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Metrics Income Opportunities TrustUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 20-F
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☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
Commission file number 333-204074
WINS Finance Holdings Inc.
(Exact name of the Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
1F, Building 1B
No. 58 Jianguo Road, Chaoyang District
Beijing 100024, People’s Republic of China
(Address of principal executive offices)
1177 Avenue of the Americas
5th Floor New York, NY 10036
646-694-8538
(New York Office)
Title of each class
Ordinary Shares, par value $.0001 per share
Trading Symbol(s)
WINS
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of September 30, 2020, the registrant had 19,837,642 ordinary shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
☐ Yes
☒ No
☐ Yes
☒ No
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
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “large accelerated filer,"accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☐ Large Accelerated filer
☐ Accelerated filer
☐ Emerging Growth Company
☒ Non-accelerated filer
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark 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 which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ US GAAP
☐ International Financial Reporting
Standards as issued by the
International
Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Item 17 ☐ Item 18
☐ Yes
☒ No
TABLE OF CONTENTS
PART I
Page
Item 1.
Identity Of Directors, Senior Management and Advisers
Item 2.
Offer Statistics and Expected Timetable
Item 3.
A.
B.
C.
D.
Item 4.
A.
B.
C.
D.
Key Information
Selected financial data
Capitalization and indebtedness
Reasons for the offer and use of proceeds
Risk factors
Information on Our Company
History and Development of the Company
Business Overview
Organizational Structure
Property, Plants and Equipment
Item 4A.
Unresolved Staff Comments
Item 5.
A.
B.
C.
D.
E.
F.
Item 6.
A.
B.
C.
D.
E.
Item 7.
A.
B.
C.
Item 8.
A.
B.
Operating and Financial Review and Prospects
Operating Results
Liquidity and Capital Resources
Research and development, patents and licenses, etc.
Trend Information
Off-balance Sheet Arrangements
Tabular Disclosure of Contractual Obligations.
Directors, Senior Management and Employees
Directors and senior management
Compensation
Board Practices
Employees
Share Ownership
Major Shareholders and Related Transactions
Major shareholders
Related party transactions
Interests of experts and counsel
Financial Information
Statements and Other Financial Information
Significant Changes
Item 9.
The Offer and Listing
1
1
1
1
3
3
3
19
19
21
30
30
30
31
43
45
47
47
48
49
50
50
53
53
55
55
55
55
57
57
A.
B.
C.
D.
E.
F.
Offer and listing details
Plan of distribution
Markets
Selling shareholders
Dilution
Expenses of the issue
Item 10.
A.
B.
C.
D.
E.
F.
G.
H.
I.
Additional Information
Share capital
Memorandum and articles of association
Material contracts
Exchange controls
Taxation
Dividends and paying agents
Statement by experts
Documents on display
Subsidiary Information
Item 11.
Quantitative and Qualitative Disclosure About Market Risk
Item 12.
Description of Securities Other Than Equity Securities
PART II
Item 13.
Defaults, Dividend Arrearages And Delinquencies
Item 14.
Material Modifications To The Rights Of Security Holders And Use Of Proceeds
Item 15.
Controls and Procedures
Item 16
[Reserved]
Item 16A
Audit Committee Financial Expert
Item 16B
Code of Ethics
Item 16C
Principal Accountant Fees and Services
Item 16D
Exemption from the Listing Standards for Audit Committees
Item 16E
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F
Change in Registrant’s Certifying Accountant
Item 16G
Corporate Governance
57
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58
62
62
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69
69
69
69
70
71
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75
Item 16H
Mine Safety Disclosure
Item 17
Financial Statements
Item 18.
Financial Statements
Item 19
Exhibits
Signatures
PART III
75
75
75
75
77
CERTAIN INFORMATION
In this Annual Report on Form 20-F, or the “Annual Report”, unless the context indicates otherwise, all references to the terms “Wins Finance” “we,” “us,”
“our company,” “the Company” and “our,” refer to Wins Finance Holdings Inc. and its wholly-owned subsidiaries, Wins Holdings LLC(“WHL”),Wins
Finance Group Limited (“WFG”), Full Shine Capital Resources Limited (“Full Shine”), Jinshang International Financial Leasing Co., Ltd. (“Jinshang
Leasing”), Shanxi Jinchen Agriculture Co., Ltd. (“Jinchen Agriculture) and Shanxi Dongsheng Finance Guarantee Co., Ltd. (“Dongsheng Guarantee”)., all
references to “China” or “PRC” and the “Chinese government” refer to the People’s Republic of China and its government. In this Annual Report, all
references to “Renminbi,” or “RMB” are to the legal currency of China and all references to “USD”. “U.S. dollars,” “dollars,” “$” or “US$” are to the legal
currency of the United States.
The Company recently learned that the Changzhi Public Security Bureau (the “Bureau”) enforced a judgement against Jinchen Agriculture and Dongsheng
Guarantee, the Company’s wholly owned subsidiary. Pursuant to this action, the Bureau froze the assets of Jinchen Agriculture and Dongsheng Guarantee.
The Company’s appointed legal counsel was unable to determine the cause of the freeze as the authorities have not provided such information, but it has
advised the Company that the Company no longer has control of the assets or operations of Jinchen Agriculture and Dongsheng Guarantee. Therefore, until
the freeze is lifted (and the Company has not been provided any guidance about when the freeze would be lifted), the Company will not be able to
consolidateJinchen Agriculture and Dongsheng Guarantee into its financial statements. The Company’s other business are unaffected by the freeze and
continue to operate normally.
The Company’s functional currency is USD. The functional currency of Jinshang Leasing, Jinchen Agriculture and Dongsheng Guarantee is
Chinese Yuan, or RMB. For financial reporting purposes, the financial statements of Jinshang Leasing, are prepared using RMB and translated into the
Company’s functional currency, USD at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each
balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and owners’ equity is translated at
historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in
shareholders’ equity.
The audited financial statements in this Annual Report have been prepared in accordance with accounting principles generally accepted in the
United States, or “U.S. GAAP”.
FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws.
These statements relate to anticipated future events, future results of operations and/or future financial performance. In some cases, you can identify
forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “ought
to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-
looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking
statements in this Annual Report include, without limitation, statements relating to:
·
·
·
·
·
·
·
·
·
·
·
our goals and strategies;
our future business development, results of operations and financial condition;
our estimates regarding expenses, future revenues, capital requirements and our need for additional financing;
our estimates regarding the market opportunity for our services;
the impact of government laws and regulations;
our ability to recruit and retain qualified personnel;
our failure to comply with regulatory guidelines;
uncertainty in industry demand;
general economic conditions and market conditions in the financial services industry;
future sales of large blocks or our securities, which may adversely impact our share price; and
depth of the trading market in our securities.
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current
views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in Item 3D “Key
Information - Risk Factors.”
You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-
looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements
for any reason after the date of this Annual Report, to conform these statements to actual results or to changes in our expectations.
i
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. Directors and Senior Management
PART I
Not required.
B. Advisers
Not required.
C. Auditors
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3. KEY INFORMATION
A. Selected financial data
The following selected financial data should be read in conjunction with Item 5 - “Operating and Financial Review and Prospects” and the
Financial Statements and Notes thereto included elsewhere in this Annual Report.
The selected consolidated statements of operations data for the fiscal years ended June 30, 2019,2018, 2017, 2016, and 2015 and the selected
balance sheet data as of June 30, 2019,2018, 2017, 2016, and 2015 are derived from the audited consolidated financial statements of Wins Finance for those
fiscal years.
The audited consolidated financial statements for the fiscal years ended June 30, 2019,2018, 2017, 2016, and 2015 are prepared and presented in
accordance with U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated
financial statements and related notes. The historical financial statements are not necessarily indicative of our future performance.
1
Statements of Income and Comprehensive Income
(US$ except share data)
2019
Guarantee service income
Commissions and fees on financial guarantee services
(Provision) reversal of provision for financial guarantee services
Commission and fees on guarantee services, net
Direct financing lease income
Direct financing lease interest income
Interest expense for direct financing lease
Business collaboration fee and commission expenses for leasing projects
Provision for lease payment receivable
Net direct financing lease income after provision for receivables
For the years ended June 30,
2017
2018
Restated
2016
2015
-
-
-
-
-
-
2,839,194
3,208,827
6,048,021
6,193,225
(2,907,999)
3,285,226
7,860,629
576,456
8,437,085
7,595,992
(411,066)
(68,342)
(81,585,960)
(74,469,376)
5,697,957
(1,546,304)
(99,320)
(3,514,961)
537,372
6,047,172
(2,094,587)
(603,873)
(27,332)
3,321,380
3,164,317
(524,409)
(222,206)
(597,444)
1,820,258
3,547,273
(188,173)
(265,829)
(70,467)
3,022,804
Financial advisory and agency income
Net revenue
-
(74,469,376)
1,695,303
2,232,675
357,284
9,726,685
402,800
5,508,284
3,386,586
14,846,475
Non-interest income
Interest on investment securities
Total non-interest income
Non-interest expense
Business taxes and surcharge
Salaries and employee charges
Rental expenses
Other operating expenses
Total non-interest expense
Income (loss) before taxes
105,878
105,878
3,942,719
3,942,719
13,752,538
13,752,538
13,958,540
13,958,540
16,657,246
16,657,246
(15,827)
(542,628)
(102,859)
(2,062,802)
(2,724,116)
(9,911)
(540,312)
(175,549)
(4,554,030)
(5,279,802)
(4,406)
(879,595)
(247,684)
(46,258)
(1,177,943)
(167,867)
(1,524,720)
(271,357)
(4,621,038)
(6,584,982)
(200,223)
(424,872)
(190,239)
(1,468,741)
(2,284,075)
(77,087,614)
895,592
22,301,280
12,881,842
29,219,646
Income tax credit (expense)
Net (loss) income from continuing operation
18,900,720
(58,186,894)
322,038
1,217,630
(1,951,489)
20,349,791
(764,445)
12,117,397
(3,146,993)
26,072,653
Income from discontinued operation
Total Net Income
Other comprehensive income (loss)
Foreign currency translation adjustment
Comprehensive income (loss)
Weighted-average common shares outstanding
Basic (1)
Diluted (1)
Earnings (loss) per share
Basic (1)
Diluted (1)
From continuing operation
From discontinued operation(2)
8,377,166
(49,809,728)
8,881,255
10,098,885
-
-
-
-
-
-
(9,623,857)
(59,433,585)
5,977,187
16,076,072
(5,130,963)
15,218,828
(19,361,292)
(7,243,895)
1,757,840
27,830,493
19,837,642
19,837,642
19,837,642
19,837,642
19,926,510
20,082,089
20,012,356
20,012,356
16,800,000
16,800,000
(2.51)
(2.51)
(2.93)
0.42
0.51
0.51
0.06
0.45
1.02
1.01
1.01
-
0.61
0.61
0.61
-
1.55
1.55
1.55
-
(1) These data have been retrospectively adjusted giving effect to the reverse merger between WFG and Sino, completed on October 26, 2015.
More information about the reverse merger is contained in our Consolidated Financial Statements.
(2) On June 9, 2020, the Changzhi Public Security Bureau enforced a judgement against Jinchen Agriculture and its subsidiary, Dongsheng
Guarantee. As a result, the Company lost control over these subsidiaries. Arising from the loss of control, the Company reported the results of
these subsidiaries as disposal group classified as held for sale.
2
2019
$
70,312 $
228,101,794
13,651,432
214,450,362
2018
Restated
13,133,540 $
309,903,262
36,019,315
273,883,947
2017
2016
2015
17,002,282 $
312,764,090
54,956,215
257,807,875
47,163,965 $
304,627,280
60,572,349
244,054,931
9,883,091
251,005,424
13,741,316
237,264,108
Balance Sheet Data
Cash and cash equivalents
Total assets
Total liabilities
Total equity
B. Capitalization and Indebtedness
Not required.
C. Reasons for the Offer and Use of Proceeds
Not required.
D. Risk Factors
In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely
affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political,
industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.
You should carefully consider the following factors and other information in this annual report before you decide to invest in our ordinary shares.
If any of the risks referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our
ordinary shares could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Operations
We rely heavily on cooperation with commercial banks.
Our business relies heavily on cooperation with commercial banks. Our cooperation arrangements with banks generally have a term of one year
and are renewable upon expiration. If we are not able to renew any of these existing arrangements on commercially reasonable terms, or at all, when they
expire, the ability to provide bank financing guarantees to clients would be negatively impacted. In addition, regulatory policies and other factors are
beyond our control. Furthermore, our cooperation arrangements are concentrated in a small number of commercial banks locally. The proportion of security
deposits the banks require from us largely depends on our business relationship and track record with them. As a result, if our relationship with one or more
key cooperating banks deteriorates materially or terminates, our business, financial condition and results of operations may be materially and adversely
affected.
Our business is subject to greater credit risks than if we provided leases to larger and more established clients, and our proprietary risk
management system may not be adequate to protect against client defaults.
The business of providing financial leasing involves a variety of risks, including the risk that the loans we made will not be repaid on time or at
all, and our risk management procedures may not fully eliminate these risks. We mainly focus on providing services to Chinese small & medium
enterprises (“SMEs”), including microenterprises, which have limited access to financing, and microcredit companies in China. Some of our clients are at
the early stage of their business and have limited financial resources, making them vulnerable to adverse competitive, economic or regulatory conditions.
These customers may expose us to greater credit risks than larger or more established businesses with longer operating histories. We seek to manage our
credit risk exposure through client due diligence, credit approvals, establishing credit limits, requiring security measures and portfolio monitoring. While
these procedures are designed to provide us with the information needed to implement adjustments where necessary, and to take proactive corrective
actions, there can be no assurance that such measures will be effective in avoiding undue credit risk. During the year ended June 30, 2019, the provision for
our lease payment receivables totaled $81.6million. The dramatic increase of these non-cash provisions is due to the adjustment of China’s financial policy
(strengthening financial risk control and deleveraging) which has significantly impacted the financing capacity and labor costs of our SME clients.
3
Our historical financial results may not be indicative of our future performance.
Our business has achieved rapid growth during the past few years. Our financial leasing business commenced in 2009 and therefore has a limited
operating history. Our net revenue increased from $1.3 million for the year ended June 30, 2012 to $9.7 million for the year ended June 30, 2017,
representing an increase of 672.6%. However, on June 9, 2020, the Changzhi Public Security Bureau (the “Bureau”) enforced a judgement against Jinchen
Agriculture. Pursuant to this action, the Bureau froze the assets of Jinchen Agriculture and its subsidiary Dongsheng Guarantee. The Company’s appointed
legal counsel was unable to determine the cause of the freeze as the authorities have not provided such information, but it has advised the Company that the
Company no longer has control of the assets or operations of Jinchen Agriculture and Dongsheng Guarantee. Therefore, until the freeze is lifted (and the
Company has not been provided any guidance about when the freeze would be lifted), we will not be able to consolidate Jinchen Agriculture and its
subsidiary Dongsheng Guarantee into our financial statements. The board of directors have the intent to dispose of Jinchen Agriculture and Dongsheng
Guarantee within 12 months after unfreezing of the assets by the Bureau. The Company’s other businesses are unaffected by the freeze and continue to
operate normally. The Company’s net revenue (not including Jinchen Agriculture and Dongsheng Guarantee) decreased from $2.2 million for the year
ended June 30, 2018 to$(74.5) million for the year ended June 30, 2019, representing a decrease of 3,435.43%, mainly caused by a non-cash provision on
our financial leasing businesses that totaled $81.6 million. During the year ended June 30,2019, the provision on our leasing business increased to $81.6
million from $3.5million in 2018, representing an increase of 2,221.11%. The limited history of our financial leasing business makes it difficult to evaluate
our prospectus.
We may face increasing competition from existing and new market participants.
China’s financial services industry for SMEs and microenterprises has experienced substantial growth in recent years, following the rapid
development of the Chinese economy and the emergence of a large number of SMEs and microenterprises. For our financial leasing business, our major
competitors include independent China leasing companies and foreign-owned leasing companies. Some of our competitors may benefit from lower pricing,
a larger customer base, a more established business reputation, more solid business relationships with banks and government authorities, a more mature risk
control mechanism or more extensive experience than we might. As we expand our presence, we expect to compete with competitors from other regions,
some of which have better knowledge of the target customers and may enjoy stronger relationships with local banks than we do.
Our business model could be negatively affected by changes and fluctuation in the banking industry.
Our business model is premised on the fact that SMEs and microenterprises are generally underserved by the banking industry because
commercial banks in China have been reluctant to lend to SMEs and microenterprises without credit support, such as third-party guarantees, or adequate
collateral of tangible assets. In the past, this has created opportunities for us to develop and expand our business. But now, new trends in the banking
industry or the applicable regulatory requirements may alleviate the high transaction costs or the lack of collateral and public information generally
associated with bank financing to our target clients or otherwise make this business more attractive to banks. In the event that commercial banks begin to
compete with us by making loans to our target clients on an unsecured basis or require a lower level of credit guarantee in return for higher risk-based
interest rates, we may experience greater competition with respect to our financial leasing business. Furthermore, any such direct competition with our
cooperating banks will undermine our relationship with them and may adversely affect our business, results of operations and prospects.In September 2019,
the CBRC and NDRC in China jointly announced the notice onin-depth development of "credit loan" to support the financing of SMEs to ease the
financing difficulty of SMEs, encourage financial institutions to take improving risk management, reduce excessive dependence on mortgage, pledge and
guarantee, and gradually increase the proportion of credit loans for SMEs. The issuance of this policy will reduce the dependence of SMEs on the guarantee
business.
In addition, our business may be subject to factors affecting the banking industry generally, such as an abrupt spike in China’s interbank rates and
the subsequent fears of tightened liquidity, as well as the increasing non-performing loan ratios as reported by the banking industry. Such factors adversely
affecting China’s banking industry may result in constraints on the banking system’s liquidity and subsequent reductions in the amount of, or tightened
approval requirements for, loans available to our customers or us. As a result, we may experience less available funding. Furthermore, if our customers’
business is negatively affected due to any such factors, our customer default risk may increase, which may materially and adversely affect our financial
condition or results of operations.
The guarantee business conducted by us in Jinzhong City, Shanxi Province has been frozen by governmental authorities and we are not sure if we
will be able to regain control of such business.
Over the past few years, our guarantee business has been concentrated in Jinzhong City, Shanxi Province, throughour subsidiaries Jinchen
Agriculture and Dongsheng Guarantee, the wholly owned subsidiary of JinchenArgiculture.On June 9, 2020, the Changzhi Public Security Bureau (the
“Bureau”) enforced a judgement against Jinchen Agriculture, the Company’s wholly owned subsidiary. Pursuant to this action, the Bureau froze the assets
of Jinchen Agriculture and its subsidiariyDongshengGuarantee. Ourappointed legal counselwas unable to determine the cause of the freeze as the
authorities have not provided us with any information, Ourappointed legal counselhas advised us that weno longer havecontrol of the assets or operations
of JinchenArgiculture. Therefore, until the freeze is lifted (and we havenot been provided any guidance about when the freeze willbe lifted), we will not be
able to consolidate Jinchen Agriculture andDongsheng Guarantee intoourfinancial statements, so wereport the frozen assets and liabilities as a disposal
group.The assets of disposal group classified as held for salewere $172.0 million and $165.6 million for the years ended June 30, 2019 and 2018,
andtheliabilities of disposal group classified as held for salewere $3.0 million and $5.2 million for the years ended June 30, 2019 and 2018,
respectively.The freeze of these assets could have a material and adverse effect on our financial results.
4
We may not be familiar with new regions or markets we enter and may not be successful in offering new products and services.
We may expand our business and enter other regional markets in the future. However, we may be unable to replicate our success in Jinzhong City
in new markets. In expanding our business, we may enter markets in which we have limited, or no, experience. We may not be familiar with the local
business and regulatory environment and we may fail to attract a sufficient number of customers due to our limited presence in that region. In addition,
competitive conditions in new markets may be different from those in our existing market and may make it difficult or impossible for us to operate
profitably in these new markets. If we are unable to manage these and other difficulties in our expansion into other regions in China, our prospects and
results of operations may be adversely affected.
As we continuously adjust our business strategies in response to the changing market and evolving customer needs, our new business initiatives
will likely lead us to offer new products and services. However, we may not be able to successfully introduce new products or services to address our
customers’ needs because we may not have adequate capital resources or lack the relevant experience or expertise or otherwise. In addition, we may be
unable to obtain regulatory approvals for our new products and services. Furthermore, our new products and services may involve increased and
unperceived risks and may not be accepted by the market and they may not be as profitable as we anticipated, or at all. If we are unable to achieve the
intended results for our new products and services, our business, financial condition, results of operations and prospects may be adversely affected.
Our impairment losses may not be adequate to cover actual losses and any increase to the impairment losses may cause our net income to
decrease.
As of June 30, 2019, our allowance for finance lease payment receivable was $85.2million. The amount of provisions or allowances has been
based on our management’s assessment of, and expectations concerning, various factors affecting the quality of our loan portfolio, such as the customers’
financial condition, repayment ability, historical default rates, the anticipated realizable value of any collateral, regional economic conditions, government
policies, interest rates and other factors, and the applicable PRC rules and regulations governing provisions for losses. If our assessment and expectations
differ from actual events, or if the quality of loan portfolios deteriorates, our provisions or allowance may not be adequate to cover our actual losses and we
may need to set aside additional provisions or allowance, which could materially and adversely affect our profitability. Our business is subject to
fluctuations based on local economic conditions. These fluctuations are neither predictable nor within our control and may have a material adverse impact
on our operations and financial condition. We may increase our impairment losses for investment in financial leases based on any such change of economic
conditions and the change of management’s assessment. Regulatory authorities may also require an increase in the provision or allowance for loan losses.
Any increase in the allowance for loan losses would result in a decrease in net income and may have a material adverse effect on our financial condition
and results of operations.
Our business is concentrated in financial guarantees and financial leasing, and therefore lacks product and business diversification. Accordingly,
our future revenues and earnings may be more susceptible to fluctuations than a more diversified company.
Prior to June 9,2020, our primary business activities consisted of providing guarantee services and offering financial lease as well financial
advisory services to our customers. However, the guarantee services were mainly conducted throughDongsheng Guarantee, whose assets were frozen by
the Changzhi Public Security Bureau. Until such assets are unfrozen, we will not be able to conduct our Guarantee business, and we have not been advised
by the authorities when such assets will be unfrozen. The freeze of DongSheng Guarantee and our lack of significant product and business diversification
could inhibit the opportunities for growth of our business, revenues and profits.
5
The commission rate in the interest rate in financial leasing business may decrease due to changes in the Chinese economic environment or
industry competitiveness, which could negatively affect our revenue and net profit.
If China’s economy does not maintain the same growth rate as it has in previous years, or China’s macro-economy slows down, the government
could tighten money supply, and banks could be less inclined to incur credit risk and extend loans to Chinese SMEs, which could negatively affect our
business. New participants may enter the financial sector and our business could face intense competition within our current region, and in the regions into
which we plan to expand, due to these new entrants. We might be unable to maintain the same level of interest rates charged for our financial leasing
service, in which case our revenue and net profit may decrease.
Our risk management framework, policies and procedures and internal controls may not fully protect us against various risks inherent in our
business.
We have established an internal risk management framework, policies and procedures to manage our risk exposures, primarily credit risk,
operational risk, compliance risk and legal risk as well as liquidity risk. These risk management policies and procedures are based upon historical behaviors
and our experience in the industry. They may not be adequate or effective in managing our future risk exposures or protecting us against unidentified or
unanticipated risks, which could be significantly greater than those historically experienced. Although we are continuously updating our policies and
procedures, we may fail to predict future risks due to rapid changes in the market and regulatory conditions, and new markets we enter. Although we have
established internal controls to ensure our risk management policies and procedures are adhered to by our employees as we conduct our business, our
internal controls may not effectively prevent or detect any non-compliance of our policies and procedures, which may have a material adverse effect on our
business, financial condition and results of operations. Effective implementation of our risk management and internal controls also depends on our
employees. Human error or other mistakes may significantly undercut the effectiveness and performance of our risk management and internal controls,
resulting in a material adverse effect on our business, results of operations and financial position.
We had material weaknesses in our internal control in financial reporting as of June 30, 2019 and such material weaknesses could adversely affect our
ability to report our results of operations and financial condition accurately and in a timely manner.
Our management identified material weaknesses and concluded that our internal control over financial reporting were not effective as of June 30,
2019. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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The specific material weaknesses we identified in our internal control over financial reporting as of June 30, 2019related to:
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lack of sufficient accounting personnel qualified in US GAAP and SEC reporting; and
insufficient accounting staff, which results in a failure to segregate duties sufficiently to ensure a timely and proper preparation and
review of the financial statements.
Although we provided more training to our accounting personnel relating to US GAAP and SEC reporting to partially address the foregoing
material weaknesses, we do not believe such weaknesses have been remediated and we can provide no assurance that they will be remediated in a timely
manner.
Any failure to maintain effective internal controls could adversely impact our ability to report our financial results on a timely and accurate basis.
If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are
not filed on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either case, this could result
in a material adverse effect on our business. Inferior internal control could also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our stock. We can give no assurance that additional material weaknesses or restatements of
financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of
these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future these controls and procedures may not be
adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
We may be subject to employee misconduct which is often difficult to detect and could harm our reputation and business.
Employee misconduct may include approving a transaction beyond authorized credit limits, hiding key customer information in the due diligence
process, engaging in fraudulent or other improper activities, or otherwise not complying with laws or our risk management procedures. Employee
misconduct is often difficult to detect and could take significant time to uncover. We cannot assure you that future incidents of employee misconduct will
not subject us to serious penalties or limitations on our business activities. We could also suffer from negative publicity, reputational damage, monetary
losses or litigation losses as a result of the misconduct of our employees.
There is often limited information regarding our customers and our ability to perform customer due diligence or detect customer fraud may be
compromised as a result.
The information available on SMEs including microenterprises is often limited. Our credit evaluation depends primarily on customer due
diligence. We cannot assure you that our customer due diligence will uncover all material information necessary to make a fully informed decision, nor can
we assure you that our due diligence efforts will be sufficient to detect fraud committed by our customers. If we fail to perform thorough due diligence or
discover customer fraud or intentional deceit, the quality of our credit evaluation may be compromised. A failure to effectively measure and limit the credit
risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and prospects. In
addition, we may be unable to monitor our customers’ actual use of the financing we guaranteed or provided, or verify if our customers have other
undisclosed private money or borrowings. We may not be able to detect our customers’ suspicious or illegal transactions, such as money laundering
activities, in our business and we may suffer financial and/or reputational damage as a result.
7
Our continued success is dependent on senior management and our ability to attract and retain qualified personnel.
Our success has been, and in the future will be, dependent on the continued services of our executive directors and senior management. There is
no assurance that any or all of our senior management will continue their employment with us. If any senior management personnel are unable or unwilling
to continue their service, we may not be able to find a suitable replacement quickly or at all. The loss of the services of any senior management personnel
and the failure to locate a suitable replacement might disrupt our business and could have an adverse impact on our ability to manage or operate our
business effectively.
