Overview
Senmiao Technology Limited (the “Company,” “we,” “us,” “our”
or similar terminology) is a U.S. holding company incorporated in the State of Nevada. We currently have two operating businesses
segments: (i) automobile transaction and related services focusing on the ride-hailing industry in People’s Republic of China
(the “PRC” or “China”) through our majority owned subsidiary, Hunan Ruixi Financial Leasing Co., Ltd.,
a PRC limited liability company (“Hunan Ruixi”), its wholly owned subsidiary, Hunan Ruixi Automobile Leasing Co., Ltd.
(“Ruixi Leasing”) and variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd.
(“Jinkailong”) (the “Automobile Transaction and Related Services”); and (ii) online lending services through
its VIE, Sichuan Senmiao Ronglian Technology Co., Ltd. (“Sichuan Senmiao”), which facilitates loan transactions between
Chinese investors and individual and small-to-medium-sized enterprise (“SME”) borrowers (our “Online Lending
Services”). Our executive offices are located in Chengdu City, Sichuan Province, China. Substantially all of our operations
are conducted in China.
During the years
ended March 31, 2019, we generated revenue of $2,551,107 from our Automobile Transaction and Related Services and $369,956
from our Online Lending Services. While we have historically focused our efforts on our Online Lending Services segment, due
to the increased regulation of peer-to-peer lending services in China, as described below (see “Business —
Regulations”), and general business opportunities that have become available to us, we have reallocated our resources
to focus on our Automobile Transaction and Related Services segment of our business.
Our Corporate History
We were incorporated in
the State of Nevada on June 8, 2017. We have established a wholly owned subsidiary, Sichuan Senmiao Zecheng Business Consulting
Co., Ltd. (“Senmiao Consulting”), in China. As of the date of this Report, Senmiao Consulting provides services to
Sichuan Senmiao, one of our VIEs, pursuant to the VIE Agreements as defined below. Senmiao Consulting and Sichuan Senmiao conduct
a major portion of our research and development activities.
Sichuan Senmiao was established
in China in June 2014. We have entered into a series of contractual arrangements (the “VIE Agreements”) with Sichuan
Senmiao and each of its equity holders through Senmiao Consulting to obtain control and become the primary beneficiary of Sichuan
Senmiao. The contractual arrangements have been in place since the establishment of Senmiao Consulting (the “Restructuring”).
On September 25,
2016, Sichuan Senmiao acquired a peer-to-peer (“P2P”) platform (including website, internet content provider (“ICP”)
registration, operating systems, servers, management system, employees and users) from Sichuan Chenghexin Investment and Asset
Management Co., Ltd. (“Chenghexin”), which had established and operated the platform for two years prior to our acquisition
(the “Acquisition”), for a total cash consideration of RMB 69,690,000 (approximately US$10.1 million).
Prior to the Acquisition,
Sichuan Senmiao was a holding company that owned a 60% equity interest in an equity investment fund management company. Sichuan
Senmiao sold its 60% equity interest for a cash consideration of RMB 60 million (approximately US$8.9 million) immediately following
the Acquisition, in order to focus on the online marketplace lending business.
On November 21, 2018,
we entered into an Investment and Equity Transfer Agreement (the “Investment Agreement”) with Hunan Ruixi and all
the shareholders of Hunan Ruixi, pursuant to which we acquired an aggregate of 60% of the equity interest of Hunan Ruixi for no
consideration. We closed the acquisition on November 22, 2018 and agreed to make a cash contribution of $6,000,000 to Hunan Ruixi,
representing 60% of its registered capital, in accordance with the Investment Agreement.
Hunan Ruixi has a
wholly owned subsidiary, Ruixi Leasing, a PRC limited liability company formed in April 2018 with a registered capital of RMB
10 million (approximately US$1.5 million). Ruixi Leasing is licensed to engage in automobile sales and leasing and has not commenced
operations as of the date of this Report.
Hunan Ruixi also owns
35% equity interest in Jinkailong and control the remaining 65% equity interest through a voting agreement with Jinkailong’s
other shareholders. Jinkailong is an automobile transaction and related services company in Chengdu City, Sichuan Province, China,
which primarily targets drivers in the ride-hailing service sector and facilitates automobile sales and financing transactions
for its clients and provides relevant after-transaction services to them.
In May 2019, we formed
Yicheng Financial Leasing Co., Ltd. (“Yicheng”), a PRC limited liability company and wholly owned subsidiary, with
a registered capital of $50 million in Chengdu City, Sichuan Province, China. Yicheng has obtained its business licenses for automobiles
sale and financial leasing on May 5, 2019 and has been engaged in automobile sales since June 2019.
Our Corporate Structure
The following diagram illustrates our corporate
structure, including our subsidiaries and our VIEs as of the date of this Report:
VIE Agreements with Sichuan Senmiao
According to the VIE Agreements,
Sichuan Senmiao is obligated to pay Senmiao Consulting service fees equal to its net income. Sichuan Senmiao’s entire operations
are controlled by the Company. There are no unrecognized revenue-producing assets that are held by Sichuan Senmiao.
Each of the VIE Agreements
is described in details below:
Equity Interest Pledge Agreement
Senmiao Consulting, Sichuan
Senmiao and all the shareholders of Sichuan Senmiao (the “Sichuan Senmiao Shareholders”) entered into an Equity Interest
Pledge Agreement, pursuant to which the Sichuan Senmiao Shareholders pledged all of their equity interest in Sichuan Senmiao to
Senmiao Consulting in order to guarantee the performance of Sichuan Senmiao’s obligations under the Exclusive Business Cooperation
Agreement as described below. During the term of the pledge, Senmiao Consulting is entitled to receive any dividends declared
on the pledged equity interest of Sichuan Senmiao. The Equity Interest Pledge Agreement terminates when all contractual obligations
under the Exclusive Business Cooperation Agreement have been fully performed.
Exclusive Business Cooperation Agreement
Pursuant to an Exclusive
Business Cooperation Agreement entered by and among the Company, WFOE, Sichuan Senmiao and each of Sichuan Senmiao Shareholders,
Senmiao Consulting will provide Sichuan Senmiao with complete technical support, business support and related consulting services
for 10 years ended September 18, 2027. The Sichuan Senmiao Shareholders and Sichuan Senmiao will not engage any third party for
the same or similar consultation services without Senmiao Consulting’s prior consent. Further, the Sichuan Senmiao Shareholders
are entitled to receive an aggregate of 20,250,000 shares of common stock of the Company under the Exclusive Business Cooperation
Agreement. Senmiao Consulting may terminate the Exclusive Business Cooperation Agreement at any time upon prior written notice
to Sichuan Senmiao and the Sichuan Senmiao Shareholders.
Exclusive Option Agreement
Pursuant to an Exclusive
Option Agreement entered by and among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders, the Sichuan Senmiao
Shareholders have granted Senmiao Consulting an exclusive option to purchase at any time their equity interests in Sichuan Senmiao
at a purchase price equal to the capital paid by the Sichuan Senmiao Shareholders in whole or at a pro-rated price for any partial
purchase. The Exclusive Option Agreement terminates after 10 years ending September 18, 2027 but can be renewed by Senmiao Consulting
at its discretion.
Powers of Attorney
Each of the Sichuan Senmiao
Shareholders has signed a power of attorney (the “Power of Attorney”), pursuant to which, each of the Sichuan Senmiao
Shareholders has authorized Senmiao Consulting to act as his or her exclusive agent and attorney with respect to all rights of
such individual as a shareholder of Sichuan Senmiao, including but not limited to: (a) attending shareholders’ meetings;
(b) exercising all the shareholder’s rights that shareholders are entitled to under PRC laws and the Articles of Association
of Sichuan Senmiao, including but not limited to voting, sale, transfer, pledge and disposition of the equity interests of Sichuan
Senmiao; and (c) designating and appointing the legal representative, chairperson, director, supervisor, chief executive officer
and other senior management members of Sichuan Senmiao. The Power of Attorney has the same term as the Exclusive Option Agreement.
Timely Report Agreement
The Company and Sichuan
Senmiao entered into a Timely Report Agreement, pursuant to which, Sichuan Senmiao agrees to make its officers and directors available
to the Company and promptly provide all information required by the Company so that the Company can make necessary filings to
the U.S. Securities and Exchange Commission (“SEC”) and other regulatory reports in a timely fashion.
The Company has concluded
that it should consolidate the financial statements with Sichuan Senmiao because it is Sichuan Senmiao’s primary beneficiary
based on the Power of Attorney from the Sichuan Senmiao Shareholders, who assigned their rights as shareholders of Sichuan Senmiao
to Senmiao Consulting, the Company’s wholly-owned subsidiary. These rights include, but are not limited to, attending shareholders’
meetings, voting on matters submitted for shareholder approval and appointing legal representatives, directors, supervisors and
senior management of Sichuan Senmiao. As a result, the Company, through Senmiao Consulting, is deemed to hold all of the voting
equity interests in Sichuan Senmiao. Pursuant to Exclusive Business Cooperation Agreement, Senmiao Consulting shall provide complete
technical support, business support and related consulting services for 10 years. Though not explicit in the VIE Agreements, the
Company may provide financial support to Sichuan Senmiao to meet its working capital requirements and capitalization purposes.
The terms of the VIE Agreements and the Company’s plan to provide financial support to Sichuan Senmiao were considered in
determining that the Company is the primary beneficiary of Sichuan Senmiao. Accordingly, the financial statements of Sichuan Senmiao
are consolidated in the Company’s consolidated financial statements.
The Restructuring
constituted a reorganization. As all of the above mentioned companies are under common control, this series of transactions are
considered as a reorganization of the entities under common control at carrying value and the consolidated financial statements
have been prepared as if the reorganization had occurred retroactively. The consolidated financial statements have been prepared
as if the existing corporate structure had been in existence throughout all periods and the reorganization had occurred as of
the beginning of the earliest period presented in the accompanying consolidated financial statements.
Voting Agreement with Jinkailong’s
Other Shareholders
In addition to obtaining
35% equity interests in Jinkailong, Hunan Ruixi, Jinkailong and other Jinkailong’s shareholders holding an aggregate of 65%
equity interests entered into a voting agreement, as amended (the “Voting Agreement”), pursuant to which all other
Jinkailong’s shareholders will vote in concert with Hunan Ruixi on numerous corporate matters including all fundamental corporate
transactions in the event of a disagreement for a period of 20 years, ending on August 25, 2038.
The Company has consolidated
the financial statements of Jinkailong into its financial statements because it is Jinkailong’s primary beneficiary based
on the Voting Agreement. Though not explicit in the business cooperation agreement by and among Jinkailong, Hunan Ruixi, and other
shareholders of Hunan Ruixi, the Company may provide financial support to Jinkailong to meet its working capital requirements
and capitalization purposes. The terms of the Voting Agreement and the Company’s plan to provide financial support to Jinkailong
were considered in determining that the Company is the primary beneficiary of Jinkailong. Accordingly, the financial statements
of Jinkailong are consolidated in the Company’s consolidated financial statements. Although we are able to consolidate the
financial statements of Jinkailong, we are only entitled to distribution of dividends and assets based on our ownership of 35%
of the equity interest of Jinkailong. However, pursuant to the Investment Agreement, we are entitled to dividend and liquidation
preference.
Our Services
Our Automobile Transaction and Related
Services
Overview
Our Automobile Transaction
and Related Services are mainly comprised of (i) facilitation of automobile transaction and financing where we connect the prospective
ride-hailing drivers to financial institutions to buy, or get financing on the purchase of, cars to be used to provide ride-hailing
services (the “auto financing and transaction facilitation”); (ii) automobile sales where we procure new cars from
dealerships and sell them to our customers in the automobile financing facilitation business (the “auto sales”); and
(iii) automobile financing where we provide our customers with auto finance solutions through financing leases (the “auto
financing”). We started our facilitation services in November 2018 and the sale of automobiles in January 2019. As of March
31, 2019, we have facilitated financing for an aggregate of 311 automobiles with total value of approximately $4.1 million and
have sold an aggregate of 212 automobiles with total value of approximately $1.8 million. Our auto financing business did not
commence until the end of March 2019 and has seen a slow growth to date. During the fiscal year ended March 31, 2019, our auto
financing and transaction facilitation and auto sales accounted for 21.1% and 62.2% of our total revenue, respectively.
Auto Financing and Transaction Facilitation
Leveraging the growing
popularity of ride-hailing services in China, we facilitate the auto financing transactions between the ride-hailing drivers and
financial institutions. As of the date of this Report, all the ride-hailing drivers we service are affiliated Didi Chuxing Technology
Co., Ltd., a major transportation company operating the largest ride-hailing platform in China (“Didi”). Our services
simplify the transaction process for both the Didi drivers and the financial institutions. Specifically, our facilitation services
include purchase services and management and guarantee services.
Purchase services
cover a wide range of services provided to Didi drivers during the process of an automobile financing transaction, including but
not limited to, credit assessment, preparation of financing application materials, assistance with closing of financing transactions,
license and plate registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver
qualification and other administrative procedures. Our service fees are based on the sales price of the automobiles and relevant
services provided. Our service fees for automobiles purchase services ranged from $500 to $4,000 per vehicle.
The management and guarantee
services are provided to Didi drivers after the delivery of automobiles, covering (i) management services including, without limitation,
ride-hailing driver training, assisting with purchase of insurances, insurance claims and after-sale automobile services, handling
traffic violations and other consulting services; and (ii) guarantee services for the obligations of Didi drivers under their
financing arrangement with financial institutions. As at March 31, 2019, the maximum contingent liabilities we were exposed would
be approximately $11.5 million if all the automobile purchasers defaulted. Our management and guarantee fees are based on the
costs of our services and the results of our credit assessment of the automobile purchasers. Our fees average approximately $1,100
per automobile for the affiliation period and are paid by the Didi drivers on a monthly basis during the affiliation period.
Transaction
Process
The following chart
illustrates our typical process of auto financing facilitation.
Financing Partners
We have established
collaboration with a number of financial institutions, including commercial banks, financial leasing companies as well as online
peer-to-peer lending platforms, which finance the purchase of automobiles by our automobile purchasers through financial leasing
agreements or loan agreements (the “Financing Agreements”). Under our arrangements with financing partners, we will
refer prospective automobile purchasers and are generally responsible for collecting information on such purchasers, conducting
credit assessment of them, registration of the cars as collateral with government and providing guarantee on the their payments
under the Financing Agreements. To secure the interests of the financing partners, each automobile is mortgaged in favor of the
financing partner which is registered with relevant local government agencies.
We typically prepay
the purchase price and expenses on behalf of the automobile purchasers when we provide purchase services and collect all the advance
payment and relevant services fees from the proceeds disbursed by the financial institutions upon the closing of the financing
and/or when the monthly installment payment made by automobile purchasers during the term of the Financing Agreements. We are
required under our arrangements with the financing partners to make payments on behalf of the automobile purchasers in the event
of default. As of March 31, 2019, the outstanding payments we made on behalf of defaulted purchasers were approximately $0.15
million. After we make payments, we will request the defaulted purchasers to pay us back. If we are unable to recover the payments
within a certain period of time, we will start our collection process. See “Business — Our Services —
Our Automobile Transaction and Related Services — Post-Financing Services.”
During the fiscal
year ended March 31, 2019, our top two financing partners were Sichuan Jinding Fortune Information Technology Co., Ltd. and Haitong
Unitrust International Leasing Co., Ltd., which collectively financed an aggregate of 191 cars with a total value of approximately
$1.9 million, representing approximately 83.9% of the transaction value financed by our financing partners as of March 31, 2019.
Partnership
with Didi
To capitalize on the
large and rapidly expanding fleet of Didi, we have established collaboration with Didi through both Hunan Ruixi and Jinkailong.
Under Jinkailong’s consulting service agreement with Didi, Jinkailong provides vehicle leasing and financing, insurance
facilitation, affiliated vehicle management, and other services for the fleet of Didi in Chengdu City, Sichuan Province. Hunan
Ruixi also entered into cooperation agreements with Didi in December 2018, pursuant to which Hunan Ruixi agreed to source automobiles
for and provide automobile financing/leasing solutions to Didi drivers in Changsha City, Hunan Province. Our relationship with
Didi is crucial to our business as it enables us to attract more automobile purchasers who are interested in working as Didi drivers
and becoming affiliated with us.
Partnership
with Feiniu
Jinkailong also entered
into a business cooperation agreement with Sichuan Feiniu Automobile Transportation Co., Ltd. (“Feiniu”), a provider
of intercity passenger transportation and freight logistics services and provider of consulting services to Didi’s drivers
on intercity carpool business. Pursuant to the business cooperation agreement, Jinkailong agreed to provide automobile and driver
sourcing services as Feiniu’s exclusive business partner for Feiniu’s intercity carpool business in Chengdu City,
Sichuan Province for a period of three years. In return, Feiniu agreed to pay Jinkailong 30% of the consulting service fee Feiniu
receives under its agreement with Didi for the proportion of automobiles supplied by Jinkailong. In addition, Jinkailong agreed
to refer no less than 30% of its customers to subscribe for Feiniu’s automobile management services, including automobile
purchase, title registration, insurance purchase and financing.
Auto Transaction Facilitation Services
Through Hunan Ruixi
and Jinkailong, we also facilitate automobile purchase transactions between dealers, our cooperative third party sales teams and
the automobile purchasers, primarily Didi drivers. We provide sales venue and vehicle sourcing for the transactions. We charge
third party sales teams and automobile purchasers a facilitation fee based on the type of vehicle and negotiation with each dealer,
third party sales team and purchaser, generally no more than $1,700 per automobile from third party sales team and $2,200 from
the purchaser.
We also provide a
series of services for the purchasers throughout the automobile purchase transaction process, including registration of license
plates and permits from the relevant government authorities, insurance facilitation and assistance with applications to financial
institutions to finance the purchase. Our service fees are based on the sales price of the automobiles and relevant services provided.
Our service fees ranged from approximately $500 to $4,000 per vehicle.
