187 shares of common stock to certain investors in the June 2019 offering upon exercise of
the pre-funded Series B warrants for a total consideration of $111. The fair value of exercised Series B warrants of $1,010,752 was
allocated to additional paid-in-capital upon exercise of warrants as of the exercise date.
F-33
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. INCOME TAXES
The United States of America
The Company is incorporated in the State of Nevada in the U.S., and is subject to U.S. federal corporate income taxes with tax rate
of 21%. The State of Nevada does not impose any state corporate income tax.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs
Act (the “Tax Act”). The Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign
subsidiaries, and future foreign earnings are subject to U.S. taxation. The Tax Act also stablished the Global Intangible Low-Taxed
Income (GILTI), a new inclusion rule affecting non-routine income earned by foreign subsidiaries. For the year ended March 31,
2020 and March 31, 2019, the Company’s foreign subsidiaries in China cumulatively were operating at loss which resulted in no
GILTI tax.
The Company’s net operating loss for the year ended March 31, 2020 amounted to approximately $1.2 million. As of March 31,
2020, the Company’s net operating loss carryforward for U.S. income taxes was approximately $2.5 million. The net operating loss
carryforward will not expire and is available to reduce future years’ taxable income, but limited to 80% of income until utilized.
Management believes that the utilization of the benefit from this loss appears uncertain due to the Company’s operating history.
Accordingly, the Company has recorded a 100% valuation allowance on the deferred tax asset to reduce the deferred tax assets to
zero on the consolidated balance sheets. As of March 31, 2020 and 2019, valuation allowances for deferred tax assets were
approximately $0.53 million and $0.27 million, respectively. Management reviews the valuation allowance periodically and makes
changes accordingly.
PRC
Senmiao Consulting, Sichuan Senmiao, Hunan Ruixi, Ruixi Leasing, Jinkailong, and Yicheng are subject to PRC Enterprise Income
Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. The EIT rate for companies operating in
the PRC is 25%.
Income taxes in the PRC are consist of:
Current income tax expenses
Deferred income tax benefits
Total income tax expenses
For the Years Ended
March 31,
2020
2019
$
$
59,451 $
(26,267)
33,184 $
21,905
-
21,905
Below is a reconciliation of the statutory tax rate to the effective tax rate:
U.S. statutory tax rate
Differential of PRC statutory tax rate
Permanent difference of write-off of receivables from guarantee of loans
Permanent difference of US (income) expenses not (taxable) deductible in PRC
Valuation allowance on deferred income tax asset
Others
Effective tax rate
F-34
For the Years Ended
March 31,
2020
2019
21.0%
4.0%
(15.5)%
3.4%
(13.1)%
(0.6)%
(0.8)%
21.0%
4.0%
-%
(24.1)%
(2.4)%
(0.4)%
(1.9)%
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020 and 2019, the Company’s PRC entities from continuing operations had net operating loss carryforwards of
approximately $1.7 million and $153,000, respectively, which will expire starting from 2023 and ending in 2024. In addition,
allowance for doubtful accounts must be approved by the Chinese tax authority prior to being deducted as an expense item on the
tax return. Jinkailong’s bad debt allowance are incurred in Company’s PRC subsidiaries which were operating at losses, the
Company believes it is more likely than not that its PRC operations will be unable to fully utilize its deferred tax assets related to
the net operating loss carryforwards in the PRC. As a result, the Company provided 100% allowance on all deferred tax assets on
allowance for doubtful account of $178,381, and nil related to its operations in the PRC at March 31, 2020 and 2019, respectively.
At March 31, 2019, full valuation allowance is provided against the deferred tax assets based upon management’s assessment as to
their realization. During the year ended March 31, 2020, the Company utilized deferred tax assets of approximately $27,000 related
to the Company’s net operating loss carryforwards.
The tax effects of temporary differences from continuing operations that give rise to the Company’s deferred tax assets are as
follows:
Net operating loss carryforwards in the PRC
Net operating loss carryforwards in the U.S.
Allowance for doubtful account
Less: valuation allowance
March 31,
2020
March 31,
2019
$
$
414,996
527,365
178,381
(1,120,742)
-
$
$
30,693
272,258
-
(302,951)
-
As of March 31, 2020 and March 31, 2019, the Company’s PRC entities associated with the discontinued P2P lending operations
had net operating loss carryforwards of approximately $8.8 million and $3.4 million, respectively, which will expire in 2023 to
2024. The Company reviews deferred tax assets for a valuation allowance based upon whether it is more likely than not that the
deferred tax asset will be fully realized. At March 31, 2020 and 2019, full valuation allowance is provided against the deferred tax
assets based upon management’s assessment as to their realization.
The tax effects of temporary differences from discontinued operations that give rise to the Company’s deferred tax assets are as
follows:
Net operating loss carryforwards in the PRC
Less: valuation allowance
18. RELATED PARTY TRANSACTIONS AND BALANCES
1.Related Party Balances
1)Due from related parties
March 31,
2020
2,206,673
(2,206,673)
-
$
$
$
$
March 31,
2019
855,483
(855,483)
-
As of March 31, 2020, balances due from related parties were $12,341 and represented operation costs of four related parties paid
by the Company on their behalf, amounts received by the Company on behalf of a related party for refund of insurance claims, and
amounts collected by a related party on behalf of the Company from the automobile purchasers, including certain installment
payments and facilitation fees. In addition, another $14,120 represents advances to the non-controlling shareholders of Hunan Ruixi
for operational purposes. The balances due from related parties were all non-interest bearing and due on demand.
F-35
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2)Due to stockholders
This is comprised of amounts payable to two stockholders and are unsecured, interest free and due on demand.
Jun Wang
Xiang Hu
Total due to stockholders
Total due to stockholders – discontinued operations
Total due to stockholders – continuing operations
3)Due to related parties and affiliates
Loan payable to related parties (i)
Other payables due to related parties (ii)
Others (iii)
Total due to related parties and affiliates
Total due to related parties and affiliates – discontinued operations
Total due to related parties and affiliates – continuing operations
March 31,
2020
March 31,
2019
$
$
$
$
$
73,384
108,711
182,095
(182,095)
-
March 31,
2020
202,487
-
26,478
228,965
(76,286)
152,679
$
$
$
$
$
107,233
972,814
1,080,047
(1,080,047)
-
March 31,
2019
95,781
297,978
22,172
415,931
-
415,931
(i)As of March 31, 2020 and 2019, the balances represented borrowings from three related parties, which is unsecured, interest free
and due in the fiscal year of 2021. The balance as of March 31, 2019 bore an interest rate of 10% per annum and is due in the
fiscal year of 2020.
(ii)As of March 31, 2019, the balance represented borrowings from two related parties, who obtained borrowings from the online
P2P lending platform of Sichuan Senmiao and then loaned the money to Jinkailong. The balance bore an interest rate of 8.22%
per annum and was fully repaid in April 2019.
(iii)As of March 31, 2020 and 2019, the balances represented $26,478 of payables to three other related parties for operational
purposes. These balances are interest free and due on demand.
Interest expense for the years ended March 31, 2020 and 2019 were $29,944 and $3,246, respectively.
2.Related Party Transactions
In December 2017, the Company entered into loan agreements with two stockholders, who agreed to grant lines of credit of
approximating $955,000 and $159,000, respectively, to the Company for five years. The lines of credit are non-interest bearing,
effective from January 2017. As of March 31, 2020, the outstanding balances in the discontinued operations were $108,711 and
$73,384, respectively.
The Company entered into two office lease agreements which were set to expire on January 1, 2020. On April 1, 2018, the two
office leases were modified with the leasing term from April 1, 2018 to March 31, 2021. As of March 31, 2020, operating lease
right-of-use assets of these leases in the continuing operations amounted $105,432. As of March 31, 2020, current leases liabilities
of these leases in the continuing operations amounted $78,482. As of March 31, 2020, current leases liabilities of these leases in the
discontinued operations amounted $53,899. For the years ended March 31, 2020 and 2019, the Company incurred $109,896 and
$113,742, respectively, to this related party in rental expenses.
F-36
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2018, Hunan Ruixi entered into an office lease agreement with Hunan Dingchentai Investment Co., Ltd.
("Dingchentai"), a Company where one of our independent director serves as legal representative and general manager. The term of
the lease agreement was from November 1, 2018 to October 31, 2023 and the rent was approximately $44,250 per year, payable on
a quarterly basis. The original lease agreement with Dingchentai was terminated on July 1, 2019. The Company entered into
another lease with Dingchentai on substantially similar terms on September 27, 2019. As of March 31, 2020, operating lease right-
of-use assets of this lease in the continuing operations amounted $130,873. As of March 31, 2020, current leases liabilities and non-
current leases liabilities of this lease in the continuing operations amounted $73,173 and $88,349, respectively. For the years ended
March 31, 2020 and 2019, the Company incurred expense of $41,661 and $13,597 in rent, respectively, to Dingchentai.
In June 2019 and January 2020, the Company entered into two automobile maintenance services contracts with Sichuan Qihuaxin
Automobile Services Co., Ltd and Sichuan Yousen Automobile Maintenance Service Co., Ltd, the companies which are controlled
by one of the noncontrolling shareholder of Sichuan Jinkailong. During the year ended March 31, 2020, the Company paid
automobile maintenance fees of $36,088 and $21,759 to those companies, respectively.