Our performance is also dependent on the talents and efforts of highly-skilled individuals. As a result, our continued ability to effectively compete,
manage and expand our business depends on our ability to retain and motivate our existing employees and attract new talented and diverse employees.
Given our relatively lean human resources structure, the loss of services of any employee holding an important position or possessing industry expertise or
experience could have a material adverse effect on our results of operations, business and prospects. Competition in the financial services industry for
qualified employees has often been intense, and we may also need to offer higher compensation and other benefits to attract new personnel. A failure to
attract and retain qualified personnel and any significant increase in staffing costs could have a negative impact on our ability to maintain our competitive
position and grow our business.
The future development and implementation of anti-money laundering laws in China may increase our obligation to supervise and report
transactions with our customers, thereby increasing our compliance efforts and costs and exposing us to criminal measures or administrative
sanctions for non-compliance.
We believe that we are not currently subject to PRC anti-money laundering laws and regulations and are not required to establish specific
identification and reporting procedures relating to anti-money laundering. PRC laws and regulations relating to anti-money laundering have evolved
significantly in recent years and may continue to develop. In the future, we may be required to supervise and report transactions with our customers for
anti-money laundering or other purposes, which may increase our compliance efforts and costs and may expose us to potential criminal measures or
administrative sanctions if we fail to establish and implement the required procedures or otherwise fail to comply with the relevant laws and regulations.
Failure to maintain our reputation and brand name could materially and adversely affect our business.
We believe that the reputation and brand name that we have built over the years plays a significant role in enabling us to obtain business from
referrals as well as to attract new customers. A large portion of our new guarantee services were referred to us by our past or existing customers or by
banks or other financial institutions. We believe that the building up and the enhancement of our reputation and brand name depend largely on, among
others, our credibility among finance providers and other players in the financial services industry which has been developed over the years of our business
operations, and our ability to provide diversified services to meet the requirements of our customers and their counter-parties. If we fail to maintain our
reputation or our customers or their counter-parties no longer perceive our services to be of high quality or if they should no longer perceive us as a
guarantee company with high credibility for whatever reason, our reputation and brand name could be adversely affected which, in turn, could affect our
ability to maintain existing or capture future business opportunities. On June 9, 2020, the Changzhi Public Security Bureau enforced a judgement against
Jinchen Agriculture and its subsidiaryDongsheng Guarantee.Our guarantee service, mainly operated by Dongsheng Guarantee, has been frozen, and we
have no access to its assets or operations. This could have the effect of reducing the number of people who wish to do business with us, andthere is also no
assurance that our past or existing customers or banks or financial institutions with whom we have business relationships will continue to work with us or
to refer new or potential customers to us. In the event our existing or past customers or banks or financial institutions with whom we have business
relationships cease to work with us or stop referring new or potential customers to us or substantially reduce their referrals to us, our business, financial
condition and results of operations would be adversely affected.
We are heavily dependent on the performance of SMEs, and any decrease in demand for services to SME’s in the PRC may adversely impact our
business operations.
The rapid growth of the economy of the PRC in the past few years has triggered a surge in the number of new SMEs and the escalation of their
respective businesses in general. Despite the growth of SMEs and the growing demand for funding from these SMEs in recent years, there can be no
assurance that the demand for financial guarantee services and financial leasing from SMEs will continue to grow. Any adverse development in national or
local economic conditions may affect the businesses or funding demands of SMEs which, in turn, may reduce the demand or depress the amount of fees we
charge for our services. Any decrease in such demand would have a material adverse effect on our result of operations and financial condition.
8
We may not be able to keep pace with changing demands in the guarantee business industry.
A significant factor of our competitiveness in the markets for guarantee services is our ability to develop our services so that we are able to
continuously tailor our services to the needs and demands of our customers and their counter-parties. Due to the changes in the global economy, the
national economy in the PRC or the local economy in Shanxi Province, the changes in the business environment of the SMEs in the PRC and the
development of different financial products, there may be changes in the market needs for guarantee services in terms of, among others, the type of services
and the scale of guarantees provided. We cannot assure that we will be able to obtain sufficient financial and human resources to develop our business in
view of such changes. The scale and expertise of our management team may not be able to meet such market needs and we may not be able to attract
suitable personnel for the development of our business. In addition, our risk management system may not keep up with changes in the business
requirements of our cooperating institutions and customers. Further, there is no assurance that our new services will be well accepted by the market, or such
services can be developed and put into the market in a timely manner or at all. In the event that we are not able to develop new services that meet the needs
of our customers or their counter-parties or that our competitors have developed new service offerings that are more accepted by the market than ours, our
business, financial condition and results of operations may be materially and adversely affected.
We may be involved in legal proceedings arising from our operations.
We may become involved in disputes with customers, financial providers and/or other parties. These disputes may lead to legal proceedings, and
may cause us to suffer costs and delays to our operations. Such legal proceedings may also adversely affect our reputation which in turn could lead to a
slowdown in our new business opportunities.
We are subject to certain foreign exchange risks.
We receive all of our revenue in Renminbi, which is currently not a freely convertible currency. A portion of our revenue must be converted into
other currencies in order to meet our foreign currency obligations from time to time. For example, we will be required to obtain foreign currency (i.e. US
dollars) to make payments of declared cash dividends, if any. The value of Renminbi against the U.S. dollar and other currencies fluctuates and is affected
by, among other things, changes in the PRC and international political and economic conditions. The value of any declared cash dividends in the future
may be affected by fluctuations in exchange rates.
Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi
amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi 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 Renminbi would have a negative effect on the
U.S. dollar amount available to us.
We have no insurance coverage for our guarantee and financial leasing business, investment assets or deposits in our bank accounts, which could
expose us to significant costs and business disruption.
We do not maintain any credit insurance, business interruption insurance, general third-party liability insurance, nor do we maintain key man life
insurance or any other insurance coverage except the mandatory social insurance for employees. If we incur any loss that is not covered by our loss reserve,
our business, financial condition and results of operations could be materially and adversely affected. Additionally, our major assets are cash deposit in
banks and investment securities in assets management products. These assets are not insured or otherwise protected. Should any bank or trust company
holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with that particular bank or
trust company.
The proportion of the financial leasing revenue to our total revenue has gradually increased, but this growth may not continue.
We are still developing our financial leasing business. The success of our financial leasing operations will be highly dependent upon our ability to
successfully develop and market our financial leasing services to targeted customers. We may not be able to develop our financial leasing business as
planned and generate revenues or profits. The revenue and income potential of our proposed financial leasing business is unproven and the lack of
operating history makes it difficult to evaluate the future prospects of this business.
Our knowledge of the Chinese financial leasing industry and market may be limited. Our perception of potential customers’ needs and their
acceptance of our financial leasing services may not be accurate.
We may not be able to work with equipment providers to successfully purchase qualified equipment identified by our customers on terms
acceptable to us. We may not be able to establish sound financial modeling in the calculation of the interest rate and residual value. Such inexperience and
lack of active knowledge may lead to failure of our financial leasing business.
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Lack of knowledge of financial leasing benefits among potential customers may make it difficult for us to market our services.
Many people in the PRC still perceive leasing companies as a “second-class bank”, and very few recognize the flexibility and benefits that
financial leasing provides. We may need to invest a tremendous amount of time and effort toward education people of the benefits of such business so that
potential customers can fully appreciate the flexibility leasing offers to deploy their assets. Failure in such education may make it difficult for us to market
our financial leasing services.
Our dividend policy is determined by the Board of Directors based the consideration of our performance, cash flow position and future growth
strategy. We cannot assure you of declaring dividend at any time in the future.
In the future, we may not have sufficient net income or cash flow for dividend distribution, and we may retain profits to cover cash flow required
for further business growth. There is no assurance that we will pay any dividends in the future. If we do not pay dividends, shareholders will not experience
investment returns except through the sale of their stock.
Failure to manage our growth could result in a negative impact on our future performance, results of operation and financial condition.
We intend to seek strategic acquisitions in the future in order to further expand our business and service offerings. It is our intention to seek
acquisition targets that have the potential to complement our existing business or our business model or to broaden our service offerings. Any failure to
successfully acquire or merge with such targets or to successfully integrate newly acquired or merged businesses into our business could have a negative
impact on our future performance, results of operations and financial condition.
Our financial performance may fluctuate from period to period and the fluctuations may make it difficult to predict our future performance. The
adjustment of our business development strategies according to the new environment may have significantly adverse effect on our performance.
Our financial performance fluctuates with our business volume. For our financial consultancy service, the level of revenue that we can achieve is
subject to fluctuations and is dependent on, among other things, the business and performance of our customers and the overall economic condition of the
PRC. Accordingly, we are susceptible to revenue volatility between financial periods.
Our financial performance is affected by the market conditions of the vastly diverse industries in which our customers operate and the overall
economic conditions of the PRC, which are factors beyond our control. In the event that we are not able to continually and consistently secure new
contracts from customers, our future financial performance will be adversely affected.
In order to achieve our long term mission, we may balance our efforts and capital to some newly developed segments, such as leasing or other
newly acquired business. This could negatively affect our current financial performance.
Our business strategy could be adjusted subject to various circumstances, such as market opportunity, overall economic condition of the PRC,
changes in the government regulations, and so on. Such adjustment could shift our future business focus and demand a large number of resource support,
which could negatively affect our future financial performance.
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Risk Relating to Doing Business in the PRC
China’s economic, political and social conditions, as well as regulatory policies, significantly affect the financial markets in China, as well as our
liquidity, access to capital and ability to operate our business.
Our operating subsidiaries are incorporated, and our operations and assets are primarily located, in the PRC. Accordingly, our results of
operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the
economies of developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past few decades, growth has been uneven
across different regions and economic sectors and there is no assurance that such growth can be sustained or is sustainable. The PRC government has
implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC
economy, but may negatively affect us. For example, our financial condition and results of operations may be adversely affected by the following factors:
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an economic downturn in China or any regional market in China;
inaccurate assessment of the economic conditions of the markets in which we operate;
economic policies and initiatives undertaken by the PRC government;
changes in the PRC or regional business or regulatory environment affecting the SME and microenterprise sector;
changes to prevailing market interest rates;
a higher rate of bankruptcy; and
the deterioration of the creditworthiness of SMEs and microenterprises in general.
In addition, an unfavorable financial and economic environment in recent years, including as a result of continued global financial uncertainties
and the Eurozone sovereign debt crisis, have had and may continue to have an adverse impact on investors’ confidence and financial markets in China.
Moreover, concerns over capital market volatility, issues of liquidity, inflation, geopolitical issues, the availability and cost of credit and concerns about the
rate of unemployment have resulted in adverse market conditions in China, which may materially and adversely affect our business and operations.
We may not in all cases be able to capitalize on the economic reform measures adopted by the PRC government. Changes in the economic,
political and social conditions or the relevant policies of the PRC government, such as changes in laws and regulations or restrictive financial measures,
could have an adverse effect on the overall economic growth of the PRC, which could subsequently hinder our current or future business, growth strategies,
financial condition and results of operations.
Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations
could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and
financial condition.
Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts
substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely
affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic
reform policies that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue
to pursue these policies, or may significantly alter these policies from time to time without notice.
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There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws
and regulations governing our business, or the enforcement and performance of our arrangements with borrowers in the event of the imposition of statutory
liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that
regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation
and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not developed a fully
integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these
laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and
enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses
may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to
keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations
and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas
causes uncertainty and may affect our business. Consequently, we cannot clearly foresee the future direction of Chinese legislative activities with respect to
either business with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and
regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause
possible problems to foreign investors.
Lack of financial leasing regulations could negatively impact our business.
Currently, there is no uniform equipment title registration process and system in China, as each municipality adopts different procedures. The
pending China Financial Leasing Law is expected to unify the registration procedures and protect the lessor against a “good-faith” third-party claim if the
leased assets are registered in the lessor’s name. In the absence of such central title registration system, the lessors’ ownership interest on the leased
equipment may be threatened. Loss of ownership to the leased equipment will have a negative effect on our financial position.
Interpretation of PRC laws and regulations involves uncertainty and the current legal environment in the PRC could limit the legal protections
available to shareholders.
PRC laws and regulations govern our operation in the PRC. Most of our subsidiaries are organized under PRC laws. The PRC legal system is a
civil law system based on written statutes, and prior court decisions have little precedent value and can only be used as a reference. Additionally, PRC
written statutes are often principle-oriented and require detailed interpretations by the enforcement bodies to further apply and enforce such laws. Since
1979, the PRC legislature has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and
governance, commercial transactions, taxation and trade, with a view to developing a comprehensive system of commercial law, including laws relating to
property ownership and development. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited
volume of published cases and the non-binding nature of prior court decisions, interpretations of the PRC laws and regulations involves a degree,
sometimes a significant degree, of uncertainty. Depending on the governmental agency or how an application or case is presented to such agency, we may
receive less favorable interpretations of laws and regulations than our competitors. In addition, any litigation in the PRC may be protracted and result in
substantial costs and diversion of resources and management attention. All of these uncertainties may limit the legal protections available to our investors
and shareholders.
Foreign ownership in financial guaranteeand financial leasing businesses may be changed due to the uncertainty of evolving PRC laws and
regulations.
We operate our financial guarantee and financial leasing business under foreign ownership structures in China. According to the Catalogue for the
Guidance of Foreign Investment Industries (“Foreign Investment Catalogue”) promulgated by the Ministry of Commerce of the PRC (“MOFCOM”) and
the National Development and Reform Commission (“NDRC”) on June27, 2017and effective as of July 28, 2017, our operation of financial guarantee and
financial leasing businesses with foreign ownership is permitted under current PRC laws and regulations. However, the PRC laws and regulations are not
fully developed and the Chinese government has been revising the laws and regulations since the Reform and Opening-up in 1979. There is still significant
uncertainty resulting from the evolving PRC laws and regulations. As a result, foreign investment in these financial industries may be restricted or
prohibited in the future if PRC laws and regulations are changed or revised due to the evolving political or economic conditions.
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The national and regional economies in the PRC and our prospects may be adversely affected by natural disasters, acts of God and the occurrence
of epidemics.
Our business is subject to general economic and social conditions in the PRC. Natural disasters, epidemics and other acts of God which are
beyond our control may adversely affect the economy, infrastructure and livelihood of the people in the PRC. Some regions in the PRC are under the threat
of earthquake, sandstorm, snowstorm, fire, drought, or epidemics such as Severe Acute Respiratory Syndrome, SARS, H5N1 avian flu, the human swine
flu, also known as influenza A (H1N1) or the recent cases of COVID-19. For instance, two serious earthquakes hit Sichuan province in May 2008 and
April 2013, and resulted in significant loss of lives and destruction of assets in the region. In addition, the epidemics of COVID-19 continues from
December 2019 to the present, causing different degrees of damage to the national and local economies in the PRC. An outbreak of any other epidemics in
the PRC, especially in the cities where we have operations, may result in material disruption of our business, which in turn may adversely affect our
financial condition and results of operations.
Our shareholders may experience difficulties in effecting service of legal process and enforcing judgments against us, our Directors or senior
management and to take action on the basis of violations of the listing rules.
We are a Cayman Islands company and our major operations are located in the PRC, and almost all of our assets and subsidiaries are located in the
PRC. Most of our directors and senior management reside within the PRC. The assets of these Directors and senior management are also located within the
PRC. As a result, it may not be possible to effect service of process upon most of our Directors and senior management outside the PRC. Moreover, the
PRC does not have treaties providing for reciprocal recognition and enforcement of court judgments in the United States. As a result, in the PRC,
recognition and enforcement of court judgments from the jurisdictions mentioned above may be difficult or impossible in relation to any matter that is not
subject to a binding arbitration provision.
We are a holding company located outside China and rely on dividend payments from our subsidiaries. Our ability to pay upstream dividends
may be restricted due to foreign exchange controls and other Chinese regulations.
We are a holding company and a significant part of our business is carried out through our operating subsidiaries in the PRC. As a result, our
ability to pay dividends depends on dividends and other distributions received from our operating subsidiaries. If any of our subsidiaries incurs debt or
losses, it may impair its ability to pay dividends or other distributions to us, which could adversely affect our ability to pay dividends to our Shareholders.
PRC law requires any foreign invested enterprises, such as our subsidiaries in the PRC, to set aside part of its net profit as statutory reserves. Our
PRC subsidiaries are required to set aside each year at least 10% of their after-tax profits for such year, as reported in its PRC statutory financial statements,
to the statutory surplus reserve of such PRC subsidiary. Such reserve may not be discontinued until the accumulated amount has reached 50% of the
registered capital of the PRC subsidiary. These statutory reserves are not available for distribution to us, except in liquidation. The calculation of
distributable profits is based on PRC Accounting Standards and Regulations, which differ in many aspects from US GAAP. As a result, our subsidiary in
the PRC may not be able to pay any dividend in a given year to us if it does not have distributable profits as determined under the PRC Accounting
Standards and Regulations, even if it has profits for that year as determined under US GAAP.
Limitations on the ability of our PRC operating subsidiary to remit its entire after-tax profits to us in the form of dividends or other distributions
could adversely affect our ability to grow, make investments that could be beneficial to our business, pay dividends and otherwise fund and conduct our
business. We cannot assure that our subsidiaries will generate sufficient earnings and cash flow to pay dividends or otherwise distribute sufficient funds to
us to enable us to pay dividends to our Shareholders.
The PRC Enterprise Income Tax Law (“PRC EIT Law”) and its implementation rules stipulate that if an entity is deemed to be a non-PRC resident
enterprise without an establishment or place of business in the PRC, withholding tax at the rate of 10% will be applicable to any dividends paid to it by its
PRC subsidiary, unless it is entitled to reduction or elimination of such tax, including by tax treaties.
In addition, restrictive covenants in bank credit facilities or other arrangements that we or our subsidiaries may enter into in the future may also
restrict the ability of our subsidiaries to pay dividends or make distributions to us. These restrictions could reduce the amount of dividends or other
distributions we receive from our subsidiaries, which in turn would restrict our ability to pay dividends to our shareholders.
Failure by our operating subsidiaries to pay us dividends could negatively impact our cash flow and our ability to make dividend distributions to
our shareholders, including during periods in which we are profitable.
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Restrictions on currency exchange may limit our ability to utilize our PRC revenue effectively.
Our reporting currency is the U.S. dollar. However, substantially all of our revenue is denominated in Renminbi. The Renminbi is currently
convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but requires approval from or
registration with appropriate government authorities or designated banks under the "capital account," which includes foreign direct investment and loans,
including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned
enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of
the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC governmental
authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions.
Since 2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny over
"irrational" overseas investments for certain industries, as well as over four kinds of "abnormal" offshore investments, which are:
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investments through enterprises established for only a few months without substantive operation;
investments with amounts far exceeding the registered capital of onshore parent and not supported by its business performance shown on
financial statements;
investments in targets which are unrelated to onshore parent's main business; and
investments with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of assets or illegal operation of
underground banking.
On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, which tightened the authenticity and compliance verification of cross-border transactions and cross-border
capital flow, including requiring banks to verify board resolutions, tax filing forms and audited financial statements before wiring foreign invested
enterprises' foreign exchange dividend distribution of over US$50,000. In addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists
certain sensitive industries that are subject to NDRC pre-approval requirements prior to remitting investment funds offshore, which subjects us to increased
approval requirements and restrictions with respect to our overseas investment activity. Since a significant amount of our PRC revenue is denominated in
Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business
activities outside of the PRC, make investments, service any debt we may incur outside of China or pay dividends in foreign currencies to our stockholders.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders
to personal liability, limit our ability to inject capital into our consolidated PRC entities, limit the ability of our consolidated PRC entities to
distribute profits to us, or otherwise adversely affect us.
On July 4, 2014, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and
Financing and Reverse Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced the Circular on Relevant Issues
Concerning Foreign Exchange Control Over Financing and Return Investment of Domestic Residents through Overseas Special Purpose Vehicles, or
Circular 75, previously issued in October 2005. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual residents, are
required to register with the local SAFE branch before making contribution to a company set up or controlled by the PRC residents outside of the PRC for
the purpose of overseas investment or financing with their legally owned domestic or offshore assets or interests, referred to in this circular as a “special
purpose vehicle.” Our current beneficial owners who, to our knowledge, are PRC residents are in the process of registering with the local SAFE branch as
required under Circular 37. We cannot, however, provide any assurances that such registration will be completed in a timely manner, or at all, or that any
future beneficial owners who are PRC residents will be able to comply with the SAFE regulations in a timely manner, or at all. Any failure of our current or
future beneficial owners who are PRC residents to comply with the registration procedures set forth in Circular 37 may subject such beneficial owners to
fines and legal sanctions and may also limit our ability to contribute additional capital into our consolidated PRC entities, limit our consolidated PRC
entities’ ability to distribute dividends to us or the offshore entities set up by our beneficial owners or otherwise materially and adversely affect our
business.
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We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue
in the future.
In February 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of
Properties by Non-Tax Resident Enterprises, or Public Notice 7. Public Notice 7 extends its tax jurisdiction to not only indirect transfers but also
transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. Public Notice 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 re-characterize such indirect transfer as a direct
transfer of the equity interests in the PRC tax resident enterprise and other properties in China. 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 up to 10% for the transfer of equity interests in a PRC resident enterprise. However, Public Notice 7 provides safe harbors for
internal group restructurings and the purchase and sale of equity through a public securities market. On October 17, 2017, the State Administration of
Taxation, or the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise
Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the
withholding of non-resident enterprise income tax. Pursuant to Public Notice 7 and SAT Bulletin 37, both the transferor and the transferee may be subject
to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties with respect to the reporting and consequences of 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, or sale or purchase of shares in other non-PRC resident
companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if
our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our
company and other non-resident enterprises in our group are transferees in such transactions, under Public Notice 7 and SAT Bulletin 37. For the transfer of
shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Public Notice
7 and SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with Public Notice 7 and SAT Bulletin 37 or to request the
relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident
enterprises in our group should not be taxed under these circulars. The PRC tax authorities have the discretion under Public Notice 7 and SAT Bulletin 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.
If the PRC tax authorities make adjustments to the taxable income of the transactions under Public Notice 7 and SAT Bulletin 37, our income tax costs
associated with such transactions will be increased, which may have an adverse effect on our financial condition and results of operations. We have made
acquisitions in the past and may conduct additional acquisitions in the future. We cannot assure you that the PRC tax authorities will not, at their discretion,
adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance to them for the investigation of any transactions
we were involved in. Heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we
may pursue in the future.
If the settlement reached between the SEC and the Big Four PRC-based accounting firms (including the Chinese affiliate of our independent
registered public accounting firm), concerning the manner in which the SEC may seek access to audit working papers from audits in China of US-
listed companies, is not or cannot be performed in a manner acceptable to authorities in China and the US, we could be unable to timely file future
financial statements in compliance with the requirements of the Exchange Act.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of
2002 against the mainland Chinese affiliates of the “Big Four” accounting firms (including the mainland Chinese affiliate of our independent registered
public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment
against the firms. The administrative law judge proposed penalties on the Chinese accounting firms including a temporary suspension of their right to
practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before
a review by the Commissioner had taken place, the Chinese accounting firms reached a settlement with the SEC whereby the proceedings were stayed.
Under the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made to the CSRC. The
Chinese accounting firms would receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and would be required to abide by
a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. The CSRC for its part
initiated a procedure whereby, under its supervision and subject to its approval, requested classes of documents held by the accounting firms could be
sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to US regulators.
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Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at
the end of four years starting from the settlement date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that
all parties will continue to apply the same procedures: i.e. the SEC will continue to make its requests for the production of documents to the CSRC, and the
CSRC will normally process those requests applying the sanitisation procedure. We cannot predict whether, in cases where the CSRC does not authorize
production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law.
While these issues raised by the proceedings are not specific to our independent registered public accounting firm or to us, they potentially affect
equally all PCAOB-registered audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed in
the United States. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, public companies in the United
States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in
financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, although
our independent registered public accounting firm was not named as a defendant in the above SEC administrative proceedings, any negative news aboutany
such future proceedings against these accounting firms may cause investor uncertainty regarding China-based, United States-listed companies, and the
market price of our shares may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to
timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be
determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary
shares from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ordinary
shares in the United States.
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Risks Related to the Company
We are a foreign private issuer and, as a result, we are not be subject to U.S. proxy rules and are subject to the Exchange Act reporting obligations
that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.
We report under the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are
exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating
the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act
requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period
of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and
other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, while U.S. domestic issuers
that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal
year, in the fiscal years ending on or after December 15, 2011, foreign private issuers will not be required to file their annual report on Form 20-F until four
months after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from
making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you
may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise
applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise
required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in the
Cayman Islands with regard to, among other things, director nomination procedures, the approval of compensation of officers, and quorum requirements at
general meetings of our shareholders. In addition, we intend to follow our home country law instead of the Listing Rules of the NASDAQ Stock Market
that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation
plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or
greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as
opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is
accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable to domestic U.S. issuers.
Our management team’s lack of experience as officers of publicly-traded companies may hinder our ability to comply with the Sarbanes-Oxley
Act.
It may be time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and
implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements,
we may not be able to obtain the independent auditor certifications that the Sarbanes-Oxley Act requires publicly-traded companies to obtain.
Freeman FinTech Corporation Limited (“Freeman”) owns approximately 67% of our outstanding common stock and its interests may differ from
those of our other stockholders.
As of June 30, 2019, Freeman owned approximately 67% of our outstanding common stock. Freeman has the right to nominate three members of
our board of directors. Freeman will have significant influence over the outcome of matters that require shareholder votes and accordingly over our
business and corporate matters. Freeman may exercise its shareholder rights in a way that it believes is in its own best interest, which may conflict with the
interest of our other shareholders. These actions may be taken even if Freeman is opposed by our other stockholders.
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We may be classified as a passive foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences to
U.S. investors.
In general, assuming we are treated as a foreign corporation for U.S. federal income tax purposes, we will be treated as a PFIC for any taxable
year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of certain 25% or more-owned corporate
subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of certain 25% or more-
owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes,
without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Annual Report captioned “Taxation—
United States Federal Income Taxation—General” under Item 10.E.) of our ordinary shares, the U.S. Holder may be subject to increased U.S. federal
income tax liability and may be subject to additional reporting requirements. Based on the composition (and estimated values) of our assets and the nature
of our income and that of our subsidiaries during our taxable year ended June 30, 2020, we don’t believe that we are a PFIC for such year. However,
because we have not performed a definitive analysis as to our PFIC status for such taxable year ended December 31, 2020, there can be no assurance in
respect to our PFIC status for such year. There also can be no assurance in respect to our status as a PFIC for our current taxable year or any future taxable
year. U.S. Holders of our ordinary shares are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion
in the section of this Annual Report under Item 10.E entitled “Taxation—United States Federal Income Taxation—U.S. Holders—Passive Foreign
Investment Company Rules.”