Auto Sales
We are also engaged
in the sales of automobiles through Hunan Ruixi. As we are targeting to sell cars to Didi, Hunan Ruixi procures new cars of model
and specification acceptable to Didi. Hunan Ruixi typically sets up periodic procurement plans based on the estimated transaction
volume of Jinkailong and buy in bulk to obtain better pricing. Hunan Ruixi will then mark up the price and sell the cars to the
ride-hailing drivers who are typically customers in our auto financing facilitation services. All the new cars Ruixi procured
are parked in our warehouses in Chengdu City.
Substantially all
of the cars are sold through a financing arrangement, under which we will receive a majority of the purchase price (ranging from
approximately 69% to 100%) from the financing proceeds and the remainder from monthly installment payments of the Didi drivers.
Auto Financing
We began offering
auto financing services in March 2019. In our self-operated financing, we act as a lessor and a customer (i.e., Didi driver) acts
as a lessee. We offer to the lessee a selection of automobiles that were purchased by us in advance. The lessee will choose the
desirable automobile to be purchased and enter into a financing lease with us. During the term of the financing lease, the lessee
will have use rights with respect to the automobile. We will obtain title to the automobile upfront and retain such title during
the term of the financing lease, as lessor. At the end of the lease term, the lessee will pay a minimal price and obtain full
title to the automobile after the financing lease is repaid in full. In connection with the financing lease, the lessee will enter
into a service agreement with us. Pursuant to this service agreement, the lessee will pay us a service fee ranging from approximately
$1,250 to approximately $3,500 for our services, which covers, among others, payment of purchase taxes and insurance, license
and plate registration, and training of ride-hailing drivers.
As of the date of this
Report, we have financed the purchase of 87 automobiles with an average financing amount per customer of approximately $19,000
and lease terms ranging from 36 to 48 months. The interest rates of our auto financing are fixed and range from 5.5% to 11.4% per
annum. No down payment is required under our financing leases.
Customers
Over 95% of our customers
are Didi drivers. Due to the complexity and difficulty of obtaining registration of various licenses required for driving a ride-hailing
car, our customers choose to become affiliated with us who offer them a simplified and smooth process to become qualified. Our
automobile purchasers, who are mostly Didi drivers, typically become affiliated with us through affiliation agreements pursuant
to which we, as a qualified management company, provide them post-transaction management services during the affiliation period,
which is usually the same as the term of the Financing Agreements.
We acquire customers
for our Automobile Transaction and Related Services through the network of third-party sales teams, referral from Didi and our
own efforts including online advertising and billboard advertising. We also send out flyers and participate in trade shows to advertise
our services. Since our acquisition of Hunan Ruixi through the date of this Report, we have serviced approximately 740 customers,
including approximately 700 Didi drivers.
Risk Management
The assessment of
prospective Didi drivers is based on collective efforts and provides a comprehensive evaluation of the automobile buyers. In our
auto financing facilitation business, assessment on a prospective buyer typically involves three parties: financial institutions,
Didi and us. As financial institution makes the ultimate decision on the financing application and the financing terms and Didi
determines the outcome of the driver qualification process, we do not maintain a credit grading system. We believe our manual
review and verification process is sufficient for the requirements of our current operations.
We conduct an initial
screening when we receive an application from the prospective Didi drivers based on credit reports from People’s Bank of
China (“PBOC”) and third party credit rating companies, and personal information including residence, ethnicity group,
driving history and involvement in legal proceeding. An initially qualified candidate must meet certain minimum criteria:
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be between
22-60 years old;
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reside in the mainland of China;
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have a driving history of at least three years;
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not be subject to on-going legal proceedings or enforcement;
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not be listed on a national delinquent debtor’s list;
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have a real intension to purchase automobile; and
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the value of purchased automobile matches the income of the
candidate.
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Additionally, we arrange
a simple in-person interview with the applicant where we gather information on marital/family status, income, assets, borrowing
history and default history, if any. This interview is typically conducted by our risk management staff who will verify the accuracy
of information on the prospective driver by cross-checking information provided by the applicant with other sources. We will also
assess the prospective driver’s potential repayment ability.
Applicants with any
of the follow attributes will be rejected:
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engaging in illegal or criminal activities;
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involved in pornography, gambling, drug dealing and gangster
activities and experiences;
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engaging in usury lending; or
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providing fraudulent information.
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Once we have completed
our risk assessments on the applicant, we recommend qualified applicants to the financial institution who proactively reviews
and makes final credit decisions on the applications we recommend. Specifically, the financial institution is ultimately responsible
for, reviewing applications and verifying applicants’ personal information collected by us through various procedures.
We also share the
driver’s personal information with Didi, who requires all the drivers to be qualified under their own standard and conduct
a background check on each driver applicant. A qualified driver must meet certain minimum criteria:
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be 22 to 60 years old for male; 22 to 55 years old
for females;
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have a driving history of at least three years with driving
license of C2 or above;
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must not commit the a hit-and-run;
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have no record of dangerous driving, drug use, driving under
alcoholic influence, and violence crime;
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have no traffic violation of 12 demerit points or more in any
year of the past three years;
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have not had their tax driver’s license revoked in Chengdu
City within the past five years; and
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have not been investigated or disciplined for unlawfully engaging
in taxi services or other passenger transportation operations in Chengdu City within the past five years.
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Our assessment of
prospective lessees in our auto financing business is substantially similar.
Post-Financing Services
Our post financing
management department is in charge of monitoring and managing monthly payments by the drivers. We send text messages and make
phone calls as reminders three business days prior to the due date. If a driver fails to pay on the due day, we will pay the financial
institution on behalf of the defaulted automobile purchaser but continue to contact the automobile purchaser and request for payments.
If the delinquency continues for more than 15 days, we then seek to repossess the car. Every car purchased through us has a GPS
device installed, which helps us locate the car. After a car is repossessed, we store it in a warehouse and later dispose of the
automobile in accordance with law and relevant financing documents. If we are unable to repossess collateral from a delinquent
automobile purchaser, we may commence a lawsuit against such purchaser.
Our Online Lending Services
Overview
We operate an online lending platform through Sichuan Senmiao in the PRC which facilitates loan transactions
between Chinese investors and individual and SME borrowers. Through our platform, we offer access to credit for borrowers and attractive
investment returns for investors. As described further below, due to an increase in PRC regulations relating to and scrutiny of
the P2P lending industry in China, during our fiscal year ended March 31, 2019, we have we have reallocated our resources away
from our Online Lending Services business to focus on the Automobile Transaction and Related Services segment of our business.
From the acquisition of our online platform in September 2016 through March 31, 2019, we have facilitated
loan transactions in an aggregate amount of over RMB729 million (approximately US$109 million). As of March 31, 2019, we had an
aggregate of 42,903 registered users and a total of 3,247 investors and 2,695 borrowers had participated in loan transactions through
our platform. We currently conduct our business operations exclusively in China, and all of our investors and borrowers are located
in China.
Our revenues from
Online Lending Services are primarily generated from fees charged for our services in matching investors with borrowers. We charge
borrowers transaction fees for the work we perform through our platform and charge our investors service fees on their actual
investment returns. The interest rates of the loans facilitated through our platform range from 7.68% to 10.80% per annum.
We charge borrowers
transaction fees based on their loan amounts. The transaction fees charged to borrowers range from 0.19% to 4.93% of the loan
amount and are paid (i) for loans accruing interest on a monthly basis, upon disbursement of the loan proceeds and (ii) for loans
accruing interest on a daily basis, upon full repayment of principal and interest. We also charge our investors a service fee
of 8.00% of their actual investment returns, and collect the fee when the investors receive their interest payments. Our interest
rates, transaction fees, service fees and other charges are all disclosed to the users of our platform.
Recent Regulatory
Developments for Online Lending Platforms
In January 2019, relevant
PRC governmental authorities issued Circular on the Classification and Disposal of Risks of Online Lending Institutions and Risk
Prevention (“Circular 175”). According to Circular 175, except for large-scale peer-to-peer direct lending marketplaces
that are strictly in compliance with all relevant laws and regulations and have not demonstrated any high-risk characteristics,
which are generally referred to as Normal Marketplaces, other marketplaces, including shell companies with no substantive operation,
small-scale marketplaces, marketplaces with high risks and marketplaces that are unable to repay investors or otherwise unable
to operate their businesses, shall exit the peer-to-peer lending industry or cease operation. Normal Marketplaces shall cease
operating those businesses that are not in compliance with laws and regulations. Circular 175 also encourages certain Normal Marketplaces
to convert into other types of online financing institutions such as online small loan companies or loan facilitation platforms.
Circular 175 provides that “small-scale marketplace” shall be determined by each province taking into consideration
a marketplace’s outstanding loan balance, number of lenders and other factors. There is no guidance on the definition of
“small-scale marketplaces” in Sichuan Province as of the date of this Report. If we are considered a small-scale marketplace
under Circular 175 as determined by Sichuan province, we may have to cease our Online Lending Services or convert into other types
of online financing institutions.
Historical
Operation
Historically, our
platform was also accessible to creditors (“Creditor Partners”) who had extended loans to borrowers outside our platform
and assigned these loans on our platform to obtain interim financing before loan maturities. We generated revenue from transaction
fees from Creditor Partners in connection with the assignment of their loans on our platform.
In January 2018, we
discontinued the loan assignment services to Creditor Partners in preparation for our record-filing under the newly promulgated
regulations of the marketplace lending industry in China. To continue our relationship with these Creditor Partners, we signed
cooperation agreements with them pursuant to which they would introduce their customers with financing needs to us and provide
guaranty for them.
In February 2018,
Sichuan Province (where we conduct a significant portion of our operations) issued local guidelines on the rectification and acceptance
of internet lending information intermediaries, which require guarantors for the loans facilitated by lending platforms to be
guaranty institutions or insurance companies that hold professional guaranty qualifications. Our Creditor Partners do not hold
the guarantor qualifications. To comply with the local guidelines and also as part of our preparation for our record filing under
the new marketplace lending regulations and as requested by the local Sichuan finance bureau in connection with their inspection
of our operations, we ceased our cooperation with our Creditor Partners in March 2018 and began to focus on facilitating loan
transactions solely between borrowers and investors on our platform.
As described further
below under section “Business — Regulations,” the recent promulgation of Chinese national, provincial and local
regulations related to market place lending platforms may require us to cease our online lending services or change our business
model as we seek to develop other sources of revenue and comply with these regulations.”
User Acquisition
In light of various laws,
regulations and rules to regulate the marketplace lending industry in China promulgated by multiple PRC governmental authorities,
in particular the requirement not to increase the transaction volume of our platform, we have reduced our spending on marketing
and our user acquisition efforts have been limited to advertising on our websites and WeChat official account and issuance of press
releases.
Our Borrowers
We service both individuals
and SME borrowers. We acquire our borrowers primarily through our own efforts, including advertising through Websites and WeChat
official account and issuance of press releases. The borrowers are generally looking for short-term financings below RMB 1,000,000
(approximately US$145,590) to fund their cash flow requirement. For the year ended March 31, 2019, we have facilitated loans to
over 120 borrowers with an aggregate principal amount of approximately RMB 151 million (approximately US$22.74 million).
Our Investors
We accept investments
from individual investors of all income levels.
For the year ended
March 31, 2019, 213 investors made investments totaling approximately RMB 151 million (approximately US$22.7 million) through
our platform. During this period, average annual investment return for investors on our platform was 7.99%. As of March 31, 2019,
we had over 3,247 investors on our platform.
Products Offered to Borrowers
We facilitate unsecured,
fixed-rate loans to individual borrowers who need to finance personal purchases and SME borrowers who are in need of capital for
business operations. Currently, the loans offered on our platform have terms ranging from 1 month to 36 months.
Pursuant to the requirement
of the Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries (the “Interim
Measures”), we do not permit individual borrowers to hold loans with aggregated outstanding principal of more than RMB 200,000
(approximately US$29,100) or SME borrowers to hold loans with aggregated outstanding principal of more than RMB 1,000,000 (approximately
US$145,592).
Loans facilitated
on our platform range in the amount of RMB 32,000 (approximately US$4,660) to RMB 200,000 (US$29,100) for individual borrowers
and RMB 70,000 (approximately US$10,190) to RMB 1,000,000 (approximately US$145,590) for SMEs. Our loans currently outstanding
include loans of one month, three months, six months and 36 months. The annual interest rate for loans averaged 8.39% for the
year ended March 31, 2019.
For the year ended
March 31, 2019, we facilitated loans to over 120 borrowers through our platform and the total amount of funds loaned to borrowers
through our platform was approximately RMB 151 million (approximately US$22.7 million).
Interest rates for
the term loans on our platform currently range from 7.68% to 10.8% per annum. We also charge borrowers transaction fees for our
services ranging from 0.19% to 4.93% The transaction fee is charged as a percentage of the loan amount and is typically paid up-front
at the time of the disbursement of loan proceeds for loans accruing interest on a monthly basis and upon full payment of principal
and interest of loans accruing interest on a daily basis. We recognize revenues generated from transaction fees when the loan
transactions are closed and invoices for such fees are issued. The interest rate and transaction fee represent the total cost
of borrowing for borrowers.
A penalty fee for
late payment is imposed as a percentage of the amount past due and will be paid to the investors should a default occur. All fees
are clearly disclosed to the borrowers. As of the date of this Report, we have not collected any penalty for late payment because
there has not been any default or delinquencies since we acquired our online lending platform.
We do not allow loan
rollovers, i.e., the repayment of a loan using proceeds from a new loan. Therefore, a borrower may not take another loan unless
the existing loan is fully paid off.
Services Offered to Investors
Through our platform,
investors have the opportunity to invest in a range of loan products with attractive returns. We provide our investors with an
automated investing tool with which an investor can invest a specified amount of money to borrowers through our platform for a
specified period of time. Once an investor commits funds to invest, the funds are automatically allocated among approved borrowers.
Our automated investing tool automatically reinvests investors' funds as long as there are sufficient funds in the investor's
account, enabling investors to automatically reinvest without having to continually revisit our website or mobile application.
Investors using our automated investing tool are allowed to withdraw their funds before a loan is fully subscribed. During the
fiscal year ended March 31, 2019, over 14% of the funds invested by investors through our platform were invested utilizing this
automated investing tool.
The minimum threshold
for a lending commitment made through our automated investing tool is RMB 100 (approximately US$14.64). For the year ended March
31, 2019, the average amount invested through our automated investing tool by each investor was approximately RMB 24,404 (approximately
US$3,753). The annual rate of return offered to an investor after deducting the management fee varies with the duration of the
investment term, with 7.07% to 7.23% for loans with a term of 30 days or less and 7.07% to 9.94% for a loan with a term of longer
than 30 days but up to 36 months.
We charge investors
a management fee for using our investing platform. The management fee is equal to 8.00% of the interest that investors receive,
and is paid at the time of each interest payment. There is no service fee if there's no investment made from investors. We recognize
revenues for services provided to investors when such fees are paid.
Transaction Process
Our platform provides
a streamlined application process for borrowers and investors alike. The entire process from initial application to disbursement
of funds on average takes approximately seven days. The following illustrates the entire application and funding process through
our platform:
Stage 1: Application
Our borrower application
process begins with the submission of a loan application by a prospective borrower. Borrowers can apply through our website or
mobile application. As part of the application process, the prospective borrower is asked to provide various personal and business
details. The specific personal and business details required will depend upon the borrower's desired loan product, but typically
include PRC identity card information, employer information, bank account information, credit card information and a credit report
from the PBOC. For business, they will need business registration certificate, tax certificate, financial report, bank statements
and credit report from the PBOC. Our borrowers are also required to designate the use of loan proceeds in their loan applications.
After loan proceeds are disbursed, we will follow up with telephone calls to confirm such designated use of proceeds. However,
due to the lack of detailed regulations, implementation measures and guidance on regulations concerning our industry, it is unclear
what measures are required to verify the use of proceeds. We believe our current practice is sufficient in light of the type of
loans facilitated and our transaction volume.
New investors sign up to our platform using
a simple online portal in which they input their PRC identity card information and bank account information. The funds they invest
over our platform are deposited into a custody account managed by our custodian bank.
Stage 2: Verification and Credit Assessment
We also supplement our review of borrower's
application with data from a number of internal and external sources, including the following:
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historical credit
data accumulated through our online platform;
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personal identity
information maintained by an organization operated under the Ministry of Public Security
(the “MPS”);
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personal credit
information maintained by an organization operated under the PBOC;
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online databases
on court order, judgment and enforcement operated by China Supreme People’s Court;
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online data from
internet or wireless service providers, including social network information;
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third-party credit
check services; and
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fraud “blacklists”
and databases.
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This data is then aggregated and used to
verify an applicant's identity, for possible fraud detection and for assessment and determination of creditworthiness.
Stage 3: Anti-Fraud and Decisioning
In order to efficiently
screen borrower applicants, we have designed an initial qualification phase to review the basic information regarding a prospective
borrower that has been submitted with his application and gathered by us from available sources. After an initial check is performed,
the prospective borrower's loan application either proceeds to the next phase of the application process or the prospective borrower
is notified of the decision to decline the application.
As part of the initial
qualification process, we will also conduct telephone or in-person interviews with individual borrowers or in the case of SME
borrowers, send our on-the-ground team to visit the applicant at their office, to verify borrower identity, credit data as well
as collateral properties, if applicable. If needed, we also engage appraisal firms to determine the value of collaterals. Based
on initial due diligence, our business development department prepares requisite reports as well as loan requests for submission
to our risk management department for further review and verification.
If a member of the
credit assessment team suspects there may be fraud involved with a particular loan application or determines that additional verification
is needed to complete the credit decisioning process, that team member will conduct further due diligence and verification, such
as additional phone calls or onsite visits to the applicant and the applicant's employer that is identified in the application.
Following our multi-level
review, the credit assessment team will either approve the loan as is, approve the loan with one or more modified sets of loan
characteristics, or decline the loan application. Unqualified borrowers are notified of the decision to decline their applications
for failing to meet minimum requirements. Qualified borrowers proceed directly to the approval, listing and funding stage.