Before the acquisition of Hunan Ruixi, five related parties of Jinkailong borrowed funds of $747,647 through the online P2P
lending platform of Sichuan Senmiao and then loaned the money to Jinkailong. As of March 31, 2019, the outstanding balance was
$297,978. During the year ended March 31, 2020, Jinkailong repaid all of the loans. Those loans bore interest rates ranging from
7.68% to 8.22% per annum and the interest expense for the years ended March 31, 2020 and 2019 was $12,184 and $0,
respectively.
19. LEASE
Effective April 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients
that does not require the Company to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease
classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The impact of the
adoption of the ASC 842, as of April 1, 2019, the Company recognized $246,227 ROU assets and $247,325 lease liabilities,
primarily related to leases of facilities. The ROU and lease liabilities are determined based on the present value of the future
minimum rental payments of the lease as of the adoption date, using an effective interest rate of 6.0%, which is determined using an
incremental borrowing rate with similar term in the PRC. The average remaining operating and finance lease term of its existing
leases is 2.1 and 2.3 years, respectively. The adoption of this standard resulted in the recording of operating lease assets and
operating lease liabilities as of April 1, 2019, with no related impact on the Company's consolidated statement of changes in
stockholders' equity or consolidated statements of operations and comprehensive loss.
Lessor
The Company's operating leases for automobile rentals have rental periods that are typically short term, generally is twelve months
or less. Revenue recognition section of Note 3 (p), the Company discloses that revenue earned from automobile rentals, wherein an
identified asset is transferred to the customer and the customer has the ability to control that asset, is accounted for under Topic 842
upon adoption for the year ended March 31, 2020. The Company did not have any automobile rentals operations prior to April 1,
2019, which the Company would have accounted for such revenue under Topic 606 for the year ended March 31, 2019.
Lessee
As of March 31, 2020, the Company has engaged in offices and showroom leases which were classified as operating leases. In
addition, the Company had automobiles leases which were classified as finance lease.
The Company occupies various offices under operating lease agreements with a term shorter than twelve months which it elected
not to recognize lease assets and lease liabilities under ASC 842. Instead, the Company recognized the lease payments in profit or
loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments
is incurred.
F-37
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company recognized lease expense on a straight-line basis over the lease term for operating lease. Meanwhile, the Company
recognized the finance leases ROU assets and interest on an amortized cost basis. The amortization of finance ROU assets is
recognized on an accretion basis as amortization expense, while the lease liability is increased to reflect interest on the liability and
decreased to reflect the lease payments made during the period. Interest expense on the lease liability is determined each period
during the lease term as the amount that results in a constant periodic interest rate of the automobile loans on the remaining balance
of the liability.
Operating and finance lease expenses are consist of following:
Operating lease cost
Lease expenses
Finance lease cost
Amortization of leased asset
Amortization of leased asset
Interest on lease liabilities
Total lease expenses
Classification
For the Years Ended
March 31,
2020
March 31,
2019
Selling, general and administrative
$
378,499
$
195,686
Cost of revenue
General and administrative
Interest expenses on finance leases
941,796
791,670
373,407
2,485,372
$
-
-
195,686
$
Operating lease expenses from continuing operations totaled $294,127 and $67,662 for the years ended March 31, 2020 and 2019,
respectively. Operating lease expenses from discontinued operations totaled $84,372 and $128,024 for the years ended March 31,
2020 and 2019, respectively. Interest expenses on finance leases from continuing operations totaled $373,407 and $0 for the years
ended March 31, 2020 and 2019, respectively.
The following table sets forth the Company’s minimum lease payments in future periods:
Twelve months ending March 31, 2021
Twelve months ending March 31, 2022
Twelve months ending March 31, 2023
Twelve months ending March 31, 2024
Twelve months ending March 31, 2025
Total lease payments
Less: discount
Present value of lease liabilities
Less: Present value of lease liabilities – discontinued operations
Present value of lease liabilities – continuing operations
20. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
Operating
lease
payments
Finance lease
payments
$
$
371,437
193,654
124,195
93,188
25,223
807,697
(67,045)
740,652
(53,899)
686,753
$
$
3,985,407
2,300,516
457,690
945
-
6,744,558
(694,497)
6,050,061
-
6,050,061
$
$
Total
4,356,844
2,494,170
581,885
94,133
25,223
7,552,255
(761,542)
6,790,713
(53,899)
6,736,814
As of March 31, 2020, the Company has a purchase commitment of 50 automobiles for a total purchase price of approximately
$699,000, which is expected to be completed by the end of December 2020.
F-38
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
In measuring the credit risk of guarantee services to automobile purchasers, the Company primarily reflects the “probability of
default” by the automobile purchasers on its contractual obligations and considers the current financial position of the automobile
purchasers and its likely future development.
The Company manages the credit risk of automobile purchasers by performing preliminary credit checks of each automobile
purchaser and ongoing monitoring every month. By using the current credit loss model, management is of the opinion that the
Company is bearing the credit risk to repay the principal and interests to the financial institutions if automobile purchasers default
on their payments for more than three months. Management also periodically re-evaluates probability of default of automobile
purchasers to make adjustments in the allowance when necessary as the Company is the guarantor of the loans.
Historically, most of the automobile purchasers would pay the Company their previous defaulted amounts within one to three
months. In December 2019, a novel strain of coronavirus, or COVID-19, surfaced and it has spread rapidly to many parts of China
and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the
temporary closure of stores and facilities in China and elsewhere. Because substantially all of the Company’s operations are
conducted in China, the COVID-19 outbreak had materially adversely affected, and may continue to affect, the Company’s business
operations, financial condition and operating results for 2020, including but not limited to decrease in revenues, slower collection of
accounts receivables and additional allowance for doubtful accounts. Some of the Company’s customers exited the ride-hailing
business and tendered their automobiles to the Company for sublease or sale to generate income or proceeds to cover payments
owed to financial institutions and the Company. For the year ended March 31, 2020, the Company recognized estimated provisions
loss of approximately $225,000 for the guarantee services because the drivers who exited the ride-hailing business were not able to
make the monthly payments.
As of March 31, 2020, the maximum contingent liabilities the Company would be exposed to was approximately $18,627,000
(including approximately $497,400 related to the discontinued P2P business), assuming all the automobile purchasers were in
default. Automobiles are used as collateral to secure the payment obligations of the automobile purchasers under the financing
agreements. The Company estimated the fair market value of the collateral to be approximately $13,918,000 as of March 31, 2020,
based on the market price and the useful life of such collateral, which represents about 74.7% of the maximum contingent
liabilities. As of March 31, 2020, approximately $1,431,000, including interests of $84,000, due to financial institutions, of all the
automobile purchases we serviced were past due as a result of the COVID-19 epidemic in China.
The Company has resumed its operation since March 23, 2020. Because of the significant uncertainties surrounding the COVID-19
outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time. As of the
date of this report, the Company’s operation has been adversely affected which resulted in significant decrease in revenue in the
quarter ended March 31, 2020 compared with prior quarters in the same fiscal year.
F-39
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. PARENT-ONLY FINANCIALS
SENMIAO TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Due from subsidiaries
Prepayments, other receivables and other assets, net
Escrow receivable
Total Current Assets
Other Assets
Intangible assets
Prepayment for intangible asset
Investments in subsidiaries
Total Assets
LIABILITIES AND EQUITY
Current Liabilities
Accrued expenses and other liabilities
Derivative liabilities
Total Current Liabilities
Other Liabilities
Excess of investments in subsidiaries
Total Liabilities
Commitments and Contingencies
Stockholders' Equity
March 31,
2020
March 31,
2019
$
$
$
$
$
$
2,590
2,575,039
92,375
-
2,670,004
750,000
-
-
3,420,004
128,796
342,530
471,326
144,980
616,306
1,950,347
1,900,000
208,327
600,000
4,658,674
-
280,000
3,718,896
8,657,570
282,172
-
282,172
-
282,172
Common stock (par value $0.0001 per share, 100,000,000 shares authorized; 29,008,818 and
25,945,255 shares issued and outstanding at March 31, 2020 and 2019, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total Senmiao Technology Limited Stockholders' Equity
Total Liabilities and Equity
2,901
27,013,137
(23,704,862)
(507,478)
2,803,698
2,595
23,833,112
(15,031,538)
(428,771)
8,375,398
$
3,420,004
$
8,657,570
F-40
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENMIAO TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
General and administrative expenses
Other Income, net
Change in fair value of derivative liabilities
Equity of losses in subsidiaries
Net loss
Foreign currency translation adjustment
Comprehensive loss attributable to stockholders
F-41
For the Years Ended March
31,
2020
2019
$ (1,215,156) $ (1,098,416)
6,810
-
(3,458,263)
(4,549,869)
359
1,796,724
(9,255,252)
(8,673,325)
(78,707)
(175,010)
$ (8,752,032) $ (4,724,879)
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENMIAO TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Equity of loss of subsidiaries
Stock compensation expense
Change in fair value of derivative liabilities
Change in operating assets and liabilities
Prepayments, receivables and other assets
Accrued expenses and other liabilities
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Purchase of intangible assets
Deposits in intangible assets
Working capital contribution for subsidiaries
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock in registered direct offering
Net proceeds from issuance of common stock upon warrants exercised
Proceeds borrowed from stockholders
Repayment of borrowing to stockholders
Borrowings to subsidiaries
Release of escrow receivable
Net Cash Provided by (Used in) Financing Activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Cash Flow Information
Cash paid for interest expense
Cash paid for income tax
Non-cash Transaction in Investing and Financing Activities
IPO expenses paid by the Company’s stockholders
Prepayments in exchange of intangible assets
Allocation of fair value of derivative liabilities for issuance of common stock proceeds
Allocation of fair value of derivative liabilities to additional paid in capital upon warrants
exercised
Issuance of restricted stock units from accrued expenses and other liabilities
F-42
For the Years Ended March
31,
2020
2019
$ (8,673,325) $ (4,549,869)
9,255,252
133,150
(1,796,724)
115,952
(109,176)
(1,074,871)
3,458,263
44,200
-
(168,362)
84,890
(1,130,878)
(470,000)
-
(5,470,082)
(5,940,082)
-
(280,000)
(6,300,000)
(6,580,000)
5,142,124
111
-
-
(675,039)
600,000
5,067,196
(1,947,757)
1,950,347
2,590
-
-
-
280,000
3,150,006
1,010,752
44,200
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
154
(1,900,000)
-
600,000
(1,299,846)
(9,010,724)
10,961,071
1,950,347
-
-
70,687
-
-
-
-
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a) Basis of presentation
The condensed financial information of Senmiao Technology Limited, has been prepared using the same accounting policies as set
out in the consolidated financial statements. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. GAAP have been condensed or omitted by reference to the consolidated financial statements.