On August 22, 2019, the Company has made a definitive analysis with respect to its PFIC status for taxable year ending December 31,2018, based
on the analysis, the Company is not a PFIC for taxable year ending December 31, 2018.
Based on the composition (and estimated values) of our assets and the nature of our income and that of our subsidiaries during the taxable year
ended June 30, 2019, we believe that we are not a PFIC for such year. However, because we have not completed our analysis as to our PFIC status for the
2020 fiscal year, there can be no assurance in respect to our PFIC status for such taxable year.
Additional financing may result in dilution to our shareholders.
We may need to raise additional funds in the future to finance internal growth, to make acquisitions or for other reasons. Any required additional
financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant
dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. Alternatively, if we
raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions
on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If additional financing is not
available when required or is not available on acceptable terms, we may be unable to successfully commercialize our product or continue our research and
development.
Future resales of our ordinary shares may cause the market price of our securities to drop significantly, even if our business is doing well.
Pursuant to the merger agreement with Wins Finance Group Ltd. (“WFG”) we issued 16,800,000 or our ordinary shares to the former shareholders
of WFG. Pursuant to the merger agreement, the WFG shareholders are restricted from selling any of the ordinary shares that they received as a result of the
merger during the twelve-month period after the closing date of the merger, subject to certain exceptions, and the former shareholders of WFG were
required to enter into lock-up agreements to such effect.
Subject to these restrictions, the Company entered into an amended and restated registration rights agreement at the closing of the merger with the
former shareholders of WFG pursuant to which such holders were granted certain demand and “piggy-back” registration rights with respect to their
securities. Furthermore, the former shareholders of WFG may sell our ordinary shares pursuant to Rule 144 under the Securities Act, if available, rather
than under a registration statement. In these cases, the resales must meet the criteria and conform to the requirements of that rule, including waiting until
one year after our filing with the SEC of a Current Report on Form 8-K containing Form 10 type information reflecting the transactions with WFG.
Upon expiration of the applicable lock-up periods, and upon effectiveness of any registration statement we file pursuant to the amended and
restated registration rights agreement or upon satisfaction of the requirements of Rule 144 under the Securities Act, the former shareholders of WFG may
sell large amounts of our ordinary shares in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility
in our stock price or putting significant downward pressure on the price of our stock.
Also pursuant to the amended and restated registration rights agreement, the initial shareholders of Sino Mercury Acquisition Corp. (“Sino”) are
entitled to make a demand that we register the resale of their initial shares at any time commencing three months prior to the date on which their shares may
be released from escrow. The presence of these additional ordinary shares trading in the public market may have an adverse effect on the market price of
our securities.
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If securities or industry analysts do not publish research or reports about us or our business or publish unfavorable research about us or our
business, the price of our securities and their trading volume could decline.
The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our
business. If one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these
analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of
our securities and their trading volume to decline.
Our stock price may be volatile, there is limited liquidity in our ordinary shares and purchasers of our securities could incur substantial losses.
Our stock price has been and is likely to continue to be volatile. The stock market in general has, and we in particular have, experienced extreme
volatility that has often been unrelated to the operating performance of our company. This volatility may be due, in part, to the small number of our
ordinary shares which are publicly tradeable. As a result of this volatility, investors may not be able to sell their securities at or above the price at which
they purchased such securities. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual
operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline
rapidly and unexpectedly. Finally, because of the significant volatility in our stock price, Nasdaq halted trading in our stock on June 7, 2017 until December
4, 2017. If volatility in our stock price continues after trading recommences, Nasdaq could again halt trading in our stock.
Due to the recent extreme fluctuations in our stock price, we have been the subject of regulatory proceedings and lawsuits, which, if determined
against us, could adversely affect our operating results.
Beginning in November 2016 and through June 2017, our stock price experienced extreme price and volume fluctuations having nothing to do
with the performance of our business. We do not know the cause of such fluctuations, but such fluctuations have resulted in significant adverse
consequences to us. Trading in our ordinary shares was halted by the Nasdaq Stock Market on June 7, 2017 until December 4, 2017 due to the fluctuations,
and class action litigations have been filed against us due to such fluctuations and the trading halt. Although we do not believe that the class action
litigations have any merit, we cannot predict the outcome of the litigations or how Nasdaq, or whether other regulatory agencies (such as the SEC), will
proceed against us. If a judgment is entered against us in the class action litigations or if a regulatory agency take action against us, our business may suffer
and the value of our ordinary shares may significantly decrease.
ITEM 4. INFORMATION ON OUR COMPANY
A. History and Development of the Company
Our History
Sino Mercury Acquisition Corp. (“Sino”) was incorporated in the State of Delaware on March 28, 2014. Sino was a blank check company formed
in order to effect a merger, capital stock exchange, asset acquisition or other similar business combination with one or more businesses or entities. On
September 2, 2014, Sino closed its initial public offering of 4,000,000 units, with each unit consisting of one share of its common stock and one right to
receive one-tenth of one share of common stock upon consummation of an initial business combination. On September 24, 2014, Sino consummated the
sale of an additional 80,100 units which were subject to an over-allotment option granted to the underwriter of its initial public offering. The units from the
initial public offering (including the over-allotment option) were sold at an offering price of $10.00 per unit, generating total gross proceeds of
$40,801,000. Simultaneously with the consummation of the initial public offering, Sino consummated the private sale of 210,000 units to one of its initial
shareholders at $10.00 per unit (the “Private Units”) for an aggregate purchase price of $2,100,000. $38,701,000 of the net proceeds from the initial public
offering, together with $2,100,000 raised from the private sale of units, for a total of $40,801,000, was deposited into the trust account and the remaining
proceeds became available to be used as working capital to provide for business, legal and accounting due diligence on prospective business combinations
and continuing general and administrative expenses. The initial public offering was conducted pursuant to a registration statement on Form S-1 (Reg. No.
333-197515) that became effective on August 26, 2014.
Wins Finance Holdings Inc. (the “Company”) was incorporated in the Cayman Islands as an exempted company on February 17, 2015 and
organized as a wholly-owned subsidiary of Sino, for the purposes of changing the jurisdiction of Sino from Delaware to the Cayman Islands through a
merger in which the Company would be the surviving corporation and, immediately following that merger, simultaneously acquiring all of the outstanding
equity of Wins Finance Group Limited, a British Virgin Islands international business company (“WFG”), by means of an exchange by the shareholders of
WFG(the “WFG Shareholders”) of 100% of the ordinary shares of WFG for cash and ordinary shares of the Company.
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WFG is a holding company that was incorporated under the laws of the British Virgin Islands on July 27, 2014. After several recapitalizations and
restructurings, WFG holds 100% of the interests of Jinshang Leasing, Jinchen Agricultureand Dongsheng Guarantee through its wholly owned subsidiary,
Full Shine. WFG is an integrated financing solution provider with operations located primarily in Jinzhong City, Shanxi Province and Beijing, China.
WFG’s goal is to assist Chinese small & medium enterprises (SMEs), including microenterprises, which have limited access to financing, in improving
their overall fund-raising capability and enable them to obtain funding for business development.
Effective October 26, 2015, the Company consummated the merger and share exchange transactions (the “Business Combination”) contemplated
by the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of April 24, 2015 and amended on May 5, 2015, by and among the
Company, Sino, WFG and the WFG Shareholders.
Upon the closing of the Business Combination (the “Closing”), the former security holders of Sino were issued an aggregate of 4,726,756 ordinary
shares of the Company, including 429,010 ordinary shares of the Company issued in exchange for Sino’s then outstanding rights. In connection with the
Business Combination, holders of 1,012,379 shares of Sino common stock sold in its initial public offering (“public shares”) exercised their rights to
convert those shares to cash at a conversion price of $10.00 per share, or an aggregate of $10,123,790.
As consideration for their outstanding ordinary shares of WFG at Closing, the WFG Shareholders received an aggregate of 16,800,000 ordinary
shares of the Company, which includes 2,500,000 ordinary shares issued at the election of the WFG Shareholders to receive such shares in lieu of cash
consideration. The WFG Shareholders elected to receive no cash consideration.
Upon the Closing, Sino’s common stock, rights and units ceased trading and the Company’s ordinary shares began trading on the NASDAQ
Capital Market under the symbol “WINS”.
As noted above, the conversion price for holders of public shares electing conversion was paid out of the Company’s trust account, which had a
balance immediately prior to the Closing of approximately $30,677,210. Of the remaining funds in the trust account, $1,057,882 was used to pay
transaction expenses and the balance of $29,619,328 was released to the Company to be used for working capital purposes.
On December 13, 2016, Appelo Ltd. and Wits Global Ltd., each an entity controlled by Mr. Wang Hong (collectively, the “Sellers”) entered into
an agreement to transfer all of the ordinary shares of the Company owned by them (an aggregate of 13,440,000 ordinary shares (approximately 67% of the
Company’s outstanding ordinary shares)) to Freeman FinTech Corporation Limited (“Freeman”), a company listed on the Hong Kong Stock Exchange. In
connection with the transaction, the Seller transferred certain rights in a registration rights agreement to Freeman.
On August 2, 2017, Spectacular Bid Limited, a wholly owned subsidiary of Freeman, completed the acquisition of approximately 67% of the
Company’s outstanding shares.
On August 28, 2018, one of our subsidiaries entered into an agreement to acquire a 30% equity interest in HuiYue Finance Leasing (Ningbo) Co.,
Ltd. (“HuiYue”). HuiYue will be a joint venture between us, Mercury International Financial Leasing (Tianjin) Co., Ltd. (formerly translated as Chenxing
International (Tianjin) Financial Leasing Co., Ltd) and Zhongtou Jinchuang (China) Financial Holding Group Co., Limited (formerly translated as Sino
Investment Jinchuang Financial Holding Co., Ltd). On October 26, 2018, the agreement was amended so that our subsidiary would acquire only a 15%
interest in HuiYue. We will pay RMB 150 million (or approximately $22.7 million) for its 15% interest in HuiYue. Pursuant to the agreement, we were
required to pay the capital within thirty years, from the date of change of HuiYue’s company registration. The first payment of RMB 20 million ($3.0
million) was made on October 30, 2018. HuiYue will focus on the financial leasing of equipment relating to port logistics, construction machinery, energy
conservation and medicine in Ningbo, China. We believe that participating in this investment has the opportunity to boost our growth in the leasing sector
by leveraging the local financial, governmental and our client resources.
On June 9, 2020, the Changzhi Public Security Bureau (the “Bureau”) enforced a judgement against Jinchen Agriculture and Dongsheng
Guarantee, the Company’s wholly owned subsidiary. Pursuant to this action, the Bureau froze the assets of Jinchen Agriculture and Dongsheng Guarantee.
Our legal counsel was unable to determine the cause of the freeze as the authorities have not provided such information, but it has advised us that the
Company no longer has control of the assets or operations of Jinchen Agriculture and Dongsheng Guarantee. Therefore, until the freeze is lifted (and we
have not been provided any guidance about when the freeze would be lifted), we will not be able to consolidate Jinchen Agriculture and Dongsheng
Guarantee into our financial statements. Our other business is unaffected by the freeze and continue to operate normally.
We are subject to the provisions of the exempted company incorporated under the Companies Law (2013 Revision) of the Cayman Islands. Our
principal executive offices are located at 1F, Building1B, No. 58 Jianguo Road, Chaoyang District, Beijing 100024, People’s Republic of China, and our
US office is located at 1177 Avenue of the Americas, 5th Floor, New York, NY 10036. Our telephone number is 646-694-8538 and our website is located
at winsfinance.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this annual report).
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Principal Capital Expenditures
For a discussion of our capital expenditures, see Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
B. Business Overview
Overview
Our company is an integrated financing solution provider with operations located primarily in Jinzhong City, Shanxi Province and Beijing, China.
Our goal is to assist Chinese SMEs, which have limited access to financing, to improve their overall fund-raising capability and enable them to obtain
funding for business development. We principally operate in the following business lines:
·
·
·
Financial Guarantees — facilitating SMEs’ financing opportunities by acting as a guarantor to secure credit facilities from lending banks and
other financial institutions.
Financial Leasing — providing direct equipment leasing or purchase-lease-back services to SMEs, to satisfy SMEs’ working capital needs.
Financial Advisory Services — providing financial advisory services to our clients.
Financial Guarantees
Our company has a 12-year operating history in the financial guarantee business, which we started in 2006. We facilitate financing from banks to
SMEs by providing a guarantee to the lenders such that, in the event of a borrower’s default, we will repay the principal, interest and related fees and
expenses in connection with the underlying debt. We believe our guarantee services enable our SME customers to obtain financing from banks on better
terms, more conveniently, easily and quickly than in the absence of such guarantees.Over the past few years, most of our business has been concentrated in
Jinzhong City, Shanxi Province, through our subsidiaries Jinchen Agriculture and Dongsheng Guarantee.However,on June 9, 2020, the Changzhi Public
Security Bureau (the “Bureau”) enforced a judgement against Jinchen AgricultureandDongsheng Guarantee, the Company’s wholly owned subsidiary.
Pursuant to this action, the Bureau froze the assets of Jinchen Agriculture andDongsheng Guarantee. Ourappointed legal counsel was unable to determine
the cause of the freeze as the authorities have not provided such information, but it has advised us that the Company no longer has control of the assets or
operations of Jinchen Agriculture and Dongsheng Guarantee. Therefore, until the freeze is lifted (and we have not been provided any guidance about when
the freeze would be lifted), we will not be able to consolidate Jinchen Agriculture and Dongsheng Guarantee into our financial statements. As such, we
reported the assets and liabilities of the affected subsidiaries as a disposal group classified as held for sale.
Financial Leasing
Our financial leasing business was started as a way to supplement its financial guarantee business. Most of the financial leasing business at that
time was derived from our established guarantee clients, serving as an alternative financing solution for SME clients that owned unencumbered valuable
equipment.
In 2009, due to growing needs of SMEs outside our guarantee clients, we expanded our financial leasing business, forming a separate subsidiary
within our company in Beijing.
Financial Advisory and Agency Services
In addition to the provision of guarantee services and financial leasing, we also enter into separate financial consultancy services agreements with
customers, under which the customer pays us consultancy fees. We provide tailor-made financial consultancy services by proposing various customized
financing methods or products to customers and assisting customers in acquiring financing. In connection with these consultancy arrangements, our
customers may utilize our guarantee services depending on individual circumstances and if the customer satisfies our requirements and risk assessment
criteria. Under certain circumstances, our company could also act as a financing dealer between other financial leasing companies who need capital and
financial institutions who are willing to provide capital, in which case it would record a net of interest income for the transactions.
21
Industry Background
SMEs are A Major Driver of China’s Economy
SMEs have become an indispensable driver in promoting economic and employment growth in the PRC, driving technological and enterprise
system innovation and contributing to China’s economic transformation.
Lack of Financing for SMEs
The financing needs of SMEs have been largely underserved by traditional financial institutions. Chinese SMEs have:
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very limited financing sources. Chinese SMEs largely rely on bank loans. For the purpose of establishing market dominance through control
of national resource allocation, most commercial banks in China principally target large, state-owned companies and focus their financial
services on key clients, industries, regions and products;
very limited access to capital markets. China’s capital markets primarily support state-owned companies and large private companies, which
meet the established criteria of asset scale, revenue and net profit. Most SMEs in China are not qualified to go public and raise capital through
China’s capital markets.
Credit Gap between Banks and SMEs in China
Historically, traditional banks have been reluctant to lend to SMEs. Although in recent years, under government guidance, traditional banks are
attaching greater importance to serving SMEs, they are still reluctant to lend to SMEs for several reasons including:
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bank loans usually require borrowers to provide a full set of credit and asset ownership records, which SMEs generally lack;
commercial banks, which are mostly government owned, are able to maintain relatively high profit margins and avoid default risk by taking
advantage of the implicit government support provided to state enterprise borrowers, thereby having no incentive to serve SMEs;
SMEs usually have limited operating history and credit profiles, are vulnerable to economic downturns, and have a higher percentage of
defaults compared with large, state-owned companies; it is therefore difficult for banks to justify the risk when lending to SMEs; and
smaller regional or local banks, which have the potential to provide lending to SMEs, are still in an early stage of development and lack vision
and energy to aggressively enter this market.
As a result, there remains a significant unmet need for financial services to SMEs in China.
Financial Guarantee — Intermediary between Banks and SMEs
The history of China’s financial guarantee industry began in 1993, when the State Council approved the establishment of China National
Investment and Guaranty Co., Ltd. Although the financial guarantee industry grew slowly before 2000 with a limited number of guarantee companies
(most of which were owned by the government), it has since evolved into an established, regulated, well-recognized and fast-growing segment of China’s
financial services industry, dominated by private sector entities. In recent years, the financial guarantee industry played an active role in supporting SME
financing.
Financial Leasing — Rapid Growth
As financial leasing has increased in China, financial leasing companies devoted to expanding SME financial leasing services have emerged and
played an important role in SMEs upgrading their equipment and adopting new technologies. Manufacturer-dependent financial leasing companies (i.e.
captive leasing companies, owned by equipment manufacturers) are the major supplier of SME financial leasing services at present. Independent financial
leasing companies are expanding into the SME financial leasing field but have been constrained in their expansion due to financial limitations associated
with the significant capital requirements of the sector and immobilization of leased assets.
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Our Strengths
We believe that the following competitive strengths have contributed to its success and establishes a solid platform for future growth:
Primary focus on Chinese SMEs
We believe that our primary focus on meeting the financing needs of China SMEs has:
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given us specialized insight into the needs and behaviors of SMEs in China, and into the complexities of providing customized financing
solutions to specific customers as well as providing industry-wide financing solutions to SMEs in general, thereby enabling us to better
understand the business and credit environment customers face;
contributed to our strong brand reputation locally as a preferred partner for SMEs seeking financing solutions in China as well as for banks
which intend to increase their exposure to the SME lending market in China;
allowed us to utilize our industry knowledge and expertise to better meet the diverse financing needs of China SMEs by developing and
offering customized financing solutions that are more flexible and efficient compared to those offered by traditional commercial banks; and
allowed us to build long-term and enduring relationships with our SME customers.
Effective and practical risk management system for Chinese SME lending
With more than ten years of operating history in serving the financing needs of SMEs, which has sharpened our specialized insight into the
business and credit environment SMEs face, we can provide innovative financing solutions based upon the financing needs and creditworthiness of our
customers. As most SMEs lack collateral at a level required by traditional commercial banks and are therefore excluded from mainstream bank financing
sources, our financing solutions (including financial guarantees and financial leasing) help bridge the “credit-gap” between otherwise creditworthy SMEs
and traditional commercial banks in China. Our risk control system, built upon “Trusted Business Circles” of core customers, has proven to be extremely
cost-effective, practical and efficient under current conditions in China. Historically in China, due to the fact that the legal system is not fully developed,
business trust and honoring of business commitments exists in small circles of personal relationships rather than in a more objective environment. Lending
through core enterprises’ “Trusted Business Circles” resolves the information asymmetry in SME lending and provides transparency into customers’
business operations. See the section titled “Our Risk Management” below for additional information on our risk management policies. However, in 2019,
with the overall downturn of China’s economy and the implementation of China’s new policies(cid:0)strengthening financial risk control and deleveraging(cid:0)has
had a great impact on the liquidity of SMEs. For the sake of prudence, once the clients havebreached the contract, we will made provision for all the
uncollected principle and interests.
Experienced and motivated management team
We attribute our success to our experienced, dedicated, and motivated management team. Most of our management team members have over 10
years of experience in the financial industry. Certain senior management members also have extensive professional experience in highly regarded
multinational financial institutions, which contributes valuable industry awareness and risk management skills and enhances management capability. Our
company is committed to maintaining a capable and motivated leadership team which cultivates a market-oriented corporate culture, encourages innovation
and operating efficiency and focuses on staying sensitive to changing conditions in the SME sector and regulatory developments in the financial services
industry.
We maintain regular professional training programs for employees, and maintain a performance-based and career-driven corporate culture. We
provide a significant amount of personal autonomy to employees and encourage sales and marketing staff to source and service their customers as if it were
their own personal business. Our ability to retain professional and motivated employees has contributed to our success by maintaining and improving upon
the strict standards of our risk management system, as well as by providing trustworthy and professional financing solutions to customers.
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Our products
We currently offer the following principal products and services to our customers, which primarily constitute SMEs: (1) financial leasing; and (2)
financial advisory and agency services. The following table shows the components of revenue, their respective percentages of our net fee and interest
income for the period indicated:
Direct financing lease income
Financial advisory and agency income
Total revenues
Financial Leasing
For the years ended June 30,
2019
2018 (Restated)
US$’000
%
US$’000
%
7,596
-
7,596
100.0%
-%
100.0%
5,698
1,695
7,393
77.0%
23.0%
100.0%
Our financial leasing business was registered in 2009 for the purpose of providing financing through equipment leasing or equipment-purchase-
lease-back services to qualified SME clients.
Due to the loss of the control of our guarantee business, we are expanding our leasing operation outside of the guarantee business. We look for
leasing opportunities and clients across China rather than on a regional or local basis. We are currently applying two business strategies for our leasing
operation: (1) focusing on a few specific industries with experience and connections, including but not limited to new energy, vehicles, education
equipment, and medical devices; and (2) increasing fee revenue through advisory services.
We purchase the applicable asset (typically manufacturing equipment, but also other tangible assets including factory buildings) from the client,
and take ownership. We then lease the applicable asset back to the client and charge rent. Upon the expiration of the lease, the client pays a nominal fee
(e.g. US $1) to purchase the applicable asset and thereafter takes title and ownership of the asset.
Typical leasing terms include:
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Asset: Equipment, or some other tangible assets including factory buildings
Typical Leasing Terms:3 – 5 years
Leasing Rate:10 – 30% over the current bench mark lending rate of PBOC
Deposit: Based upon the client’s qualifications, a deposit of 1% - 10 % of contract amount is required from a new leasing client
Transaction Fee: Based upon the client’s qualifications
Advisory Fee: Based upon the services provided to clients
Lease Payment Term: Quarterly or semi-annually
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Financial Advisory and Agency Services
We also provide tailor-made financial consultancy services to clients by entering into consultancy services agreements. We may, at the customers’
request, provide (1) consultancy services alone, or (2) consultancy services together with financial leasing. We typically propose customized methods of
financing to customers according to their needs and circumstances and then assists customers to apply for financing. We may also recommend other
financing methods or financial products to customers. During the term of the financial consultancy services agreement, and within the services scope
prescribed in such agreement, we provide a variety of financial consultancy services including investigation, research, and locating the source of financing
and closing of financing. We also provide advice on financing and cash flow planning and management to better align customers’ cash generation activities
with their required repayment schedule, thereby improving their liquidity and reducing their default risk.
Most customers for financial consultancy services are SMEs. Many SMEs in China, due to their size of operation, lack experienced staff in
handling loan applications, and may not be familiar with compliance matters including relevant rules and regulations or lending bank’s requirements. With
our established cooperation with lending banks, experience in the financial services field and understanding of the requirements of lending banks, market
trends as well as financial products offerings in the market, we are able to provide all-round financial consultancy services to customers. In addition, our
financial consultancy services provide an attractive opportunity to expand and diversify our business and client base.
Under certain circumstances, we could also act as a dealer for other financing leasing companies, by providing short-term bridge loans (usually 90
days) against the leasing contracts and leasing receivables of these leasing company borrowers; and in the meantime, we would obtain a bridge loan from
other financial institutions at a discounted rate. Typically, the above processes occur simultaneously, and therefore, our resell risk is largely mitigated. In
very rare cases, if the leasing borrowers are in default, we will have to use our principal capital to repay the bridge loan to the financial institutions, and
hold the leasing contracts and leasing receivables. Therefore, we are very careful in selecting these types of transactions, and only accept a limited number
of transactions of this nature.
The provision of financial consultancy and agency services is within the scope of our business license.
Our Risk Management
Risk management is integral to the success of our business. Our risk operation model is based upon a “Trusted Business Circle” concept. China
has not yet developed sophisticated credit databases or credit reporting structures, which means that decisions to lend to Chinese SMEs frequently involve
reliance on company-provided information which is difficult to independently verify. Our Trusted Business Circle concept involves identifying potential
credit-worthy customers through their ongoing participation in an existing supply chain or other relationship with an existing core customer. The Trusted
Business Circle is embedded into each customer’s ongoing business activity, forming an ecosystem around that existing business activity. The Trusted
Business Circle contains core enterprises’ business partners, transaction partners, lending banks, major shareholders’ friends circle, etc., which provides an
opportunity for information verification and cross-referencing and some protection from default as new customers will want to preserve their relationships
within the Trusted Business Circle. The system can be scaled as each new participant creates its own Trusted Business Circle.
Principal of Our Risk Management
Our “Trusted Business Circle” refers to two types of relationships: (1) “industry chain”, meaning a core enterprise surrounded by a business circle
which has an industry chain upstream and downstream trading networks; and (2) “Business Connection”, meaning core enterprises’ business partners,
transaction partners, lending banks, major shareholders’ friends circle, etc. which can provide cross-referenced and additional information, transactional
history, and business performance regarding potential SME customers.
Typically, SMEs have a relatively high risk profile. Especially in the context of an economic downturn, SMEs have less capability to withstand
cyclical challenges compared with large privately-owned companies or state-owned enterprises. In addition, the regulatory and tax frameworks for SMEs
are not standardized, which creates some regulatory and tax risk exposure. SMEs also frequently have very limited credit profile and transaction data
available for evaluation during the lending process. In 2019, with the overall downturn of China’s economy has had a great impact on the most of the
China’s company. Among them, SMEs are relatively weak in risk tolerance, and bear the brunt of the adverse impact, leading to a substantial increase in
our provisions.
Our “Trusted Business Circle” model can, to a certain extent, resolve the issues inherent in SME loans, such as information asymmetry, risk
control difficulties and high borrowing costs. Within our operating history, this model has proved extremely effective and efficient in risk control, and has
enabled us to take on SME clients which would not normally have been accepted during a standard review process.
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The “Industry Chain” model refers to our reliance on core industry chain enterprises to evaluate all participants of an industry chain and design
customized and/or standardized financial services and products, offering integrated solutions to all enterprises within the industry chain. We typically target
one core enterprise in the targeted industry chain, which is either an existing trusted client of our company or a verifiably reputable or creditworthy
company, such as a state-owned enterprise. Surrounding this core enterprise, there are numbers of upstream and downstream SMEs. Through a
comprehensive analysis of the information flow, capital flow and logistics among the industry chain’s participants from downstream to upstream, we pick
qualified SMEs as clients.
The “Business Connection” model refers to our reliance on business “acquaintances” to crosscheck information to mitigate risks. For example,
potential clients may be directly referred by lending banks with which we are already working closely. Typically, “acquaintance” banks are able to share
additional information relating to those referred clients with us for risk assessment. Moreover, those SMEs referred by banks naturally value their
relationship with the banks, and would like to maintain good standing during and after any transaction with us.
Business Process Risk Management
We have a standard business process for reviewing, processing and approving a guarantee or leasing application.