Stage 4: Approval, Listing and Funding
Once a loan application
is approved, we enter into a loan agreement with respect to borrowers. The loan agreements are between a borrower, investor(s)
who fund the borrower's loan and our platform. Upon a borrower's acceptance of the loan documents, the loan is then listed on
our platform for investors to view. Once a loan is listed on our platform, investors may then subscribe to the loan using our
automated or self-directed investing tools. We enter into a finance intermediary service contract with each borrower prior to
the disbursement of the loan proceeds. The contract provides for the services fees we will charge the borrower to facilitate the
loan transaction on our platform as well as the rights and obligations of each party in the transaction.
Once a loan is fully
subscribed, funds are then drawn from a custody account and disbursed to the borrower.
Stage 5: Servicing and Collections
We provide payment reminder services through
text messages or phone calls one week before payment dates. For loans with a term of 30 days or shorter, borrowers repay interest
and principle upon maturity. For loans with a term of longer than 30 days, borrowers pay interest on a monthly basis.
We are generally not involved in the collection
process after a loan is delinquent. Upon any of these events, the investors may sell defaulted loans to third party asset companies.
They may also initiate legal action against the borrowers in default. We only become involved in the legal action when a lender
engages us to assist the lender in a legal action initiated upon a default. Since there have not been any defaulted loans on our
platform as of the date of this Report, our collection process has not been tested in practice.
Risk Management
Our Loan Assessment Committee and Risk
Management Division
We have a loan assessment
committee, comprised of five individuals: director of operation, director of risk management, chief compliance officer, chief
executive officer and independent review officer. Based on the recommendation of our operation and risk management teams, each
application received through our platform is submitted to our loan assessment committee for final review and decision.
To approve a loan,
our loan assessment committee must reach a consensus and the independent review officer has the authority to veto the decision
of other committee members. In the year ended March 31, 2019, approximately 90.76% of the loan applications submitted to our loan
assessment committee were approved.
We also have an independent
risk management division, responsible for establishment and maintenance of risk management systems, evaluation and assessment
of risks in operation, documentation, and completion of risk analysis reports etc.
Fraud Detection
Our fraud detection
system is part of our larger risk management system. The system identifies and rejects potential borrower applications. Our system
combines offline verification and the use of third-party credit services. Our offline verification activities involve members
of our credit assessment team speaking with potential borrowers and their third-party references to inquire after any inconsistencies
in a loan application. We also utilize government agency's open database to check their identity card numbers against known criminals
and third party companies' credit information on potential borrowers. We maintain a blacklist of applicants after detecting any
fraudulent borrowers.
Investor Protection
We emphasize investor
protection through all stages of a transaction including but not limited to implementing strict risk management measures to assess
and verify borrowers’ creditworthiness and monitoring borrowers' payment status. With all these efforts, we have not had
any defaulted loan since the launch of our platform.
We also strike to
follow the best industry practice to protect our investors. For example, we have engaged XW Bank to provide fund depository services
for our platform and assume fund depository functions including settlement, accounting and safeguarding online lending capital.
In addition, we have obtained the Level III Certification of Information System Security issued by the MPS.
Our Technology
We believe our technology
platform is a competitive advantage and an important reason that borrowers and investors utilize our platform. Key features of
our technology platform include:
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Mobile applications.
We have developed
different user-friendly mobile applications for borrowers and investors, which enable borrowers, Creditor Partners and investors
to access our platform at any time or location. Approximately 85.13% of investments were facilitated through our mobile application
during the year ended March 31, 2019.
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Fraud detection.
We use a combination
of current and historical data obtained during the application process, third-party data and sophisticated analytical tools to
help determine an application's fraud risk. High risk applications are subject to further investigation. In case where fraud is
confirmed, the application is cancelled, and we identify and flag characteristics of the loan to help refine our fraud detection
efforts.
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Scalable platform.
Our platform
is built on a distributed, load-balanced computing infrastructure, which is both highly scalable and reliable. The infrastructure
can be expanded easily as data storage requirements and user visits increase. We utilize a unified platform, which administrates
all systems and servers and can reconfigure or redeploy systems or servers automatically whenever needed.
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Data security.
Our network is configured
with multiple layers of security to isolate our databases from unauthorized access and we use sophisticated security protocols
for communication among applications. To prevent unauthorized access to our system we utilize a system of firewalls and also maintain
a perimeter network, or a demilitarized zone, to separate our external-facing services from our internal systems. Our entire website
and public and private application programming interfaces use the Secure Sockets Layer networking protocol.
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Stability.
Our systems infrastructure
is hosted in cloud based data centers in Hangzhou and Shenzhen. We have multiple layers of redundancy to ensure the reliability
of our network. We also have a working data redundancy model with comprehensive backups of our databases and our development environment
conducted every day.
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Competition
The automobile financing
industry in China is large and evolving. According to Didi, there were approximately 300 automobile financing and leasing companies
that have established business relationships with Didi in Chengdu City as of June 2019. We face significant competition primarily
from companies that operate in Chengdu, such as Chengdu Jingtengjian Business Consulting Co., Ltd., FAW Huidi Automotive Technology
Co., Ltd. and Guobang (Chengdu) Financing and Leasing Co., Ltd.
The online P2P lending
industry is competitive in China. According to Wangdaizhijia, as of March 31, 2019, there were 959 online P2P lending platforms
that were in operation in China and 20 platforms in Sichuan, the province in which we primarily conduct our online P2P lending
business. Our competitors in Sichuan include Jinding Wealth and Chengdu Hongxue Jinxin Business Consulting Co., Ltd. We also compete
nationwide with other online P2P lending platforms, as well as traditional financial institutions, which may have a larger investor
and borrower base and substantial financial resources.
We also compete with
other financial products and companies that attract borrowers, investors or both. With respect to borrowers, we compete with other
internet finance marketplaces and traditional financial institutions, such as consumer finance business units in commercial banks,
credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment
products and asset classes, such as equities, bonds, investment trust products, bank savings accounts and real estate.
Regulations
This section sets
forth a summary of the most significant rules and regulations that affect our business activities in China or the rights of our
stockholders to receive dividends and other distributions from us.
Regulations Related to Ride-Hailing
Services
In order to manage
the rapidly growing ride-hailing service market and control relevant risks, on July 28, 2016, seven ministries and commissions,
including the Ministry of Transport, jointly promulgated the Interim Measures for the Administration of Online Taxi Booking Business
Operations and Services
,
which legalizes ride-hailing services such as Didi and requires the ride-hailing services to meet
the requirements set out by the Interim Measures and obtain requisite service licenses.
On November 5, 2016,
the Municipal Communications Commission of Chengdu City and a number of municipal departments jointly issued the Implementation
Rules for the Administration of Taxi Management Services for Chengdu Network. On August 10, 2017, the Transportation Commission
of Chengdu further issued guidelines on compliance requirements for ride-hailing businesses, including Working Process for the
Online Appointment of Taxi Drivers Qualification Examination and Issuance and Online Appointment Taxi Transportation Certificate
Issuance Process. According to these regulations and guidelines, three licenses or certificates are required for operating the
ride-hailing business: (1) the ride-hailing service platform such as Didi is required to obtain the online reservation taxi operating
license; (2) the automobiles used for online ride-hailing are required to obtain the online reservation taxi transport certificate
(the “automobile certificate”); (3) the drivers are required obtain the online reservation taxi driver's license (the
“driver’s license”).
Without requisite
automobile certificate or driver’s license, ride-hailing drivers may be suspended from providing ride-hailing services,
their illegal income may be confiscated and they may be subject to fines amounting to RMB5,000 (US$730) to RMB30,000 (US$4,370)
for each offense.
Regulations Related to Financial
Leasing
In September 2013,
the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) issued the Administration Measures of
Supervision on Financing Lease Enterprises (the “Leasing Measures”), to regulate and administer the business operations
of financial leasing enterprises. According to the Leasing Measures, financial leasing enterprises are allowed to carry out financial
leasing businesses in such forms as direct lease, sublease, sale- and-lease-back, leveraged lease, entrusted lease and joint lease
in accordance with the provisions of relevant laws, regulations and rules. However, the Leasing Measures prohibit financial leasing
enterprises from engaging in financial businesses such as accepting deposits, and providing loans or entrusted loans. Without
the approval from relevant authorities, financial leasing enterprises shall not engage in inter-bank borrowing and other businesses.
In addition, financial leasing enterprises are prohibited from carrying out illegal fund-raising activities in the name of financial
leases. The Leasing Measures require financial leasing enterprises to establish and improve their financial and internal risk
control systems, and a financial leasing enterprise’s risk assets may not exceed ten times that of its total net assets.
Regulations Related to the Marketplace Lending Industry
In July 2015,
ten PRC central government ministries and regulators, including the PBOC, China Banking Regulatory Commission (the “CBRC”),
the Ministry of Finance, the MPS and the Cyberspace Administration of China, together released the Guidelines on Promoting Healthy
Growth of Internet Finance (the “Guidelines”), which identified the CBRC as the supervisory regulator for the online
lending industry. According to the Guidelines, online marketplace lending platforms shall only serve as intermediaries to provide
information services to borrowers and investors, and shall not provide credit enhancement services or illegally conduct fundraising.
The Guidelines also outlined certain regulatory propositions, which would require Internet finance companies, including marketplace
lending platforms, to (i) complete website registration procedures with the administrative departments overseeing telecommunications;
(ii) use banking financial institutions' depository accounts to hold lending capital, and engage an independent auditor to audit
such accounts and publish audit results to customers; (iii) improve the disclosure of operational and financial information, provide
sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors; (iv) enhance
online security management to protect customers' personal and transactional information; and (v) take measures against anti-money
laundering and other financial crimes.
Effective as of September 1,
2015, the Provisions of the Supreme People’s Court on Application of Laws to the Hearing of Private Lending Cases (the “Provisions
on Private Lending Cases”) define private lending as financings between natural persons, legal persons or other organizations.
The Provisions set forth that private lending contracts will be upheld as invalid under the circumstance that (i) relending of
funds to a borrower that knew or should have known that the funds were fraudulently obtained from a financial institution; (ii)
relending of funds to a borrower that knew or should have known that the funds were borrowed from other enterprises or raised
by the company's employees; (iii) lending of funds to a borrower wherein the investor knew or should have known that the borrower
intended to use the borrowed funds for illegal or criminal purposes; (iv) violations of public orders or good morals; or (v) violations
of mandatory provisions of laws or administrative regulations.
According to
the Provisions on Private Lending Cases (i) when the interest rate agreed between the borrower and investor does not exceed an
annual interest rate of 24%, the People's Court will uphold the interest rate charged by the investor, and (ii) when the interest
rate agreed between the borrower and investor exceeds an annual interest rate of 36%, the portion in excess of 36% is void and
the People's Court will uphold the borrower's claim for return of the excess portion to the borrower. For loans with interest
rates per annum between 24% and 36%, if the interest on the loans has already been paid to the investor, and so long as such payment
has not damaged the interest of the state, the community or any third parties, the courts will likely not enforce the borrower's
demand for the return of such interest payment. If an interest rate for overdue payments is not agreed to before lending, the
interest rate on overdue payments is permitted up to the interest rate for the loan. If neither the interest rate for the loan
nor the interest rate for overdue payments have been agreed to, overdue payments are permitted to have an interest rate of 6%.
In August 2016,
the CBRC, the Ministry of Industry and Information Technology (the “MIIT”), the MPS and the State Internet Information
Office jointly promulgated the Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries.
Apart from what had already been emphasized in the Guidelines and other previously released guidance, the Interim Measures include
(i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection measures
for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and (vii) legal
liabilities.
Under the general
principles and filing administration sections, the Interim Measures provide that online lending intermediaries shall not engage
in credit enhancement services, direct or indirect cash concentration or illegal fundraising. The sections also stipulate a supervisory
system and list the administrative responsibilities of different supervisory authorities, including the CBRC and its local counterpart
and local financial regulators. Furthermore, these sections require online lending intermediaries to file with the local financial
regulators, to apply for relevant telecommunications business licenses thereafter in accordance with the provisions of the relevant
telecommunications authorities and to include serving as an Internet lending information intermediary in its business scope.
Under the business
rules and risk management guidelines section, the Interim Measures stipulate that online lending intermediaries shall not engage
in or be commissioned to engage in thirteen prohibited activities, including: (i) directly or indirectly financing its own projects;
(ii) directly or indirectly receiving or collecting lenders' funds; (iii) directly or indirectly offering guarantees to lenders
or guaranteeing principal and interest payments; (iv) commissioning or authorizing a third party to advertise or promote financing
projects at any physical locations other than through electronic channels such as the Internet and mobile phones; (v) providing
loans (unless otherwise permitted by laws and regulations); (vi) dividing the term of financing projects; (vii) offering its own
wealth management products or other financial products to raise funds or act as a proxy in the selling of banks' wealth management
products, brokers’ asset management products, funds, insurance or trust products; (viii) providing services similar to asset-based
securitization services or conducting credit assignment activities in the form of asset packaging, asset securitization, asset
trusts or fund shares; (ix) mixing with, bundling with or acting as a proxy in relation to investment, sales agent and brokerage
services of other businesses (unless permitted by laws and regulations); (x) fabricating or exaggerating the authenticity or earnings
outlook of a financing project, concealing its flaws and risks, falsely advertising or promoting a project with intentional ambiguity
or other deceptive means, or spreading false or incomplete information to damage the commercial reputation of others, or to mislead
lenders or borrowers; (xi) providing intermediary services for loans used to invest in high-risk financing projects such as stocks,
over-the-counter margin financing, futures contracts, structured products and other derivatives; (xii) operating equity-based
crowd-funding; and (xiii) other activities prohibited by laws and regulations. The Interim Measures, under the business rules
and risk management section, also stipulate specific obligations or business principles of online lending intermediaries, including
but not limited to online dispute resolution services, examination and verification functions, anti-fraud measures, risk education
and training, information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service
fees, electronic signatures and loan management. In addition, the Interim Measures stipulate that online lending intermediaries
shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation,
post-loan tracking and pledge management in accordance with online-lending regulations, via offline physical locations. Furthermore,
the Interim Measures provide that online lending intermediaries shall, based on their risk management capabilities, set upper
limits on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending
intermediaries. In the case of natural persons, this limit shall not be more than RMB 200,000 (US$30,756) for one online lending
intermediary and not more than RMB 1 million (US$153,782) in total from all platforms, while the limit for a legal person or organization
shall not be more than RMB 1 million for one online lending intermediary and not more than RMB 5 million (US$768,911) in total
from all platforms.
In the protection
for investors and borrowers section, the Interim Measures require that online lending intermediaries (i) separate their own capital
from funds received from lenders and borrowers and (ii) select a qualified banking financial institution as their funding depository
institution, which shall perform depository and administration responsibilities as required. In the remaining sections, the Interim
Measures provide for other miscellaneous requirements for online lending intermediaries, including but not limited to, risk assessment
and disclosure, auditing and authentication, industry association, reporting obligations, information security and disclosure
and legal liabilities. Online lending intermediaries established prior to the effectiveness of the Interim Measures have a transition
period of twelve months to rectify any activities that are non-compliant with the Interim Measures, except with respect to criminal
activity, which must be terminated immediately.
In October 2016,
several regulations on Internet finance were publicly announced, including but not limited to, the Notice of the General Office
of the State Council on the Issuance of Special Rectification Implementation Plan regarding Internet Finance, Special Rectification
Implementation Plan regarding Online Lending Risks, Special Rectification Implementation Plan for Risks of Asset Management Business
through the Internet and Trans-subject Business, Special Rectification Implementation Plan for Risks regarding Non-Bank Payment
Institutions, Special Rectification Implementation Plan for Risks of Internet Financing Advertising and Financial Activities in
the form of financial investment (together the “Special Rectification Implementation Plans”). The Special Rectification
Implementation Plans emphasize principles and rules in related to Internet finance regulations, and stipulate that (i) “look-through”
supervision method shall be adopted, and (ii) companies in the same group that hold a number of financial business qualifications
shall not violate rules of related party transactions and other related business regulations.
In November 2016,
the CBRC, the MIIT and the State Administration for Industry and Commerce (“SAIC”), jointly issued the Guidance to
the Administration of Filling and Registration of Online Lending Information Intermediaries (the “Guidance of Administration”),
which provides the general filing rules for online lending intermediaries, and delegates the filing authority to local financial
authorities. The Guidance of Administration require that online lending intermediaries apply for registration with local financial
regulators. Under the general filing procedures for online lending intermediaries which had already been established and operated
prior to the promulgation of the Guidance of Administration, before an filing application is submitted to local financial regulators,
the online lending intermediaries may be required to: (i) rectify any breach of applicable regulations as required by local financial
regulators; and (ii) apply to the SAIC to amend or register such entity's the business scope.
The CBRC also authorizes local financial regulators to make detailed implementation rules regarding filing
procedures.
In February 2017,
the CBRC released the Guidance to Regulate Funds Depositories for Online Lending Intermediaries (the “Depository Guidance”).
The Depository Guidance defines depositories as commercial banks that provide online lending fund depository services, and stipulates
that the depositories shall not be engaged in offering any guarantee, including: (i) offering guarantees for lending transaction
activities conducted by online lending intermediaries, or undertaking any liability for breach of contract related to such activities;
(ii) offering guarantees to lenders, guarantying principal and earnings or bearing the risks associated with fund lending operations
for lenders.
Apart from the requirements
set forth in the Interim Measures and the Guidance of Administration, the Depository Guidance imposes certain responsibilities
on online lending intermediaries, including requiring them to enter into fund depository agreements with only one commercial bank
to provide fund depository services, organize independent auditing on funds depository accounts of borrowers and investors and
various other services. The Depository Guidance also provides that online lending intermediaries permitted to develop an online
lending fund depository business shall satisfy certain conditions, including: (i) completing registration, filing records and
obtaining a business license from the SAIC; (ii) filing records with the local financial regulator; and (iii) applying for a corresponding
value-added telecommunications business license pursuant to the relevant telecommunication authorities. The Depository Guidance
also requires online lending intermediaries to perform various obligations, and prohibits them advertising their services with
the information of their depository except for in accordance with necessary exposure requirements, the interpretation and applicability
of which is unclear, as well as oversight requirements. The Depository Guidance also raises other business standards and miscellaneous
requirements for depositories and online lending intermediaries as well. Online lending intermediaries and commercial banks conducting
the online depository services prior to the effectiveness of the Depository Guidance have a six-month grace period to rectify
any activities not in compliance with the Depository Guidance.