b) Investments in subsidiaries and equity of loss in subsidiaries
The investments in subsidiaries consist of investments in Senmiao Consulting, Hunan Ruixi and Yicheng. The equity losses in
subsidiaries consist of equity loss in Senmiao Consulting, Hunan Ruixi and Yicheng.
c) Stockholders’ equity
Restricted Stock Units
On July 31, 2018, the Board approved the issuance of 5,000 restricted stock units (“RSUs”) to each of the five directors as stock
compensation for their services for the Company’s fiscal year ending March 31, 2019. Total RSUs granted to the five directors were
25,000 for an aggregate fair value of $117,750. Pursuant to the Restricted Stock Unit Award Agreements (“Award Agreements”) on
August 3, 2018, the RSUs vest in four equal quarterly installments on August 3, 2018, April 1, 2019, July 1, 2019 and October 1,
2019 or in full upon the occurrence of a change in control of the Company, subject to the terms and conditions set forth in the
Award Agreements, provided that the director remains in service as a director through the applicable vesting date. The RSUs will be
settled by the Company’s issuance of shares of common stock in certificated or uncertificated form upon the earlier of (i) a change
in control and (ii) the director’s cessation as a director of the Company due to a “separation of service” within the meaning of
Section 409A of the Internal Revenue Code of 1986, as amended, or the director’s death or disability.
As of March 31, 2019, the first installment of 6,250 RSUs vested. The fair value of the vested RSUs is calculated at the grant date
market price of the Company’s common stock multiplying by the number of vested shares.
On December 11, 2019, the Board approved the issuance of 30,303 RSUs to each of the Company’s five directors as stock
compensation for their services for the Company’s fiscal year ending March 31, 2020.
As of March 31, 2020, the Company issued a total of 169,015 RSUs and accounted for as expenses and charged to common stock.
F-43
SENMIAO TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Registered Direct Offering
On April 15, 2019, the SEC declared effective the Company’s Registration Statement on Form S-3, pursuant to which, along with
the accompanying prospectus, the Company registered up to $80,000,000 in aggregate principal amount of its common stock,
preferred stock, debt securities, warrants, rights and/or units. On June 21, 2019, the Company closed a registered direct offering of
an aggregate of 1,781,361 shares of its common stock, and in connection therewith, issued to the investors (i) for no additional
consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock and (iii) for nominal
additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of common stock. The
Company sold the shares of common stock at a price of $3.38 per share (the “Share Purchase Price”). The Company received gross
proceeds from the offering, before deducting estimated offering expenses payable by the Company, of approximately $6,000,000.
The Series A warrants are exercisable immediately upon issuance at an exercise price of $3.72 per share and will expire on the
fourth (4th) anniversary of the original issue date. In the event that on December 20, 2019, the exercise price is greater than the Six
Month Adjustment Price as defined below, on the trading day immediately following December 20, 2019 (the “Six Month
Measuring Date”), the exercise price shall automatically adjust to the Six Month Adjustment Price (as adjusted for stock splits,
stock dividends, stock combinations, recapitalizations and similar events). Six Month Adjustment Price means the greater of
(x) $1.50 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) and (y) 100% of
the quotient of (I) the sum of the five lowest VWAPs of the common stock during the ten consecutive trading day period ending and
including the Six Month Measuring Date, divided by (II) five. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination, reclassification or similar transaction during such period. The exercise price of the
Series A warrant was adjusted from $3.72 to $1.50 per share on December 20, 2019.
The Series B warrants are pre-funded warrants and are being issued as a true-up with respect to the shares of common stock. The
maximum aggregate number of shares of common stock issuable upon exercise of the Series B warrants is 1,116,320. Initially, the
Series B warrants shall not be exercisable for any shares of common stock. In the event that on the fiftieth (50th) day after the
closing date (the “Adjustment Measuring Time”), the closing price of the common stock is less than the Share Purchase Price, then
the number of shares of common stock issuable upon exercise of the Series B warrants shall be adjusted (upward or downward, as
applicable) to the greater of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to fifty percent (50%) of
the difference of (A) the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined in Purchase
Agreement) as of the Adjustment Measuring Time, less (B) the aggregate number of shares of common stock issued to the investors
at the closing (as adjusted for share splits, share dividends, share combinations, recapitalizations and similar events). During the
year ended March 31, 2020, the Company issued an aggregate of 1,113,187 shares of common stock to certain investors in the
June 2019 offering upon exercise of the pre-funded Series B warrants for a total consideration of $111.
22. SUBSEQUENT EVENTS
On July 4, 2020, Hunan Ruixi, Jinkailong and the other shareholders of Jinkailong entered into an agreement (the “JKL Investment
Agreement”) with Hongyi Industrial Group Co., Ltd. (“Hongyi”).
Pursuant to the JKL Investment Agreement, Jinkailong agreed to issue and Hongyi agreed to subscribe for a 27.03% equity interest
in Jinkailong in consideration of RMB50 million (approximately $7.0 million) (the “Investment”). The Investment will be made in
two payments: (i) the first payment of RMB10 million (approximately $1.4 million) is due no later than September 30, 2020 and
(ii) the remaining RMB40 million (approximately $5.6 million) is due within 30 days after the record-filing of the Investment has
been made with the local PRC government and the other shareholders of Jinkailong having made their respective capital
contributions in full in cash, but no later than December 31, 2020. As a result, Hunan Ruixi will be required to pay RMB3.5 million
(approximately $0.5 million) to Jinkailong as a capital contribution. Upon the full payment of the consideration, the Investment will
be deemed to be closed (the “Closing”).
As a result of the Investment, the original shareholders’ ownership percentage will be proportionally diluted but Hunan Ruixi will
continue to control Jinkailong pursuant to the Voting Agreements.
The JKL Investment Agreement sets performance targets for Jinkailong during a three-year performance commitment period
following the Closing. During the performance commitment period, Jinkailong has agreed, and its original shareholders have
agreed to cause Jinkailong, to seek to achieve annual revenue for Jinkailong of no less than RMB52 million (approximately $7.4
million), RMB90 million (approximately $12.7 million) and RMB110 million (approximately $15.6 million), respectively, and
annual net profit of no less than RMB10 million (approximately $1.4 million), RMB20 million (approximately $2.8 million) and
RMB25 million (approximately $3.5 million), respectively, during the first, second and third year of the performance commitment
period.
The JKL Investment Agreement also provides Hongyi certain shareholder rights, including, but not limited to, the right to receive
any undistributed dividends, a right of first refusal for any equity transfer from the other shareholders of Jinkailong, a tag-along
right during the performance commitment period, anti-dilution rights, redemption rights, subscription rights and priority in
liquidation or dissolution of Jinkailong. Specifically, pursuant to the redemption right provision in the JKL Investment Agreement,
in the event that Jinkailong (i) fails to become public through an IPO for a valuation of no less than RMB350 million
(approximately $49.5 million) or merge with a public company for a valuation of no less than RMB300 million (approximately
$42.5 million) within the six months following the performance commitment period, (ii) fails to achieve an accumulated net profit
of RMB24 million (approximately $3.4 million) for the first two years of the performance commitment period or a net profit of
RMB20 million (approximately $2.9 million) for the third year of the performance commitment period, or (iii) has any material and
adverse change to its core business, including but not limited to being included in the list of dishonest persons and loss of over one
third of its online ride-hailing taxi operating licenses, as well as bankruptcy, liquidation or cessation of operations, Hongyi shall
have the right to require certain shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in
Jinkailong. Based on a repurchase formula provided for in the JKL Investment Agreement, the maximum repurchase amount that
Hunan Ruixi would be subject to is RMB28,320,000 (approximately $4.0 million).
F-44
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)).
Based on the foregoing evaluation, our principal executive officer and principal financial officer concluded that, as of March 31,
2019, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses
described below.
Management's Report on Internal Control over Financial Reporting
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2020, based on the
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) (2013 Framework). Based on this evaluation under the 2013 Framework, our principal executive officer and principal
financial officer have concluded that our internal control over financial reporting was not effective March 31, 2020 due to the
following material weaknesses:
· We did not have sufficient personnel with appropriate levels of accounting knowledge and experience to address complex
U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S.