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Application Acceptance: We consider whether to accept a client’s application for a guarantee or lease based upon an initial assessment of the
customer’s background and purpose of the request. Typically, potential SMEs clients falling into one of our “Trusted Business Circles” will
have much larger probability of acceptance.
Due Diligence: Typically, we review but do not fully rely on a client’s financial statements, which in China are sometimes of questionable
accuracy.
We like to access first-hand information which cannot be influenced by the clients. We usually conduct due diligence on the following aspects:
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Credit History: although the credit history of SMEs is often limited, we will deny those clients who have any default history with a bank or
other financial source;
On-Site Investigation: We determine from direct sources a client’s utility usage, which can help verify their level of business activity (with
quarterly monitoring of clients’ utility usage during the term of any transaction);
Public Information: We review employee hiring history in the prior 6 months. Increase in SME hiring typically correlates directly with
working capital requirements to expand production capacity. This information is easy to obtain from governmental sources;
Net Worth of Controlling Party: We typically limit transaction value to an amount which is smaller than the net worth of any controlling party
of the SME target;
Reputation of the Controlling Party: Typically, there is less risk is less if the reputation of controlling party is good;
Lifestyle of Controlling Party: Lifestyle of controlling party in the past 6 months is also important. Any changes could raise a concern; and
Counter-guarantee: We assess the quality and quantity of the above security measures to determine the extent to which a counter-guarantee is
required. Similar due diligence measures and standards are applied to any counter-guarantor.
Based upon the results of the due diligence review, our project manager prepares and submits a credit evaluation report for internal review and
approval.
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Signing, Closing and Auction Agreements: After internal authorization procedures have been approved, we will proceed with signing and
closing. At closing, we sign a pre-authorized auction agreement with any counter-guarantor and the client company pursuant to which, in the
event of a default, pledged collateral and/or other specified assets can be sold at auction immediately, at our discretion.
Portfolio Management: In cases where heightened risk is detected in the guarantee business, such as material changes to the customer’s
business or difficulties in repaying the underlying financing, our risk management team steps in and participates in any loan modification and
related discussions. If a customer defaults, we proceed with the collection process, through which we seek repayment of any defaulted
payment which is covered under the guarantee.
Collection: We have a standard collection procedure in ourcredit guarantee and financial leasing businesses. Our company initiates the
collection process when it covers defaulted payments or a customer defaults on the leasing facility grantees. Our business team and risk
management team negotiate the terms of a repayment plan with the defaulting customer and enter into a repayment agreement with such
defaulting customer. If the defaulting customer fails to make full repayment according to the repayment plan or we are unable to reach an
agreement with the defaulting customer regarding the repayment plan, we approach the third party counter-guarantors regarding the payment
of the loan (including default payment receivables) or, upon approval from the Risk Management Department at the group level, may take
necessary legal action, or directly put counter-guarantee assets in auction.
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Operational Risk Management
Operational risk is the risk resulting from inadequate or failed internal controls and systems, human error or external events. We consider
operational risk to be one of the major risks in the business sector and believes that this inherent risk can be controlled or mitigated through adequate and
comprehensive operational policies and procedures. We have applied the following measures:
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Established a vertical risk management system to ensure the independence of its risk management;
Continuously improve operational procedures and internal control systems, and utilizes IT systems to monitor and control the performance of
each procedure. In particular, we have adopted and have strictly implemented measures to prevent and detect potential employee fraud, such
as two-person investigation teams, segregation of business team and credit review team, multiple approval layers, onsite visits and inspection,
and interviews conducted by our high-level managers with the owner or management of the borrowers;
To seek proper damages and pursue legal proceedings, if necessary, if any misconduct by an employee is discovered; and
Continuously provides ethical education to all employees.
Our SME Clients and Clients’ Expansion Strategy
Clients
For the year ended June 30, 2019, there were 3 customers that accounted for 43%, 12% and 11% of the Jinshang Leasing’s revenue. For year
ended June 30, 2018, there were two customers that accounted for 15%and 14% of the Jinshang Leasing’s revenue.
As of June 30, 2019, two customers accounted for 45% and 12%, respectively, of the minimum lease payments receivable of Jinshang Leasing. As
of June 30, 2018, five customers accounted for 20%, 20%, 13%, 13% and 12%, respectively, of the minimum lease payments receivable of Jinshang
Leasing.
Client Expansion Strategy
Our principal client expansion strategies are through referrals and existing clients.
Referrals inside our “Business Connection” network. We maintain good relationships with a wide array of business entities, including lending
banks as well as past or existing SME clients. Some potential clients were referred by the lending banks which have existing cooperation relationships with
us. From time to time, some of our potential clients approach us through past or existing clients. Referrals are not subject to any referral fees or rebate
arrangements between us and our clients or lending banks.
Transaction partners inside the “Industry Chain” network. We identify well-qualified clients through past or existing clients as trusted members
and core enterprises of each industry chain in our network. We approach the supplier companies of these core enterprises as potential clients. As an
additional security component, we sometimes provide guarantees supported by supplier companies’ accounts receivables where the obligor is a core
enterprise customer. Through intervention by us with our existing trusted core enterprise, the supplier SME might receive faster turn-around on cash as
working capital, thereby mitigating the risk to us. In addition to our existing trusted SME clients, we look to well-regarded state-owned enterprises or large
private companies as potential core enterprise candidates.
27
Government Regulations
Foreign Investments
According to the Catalogue for the Guidance of Foreign Investment Industries (“Foreign Investment Catalogue”) promulgated by the Ministry of
Commerce of the PRC (“MOFCOM”) and the National Development and Reform Commission (“NDRC”) on June27, 2017 and effective as of July 28,
2017, investments by non-Chinese entities and individuals in financial guarantee and financial leasing business are permitted activities to be undertaken
through foreign investments.
Financial Guarantee Businesses
According to Interim Measures for the Administration of Financing Guarantee Companies (“Interim Measures”) promulgated by the Chinese
Banking Regulatory Commission, NDRC, the Ministry of Industry and Information Technology, the Ministry of Finance, MOFCOM, the People’s Bank of
China and the State Administration for Industry and Commerce, effective March 8, 2010:
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The regulatory department shall stipulate the minimum registered capital of a financing guarantee company in accordance with the local
condition, which shall not be less than RMB 5 million. The registered capital shall be paid-in monetary capital;
The balance of the financing guarantee liabilities provided by a financing guarantee company for any single individual guaranteed party shall
not exceed 10% of the net assets of the company, the balance of the financing guarantee liabilities provided for any single individual
guaranteed party and the affiliated parties thereof shall not exceed 15% of the net assets of the company, and the balance of the guarantee
liabilities provided for bond issuance by any single individual guaranteed party shall not exceed 30% of the net assets of the company;
The balance of the financing guarantee liabilities of a financing guarantee company shall not be more than 10 times its net assets;
A financing guarantee company shall make a provision for the unearned liability reserves in an amount equal to 50% of the income from
guarantee fees of the year and make a provision for the guarantee indemnity reserves in an amount equal to no less than 1% of the year-end
balance of the guarantee liabilities of the year. If the accumulative guarantee indemnity reserves reach 10% of the balance of the guarantee
liabilities of the year, provision shall be made for the guarantee indemnity reserves on the basis of the difference; and
· Where a financing guarantee company violates any law, regulation or Interim Measures and if there are provisions on punishment in the
relevant laws and regulations, it shall be punished in accordance with the provisions in Interim Measures. Otherwise, the regulatory
department shall order it to make rectifications and may give it a warning or fine. If a crime is constituted, it shall be subject to criminal
liabilities.
Financial Leasing Businesses
According to Measures for the Administration of Foreign-funded Lease Industry promulgated by the Ministry of Commerce, effective as of March
5, 2005andrepealed on February 22,2018:
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The total foreign-invested assets of a foreign-funded lease company or foreign-funded financing lease company may not be less than $5
million;
A foreign-funded financing lease company must have a registered capital of not less than $10 million;
For the purposes of preventing risks and guaranteeing the business operation security, generally, the risk assets of a financing lease company
shall not exceed 10 times of the total amount of the net assets of the company. Risk assets shall be determined on the basis of residue assets,
namely, the result after deducting the cash, bank deposits, national debts and entrusted lease assets from the total assets of the company.
In 2019(cid:0)the Ministry of Commerceannounced that it would transfer the responsibility of supervising financial leasing companies to the
CBRC, which will perform the relevant responsibilities from April 20. The new supervision system has not yet been announced, but it will certainly be
stricter than the original one announced by the Ministry of Commerce effective on March 5,2015.
Employment Matters
Laws and Regulations on Social Insurance
As required under Regulation of Insurance for Labor Injury which was amended on December 8, 2010 and effective January 1, 2011, Provisional
Insurance Measures for Maternity of Employees which took effect on January 1, 1995, Regulation of Unemployment Insurance which was promulgated on
and took effect on January 22, 1999, the Interim Regulations on the Collection and Payment of Social Insurance Premiums which was promulgated on and
took effect on January 22, 1999 and the Interim Provisions on Registration of Social Insurance which was promulgated on and took effect on March 19,
1999, enterprises are required to provide their employees in the PRC with welfare schemes covering pension insurance, unemployment insurance,
maternity insurance, injury insurance and medical insurance. An enterprise that fails to make social insurance contributions in accordance with the relevant
regulations may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline. If the enterprise fails to rectify the
non-compliance by the stipulated deadline set out by the government authorities, it can be assessed a late fee by the relevant authority in the amount of
0.2% of the amount overdue per day from the original due date.
28
In addition, on October 28, 2010, National People’s Congress Standing Committee promulgated the PRC Social Insurance Law, which became
effective on July 1, 2011, to clarify the contents of the social insurance system in the PRC. According to the PRC Social Insurance Law, employees within
the PRC must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the
employers must, together with their employees or separately, pay the social insurance premiums for such employees. According to this law, employees who
come from rural area shall participate in social insurance and foreigners working in the PRC may also participate in social insurance. An employer that fails
to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee of 0.05% of
the amount overdue per day from the original due date by the relevant authority. If the employer still fails to rectify the failure to make social insurance
contributions within such stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue.
Laws and Regulations on Housing Provident Fund
According to the Regulations on Management of Housing Provident Fund, which became effective on April 3, 1999 and was amended on March
24, 2002, enterprises in the PRC must undertake registration at the appropriate managing center of Housing Provident Fund and then, upon examination by
such managing center of Housing Provident Fund, undergo the procedures of opening an account of Housing Provident Fund for their employees at a
relevant bank. Enterprises are also obliged to pay and deposit required amounts with Housing Provident Fund in the full amount in a timely manner. An
enterprise that fails to make Housing Provident Fund contributions may be ordered to rectify the non-compliance and pay the required contributions within
a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement.
Legal Proceedings
Except as described below, we are not and have not been involved in any legal proceedings which may have, or have had, a significant effect on
our business, financial position and results of operations or liquidity, and we are not aware of any proceedings that are pending or threatened which may
have a significant effect on our business, financial position, results of operations, or liquidity. From time to time, we may be subject to legal proceedings
and claims in the ordinary course of business, principally personal injury and property casualty claims. We expect that these claims would be covered by
insurance, subject to customary deductibles. Any such claims, even if lacking merit, could result in the expenditure of managerial resources and materially
adversely affect its business, financial condition and results of operations.
The Company is involved in various legal actions arising in the ordinary course of its business. As of June 30, 2019, the Company was involved in
1lawsuits in China, which the Company is a defendant in relation to its financing lease business (see below). The cases are in the process of being enforced.
On October 31, 2014, King & Wood Mallesons filed a complaint in Xicheng District People's Court of Beijing on behalf of its client for breach of
contract against Jinshang Leasing, our subsidiary. On February 3, 2015, the court agreed with Jinshang Leasing that it did not have jurisdiction over the
proceeding, and the case was transferred to the court in Beijing, Haidian. There has been no activity in the case since it was transferred to the Beijing
Haidian court. We believe that resolution of this matter will not result in any payment that, in the aggregate, would be material to our financial position or
results of operations.
As of June 30, 2018, the Company and certain of its executive officers have been named as defendants in one civil securities lawsuit filed in U.S.
District Courts. On April 20, 2017, Michel Desta filed a securities class action complaint in the District Court for the Central District of California seeking
monetary damages against us, JianmingHao, Renhui Mu, Peiling (Amy) He, and Junfeng Zhao (entitled Desta v. Wins Finance Holdings, Inc., et al.; C.D.
Cal. Case No. 2:17-cv-02983) (hereafter, the “California Action”). On June 26, 2017, the Court issued an Order appointing lead plaintiffs and lead counsel,
and on August 25, 2017 lead plaintiffs filed an Amended Class Action Complaint. The Amended Complaint (which did not name Peiling (Amy) He as a
defendant), alleges a claim against us for securities fraud purportedly arising from alleged misrepresentations concerning Wins’ principal executive offices
(which alleged misrepresentations resulted in Wins being added to, and then removed from, the Russell 2000 index). On October 24, 2017, we moved to
dismiss the Amended Complaint for failure to state a claim as against us.
On March 1, 2018, the District Court for the Central District of California issued an Order denying the Company’s motion to dismiss. Thus, the
civil action has proceeded to the fact gathering “discovery” stage in respect to the Company.
As a result of a private mediation conducted in November 2018, the Company agreed in principle to settle the class action, on behalf of all
remaining defendants. The full terms of that settlement remain confidential (but include certain contingencies concerning shareholder participation in the
settlement and required court approvals). The court granted preliminary approval of the settlement by order entered on March 4, 2019. Given that the
Company has not yet received the necessary approvals from Chinese regulators as to the transfer of the settlement funds from China to the United States,
the Court entered an Order dated August 11, 2020 setting a final settlement approval hearing for March 22, 2021.
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On July 24, 2020, Samuel Kamau filed a shareholder class action complaint in the District Court for the Central District of California seeking
unspecified monetary damages for alleged violations of the United States Securities Exchange Act of 1934 during the period from October 31, 2018 to July
6, 2020 against Wins Finance Holdings Inc., Renhui Mu, and Junfeng Zhao (entitled Kamau v. Wins Finance Holdings, Inc., et al.; C.D. Cal. Case No.
2:20-cv-06656). Plaintiff’s initial complaint alleges, among other things, that Defendants purportedly violated the securities laws by failing to disclose that
the repayment of a RMB 580 million “loan” to Guohong Asset Management Co., Ltd. was “highly uncertain,” and that the resignation of the Company’s
former independent auditor was “foreseeably likely” given the non-payment of the foregoing loan as well as alleged material weaknesses in the Company’s
control over financial reporting.
The Amended Complaint does not specifically allege the damages purportedly suffered by the class, and we are not yet able to provide a reliable
estimate of any such damage claim. We believe that the claims from this proceeding are without merit and basis, we are vigorously defending this
proceeding.
C. Organizational Structure
The following is an organizational chart setting forth the ownership of our company’s subsidiaries as of the date of this Annual Report:
Our Current Corporate Structure
D. Property, Plants and Equipment
Our company office space at (a) 1177 Avenue of the Americas, 5th Floor New York, NY 10036, (b) 1F, Building 1B, No. 58. Jianguo Road,
Chaoyang District, Beijing, 100024, the PRC, and (c) No. 229.Yutai Road, Yuci District, Jinzhong City, Shanxi Province, 030600, the PRC. We believe that
its office space is sufficient for its current purposes.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
30
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial
statements and related notes included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking
statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information - Risk factors.” and elsewhere in this
Annual Report.
Correction of Prior Financial Information
Subsequent to the filling of Form 20F for the financial year ended June 30, 2018, management identified the following accounting errors:
1. As the fact of de-consolidation of subsidiaries Jinchen Agriculture and Dongsheng Guarantee, management reclassified the assets and liabilities of
Jinchen Agriculture and Dongsheng Guarantee to the disposal groups held for sale. The balance of total assets and liabilities of the disposal groups held for
sale as at 30 June, 2018 is $ 165,569,072 and $ 5,238,071 respectively. Management also reclassified the businesses of Jinchen Agriculture and Dongsheng
Guarantee in the consolidated statements of operations and comprehensive income and cash flows statement for the year ended 30 June 2018 into the
discontinued operation.
2. Management re-evaluate the collectability of the minimum lease payment according to some risks were identified after the 30 June, 2018. The provision
of allowance of minimum lease payment was understated with amount of $ 406,441 for the year ended June 30, 2018 and the balance of the allowance of
minimum lease receivable was overstated with amount of $ 399,451.
3. There was a total of $ 33,685 interest expense should be recorded in the year ended of 30 June, 2018. This error overstated the net profit before tax of $
33,685 and understated the interest payable of $ 33,105 as at 30 June, 2018.
4. Income tax impact of the errors stated in 2 and 3 above totaled $ 39,142 which understate the net profit for the year ended June 30, 2018 and understated
the income tax payable with amount of $ 61,394 as at June 30, 2018.
5. The Company understated deferred tax assets of $ 99,862 as at June 30, 2018.
6. The Company understated the balance of minimum lease payment receivable and deposit from leases recorded in other payable with total amount of $
977,690.
7. The Company understated the interest income from financial leasing and overstated the income from agency business with amount of $ 466 for the year
ended June 30, 2018.
Overview
Wins Finance, a Cayman Island holding company with business operations in China, is a leading and integrated lending solution provider mainly serving
small-and-medium sized enterprises (SMEs) in Jinzhong City, Shanxi Province and Beijing, China. We are currently providing two financial products and
one supplementary service:
·
·
·
Financial Guarantees: We act as a guarantor both to access and share credit risks and to facilitate financing arrangements between SMEs and
banks; we will repay principal, interest and fees and expenses related to the guaranteed loan in the event that a customer default;
Financial Leasing (or Capital Leasing): We provide direct equipment leasing or purchase-leaseback services to SMEs, to satisfy SMEs’ cash flow
needs;
Financing advisory: We structure suitable financing solutions for SME clients based upon their needs and qualifications, designed to help SMEs
save on taxes, lower financing costs, and provide other benefits.
Our financial guarantee business was mainly conducted by Dongsheng Guarantee, which was incorporated on February 22, 2006 in Jinzhong City, Shanxi
Province. It typically provides a one-year term of guarantee for customers’ loans and the guarantee scope typically covers the principal amount and interest.
guarantee fee, which is calculated with reference to the principal amount, annual guarantee fee rate and the term of the guarantee, ranges from 2% to 4%.
However, on June 9, 2020, the Changzhi Public Security Bureau enforced a judgement against Jinchen Agriculture and its subsidiaryDongsheng Guarantee,
and all the information and assets of those companies was frozen and can’t be obtained. Because of this, Jinchen Agriculture and Dongsheng Guarantee are
no longer under our control and their operations have been seriously and adversely affected. We have not consolidated the financial results of Jinchen and
Dongsheng with our results for 2019 due to our lack of control of these entities. The authorities have not explained to the us the reasons for the asset freeze
and do not know when, or if, the freeze will be lifted.
31
Credit risks, including customer defaults from the guarantee business and impairment losses on the investment in financial leases, are inherent in our
business. Our risk control system, based upon our “Trusted Business Circle” of core enterprises, has proved practical and efficient given the limitations in
the current credit system in China. During these periods there were several financial leasing contracts outstanding. The impaired losses of our lease
receivables were $81.6million and $3.5million for the years ended June 30, 2019 and 2018, respectively.
Our net revenue (excluding financial guarantee business), which consists primarily of direct financing lease interest income, financial advisory and lease
agency income, was $(74.5) million for the year ended June 30, 2019, representing a decrease of $76.7million or 3,435%, from $2.2million for the year
ended June 30, 2018. We note that the impairment allowance for the investment in financial leases that have affected our operating results are non-cash
items and represent Management’s assessment of the default risk of itsfinance leasing customers. Interest on investment securities was $0.1million for the
year ended June 30, 2019, representing a decrease of $3.8million or 97.3% from $ 3.9million for the year ended June 30, 2018.Net lossfrom continuing
operation was $(58.2) million for the year ended June 30, 2019, representing a decrease of $59.4million, or 4,950%, from net profit from continuing
operation$1.2million for the year ended June 30, 2018.
On June 9, 2020, the Changzhi Public Security Bureau (the “Bureau”) enforced a judgement against Jinchen Agriculture and Dongsheng Guarantee, the
Company’s wholly owned subsidiaries. Pursuant to this action, the Bureau froze the assets of Jinchen Agriculture and Dongsheng Guarantee. Our
appointed legal counsel was unable to determine the cause of the freeze as the authorities have not provided such information, but it has advised us that the
Company no longer has control of the assets or operations of Jinchen Agriculture and Dongsheng Guarantee. Therefore, until the freeze is lifted (and
wehave not been provided any guidance about when the freeze would be lifted), we will not be able to consolidate Jinchen Agriculture and Dongsheng
Guarantee into our financial statements. The operations will be discontinued, so the net income from Jinchen Agriculture and Dongsheng Guarantee will be
reported as Income from discontinued operations, $8.4 million and $8.9 million for the year ended June 30,2019 and 2018, respectively.
32
Key Factors that Affect Operating Results
Our operating subsidiaries are incorporated, and our operations and assets are primarily located, in the PRC. Accordingly, our results of operations,
financial condition and prospects are affected by China’s economic and regulation conditions in the following factors: (a) an economic downturn in China
or any regional market in China;(b) economic policies and initiatives undertaken by the PRC government; (c) changes in the PRC or regional business or
regulatory environment affecting the SME and microenterprise sector; (d) changes to prevailing market interest rates; (e) a higher rate of bankruptcy; (f) the
deterioration of the creditworthiness of SMEs and microenterprises in general; and (g) the change of currency exchange rate of RMB to USD. Unfavorable
changes could affect demand for the services that we provide and could materially and adversely affect the results of operations. Although we have
generally benefited from China’s economic growth and the policies to encourage lending to SMEs, we are also affected by the complexity, uncertainties
and changes in the PRC economic conditions and regulations governing the non-banking financial industry.
Our results of operations are also affected by the impairment allowance for the investment in financial leases which are a non-cash item and represent an
assessment of the risk of future impairment losses. The amount of provisions or allowances has been recorded based on management’s assessment. We may
increase or decrease the allowance for impairment losses for investment in financial leases based on any such change of economic conditions and the
change of management’s assessment. Any change in the loan losses would have an effect on our financial condition and results of operations.
We hold a significant amount ofinvestment securities in assets management products issued by banks and financial institutions, including government
bonds, corporate bonds and central bank notes. The interest income on these assets highly depends on market interest rate in the market of investment
products especially government bonds and corporate bonds, and the management ability of the asset management companies. Any changes on the market
conditions will affect our interest income from those investments and then the financial results.
33
Results of Operations
Year Ended June 30, 2019 Compared to Year Ended June 30, 2018
Direct financing lease income
Direct financing lease interest income
Interest expense for direct financing lease
Business collaboration fee and commission expenses for leasing projects
Provision for lease payment receivable
Net direct financing lease interest income after provision for
receivables
Financial advisory and lease agency income
Net revenue
Non-interest income
Interest on investment securities-held to maturity
Total non-interest income
Non-interest expense
Business taxes and surcharge
Salaries and employees charges
Rental expenses
Other operating expenses
Total non-interest expense
Income before taxes
Income tax credit
NET (LOSSES)/INCOME
For the years ended June 30,
2019
2018
Changes
$
%
$
7,595,992 $
(411,066)
(68,342)
(81,585,960)
Restated
5,697,957 $
(1,546,304)
(99,320)
(3,514,961)
1,898,035 $
1,135,238
30,978
(78,070,999)
33.31%
(73.42%(cid:0)
(31.19%(cid:0)
2,221.11%
(74,469,376)
537,372
(75,006,748)
-
(74,469,376)
1,695,303
2,232,675
(1,695,303)
(76,702,051)
(13,958.07%(cid:0)
(100.00%(cid:0)
(3,435.43%(cid:0)
105,878
105,878
3,942,719
3,942,719
(3,836,841)
(3,836,841)
(15,827)
(542,628)
(102,859)
(2,062,802)
(2,724,116)
(9,911)
(540,312)
(175,549)
(4,554,030)
(5,279,802)
(5,916)
(2,316)
72,690
2,491,228
2,555,686
(77,087,614)
895,592
(77,983,206)
18,900,720
(58,186,894)
322,038
1,217,630
18,578,682
(59,404,524)
(97.31%(cid:0)
(97.31%(cid:0)
59.69%
0.43%
(41.41%(cid:0)
(54.70%(cid:0)
(48.40%(cid:0)
(8,707.45%(cid:0)
(5,769.10%(cid:0)
(4,878.70%(cid:0)
(cid:0)5.68%(cid:0)
$ (cid:0)593.22%(cid:0)
Income from discontinued operation
Total Net (Losses) /Income
8,377,166
(49,809,728) $
8,881,255
10,098,885 $
(504,089)
(59,908,613)
$
34
Net Revenue
Our net revenue consists of commissions and fees on our direct financing lease interest income and financial advisory and lease agency income. Net
revenue decreased by $76.7 million, or 3,435.4% to $(74.5) million for the year ended June 30, 2019, compared to $2.2 million for the year ended June 30,
2018. The decrease was primarily attributable to the decrease of $75.0million in net direct financing lease interest income and $1.7 million in financial
advisory and lease agency income. The decrease is mainly due to the worsening of China’s economy and strict macro-control of the Chinese government
over financial policy, which leads to fewer financing opportunities for our main customers.
Net commissions and fees on financial guarantee services, net direct financing lease interest income, and financial advisory and lease agency income, for
the year ended June 30, 2019 were nil, $(74.8) million and nil, respectively.
For the years ended June 30,
2019
2018(Restated)
Changes
USD
$ (74,469,376)
-
$ (74,469,376)
Percentage
of Revenue
100.0% $
-
100.0% $
USD
537,372
1,695,303
2,232,675
Percentage
of Revenue
$
24.0% $ (75,006,748)
76.0%
(1,695,303)
100.0% $ (76,702,051)
%
(13,958.1)%
(100.0)%
(3,435.4)%
Net direct financing lease interest income
Financial advisory and agency income
Total
Direct financing lease income
Direct financing lease interest income
Direct financing lease interest income increased by $1.9 million, or 33.3%, to $7.6 million for the year ended June 30, 2019, compared to $5.7 million for
the year ended June 30, 2018. The increase was primarily attributable to new contracts signed which aggregated $67.1 million.
Interest expense for capital lease
Interest expense for capital leases represents the interest incurred on the long-term loans from banks and other financial institutions for financial support for
capital leases. Interest expense for capital leases decreased by $1.1million, or 73.4%, to $0.4 million for the year ended June 30, 2019, compared to $1.5
million for the year ended June 30, 2018. The decrease was primarily attributable to the decrease in the average balance of outstanding loans from banks
and other financial institutions.
Business collaboration fee and commission expenses for leasing projects
We pay fees and commissions on collaboration for leasing projects for services rendered during the transaction process. Such fee and commissions
decreased by 31.2% for the year ended June 30, 2019, compared to the year ended June 30, 2018.