Some elements of our
platform may not currently be operating in full compliance with the Depository Guidelines, the rules proposed by the Interim Measures
and other principles that have been announced in recent years. Moreover, the Interim Measures also stipulated a 12-month transition
period from the time of its effectiveness for online lending intermediaries to adjust their business models. See “Business
— Risk Factors — Risks Related to Doing Business in China — Our operations may need to
be modified to comply with existing and future requirements set forth by the CBRC or laws or regulations promulgated by other
PRC authorities regulating the marketplace lending industry in China.”
In addition, on April 7,
2017, the CBRC issued the Guideline of Risk Prevention and Control of Banking Industry, which prohibits online lending intermediaries
from (i) approaching potential borrowers that are incapable of repaying or (ii) offering Online Lending Services to college students
under the age of 18.
In December 2017,
the Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending
Intermediaries (“Circular 57”), providing further clarification on several matters in connection with the rectification
and record-filing of online lending information intermediaries, including, among other things:
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Requirements relating to risk reserve funds.
The
online lending information intermediaries shall discontinue setting aside additional funds as risk reserve funds or originating
new risk reserve funds. In addition, the existing balance of risk reserve funds shall be gradually reduced. Moreover, online lending
information intermediaries are prohibited from promoting their services by publicizing the risk reserve funds, and authorities
shall actively encourage the online lending information intermediaries to seek third parties to provide lenders with alternate
means of investors' protection, including third-party guarantee arrangements.
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Requirements relating to assignment of debt.
Low
frequency assignment of debts between lenders shall be deemed as compliance. However, providing services similar to asset-based
securitization services or conducting credit assignment activities in the form of asset packaging, asset securitization, asset
trusts or fund shares shall be deemed as incompliance; “super lender” mode, which the senior manager or affiliated
person of online lending information intermediaries, under the authorization of the platform, concluding loan agreements with
the borrower and extending loans directly to the borrower and then release a product equaling to the amount of the loan on the
platform, transferring the creditor's right to the actual lender, will be deemed as incompliance.
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Requirements to qualify for record-filing.
Circular
57 sets forth certain requirements which an online lending intermediary shall not be in breach before it can qualify for the record-filing,
including: (i) an online lending intermediary may not conduct the “thirteen prohibited actions” or exceed the individual
lending amount limit after August 24, 2016, and shall gradually reduce the balance; (ii) an online lending intermediary which
has participated in businesses of the real estate mortgage, campus loan or “cash loan,” is required to suspend the
new loan origination and the outstanding balance of the abovementioned loans shall be gradually reduced within a certain timetable
as required under the CBRC Circular 26 and Circular 141 (as defined below); and (iii) the online lending intermediaries are
required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the
National Online Lending Rectification Office to hold customer funds. For the online lending intermediaries that are unable to
accomplish the rectification and record-filing but are continuing to participate in the online lending business, the relevant
authorities shall subject online lending intermediaries to administrative sanctions, including but not limited to revoking their
telecommunicating business operation license, shutting down their business websites and requesting financial institutions not
to provide any financial services to such online lending intermediaries.
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Requirements relating to the timing of record-filing.
The
local governmental authorities shall conduct and complete acceptance inspection of the rectification with the following timetable:
(i) completion of record-filing for major online lending information intermediaries by the end of April 2018; (ii) with respect
to online lending information intermediaries with substantial outstanding balance of those loans prohibited under the relevant
laws and regulations and timely reduction of those balance is difficult, the relevant business and outstanding balance shall be
disposed and/or carved out, and record-filing shall be completed by the end of May 2018; (iii) with respect to those online
lending information intermediaries with complex and extraordinary circumstances and substantial difficulties exist to complete
rectification, the “relevant work” shall be completed by the end of June 2018.
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In December 2017,
the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued the Notice on Regulating
and Rectifying “Cash Loan” Business (the “Circular 141”), outlining general requirements on the “cash
loan” business conducted by network microcredit companies, banking financial institutions and online lending information
intermediaries. Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios,
with no specified use of loan proceeds, no qualification requirement on customers and unsecured etc. Circular 141 sets forth several
general requirements with respect to “cash loan” business, including, without limitation: (i) no organizations or
individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregated borrowing
costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit
on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s
Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and
determine the borrower's eligibility, credit limit and cooling-off period, etc. Loans to any borrower without income sources are
prohibited; and (iv) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven”
risk management model.
In additions, Circular
141 emphasizes several requirements on the online lending information intermediaries. For instance, such intermediaries are prohibited
from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated
use of proceeds. Also, such intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from
the principal of loans provided to the borrowers in advance.
Any violation of Circular
141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation,
revocation of license, order to cease business operation, and criminal liabilities.
On December 8, 2017,
the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks released Circular 57. Circular 57
requires local financial regulator, local CBRC, the People’s Bank local branch, local public security, local communication
administrative department and local Administration for Industry and Commerce (“AIC”) to jointly inspect and accept
whether an internet lending information intermediary or P2P company complies with the Interim Measures. The P2P company can only
be filed records (“P2P Filing”) with the local financial regulator after receiving acceptance certificate or document
issued jointly by local financial regulator and local CBRC. Normally, the P2P Filing should be completed before April 2018 according
to the Circular 57. Circular 57 forbids several credit assignment models, including: (i) providing asset securitization services
or transfer creditor’s rights in form of packaged assets, securitized assets, trust assets or fund shares; (ii) certain
credit transfer from related individual party of the P2P company to the lender on the platform; and (iii) using credit right from
the peer-to-peer lending platform as a pledge to borrow money from other lenders. In accordance with Circular 57, online lending
marketplaces shall optimize their business portfolios continuously and manage the scale of their businesses. Marketplaces that
have received rectification notices shall ensure steady decrease of the balance of non-compliant business on these marketplaces
and shall not engage in any new non-compliant operations.
On
August 13, 2018, the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks issued the Notice
on Conducting Compliance Inspection on P2P Lending Platforms, or the Notice on Compliance Inspection, which requires that P2P
lending platforms, local internet finance associations and relevant governmental authorities conduct compliance inspections based
on a checklist of 108 compliance criteria and that such inspections shall be completed by December 31, 2018. The Notice on Compliance
Inspection further states that only P2P lending platforms which pass the compliance check and satisfy a period of operations and
tests may apply for filing.
In
January 2019, the Office of the Lending Group for the Special Campaign against Internet Financial Risks and the Office of the
Special Campaign against Peer-to-peer Lending Risks issued Circular 175. according to Circular 175, except for large-scale peer-to-peer
direct lending marketplaces that have not demonstrated any high-risk characteristics, which are generally referred to as Normal
Marketplaces, other marketplaces, including shell companies with no substantive operation, small-scale marketplaces, marketplaces
with high risks and marketplaces on which investors are not fully repaid or that are otherwise unable to operate their
businesses, shall exit the peer-to-peer lending industry or cease operation. Normal Marketplaces shall cease operating businesses
that are not in compliance with laws and regulations. Circular 175 also encourages certain Normal Marketplaces to convert into
other types of online financing institutions such as online small loan companies or loan facilitation platforms. In accordance
with Circular 175, Normal Marketplaces shall strictly manage the scale of its business and number of investors, follow the requirements
of Dual Decrease and report relevant data to competent government agencies. According to Circular 175, the overarching objective
of Circular 175 is for PRC government agencies to effect orderly exits of certain peer-to-peer direct lending marketplaces without
inducing systematic risk in the financial system or causing significant social turbulence until only those marketplaces that are
strictly in compliance with all relevant laws and regulations remain in operation in the peer-to-peer direct lending industry.
Regulations Related to Illegal Fundraising
PRC laws and regulations
prohibit persons and companies from raising funds through advertising to the public a promise to repay premium or interest payments
over time through payments in cash or in kind except with the prior approval of the applicable government authorities. Failure
to comply with these laws and regulations may result in penalties imposed by the PBOC, the AIC and other governmental authorities
and can lead to civil or criminal lawsuits.
The Measures for the
Banning of Illegal Financial Institutions and Illegal Financial Business Operations, promulgated by the State Council of the People’s
Republic of China (“State Council”) in July 1998, and amended on January 2011, and the Notice on Relevant Issues Concerning
the Penalty on Illegal Fund-Raising, issued by the General Office of the State Council in July 2007, explicitly prohibit illegal
public fund-raising. The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from
the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant
authorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a
specified period of time, and (iii) using a legitimate form to disguise the unlawful purpose.
The Supreme People’s
Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal
Fund-Raising (the “Illegal Fund-Raising Judicial Interpretations”), which became effective in January 4, 2011, to
clarify the criminal charges and punishments regarding illegal public fund-raising. The Illegal Fund-Raising Judicial Interpretations
provide that a public fund-raising will constitute a criminal offense of “illegally soliciting deposits from the
public” under the PRC Criminal Law, if it meets all of the following criteria: (i) the fund-raising has not been approved
by relevant authorities or is concealed under the disguise of legitimate acts; (ii) the fund-raising employs general solicitation
or advertising such as social media, promotion meetings, leafleting and short messaging service advertising; (iii) the fundraiser
promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, properties in kind
or other payment forms; and (iv) the fund-raising targets the general public as opposed to specific individuals. An illegal fund-raising
activity will be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising
Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits
from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000,
(ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding
RMB500,000, or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe
consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. The Measures for the Banning
of Illegal Financial Institutions and Illegal Financial Business Operations also prohibits facilitating loans to the public without
the approval of the PBOC.
Our platform only
acts as an information service provider in the facilitation of loans between borrowers and investors, our platform has not been
subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. In this regard,
as advised by our PRC counsel, the business operation of our platform does not violate the current existing PRC laws and regulations
prohibiting illegal fundraising. Nevertheless, uncertainties exist with respect to the PBOC, AIC and other governmental authorities'
interpretations of the fundraising-related laws and regulations. While our agreements with investors require investors to guarantee
the legality of all funds investors put on our platform, we do not verify the source of investors’ funds separately, and
therefore, to the extent that investors' funds are obtained through illegal fundraising, we may be negligently liable as a facilitator
of illegal fundraising. In addition, while our loan agreements contain provisions that require borrowers to use the proceeds for
purposes listed in their loan applications, we do not monitor the borrowers' use of funds on an on-going basis, and therefore,
to the extent that borrowers use proceeds from the loans for illegal activities, we may be negligently liable as a facilitator
of an illegal use. Although we have designed and implemented procedures to identify and eliminate instances of fraudulent conduct
on our platform, as the number of borrowers and investors on our platform increases, we may not be able to identify all fraudulent
conduct that may violate illegal fundraising laws and regulations.
Regulations Related to Value-Added
Telecommunication Business Certificates and Foreign Investment Restrictions
PRC regulations impose
sanctions for engaging in Internet information services of a commercial nature without having obtained an ICP certificate or engaging
in the operation of online data processing and transaction processing (“ODPTP”) without having obtained an ODPTP certificate.
These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation
of illegal gains and, in the case of significant infringements, the websites may be ordered to close. Nevertheless, the PRC regulatory
authorities' enforcement of such regulations in the context of online lending platforms remains unclear.
According to the Provisions
on the Administration of Foreign-invested Telecommunication Enterprises, the ratio of investment by foreign investors in a foreign-invested
telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%. The
Circular of Ministry of Industry and Information Technology Concerning Lifting Restrictions on the Proportion of Foreign Equity
in Online Data Processing and Transaction Processing Business (E-commerce) (the “Circular 196”), which was promulgated
on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered capital in a foreign-invested
telecommunication enterprise engaging in the operation of online data processing and transaction processing (E-commerce). However,
foreign investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise
that engages in the operation of Internet information services. Under either circumstance, the largest foreign investor will be
required to have a satisfactory business track record and operational experience in the value-added telecommunications business.
While Circular 196
permits foreign ownership, in whole or in part, of online data and deal processing businesses (E-commerce), a sub-set of value-added
telecommunications services, it is not clear whether our online lending platform will be deemed as online data and deal processing.
See “Business — Risk Factors — Risks Related to Doing Business in China — We
may be required to obtain a value-added telecommunication business certificate and be subject to foreign investment restrictions.”
Regulations Related to Internet
Advertising
The Interim Measures
for Administration of Internet Advertising (the “Internet Advertising Measures”), were adopted by the SAIC and became
effective on September 1, 2016. The Internet Advertising Measures regulate Internet advertising activities. According to
the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content of advertisements.
The identity, administrative license, cited information and other certificates that advertisers are required to obtain in publishing
Internet advertisements shall be true and valid. Internet advertisements shall be distinguishable and prominently marked as “advertisements”
in order to enable consumers to identify them as advertisements. Publishing and circulating advertisements through the Internet
shall not affect the normal use of the Internet by users. It is not allowed to induce users to click on the content of advertisements
by any fraudulent means, or to attach advertisements or advertising links in the emails without permission. The Internet Advertising
Measures also impose several restrictions on the forms of advertisements and activities used in advertising. “Internet advertising”
as defined in the Internet Advertising Measures refers to commercial advertisements that directly or indirectly promote goods
or services through websites, web pages, Internet applications or other Internet media in various forms, including texts, pictures,
audio clips and videos. Where Internet advertisements are not identifiable and marked as “advertisements”, a fine
of not more than RMB 100,000 (US$15,378) may be imposed in accordance with Advertising Law. A fine ranging from RMB 5,000 (US$769)
to RMB 30,000 (US$4,613) may be imposed for any failure to provide a prominently marked “CLOSE” button to ensure “one-click
closure”. Advertisers who induce users to click on the content of advertisements by fraudulent means or without permission,
attach advertisements or advertising links in the emails shall be imposed a fine ranging from RMB 10,000 (US$1,538) to RMB 30,000
(US$4,613). Our marketplace is in the process of complying with the new Internet Advertising Measures during our advertising activities.
Regulations Related to Information
Security and Confidentiality of User Information
Internet activities
in China are regulated and restricted by the PRC government and are subject to criminal penalties under the Decision Regarding
the Protection of Internet Security.
The MPS has promulgated
measures that prohibit use of the Internet in ways that, among other things, result in leaks of government secrets or the spread
of socially destabilizing content. The MPS and its local counterparts have authority to supervise and inspect domestic websites
to carry out its measures. Internet information service providers that violate these measures may have their licenses revoked
and their websites shut down.
On June 22, 2007,
the MPS, the State Secrecy Administration and other relevant authorities jointly issued the Administrative Measures for the Hierarchical
Protection of Information Security, which divides information systems into five categories and requires the operators of information
systems ranking above Grade II to file an application with the local Bureau of Public Security within 30 days of the date of its
security protection grade determination or since its operation. The Company completed its registration with the local Bureau of
Public Security in April, 2017.
The PRC government
regulates the security and confidentiality of Internet users’ information. The Administrative Measures on Internet Information
Service, the Regulations on Technical Measures of Internet Security Protection and the Provisions on Protecting Personal Information
of Telecommunication and Internet Users, which were issued on July 16, 2013 by the MIIT, set forth strict requirements to
protect personal information of Internet users and require Internet information service providers to maintain adequate systems
to protect the security of such information. Personal information collected must be used only in connection with the services
provided by the Internet information service provider. Moreover, the Rules for Regulating the Order in the Market for Internet
Information Service also protect Internet users’ personal information by (i) prohibiting Internet information service providers
from unauthorized collection, disclosure or use of their users’ personal information and (ii) requiring Internet information
service providers to take measures to safeguard their users' personal information. In December 2012, the Standing Committee
of the National People’s Congress passed the Decision on Strengthening Internet Information Protection, which provides that
all Internet service providers in China, including Internet information service providers, must require that their users provide
identification information before entering into service agreements or providing services.
On November 7,
2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which came into effect on
June 1, 2017 (“Cyber Security Law”). The Cyber Security Law requires network operators to perform certain functions
related to cyber security protection and the strengthening of network information management. For instance, under the Cyber Security
Law, network operators of key information infrastructure generally shall, during their operations in the PRC, store the personal
information and important data collected and produced within the territory of PRC.
On April 11,
2017, the Cyberspace Administration of China announced the Measures for the Security Assessment of Personal Information and Important
Data to be Transmitted Abroad (consultation draft) (the “Consultation Draft of Security Assessment Measures”). The
Consultation Draft of Security Assessment Measures requires network operators to conduct security assessments and obtain consents
from owners of personal information prior to transmitting personal information and other important data abroad. Moreover, under
the Consultation Draft of Security Assessment Measures, the network operators are required to apply to the relevant regulatory
authorities for security assessments under several circumstances, including but not limited to: (i) if data to be transmitted
abroad contains personal information of more than 500,000 users in aggregate; (ii) if the quantity of the data to be transmitted
abroad is more than 1,000 gigabytes; (iii) if data to be transmitted abroad contains information regarding nuclear facilities,
chemical biology, national defense or military projects, population and health, or relates to large-scale engineering activities,
marine environment issues or sensitive geographic information; (iv) if data to be transmitted abroad contains network security
information regarding system vulnerabilities or security protection of critical information infrastructure; (v) if key information
infrastructure network operators transmit personal information and important data abroad; or (vi) if any other data to be transmitted
abroad contains information that might affect national security or public interest and are required to be assessed as determined
by the relevant regulatory authorities.
Regulations Related to Company Establishment
and Foreign Investment
The establishment,
operation and management of corporate entities in China is governed by the Company Law of the PRC (the “Company Law”).
According to the Company Law, companies established in the PRC are either limited liability companies or joint stock limited liability
companies. The Company Law applies to both PRC domestic companies and foreign-invested companies. The establishment procedures,
approval procedures, registered capital requirements, foreign exchange matters, accounting practices, taxation and labor matters
of a wholly foreign-owned enterprise are regulated by the Wholly Foreign-Owned Enterprise Law of the PRC and the Implementation
Regulation of the Wholly Foreign-Owned Enterprise Law. According to these regulations, foreign-invested enterprises in the PRC
may only pay dividends out of their accumulated profit, if any, determined in accordance with PRC accounting standards and regulations.