GAAP. Specifically, our control did not operate effectively to ensure the appropriate and timely analysis of and
accounting for unusual and non-routine transactions and certain financial statement accounts;
· We were lack of adequate policies and procedures in internal audit function to ensure that our policies and procedures have
been carried out as planned;
· We did not establish appropriate backup and restoration plan; and
· We did not establish and perform periodic review and security monitoring of unauthorized access to the financial system.
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of PCAOB Auditing Standard AS
2201, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
Company's annual or interim financial statements will not be prevented or detected on a timely basis. During the year ended March
31, 2020, we hired Deloitte to help us improve our framework of internal controls, including setting up a risk and control matrix,
drawing flowcharts of significant transactions, evaluating controls effectiveness and preparing manual of internal control. We also
developed an operational and financial system for our Automobile Transaction and Related Services to warn of risks and support
management’s ability to make significant decisions. As of March 31, 2020, we have completed the following remediation:
· We have improved the communication to the Board and obtain proper approval for the material transactions;
· We have retained an experienced U.S. GAAP consultant to assist us in the financial reporting and complex accounting
issues;
· We have hired an internal audit staff to start our internal audit work.
We plan to address the weaknesses identified above by implementing the following measures:
(i) hiring additional accounting staffs with comprehensive knowledge of U.S. GAAP and SEC reporting requirements;
(ii) improving our internal audit function, internal control policies and monitoring controls based on the work of our internal
audit staff; and
(iii) improving our system security environment and conducting regular backup plan and penetration testing to ensure the
network and information security.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the fourth quarter of the year
ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
95
Item 9B.
Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Directors and Executive Officers
Our current directors and officers are as follows:
Name
Xi Wen
Xiaoyuan Zhang
Chunhai Li
Haitao Liu
Xiaojuan Lin
Trent D. Davis
Sichun Wang
Jie Gao
Age
37
32
35
48
55
52
32
41
Position
Chief Executive Officer, Chairman of the Board, President and Secretary,
Executive Director of Sichuan Senmiao
Chief Financial Officer and Treasurer
Chief Technology Officer
Chief Executive Officer of Sichuan Senmiao
Director
Director
Director
Director
Xi Wen has been serving as President, Secretary and Director of the Company since June 2017, was appointed chairman of the
board on July 20, 2017 and our Chief Executive Officer on August 1, 2018. Mr. Wen has over 10 years of experience in finance and
investment management. He has been serving as Executive Director of Sichuan Senmiao since February 2017, in charge of all
aspects of Senmiao's operations. Immediately prior to joining Senmiao, Mr. Wen served as a director of Chenghexin, where he was
responsible for overseeing the operations of the Aihongsen lending platform from May 2015 to February 2017. He also founded
Chengdu Fubang Zhuoyue Investment Co. in September 2013 and served as General Manager until May 2015. From January 2009
to August 2013, Mr. Wen was the General Manager of Chengdu Haiyuan Trading Co., Ltd., in charge of the company’s daily
operations. Mr. Wen holds a Bachelor’s degree in Business and Economics from Manchester Metropolitan University in
Manchester, United Kingdom. Mr. Wen is qualified to serve on our board of directors due to his knowledge of our businesses and
expertise in business management, finance and investment.
Xiaoyuan Zhang has been serving as our Chief Financial Officer since September 17, 2018. She has served as a director and
the chairperson of the Audit Committee of Color Star Technology Co., Ltd. (Nasdaq: HHT), a provider of online and offline
education services in China, since July 2019. Mr. Zhang previously served as Senior Auditor and Assurance Manager of Ernst &
Young Hua Ming LLP, Chengdu Branch, from October 2010 to September 2018 where she participated in audits of several public
companies listed in China, Hong Kong and Singapore, as well as large state-owned and foreign investment enterprises. Ms. Zhang
received her dual bachelor’s degrees in accounting and law from Southwestern University of Finance and Economics in Chengdu,
China. Ms. Zhang is an intermediate accountant and a Certified Public Accountant of the Chinese Institute of Certified Public
Accountants.
Chunhai Li has been serving as the Chief Technology Officer of the Company since July 20, 2017 and Chief Technology
Officer of Sichuan Senmiao since September 2016. Before joining Sichuan Senmiao, he was the Director of Research and
Development of Beijing Huashengtiancheng Technology Co., Ltd. from October 2014 to August 2016, where he was in charge of
the development of bank data platform and team management. Prior to that, he was the Director of Research and Development at
Zhongkesanyang (Beijing) Technology Co., Ltd. from February 2013 to September 2014, primarily responsible for the organization
of the company and technology team as well as management of technology and operations. From October 2007 to February 2013,
he was the project manager for online banking at Beijing Yuxinyicheng Technology Co., Ltd., where he participated in and
managed the online banking projects for many banks. Mr. Li received his bachelor's degree in computer science from University of
Electronic Science and Technology of China.
96
Haitao Liu has been serving as the Chief Executive Officer of Sichuan Senmiao since August 1, 2018. Mr. Liu previously
served as Chief Executive Officer of Shenzhen Qianhai Tuteng Internet Financial Services Co., Ltd., a peer-to-peer online lending
company specialized in auto loans, from May 2015 to April 2018. Prior to that, he served as the Deputy General Manager of
Chengdu High-Tech Zone Xingrui Microfinance Co., Ltd., a company offering loans to small businesses and individuals, from
May 2012 to April 2015, as the Chief Financial Officer of Sichuan Information Industry Co., Ltd., an information technology
company, from July 2006 to May 2012, and as the Deputy General Manager of Sichuan Zhongxin Hengde CPA Co., Ltd. from
June 2000 to July 2006. He also served as a civil servant in Chenghua District People’s Government of Chengdu from June 1993 to
June 2000. Mr. Liu received a master’s degree in EMBA (Finance) from Southwestern University of Finance and Economics, a
bachelor’s degree in Business Administration from Southwest Jiaotong University and an associate degree in Commercial Economy
from Southwestern University of Finance and Economics in China.
Xiaojuan Lin has been a director of the Company since July 20, 2017. Since March 2011, Ms. Lin has been the legal
representative and Executive General Manager of Hunan Dinchengtai Investment Co. Ltd. She previously served as Deputy
General Manager and Finance Manager of Hunan Xinhongxin Group from April 2004 to February 2010 where she was in charge of
the group's finance, tax and accounting matters. From August 2000 to March 2004, Ms. Lin served as Finance Manager for
Northwest Region at Tianjin Jiashijian Commercial Group, where she managed the group's finance, tax and accounting matters. She
also acted as Budgeting and Accounting Manager of Cygent Hotel from 1986 to 2000. Ms. Lin holds a Bachelor’s degree in
Statistics from Hunan Finance University in Hunan, China. She is a Certified Public Accountant in China. Ms. Lin is qualified to
serve on our board of directors due to her expertise in accounting and finance.
Trent D. Davis has been a director of the Company since March 21, 2018. Mr. Davis is currently the Chief Executive Officer
of Paulson Investment Company, LLC, which is a boutique investment firm specializing in private equity offerings for small to
mid-cap markets. Formerly, from December 2014 to December 2018, Mr. Davis was President and Chief Operating Officer of
Whitestone Investment Network, Inc., which specializes in providing executive advisory services to small entrepreneurial
companies, as well as restructuring, recapitalizing, and making strategic investments in small to midsize companies. Currently, Mr.
Davis is a Director for INVO Bioscience (OTC: INVOD), which is a medical device company focused on creating simplified,
lower cost treatments for patients diagnosed with infertility. Formerly, from September 2016 to August 2019, Mr. Davis was Vice
Chairman and Lead Director of Eastside Distilling Inc. (Nasdaq: EAST), a manufacturer of high-quality, master-crafted spirits. As
the Lead Independent Director Dataram Corporation (Nasdaq: DRAM), which develops, manufactures, and markets memory
products primarily used in enterprise servers and workstations worldwide, from July 2015 to April 2017, Mr. Davis helped the
company successfully complete the reverse merger with U.S. Gold Corp (Nasdaq: USAU), a gold exploration and development
company. Previously, from December 2014 to July 2015, Mr. Davis was Chairman of the Board for Majesco Entertainment
Company (Nasdaq: COOL), an innovative developer, marketer, publisher, and distributor of interactive entertainment for
consumers around the world. From November 2013 until July 2014, Mr. Davis served as the President and Director of Paulson
Capital Corp. (Nasdaq: PLCC) until he successfully completed the reverse merger of Paulson with VBI Vaccines (Nasdaq: VBIV).
He went on to serve as a member of its Board of Directors and Audit Committee until May 2016. Mr. Davis was also the Chief
Executive Officer of Paulson Investment Company, Inc., a subsidiary of Paulson Capital Corp, from July 2005 to October 2014,
and is credited with overseeing the syndication of approximately $600 million for over 50 client companies in both public and
private transactions. In 2003, Mr. Davis served as Chairman of the Board of the National Investment Banking Association. Mr.
Davis holds a B.S. in Business and Economics from Linfield College and an M.B.A. from University of Portland. Mr. Davis is
qualified to serve on our board of directors because of his deep knowledge of finance and public company issues, capital market,
advisory and entrepreneurial experiences, and extensive expertise in operational and executive management.