Provision for lease payment receivable
We accrue allowances for the impairment on our investment in direct financing leases based on historical experience and an estimate of collectability of the
lease receivables. Provision for lease payment receivable increased by $78.1million, to $81.6million, for the year ended June 30, 2019, from $3.5million
for the year ended June 30, 2018. The increase was primarily attributable toadjustment of China’s economic policy (strengthening financial risk controls
and deleveraging), which has significantly impacted the financing capacity of SMEs and the economic recession in China, which led to the shortage of
working capital and the increase in default risk of our SME customers. Jinshang Leasing made a specific allowance of $85.0million and $3.5million for the
year ended June 30, 2019 and 2018, respectively, for customers individually evaluated for impairment. Jinshang Leasing also made a general allowance of
$0.2 million and $0.8million for the years ended June 30, 2019 and 2018, respectively, for customers collectively evaluated for impairment. On grounds of
prudence, if the client default, we will make allowance for all uncollected principal and interests (including the amount due and not due) as provision.
Net direct financing lease interest income after provision for receivables
Net direct financing lease interest income after provision for receivables decreased by $75.0 million, or 13,958.07%, to $(74.5) million for the year ended
June 30, 2019, compared to $0.5 million for the year ended June 30, 2018.
Financial advisory and agency income
Financial advisory and lease agency income decreased by $1.7 million to nil for year ended June 30, 2019, from $1.7 million for the year ended in June 30,
2018.
35
Non-interest income
Interest on investment securities
Interest on investment securities decreased by $3.8million to $0.1 million for the year ended June 30, 2019, compared to $3.9million for the year ended
June 30, 2018. The decrease was primarily attributable to the decrease of average balance of investment securities.
Non-interest expenses
Non-interest expenses mainly consisted of business tax and surcharges, salary and benefits for employees, office rental expenses, traveling costs,
depreciation of equipment, lawyer's fees, professional fees, consultation fees and office supplies. Non-interest expenses decreased by $2.6million, or
48.4%, to $2.7million for the year ended June 30, 2019, compared to $5.3million for the year ended June 30, 2018. The decrease was primarily caused by a
decrease in legal and professional fees from $2.3 million in the year ended June 30, 2018 to $0.4million in the year ended June 30, 2019.
Non-interest expenses - Other operating expenses
Legal and professional fees
Audit fees
Impairment on investment securities
Depreciation
Settlement fee for class action
Others
Total
For the years ended June 30,
2019
2018
Restated
$
$
483,336 $
240,665
-
13,820
1,260,000
64,981
2,062,802 $
2,371,324
384,646
1,272,723
113,424
-
411,913
4,554,030
The decrease in other operating expenses was mainly caused by: (i) a decrease in legal and professional fees amounting $0.5 million and $2.5 million in the
years ended June 30, 2019 and 2018, respectively, with the decrease in 2019due in part to a decline in legal fees incurred in connection with a Class Action
litigation; (ii) an impairment loss of $1.3 million in the year ended June 30, 2019 on a promissory note (included in investment securities), plus accrued
interest, which we purchased from a third party in January 2016 with a principal amount of $1.0 million, originally bearing interest at 12% per annum and
due in January 2017. No such amount was recorded in the year ended June 30, 2018.
Income taxes
The income tax rate of our PRC subsidiaries is 25% pursuant to the Enterprise Income Tax (“EIT”) Law. According to the Tax Regulation Caishui [2012]
No. 25 issued by the Ministry of Finance of the People’s Republic of China, credit guarantee institutions for SMEs are subject to a pre-tax deduction for the
provision of default losses equal to 1% of the outstanding guarantee balance, and 50% of guarantee income in current year should be deferred and taxable
in the next year. According to Tax Regulation Caishui [2008] No.1, the income from investment in assets management products is subject to a tax-
exemption.
Income tax credit increased by $18.6 million to a tax credit of $18.9million, for the year ended June 30, 2019, compared to a tax credit of $0.3million for
the year ended June 30, 2018. The increase was primarily attributable to the sharply increase of provision for lease payment receivable. For the years ended
June 30, 2019 and 2018, losses before taxes excluding the interest on investment securities and offshore expenses was $78.5 million and $1.8million,
respectively.
36
Net income from continuing operation
As a result of the above, net income from continuing operations decreased by $59.4 million, or 4,878.7%, to $(58.2) million for the year ended June 30,
2019, compared to $1.2 million for the year June 30, 2018.
Income from discontinued operation
On June 9, 2020, the Changzhi Public Security Bureau (the “Bureau”) enforced a judgement against Jinchen Agriculture. Pursuant to this action, the
Bureau froze the assets of Jinchen Agriculture and its subsidiary Dongsheng Guarantee. Our appointed legal counsel was unable to determine the cause of
the freeze as the authorities have not provided us with any information. The legal counsel has advised us that we no longer have control of the assets or
operations of Jinchen Agriculture. Therefore, until the freeze is lifted (and wehave not been provided any guidance about when the freeze will be lifted), we
will not be able to consolidate Jinchen Agriculture into our financial statements, so we are accounting for the frozen assets and liabilities as discontinued
operation. For the year ended June 30,2019 and 2018, income from discontinued operation was $8.4 million and $8.9 million. We have plans to dispose
Jinchen Agriculture and Dongsheng Guarantee once we are able to do so when the freeze by the Bureau is lifted.
Critical Accounting Policies and Estimates
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, management reviews these
estimates using information then currently available. Changes in facts and circumstances may cause Wins Finance to revise its estimates. Material estimates
that are particularly susceptible to significant change in the near-term include the determination of the allowances for doubtful accounts receivable and for
guarantee losses.
Significant accounting estimates reflected in the financial statements include, but are not limited to: (i) the allowance for doubtful receivables; (ii) estimates
of losses on unexpired contracts and financial guarantee service contracts; (iii) accrual of estimated liabilities; (iv) useful lives of long-lived assets; (v)
impairment of long-lived assets; (vi) valuation allowance for deferred tax assets; (vii) contingencies; and (viii) share-based compensation.
.
Operating segments
ASC 280, Segment Reporting, requires companies to report financial and descriptive information about their reportable operating segments, including
segment profit or loss, certain specific revenue and expense items, and segment assets. All of the Company’s activities are interrelated, and each activity is
dependent and assessed based on how each of the activities of the Company supports the others.
The Company’s chief operating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results to make
decisions about allocating resources and assessing performance for both the financing lease business and the guarantee business. The Company’s net
revenues are all generated from customers in the PRC. Hence, The Company operates and manages its business within one reportable segment, which is to
provide financial services in the PRC domestic market.
For the year ended June 30, 2019, there were 3 customers that accounted for 43%, 12% and 11% of the Jinshang Leasing’s revenue, respectively. For the
year ended June 30, 2018, there were two customers that accounted for 15% and 14% of the Jinshang Leasing’s revenue, respectively.
As of June 30, 2019, two customers accounted for 45% and 12%, respectively, of the minimum lease payments receivable of Jinshang Leasing. As of June
30, 2018, five customers accounted for 20%, 20%, 13%, 13% and 12%, respectively, of the minimum lease payments receivable of Jinshang Leasing.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less that are
unrestricted as to withdrawal and use.
37
Restricted Cash
Restricted cash represents cash pledged to banks by Wins Finance’s subsidiary Jinshang Leasing. The banks providing loans to the Company and to pledge
a cash deposit of 10% of the loan amount to an time deposit account that is restricted from use. The deposit is released after the bank loan is paid off.
Investments securities – held to maturity
Investments in non-marketable asset management products issued by banks and financial institutions (the issuers) with original maturities of one year or
three or five years are classified as investment securities – held to maturity ("HTM"). The Company’s asset management products are managed by banks
and financial institutions and invested in fixed-income financial products that are permitted by the China Securities Regulatory Commission (“CSRC”),
such as government bonds, corporate bonds and central bank notes. The investment portfolios of these products are not disclosed to the Company by the
banks or financial institutions.
HTM securities are those securities in which the Company has the ability and intent to hold the security until maturity. HTM securities are recorded at
amortized cost. Premiums and discounts on HTM securities are amortized or accreted over the life of the related HTM security as an adjustment to yield
using the effective-interest method. There were no such premiums or discounts on HTM securities for any of the reporting periods presented herein.
A decline in the market value of any HTM securities below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying
amount to fair value. To determine whether an impairment is other-than-temporary, the Company considers all available information relevant to the
collectability of the security, including past events, current conditions, and reasonable and supportable forecasts when developing an estimate of cash flows
expected to be collected. The Company regularly evaluates the potential for impairment of the HTM securities, in particular when conditions indicate a
potential for impairment, but not less than annually. There was no impairment noted for any of the reporting periods presented herein.
Interest income from HTM securities is recognized when the Company’s right to receive payment is established. Accrued but unpaid interest income is
recorded as interest receivable in the accompanying consolidated balance sheets.
Net investment in direct financing lease
Lease contracts that Jinshang Leasing enters with financing lease customers transfer substantially all the rewards and risks of ownership of the leased
assets, other than legal title, to the customers. These financing lease contracts are accounted for as direct financing leases in accordance with ASC 840-10-
25 and ASC 840-40-25. At the inception of a transaction, the cost of the leased property is capitalized at the present value of the minimum lease payment
receivables and the unguaranteed residual value of the property at the end of the lease. The difference between the sum of (i) the minimum lease payment
receivables and the unguaranteed residual value and (ii) the cost of the leased property is recognized as unearned income. Unearned income is recognized
over the period of the lease using the effective interest rate method.
Net investment in direct financing leases is recorded at net realizable value consisting of minimum lease payments to be received less allowance for
uncollectible, as needed, and less the unearned income. The allowance for lease payment receivable losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is
based on Jinshang Leasing’s loss history, known and inherent risks in the transactions, adverse situations that may affect the lessee’s ability to repay, the
estimated value of any underlying asset, current economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires
material estimates that may be susceptible to significant revision as more information becomes available. While management uses the best information
available upon which to base estimates, future adjustments to the allowance may be necessary if economic conditions differ substantially from the
assumptions used for the purposes of analysis.
Jinshang Leasing provides “Specific Allowance” for the lease payment receivable of lease transactions if any specific collectability risk is identified, and a
“General Allowance”, based on total minimum lease payment receivable balance of those transactions with no specific risk identified, to be used to cover
unidentified probable loss. Jinshang Leasing performs periodic and systematic detailed reviews to identify credit risks and to assess the overall
collectability, and may adjust its estimates on allowance when new circumstances arise.
Revenue recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) on January 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.
38
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 were no material changes to the
Company’s consolidated financial statements upon adoption of ASC 606.
Direct financing lease interest income
Direct financing lease interest income is recognized on an accrual basis using the effective interest method over the term of the lease by applying the rate
that discounts the estimated future minimum lease payment receivables through the period of the lease to the amount of the net investment in the direct
financing lease at inception.
The accrual of financing lease interest income is discontinued when a customer becomes 90 days or more past due on its lease or interest payments to
Jinshang Leasing, unless Jinshang Leasing believes the interest is otherwise recoverable. Leases may be placed on non-accrual earlier if Jinshang Leasing
has significant doubt about the ability of the customer to meet its lease obligations, as evidenced by consistent delinquency, deterioration in the customer’s
financial condition or other relevant factors. Payments received while the lease is on non-accrual are applied to reduce the amount of the recorded value.
Jinshang Leasing resumes accruing the interest income when Jinshang Leasing determines that the interest has again become recoverable, as, for example,
if the customer resumes payment of the previous interest, and shows material improvement in its operating performance, financial position, and similar
indicators.
Financial advisory and agency income
Jinshang Leasing provide financing solutions to customers and receive advisory fees as compensation. The Company earns advisory fee income from a
range of services it provides to its customers at a point in time. Revenue for those services is recognized when the transactions are completed.
As a licensed finance lease Company, Jinshang Leasing acts as agent in finance lease transactions between other finance lessors and lessees, or between
banks and lessees. Jinshang Leasing neither receives the benefit of receiving the lease payments nor assumes the repayment obligations in these
transactions. The lease agency income and advisory fees received in these transactions are recognized as income on a net basis during the service period as
the related service obligations are completed.
Jinshang Leasing acts as a financing agency between other financial leasing companies that need capital and financial institutions that are willing to provide
capital. Other financial leasing companies factor to Jinshang Leasing their right to collect capital lease receivables in order to obtain capital from Jinshang
Leasing, and Jinshang Leasing factors to other financial institutions its right to collect debts from these financial leasing companies in order to finance
entirely the capital that Jinshang Leasing provides to other financial leasing companies. All of these factoring transactions are structured with recourse
rights to the assignor of the receivable. Specifically, the financial institutions bear the credit risk should the financial leasing companies fail to repay capital
lease receivables. Financial agency income that Jinshang Leasing earns from factoring transactions is accrued monthly as net interest income and payments
that Jinshang Leasing makes on factoring loans from financial institutions are accrued monthly as interest cost, in each case in accordance with the terms of
the factoring loan contracts. Jinshang Leasing recorded net interest income of nil in each of the years ended June 30, 2019 and 2018 on these financing
agency transactions.
Contract Balances
For the year ended June 30, 2019 and 2018, the Company did not have any significant incremental costs of obtaining contracts with customers incurred
and/or costs incurred in fulfilling contracts with customers within the scope of ASC Topic 606, that shall be recognized as an asset and amortized to
expenses in a pattern that matches the timing of the revenue recognition of the related contract.
As of June 30, 2019 and 2018, the Company does not have any contract assets (unbilled receivables) since revenue is recognized when the performance
obligation is fulfilled and the payment from customers is not contingent on a future event.
Advances received from customers related to unsatisfied performance obligations are recorded as contract liabilities (unearned income), which will be
recognized as revenues upon the satisfaction of performance obligations through the transfer of related promised services to customers.
39
Allocation to Remaining Performance Obligations
The Company has elected to apply the practical expedient in paragraph ASC Topic 606-10-50-14 and did not disclose the information related to transaction
price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2019 and 2018, because either the performance
obligation of the Company’s contracts with customers has an original expected duration of one year or less or the Company has a right to consideration
from a borrower or a customer in an amount that corresponds directly with the value to the borrower or the customer of the Company’s performance
completed to date, therefore the Company may recognize revenue in the amount to which the Company has a right to invoice or collect.
Property and equipment
Plant and equipment are recorded at cost less accumulated depreciation and impairment. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, with 3% salvage value. The average estimated useful lives of property and equipment are discussed in Note 8in the
financial statements.
The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the corresponding accounts and includes
any gain or loss in the statements of income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major
additions and improvements of equipment are capitalized.
Impairment of long-lived assets
The Company applies the provisions of ASC No. 360 Sub topic 10, “Impairment or Disposal of Long-Lived Assets” (ASC 360-10) issued by the Financial
Accounting Standards Board (“FASB”). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from
the use and eventual disposition of the asset. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the
carrying value exceeds the fair value.
The Company tests long-lived assets, including property and equipment and finite-lived intangible assets, for impairment at least annually or more
frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount of the assets is greater than their fair value. Assets
are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The
Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of
the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected
undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The
estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments.
The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
There were no impairment losses on long-lived assets in the years ended June 30, 2019 and 2018.
Non-marketable equity investments
On August 28, 2018, a subsidiary of the Company entered into an agreement to acquire a 30% equity interest in HuiYue Finance Leasing (Ningbo) Co.,
Ltd. (“HuiYue”). HuiYue will be a joint venture between the Company, Mercury International Financial Leasing (Tianjin) Co., Ltd. (formerly translated as
Chenxing International (Tianjin) Financial Leasing Co., Ltd) and ZhongtouJinchuang (China) Financial Holding Group Co., Limited (formerly translated as
Sino Investment Jinchuang Financial Holding Co., Ltd). The Company was originally required to pay RMB 300 million ($43.7 million) for its 30% interest
in HuiYue.
On October 26, 2018, the parties to the agreement entered into an amendment providing that the Company would acquire only a 15% equity interest in
HuiYue (instead of the originally contemplated 30%) for RMB150 million ($21.8 million). Pursuant to the agreement, the Company was required to pay the
capital within thirty years, from the date of change of HuiYue’s company registration. The first payment of RMB 20 million ($2.9 million) was made on
October 30, 2018. HuiYue will focus on the financial leasing of equipment relating to port logistics, construction machinery, energy conservation and
medicine in Ningbo, China. The Company believes that participating in this investment has the opportunity to boost the Company’s growth in the leasing
sector by leveraging the local financial, governmental and client resources of the Company.
The Company elected to record its equity investments in this privately held company using the measurement alternative at cost, less impairment, with
subsequent adjustments for observable price changes resulting from orderly transactions for identical or similar investments of the same issuer, since the
Company does not have significant influence over HuiYue and its investment in HuiYue is without readily determinable fair value. There was no
observable price change for the year ended June 30, 2019.
40
Equity investments in HuiYue accounted for using the measurement alternative are subject to periodic impairment reviews. The Company's impairment
analysis considers both qualitative and quantitative factors that may have a significant effect on the fair value of these equity securities.
All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in non-interest income (expenses). Dividend income is
recognized when the right to receive the payment is established.
Fair value measurements
ASC Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information for 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all non-financial assets
and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
Level 1 - inputs are based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and
liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing
the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow
models, and similar techniques.
As of June 30, 2019 and 2018, financial instruments of the Company primarily consisted of cash, restricted cash, accounts receivables, other receivables,
and bank and other loans which were carried at cost or amortized cost on the consolidated balance sheets, and carrying amounts approximated their fair
values because of their generally short maturities or the rate of interest of these instruments approximate the market rate of interest.
Foreign currency translation
The Company’s functional and reporting currency is the United States Dollar (“US dollars” or “USD”). The functional currency of the Company’s
subsidiaries in the PRC is the Chinese Yuan, or Renminbi (“RMB”).
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of
exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional
currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of
operations.
For financial reporting purposes, the financial statements of the Company’s subsidiaries are prepared using RMB and translated into the Company’s
functional currency at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate in effect at each balance
sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders' equity is translated at
historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in
stockholders’ equity.
Balance sheet items, except for equity accounts
June 30,
2019
June 30,
2018
6.8680
6.6191
For the years ended June
30
2019
2018
Items in the statements of income and comprehensive income, and statements of cash flows
6.8221
6.5052
Interest expense
Interest expense arising from the loans providing funds for financial leasing contracts is classified as cost of revenue in the consolidated statements of
income.
Non-interest expenses
Non-interest expenses primarily consist of salary and benefits for employees, travel cost, entertainment expense, depreciation of equipment, office rental
expense, professional service fees, office supplies, and similar items.
41
Income taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” ASC 740 requires a Company to use the asset and
liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment of the changes.
Under ASC 740, a 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. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Operating leases
The Company leases its office premises under lease agreements that qualify as operating leases. The Company adopted ASU No. 2016-02 and related
standards (collectively ASC 842, Leases), which replaced previous lease accounting guidance, on January 1, 2019 using the modified retrospective method
of adoption. The Company elected the transition method expedient which allows entities to initially apply the requirements by recognizing a cumulative-
effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not
been restated.
Disposal groups (or non-current assets) held-for-sale and discontinued operations
Disposal groups (or non-current assets) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction
and a sale is considered highly probable. The disposal groups or the non- current assets (except for certain assets as explained below) are stated at the lower
of carrying amount and fair value less costs to sell. Deferred tax assets, assets arising from employee benefits, financial assets (other than investments in
subsidiaries and associates) and investment properties, which are classified as held for sale, would continue to be measured in accordance with the
significant accounting policies set out elsewhere in Note 20.
A discontinued operation is a component of the Company’s business, the operations and cash flows of which can be clearly distinguished from the rest of
the group and which represent a separate major line of business or geographic area of operations, or is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
When an operation is classified as discontinued, a single amount is presented in the income statement, which comprises the post-tax profit or loss of the
discontinued operation and the post-tax gain or loss recognized on the measurement to fair value less costs to sell, or on the disposal, of the assets or
disposal groups constituting the discontinued operation.
Commitments and contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a
wide range of matters, including, among other things, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss
Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of the loss
can be reasonably estimated.
42
Liquidity and Capital Resources
We have funded working capital and other capital requirements primarily by equity contribution from shareholders, cash flow from operations, and bank
and other loans. Cash is required to maintain security deposits at banks, to issue capital leases to customers, to repay debts, to make default payments,
salaries, office rental expenses, income taxes and other operating expenses.
Our management believes that current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the
next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other developments, and
may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar
actions. If it is determined that the cash requirements exceed the amount of cash and cash equivalents on hand, we may seek to issue debt or equity
securities or obtain a credit facility.
The following summarizes the key components of our cash flowsfrom continuing operations for the years ended June 30, 2019 and 2018:
Net cash (used in) provided by operating activities
Net cash provided by investing activities
Net cash used in financing activities
Effect of exchange rate change on cash, cash equivalents and restricted cash
Net (decrease) increase in cash and cash equivalents and restricted cash
For the years ended
June 30,
2019
$
$
(37,713,446) $
48,386,950
(17,200,372)
(6,536,360)
(13,063,228) $
2018
Restated
6,687,904
25,669,861
(20,578,208)
(1,351,788)
10,427,769
Net cash used in operating activities was approximately $37.7million for the year ended June 30, 2019, while net cash provided by operating activities was
approximately $6.7million for the year ended June 30, 2018. The net cash used in operating activities for the year ended June 30, 2019 mainly consisted of
$41.7million of cash used in minimum lease payment receivable. The net cash provided by operating activities for the year ended June 30, 2018 mainly
consisted of $10.1million of cash provided by the net income of current year (excluding non-cash provision for guarantees, and lease payment receivables
and impairment loss on investment securities totaled $4.8 million), offset by $12.0 million of cash used in interest receivable.
Net cash provided by investing activities was approximately $48.4 million for the year ended June 30, 2019, while net cash provided by investing activities
was approximately $25.7 million for the year ended June 30, 2018. Net cash provided by investing activities for the year ended June 30, 2019 mainly
consisted of $46.9 million of proceeds from maturities of investment securities and $4.4 million of withdrawal of pledged bank deposits offset by $2.9
million of deposits paid to banks for financial leasing services. Net cash provided by investing activities for the year ended June 30, 2018 mainly consisted
of $36.4million of proceeds from maturities of investment securities, offset by $10.8 million of purchases of investment securities.
Net cash used in financing activities was approximately $17.2 million for the year ended June 30, 2019, while net cash used in financing activities was
approximately $20.6 million for the year ended June 30, 2018.Net cash used in financing activities for the year ended June 30, 2019 and 2018 consisted of
$17.2 million and $20.6 million to repay long term loans respectively.
43
Commitments and Contractual Obligations
The following table presents our material contractual obligations as of June 30, 2019 and 2018:
Contractual Obligations
Bank loans for capital lease business–principal
Total as at
June 30,
2019
Less than 1 year
1 – 3 years
3 – 5
years
5+
years
amount
$
338,763
338,763
- $
- $
Other loans for capital lease business– principal
amount
Due to a related party
Operating lease obligations
377,393
464,000
194,089
1,374,245
377,393
464,000
194,089
1,374,245
$
-
-
$
-
-
-
- $
Contractual Obligations
Bank loans for capital lease business–principal
Total as at
June 30,
2018
(Restated)
Less than 1 year
1 – 3 years
3 – 5
years
5+
years
amount
$
13,696,574
13,345,068
351,506 $
Other loans for capital lease business– principal
amount
Due to a related party
4,774,510
464,000
18,935,084
4,382,920
464,000
18,191,988
$
391,590
-
743,096 $
- $
-
-
- $
-
-
-
-
-
-
-
-
-
44
Off-balance Sheet Arrangements
During the year ended June 30, 2018, Jinshang Leasing and a third party jointly entered into certain finance lease contracts with a customer with total
contract amount of $70.1 million (RMB464 million). Jinshang Leasing provides financing to the customer of $6.4 million (RMB44 million)(included in
Note 6- net investment in direct financing leases) and the third party provides the remaining financing of $61.2 million (RMB420 million), for a period up
to August 2020. Jinshang Leasing also acts as a guarantor and is obligated to pay the third party if the customer fails to pay the obligations when they
become due. As of June 30, 2019, the maximum guarantee issued by Jinshang Leasing was $67.3 million (RMB462 million).
Disposal groups (or non-current assets) held-for-sale and discontinued operations
Disposal groups (or non-current assets) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction
and a sale is considered highly probable. The disposal groups or the non-current assets (except for certain assets as explained below) are stated at the lower
of carrying amount and fair value less costs to sell. Deferred tax assets, assets arising from employee benefits, financial assets (other than investments in
subsidiaries and associates) and investment properties, which are classified as held for sale, would continue to be measured in accordance with the
significant accounting policies set out elsewhere in Note 20.
A discontinued operation is a component of the Company’s business, the operations and cash flows of which can be clearly distinguished from the rest of
the group and which represent a separate major line of business or geographic area of operations, or is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
When an operation is classified as discontinued, a single amount is presented in the income statement, which comprises the post-tax profit or loss of the
discontinued operation and the post-tax gain or loss recognized on the measurement to fair value less costs to sell, or on the disposal, of the assets or
disposal groups constituting the discontinued operation.
Impact of Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance
supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. In addition, there are disclosure requirements related to the nature,
amount, timing, and uncertainty of revenue recognition. On July 1, 2018, we adopted ASC 606, applying the modified retrospective method to contracts
that were not completed as of July 1, 2018. The adoption did not have a material impact on retained earnings as of July 1, 2018. Results for reporting
periods beginning on or after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in
accordance with our historic accounting under ASC 605. Additional disclosures have been made. Please see the Notes to Consolidated Financial
Statements for details.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities.
This guidance amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main provisions require
equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured
at fair value through earnings, unless they qualify for a measurement alternative. The new guidance will require modified retrospective application to all of
our outstanding instruments beginning July 1, 2018, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the
first period in which the guidance becomes effective. However, changes to the accounting for equity securities without a readily determinable fair value
will be applied prospectively. Additional disclosures have been made. Please see the Notes to Consolidated Financial Statements for details.
In November 2016, the FASB issued ASU No. 2016-18, Statements of Cash Flows (Topic 230): Restricted Cash. This guidance requires that a statement of
cash flows explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The standard is effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. The standard should be applied to each period presented using a
retrospective transition method. The adoption of this standard resulted in our restricted cash being included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
45
Other accounting standards adopted beginning July 1, 2018 do not have a significant impact on the Company’s consolidated financial statements.
Impact of Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) for recognition of credit losses on financial instruments,
which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year
entities), with early adoption permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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. We do not intend to adopt the new standard early and are currently evaluating the impact the new guidance
will have on our financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required recognize the following for all
leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee's obligation to make lease payments
arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use
of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must
recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU
are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. We are
evaluating this ASU and have not yet determined the effect of this standard on its ongoing financial reporting.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement, which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the
financial statements. The amendments in the new guidance remove, modify and add certain disclosure requirements related to fair value measurements
covered in Topic 820, Fair Value Measurement. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted for either the entire standard or only the requirements that modify or eliminate the disclosure requirements,
with certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. We are currently evaluating the
impact of adopting this guidance.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities,
which modifies the guidance related to indirect interests held through related parties under common control for determining whether fees paid to decision
makers and service providers are variable interest. ASU 2018-17 is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019 and early adoption is permitted. We are currently evaluating the impact of adopting this guidance.