A PRC company is required to set aside general reserves of at least 10% of its after-tax profit, until the cumulative amount of
such reserves reaches 50% of its registered capital unless the provisions of laws regarding foreign investment provide otherwise.
In addition, PRC companies may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare
and bonus funds at their discretion. These reserves and employee welfare and bonus funds are not distributable as cash dividends.
A PRC company may not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from
prior fiscal years may be distributed together with distributable profits from the current fiscal year. In September 2016,
the National People's Congress Standing Committee published its decision to revise the laws relating to wholly foreign-owned enterprises
and other foreign-invested enterprises. Such decision, which became effective on October 1, 2016, changes the “filing
or approval” procedure for foreign investments in China such that foreign investments in business sectors not subject to
special administrative measures will only be required to complete a filing instead of the existing requirements to apply for approval.
The special entry management measures shall be promulgated or approved to be promulgated by the State Council. Pursuant to a notice
issued by the National Development and Reform Commission (“NDRC”) and MOFCOM on October 8, 2016, the special
entry management measures shall be implemented with reference to the relevant regulations as stipulated in the Catalogue of Industries
for Guiding Foreign Investment in relation to the restricted foreign investment industries, prohibited foreign investment industries
and encouraged foreign investment industries. Pursuant to the Provisional Administrative Measures on Establishment and Modifications
Filing for Foreign Investment Enterprises promulgated by MOFCOM on October 8, 2016, establishment and changes of foreign
investment enterprises not subject to the approval under the special entry management measures shall be filed with the relevant
commerce authorities.
The Provisions on
Guiding the Orientation of Foreign Investment and the 2015 revision of the Catalogue of Industries for Guiding Foreign Investment
classify foreign investment projects into four categories: encouraged projects, permitted projects, restricted projects and prohibited
projects. The purpose of these regulations is to direct foreign investment into certain priority industry sectors and restrict
or prohibit investment in other sectors. If the industry sector in which the investment is to occur falls into the encouraged
category, foreign investment can be conducted through the establishment of a wholly foreign-owned enterprise. If a restricted
category, foreign investment may be conducted through the establishment of a wholly foreign-owned enterprise, provided certain
requirements are met, and, in some cases, the establishment of a joint venture enterprise is required with varying minimum shareholdings
for the Chinese party depending on the particular industry. If a prohibited category, foreign investment of any kind is not allowed.
Any industry not falling into any of the encouraged, restricted or prohibited categories is classified as a permitted industry
for foreign investment. Our online lending and risk management consulting businesses are classified as permitted foreign investment
projects. However, if our online lending platform is required to obtain an ICP certificate (see “Business — Risk Factors
— Risks Related to Doing Business in China — We may be required to obtain a value-added telecommunication business
certificate and be subject to foreign investment restrictions.”), our foreign investment will not be permitted to exceed
50% and the main foreign investor will be required to have a good track record and operational experience in value-added telecommunications
businesses.
The Special Administrative
Measures for Entrance of Foreign Investment (Negative List) (2018 Version) (the “2018 Negative List”), which was promulgated
jointly by the MOFCOM and the NDRC on June 28, 2018 and became effective on July 28, 2018, replaced and partly abolished the Guidance
Catalogue of Industries for Foreign Investment (2017 Revision) regulating the access of foreign investors to China. Foreign investors
should refrain from making investing in any of prohibited sectors specified in the 2018 Negative List, and foreign investors are
required to obtain the permit for access to other sectors that are listed in the 2018 Negative List but not classified as “prohibited.”
On June 30, 2019, the
MOFCOM and the NDRC promulgated the new Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019
Version) which will become effective on July 31, 2019 (the “2019 Negative List”) to replace the 2018 Negative List.
Neither our Automobile Transaction and Related Services nor our Online Lending Services is listed in 2018 Negative List or 2019
Negative List. However, if we are required to obtain an ICP certificate for our Online Lending Services, we may be subject to foreign
investment restrictions which prohibit us from holding more than 50% of our Online Lending Services.
According to the Foreign
Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted by one or more
natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign
investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually
or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires
stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign
investor, individually or collectively with other investors, invests in a new project within China; and (iv) investments in other
means as provided by laws, administrative regulations, or the State Council.
According to the Foreign
Investment Law, the State Council will publish or approve to publish the “negative list” for special administrative
measures concerning foreign investment. The Foreign Investment Law grants national treatment to foreign-invested enterprises (“FIEs”),
except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in the
“negative list”. Because the “negative list” has yet to be published, it is unclear whether it will differ
from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment
Law provides that FIEs operating in foreign restricted or prohibited industries will require market entry clearance and other
approvals from relevant PRC governmental authorities. If a foreign investor is found to invest in any prohibited industry in the
“negative list”, such foreign investor may be required to, among other aspects, cease its investment activities, dispose
of its equity interests or assets within a prescribed time limit and have its income confiscated. If the investment activity of
a foreign investor is in breach of any special administrative measure for restrictive access provided for in the “negative
list”, the relevant competent department shall order the foreign investor to make corrections and take necessary measures
to meet the requirements of the special administrative measure for restrictive access.
Besides, the PRC government
will establish a foreign investment information reporting system, according to which foreign investors or foreign-invested enterprises
shall submit investment information to the competent department for commerce concerned through the enterprise registration system
and the enterprise credit information publicity system, and a security review system under which the security review shall be
conducted for foreign investment affecting or likely affecting the state security.
Furthermore, the Foreign
Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign investment
may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.
In addition, the Foreign
Investment Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including,
among others, that a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency, its contributions,
profits, capital gains, income from disposition of assets, royalties of intellectual property rights, indemnity or compensation
lawfully acquired, and income from liquidation, among others, within China; local governments shall abide by their commitments
to the foreign investors; governments at all levels and their departments shall enact local normative documents concerning foreign
investment in compliance with laws and regulations and shall not impair legitimate rights and interests, impose additional obligations
onto FIEs, set market access restrictions and exit conditions, or intervene with the normal production and operation activities
of FIEs; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation
shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; and mandatory
technology transfer is prohibited.
Regulations Related to Labor and
Social Security
Pursuant to the PRC
Labor Law, the PRC Labor Contract Law and the Implementing Regulations of the Employment Contracts Law, labor relationships between
employers and employees must be executed in written form. Wages may not be lower than the local minimum wage. Employers must establish
a system for labor safety and sanitation, strictly abide by state standards and provide relevant education to its employees. Employees
are also required to work in safe and sanitary conditions.
On December 28,
2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch.
Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of
dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by
the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage in temporary,
auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources
and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched workers hired
by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched
workers). The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this
regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March 1,
2016. In addition, an employer is not permitted to hire any new dispatched worker until the number of its dispatched workers has
been reduced to below 10% of the total number of its employees.
Under PRC laws, rules
and regulations, including the Social Insurance Law, the Interim Regulations on the Collection and Payment of Social Security
Funds and the Regulations on the Administration of Housing Accumulation Funds, employers are required to contribute, on behalf
of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance,
basic medical insurance, occupational injury insurance, maternity leave insurance and housing accumulation funds. These payments
are made to local administrative authorities and any employer who fails to contribute may be fined and ordered to pay the deficit
amount. See “Business — Risk Factors — Risks Related to Doing Business in China —
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
Regulations on Intellectual Property
The PRC has adopted
legislation governing intellectual property rights, including copyrights, trademarks and patents. The PRC is a signatory to major
international conventions on intellectual property rights and is subject to the Agreement on Trade Related Aspects of Intellectual
Property Rights as a result of its accession to the World Trade Organization in December 2001.
The National People's
Congress amended the Copyright Law in 2001 and 2010 to widen the scope of works and rights that are eligible for copyright protection.
The amended, the Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and
software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.
To address copyright infringement related to content posted or transmitted over the Internet, the National Copyright Administration
and former Ministry of Information Industry jointly promulgated the Administrative Measures for Copyright Protection Related to
the Internet in April 2005. These measures became effective in May 2005.
On December 20,
2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from January 1, 2002,
and revised in 2013, which are intended to protect the rights and interests of the computer software copyright holders and encourage
the development of software industry and information economy. In the PRC, software developed by PRC citizens, legal persons or
other organizations is automatically protected immediately after its development, without an application or approval. Software
copyrights may be registered with the designated agency and if registered, the certificate of registration issued by the software
registration agency will be the primary evidence of the ownership of the copyright and other registered matters. On February 20,
2002, the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright Registration, which
outline the operational procedures for registration of software copyright, as well as registration of software copyright license
and transfer contracts. The Copyright Protection Center of China is mandated as the software registration agency.
The PRC Trademark
Law, adopted in 1982 and revised in 1993, 2001 and 2013 respectively, protects the proprietary rights to registered trademarks.
The Trademark Office under the SAIC handles trademark registrations and may grant a term of ten years for registered trademarks,
which may be extended for another ten years upon request. Trademark license agreements shall be filed with the Trademark Office
for record. In addition, if a registered trademark is recognized as a well-known trademark, the protection of the proprietary
right of the trademark holder may reach beyond the specific class of the relevant products or services.
The Patent Law of
the PRC and its Implementation Rules provide for three types of patents: invention, utility model and design. The duration of
a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Regulations Related to Foreign Exchange
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most recently amended
in August 2008. Payments of current account items, such as profit distributions and trade and service-related foreign exchange
transactions, can usually be made in foreign currencies without prior approval from the State Administration of Foreign Exchange
(“SAFE”) by complying with certain procedural requirements. By contrast, approval from or registration with appropriate
PRC authorities or banks authorized by appropriate PRC authorities is required where RMB capital is to be converted into foreign
currency and remitted out of China to pay capital expenses.
SAFE promulgated the
Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital
of Foreign-invested Enterprises (“Circular 19”), effective on June 1, 2015, in replacement of SAFE Circular 142
(the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises. According to Circular 19, the flow and use of the RMB capital converted
from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not
be used for the issuance of RMB entrusted loans or the repayment of inter-enterprise loans or the repayment of banks loans that
have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered
capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that
RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used
for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments
in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing
the Foreign Exchange Settlement Management Policy of Capital Account (the “Circular 16”), effective on June 9,
2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted
from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition
against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 or Circular 16 could result
in administrative penalties.
From 2012, SAFE has
promulgated several circulars to substantially amend and simplify the current foreign exchange procedure. Pursuant to these circulars,
the opening of various special purpose foreign exchange accounts, the reinvestment of RMB proceeds by foreign investors in the
PRC and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer
require the approval or verification of SAFE. In addition, domestic companies are no longer limited to extend cross-border loans
to their offshore subsidiaries but are also allowed to provide loans to their offshore parents and affiliates and multiple capital
accounts for the same entity may be opened in different provinces. SAFE also promulgated the Circular on Printing and Distributing
the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents
in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors
in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct
investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated
SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 delegates the power to enforce the foreign exchange
registration in connection with inbound and outbound direct investments under relevant SAFE rules from local branches of SAFE
to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments.
On January 26,
2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance
to Further Promote Foreign Exchange Control (the “SAFE Circular 3”), which stipulates several capital control measures
with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle
of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing
records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses
before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the
sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the
registration procedures in connection with an outbound investment.
Regulations Relating to Offshore
Special Purpose Companies Held by PRC Residents
SAFE promulgated the
Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles (the “SAFE Circular 37”) in July 2014 that requires PRC residents or entities to register with
SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of
overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore
special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens
or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers
or divisions.
SAFE Circular 37 was
issued to replace SAFE Circular 75 (the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents
Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles. SAFE further enacted the Notice on Further
Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment (the “SAFE Circular 13”)
effective from June 1, 2015, which allows PRC residents or entities to register with qualified banks in connection with their
establishment or control of an offshore entity established for the purpose of overseas investment or financing. However, remedial
registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under
the jurisdiction of the relevant local branch of SAFE. In the event that a PRC shareholder holding interests in a special purpose
vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited
from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and
the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
See “Business
— Risk Factors — Risks Related to Doing Business in China — PRC regulations relating
to offshore investment activities by PRC residents may limit our PRC subsidiaries' ability to increase their registered capital
or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.”
SAFE Regulations Relating to Employee
Stock Incentive Plans
On February 15,
2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Stock Incentive Plans of Overseas Publicly-Listed Companies (the “Stock Option Rules”), which replaced the Application
Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock
Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other
relevant rules and regulations, PRC residents who participate in a stock incentive plan in an overseas publicly listed company
are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive
plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed
company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures
with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted
institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding shares
or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to our share
incentive plans if there are any material changes to the share incentive plans, the PRC agent or the overseas entrusted institution
or other material changes. In addition, SAFE Circular 37 provides that PRC residents who participate in a share incentive plan
of an overseas unlisted special purpose company may register with SAFE or its local branches before exercising rights. See “Business
— Risk Factors — Risks Related to Doing Business in China — Any failure to comply
with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants
or us to fines and other legal or administrative sanctions.”
Regulations Related to Tax
Under the PRC Enterprise
Income Tax Law (the “EIT Law”), which became effective on January 1, 2008, an enterprise established outside
the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. In
2009, the SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax
Resident Enterprise on the Basis of De Facto Management Bodies (the “SAT Circular 82”), which provides certain specific
criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated
offshore is located in China. Further to SAT Circular 82, in 2011, the SAT issued the Administrative Measures for Enterprise Income
Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial) (the “SAT Bulletin 45”) to provide more
guidance on the implementation of SAT Circular 82.
According to SAT Circular
82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC resident
enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income
tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments
in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions
are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals,
and minutes and files of its board of directors and shareholders' meetings are located or kept in the PRC; and (d) more than half
of the enterprise's directors or senior management with voting rights habitually reside in the PRC.
Although SAT Circular
82 and SAT Bulletin 45 only apply to offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups
and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s
general position on how the term “de facto management body” could be applied in determining the tax resident status
of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
The State Administration
of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including
the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (the “SAT
Circular 698”), the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises (the “SAT Circular
24”) and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises
(the “SAT Circular 7”). Pursuant to these rules and notices, if a non-PRC resident enterprise transfers its equity
interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax authorities at the place where
the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%. In addition, if a non-PRC resident
enterprise indirectly transfers so-called PRC Taxable Properties, referring to properties of an establishment or a place of business
in China, real estate properties in China and equity investments in a PRC tax resident enterprise, by disposition of the equity
interests in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of
PRC enterprise income tax, the transfer will be re-characterized as a direct transfer of the PRC Taxable Properties and gains
derived from the transfer may be subject to a PRC withholding tax of up to 10%. SAT Circular 7 has listed several factors to be
taken into consideration by the tax authorities in determining if an indirect transfer has a reasonable commercial purpose. However,
regardless of these factors, an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial
purpose and be taxable in the PRC: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived
directly or indirectly from PRC Taxable Properties; (ii) at any time during the one year period before the indirect transfer,
90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments
in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks
assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC Taxable Properties
are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from
the indirect transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those assets.
On the other hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to PRC
tax. The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties.
Under SAT Circular
7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price
to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price. If they fail
to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities. If neither party complies with the
tax payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest
on the seller. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300%
of the unpaid tax on them. The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted
the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.
Regulations Related to PRC Value-Added
Tax
In
March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting
the Pilot Plan for Replacing Business Tax by Value-Added Tax (“VAT”), which became effective on May 1, 2016. Pursuant
to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including
the value-added telecommunication services, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision
of some modern services. Certain small taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%. Unlike
business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable
on the modern services provided.
On April 4, 2018,
the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which came into
effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17% and 11%
respectively become subject to lower VAT rates of 16% and 10% respectively starting from May 1, 2018. Furthermore, according to
the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the
State Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable
goods previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively
starting from April 1, 2019.
Pursuant to applicable
PRC regulations promulgated by the Ministry of Finance of China and the SAT, we are required to pay a VAT at a rate of 6% for
our services and 13% for our automobile sales and financial leasing, with respect to revenues derived from the provision of Automobile
Transaction and Related Services. All revenues derived from Online Lending Services are subject to the rate of 3% as Sichuan Senmiao
is a small taxpayer. A taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT
chargeable on the revenue from services provided.
Regulations Related to Mergers and
Acquisitions
On August 8,
2006, six PRC regulatory agencies, including China Securities Regulatory Commission (the “CSRC”), promulgated the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which
became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, require
offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled
by PRC domestic enterprises or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an
overseas stock exchange. On September 21, 2006, the CSRC published a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval.
The M&A Rules,
and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A
Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact
or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise
which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee
of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions
which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can
be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing
the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Circular 6”),
which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors.
Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger
and Acquisition of Domestic Enterprises by Foreign Investors (the “MOFCOM Security Review Regulations”), which became
effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and
acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by
which foreign Investors may acquire the “de facto control” of domestic enterprises with “national security”
concerns. Under the MOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction
when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger
or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under
Circular 6 led by the NDRC and MOFCOM under the leadership of the State Council, to carry out the security review. The regulations
prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments,
leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation
stating that the merger or acquisition of a company engaged in the marketplace lending business requires security review.
Employees
As of the date of this
Report, we had a total of 139 full-time employees including two executive officers, 92 employees in our Automobile Transaction
and Related Services segment and 45 employees in our Online Lending Services segment.
The following table
sets forth the breakdown of our employees by function in our Automobile Transaction and Related Services segment:
Function
|
|
Number
of Employees
|
Management
|
|
3
|
Risk Management
|
|
4*
|
Operations
|
|
10
|
Marketing
|
|
35
|
Drivers & Automobile Management
|
|
22
|
Post Financing Management
|
|
5
|
Human Resources & Administration
|
|
5
|
Finance and Accounting
|
|
8
|
Total
|
|
92
|
The following table
sets forth the breakdown of our employees by function in our Online Lending Services segment:
Function
|
|
Number of
Employees
|
Management
|
|
5
|
Technology
|
|
17
|
Risk Management
|
|
1*
|
Operations
|
|
8
|
Human Resources
|
|
6
|
Business Development
|
|
6
|
Finance and Accounting
|
|
2
|
Total
|
|
45
|
*Our risk management functions for both
segments are undertaken by one risk management team although the staff are allocated between two segments for administration purposes.