97
Sichun Wang has been a director of the Company since November 8, 2018. Ms. Wang has served as the senior investment
manager and financial controller of SWHY SDH Equity Investment Management, an equity investment and management company,
since October 2016, where she leads the financial department of the company and participated in several pre-initial-public offering,
mergers and acquisitions and secondary offering projects. From February 2016 to April 2016, she served as the trust manager of JIC
Trust Company Limited, a trust and financial company. Prior to that, Ms. Wang served as the assistant manager of KPMG Huazhen
from September 2011 to January 2016, where she participated in audits of multiple companies and achieved Bravo Award for
outstanding performance. Ms. Wang received her Bachelor of Arts degree in accounting with honors from Michigan State
University in East Lansing, MI. She is a Certified Public Accountant in China. Ms. Wang is qualified to serve on our board of
directors due to her expertise in accounting and auditing and her experience with capital market and corporate financing.
Jie Gao has served as a director of the Company since November 8, 2018. She has been the general manager of Hunan Ruixi,
our majority owned subsidiary, since February 2018. She has also served as the executive director of Ruixi Leasing, a wholly
owned subsidiary of Hunan Ruixi, since April 2018. Prior to that, she was the executive director of Guangdong Hu Mao Sheng
Tang Fund Management Co., Ltd., a fund management company, from May 2017 to January 2018, where she was responsible for
the establishment and management of the finance and investment department. She served as the project director of finance and
investment department of Resgreen Biotechnology Group Co., Ltd., a biotechnology company, from October 2003 to March 2017.
Before that, she also served in administrative positions in electronic technology companies in Changsha, Hunan, China. She
received an associate’s degree in hotel secretary from Hunan University of Commerce in Changsha, Hunan, China. Ms. Gao is
qualified to serve on our board of directors due to her experience in business management, investment and finance.
Family Relationships
There are no family relationships, or other arrangements or understandings between or among any of the directors, executive
officers or other persons pursuant to which such person was selected to serve as a director or officer.
Board Committees
Our board of directors currently have an Audit Committee, Compensation Committee, and Nomination and Corporate
Governance Committee. Each committee's members and functions are described below.
Audit Committee. Our audit committee consists of Ms. Lin, Mr. Davis and Ms. Wang, and is chaired by Ms. Wang. Each of
our audit committee members satisfies the “independence” requirements of the Nasdaq listing rules of and meet the independence
standards under Rule 10A-3 under the Exchange Act. We have determined that Ms. Lin qualifies as an “audit committee financial
expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of
our company. The audit committee is responsible for, among other things:
·
·
·
·
·
·
·
·
selecting the independent registered public accounting firm and pre-screening all auditing and non-auditing services
permitted to be performed by the independent registered public accounting firm;
reviewing with the independent registered public accounting firm any audit problems or difficulties and management's
response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the
Securities Act;
discussing the annual audited financial statements with management and the independent registered public accounting
firm;
reviewing the adequacy of our internal controls and any special audit steps adopted in light of material control
deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
meeting separately and periodically with management and the independent registered public accounting firm; and
reporting to the board of directors.
98
Compensation Committee. Our compensation committee consists of Ms. Lin, Ms. Wang and Mr. Davis and is chaired by Ms.
Lin. Each of the compensation committee members satisfies the “independence” requirements of the listing rules of Nasdaq. The
compensation committee assists the board of directors in reviewing and approving the compensation structure, including all forms
of compensation, relating to our directors and executive officers. Our executive officers may not be present at any committee
meeting during which their compensation is deliberated upon. The compensation committee is responsible for, among other things:
·
·
·
·
reviewing the total compensation package for our executive officers and making recommendations to the board of
directors with respect to it;
approving and overseeing the total compensation package for our executives other than the three most senior executives;
reviewing the compensation of our directors and making recommendations to the board of directors with respect to it;
and
periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar
arrangements, annual bonuses, and employee pension and welfare benefit plans.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of
Ms. Lin, Ms. Wang and Mr. Davis, and is chaired by Ms. Lin. Each member of our nominating and corporate governance commit
satisfies the “independence” requirements of the Nasdaq listing rules. The nominating and corporate governance committee assists
the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board of
directors and its committees. The nominating and corporate governance committee is responsible for, among other things:
·
·
·
·
recommending nominees to the board of directors for election or re-election to the board of directors, or for appointment
to fill any vacancy on the board of directors;
reviewing annually with the board of directors the current composition of the board of directors with regards to
characteristics such as independence, age, skills, experience and availability of service to us;
selecting and recommending to the board of directors the names of directors to serve as members of the audit committee
and the compensation committee, as well as of the nominating and corporate governance committee itself; and
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and
effectiveness of our procedures to ensure proper compliance.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has been an officer or employee of our Company. None of our
officers and directors currently serves, or in the past year has served, as a member of the compensation committee or other board
committee performing equivalent functions of any entity that has one or more executive officers serving on our board of directors
or Compensation Committee.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who
beneficially own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC.
These reporting persons are also required to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review
of such forms, we believe that during the year ended March 31, 2020 there were no delinquent filers.
Code of Ethics
We have adopted a written code of ethics that applies to all of our directors, officers and employees in accordance with the
rules of the Nasdaq Stock Market and the SEC. We have filed copies of our code of ethics, our audit committee charter, our
compensation committee charter and our nominating committee charter as exhibits to our registration statement in connection with
our IPO. You may review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy
of the code of ethics will be provided without charge upon request to us.
99
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:
1.
2.
3.
4.
5.
6.
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.
Item 11.
Executive Compensation
Summary Compensation Table
The following table sets forth the cash and non-cash compensation awarded to or earned by: (i) each individual who served as
the executive officers of our company during the years ended March 31, 2020 and 2019. For purposes of this document, these
individuals are collectively referred to as the “named executive officers” of the Company.
Name and
principal
position
Xin Chen,
Former
Chief
Executive
Officer (1)
Xi Wen
Chief
Executive
Officer,
Chairman,
President
and
Secretary
Rong Zhu,
Former
Chief
Financial
Officer and
Treasurer,
Current
Chief
Financial
Officer and
Treasurer of
Sichuan
Senmiao
(5)
Salary
($)
Bonus
($)
Year
Stock
awards
($)
Option
awards
($)
Non-equity
incentive plan
compensation
($)
Nonqualified
deferred
compensation
earnings
($)
All other
compensation
($)
Total
($)
2020
—
2019
37,372
—
—
—
—
2020 156,319
— 31,050
—
—
—
2019
20,000
—
5,525
—
2020
15,833
—
—
—
2019
19,375
2020
71,280
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 37,372(2)
— 187,369(3)
— 25,525(4)
— 15,833
— 19,375(6)
— 71,280
Xiaoyuan
Zhang,
Chief
Financial
Officer and
Treasurer
(7)
Chunhai Li,
Chief
Technology
Officer
Haitao Liu
Chief
Executive
Officer,
Sichuan
Senmiao
(9)
2019
44,027
—
—
2020
2019
45,616
19,673
2020
71,280
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 44,027(8)
— 45,616
— 19,673
— 71,280
2019
52,074
—
—
—
—
—
— 52,074(10)
100
(1) Ms. Chen resigned as Chief Executive Officer of the Company on July 31, 2018.
(2) The amount represents the total compensation Ms. Chen received as Chief Executive Officer of the Company from April
1, 2018 through her resignation on July 31, 2018.
(3) The amount represents the total compensation Mr. Wen received as the Company’s Chairman and executive officer. Mr.
Wen did not receive any compensation for his services as President and Secretary until June 20, 2019.
(4) The amount represents the total compensation Mr. Wen received as the Company’s Chairman.
(5) Ms. Zhu resigned as the Chief Financial Officer and Treasurer effective September 17, 2018.
(6) The amount represents the total compensation Ms. Zhu received as the Company’s Chief Financial Officer and Treasurer
through September 17, 2018, the effective date of her resignation. Ms. Zhu is the Chief Financial Officer and Treasurer
of Sichuan Senmiao after her resignation.
(7) Ms. Xiaoyuan Zhang was appointed by the Board to serve as the Chief Financial Officer and Treasurer of the Company
upon the resignation of Ms. Rong Zhu.
(8) The amount represents the total compensation Ms. Zhang received as the Company’s Chief Financial officer and
Treasurer from September 17, 2018 through March 31, 2019.
(9) Mr. Liu was appointed by the Board to serve as the Chief Executive Officer of Sichuan Senmiao upon the resignation of
Ms. Xin Chen, effective August 1, 2018.
(10) The amount represents the total compensation Mr. Liu received as the Chief Executive Officer of Sichuan Senmiao from
August 1, 2018 through March 31, 2019.
(11) Except Mr. Wen’s salaries paid for his services as Chief Executive Officer of the Company, other executive officers
received their salaries in Renminbi which were translated into U.S. dollars at the average exchange rate used to translate
statement of operations items, which was RMB6.9472 to US$1.00 for the year ended March 31, 2020 and RMB6.7126
to US$1.00 for the year ended March 31, 2019.
Employment Agreements and Potential Payments Upon Termination
Xi Wen, Chief Executive Officer, Chairman of the Board, President and Secretary
On May 27, 2019, the Company and Mr. Wen entered into an employment agreement (the “Wen Agreement”) to memorialize
the compensation arrangement and the other terms of Mr. Wen’s continuing employment with the Company and Sichuan Senmiao.