46
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior management
The following table sets forth information for our executive officers, directors and director nominees as of the date of this Annual Report. Unless
otherwise stated, the address for our directors and executive officers is c/o WINS Finance Holdings Inc. 1F, Building 7, No. 58 Jianguo Road, Chaoyang
District, Beijing 100024, PRC.
Name
Renhui Mu
Yuchan Cheng
Xiaofeng Zhong (1)(2)(3)
Jiyi Li (1)(2)(3)
Weiqi Chen (1)(2)(3)
Age
45
39
41
47
35
Position(s)
Chairman, Chief Executive Officer, Chief Operating Officer and Director
Chief Financial Officer
Director
Director
Director
(1)
(2)
(3)
Member of our Audit Committee.
Member of our Compensation Committee.
Member of our Nominating Committee
Executive Officers and Directors
Renhui Mu has served as Chief Operating Officer since October 2015 and as a Chairman and Chief Executive Officer since April 2017. Mr. Mu
has served as our Co-Chief Executive Officer from October 2015 to April 2017. Mr. Mu joined the Company in October 2013 and served as its Chief
Executive Officer and Chief Operating Officer since such date. Previously, Mr. Mu served as a Deputy General Manager of China CITIC Bank (China)
Enterprise Bank Department and General Manager of CITIC Bank (China) Enterprise Bank Beijing Branch from January 2010 to September 2013. From
December 2006 to December 2009, Mr. Mu served as Vice President of ABN Beijing Branch Enterprise Bank Department. From January 2005 to
December 2006, Mr. Mu served as Vice President of Energy and Resource Department in HSBC Bank. From 2000 to January 2005, Mr. Mu served as
investment director in the water business department of Hong Kong Inter China Holdings Company. Mr. Mu is a licensed attorney. He obtained his Master
degree of civil law and commercial law from Tsinghua University and his Bachelor degree of Arts in English from Tsinghua University in the PRC.
Yuchan Cheng has served as our Chief Financial Officer since August 2020. Ms. Yuchan Cheng served as finance director at Runfa Investment
Group, a private investment company focuses on the energy industry, from April 2019 to June 2020. From May 2017 to January 2019, she served as
finance Director at Beijing Tong Cheng Yi Long Network Technology Co. LTD, an internet finance company. Ms Cheng also served as finance director at
OMEGA International Group, an U.S. privately owned company focusing on professional services (consulting, finance/accounting, legal) from August
2013 to March 2017. She served as finance manager at China National Software & Service Co, LTD from November 2008 to July 2013. Ms. Cheng is a
certified Tax Agent and Senior Accountant. She got her Bachelor of Management from Beijing Jiaotong University.
47
Xiaofeng Zhong has served as a member of our board of directors and the Chairman of Audit committee since August 2017. Mr. Zhong has
served as the Vice President of CIF Investment Fund Management Co., Ltd., a subsidiary of China Citic Group since April 2014. From January 2008 until
April 2014, Mr. Zhong was the Vice President of Ping An Innovation Capital Investment Co., Ltd., a subsidiary of China Ping An Group. From February
2002 until December 2017, Mr. Zhong was a manager at Deloitte Touche Tohmatsu. He received a Master degree in Finance from Fudan University and a
Bachelor degree in International Accounting from Shenzhen University.
Jiyi Li has served as an independent director for the Company since June 2020. Mr. Jiyi Li founded Beijing Microdouble Technology Ltd, an IT
company focus on on-line children robot training, in 2018 and has served as its General Manager since then. Previously, Mr. Li served as investment
partner at Shengjing Wanglian Technology LLC, a funding company equity invested into SMEs, from August 2015 to January 2018. From October 2012 to
August 2015, Mr. Li served as co-founder at Beijing Yunzheng IT Ltd, an on-line finance company. From September 2011 to October 2012, Mr. Li served
as secretary of the board and managing partner at Shengjing Wanglian Technology LLC. From February 2008 to September 2011 he served as secretary of
the board at Beijing Sumavision Technology LLC. Mr. Li is a licensed attorney. He got his Master of civil law and commercial law from Tsinghua
University.
Weiqi Chen has served as an independent director for the company since August 2017. Mr. Chen has been a partner in Autobot Capital, a Venture
Investment Fund, since June 2015. He worked for Shenzhen K&C Capital as an investment manager from September 2011 to December 2014. Mr. Chen
served for Shenzhen GTJA Investment Group as an associate from February 2009 to August 2011.He worked in the PSF Department of HSBC Shenzhen
Branch from January 2008 to December 2008. Mr. Chen holds a Bachelor degree in Economics from the School of Economics at Shenzhen University.
Arrangements Concerning Election of Directors; Family Relationships
Our current board of directors consists of five directors. We are not a party to, and are not aware of, any voting agreements among our
shareholders. In addition, there are no family relationships among our executive officers and directors.
B. Compensation
The aggregate compensation paid and other payments expensed by us to our directors and executive officers with respect to the year ended June
30, 2019and 2018was $89,708 and $109,021 respectively. This amount includes approximately $14,951 and $10,177 for the year ended June 30, 2019 and
2018 respectively, set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel,
professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in
our industry.
Employment Agreements with Executive Officers
We have entered into a written employment agreement with Renhui Mu and Yuchan Cheng. These agreements contain provisions customary for a
company in our industry regarding non-competition and confidentiality of information, but do not provide for a minimum term of employment. The
enforceability of covenants not to compete in China and the United States may be subject to limitations.
Our agreement with each of Mr. Mu and Ms. Cheng does not provide for benefits upon the termination of employment with us, other than
payment of salary and benefits during the required notice period for termination of the agreement.
48
C. Board Practices
Board of Directors
Independence of Directors
As a result of our ordinary shares being listed on Nasdaq we adhere to the rules of Nasdaq in determining whether a director is independent. The
Nasdaq listing standards define an “independent director” as a person, other than an executive officer of a company or any other individual having a
relationship which, in the opinion of the issuer’s board of directors, would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. Consistent with these considerations, our board of directors has determined that Xiaofeng Zhong, Jiyi Li and Weiqi Chen are
independent directors of our company. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Board Leadership Structure and Role in Risk Oversight
Mr. Mu serves as Chairman of the Board of Directors and as Chief Executive Officer of our company. We believe in the importance of
independent oversight and we will endeavor to ensure that this oversight is truly independent and effective through a variety of means, including:
·
·
·
Having a majority of the board be considered independent.
At each regularly scheduled Board meeting, all independent directors will typically be scheduled to meet in an executive session without the
presence of any management directors.
The charters for each of standing committees of the Board will require that all of the members of those committees be independent.
Given the small size of the Board of Directors, we do not believe that Mr. Mu’s combined role of Chief Executive Officer and Chairman impact
the independent oversight of our majority independent board
Meetings and Committees of the Board of Directors
Audit Committee Information
The audit committee of our board of directors is comprised of Xiaofeng Zhong, Jiyi Li and Weiqi Chen. Xiaofeng Zhong serves as the chairman of
the audit committee. Each of the members of the audit committee is independent under the applicable Nasdaq listing standards. The purposes of the audit
committee, as specified in our Audit Committee Charter, include, but are not limited to:
reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the
board whether the audited financial statements should be included in our Form 20-F;
discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the
preparation of our financial statements;
discussing with management major risk assessment and risk management policies;
·
· monitoring the independence of the independent auditor;
·
verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible
for reviewing the audit as required by law;
reviewing and approving all related-party transactions;
inquiring and discussing with management our compliance with applicable laws and regulations;
pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of
the services to be performed;
appointing or replacing the independent auditor;
determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work;
establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting
controls or reports which raise material issues regarding our financial statements or accounting policies; and
approving reimbursement of expenses incurred by our management team in identifying potential target businesses.
·
·
·
·
·
·
·
·
·
Financial Experts on Audit Committee
Our audit committee will at all times be composed exclusively of “independent directors,” as defined for audit committee members under the
Nasdaq listing standards and the rules and regulations of the SEC, who are “financially literate,” as defined under Nasdaq’s listing standards. Nasdaq’s
listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet,
income statement and cash flow statement. We are required to certify to Nasdaq that the audit committee has, and will continue to have, at least one
member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience
or background that results in the individual’s financial sophistication. The Board of Directors has determined that Xiaofeng Zhong satisfies Nasdaq’s
definition of financial sophistication and also qualify as an “audit committee financial expert” as defined under rules and regulations of the SEC.
Nominating Committee Information
The nominating committee of our board of directors is comprised of Xiaofeng Zhong, Jiyi Li and Weiqi Chen. Each of the members of the
nominating committee is independent under the applicable Nasdaq listing standards. The nominating committee is responsible for overseeing the selection
of persons to be nominated to serve on our board of directors.
Guidelines for Selecting Director Nominees
The nominating committee will consider persons identified by its members, management, shareholders, investment bankers and others. The
guidelines for selecting nominees, which are specified in our Nominating Committee Charter, generally provide that persons to be nominated:
·
·
·
should have demonstrated notable or significant achievements in business, education or public service;
should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a
range of skills, diverse perspectives and backgrounds to its deliberations; and
should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the shareholders.
The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity
and professionalism in evaluating a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or
attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time and will also consider the overall experience
and makeup of its members to obtain a broad and diverse mix of board members. The nominating committee will not distinguish among nominees
recommended by shareholders and other persons.
Compensation Committee Information
The compensation committee of our board of directors is comprised of Xiaofeng Zhong, Jiyi Li and Weiqi Chen. The compensation committee’s
duties, which are specified in our Compensation Committee Charter, include, but are not limited to:
·
·
·
·
·
·
·
·
reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation,
evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration
(if any) of our Chief Executive Officer’s based on such evaluation;
reviewing and approving the compensation of all of our other executive officers;
reviewing our executive compensation policies and plans;
implementing and administering our incentive compensation equity-based remuneration plans;
assisting management in complying with our annual report disclosure requirements;
approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers
and employees;
if required, producing a report on executive compensation to be included in our annual report or proxy statement; and
reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
49
Indemnification of Directors and Officers
The Companies Law (2013 Revision) of the Cayman Islands permits the Company to indemnify its directors, officers, employees and agents,
subject to limitations imposed by the Companies Law. Our Memorandum and Articles of Association require us to indemnify directors and officers to the
full extent permitted by the Companies Law. We have also entered into indemnification agreements with its officers and directors that provide for
indemnification to the maximum extent allowed under the Companies Law.
D. Employees
As of June 30, 2019, we had 24 full-time employees. We recruit personnel from the open market and enter into employment contracts with
employees. We offer competitive remuneration packages to employees, including salaries and bonuses to qualified employees. We provide staff training on
a regular basis to enhance employees’ knowledge of financial products in the market and the applicable laws and regulations in relation to the industry in
which we operate.
E. Share Ownership
Share Ownership of Executive Officers and Directors
For information concerning the beneficial ownership of our ordinary shares by our executive officers and directors, see the table in Item 7A.
“Major Shareholders and Related Party Transactions—Major shareholders.”
On February 14, 2017, Wins Finance terminated the option agreements with our directors and executive officers for no consideration.
As a result of the termination of such options and the automatic termination of options upon the previously announced departures of executive
officers and directors of the Company, as of June 30, 2019, the Company did not have any options outstanding.
2015 Long Term Incentive Equity Plan
General
On April 10, 2015, our board of directors adopted the 2015 Long-Term Equity Incentive Plan (the “2015 Plan”), subject to the approval of Sino’s
shareholders. The 2015 Plan was approved by Sino’s shareholders on October 16, 2015. The purpose of the 2015 Plan is to assist in attracting, retaining,
motivating, and rewarding certain key employees, officers, directors, and consultants of the Company and its affiliates and promoting the creation of long-
term value for shareholders of the Company by closely aligning the interests of such individuals with those of such shareholders. The 2015 Plan authorizes
the award of share-based incentives to encourage eligible employees, officers, directors, and consultants, as described below, to expend maximum effort in
the creation of shareholder value.
Summary of the 2015 Plan
The 2015 Plan may be administered by the board of directors or a committee of the board. All references in the 2015 Plan to “committee” mean
the board, if no committee has been designated to administer the plan. If administered by a committee, such committee shall be composed of at least two
directors, all of whom are “outside directors” within the meaning of the regulations issued under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “IRC”) and “non-employee” directors within the meaning of Rule 16b-3 under the Exchange Act. Initially, the compensation committee will
administer the 2015 Plan.
Subject to the provisions of the 2015 Plan, the committee determines, among other things, the persons to whom from time to time awards may be
granted, the specific type of awards to be granted, the number of shares subject to each award, share prices, any restrictions or limitations on the awards,
and any vesting, exchange, deferral, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions related to the awards.
Shares Subject to the Plan
10% of our ordinary shares have been reserved for issuance in accordance with the plan’s terms. Ordinary shares subject to other awards that are
forfeited or terminated will be available for future award grants under the plan. Ordinary shares that are surrendered by a holder or withheld by the
Company as full or partial payment in connection with any award under the plan, as well as any ordinary shares surrendered by a holder or withheld by the
Company or one of its subsidiaries to satisfy the tax withholding obligations related to any award under the plan, shall not be available for subsequent
awards under the plan.
Under the plan, on a change in the number of ordinary shares outstanding as a result of a dividend on ordinary shares payable in ordinary shares,
share forward split or reverse split or other extraordinary or unusual event that results in a change in the ordinary shares as a whole, the terms of the
outstanding award will be proportionately adjusted.
50
Eligibility
The Company may grant awards under the plan to employees, officers, directors and consultants who are deemed to have rendered or to be able to
render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success
of the Company. An incentive share option may be granted under the plan only to a person who, at the time of the grant, is an employee of the Company or
a related company.
Types of Awards
Options. The plan provides both for “incentive” share options as defined in Section 422 of the IRC, and for options not qualifying as incentive
options, both of which may be granted with any other share based award under the plan.
The board or committee determines the exercise price per ordinary share purchasable under an incentive or non-qualified share option, which may
not be less than 100% of the fair market value on the day of the grant or, if greater, the par value of an ordinary share. However, the exercise price of an
incentive share option granted to a person possessing more than 10% of the total combined voting power of all classes of the Company’s share capital may
not be less than 110% of the fair market value on the date of grant. The aggregate fair market value of all ordinary shares with respect to which incentive
share options are exercisable by a participant for the first time during any calendar year (under all of the Company’s plans), measured at the date of the
grant, may not exceed $100,000 or such other amount as may be subsequently specified under the IRC or the regulations thereunder.
An incentive share option may only be granted within a ten-year period from the effective date of the plan and may only be exercised within ten
years from the date of the grant, or within five years in the case of an incentive share option granted to a person who, at the time of the grant, owns ordinary
shares possessing more than 10% of the total combined voting power of all classes of the Company’s share capital.
Subject to any limitations or conditions the board or committee may impose, share options may be exercised, in whole or in part, at any time
during the term of the share option by giving written notice of exercise to the Company specifying the number of ordinary shares to be purchased. The
notice must be accompanied by payment in full of the purchase price, either in cash or, if provided in the agreement, in the Company’s securities or in
combination of the two.
Generally, share options granted under the plan may not be transferred other than by will or by the laws of descent and distribution and all share
options are exercisable, during the holder’s lifetime, only by the holder (or in the event of legal incapacity or incompetency, the holder’s guardian or legal
representative). However, a holder, with the approval of the board or committee, may transfer a non-qualified share option by gift to a family member of
the holder, by domestic relations order to a family member of the holder or by transfer to an entity in which more than 50% of the voting interests are
owned by family members of the holder or the holder.
Generally, if the holder is an employee, no share options granted under the plan may be exercised by the holder unless he or she is employed by
the Company or one of its subsidiaries at the time of the exercise and has been so employed continuously from the time the share options were granted.
However, in the event the holder’s employment is terminated due to disability, the holder may still exercise his or her vested share options for a period of
12 months or such other greater or lesser period as the board or committee may determine, from the date of termination or until the expiration of the stated
term of the share option, whichever period is shorter. Similarly, should a holder die while employed by the Company or a subsidiary, his or her legal
representative or legatee under his or her will may exercise the decedent holder’s vested share options for a period of 12 months from the date of his or her
death, or such other greater or lesser period as the board or committee may determine or until the expiration of the stated term of the share option,
whichever period is shorter. If the holder’s employment is terminated due to normal retirement, the holder may still exercise his or her vested share options
for a period of 12 months from the date of termination or until the expiration of the stated term of the share option, whichever period is shorter. If the
holder’s employment is terminated for any reason other than death, disability or normal retirement, the share option will automatically terminate, except
that if the holder’s employment is terminated by the Company without cause, then the portion of any share option that is vested on the date of termination
may be exercised for a period of three months (or such other greater or lesser period as the committee may specify in the award agreement) from the date of
such termination or until the expiration of the stated term of the share option, whichever period is shorter.
Share Appreciation Rights. Under the plan, the committee may grant share appreciation rights in tandem with a share option or alone and
unrelated to a share option. The committee may grant share appreciation rights to participants who have been, or are being, granted share options under the
plan as a means of allowing the participants to exercise their share options without the need to pay the exercise price in cash. In conjunction with non-
qualified share options, share appreciation rights may be granted either at or after the time of the grant of the non-qualified share options. In conjunction
with incentive share options, share appreciation rights may be granted only at the time of the grant of the incentive share options. A share appreciation right
entitles the holder to receive a number of ordinary shares having a fair market value equal to the excess fair market value of one ordinary share over the
exercise price of the related share option, multiplied by the number of shares subject to the share appreciation right. The granting of a share appreciation
right in tandem with a share option will not affect the number of ordinary shares available for awards under the plan. The number of shares available for
awards under the plan will, however, be reduced by the number of ordinary shares acquirable upon exercise of the share option to which the share
appreciation right relates.
Restricted Shares. Under the plan, the committee may award restricted shares either alone or in addition to other awards granted under the plan.
The board or committee determines the persons to whom grants of restricted shares are made, the number of shares to be awarded, the price if any to be
paid for the restricted shares by the person receiving the shares, the time or times within which awards of restricted shares may be subject to forfeiture, the
vesting schedule and rights to acceleration thereof, and all other terms and conditions of the restricted share awards.
The plan requires that all restricted shares awarded to a holder remain in The Company’s physical custody until the restrictions have terminated
and all vesting requirements with respect to the restricted shares have been fulfilled. The Company will retain custody of all dividends or distributions
made or declared with respect to the restricted shares during the restriction period. A breach of any restriction regarding the restricted shares will cause a
forfeiture of the restricted shares and any retained distributions. Except for the foregoing restrictions, the holder will, even during the restriction period,
have all of the rights of a shareholder, including the right to vote the shares.
51
Other Share-Based Awards. Under the plan, the committee may grant other share-based awards, subject to limitations under applicable law, that
are denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, ordinary shares, as deemed consistent with
the purposes of the plan. These other share-based awards may be in the form of purchase rights, ordinary shares awarded that are not subject to any
restrictions or conditions, convertible or exchangeable debentures or other rights convertible into ordinary shares and awards valued by reference to the
value of securities of, or the performance of, one of the Company’s subsidiaries. These other share-based awards may include performance shares or
options, whose award is tied to specific performance criteria. These other share-based awards may be awarded either alone, in addition to, or in tandem
with any other awards under the plan or any of the Company’s other plans.
Accelerated Vesting and Exercisability
If any one person, or more than one person acting as a group, acquires the ownership of our ordinary shares that, together with the shares held by
such person or group, constitutes more than 50% of the total fair market value or combined voting power of our ordinary shares, and the Company’s board
of directors does not authorize or otherwise approve such acquisition, then the vesting periods of any and all share options and other awards granted and
outstanding under the plan shall be accelerated and all such share options and awards will immediately and entirely vest, and the respective holders thereof
will have the immediate right to purchase and/or receive any and all ordinary shares subject to such share options and awards on the terms set forth in the
plan and the respective agreements respecting such share options and awards. An increase in the percentage of shares owned by any one person, or persons
acting as a group, as a result of a transaction in which the Company acquires its shares in exchange for property is not treated as an acquisition of shares.
The committee may, in the event of an acquisition by any one person, or more than one person acting as a group, together with acquisitions during
the 12-month period ending on the date of the most recent acquisition by such person or persons, of assets from the Company that have a total gross fair
market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately before such acquisition or
acquisitions, or if any one person, or more than one person acting as a group, acquires the ownership of the Company ordinary shares that, together with the
shares held by such person or group, constitutes more than 50% of the total fair market value or combined voting power of the Company ordinary shares,
which has been approved by the Company’s board of directors, (i) accelerate the vesting of any and all share options and other awards granted and
outstanding under the plan, or (ii) require a holder of any award granted under the plan to relinquish such award to the Company upon the tender by the
Company to the holder of cash in an amount equal to the repurchase value of such award. For this purpose, “gross fair market value” means the value of the
assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets and “repurchase
value” means the aggregate fair market value of the shares (if the award to be settled is comprised of ordinary shares) or the aggregate difference between
the fair market value of the shares and the exercise price of the award (if the award is a share option or share appreciation right).
Notwithstanding any provisions of the plan or any award granted thereunder to the contrary, no acceleration shall occur with respect to any award
to the extent such acceleration would cause the plan or an award granted thereunder to fail to comply with Section 409A of the IRC.
Award Limitation
No participant may be granted awards for more than 1% of the outstanding shares of the Company in any calendar year.
Other Limitations
The board or committee may not modify or amend any outstanding option or share appreciation right to reduce the exercise price of such option or
share appreciation right, as applicable, below the exercise price as of the date of grant of such option or share appreciation right. In addition, no option or
share appreciation right may be granted in exchange for the cancellation or surrender of an option or share appreciation right or other award having a higher
exercise price.
Withholding Taxes
Upon the exercise of any award granted under the plan, the holder may be required to remit to the Company an amount sufficient to satisfy all
federal, state and local withholding tax requirements prior to delivery of any certificate or certificates for ordinary shares.
Term and Amendments
Unless terminated by the board, the plan shall continue to remain effective until no further awards may be granted and all awards granted under
the plan are no longer outstanding. Notwithstanding the foregoing, grants of incentive share options may be made only until ten years from the date of the
consummation of the acquisition. The board may at any time, and from time to time, amend the plan, provided that no amendment will be made that would
impair the rights of a holder under any agreement entered into pursuant to the plan without the holder’s consent.
52
United States Federal Income Tax Consequences
The following discussion of the United States federal income tax consequences of participation in the plan is only a summary of the general rules
applicable to the grant and exercise of share options and other awards and does not give specific details or cover, among other things, state, local and
foreign tax treatment of participation in the plan. The information contained in this section is based on present law and regulations, which are subject to
being changed prospectively or retroactively. This summary also assumes that participants are individual citizens or residents of the United States and does
not address the passive foreign investment company rules of the IRC, which are discussed generally in the section of this Annual Report under Item 10.E
“Taxation – United States Federal Income Taxation – U.S. Holders – Passive Foreign Investment Company Rules.”
Incentive Share Options. Participants will recognize no taxable income upon the grant of an incentive share option. The participant generally
will realize no taxable income when the incentive share option is exercised. The excess, if any, of the fair market value of the shares on the date of exercise
of an incentive share option over the exercise price will be treated as an item of adjustment for a participant’s taxable year in which the exercise occurs and
may result in an alternative minimum tax liability for the participant. The Company will not qualify for any deduction in connection with the grant or
exercise of incentive share options. Upon a disposition of the shares after the later of two years from the date of grant or one year after the transfer of the
shares to a participant, the participant will recognize the difference, if any, between the amount realized and the exercise price as long-term capital gain or
long-term capital loss, as the case may be, if the shares are capital assets.
If ordinary shares acquired upon the exercise of an incentive share option is disposed of prior to the expiration of the holding periods described
above, the participant will recognize ordinary compensation income in the taxable year of disposition in an amount equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the exercise price paid for the shares; and the Company will qualify for a deduction equal to any
amount recognized, subject to the limitation that the compensation be reasonable.
Non-Qualified Share Options. With respect to non-qualified share options:
·
·
·
upon grant of the share option, the participant will recognize no income provided that the exercise price was not less than the fair market
value of the Company ordinary shares on the date of grant;
upon exercise of the share option, if the ordinary shares are not subject to a substantial risk of forfeiture, the participant will recognize
ordinary compensation income in an amount equal to the excess, if any, of the fair market value of the shares on the date of exercise over the
exercise price, and the Company will qualify for a deduction in the same amount, subject to the requirement that the compensation be
reasonable; and
The Company will be required to comply with applicable federal income tax withholding requirements with respect to the amount of ordinary
compensation income recognized by the participant.
On a disposition of the shares, the participant will recognize gain or loss equal to the difference between the amount realized and the sum of the
exercise price and the ordinary compensation income recognized. The gain or loss will be treated as capital gain or loss if the shares are capital assets and
as short-term or long-term capital gain or loss, depending upon the length of time that the participant held the shares.
If the shares acquired upon exercise of a non-qualified share option are subject to a substantial risk of forfeiture, the participant will recognize
ordinary income at the time when the substantial risk of forfeiture is removed, unless the participant timely files under Section 83(b) of the IRC to elect to
be taxed on the receipt of shares, and the Company will qualify for a corresponding deduction at that time. The amount of ordinary income will be equal to
the excess of the fair market value of the shares at the time the income is recognized over the amount, if any, paid for the shares.
Share Appreciation Rights. Upon the grant of a share appreciation right, the participant recognizes no taxable income and the Company receives
no deduction. The participant recognizes ordinary income and the Company receives a deduction at the time of exercise equal to the cash and fair market
value of ordinary shares payable upon the exercise.
Restricted Shares. A participant who receives restricted shares will recognize no income on the grant of the restricted shares and the Company
will not qualify for any deduction. At the time the restricted shares are no longer subject to a substantial risk of forfeiture, a participant will recognize
ordinary compensation income in an amount equal to the excess, if any, of the fair market value of the restricted shares at the time the restriction lapses
over the consideration paid for the restricted shares. A participant’s shares are treated as being subject to a substantial risk of forfeiture so long as his or her
sale of the shares at a profit could subject him or her to a suit under Section 16(b) of the Exchange Act. The holding period to determine whether the
participant has long-term or short-term capital gain or loss begins when the restriction period expires, and the tax basis for the shares will generally be the
fair market value of the shares on this date.
A participant may elect under Section 83(b) of the IRC, within 30 days of the transfer of the restricted shares, to recognize ordinary compensation
income on the date of transfer in an amount equal to the excess, if any, of the fair market value on the date of transfer of the restricted shares, as determined
without regard to the restrictions, over the consideration paid for the restricted shares. If a participant makes an election and thereafter forfeits the shares,
no ordinary loss deduction will be allowed. The forfeiture will be treated as a sale or exchange upon which there is realized loss equal to the excess, if any,
of the consideration paid for the shares over the amount realized on such forfeiture. The loss will be a capital loss if the shares are capital assets. If a
participant makes an election under Section 83(b), the holding period will commence on the day after the date of transfer and the tax basis will equal the
fair market value of shares, as determined without regard to the restrictions, on the date of transfer.