All of our employees are
based in the cities of Chengdu, Deyang and Changsha, where our operations are located.
We believe we offer
our employees competitive compensation packages and a work environment that encourages initiative and is based on merit, and as
a result, we have generally been able to attract and retain qualified personnel and maintain a stable core management team. We
plan to hire additional employees as we expand our business.
As required by PRC
regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a
pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan and a housing provident fund. We are required under PRC law to make contributions to employee benefit
plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified
by the local government from time to time. We have not made adequate employee benefit payments, and may be required to make up
the contributions for these plans as well as to pay late fees and fines. See “Business — Risk Factors — Risks
Related to Doing Business in China — Failure to make adequate contributions to various employee benefit plans
as required by PRC regulations may subject us to penalties.”
We enter into standard
labor and confidentiality agreements with each of our employees. We believe that we maintain a good working relationship with
our employees, and we have not experienced any major labor disputes.
Seasonality
Due to the short operating
history of our Automobile Transaction and Related Services, we have not observed trends or patterns in revenues in such services.
We do not experience any seasonality in our Online Lending Services.
Research and Development
With an aim to standardize
our transaction process and achieve higher operating efficiency, we are developing an integrated information system for Our Automobile
Transaction and Related Services. The system will comprise modules for procurement, qualification assessment, delivery and post-transaction
management which covers the whole transaction process. We have completed the development of certain functions such as information
entry and delivery which are being tested by us. We expect to complete and launch the system by the end of 2019.
Intellectual Property
We regard our trademarks,
domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on
PRC trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and
others to protect our proprietary rights. We own 15 software copyrights and six trademarks. We have five trademark applications
pending at the PRC Trademark Office. We have also registered numerous domain names, including
www.51ruixi.com
,
www.jklqc.com
,
www.ihongsen.com
and
www.senmiaotech.com
. The information on our websites is not a part of, or incorporated in,
this Report.
Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property
rights, which could result in substantial costs and diversion of our resources.
In addition, third
parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement
of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop
non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover,
even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect
our results of operations.
See “Business
— Risk Factors — Risks Related to Our Business Generally — We may not be able to
prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.”
and “— We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt
our business and operations.”
Insurance
We obtain accident
insurance and commercial liability insurance, which are mandatory, on all the automobiles we purchase for sales or financing and
pass on the costs of such insurance to our customers in the sale/financing transaction. We provide social security insurance including
pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We do no maintain
any property insurance policies, business interruption insurance or general third-party liability insurance, nor do we maintain
product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations
in China.
Recent Developments
June 2019 Registered Direct Offering
On June 17, 2019, we
entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”)
in connection with the registered direct public offering (the “June 2019 Offering” ) of 1,781,361 shares (the “Shares”)
of the Company’s common stock, par value $0.0001 per share, for a purchase price of approximately $6,000,000. The Shares
were offered at a price of $3.38 per share (the “Share Purchase Price”). On June 21, 2019, we closed the June 2019
Offering. The Shares and the Warrants were issued pursuant to a prospectus supplement filed with the Commission on June 20, 2019
to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-230397), which was initially filed
with the Commission on March 19, 2019, and was declared effective on April 15, 2019.
In connection with
the June 2019 Offering, we also issued to the Investors for no consideration, Series A common stock purchase warrants (the “Series
A Warrants”) and for nominal consideration, pre-funded Series B common stock purchase warrants (the “Series B Warrants”;
and together with the Series A Warrants, the “Warrants”).
The Company is using
the proceeds for general corporate purposes, including automobile purchases, the costs of providing leasing and other automobile
transaction services, including financial leasing, costs of developing other types of financing businesses, investments in other
entities, costs of technology development, costs of new hires, capital expenditures, working capital and the costs of operating
as a public company. At least $500,000 of the proceeds was deposited into an account at a bank in the United States, which
proceeds (x) may solely be used to satisfy any reasonable legal, audit, accounting and other professional fees and expenses of
the Company and (y) shall not be transferred or used for any other purposes without the prior written consent of certain investors.
The Series A Warrants
provide for the purchase of up to an aggregate of 1,336,021 shares of common stock. The Series A Warrants are exercisable immediately
upon issuance (the “Series A Initial Exercise Date”), at an exercise price of $3.72 per share (the “Series A
Exercise Price”) and will expire on the fourth (4th) anniversary of the Series A Initial Exercise Date. In the event that
the Company issues any equity or equity-linked securities at a price lower than the Series A Exercise Price (subject to certain
exceptions), the Investors have full ratchet anti-dilution protection. On the six (6)-month anniversary of the Series A Initial
Exercise Date, if the average Volume Weighted Average Price (“VWAP”) during the ten (10) trading days prior to such
anniversary (“New Exercise Price”) is less than the Series A Exercise Price, then the Series A Exercise Price has a
one-time price adjustment equal to the New Exercise Price; provided, however, in no event, shall the New Exercise Price be less
than $1.50 per share. Subject to standard equity conditions, commencing on the tenth (10th) trading day after Series A Initial
Exercise Date, the Company may force the exercise of the Series A Warrants if at any time the VWAP of the common stock exceeds
$11.16 (as adjusted for stock splits, stock dividends, recapitalizations and similar events) for ten (10) consecutive trading days.
The Series B Warrants
are pre-funded warrants and were issued as a true-up with respect to the Shares. Initially, the Series B Warrants won’t be
exercisable for any shares of common stock. In the event that on the fiftieth (50th) day after the closing date (the “Adjustment
Measuring Time”), the closing price of the common stock is less than the Share Purchase Price, then the number of shares
of common stock issuable upon exercise of the Series B Warrants shall be adjusted (upward or downward, as applicable) to the greater
of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to fifty percent (50%) of the difference of (A)
the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined the in Purchase Agreement) as of the Adjustment
Measuring Time, less (B) the aggregate number of Shares issued to the Investors at the closing (as adjusted for share splits, share
dividends, share combinations, recapitalizations and similar events). The maximum aggregate number of shares of common stock issuable
upon exercise of the Series B Warrants is 1,116,320. The Series B Warrants are exercisable commencing on the first (1st) day of
the Adjustment Measuring Time for a period of one (1) year from the issuance of the Series B Warrants. The Series B Warrants have
the same exercise price as the Series A Exercise Price. The Series B Warrants have no anti-dilution or reset provisions on the
exercise price.
The exercise of the
Warrants are subject to beneficial ownership limitations such that an Investor may not exercise any Warrant to the extent that
such exercise would result in the Investor being the beneficial owner in excess of 4.99% (or, upon election of such Investor, 9.99%),
which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase
in such limitation will not be effective until 61 days following notice to the Company. Additionally, pursuant to Nasdaq Listing
Rule 5635(d), in no event will the Company issue more than 19.99% of the Company’s total issued and outstanding shares as
of June 17, 2019.
Pursuant to the Purchase
Agreement: (a) each of the Investors shall have a 40% right of participation (on a pro-rata basis) in any debt or equity linked
financings undertaken by the Company for eighteen (18) months following the closing of the June 2019 Offering. Further, until ninety
(90) days after the closing of the June 2019 Offering, the Company shall not, directly or indirectly, offer or issue any securities
(or enter into any agreement with respect thereto) other than customary exceptions; (b) the Company may also not enter into any
variable rate transactions so long as any of the Warrants are still outstanding; (c) each of our directors and executive
officers, have entered into lock-up agreements that generally prohibit the sale, transfer, or other disposition of our securities,
without the prior written consent of the Investors, for a period of sixty (60) days following the closing of the June 2019
Offering; (d) the Company entered into leak-out agreements with the Investors which provide that during the period commencing on
June 17, 2019, and ending on the fortieth (40
th
) day after such date, each of the Investors cannot sell, dispose or
otherwise transfer, directly or indirectly, (including, without limitation, any sales, short sales, swaps or any derivative transactions
that would be equivalent to any sales or short positions) on any trading day during the Restricted Period (as defined in the Purchase
Agreement) (any such date, a “Date of Determination”), shares of common stock held by the Investors as of June 17,
2019, including the Shares and the shares of common stock underlying the Warrants, in an amount more than each Investor’s
pro-rate amount of 30% of the daily average composite trading volume of the common stock as reported by Bloomberg, LP for the applicable
Date of Determination.
FT Global Capital,
Inc. (“FT Global”) acted as the exclusive placement agent for the June 2019 Offering. Pursuant to an engagement letter
between the Company and FT Global, FT Global received cash compensation of approximately $480,000. Additionally, FT Global received
warrants (the “Placement Agent Warrants”) to purchase 142,509 shares of common stock. The Placement Agent Warrants
will expire on the four year anniversary of their issuance and have an exercise price of $3.38.
The following discussion of risk factors
contains forward-looking statements. These risk factors may be important to understanding other statements in this Report. The
following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part II, Item
8, “Financial Statements and Supplementary Data” of this Form 10-K.
The business, financial condition and
operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not
limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial
condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results.
Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition,
operating results and stock price.
Because of the following factors, as
well as other factors affecting the Company’s financial condition and operating results, past financial performance should
not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Risks Related to our Automobile Transaction
and Related Services
We face
intense competition, which may lead to loss of market share, reduced service fees and revenue, increased expenses, departures
of qualified employees, and disputes with competitors.
We face intense competition
in the automobile transaction and financing industry. Our competitors may have significantly more resources than we do, including
financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of
their services. As a result, they may have deeper relationships with automobile dealers, automobile financing partners and other
third-party service providers than we do. This could allow them to develop new services, adapt more quickly to changes in technology
and to undertake more extensive marketing campaigns, which may render our services less attractive to consumers and cause us to
lose market share. Moreover, intense competition in the markets we operate in may reduce our service fees and revenue, increase
our operating expenses and capital expenditures, and lead to departures of our qualified employees. We may also be harmed by negative
publicity instigated by our competitors, regardless of its validity. We may in the future continue to encounter disputes with
our competitors, including lawsuits involving claims asserted under unfair competition laws and defamation which may adversely
affect our business and reputation. Failure to compete with current and potential competitors could materially harm our business,
financial condition and our results of operations.
Our relationship
with Didi, a leading Chinese ride-hailing service platform, third party sales teams and financing partners is crucial to our ability
to grow our business, results of operations and financial condition.
Our strategic relationship
with Didi, a leading ride-hailing service platform in China, is crucial to our business as most of the cars we provide services
to are used as ride-hailing vehicles for Didi. Our cooperative arrangement with Didi is on a non-exclusive basis, and Didi may
have cooperative arrangements with our competitors. If our collaboration with Didi was terminated, we may not be able to maintain
our existing customers or attract new customers who are and will be Didi drivers, which could materially and adversely affect
our business and impede our ability to continue our operations.
We also cooperate
with third party sales teams, automobile dealers and financial institutions and others to provide automobile transaction and financing
services. Our ability to acquire consumers depends on our own marketing efforts through online advertising and billboard advertising,
as well as the network of different third party sales teams. Our ability to attract and maintain customers also depends on whether
our financing partners provide timely and sufficient funding to automobile purchase. We intend to strengthen relationships with
existing financing partners and develop new relationships for our automobile transaction and financing business. If we are not
able to attract or retain cooperative third party sales teams or financing partners as new business partners on acceptable terms,
our business growth will be hindered and our results of operations and financial condition will suffer.
We do not have written agreements
in place with certain financing partners and adverse change in our relationship with such financing partners may materially and
adversely impact our business and results of operations.
We rely on a limited
number of financing partners to fund automobile transactions for automobile purchasers. However, we do not have written agreements
in place with these financing partners obligating them to provide financing. For example, one of our top financing partners has
been funding the automobile purchases by purchasers referred by us through an agreement with a related party of Jinkailong. Because
such financing partners are not contractually bound by any specific commitment to provide financing, they may determine not to
collaborate with us or limit the funding that is available for financing transactions we facilitate, which will materially and
adversely affect our business, financial condition and results of operations.
Our customers’
failure to fully comply with PRC taxi-related laws may expose us to potential penalties and negatively affect our operations.
According to the guidelines
issued by the Municipal Communications Commission of Chengdu in November 2016, online reservation taxi operating license, automobile
certificate and online reservation taxi driver’s license are required to operate the online ride-hailing business. Approximately
10% of the automobiles used for online ride-hailing that are affiliated with us do not have the automobile certificates and approximately
79% of our ride-hailing drivers have not obtained the online reservation taxi driver’s licenses. We are in the process of
assisting the drivers to obtain the required certificate and license. However, there is no guarantee that all of the drivers affiliated
without us would be able to obtain all the certificate and license. Our ability and method to provide the automobile transaction
related services might be affected or restricted if our affiliated drivers or automobiles do not possess the requisite license.
Our business and results of operations will be materially affected if our affiliated drivers are suspended from providing ride-hailing
services or imposed substantial fines.
We advance
payments for over 90% of the automobile purchases for our customers and we can provide no assurances that our current financial
resources will be adequate to support this operation.
We prepay all the
purchase price and expenses on behalf of the automobile purchasers when we provide purchase services and collect all the advance
payment and relevant services fees from the proceeds disbursed by the financial institutions upon the closing of the financing
and/or when the monthly installment payment made by automobile purchasers during the lease term. As of March 31, 2019, we had
advanced payments of approximately $2.6 million (RMB17.2 million) for the automobile purchases. We fund those advance payments
by proceeds of our initial public offering (“IPO”) and loans from financial institutions.
Our liquidity may
be negatively impacted as a result of the increases in advance payments for automobile purchases in addition to general economic
and industry factors. We anticipate that, to the extent that we require additional liquidity, it will be funded through the incurrence
of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. If we raise additional
funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The
covenants under future credit facilities may limit our ability to obtain additional debt financing. We cannot be certain that
additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative
impact on our financial condition and our ability to pursue our business strategies.
Our failure to raise
additional capital and in sufficient amounts may significantly impact our ability to maintain and expand our business.
Jinkailong uses the bank accounts
of its related parties for and failure to use such accounts may have an adverse impact on our operations.
Jinkailong has been
using the bank accounts of its shareholder or companies owned by its shareholders (other than us) to receive and remit payments
during its daily operations. Jinkailong has authorization from these related parties to use the bank accounts and has designated
its own accounting staff to manage such accounts. However, if owners of the bank accounts revoke their authorization, prohibit
or limit Jinkailong’s access to the bank accounts, we may not receive payments timely or at all from financial institutions
or the automobile purchasers, which may adversely affect our operations. Jinkailong may lose all or part of the funds in the accounts
in the event that such accounts are subject to creditor’s claims and frozen or closed by court order.
We may
need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances,
and financing may not be available on terms acceptable to us, or at all.
We have been financing
our Automobile Transaction and Related Services through borrowing from third parties and related parties and proceeds from our
IPO and follow-on public offering. As we intend to continue to make investments to support the growth of our automobile business,
we may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen
circumstances, including developing new solutions and services, increasing the amount of financing transactions we facilitate,
further enhance our risk management capabilities, increasing our sales and marketing expenditures to improve brand awareness and
engage automobile purchasers through expanded online channels, enhancing our operating infrastructure and acquiring complementary
businesses and technologies. We plan to expand our Automobile Transaction and Related Services, and we may need to make additional
capital contribution as a result. Accordingly, we may need to engage in equity or debt financings to secure additional funds.
However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Repayment of
the debts may divert a substantial portion of cash flow to repay principal and service interest on such debt, which would reduce
the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default
and foreclosure on our assets if our operating cash flow is insufficient to service debt obligations, which could in turn result
in acceleration of obligations to repay the indebtedness and limit our sources of financing.
Volatility in the
credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further
issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity
securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are
unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue
our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly
limited, and our business, financial condition, results of operations and prospects could be adversely affected.
Our automobile
financing facilitation services may subject us to regulatory and reputational risks, each of which may have a material adverse
effect on our business, results of operations and financial condition.
We provide automobile
financing facilitation services to finance consumers’ car purchases. The PRC laws and regulations concerning financial services
are evolving and the PRC government authorities may promulgate new laws and regulations in the future. We cannot assure you that
our practices would not be deemed to violate any PRC laws or regulations either now or in the future. The financing products of
our financial partners referred by us may be deemed to exceed the stipulated cap on the financing amount relative to the car purchase
price, in which case we may be required to make adjustments to our cooperation arrangements or cease to cooperate with these financing
partners. If we are required to make adjustments to our automobile financing facilitation referral business model or withdraw,
discontinue or change some of our automobile financing facilitation referral services, our business, financial condition and results
of operations would be materially and adversely affected. In addition, if the financing products referred by us and our cooperation
with financing partners were to be deemed as in violation of applicable PRC laws or regulations, our reputation would suffer.
Moreover, developments
in the financial service industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application
of existing laws, regulations and policies, which may limit or restrict consumer financing or related facilitation services like
those we offer. We may, from time to time, be required to adjust our arrangement with third-party financing partners, which could
materially and adversely affect our business, results of operations and financial condition. Furthermore, we cannot rule out the
possibility that the PRC government will institute a new licensing regime covering services we provide in the future. If such
a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely
manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
We are
exposed to credit risk in our auto financing facilitation and auto financing businesses. Our current risk management system may
not be able to accurately assess and mitigate all risks to which we are exposed, including credit risk.
We are exposed to
credit risk as we provide automobile financing facilitation to automobile purchasers and are required to provide guarantees to
most of our financing partners on the financing for automobile purchases facilitated by us. As at March 31, 2019, the maximum
contingent liabilities the Company exposed to would be approximately $11.5 million if all the automobile purchasers defaulted.
Customers may default on their lease/loan payments for a number of reasons including those outside of their or our control. The
credit risk may be exacerbated in automobile financing due to the relatively limited credit history and other available information
of many consumers in China.