Under the Wen Agreement, Mr. Wen is entitled to the following compensation: (i) an annual salary of US$100,000 for his service as
Chief Executive Officer of the Company, payable quarterly in arrears, starting upon the Company’s receipt of proceeds from a
financing of at least $1,000,000; (ii) an annual salary of RMB 600,000 (approximately US$87,354) for his service as the Executive
Director for Sichuan Senmiao, payable monthly in arrears starting upon the Company’s receipt of proceeds from a financing of at
least $1 million; and (iii) a cash bonus of up to US$50,000 for his services as Chief Executive Officer of the Company for the fiscal
year ended March 31, 2020 upon satisfaction of the performance targets as reviewed by the Compensation Committee.
Mr. Wen is also entitled to participate in the Company’s equity incentive plans and other Company benefits (including health
insurance, vacation and expense reimbursement), each in accordance with the Company’s policies as determined by the Board from
time to time. The Wen Agreement has an initial term of three years and is subject to successive, automatic one-year extensions
unless either party gives notice of non-extension to the other party at least 30 days prior to the end of the applicable term.
101
Pursuant to the Wen Agreement, the Company may terminate Mr. Wen’s employment for cause (as defined in the Wen
Agreement), at any time, without notice. Upon a termination for cause, Mr. Wen will not be entitled to receive payment of any
severance benefits or other amounts by reason of the termination, and his right to all other benefits will terminate, except as
required by any applicable law.
The Company may also terminate Mr. Wen’s employment without cause upon 30 days’ advance written notice. In the case of
such a termination by the Company, the Company is required to provide the following severance payments and benefits to Mr.
Wen: (1) a lump sum cash payment equal to three (3) months of the base salary as of the date of such termination; (2) a lump sum
cash payment equal to a pro-rated amount of his target annual bonus for the year immediately preceding the termination, if any; (3)
payment of premiums for continued health benefits under the Company’s health plans for three (3) months following the
termination, if any; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding equity awards held by Mr.
Wen.
In addition, if the Company or its successor terminates the Wen Agreement upon a merger, consolidation, or transfer or sale of
all or substantially all of the assets of the Company with or to any other individual(s) or entity, Mr. Wen shall be entitled to the
following severance payments and benefits upon such termination: (1) a lump sum cash payment equal to three months of the base
salary at a rate equal to the greater of his annual salary in effect immediately prior to the termination, or his then current annual
salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of his target annual bonus for
the year immediately preceding the termination; (3) payment of premiums for continued health benefits under the Company’s
health plans for three months following the termination; and (4) immediate vesting of 100% of the then-unvested portion of any
outstanding equity awards held by Mr. Wen.
Pursuant to the Wen Agreement, Mr. Wen may terminate his employment at any time with 30 days’ advance written notice
without cause or if there is any significant change in his authority, duties and responsibilities or a material reduction in his annual
salary. In such case, Mr. Wen will be entitled to receive compensation equivalent to three months of his base salary.
In order to receive any severance benefits under the Wen Agreement, Mr. Wen will be required to execute and deliver to the
Company a general release of claims in a form reasonably satisfactory to the Board.
The Wen Agreement also contains customary restrictive covenants relating to confidentiality, non-competition and non-
solicitation.
Xiaoyuan Zhang, Chief Financial Officer and Treasurer
On September 17, 2018, the Company and Ms. Zhang entered into an employment agreement (the “Zhang Agreement”).
Under the Zhang Agreement, Ms. Zhang is entitled to an annual salary of RMB540,000 (approximately $78,620) for her services as
Chief Financial Officer and Treasurer of the Company. She is also entitled to participate in the Company’s equity incentive plans
and other Company benefits, each as determined by the Board from time to time. Her employment has an initial term of one year
and is subject to successive, automatic one-year extensions unless either party gives notice of non-extension to the other party at
least 30 days prior to the end of the applicable term.
Pursuant to the Zhang Agreement, the Company may terminate Ms. Zhang’s employment for cause, at any time, without
notice or remuneration, for certain acts, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to the
detriment of the Company, or misconduct or a failure to perform agreed duties. In such case, Ms. Zhang will not be entitled to
receive payment of any severance benefits or other amounts by reason of the termination, and her right to all other benefits will
terminate, except as required by any applicable law. The Company may also terminate Ms. Zhang’s employment without cause
upon 30 days’ advance written notice. In such case of termination by the Company, the Company is required to provide the
following severance payments and benefits to Ms. Zhang: a cash payment of one month of base salary as of the date of such
termination for each year (which is any period longer than six months but no more than one year) and a cash payment of half month
of base salary as of the date of such termination for any period of employment no more than six months, provided that the total
severance payments shall not exceed twelve months of base salary.
102
Pursuant to the Zhang Agreement, Ms. Zhang may terminate her employment at any time with 30 days’ advance written notice
if there is any significant change in her duties and responsibilities or a material reduction in her annual salary. In such case, Ms.
Zhang will be entitled to receive compensation equivalent to 3 months of her base salary. In addition, if the Company or its
successor terminates the Zhang Agreement upon a merger, consolidation, or transfer or sale of all or substantially all of the assets of
the Company with or to any other individual(s) or entity, Ms. Zhang shall be entitled to the following severance payments and
benefits upon such termination: (1) a lump sum cash payment equal to 3 months of base salary at a rate equal to the greater of her
annual salary in effect immediately prior to the termination, or her then current annual salary as of the date of such termination;
(2) a lump sum cash payment equal to a pro-rated amount of target annual bonus for the year immediately preceding the
termination; (3) payment of premiums for continued health benefits under the Company’s health plans for 3 months following the
termination; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding equity awards held by Ms. Zhang.
The Zhang Agreement also contains customary restrictive covenants relating to confidentiality, non-competition and non-
solicitation.
Chunhai Li, Chief Technology Officer
Mr. Li serves as Chief Technology Officer of the Company pursuant to an employment agreement dated July 20, 2017. Under
his employment agreement, Mr. Li is entitled to an annual salary of $1.00 for his services Chief Technology Officer of the
Company. His employment has an initial term of one year and is subject to successive, automatic one-year extensions unless either
party gives notice of non-extension to the other party at least 30 days prior to the end of the applicable term.
We may terminate Mr. Li's employment for cause, at any time, without notice or remuneration, for certain acts of the
executive officer, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or
misconduct or a failure to perform agreed duties. In such case, Mr. Li will not be entitled to receive payment of any severance
benefits or other amounts by reason of the termination, and his right to all other benefits will terminate, except as required by any
applicable law. We may also terminate Mr. Li's employment without cause upon 30 days' advance written notice. In such case of
termination by us, we are required to provide the following severance payments and benefits to him: (1) a lump sum cash payment
equal to 3 months of his base salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of
his target annual bonus for the year immediately preceding the termination, if any; (3) payment of premiums for continued health
benefits under the Company's health plans for 3 months following the termination, if any; and (4) immediate vesting of 100% of the
then-unvested portion of any outstanding equity awards held by him.
Mr. Li may terminate his employment at any time with 30 days' advance written notice if there is any significant change in his
duties and responsibilities or a material reduction in his annual salary. In such case, Mr. Li will be entitled to receive compensation
equivalent to three months of his base salary.
Mr. Li has agreed to hold, both during and after the termination of his employment agreement, in strict confidence and not to
use, except as required in the performance of his duties in connection with the employment, any of our confidential information or
proprietary information of any third party received by us and for which we have confidential obligations. In addition, he has agreed
to be bound by non-competition and non-solicitation restrictions during the term of his employment and for one year following
termination of his employment.
Mr. Li also serves as Chief Technology Officer of Sichuan Senmiao pursuant to an employment agreement with Sichuan
Senmiao for a term of three years ending September 11, 2022. Pursuant to the renewed employment agreement with Sichuan
Senmiao in September 2019, Mr. Li receives an annual salary of RMB374,004 (approximately US$53,835) for his services and is
entitled to benefits under PRC government statutory employee benefit plans.
103
Haitao Liu, Chief Executive Officer of Sichuan Senmiao
Mr. Liu serves as the Chief Executive Officer of Sichuan Senmiao pursuant to his employment agreement with Sichuan
Senmiao, dated August 1, 2018. The term of his employment was for one year, subject to a one-month probation period. He is
entitled to a monthly salary of RMB 45,000 (approximately US$6,551) except that he will receive RMB 36,000 (approximately
US$5,241) for his probation period. The employment may be terminated (i) by mutual consent, (ii) immediately for cause by
Sichuan Senmiao, (iii) for incapacity after non-work related illness or injury by Sichuan Senmiao with a 30-day prior written notice
or a one-month salary as severance payment, (iii) by a 30-day prior written notice from Mr. Liu and a three-day prior notice during
the probation period, or (iv) immediately for cause by Mr. Liu. In connection with the employment agreement, Mr. Liu and Sichuan
Senmiao entered into a confidentiality agreement, pursuant to which Mr. Liu agreed not to release or disclose Sichuan Senmiao's
confidential information.
Despite the expiration of his employment agreement, Mr. Liu has agreed to continue to serve as the Chief Executive Officer of
Sichuan Senmiao as well as assist to oversee our Automobile Transaction and Related Services after the discontinuation of our P2P
business under the same terms of his employment agreement. We expect to enter into a new employment agreement with Mr. Liu
reflecting the changes in his responsibilities in the next few months.
Outstanding Equity Awards at Fiscal Year-End
As of Mach 31, 2020, there was no outstanding equity awards of executive officers.