On a disposition of the shares, a participant will recognize gain or loss equal to the difference between the amount realized and the tax basis for the
shares.
Whether or not the participant makes an election under Section 83(b), the Company generally will qualify for a deduction, subject to the
reasonableness of compensation limitation, equal to the amount that is taxable as ordinary income to the participant, in the taxable year in which the income
is included in the participant’s gross income. The income recognized by the participant will be subject to applicable withholding tax requirements.
Dividends paid on restricted shares that are subject to a substantial risk of forfeiture generally will be treated as compensation that is taxable as
ordinary compensation income to the participant and will be deductible by the Company subject to the reasonableness limitation. If, however, the
participant makes a Section 83(b) election, the dividends will be treated as dividends and taxable as ordinary income to the participant, but will not be
deductible by the Company.
Other Share-Based Awards. The federal income tax treatment of other share-based awards will depend on the nature and restrictions applicable
to the award.
Section 162(m) Limits. Section 162(m) of the IRC places a limit of $1,000,000 on the amount of compensation that a publicly traded company
may deduct in any one year with respect to each of its chief executive officer and 4 most highly paid executive officers. Certain performance-based
compensation approved by shareholders is not subject to the deduction limit. The plan is qualified such that awards under the plan may constitute
performance-based compensation not subject to Section 162(m) of the IRC. One of the requirements for equity compensation plans is that there must be a
limit to the number of shares granted to any one individual under the plan. Accordingly, the plan provides that the maximum number of shares for which
awards may be made to any employee in any calendar year is 40,000. The maximum amount payable pursuant to that portion of a cash award granted under
the plan for any fiscal year to any employee that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the
IRC may not exceed $500,000. Under the plan the board of directors or the compensation committee has the power to impose restrictions on awards to
ensure that such awards satisfy the requirements for performance-based compensation under Section 162(m) of the IRC.
Certain Awards Deferring or Accelerating the Receipt of Compensation. Section 409A of the IRC, enacted as part of the American Jobs
Creation Act of 2004, imposes certain new requirements applicable to “nonqualified deferred compensation plans.” If a nonqualified deferred
compensation plan subject to Section 409A fails to meet, or is not operated in accordance with, these new requirements, then all compensation deferred
under the plan may become immediately taxable. Share appreciation rights and deferred share awards that may be granted under the plan may constitute
deferred compensation subject to the Section 409A requirements. It is our intention that any award agreement governing awards subject to Section 409A
will comply with these rules.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of September 30, 2020by (i) each
person or entity known to us to beneficially own more than 5% of our outstanding ordinary shares; (ii) each of our executive officers and directors
individually; and (iii) all of our executive officers and directors as a group.
53
The percentage of beneficial ownership of our ordinary shares is based on 19,837,642 ordinary shares outstanding as of September 30, 2020.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting power or investment power with respect to
securities. All options and warrants currently exercisable or exercisable into ordinary shares within 60 days of September 30, 2020 are deemed to be
outstanding and beneficially owned by the shareholder holding such options or warrants for the purpose of computing the number of shares beneficially
owned by such shareholder. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option
or warrant. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other
shareholder.
Except as indicated in the footnotes below, we believe that the persons named in the table below have sole voting and investment power with
respect to the ordinary shares indicated in the table as being beneficially owned by them.
As of September 30, 2020, based on information provided to us by our transfer agent in the United States and other information reasonably
available to us, we had 352 holders of record. Such holders of record held, as of that date, 98.8% of our outstanding ordinary shares, the vast majority of
which are held outside the United States. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as
1.2% of our outstanding ordinary shares are recorded in the name of Cede & Co. as nominee for the Depository Trust Company, in whose name all shares
held in “street name” are held in the United States.
Name and Address of Beneficial Owner (1)
5% or Greater Shareholders (other than directors and executive officers)
Peilin Zhao
Great Finance Holdings Limited
Spectacular Bid Limited
Cosmic Expert Ltd.
Directors and Executive Officers
Renhui Mu
Junfeng Zhao
Yuchan Cheng
XiaofengZhong
Jiyi Li
Weiqi Chen
All director and executive officers as a group (5 persons)
*Less than 1% of our ordinary shares.
Ordinary Shares
Beneficially Owned
Number
Percent (2)
1,009,000(3)
1,100,000(4)
13,440,000(5)
1,620,000(6)
110
840,000(7)
-
-
-
-
840,110
5.1%
5.5%
67.7%
8.2%
*
4.2%
*
*
*
*
4.2%
(1) Unless otherwise indicated the business address for the above individuals and entities is c/o Wins Finance Holdings Inc., 1F, Building 7, No. 58
Jianguo Road, Chaoyang District, Beijing 100024.
(2) The percentage of beneficial ownership is calculated based on 19,837,642 outstanding ordinary shares, as of September 30, 2020.
(3) Peilin Zhao’s business address is Room 2705-10, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong.
(4) Represents shares held by Jing Zhao and Great Finance Holdings Limited, of which Ms. Zhao controls and therefore has voting and disposition power
over such shares. The foregoing is based on a Schedule 13D/A filed October 16, 2015.
(5) Freeman FinTech Corporation Limited controls Spectacular Bid Limited. Freeman FinTech Corporation Limited is a publicly traded company on the
Hong Kong Stock Exchange.
(6) Represents shares held by Cosmic Expert Ltd, which Wenyu Li controls. As such, she has voting and dispositive power over such shares.
Represents shares held by Glowing Assets Holdings Ltd, of which Mr. Zhao is the sole officer and director and as such controls the voting and
disposition of such shares.
(7)
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None of our shareholders have voting rights different from the voting rights of other shareholders. To the best of our knowledge, we are not owned
or controlled, directly or indirectly, by another corporation or by any government. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of our company.
B. Related Party Transactions
The Company has adopted a Related Person Policy that requires it (and its subsidiaries) to avoid, wherever possible, all related party transactions
that could result in actual or potential conflicts of interests, except as approved by unconflicted executives, the board of directors, or audit committee in
accordance with guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1)
the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2) the Company or any of its subsidiaries is a participant,
and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of WFG’s shares of common stock, or
(c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a
result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has
interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his
or her family, receives improper personal benefits as a result of his or her position.
Our audit committee, pursuant to its written charter, is responsible for reviewing and approving related-party transactions to the extent the
Company enters into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party
transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under
the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may participate in the approval of any
transaction in which he is a related party, but that director is required to provide the audit committee with all material information concerning the
transaction. Additionally, the Company requires each of its directors and executive officers to complete an annual directors’ and officers’ questionnaire that
elicits information about related party transactions. These procedures are intended to determine whether any such related party transaction impairs the
independence of a director or presents a conflict of interest on the part of a director, employee or officer.
Other than the executive and director compensation arrangements and the indemnification agreements and arrangements with respect to directors
and officers discussed in Item 6“Directors, Senior Management and Employees,” we have not entered into any transactions since July 1, 2017 to which we
have been or are a party to and in which any of our directors, executive officers or holders of more than 5% of our share capital, or any immediate family
member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information.
Financial Statements
See Item 18 – Financial Statements.
Legal Proceedings
Except as described below, we are not and have not been involved in any legal proceedings which may have, or have had, a significant effect on
our business, financial position and results of operations or liquidity, and we are not aware of any proceedings that are pending or threatened which may
have a significant effect on our business, financial position, results of operations, or liquidity. From time to time, we may be subject to legal proceedings
and claims in the ordinary course of business, principally personal injury and property casualty claims. Any such claims, even if lacking merit, could result
in the expenditure of managerial resources and materially adversely affect its business, financial condition and results of operations.
The Company is involved in various legal actions arising in the ordinary course of its business. As of June 30, 2018, the Company was involved in
3 lawsuits in China, of which 2 of the legal actions were initiated by the Company as plaintiff in relation to the guarantee business, and in the other of
which the Company is a defendant in relation to its financing lease business (see below). The Company initiated legal proceedings to collect delinquent
balances, interest and penalties from guarantees. 2 of these cases with an aggregated claim of $639,104 have been adjudicated by the Court in favor of the
Company and these cases are in the process of being enforced.
55
On October 31, 2014, King & Wood Mallesons filed a complaint in Xicheng District People's Court of Beijing on behalf of its client for breach of
contract against Jinshang Leasing, our subsidiary. On February 3, 2015, the court agreed with Jinshang Leasing that it did not have jurisdiction over the
proceeding, and the case was transferred to the court in Beijing, Haidian. There has been no activity in the case since it was transferred to the Beijing court.
We believe that resolution of this matter will not result in any payment that, in the aggregate, would be material to our financial position or results of
operations.
As of June 30, 2018, the Company and certain of its executive officers have been named as defendants in one civil securities lawsuit filed in U.S.
District Courts. On April 20, 2017, Michel Desta filed a securities class action complaint in the District Court for the Central District of California seeking
monetary damages against us, Jianming Hao, Renhui Mu, Peiling (Amy) He, and Junfeng Zhao (entitled Desta v. Wins Finance Holdings, Inc., et al.; C.D.
Cal. Case No. 2:17-cv-02983) (hereafter, the “California Action”). On June 26, 2017, the Court issued an Order appointing lead plaintiffs and lead counsel,
and on August 25, 2017 lead plaintiffs filed an Amended Class Action Complaint. The Amended Complaint (which did not name Peiling (Amy) He as a
defendant), alleges a claim against us for securities fraud purportedly arising from alleged misrepresentations concerning Wins’ principal executive offices
(which alleged misrepresentations resulted in Wins being added to, and then removed from, the Russell 2000 index). On October 24, 2017, we moved to
dismiss the Amended Complaint for failure to state a claim as against us. On March 1, 2018, the District Court for the Central District of California issued
an Order denying the Company’s motion to dismiss. Thus, the civil action has proceeded to the fact gathering “discovery” stage in respect to the Company.
As a result of a private mediation conducted in November 2018, the Company agreed in principle to settle the class action, on behalf of all
remaining defendants. The full terms of that settlement remain confidential (but include certain contingencies concerning shareholder participation in the
settlement and required court approvals). The court granted preliminary approval of the settlement by order entered on March 4, 2019. Given that the
Company has not yet received the necessary approvals from Chinese regulators as to the transfer of the settlement funds from China to the United States,
the Court entered an Order dated August 11, 2020 setting a final settlement approval hearing for March 22, 2021.
On July 24, 2020, Samuel Kamau filed a shareholder class action complaint in the District Court for the Central District of California seeking
unspecified monetary damages for alleged violations of the United States Securities Exchange Act of 1934 during the period from October 31, 2018 to July
6, 2020 against Wins Finance Holdings Inc., Renhui Mu, and Junfeng Zhao (entitled Kamau v. Wins Finance Holdings, Inc., et al.; C.D. Cal. Case No.
2:20-cv-06656). Plaintiff’s initial complaint alleges, among other things, that Defendants purportedly violated the securities laws by failing to disclose that
the repayment of a RMB 580 million “loan” to Guohong Asset Management Co., Ltd. was “highly uncertain,” and that the resignation of the Company’s
former independent auditor was “foreseeably likely” given the non-payment of the foregoing loan as well as alleged material weaknesses in the Company’s
control over financial reporting.
The Amended Complaint does not specifically allege the damages purportedly suffered by the class, and we are not yet able to provide a reliable
estimate of any such damage claim. We believe that the claims from this proceeding are without merit and basis, we are vigorously defending this
proceeding.
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Dividend Policy
We have never declared and do not anticipate paying cash dividends in the foreseeable future. See Item 3D “Key Information – Risk factors - Our
dividend policy is determined by the Board of Directors based the consideration of our performance, cash flow position and future growth strategy. We
cannot assure you of declaring dividend at any time in the future.” Any return on investment may be limited to the value of our securities.” Our board of
directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on then-existing conditions,
including our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our board of directors
may deem relevant.
B. Significant Changes
Wins Finance Holdings Inc. (the “Company”) recently learned that, on June 9, 2020, the Changzhi Public Security Bureau (the “Bureau”)
enforced a judgement against Shanxi Jinchen Agriculture Co., Ltd. (“Jinchen Agriculture”), the Company’s wholly owned subsidiary. Pursuant to this
action, the Bureau froze the assets of Shanxi Jinchen and its subsidiary, Dongsheng Guarantee. The Company’s appointed legal counsel was unable to
determine the cause of the freeze as the authorities have not provided such information, but it has advised the Company that the Company no longer has
control of the assets or operations of Shanxi Jinchen and Dongsheng Guarantee. Therefore, until the freeze is lifted (and the Company has not been
provided any guidance about when the freeze would be lifted), the Company will not be able to consolidate Shanxi Jinchen and Dongsheng Guarantee into
its financial statements.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ordinary shares were listed on the NASDAQ Capital Market on October 28, 2015 under the symbol “WINS.” Prior to that date, there was no
public trading market for our securities. Our ordinary shares were halted by the NASDAQ from June 7, 2017 until December 4, 2017.
We have advised NASDAQ that we will seek to increase the liquidity of our ordinary shares in an attempt to limit the volatility in the trading price
of our ordinary shares. We cannot guarantee that any actions we take will have the intended effect of reducing market volatility.
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Transfer Agent
The transfer agent for our ordinary shares is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
B. Plan of Distribution
Not applicable.
C. Markets for Ordinary Shares
Our ordinary shares are listed on the NASDAQ Capital Market under the symbols “WINS.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Registration Number and Purposes of the Company
Our registration number with the Cayman Islands Registrar of Companies is 296825. Our purpose as set forth in our amended and restated
memorandum and articles of association is unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the
laws of the Cayman Islands.
Voting Rights and Conversion
All ordinary shares have identical voting and other rights in all respects. Subject to any rights or restrictions attached to any shares, every
shareholder who (being an individual) is present in person or by proxy or, if a corporation or other non-natural person is present by its duly authorized
representative or by proxy, shall have one vote for every share of which he is the holder. There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of ordinary
shares do not have any conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the ordinary
shares.
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Ownership and Transfer of Shares
Any shareholder may transfer all or any of his or her shares by an instrument of transfer provided that such transfer complies with applicable rules
of the SEC and federal securities laws of the United States. The instrument of transfer of any share shall be in writing and shall be executed by or on behalf
of the transferor (and if the directors so require, signed by or on behalf of the transferee). The transferor shall be deemed to remain the holder of a share
until the name of the transferee is entered in the Register of Members.
Election of Directors
The Company may by Ordinary Resolution (as defined below) appoint any person to be a director or may by Ordinary Resolution remove any
director. The directors may appoint any person to be a director, either to fill a vacancy or as an additional director provided that the appointment does not
cause the number of directors to exceed any number fixed by or in accordance with the Articles of Association as the maximum number of directors. The
term “Ordinary Resolution” means a resolution passed by a simple majority of the shareholders as, being entitled to do so, vote in person or, where proxies
are allowed, by proxy at a general meeting, and includes a unanimous written resolution.
Powers of Directors
The Company’s Amended and Restated Memorandum and Articles of Association provide that the quorum for the transaction of the business of
the Board of Directors may be fixed by the Board of Directors, and unless so fixed shall be two if there are two or more directors, and shall be one if there
is only one director.
Subject to the provisions of the Companies Act, the Company’s Amended and Restated Memorandum and Articles of Association and to any
directions given by Special Resolution (as defined in the Companies Act), the business of the Company shall be managed by the Board of Directors who
may exercise all the powers of the Company. A duly convened meeting of the Board of Directors at which a quorum is present may exercise all powers
exercisable by the Board of Directors. The Company’s Amended and Restated Memorandum and Articles of Association provide that all cheques,
promissory notes, drafts, bills of exchange and other negotiable or transferable instruments and all receipts for monies paid to the Company shall be signed,
drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Board of Directors shall determine by resolution. The Board of
Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any director who has held any other salaried office or
place of profit with the Company or to his widow or dependents and may make contributions to any fund and pay premiums for the purchase or provision
of any such gratuity, pension or allowance. The Board of Directors may exercise all the powers of the Company to borrow money and to mortgage or
charge its undertaking, property and assets (present and future) and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages,
bonds and other such securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.
The Company’s Amended and Restated Memorandum and Articles of Association do not provide for any age for the retirement or non-retirement
of directors. The Company’s Amended and Restated Memorandum and Articles of Association provide that the Company in general meeting fix a
minimum shareholding required to be held by a director, but unless and until such a shareholding qualification is fixed a director is not required to hold
shares.
Approval of Interested Transactions
The Company’s Amended and Restated Memorandum and Articles of Association provide that a director shall be at liberty to vote in respect of
any contract or transaction in which he is interested provided that the nature of the interest of any director in any such contract or transaction shall be
disclosed by him at or prior to its consideration and any vote thereon
Dividend Rights
Subject to the Companies Act and the Company’s Amended and Restated Memorandum and Articles of Association and except as otherwise
provided by the rights attached to any shares, the Company’s Board of Directors may resolve to pay dividends and other distributions on shares in issue and
authorize payment of the dividends or other distributions out of the funds of the Company lawfully available therefor. No dividend or other distribution
shall be paid except out of the realized or unrealized profits of the Company, out of the share premium account or as otherwise permitted by law.
59
The Company’s Amended and Restated Memorandum and Articles of Association provide that except as otherwise provided by the rights attached
to any shares, all dividends and other distributions shall be paid according to the par value of the shares that a shareholder holds. The Board of Directors
may deduct from any dividend or other distribution payable to any shareholder all sums of money (if any) then payable by him to the Company on account
of calls or otherwise.
The Company’s Amended and Restated Memorandum and Articles of Association provide that any dividend or other distribution which cannot be
paid to a shareholder and/or which remains unclaimed after six months from the date on which such dividend or other distribution becomes payable may, in
the discretion of the Board of Directors, be paid into a separate account in the Company’s name, provided that the dividend or other distribution shall
remain as a debt due to the shareholder. Any dividend or other distribution which remains unclaimed after a period of six years from the date on which such
dividend or other distribution becomes payable shall be forfeited and shall revert to the Company.
Liquidation Rights
The Company’s Amended and Restated Memorandum and Articles of Association provide that if the Company shall be wound up the liquidator
shall apply the assets of the Company in satisfaction of creditors’ claims in such manner and order as such liquidator thinks fit. Subject to the rights
attaching to any shares, in a winding up:
(a) if the assets available for distribution amongst the shareholders shall be insufficient to repay the whole of the Company’s issued share capital, such
assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the par value of the shares held by
them; or
(b) if the assets available for distribution amongst the shareholders shall be more than sufficient to repay the whole of the Company’s issued share
capital at the commencement of the winding up, the surplus shall be distributed amongst the shareholders in proportion to the par value of the shares held
by them at the commencement of the winding up subject to a deduction from those shares in respect of which there are monies due, of all monies payable
to the Company for unpaid calls or otherwise.
The Company’s Amended and Restated Memorandum and Articles of Association provide that if the Company shall be wound up the liquidator
may, subject to the rights attaching to any shares and with the sanction of a Special Resolution of the Company and any other sanction required by the
Companies Act, divide among the shareholders in kind the whole or any part of the assets of the Company and may for that purpose value any assets and
determine how the division shall be carried out as between the shareholders or different classes of shareholders. No shareholder shall be required to accept
any asset upon which there is a liability.
Shareholder Meetings: Action by Written Consent
The Company’s Amended and Restated Memorandum and Articles of Association provide that the Company may, but shall not (unless required
by statute) be obliged to, in each year hold a general meeting as its annual general meeting, and shall specify the meeting as such in the notices calling it.
Any annual general meeting shall be held at such time and place as the directors shall specify and if no other time and place is prescribed by them, it shall
be held at the Company’s registered office on the second Wednesday in December of each year at ten o’clock in the morning. General meetings may be
called by the Company’s Board of Directors or by the Board of Directors at the request of the holder(s) or no less than 10% in par value of the Company’s
issued shares. The Company’s Amended and Restated Memorandum and Articles of Association provide that any request for a meeting made by
shareholders must state the object(s) of the meeting and must be signed by the shareholder(s) requesting the meeting and deposited at the Company’s
registered office.’
The Company’s Amended and Restated Memorandum and Articles of Association provide that a person may participate at a general meeting by
conference telephone or other communications equipment by means of which all the persons participating in the meeting can communicate with each other.
Participation by a person in a general meeting in this manner is treated as presence in person at that meeting.
A resolution (including a Special Resolution) in writing (in one or more counterparts) signed by or on behalf of all of the shareholders entitled to
receive notice of and to attend and vote at general meetings shall be as valid and effective as if the resolution had been passed at a general meeting of the
Company duly convened and held.
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Quorum
The Company’s Amended and Restated Memorandum and Articles of Association provide that no business shall be transacted at any general
meeting of shareholders of the Company unless a quorum is present. The Company’s Amended and Restated Memorandum and Articles of Association
provide that two shareholders being individuals present in person or by proxy or if a corporation or other non-natural person by its duly authorized
representative or proxy shall be a quorum unless the Company has only one shareholder entitled to vote at such general meeting in which case the quorum
shall be that one Member present in person or by proxy or (in the case of a corporation or other non-natural person) by its duly authorized representative or
proxy.
Approval of Mergers, Consolidations and Acquisitions
The Company’s Amended and Restated Memorandum and Articles of Association provide that the Company shall, with the approval of a Special
Resolution, have the power to merge or consolidate with one or more constituent companies (as defined in the Companies Act), upon such terms as the
Board of Directors may determine.
Access to Corporate Records
The Board of Directors shall determine whether and to what extent and at what times and places and under what conditions or regulations the
accounts and books of the Company or any of them shall be open to the inspection of shareholders of the Company and no shareholder (who is not a
director) shall have any right of inspecting any account or book or document of the Company except as conferred by Companies Act or authorized by the
Board of Directors or by the Company at a general meeting.
Modification of Class Rights
The Company’s Amended and Restated Memorandum and Articles of Association provide that if at any time the share capital of the Company is
divided into different classes of shares, all or any of the rights attached to any class (unless otherwise provided by the terms of issue of the Shares of that
class) may, whether or not the Company is being wound up, be varied without the consent of the holders of the issued shares of that class where such
variation is considered by the Board of Directors not to have a material adverse effect upon such rights; otherwise, any such variation shall be made only
with the consent in writing of the holders of not less than two thirds of the issued shares of that class, or with the sanction of a resolution passed by a
majority of not less than two thirds of the votes cast at a separate meeting of the holders of the shares of that class.
Registration Rights
For a discussion of registration rights we have granted to our existing shareholders, please see Item 7 “Major Shareholders and Related Party
Transactions—Related Party Transactions”
Changes in Capital
Our Amended and Restated Memorandum and Articles of Association provide that the Company may by Ordinary Resolution:
(a) increase its share capital by such sum as the Ordinary Resolution shall prescribe and with such rights, priorities and privileges annexed
thereto, as the Company in general meeting may determine;
(b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;
(c) convert all or any of its paid-up shares into stock, and reconvert that stock into paid-up Shares of any denomination;
(d) by subdivision of its existing shares or any of them divide the whole or any part of its share capital into shares of smaller amount than is
fixed by the Memorandum or into shares without par value; and
(e) cancel any shares that at the date of the passing of the Ordinary Resolution have not been taken or agreed to be taken by any person and
diminish the amount of its share capital by the amount of the shares so cancelled.
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Our Amended and Restated Memorandum and Articles of Association provide that, subject to the provisions of the Companies Act and the
provisions of our Amended and Restated Memorandum and Articles of Association regarding the matters to be dealt with by Ordinary Resolution, the
Company may by Special Resolution:
(a) change its name;
(b) alter or add to its Articles of Association;
(c) alter or add to its Memorandum of Association with respect to any objects, powers or other matters specified therein; and
(d) reduce its share capital or any capital redemption reserve fund.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4.
Information on the Company,” Item 7B “Major Shareholders and Related Party Transactions - Related Party Transactions” or elsewhere in this Annual
Report
D. Exchange controls
The principal regulations governing foreign currency exchange in the PRC are the Foreign Exchange Administration Regulations promulgated by
the State Council, as amended on August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the RMB is freely
convertible for current account items, as long as true and lawful transaction basis is provided, but not for capital account items, such as capital transfer,
direct investments, loans, repatriation of investments, investments in securities and derivatives outside of the PRC, unless the prior approval of the State
Administration of Foreign Exchange, or the SAFE, is obtained and prior registration with the SAFE is made.
E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership and disposition of our
securities. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may
arise under the laws of any state, local, foreign or other taxing jurisdiction.
Cayman Islands Taxation
The government of the Cayman Islands will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty,
inheritance tax, gift tax or withholding tax upon the Company or its shareholders. The Cayman Islands are not party to any double taxation treaties that are
applicable to payments made to or by us.
No Cayman Islands stamp duty will be payable by you in respect of the issue or transfer of shares. However, an instrument transferring title to a
share, if brought to or executed in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions
Law (Revised) of the Cayman Islands, for a period of 20 years from the date of the undertaking, being 10 March 2015, that no law which is enacted in the
Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to
be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of the
shares, debentures or other obligations, of the Company or (ii) by way of the withholding in whole or in part of a payment of a dividend or other
distribution of income or capital by the Company to its shareholders or a payment of principal or interest or other sums due under a debenture or other
obligation of the Company.
People’s Republic of China Tax Considerations
If we are considered a PRC resident enterprise under the EIT Law, our stockholders who are deemed non-resident enterprises may be subject to
the 10% EIT on the dividends payable by us or any gains realized from the transfer of our common stock, if such income is deemed derived from China,
provided that (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but its income
derived from China has no real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant
PRC tax authorities consider the dividends we pay with respect to our common stock and the gains realized from the transfer of our common stock to be
income derived from sources within the PRC, it is also possible that such dividends and gains earned by non-resident individuals may be subject to the 20%
PRC individual income tax. It is uncertain whether, if we are considered a PRC resident enterprise, holders of our common stock would be able to claim the
benefit of tax treaties or arrangements entered into between China and other jurisdictions.
If we are required under the PRC tax law to withhold PRC income tax on our dividends payable to our non-PRC resident stockholders, or if any
gains realized from the transfer of our common stock by our non-PRC resident stockholders are subject to the EIT or the individual income tax, your
investment in our common stock could be materially and adversely affected.
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U.S. Federal Income Taxation
General
The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary
shares. The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is
for U.S. federal income tax purposes:
·
an individual citizen or resident of the United States;
·
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of Columbia;
·
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
·
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all
substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
A beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary
shares is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such
owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are
described below under the heading “Non-U.S. Holders.”
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated
thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a
retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s
individual circumstances. In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning of
Section 1221 of the Code, and does not discuss the potential application of the alternative minimum tax or the U.S. federal income tax consequences to
holders that are subject to special rules, including:
·
·
·
·
·
·
·
·
·
·
·
financial institutions or financial services entities;
broker-dealers;
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
tax-exempt entities;
governments or agencies or instrumentalities thereof;
insurance companies;
regulated investment companies;
real estate investment trusts;
certain expatriates or former long-term residents of the United States;
persons that actually or constructively own 5% or more of our voting shares;
persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive
plans or otherwise as compensation;
63
·
·
·
·
persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
persons whose functional currency is not the U.S. dollar;
controlled foreign corporations; or
passive foreign investment companies.