If we are
unable to repossess the car collateral for delinquent financing payments of the automobile purchasers referred by us or do so
in a cost-effective manner or if our ability to collect delinquent financing payments is impaired, our business and results of
operations would be materially and adversely affected. We may also be subject to risks relating to third-party debt collection
service providers who we engage for the recovery and collection of loans.
Under most of the
financial leases/loan agreements between the automobile purchasers and third-party financing partners, we guarantee the lease/loan
payments including principal and the accrued and unpaid interest for the automobile purchase funded by these financing partners.
Therefore, failure to collect lease/loan payments or to repossess the collateral may have a material adverse effect on our business
operations and financial positions. Although the lease/loan payments are secured by the cars, we may not be able to repossess
the car collateral when our customers default. Our measures to track the cars include installing GPS trackers on cars. We cannot
assure you that we will be able to successfully locate and recover the car collateral. We have in the past failed to repossess
one car as the GPS trackers failed to function properly or had been disabled, and we cannot assure you that this incident will
not happen again the future. We also cannot assure you that there will not be regulatory changes that prohibit the installation
of GPS trackers, or the realized value of the repossessed cars will be sufficient to cover our customers' payment obligations.
If we cannot repossess some of these cars or the residual values of the repossessed cars are lower than we expected and not sufficient
to cover the automobile purchaser' payment obligation, our business, results of operations and financial condition may be materially
and adversely affected.
Moreover, the current
regulatory regime for debt collection in the PRC remains unclear. We aim to ensure our collection efforts carried out by our asset
management department comply with the relevant laws and regulations in the PRC. However, if our collection methods are viewed
by the automobile purchasers or regulatory authorities as harassments, threats or other illegal means, we may be subject to risks
relating to our collection practice, including lawsuits initiated by the borrowers or prohibition from using certain collection
methods by the regulatory authorities. Any perception that our collection practices are aggressive and not compliant with the
relevant laws and regulations in the PRC may result in harm to our reputation and business, decrease in the willingness of prospective
customers to apply for and utilize our service, or fines and penalties imposed by the relevant regulatory authorities, any of
which may have a material adverse effect on our business, financial condition and results of operations.
We may
not be able to enforce our rights against automobile purchaser.
We offer automobile
purchaser various value-added services associated with purchasing a car with financing. Such services include, among others, credit
assessment, preparation of financing application materials, assistance with closing of financing transactions, license and plate
registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification
and other administrative procedures. We charge automobile purchaser fees for such services, but we do not enter into agreements
with such automobile purchaser regarding the provision and payment of the purchase services. In the event a legal dispute arises
between the purchaser and us, we may not be able to enforce our rights against the purchaser, which may materially and adversely
affect our business, results of operation and financial condition.
We are
required to obtain certain licenses and permits for our business operations, and we may not be able to obtain or maintain such
licenses or permits.
We may be deemed to
operate financing guarantee business by the PRC regulatory authorities. Under certain arrangements in our services, we provide
guarantees to our customers who apply for financing with certain of our financing partners. In August, 2017, the PRC State Council
promulgated the Regulations on the Administration of Financing Guarantee Companies (the “Financing Guarantee Rules”),
which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers
to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing,
and “financing guarantee companies” refer to companies legally established and operating financing guarantee business.
According to the Financing Guarantee Rules, the establishment of financing guarantee companies are subject to the approval by
the relevant governmental authority, and unless otherwise stipulated, no entity may operate financing guarantee business without
such approval.
We do not believe that the Financing Guarantee Rules apply to our car financing facilitation business as we
provide guarantees to our financing partners in connection with the financing of the purchase of automobiles and such guarantees
are not provided independently as our principal business. However, due to the lack of further interpretations, the exact definition
and scope of “operating financing guarantee business” under the Financing Guarantee Rules is unclear. It is uncertain
whether we would be deemed to operate financing guarantee business in violation of relevant PRC laws or regulations because of
our current arrangements with certain financial institutions. If the relevant regulatory authorities determine that we are operating
financing guarantee business, we may be required to obtain approval or license for financing guarantee business to continue our
collaboration arrangement with certain financial institutions.
In addition, based on our current business
model, we prepay the purchase price of automobiles and all service related expenses and collect the advance payment (without any
interest) through monthly installment payments from the automobile purchaser.
Pursuant to Provisions
on Several Questions Concerning the Application of Law in the Trial of Private Lending Cases released by the Supreme People's
Court in June 2015, private lending refers to the act of financing between natural persons, legal persons and other organizations
and among them. According to the Approval on How to Confirm the Effectiveness of Lending Behavior between Citizens and Enterprises
issued by the PRC Supreme People's Court's in 1999, the private lending refers to the lending between citizens and non-financial
enterprises (hereinafter referred to as enterprises). As long as all parties' declaration of intention is true, it can be recognized
as valid. (the “Private Lending Rules”).
We do not believe that
the Private Lending Rules apply to our automobile purchase services business as we need to pay in advance to different suppliers
to complete our services such as preparation of financing application materials, assistance with closing of financing transactions,
license and plate registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver
qualification and other administrative procedures. We have no intention to lend money to and gain interest from automobile purchasers.
We collect payments in a period longer than 12 months based on current product designs.
However, it is uncertain
whether we would be deemed to operate private lending business in violation of relevant PRC laws or regulations because we prepay
on behalf of automobile purchasers and collect payments over a period of more than 12 months. If the relevant regulatory authorities
determine that we are operating private lending business, we may be penalized for engaging in businesses out of the scope of our
business license. Pursuant to the Regulations on the Registration of Enterprise Legal Persons, we may be given warnings, fined,
confiscated of illegal income, required to suspension and rectification, or our business license might be withheld and revoked
by relevant regulatory authorities.
Consequently, we may
be required to obtain approval or license for financing business to continue our current collection method of payments. If we are
no longer able to maintain our current collection method of payments, or become subject to penalties, our business, financial condition,
results of operations and prospects could be materially and adversely affected.
Our failure
to sell cars that we purchased from dealers may have a material and adverse effect on our business, financial condition and results
of operations.
In January 2019, we
started to purchase automobiles from automotive dealers for sales. We primarily purchase automobile models that are reliable,
affordable and based on the preference of Didi, feedback from and market analysis as to perception and demand for such models,
and that will appeal to car buyers in lower-tier cities. We price automobiles based on our automotive transaction data associated
with providing automotive transaction services. We have limited experience in the purchase of automobiles for sale to purchasers,
and there is no assurance that we will be able to do so effectively. Demand for the type of automobiles that we purchase can change
significantly between the time the automobiles are purchased and the date of sale. Demand may be affected by new automobile launches,
changes in the pricing of such automobiles, defects, changes in consumer preference and other factors, and dealers may not purchase
them in the quantities that we expect. We may also need to adopt more aggressive pricing strategies for these cars than originally
anticipated. We also face inventory risk in connection with the automobiles purchased, including the risk of inventory obsolescence,
a decline in values, and significant inventory write-downs or write-offs. If we were to adopt more aggressive pricing strategies,
our profit margin may be negatively affected as well. We may also face increasing costs associated with the storage of these automobiles.
Any of the above may materially and adversely affect our financial condition and results of operations.
We assist
automobile purchasers to get financing from financing institutions, which may constitute provision of intermediary service, and
our agreements with these financial institutions may be deemed as intermediation contracts under the PRC Contract Law.
We assist automobile
purchasers to get financing from financing institutions, which may constitute an intermediary service, and such services may be
deemed as intermediation contracts under the PRC Contract Law. Under the PRC Contract Law, an intermediary may not claim for service
fee and is liable for damages if it conceals any material fact intentionally or provides false information in connection with
the conclusion of an intermediation contract, which results in harm to the client’s interests. Therefore, if we fail to
provide material information to financial institutions, or if we fail to identify false information received from automobile purchasers
or others and in turn provide such information to financial institutions, and in either case if we are also found to be at fault,
due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or employee supervision,
we could be held liable for damage caused to financial institutions as an intermediary pursuant to the PRC Contract Law. In addition,
if we fail to complete our obligations under the agreements entered into with financial institutions, we could also be held liable
for damages caused to financial institutions pursuant to the PRC Contract Law.
If data
provided by automobile purchasers and other third-party sources or collected by us are inaccurate, incomplete or fraudulent, the
accuracy of our credit assessment could be compromised, customer trust in us could decline, and our business, financial position
and results of operations would be harmed.
China’s credit
infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in 2002 has been
the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference
Center only records limited credit information, such as tax payments, civil lawsuits, foreclosures and bankruptcies. Moreover,
this credit database is only accessible to banks and a limited number of market players authorized by the Credit Reference Center
and does not support sophisticated credit scoring and assessment. In 2015, the PBOC announced that it would open the credit reporting
market to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a
widely-applicable, reliable and sophisticated credit infrastructure in the market we operate.
For the purpose of
credit assessment, we obtain credit information from prospective automobile buyers, and with their authorization, obtain credit
data from external parties to assess applicants’ creditworthiness. We may not be able to source credit data from such external
parties at a reasonable cost or at all. Such credit data may have limitations in measuring prospective automobile purchasers’
creditworthiness. If there is an adverse change in the economic condition, credit data provided by external parties may no longer
be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk management capabilities.
As a result, our assessment of an automobile purchaser’s credit profile may not reflect that particular car buyer’s
actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information.
To the extent that
automobile purchasers provide inaccurate or fraudulent information to us, or the data provided by third-party sources is outdated,
inaccurate or incomplete, our credit evaluation may not accurately reflect the associated credit risks of automobile purchasers.
Among other things, we rely on data from external sources, such as the personal credit report from PBOC. These checks may fail
and fraud may occur as we may fail to discover or reveal fake documents or identities used by fraudulent automobile purchasers.
Additionally, once we have obtained an automobile purchaser's information, the automobile purchaser may subsequently (i) become
delinquent in the payment of an outstanding obligation; (ii) default on a pre-existing debt obligation; (iii) take on additional
debt; or (iv) experience other adverse financial events, making the information we previously obtained inaccurate. We also collect
car collateral location data by installing GPS trackers for lease/loan payment monitoring purposes. The location data we collected
may not be accurate. As a result, our ability to repossess the car collateral could be severely impaired. If we are unable to
collect the lease/loan payments we facilitated or repossess the car collateral due to inaccurate or fraudulent information, our
results of operations and profitability would be harmed.
We may
be subject to product liability claims if people or property are harmed by vehicles purchased through us.
Vehicles purchased through
us may be defectively designed or manufactured. As a result, we may be exposed to product liability claims relating to personal
injury or property damage. Third parties subject to such injury or damage may bring claims or legal proceedings against us because
we facilitate the financing/purchase of the product. Although we would have legal recourse against the automobile manufacturers
or dealers under PRC law, attempting to enforce our rights against the automobile manufacturers or dealers may be expensive, time-consuming
and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance
in relation to vehicles purchased through us. As a result, any material product liability claim or litigation could have a material
and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the
expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.
If the
ride-hailing drivers engage in, or are subject to, criminal, violent, inappropriate, or dangerous activity that results in major
safety incidents, our ability to attract and retain new customers may be harmed, which could have an adverse impact on our reputation,
business, financial condition, and operating results.
We are not able to
control or predict the actions of the ride-hailing drivers and third parties, either during the process of providing services
or otherwise. Such actions may result in injuries, property damage, or loss of life for passengers and third parties, or business
interruption, brand and reputational damage, or significant liabilities for us. Our screen and evaluation of the drivers may not
expose all potentially relevant information and may fail to disclose information that could be relevant to a determination of
eligibility. In addition, we do not independently test drivers’ driving skills.
If the ride-hailing
drivers engage in criminal activity, misconduct, or inappropriate conduct, and we may receive negative press coverage as a result
of our business relationship with such drivers, which would adversely impact our brands, reputation, and business. There have
been numerous incidents and allegations of Didi drivers sexually assaulting, abusing, and kidnapping consumers, or otherwise engaging
in criminal activity. If other criminal, inappropriate, or other negative incidents occur due to the conduct of ride-hailing drivers
or third parties, our ability to attract customers may be harmed, and our business and financial results could be adversely affected.
Further, we may be
subject to claims of significant liability based on traffic accidents, deaths, injuries, or other incidents that are caused by
ride-hailing drivers, consumers, or third parties. Our auto liability and general liability insurance policies may not cover all
potential claims to which we are exposed, and may not be adequate to indemnify us for all liabilities. These incidents may subject
us to liability and negative publicity, which would increase our operating costs and adversely affect our business, operating
results, and future prospects. Even if these claims do not result in liability, we will incur significant costs in investigating
and defending against them.
Government
policies on automobile purchases and ownership may materially affect our results of operations.
Government policies
on automobile purchases and ownership may have a material effect on our business due to their influence on consumer behaviors.
Since 2009, the PRC government has changed the purchase tax on automobiles with 1.6 liter or smaller engines several times. In
addition, in August 2014, several PRC governmental authorities jointly announced that from September 2014 to December 2017, purchases
of new energy automobiles designated on certain catalogs will be exempted from the purchase taxes. In April 2015, several PRC
governmental authorities also jointly announced that from 2016 to 2020, purchasers of new energy automobiles designated on certain
catalogs will enjoy subsidies. In December 2016, relevant PRC governmental authorities further adjusted the subsidy policy for
new energy automobiles. On March 26, 2019, the PRC governmental authorities updated government subsidy policy for new energy automobiles
which raises the threshold for the subsidy and reduces the amount of subsidies. We cannot predict whether government subsidies
will remain in the future or whether similar incentives will be introduced, and if they are, their impact on automobile retail
transactions in China. It is possible that automobile retail transactions may decline significantly upon expiration of the existing
government subsidies if consumers have become used to such incentives and delay purchase decisions in the absence of new incentives.
If automobile retail transactions indeed decline, our revenues may fluctuate and our results of operations may be materially and
adversely affected.
Some local governmental
authorities also issued regulations and relevant implementation rules in order to control urban traffic and the number of automobiles
within particular urban areas. For example, local Beijing governmental authorities adopted regulations and relevant implementing
rules in December 2010 to limit the total number of license plates issued to new automobile purchases in Beijing each year. Local
Guangzhou governmental authorities also announced similar regulations, which came into effect in July 2013. There are similar
policies that restrict the issuance of new automobile license plates in Shanghai, Tianjin, Hangzhou, Guiyang and Shenzhen. In
September 2013, the State Council released a plan for the prevention and remediation of air pollution, which requires large cities,
such as Beijing, Shanghai and Guangzhou, to further restrict the number of motor vehicles. In March 2018, the Beijing government
issued an additional regulation to limit the total number of vehicles in Beijing to no more than 6.1 million by the end of 2018
and no more than 6.2 million by the end of 2019. We cannot assure you that similar measures will not be adopted in Sichuan and
Hunan Provinces. Such regulatory developments, as well as other uncertainties, may adversely affect the growth prospects of China’s
automobile industry, which in turn may have a material adverse impact on our business.
The ride-hailing
service market is still in a relatively early stage of growth and if such market does not continue to grow, grow more slowly than
we expect or fail to grow as large as we expect, our business, financial condition and results of operations could be adversely
affected.
According to the Chinese
Academy of Industry Economy Research Institute, the ride-hailing service market in China has grown rapidly since 2015. However,
it is still relatively new, and it is uncertain to what extent market acceptance will continue to grow, if at all. Our success
will depend to a substantial extent on the willingness of people to widely-adopt ride-hailing. If the public does not perceive
ridesharing as beneficial, or chooses not to adopt it as a result of concerns regarding safety, affordability or for other reasons,
whether as a result of incidents on the ride-hailing service platform or otherwise, then the ride-hailing service market may not
further develop, or may develop more slowly than we expect or may not achieve the growth potential we expect, any of which could
adversely affect our business, financial condition and results of operations.
Our business
is subject to risks related to China's automobile leasing and financing industry, including industry-wide and macroeconomic risks.
We operate in China’s
automobile leasing and financing industry. We cannot assure you that this market will continue to grow rapidly in the future.
Further, the growth of China’s automobile leasing and financing industry could be affected by many factors, including:
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general economic conditions in China and around the world;
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the growth of disposable household income and the availability
and cost of credit available to finance car purchases;
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the growth of China's automobile industry;
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taxes and other incentives or disincentives related to car purchases
and ownership;
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environmental concerns and measures taken to address these concerns;
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the cost of energy, including gasoline prices, and the cost
of car license plates in various cities with license plate lottery or auction systems in China;
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the improvement of the highway system and availability of parking
facilities;
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other government policies relating to automobile leasing and
financing in China;
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fluctuations in the sales and price of new and used cars;
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consumer acceptance of financing car purchases;
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ride sharing, transportation networks, and other fundamental
changes in transportation pattern; and
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other industry-wide issues, including supply and demand for
cars and supply chain challenges.
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Any adverse change
to these factors could reduce demand for used cars and hence demand for our services, and our results of operations and financial
condition could be materially and adversely affected.
Risks Related to Our Online Lending
Services
We have a limited operating history,
and have significantly deemphasized our efforts, in the new and highly regulated P2P lending sector in China, which makes it difficult
to evaluate our future prospects in this sector.
The market for China's
online marketplace lending is new and may not develop as expected. The regulatory framework for this market is also evolving and
may remain uncertain for the foreseeable future. Potential borrowers and investors may not be familiar with this market and may
have difficulty distinguishing our services from those of our competitors. As such, we have significantly deemphasized our
efforts in the Online Lending Services part of our business.
Our online platform
was launched in May 2014 by its former owner and acquired by us in September 2016. Our platform has a limited operating history.
As our business develops or in response to competition or regulatory requirements, we may make adjustments to our existing products,
or make adjustments to our business model. Any significant change to our business model may not achieve expected results and may
have an adverse impact on our financial conditions and results of operations. It is therefore difficult to effectively assess our
future prospects. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter
in this developing and highly regulated market. These risks and challenges include our ability to, among other things:
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navigate an evolving regulatory environment;
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enhance our risk management capabilities;
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improve our operational efficiency;
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maintain the security of our platform and the confidentiality of the information provided and utilized across our platform;
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attract, retain and motivate talented employees; and
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defend ourselves against litigation, regulatory, intellectual property, privacy or other claims.
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If we fail to
address or manage any of these risks and challenges, our business and results of operations will be harmed.