Director Compensation
The following table sets forth certain information concerning the compensation of our then serving executive directors for the
fiscal year ended March 31, 2020, except that the compensation of Xi Wen as a director is included in “– Summary Compensation
Table”:
Fees
earned
or
paid in
cash
$
20,000
40,000
20,000
20,000
Stock
awards
$
31,050
31,050
20,000
20,000
Option
awards
$
Non-equity
incentive plan
compensation
$
Nonqualified
deferred
compensation
earnings
$
All other
compensation
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
51,050
71,050
40,000
40,000
Xiaojuan Lin
Trent Davis
Sichun Wang
Jie Gao
Each of our directors receives an annual retainer of $20,000 except that Mr. Trent receives an annual retainer of $40,000. They
will also be reimbursed for reasonable, pre-approved expenses in connection with the performance of their services.
On August 3, 2018, our board of directors approved the grant of 5,000 RSUs to each of our directors then in office as part of
their compensation for the fiscal year ended March 31, 2019. The RSUs vest in four equal quarterly installments on August 3, 2018,
April 1, 2019, July 1, 2019 and October 1, 2019 or in full upon the occurrence of a change in control of the Company, subject to the
terms and conditions set forth in the RSU agreement, provided that the director remains in service as a director through the
applicable vesting date. RSUs will be settled by the Company's issuance of a share of common stock in certificated or uncertificated
form upon the earlier of a (i) change in control and (ii) the director’s cessation as a director of the Company due to a "separation of
service" within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, or the director’s death or
disability.
As of March 31, 2020, the first installment of RSUs vested and the Company accounted for the vested RSUs as expenses and
charged to common stock.. The fair value of the vested RSUs is calculated at the grant date market price of the Company’s common
stock multiplying by the number of vested shares.
On December 11, 2019, our board of directors approved the issuance of 30,303 RSUs to each of our directors as stock
compensation for their services for the fiscal year ended March 31, 2020. The RSUs either vest on March 31, 2020 in full or upon
the occurrence of a change in control of the Company, subject to the terms and conditions set forth in the Agreement, provided that
the director receiving such RSUs remains in service as a director through March 31, 2020. RSUs shall be settled by the Company's
issuance of a share of common stock in certificated or uncertificated form upon the earlier of (i) March 31, 2020, (ii) change in
control and (ii) the director's cessation as a director of the Company due to a “separation of service” within the meaning of Section
409A of the Internal Revenue Code of 1986, as amended, or the director's death or disability.
As of March 31, 2020, all of the RSUs vested and the Company accounted for the vested RSUs as expenses and charged to
common stock. The fair value of the vested RSUs is calculated at the grant date market price of the Company’s common stock
multiplying by the number of vested shares. Total compensation expense for the year ended March 31, 2020 was $133,150.
104
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of the date of this Report, there were 28,839,803 shares of common stock outstanding, which does not include the shares of
common stock underlying the vested RSUs. The following table sets forth certain information known to us with respect to the
beneficial ownership of common stock as of that date by (i) each of our directors, (ii) each of our executive officers, (iii) all of our
directors and executive officers as a group, and (iv) each person, or group of affiliated persons, whom we know to beneficially own
more than 5% of our common stock.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect
to all shares beneficially owned by them.
Name and Address of Beneficial Owner (1)
5% Stockholders
Senmiao International Investment Group Limited (2)
THS Investment Group Limited (3)
HSM Investment Group Limited (4)
HSA Investment Group Limited (5)
Officers and Directors
Xiaoyuan Zhang
Haitao Liu
Chunhai Li
Xi Wen (6)
Xiaojuan Lin (7)
Trent D. Davis (7)
Jie Gao (8)
Sichun Wang (8)
All directors and executive officers as a group (eight individuals)
* Less than 1%.
Amount and
Nature of
Beneficial
Ownership
Percentage of
Outstanding
Shares
10,575,000
1,687,500
1,912,500
2,475,000
—
—
—
1,158,053
35,303
35,303
30,303
30,303
1,289,265
36.7%
5.9%
6.6%
8.6%
—
—
—
4.0%
*
*
*
*
4.4%
(1) Unless otherwise indicated, the business address of each of the individuals is 16F, Building A, Shihao Square, Middle
Jiannan Avenue, High-Tech Zone, Chengdu, Sichuan, China.
(2) Xiang Hu, through Senmiao International Investment Group Limited, a British Virgin Islands company wholly owned by
him, owns 10,575,000 shares of common stock of the Company.
(3) The natural person who exercises voting and dispositive power over the shares held by THS Investment Group Limited
is Aiming Hu, who is the parent of Xiang Hu.
(4) The natural person who exercises voting and dispositive power over the shares held by HSM Investment Group Limited
is Chan Wang.
(5) The natural person who exercises voting and dispositive power over the shares held by HSA Investment Group Limited
(6)
is Wuyong Luo.
Includes 1,122,750 shares of common stock of the Company held in the name of Mr. Wen’s spouse and 35,303 shares of
common stock underlying 35,303 RSUs, all of which RSUs have been vested but the underlying shares of common stock
of which have not been issued as of the date of this Report.
(7) Represents 35,303 shares of common stock underlying 35,303 RSUs, all of which RSUs have been vested but the
underlying shares of common stock of which have not been issued as of the date of this Report.
(8) Represents 30,303 shares of common stock underlying 30,303 RSUs, all of which have been vested but the underlying
shares of common stock of which have not been issued as of the date of this Report.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Our audit committee must review and approve any related person transaction we propose to enter into which would need to be
disclosed under Item 404(a) of Regulation S-K. Our audit committee charter details the policies and procedures relating to
transactions that may present actual, potential or perceived conflicts of interest and may raise questions as to whether such
transactions are consistent with the best interest of our company and our stockholders.
In December 2017, Sichuan Senmiao entered into loan agreements with two stockholders, who agreed to grant lines of credit
of approximating $955,000 and $159,000, respectively, to Sichuan Senmiao for five years. The lines of credit are non-interest
bearing, effective from January 2017. As of March 31, 2020, the outstanding balances in the discontinued operations were $108,711
and $73,384, respectively.
During the year end March 31, 2017, we entered into two office lease agreements which were set to expire in January 2020
with Hong Li, a shareholder of Sichuan Senmiao. On April 1, 2018, the two office leases were modified with the leasing term from
April 1, 2018 to March 31, 2021. For the years ended March 31, 2020 and 2019, the Company paid $109,896 and $113,742,
respectively, to the shareholder in rental expenses.
In September 2019, Hunan Ruixi entered into an office lease agreement which was set to expire in October, 2023 with Hunan
Dingchentai Investment Co., Ltd. ("Dingchentai"), a Company where one of our independent director serves as legal representative
and general manager. The rent was approximately $44,250 per year, payable on a quarterly basis. For the years ended March 31,
2020 and 2019, the Company incurred expense of $41,661 and $13,597 in rent, respectively, to Dingchentai.
105
In June 2019 and January 2020, the Company entered into two automobile maintenance services contracts with Sichuan
Qihuaxin Automobile Services Co., Ltd and Sichuan Yousen Automobile Maintenance Service Co., Ltd, the companies which are
controlled by one of the noncontrolling shareholder of Sichuan Jinkailong. During the year ended March 31, 2020, the Company
paid automobile maintenance service fees of an aggregate of $36,088 and $21,759 to those companies, respectively.
Director Independence
Our board of directors has determined that each of Mr. Davis, Ms. Lin and Ms. Wang qualifies as an “independent director”
under the Nasdaq listing rules, which is defined generally as a person other than an officer or employee of the company or its
subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors would interfere
with the director's exercise of independent judgment in carrying out the responsibilities of a director. Our independent directors will
have regularly scheduled meetings at which only independent directors are present.
106
Item 14.
Principal Accountant Fees and Services.
The following table shows the fees that we paid or accrued for the audit and other services provided by our independent
registered public accounting firms for the fiscal years ended March 31, 2020 and 2019.
Fee Category
Audit Fees (1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Fiscal Year
Ended March
31,
2020
Fiscal Year
Ended March
31,
2019
$
$
$
$
261,755
50,000
22,400
-
$
$
$
$
212,664
35,178
-
-
(1) This category consists of fees for professional services rendered by our principal independent registered public
accountants for the audit of our annual financial statements, review of financial statements included in our quarterly
reports and services that are normally provided by the independent registered public accounting firms in connection with
statutory and regulatory filings or engagements for those fiscal years.
(2) This category consists of fees for assurance and related services by our independent registered public accountant that are
reasonably related to the performance of the audit or review of our financial statements and are not reported above under
“Audit Fees.” The services for the fees disclosed under this category include consultations concerning financial
accounting and reporting standards.
(3) This category consists of fees for professional services rendered by our independent registered public accountant for tax
compliance, tax advice, and tax planning.
(4) This category consists of fees for services provided by our independent registered public accountants other than the
services described above.
Policy on Pre-Approval of Audit Services
Our audit committee pre-approves all services, including both audit and non-audit services, provided by our independent
registered public accounting firm.
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
(1)
The Financial Statements in Item 8 herein; and
(2)
Index to the Financial Statements in Item 8 herein.
All financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required,
or the required information is presented in the financial statements and notes thereto in Item 15 of Part IV below.
(3)
Exhibits
We hereby file as part of this Report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein
by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Section of the SEC, 100 F Street,
N.E., Washington, D.C. 20549, at prescribed rates or on the SEC website at www.sec.gov.
107
Item 16.
Form 10-K Summary
Not applicable.
Exhibit
No.