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws
or, except as discussed herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider the
tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities. If a partnership (or other entity
classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a
partner in the partnership generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes that any
distribution made (or deemed made) in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with
the sale or other disposition of such ordinary shares will be in U.S. dollars. In addition, this discussion assumes that we will be treated as a foreign
corporation for U.S. federal income tax purposes.
We have not sought, and will not seek, a ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income
tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can
be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this
discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH HOLDER OF OUR
ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX
TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject to the passive foreign investment company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross
income as ordinary income the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally will be
treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as
determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the dividends-received deduction generally allowed to
U.S. corporations in respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and
profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally
will be treated as gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders, any such dividends may be subject to U.S. federal income tax at the lower applicable regular long
term capital gains tax rate (see “ — Taxation on the Disposition of Ordinary Shares” below) provided that (1) our ordinary shares are readily tradable on an
established securities market in the United States, or, in the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we are eligible for
the benefits of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the
Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (2) we are not a PFIC, as
discussed below, for either the taxable year in which such dividend was paid or the preceding taxable year, and (3) certain holding period requirements are
met. Under published IRS authority, ordinary shares are considered for purposes of clause (1) above to be readily tradable on an established securities
market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market. Although our ordinary
shares are currently listed on the NASDAQ Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability of
the lower rate for any dividends paid in respect to our ordinary shares.
If a PRC income tax applies to any cash dividends paid to a U.S. Holder on the ordinary shares, such tax may be treated as a foreign tax eligible
for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to
applicable conditions and limitations). In addition, if such PRC tax applies to any such dividends, such U.S. Holder may be entitled to certain benefits
under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the
U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
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Taxation on the Disposition of Ordinary Shares
Upon a sale or other taxable disposition of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary
shares.
The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax
rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a
maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
exceeds one year. The deductibility of capital losses is subject to various limitations.
If a PRC income tax applies to any gain from the disposition of the ordinary shares by a U.S. Holder, such tax may be treated as a foreign tax
eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability
(subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such gain, such U.S. Holder may be entitled to certain benefits
under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the
U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation,
including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over
the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the
production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties
derived from the active conduct of a trade or business), and gains from the disposition of passive assets.
Based on the composition (and estimated values) of our assets and the nature of our income and that of our subsidiaries during the taxable year
ended June 30, 2019, we believe that we are not a PFIC for such year. However, because we have not completed our analysis as to our PFIC status for the
2020 fiscal year, there can be no assurance in respect to our PFIC status for such taxable year.
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If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary
shares, and such U.S. Holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in which the U.S.
Holder held (or was deemed to hold) our ordinary shares, a QEF election along with a purging election or a mark-to-market election, each as described
below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes in respect to:
· any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
· any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are
greater than 125% of the average annual distributions received by such U.S. Holder in respect of the ordinary shares during the three preceding taxable
years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ordinary shares).
Under these rules,
·
·
·
·
the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary
shares;
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we
qualified as a PFIC, will be taxed as ordinary income;
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be
taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such
other taxable year of the U.S. Holder.
In general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary
shares by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder generally will be
required to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a
current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends if we are treated
as a PFIC for that taxable year. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the
QEF rules, but if deferred, any such taxes will be subject to an interest charge.
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The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder
generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if
certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S.
Holder, we will endeavor to provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC
annual information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will have
timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such
ordinary shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares or
a QEF election along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale or other taxable
disposition of such ordinary shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, for regular U.S.
federal income tax purposes, U.S. Holders of a QEF generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not
distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally should not be taxable as a
dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will be increased by amounts that are included in
income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of
holding such property the U.S. Holder is treated under the applicable attribution rules as owning ordinary shares in a QEF.
Although a determination as to our PFIC status will be made annually, an initial determination that we are a PFIC generally will apply for
subsequent years to a U.S. Holder who held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent
years. A U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to
hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect to such ordinary shares. In
addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to such ordinary shares for any of our taxable years that end within or
with a taxable year of the U.S. Holder and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years
in which we are a PFIC and during which the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to
apply to such shares unless the holder files on a timely filed U.S. federal income tax return (including extensions) a QEF election and a purging election to
recognize under the rules of Section 1291 of the Code any gain that it would otherwise recognize if the U.S. Holder sold shares for their fair market value
on the “qualification date.” The qualification date is the first day of our tax year in which we qualify as a QEF with respect to such U.S. Holder. The
purging election can only be made if such U.S. Holder held shares on the qualification date. The gain recognized by the purging election generally will be
subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the
U.S. Holder generally will increase the adjusted tax basis in its shares by the amount of gain recognized and will also have a new holding period in the
shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder
may make a mark-to-market election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for
the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a
PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary shares as long as such shares continue to be
treated as marketable stock. Instead, in general, the U.S. Holder will include as ordinary income for each year that we are treated as a PFIC the excess, if
any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also will
be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value of its ordinary
shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The
U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale
or other taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC will be treated as ordinary income. Special tax rules
may also apply if a U.S. holder makes a mark-to-market election for a taxable year after the first taxable year in which the U.S. Holder holds (or is deemed
to hold) its ordinary shares and for which we are determined to be a PFIC.
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the
Securities and Exchange Commission, including the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules
sufficient to ensure that the market price represents a legitimate and sound fair market value. Although our ordinary shares are currently listed on the
NASDAQ Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences of a mark-to-
market election in respect to our ordinary shares.
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If we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be
deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if
we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the
lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the
information that may be required to make or maintain a QEF election in respect to the lower-tier PFIC. However, there is no assurance that we will have
timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-
market election generally would not be available in respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding
the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form
8621 (whether or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide
such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to
those described above. Accordingly, U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules
to our ordinary shares under their particular circumstances.
Additional Taxes
U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare
contribution tax on unearned income, including, without limitation, dividends on, and gains from, the sale or other taxable disposition of, our ordinary
shares, subject to certain limitations and exceptions. Under applicable regulations, in the absence of a special election, such unearned income generally
would not include income inclusions under the QEF rules discussed above under “— Passive Foreign Investment Company Rules,” but would include
distributions of earnings and profits from a QEF. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their
ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such
dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).
In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable
disposition of our ordinary shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by
an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and
certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower
applicable tax treaty rate).
Cash dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if
required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable
U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch
profits tax at a 30% rate or a lower applicable tax treaty rate.
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Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes will apply to cash distributions made on our ordinary shares within the
United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S.
Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office)
outside the United States will be subject to information reporting in limited circumstances. In addition, certain information concerning a U.S. Holder’s
adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long-term or
short-term also may be required to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign
Financial Assets) to report their interest in our ordinary shares.
Moreover, backup withholding of U.S. federal income tax at a current rate of 24%, generally will apply to cash dividends paid on our ordinary
shares to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other
than an exempt recipient), in each case who:
·
·
·
fails to provide an accurate taxpayer identification number;
is notified by the IRS that backup withholding is required; or
in certain circumstances, fails to comply with applicable certification requirements.
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its
foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a
Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished
to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for
obtaining an exemption from backup withholding in their particular circumstances.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
You may inspect our securities filings, including this Annual Report and the exhibits and schedules thereto, without charge at the offices of the
SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of the Annual Report from the Public Reference Section of
the SEC, 100 F Street, NE, Washington, D.C. 20549 upon the payment of the prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants like us that file electronically with the SEC. You can also inspect the Annual Report on this website.
A copy of each document (or a translation thereof to the extent not in English) concerning our company that is referred to in this Annual Report is
available for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our offices at 1177 Avenue of the Americas,
5th Floor New York, NY 10036.
I. Subsidiary Information
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest expenses on borrowings and income generated by finance lease receivables,
excess cash, which is mostly held in interest-bearing bank deposits and investment securities. We have not used derivative financial instruments in our
investment portfolio and to manager our interest rate exposure. Interest earning instruments carry a degree of interest rate risk. We have not been exposed
to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest expense and income may fall
short of expectations due to changes in market interest rates.
Credit Risk
Credit risk is one of the most significant risks for our business. Credit risk exposure arises principally in finance lease receivables and in financial
guarantees that are off-balance sheet financial instruments.
Credit risk is controlled by the application of credit approvals, limits on the amounts guaranteed and monitoring procedures. We manage credit
risk through our risk control system, which commences with the establishment of overall risk management strategies, pre-transaction due diligence and
assessment, in-transaction risk evaluation, product design, determination of risk-adjusted pricing, design of counter-guarantee requirements and ongoing
post-transaction monitoring. To minimize credit risk, we require collateral in the form of rights to cash, securities or property and equipment. Typically, we
also require our guarantee clients to provide one or more personal guarantors, referred to as “counter-guarantors,” so that such personal guarantors are
jointly and severally liable for the repayment of the financing guaranteed with the borrower.
We identify credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.
We hold our cash and bank deposits at Chinese well-known financial institutions located inside the PRC with good reputations and international
financial institutions located outside the PRC with high credit ratings from internationally-recognized rating agencies and well-acknowledged in the
worldwide. We manage our credit risks by diversity of deposit banks and strict consideration in selection of these institutions by taking into account, among
others, their reputation, stability, ratings and reported cash reserve.
Additionally, Chinese financial institutions are subject to a series of risk control regulation and PRC laws, which protect the third-party depositors’
rights over and interests in their depository capital. The PRC bank regulatory authorities are empowered to take over the operation and management when
any PRC bank faces a material credit crisis.
Foreign Exchange Risk
The value of the RMB against the U.S. dollar and other currencies is affected by, among others, changes in China’s political and economic
conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, is based on exchange rates set by
the People’s Bank of China. In July 2005, the PRC government changed its decades-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. Between July 2008 and June 2010, this appreciation halted and the
exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at
times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-
year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, RMB is
determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen
and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital
outflows of China. This depreciation halted in 2017, and the RMB appreciated approximately 7% against the U.S. dollar during this one-year period. Since
February 2018, the RMB has depreciated significantly, over 8% against the U.S. dollar. With the development of the foreign exchange market and progress
towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate
system, and we cannot assure you that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to
predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
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Significant revaluation of the RMB may have a material and adverse effect on your investment. To the extent that we need to convert U.S. dollars
into RMB for capital expenditures and working capital and other business purposes, 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, if we decide to convert RMB into U.S. dollars for the purpose of making
payments for dividends on our ordinary shares, strategic acquisitions or investments or 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.
A majority of our revenues and costs are denominated in RMB. At the Cayman Islands holding company level, we may receive dividends and
other fees paid to us by our subsidiary and consolidated affiliated entities in China. Any significant revaluation of RMB may materially and adversely
affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars. For
example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the
extent that we need to convert U.S. dollars into RMB for such purposes. 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 ordinary shares.
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 negative effect on your investment.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act) as of June 30, 2019. Based on that evaluation,
our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and
procedures as of June 30, 2019were not effective due to the material weaknesses in our internal control over financial reporting described below.
(b)-(c) Management’s annual report on internal control over financial reporting and attestation report of the registered public accounting firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of a company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in
accordance with authorizations of a company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to
consolidated financial statements preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the SEC, our management assessed the
effectiveness of our internal control over the financial reporting as of June 30, 2019, using criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management
concluded that our internal control over financial reporting was not effective as of June 30, 2019due to the following material weaknesses:
·
·
lack of sufficient accounting personnel qualified in US GAAP and SEC reporting; and
insufficient accounting staff, which results in a failure to segregate duties sufficiently to ensure a timely and proper preparation and
review of the financial statements.
We plan to take steps to remediate the material weaknesses in our internal control over financial reporting as soon as practicable by:
·
hiring additional internal staff familiar with US GAAP and SEC reporting.In the past couple of years, we have made offers to hire
accounting personnel familiar with US GAAP and SEC reporting experience, but has as of yet been unable to hire a suitable candidate.
We now plan to hire a professional recruitment agency to assist us in the identification and selection of appropriate candidates.
·
Enhance staff awareness of laws and regulations by conducting more trainings.
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·
hiring sufficient staff to adequately segregate responsibilities and insure timely preparation of financial statements; and providing training
to our accounting personnel on US GAAP, SEC reporting and other regulatory requirements regarding the preparation of financial
statements.In July 2018 and July 2017, our financial personnel attended US GAAP and SEC reporting training sessions organized by an
international accounting firm. We plan to hold similar US GAAP and SEC reporting training on a regular basis.
Although we increased the training provided to accounting personnel relating to US GAAP and SEC reporting to partially address the foregoing
material weaknesses, we do not believe such weaknesses have been remediated and we can provide no assurance that they will be remediated in a timely
manner.
We believe that we are taking the steps necessary for remediation of the material weaknesses identified above, and we will continue to monitor the
effectiveness of these steps and to make any changes that our management deems appropriate.
Our management does not believe that these material weaknesses had a material effect on our financial condition or results of operations or caused
our financial statements as of and for the year ended June 30, 2019to contain a material misstatement.
Our independent registered public accounting firm, Audit Alliance LLP, has audited the effectiveness of our Company’s internal control over
financial reporting as of June 30, 2019.
(d) Changes in internal control over financial reporting
Except as disclosed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act) that occurred during the year ended June 30, 2019that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. It should be noted that while our management believes that our disclosure controls and procedures provide a reasonable level of
assurance; our management does not expect that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A
control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
Our Board of Directors has determined that Xiaofeng Zhong, a member of our audit committee is an audit committee financial expert as defined
by rules of the U.S. Securities and Exchange Commission and is an independent director under Nasdaq Listing Rules.
ITEM 16B. CODE OF ETHICS.
We have adopted a Code of Business Conduct and Ethics that applies to all of our subsidiaries and to all of our directors and employees, including
our chief executive officer, chief financial officer, controller or principal accounting officer, or other persons performing similar functions, which complies
with the “code of ethics” contemplated by Item 16B of Form 20-F promulgated by the U.S. Securities and Exchange Commission. A copy of our Code of
Business Conduct and Ethics is available on our website at www.winsholdings.com. If we make any amendment to the Code of Business Conduct and
Ethics or grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver
on our website to the extent required by the rules and regulations of the U.S. Securities and Exchange Commission. Under Item 16B of the U.S. Securities
and Exchange Commission’s Form 20-F, if a waiver or amendment of the Code of Business Conduct and Ethics applies to our principal executive officer,
principal financial officer, principal accounting officer or controller and relates to standards promoting any of the values described in Item 16B(b) of Form
20-F, we will disclose such waiver or amendment on our website in accordance with the requirements of Instruction 4 to such Item 16B.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table represents aggregate fees billed to us for professional services rendered by our independent registered public accounting firms
during the periods indicated below.
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
Total
2019
2018
240,665 $
-
-
240,665 $
384,646
-
-
384,646
$
$
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(1) The audit fees of $240,665and $384,646 for the years ended June 30, 2019 and 2018 were billed by Centurion ZD CPA & Co., our former independent
registered public accounting firm, for professional services rendered for the integrated audits and review of our financial statements.
(2) There were no audit-related fees for the year ended June 30, 2019 and 2018.
(3) There were no tax fees for the years ended June 30, 2019 and 2018.
The business address of Centurion ZD CPA & Co. is Unit 1304, 13/F., Two Harbourfront, 22 Tak Fung Street, Hunghom, Hong Kong.
The business address of Audit Alliance.is20 Maxwell Road, #11-09, Maxwell House, Singapore 069113.
Audit Committee Pre-Approval
Our Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for us by our independent auditor,
including the fees and terms thereof (subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act
that are approved by our Audit Committee prior to the completion of the audit). All of the services described above were approved by our Audit Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X promulgated by the SEC.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
On June 28, 2016, the Company, repurchased in privately negotiated transactions 5,100 of its ordinary shares from Bradley Reifler, a former
director of the Company, for $60,180 or $11.80 per share and 1,480,000 shares from Bluesky LLC for $17,464,000 or $11.80 per share. Bluesky LLC is a
limited liability company owned and controlled by Bluesky Family Trust, a family trust benefitting the family of Jianming Hao. Of the amounts payable to
Bluesky, $17 million was paid. On December 2, 2016, the Company repurchased 204,005 of its ordinary shares from Richard Xu, a former officer of the
Company, for a consideration of $204.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
On June 30, 2020, Wins Finance Holdings Inc. (the “Company”) received a letter from Centurion ZD CPA & Co. (“CZD”) pursuant to which
CZD resigned as the Company’s independent registered public accounting firm.
CZD’s reports on the financial statements of the Company for the fiscal years ended June 30, 2017 and 2018 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. CZD expressed an adverse opinion on the
Company's internal control over financial reporting as of June 30, 2017 and 2018 because of material weaknesses.
During the Company's fiscal years ended June 30, 2017 and 2018 and through June 30, 2020, there were no disagreements with CZD on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to CZD’s satisfaction,
would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for
such period.
During the Company’s years ended June 30, 2017 and 2018 and through June 30, 2020, except with respect to the material weaknesses described
below, there were no “reportable events” (defined below) requiring disclosure pursuant to Item 16F(a)(1)(iv) of Form 20-F. As used herein, the term
“reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F. The following material weaknesses have been
identified and included in management's assessment: lack of sufficient accounting personnel qualified in US GAAP, and SEC reporting; and insufficient
accounting staff, which results in a failure to segregate duties sufficiently to ensure a timely and proper preparation and review of the financial statements.
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The Company has provided CZD with a copy of the foregoing disclosures and has requested that CZD review such disclosures and provide a letter
addressed to the Securities and Exchange Commission (“SEC”) as specified by Item 16F(a)(3) of Form 20-F. A copy of such letter was filed as Exhibit 99.1
to the Company’s Current Report on Form 6-k filed with the SEC on July 6, 2020.
On July 17, 2020, Wins Finance Holdings Inc. (the “Company”) engaged Audit Alliance LLP (“AA”) as its principal accountant. During the years
ended June 30, 2019 and 2018 and through July 17, 2020, neither the Company nor anyone on its behalf consulted AA regarding either (i) the application
of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the consolidated
financial statements of the Company, and neither a written report nor oral advice was provided to the Company that AA concluded was an important factor
considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject
of a disagreement (as defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions to Item 16F of Form 20-F) or a reportable event.
ITEM 16G. CORPORATE GOVERNANCE.
Except as stated above, we currently intend to comply with the rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in
the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules. Following our
home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on Nasdaq, may provide less protection
than is accorded to investors under Nasdaq listing requirements applicable to domestic issuers. For more information, see Item 3D “Key Information - Risk
Factors —As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise
applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.”
ITEM 16H. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 17. FINANCIAL STATEMENTS
Financial Statements are set forth under Item 18.
ITEM 18. FINANCIAL STATEMENTS
PART III
Our Financial Statements beginning on pages F-1 through F-40, as set forth in the following index, are hereby incorporated herein by reference.
These Financial Statements are filed as part of this Annual Report.
ITEM 19. EXHIBITS
No.
1.1
1.2
2.1
2.2
4.1
Description
Amended and Restated Articles of Association of the Company (incorporated by reference from Annex C-4 to the proxy
statement/prospectus forming a part of the registrant’s Registration Statement on Form S-4 (Registration No. 333-204074), originally
filed with the SEC on May 11, 2015)
Certificate of Incorporation on Change of Name of the registrant (incorporated by reference from Annex C-1 to the proxy
statement/prospectus forming a part of the registrant’s Registration Statement on Form S-4 (Registration No. 333-204074), originally
filed with the SEC on May 11, 2015).
Form of the Company’s Ordinary Share Certificate (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement
on Form S-4 (Registration No. 333-204074), originally filed with the SEC on May 11, 2015)
Agreement and Plan of Reorganization, dated as of April 24, 2015 and amended on May 5, 2015, by and among Sino Mercury
Acquisition Corp (“Sino”), Wins Finance Holdings Inc., Wins Finance Group Ltd. (“WFG”) and the shareholders of WFG
(incorporated by reference from Annex A to the proxy statement/prospectus forming a part of the registrant’s Registration Statement
on Form S-4 (Registration No. 333-204074), originally filed with the SEC on May 11, 2015).
Amended and Restated Registration Rights Agreement dated as of October 27, 2015 among the Company, the initial stockholders of
Sino and the shareholders of WFG (incorporated by reference to Exhibit 10.8 to the definitive Proxy Statement/Prospectus included
with the Registration Statement on Form S-4/A filed on September 11, 2015.
75
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
8.1
12.1
12.2
13.1
99.1
101.1NS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Securities Escrow Agreement dated as of August 26, 2014, as amended on June 21, 2016 by and among the Company and the initial
stockholders of Sino (incorporated by reference to Exhibit 10.3 of Sino Mercury Acquisition Corp.’s Form S-1/A filed on July 18,
2014).
Escrow Agreement dated as of October 27, 2016 among Wins Finance Holdings Inc., the Representative (as described in the
Agreement and Plan of Reorganization) and Continental Stock Transfer & Trust Company, as Escrow Agent (incorporated by reference
to Annex F to the definitive Proxy Statement/Prospectus included with the Registration Statement on Form S-4/A filed on September
21, 2015)
Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.2 of Sino’s Form 8-K filed on April 27, 2015).
Loan Contract between Jinshang International Financial Leasing Co., Ltd. and Bank of China, Shouzhou Branch (incorporated by
reference to Exhibit 10.9 to the Registrant Statement on Form S-4/A filed on May 11, 2015)
Loan Contract between Jinshang International Financial Leasing Co., Ltd. and China Citic Bank (incorporated by reference to Exhibit
10.10 to the Registrant Statement on Form S-4/A filed on May 11, 2015)
Tenancy Agreement between Jinshang International Financial Leasing Co., Ltd. and Beijing Dong Sheng International Culture
Industry Development Co., Ltd. (incorporated by reference to Exhibit 10.11 to the Registrant Statement on Form S-4/A filed on May
11, 2015)
Tenancy Agreement between Shanxi Dongsheng Financial Guarantee Co., Ltd. and Shanxi Province YuciWangcheng Enterprises
Limited (incorporated by reference to Exhibit 10.12 to the Registrant Statement on Form S-4/A filed on May 11, 2015)
2015 Long Term Incentive Equity Plan (incorporated by reference to Annex D to the definitive Proxy Statement/Prospectus included
with the Registration Statement on Form S-4/A filed on September 21, 2015)
Summary Purchase-and-Lease-Back Agreement dated December 23, 2015 by and between Jinshang International Financial Lease Co.,
Ltd, and Liaoning Sg Automotive Group Co., Ltd.(incorporated by reference to Exhibit 4.10 to Amendment No. 1 to the Annual
Report on Form 20-F filed on _October 24, 2016)
Summary Purchase-and-Lease-Back Agreement dated April 23, 2016 by and between Jinshang International Financial Lease Co., Ltd,
and Liaoning Sg Automotive Group Co., Ltd.(incorporated by reference to Exhibit 4.11 to Amendment No. 1 to the Annual Report on
Form 20-F filed on _October 24, 2016)
Equity Adjustment Agreement with Mercury International Financial Leasing (Tianjin) Co., Ltd. (formerly translated as Chenxing
International (Tianjin) Financial Leasing Co., Ltd.) and Zhongtou Jinchuang (China) Financial Holding Group Co., Limited (formerly
translated as Sino Investment Jinchuang Financial Holding Co., Ltd.) dated August 28, 2018(incorporated by reference to Exhibit 4.12
to the Annual Report on Form 20-F filed on _October 31, 2018)
Amendment to Equity Adjustment Agreement with Mercury International Financial Leasing (Tianjin) Co., Ltd. (formerly translated as
Chenxing International (Tianjin) Financial Leasing Co., Ltd.) and Zhongtou Jinchuang (China) Financial Holding Group Co., Limited
(formerly translated as Sino Investment Jinchuang Financial Holding Co., Ltd.) dated October 26, 2018(incorporated by reference to
Exhibit 4.12 to the Annual Report on Form 20-F filed on _October 31, 2018)
List of Subsidiaries of the Company(incorporated by reference to Exhibit 4.12 to the Annual Report on Form 20-F filed on _October
31, 2018)
Certification of Chief Executive Officers Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officers and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Letter from Centurion ZD CPA & Co., dated July 6, 2020 (incorporated by reference to Exhibit 99.1 to the CurrentReport on Form 20-
F filed on July 6, 2020)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definitions Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
76
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Date: October 1, 2020
WINS FINANCE HOLDINGS INC.
/s/
By:
Name:Renhui Mu
Title: Chief Executive Officer and Chief Operating Officer
(Principal Executive Officer)
/s/
By:
Name:Yuchan Cheng
Title: Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
77
FINANCIAL STATEMENTS
Contents
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2019 and 2018
Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended June 30, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018
Notes to Consolidated Financial Statements
Page(s)
F-2 – F-3
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBIC ACCOUNTING FIRM
Opinion on the financial statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Wins Finance Holdings Inc. and subsidiaries (collectively, the “Company”) as
of June 30, 2019 and 2018, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity and cash
flows for each of the two years ended June 30, 2019 and 2018, and the related notes (collectively referred to as the “financial statements”). Except for the
matter highlighted in the Basis for qualified opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the two years ended June 30, 2019 and 2018, in conformity
with U.S. generally accepted accounting principles.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material
weakness referred to above is described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15. We
considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 and 2018 consolidated
financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on
those consolidated financial statements.
Basis for qualified opinion
Loss of control over subsidiaries
As disclosed in Note 1 to the financial statements, the board of directors are of the view that the Company has lost its ability to control its subsidiaries and
has not had control of its subsidiaries since June 9, 2020. The subsidiaries are namely Shanxi Jincheng Agriculture Co., Ltd and Shanxi Dongsheng Finance
Guarantee Co., Ltd (collectively “subsidiaries without control”). We were unable to carry out any audit procedures or to obtain information we considered
necessary during our audit of the financial statements of the subsidiaries without control stated on the face of the balance sheet of the Company classified
as disposal group. Therefore, we could not determine the effect of adjustments, if any, on the financial position of Company as at June 30 2019 and 2018 or
on its financial performance and cash flows for the year then ended.
F-2
We also did not receive disclosure from management of subsidiaries without control regarding the results of their assessment of the risk that the financial
statements may be materially misstated as a result of fraud. Accordingly, we could not obtain assurance over the completeness of any allegations of fraud,
or suspected fraud, affecting the Company’s financial statements as communicated by employees, former employees, analysts, regulators or others.
Management of subsidiaries without control is unable to acknowledge their responsibilities for the design, implementation and maintenance of accounting
and internal control systems that are designed to prevent and detect fraud and error, the objectives of which are to provide us with reasonable, but not
absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed as authorized.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our qualified opinion.
/s/ Audit Alliance LLP
We have served as the Company’s auditor since 2018.
Singapore
October 1, 2020
F-3
WINS FINANCE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In US dollars, except share data)
ASSETS
Cash
Restricted cash (Note 4)
Investment securities-held to maturity (Note 5)
Net investment in direct financing leases (Note 6)
Interest receivable
Operating lease, right-of-use asset (Note 7)
Property and equipment, net (Note 8)
Deferred tax assets, net (Note 17)
Other assets (Note 9)
Non-marketable investment (Note 3
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