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
EXHIBIT INDEX
Description
Articles of Incorporation of the Company, incorporated herein by reference to Exhibit 3.1 to the Amendment No.7 to
Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Certificate of Amendment to Articles of Incorporation of the Company, incorporated herein by reference to Exhibit 3.2
to the Amendment No.7 to Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Bylaws of the Company, incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form S-1
filed by the Company with the SEC on October 30, 2017.
Form of Series A Warrant, Incorporated herein by reference to Exhibit 4.1 on the Current Report on Form 8-K filed by
the Company with the SEC on June 18, 2019
Form of Series B Warrant, Incorporated herein by reference to Exhibit 4.2 on the Current Report on Form 8-K filed by
the Company with the SEC on June 18, 2019
Form of Placement Agent Warrant, Incorporated herein by reference to Exhibit 4.3 on the Current Report on Form 8-K
filed by the Company with the SEC on June 18, 2019
Description of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended*
Exclusive Business Cooperation Agreement, dated September 18, 2017, by and between Sichuan Senmiao Zecheng
Business Consulting Co., Ltd. and Sichuan Senmiao Ronglian Technology Co., Ltd., incorporated herein by reference
to Exhibit 10.1 to the Amendment No. 7 to Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Form of Equity Interest Pledge Agreement by and among Sichuan Senmiao Zecheng Business Consulting Co., Ltd.,
Sichuan Senmiao Ronglian Technology Co., Ltd. and each equity holder of Sichuan Senmiao Ronglian Technology
Co., Ltd., incorporated herein by reference to Exhibit 10.2 to the Amendment No. 7 to Registration Statement on Form
S-1 filed with the SEC on March 14, 2018
Exclusive Option Agreement, dated September 18, 2017, by and among Sichuan Senmiao Zecheng Business
Consulting Co., Ltd., Sichuan Senmiao Ronglian Technology Co., Ltd. and each equity holder of Sichuan Senmiao
Ronglian Technology Co., Ltd., incorporated herein by reference to Exhibit 10.3 to the Amendment No. 7 to
Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Form of Power of Attorney, incorporated herein by reference to Exhibit 10.4 to the Amendment No. 7 to Registration
Statement on Form S-1 filed with the SEC on March 14, 2018
Timely Reporting Agreement, dated September 18, 2017, by and between Sichuan Senmiao Ronglian Technology Co.,
Ltd. and the Company, incorporated herein by reference to Exhibit 10.5 to the Amendment No. 7 to Registration
Statement on Form S-1 filed with the SEC on March 14, 2018
108
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Lease Agreement, dated April 1, 2018, by and between Xiaodong Yang, Pin Li and Hong Li, as landlord, and Senmiao
Consulting, as tenant, incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed
with the SEC on August 14, 2018
Lease Agreement, dated April 1, 2018, by and between Xiaodong Yang, Pin Li and Hong Li, as landlord, and Sichuan
Senmiao, as tenant, incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with
the SEC on August 14, 2018
Employment Agreement, dated August 1, 2018, by and between Sichuan Senmiao and Haitao Liu, incorporated herein
Exhibit 10.5 to the Quarterly Report on Form 10-Q filed with the SEC on August 14, 2018
Employment Agreement between the Company and Chunhai Li, incorporated herein by reference to Exhibit 10.18 to
the Amendment No. 7 to Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Form of Director Offer Letter, incorporated herein by reference to Exhibit 10.19 to the Amendment No. 7 to
Registration Statement on Form S-1 filed with the SEC on March 14, 2018
Loan Agreement, effective January 1, 2017, by and between Xiang Hu and Sichuan Senmiao Ronglian Technology
Co., Ltd., incorporated herein by reference to Exhibit 10.22 to the Amendment No. 7 to Registration Statement on
Form S-1 filed with the SEC on March 14, 2018
Loan Agreement, effective January 1, 2017, by and between Jun Wang and Sichuan Senmiao Ronglian Technology
Co., Ltd., incorporated herein by reference to Exhibit 10.23 to the Amendment No. 7 to Registration Statement on
Form S-1 filed with the SEC on March 14, 2018
Investment and Equity Transfer Agreement, dated as of November 21, 2018, by and among Senmiao Technology
Limited, Hunan Ruixi Financial Leasing Co., Ltd., Hunan Ruipin Cultural Industry Co., Ltd., Luziyun International
Group (Southeast Asia) Shares Limited and Chengdu Little Monkey Information and Technology Co., Ltd.
incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the
SEC on November 28, 2018
Business Cooperation Agreement and Valuation Adjustment Mechanism and Indemnification Agreement, dated
August 26, 2018, by and among Sichuan Jinkailong Automobile Leasing Co., Ltd., Hunan Ruixi Financial Leasing
Co., Ltd., Xiaoliang Chen, Xi Yang, Yiqiang He and Xiaohui Luo, incorporated herein by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q filed by the Company with the SEC on February 19, 2019
Amendment to Business Cooperation Agreement and Valuation Adjustment Mechanism and Indemnification
Agreement, dated October 16, 2018, by and among Sichuan Jinkailong Automobile Leasing Co., Ltd., Hunan Ruixi
Financial Leasing Co., Ltd., Xiaoliang Chen, Xi Yang, Yiqiang He and Xiaohui Luo, incorporated herein by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on February 19, 2019
Collaboration Agreement, dated August 13, 2019, by and between Didi Chuxing Technology Co., Ltd. and Sichuan
Jinkailong Automobile Leasing Co., Ltd., incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q filed with the SEC on February 14, 2020
109
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Collaboration Agreement, dated December 6, 2019, by and between Didi Chuxing Technology Co., Ltd. and Hunan
Ruixi Financial Leasing Co., Ltd., incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q filed with the SEC on February 14, 2020
Consulting Service Agreement, dated March 26, 2019, by and between Didi Chuxing Technology Co., Ltd. and
Sichuan Jinkailong Automobile Leasing Co., Ltd., incorporated herein by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q filed with the SEC on February 14, 2020
Voting Agreement, dated August 26, 2018, by and among Hunan Ruixi Financial Leasing Co., Ltd. and certain
shareholders of Sichuan Jinkailong Automobile Leasing Co., Ltd., incorporated herein by reference to Exhibit 10.7 to
the Quarterly Report on Form 10-Q filed by the Company with the SEC on February 19, 2019
Amendment to the Voting Agreement, dated November 11, 2018, by and among Hunan Ruixi Financial Leasing Co.,
Ltd. and certain shareholders of Sichuan Jinkailong Automobile Leasing Co., Ltd., incorporated herein by reference to
Exhibit 10.8 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on February 19, 2019
Employment Agreement, dated as of May 27, 2019, by and between Senmiao Technology Limited and Xi Wen,
incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 30,
2019
Employment Agreement, dated as of September 17, 2018, by and between the Company and Xiaoyuan Zhang,
incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September
20, 2018
Form of Securities Purchase Agreement, incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on June 18, 2019
Form of Lock-Up Agreement, incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with the SEC on June 18, 2019
Form of Leak-Out Agreement, incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K
filed with the SEC on June 18, 2019
Form of Hunan Ruixi Financial Leasing Contract, incorporated herein by reference to Exhibit 10.30 to the Annual
Report on Form 10-K filed with the SEC on July 5, 2019
Form of Hunan Ruixi Service Agreement, incorporated herein by reference to Exhibit 10.31 to the Annual Report on
Form 10-K filed with the SEC on July 5, 2019
Form of Jinkailong Automobile Affiliation Agreement, incorporated herein by reference to Exhibit 10.32 to the Annual
Report on Form 10-K filed with the SEC on July 5, 2019
Voting Agreement, dated February 13, 2020, by and between Hunan Ruixi Financial Leasing Co., Ltd. and Chengdu
Simushi Technology Co., Ltd.*
English Translation to Investment Agreement, dated July 4, 2020, by and among Hongyi Industrial Group Co., Ltd.,
Hunan Ruixi Financial Leasing Co., Ltd., Sichuan Jinkailong Automobile Leasing Co., Ltd. and other shareholders of
Jinkailong, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on
July 8, 2020
110
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Code of Ethics, incorporated herein by reference to Exhibit 14.1 to the Amendment No. 7 to Registration Statement on
Form S-1 filed with the SEC on March 14, 2018
List of Subsidiaries, incorporated herein by reference to Exhibit 21.1 to the Annual Report on Form 10-K filed with
the SEC on July 5, 2019
Consent of Friedman LLP*
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002**
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema*
101.CAL
XBRL Taxonomy Calculation Linkbase*
101.LAB
XBRL Taxonomy Label Linkbase*
101.PRE
XBRL Definition Linkbase Document*
101.DEF
XBRL Definition Linkbase Document*
* Filed herewith
** Furnished herewith
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 9, 2020
SENMIAO TECHNOLOGY LIMITED
/s/ Xi Wen
By:
Xi Wen
Chief Executive Officer
(Principal Executive Officer)
/s/ Xiaoyuan Zhang
By:
Xiaoyuan Zhang
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
/s/ Xi Wen
Xi Wen
Position
Chief Executive Officer, President and Chairman of the
Board
/s/ Xiaoyuan Zhang
Xiaoyuan Zhang
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Trent Davis
Trent Davis
/s/ Xiaojuan Lin
Xiaojuan Lin
/s/ Sichun Wang
Sichun Wang
/s/ Jie Gao
Jie Gao
Director
Director
Director
Director
112
Date
July 9, 2020
July 9, 2020
July 9, 2020
July 9, 2020
July 9, 2020
July 9, 2020