If we are unable to maintain low
default rates for loans facilitated by our platform, our business and results of operations may be adversely affected.
Investments in loans
on our platform involve inherent risks as the return of the principal on a loan investment made through our platform is not guaranteed,
although we aim to limit investor losses due to borrower defaults through various preventive measures we have taken or will take.
Our ability to attract borrowers and investors to, and build trust in, our platform is significantly dependent on our ability to
effectively evaluate a borrower's credit profile and maintain low default rates. If we are unable to effectively and accurately
assess the credit profiles of borrowers, we may be unable to maintain low default rates of loans facilitated by our platform. In
addition, once a loan application is approved, we do not further monitor certain aspects of the borrower's credit profile, such
as changes in the borrower's credit report. If the borrower's financial condition deteriorates, we may not be able to take measures
to prevent default on the part of the borrower and thereby maintain low default rates for loans facilitated by our platform. As
of the date of this Report, there have not been any default or delinquencies. Since we started to offer unsecured loans, we may
find it difficult or unable to maintain low default rates of loans facilitated through our platform. Although we implement various
investor protection measures, if widespread defaults were to occur, investors may still incur losses and lose confidence in our
platform and our business and results of operations may be adversely affected.
If we are unable to maintain relationships with our third-party
service providers, our business will suffer.
We rely on third-party
service providers to operate various aspects of our business and platform. For instance, we rely on our depository bank to provide
fund depository services and third-party payment companies to serve as payment channels to ensure compliance with various laws
and regulations. Most of our agreements with third-party service providers are non-exclusive and do not prohibit the third-party
service provider from working with our competitors or from offering competing services. Our third-party service providers could
decide that working with us is not in their interests, could decide to enter into exclusive or more favorable relationships with
our competitors or could themselves become our competitor. Although we have changed third-party service providers in the past
without difficulty, switching to new third-party service providers could cause temporary disruptions to our business. In addition,
our third-party service providers may not perform as expected under our agreements or we could in the future have disagreements
or disputes with our third-party service providers, which could negatively impact our operations or threaten our relationships
with our third-party service providers.
Third-party payment
companies and depository banks in China, including a depository bank that takes deposits and transfers funds on our platform and
the third-party payment company with which it works, are subject to oversight by the PBOC and must comply with complex rules and
regulations, licensing and examination requirements, including, but not limited to, minimum registered capital, maintenance of
payment business licenses, anti-money laundering regulations and management personnel requirements. Some third-party payment companies
have been required by the PBOC to suspend their credit card pre-authorization and payment services in certain areas of China.
If the third-party service providers that serve as payment channels for our platform were to suspend, limit or cease their operations,
or if our relationships with our third-party service providers were to otherwise terminate, we would need to implement substantially
similar arrangements with other third-party service providers. Negative publicity about our or other third-party service providers
or the industry in general may also adversely affect our users' confidence and trust in the use of third-party payment companies
and depository banks to carry out the payment and depository functions in connection with the origination or assignment of loans
on our platform. If any of these were to happen, the operation of our platform could be materially impaired and our results of
operations would suffer.
The recently published
Guidelines, which were released by ten PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry
of Finance, the MPS and the Cyberspace Administration of China, require market lending platforms to use bank depository accounts
to hold lending capital, which is further emphasized in the Interim Measures for the Administration of Business Activities of
Online Lending Information Intermediaries, or the Interim Measures. In addition, the Administrative Measures of Non-Bank Payments
Institutions Network Payment Service, or the Administrative Measures, which became effective from July 1, 2016, prohibit
payment institutions from opening payment accounts for institutions engaging in the lending business and also set ceilings for
the maximum deposits permitted into an account opened with a third-party payment company. In February 2017, the CBRC released
the Guidance to the Operation of Depositing Online Lending Funds, or the Guidance. The Guidance further specifies that qualified
commercial banks may act as depositories to hold online lending funds, and that other banking financial institutions are not qualified
to set up individual accounts or provide settlement and payment functions. The Guidance also sets forth basic requirements for
commercial banks, including maintaining separate accounts to hold online lending funds and private funds owned by online lending
platforms and prohibits outsourcing or assigning such entities' responsibilities for setting up capital accounts, dealing with
transaction information, verifying trading passwords and various other services to third parties, provided, however, that certain
cooperation regarding payment services with third-party payment companies is permitted in accordance with clarifications by the
CBRC. However, CBRC’s remarks regarding the Guidance are not entirely clear regarding the definition and scope of the term
“certain cooperation regarding payment services.” In addition, the Guidance imposes certain responsibilities on online
lending intermediaries such as us, including requiring them to organize independent auditing on funds depository accounts of borrowers
and investors. The Guidance stipulated a 6-month grace period from the time of its announcement for online lending intermediaries
to adjust their business models. See “Business —Regulations — Regulations Related to the Marketplace Lending
Industry.”
If we do not compete effectively,
our results of operations could be harmed.
The online marketplace
lending industry in China is competitive. We compete with a large number of online finance marketplaces. We also compete
with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete
with other lending platforms and traditional financial institutions, such as consumer finance business units in commercial banks,
credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment
products and asset classes, such as equities, bonds, investment trust products, bank savings accounts and real estate.
Some of our competitors
operate with different business models, have different cost structures or participate selectively in different market segments.
They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our
current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may
be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also
have longer operating histories, more extensive user bases, greater brand recognition and brand loyalty and broader partner relationships
than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic
alliance with one or more of our competitors. Our competitors may be better at developing new products, offering more attractive
investment returns or lower fees, responding faster to new technologies and undertaking more extensive and effective marketing
campaigns.
We also face competition
within Sichuan Province, which is where we conduct the bulk of our operations. As of the date of this Report, there are approximately
17 lending platforms in Sichuan Province. The Company's primary competitors in Sichuan include Jinding Wealth and Chengdu Hongxue
Jinxin Business Consulting Co., Ltd., although some of these companies, such as Jinding Wealth, are established lending platforms
with large and existing borrower and investor bases as well as substantial financial resources.
If we are unable to
compete with our competitors, the demand for our platform could stagnate or substantially decline, we could continue to experience
reduced revenues or our platform could fail to maintain our market acceptance, any of which could harm our business and results
of operations.
Credit and other information that
we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrower's creditworthiness,
which may compromise the accuracy of our credit assessment.
For the purpose of
credit assessment, we obtain borrower credit information from third parties, such as financial institutions and e-commerce providers,
and assess applicants' credit and assign credit scores to borrowers based on such credit information. A credit score assigned
to a borrower may not reflect that particular borrower's actual creditworthiness because the credit score may be based on outdated,
incomplete or inaccurate consumer reporting data. We currently do not have a comprehensive way to determine whether borrowers
have obtained loans through other online finance marketplaces, creating the risk whereby a borrower may borrow money through our
platform in order to pay off loans to investors on other platforms. Additionally, there is a risk that, following our obtaining
a borrower's credit information, the borrower may have:
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become delinquent in the payment of an outstanding obligation;
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defaulted on a pre-existing debt obligation;
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taken on additional debt; or
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sustained other adverse financial events.
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Such inaccurate or
incomplete borrower credit information could compromise the accuracy of our credit assessment and adversely affect the effectiveness
of our control over our default rates, which could in turn harm our reputation and adversely affect our business, financial condition
and results of operations.
In addition, our business
of connecting investors and borrowers may constitute an intermediary service, and our contracts with these investors and borrowers
may be deemed as intermediation contracts, under the PRC Contract Law. Under the PRC Contract Law, an intermediary may not claim
for service fee and is liable for damages if it conceals any material fact intentionally or provides false information in connection
with the conclusion of an intermediation contract, which results in harm to the client's interests. See “Business —
Regulations — Regulations Related to the Marketplace Lending Industry.” Therefore, if we fail to provide material information
to investors, or if we fail to identify false information received from borrowers or others and in turn provide such information
to investors, and in either case if we are also found to be at fault, due to failure or deemed failure to exercise proper care,
such as to conduct adequate information verification or employee supervision, we could be held liable for damages caused to investors
as an intermediary pursuant to the PRC Contract Law. In addition, if we fail to complete our obligations under the agreements entered
into with investors and borrowers, we could also be held liable for damages caused to borrowers or investors pursuant to the PRC
Contract Law. On the other hand, we do not assume any liability solely on the basis of failure to correctly assess the creditworthiness
of a particular borrower in the process of facilitating a loan transaction, as long as we do not conceal any material fact intentionally
or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailed regulations and
guidance in the area of peer-to-peer lending services and the possibility that the PRC government authority may promulgate new
laws and regulations regulating peer-to-peer lending services in the future, there are substantial uncertainties regarding the
interpretation and application of current or future PRC laws and regulations for the peer-to-peer lending service industry, and
there can be no assurance that the PRC government authority will ultimately take a view that is consistent with us.
Fraudulent activity on our platform
could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.
We are subject to the
risk of fraudulent activity both on our platform and associated with users and third parties handling user information. Our resources,
technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent
activity could negatively impact our brands and reputation, reduce the volume of loan transactions facilitated through our platform
and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could
even lead to regulatory intervention, and may divert our management's attention and cause us to incur additional expenses and costs.
Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we
cannot rule out the possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If
any of the foregoing were to occur, our results of operations and financial conditions could be adversely affected.
Our platform and internal systems
rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal
systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability
of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained,
and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released
for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience
for our users, delay introductions of new features or enhancements, result in errors or compromise our ability to protect user
data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm
to our reputation, loss of user or liability for damages, any of which could adversely affect our business, results of operations
and financial conditions.
Because some users may come to our
platform from referrals of third parties, it is possible that an unsatisfied user could make a claim against us based on the content
of any information provided by these third parties that could result in claims that are costly to defend and distracting to management.
Some users may come
to our platform after reviewing information provided by a third party. We do not review, approve or adopt any information provided
by third parties website and, while we do not believe we would have liability for such information, it is possible that an unsatisfied
user could bring claims against us based on such information. Such claims could be costly and time-consuming to defend and would
distract management's attention from the operation of our business and create negative publicity, which could affect our reputation.
Risks Related to Our Business Generally
We have incurred net losses and
may continue to incur net losses in the future.
We had net losses
of US$4,542,525 and US$9,858,972 in the years ended March 31, 2019 and 2018, respectively, and may continue to incur losses in
the future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our
business, attract borrowers, investors and partners and further enhance and develop our loan products and platform. These efforts
may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset
these higher expenses. There are other factors that could negatively affect our financial conditions. For example, the default
rates of the loans facilitated through our platform may be higher than expected, which may lead to lower than expected net revenues.
As a result of the foregoing and other factors, our net revenue growth may slow, our net income margins may decline or we may
incur additional net losses in the future and may not be able to achieve and maintain profitability on a quarterly or annual basis.
In addition, our net revenue growth rate will likely decline as our net revenue grows to higher levels.
We may need additional capital, and financing may not be available
on terms acceptable to us, or at all.
In the fiscal years ended
March 31, 2018 and 2019, our principal sources of liquidity were proceeds from our IPO and capital contribution from our stockholders.
As of March 31, 2019, we had cash and cash equivalents of US$5,020,510, compared with cash and cash equivalents of approximately
US$11,141,566 as of March 31, 2018. We anticipate that, with the proceeds from our June 2019 Offering and anticipated cash
flows from operating activities, we will be able to meet our anticipated working capital requirements and capital expenditures
in the ordinary course of business for the next 12 months. If we fail to do so due to unexpected situations, we anticipate to
receive loans from our stockholders to fund our operations. However, we cannot assure you this will be the case. We may need additional
cash resources in the future if we experience changes in business conditions or other developments. We may also need additional
cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar
actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time,
we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result
in further dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could
result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts
or on terms acceptable to us, if at all.
Fluctuations in interest rates could
negatively affect our results of operations.
We charge service
fees to automobile purchasers for facilitating financing transactions. If prevailing market interest rates increase, automobile
purchasers would be less likely to finance automobile purchases with credit or we may need to reduce our service fees to mitigate
the impact of increased interest rates. If we do not sufficiently lower our service fees and keep our fees competitive in such
instances, automobile purchasers may decide not to utilize our services because of our less competitive service fees and may take
advantage of lower service fees offered by other companies, and our ability to attract prospective automobile purchasers as well
as our competitive position may be severely undermined. On the other hand, if prevailing market interest rates decline, the operating
margins of financial institutions may decrease, which may make the financial institutions less likely to finance automobile purchases.
Under either circumstance, our financial condition and profitability could also be materially and adversely affected.
In addition, all loans
facilitated through our platform have fixed interest rates. If interest rates rise, investors who have already committed capital
may lose the opportunity to take advantage of the higher rates. If interest rates decrease after a loan is made, borrowers through
our platform may prepay their loans to take advantage of the lower rates. Investors through our platform would lose the opportunity
to collect the above-market interest rates payable on the prepaid loans and might delay or reduce future loan investments. As
a result, fluctuations in the interest rate environment may discourage users from participating in our platform, which may adversely
affect our business.
Our quarterly results may fluctuate
significantly and may not fully reflect the underlying performance of our business.
Our quarterly results
of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary significantly
in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating
results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are
not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our common
stock. Factors that may cause fluctuations in our quarterly financial results include:
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our ability to attract new customers and maintain relationships with existing customers;
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our ability to maintain existing relationship with existing financing partners and establish new relationships with additional financial partners for our Automobile Transaction and Related Services;
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the amount of automobile financing transactions we facilitate;
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overdue ratios of automobile financing transactions/loans we facilitate;
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financial institutions’ willingness and ability to fund financing transactions through our platform on reasonable terms;
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loan volumes and the channels through which users are sourced, including the relative mix of online and offline channels;
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changes in our product mix and introduction of new products and services;
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the amount and timing of operating expenses related to acquiring customers and the maintenance and expansion of our business, operations and infrastructure;
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our ability to manage transaction volume growth during the period;
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the timing of expenses related to the development or acquisition of technologies or businesses;
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network outages or security breaches;
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general economic, industry and market conditions;
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our emphasis on customer experience instead of near-term growth; and
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the timing of expenses related to the development or acquisition of technologies or businesses.
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If we fail to promote and maintain our brands in an effective
and cost-efficient way, our business and results of operations may be harmed.
We believe that developing
and maintaining awareness of our brands effectively is critical to attracting new and retaining existing customers. Successful
promotion of our brands and our ability to attract customers depend largely on the effectiveness of our marketing efforts and
the success of the channels we use to promote our services. Our efforts to build our brands have caused us to incur expenses,
and it is likely that our future marketing efforts will require us to incur additional expenses. These efforts may not result
in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses
incurred. If we fail to successfully promote and maintain our brands while incurring substantial expenses, our results of operations
and financial condition would be adversely affected, which may impair our ability to grow our business.
Any harm to our brands or reputation
or any damage to the reputation of our business partners or other third parties, or the online marketplace lending industry, the
automobile financing industry, or the ride-hailing industry may materially and adversely affect our business and results of operations.
Maintaining and enhancing
the recognition and reputation of our brands is critical to our business and competitiveness. Factors that are vital to this objective
include but are not limited to our ability to:
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maintain
and develop relationships with dealers, ride-hailing platforms and financial institutions;
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provide
prospective and existing customers with superior experiences;
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enhance
and improve our credit assessment and decision-making models;
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effectively
manage and resolve any user complaints of financial institutions or customers; and
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effectively
protect personal information and privacy of customers.
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Any malicious or innocent
negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but not
limited to our management, business, compliance with law, financial conditions or prospects, whether with merit or not, could
severely hurt our reputation and harm our business and operating results. As the markets for China's automobile financing, ride-hailing
and online marketplace lending are new and the regulatory framework for these market is also evolving, negative publicity about
these markets may arise from time to time. Negative publicity about China’s automobile financing, ride-hailing and online
finance marketplace industries in general may also have a negative impact on our reputation, regardless of whether we have engaged
in any inappropriate activities.
In addition, certain factors
that may adversely affect our reputation are beyond our control. Negative publicity about our partners, outsourced service providers
or other counterparties, such as negative publicity about any failure by them to adequately protect the information of users,
to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation.
Furthermore, any negative development in any of the automobile financing, ride-hailing or online marketplace lending industries,
such as bankruptcies or failures of other companies in any of this these, and especially a large number of such bankruptcies or
failures, or negative perception of any of the industries as a whole, such as that arises from any failure of other finance marketplaces
to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents,
could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability
to attract new borrowers and investors. Negative developments in these industries, such as widespread automobile purchaser/borrower
defaults, unethical or illegal activities by industry players and/or the closure of platforms providing similar services, may
also lead to tightened regulatory scrutiny of these sectors and limit the scope of permissible business activities that may be
conducted by us. If any of the foregoing takes place, our business and results of operations could be materially and adversely
affected.
Our reputation may be harmed if
information supplied by customers is inaccurate, misleading or incomplete.
Our customers supply
a variety of information that is included in the loan listings on our platform or in the applications to financing partners. We
do not verify all the information we receive from our customers, and such information may be inaccurate or incomplete. For example,
a borrower may use loan proceeds for other purposes with increased risk than as originally provided. If investors invest in loans
through our platform or financing partners provide funding to the automobile purchasers based on information supplied by borrowers
or automobile purchasers that is inaccurate, misleading or incomplete, those investors/financing partners may not receive their
expected returns and our reputation may be harmed. Moreover, inaccurate, misleading or incomplete customer information could also
potentially subject us to liability as an intermediary under the PRC Contract Law. See “Business — Regulations.”
Our operations depend on the performance
of the internet infrastructure and fixed telecommunications networks in China.
Almost all access to
the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory
supervision of the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications
capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative
networks or services in the event of disruptions, failures or other problems with China's internet infrastructure or the fixed
telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required
to upgrade our technology and infrastructure to keep up with the requirements of our operations. We cannot assure you that the
internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with
the continued growth in internet usage.
In addition, we have
no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications
and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access
fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.
Misconduct, errors and failure to
function by our employees and third-party service providers could harm our business and reputation.
We are exposed to many
types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our
business depends on our employees and third-party service providers to interact with potential customers, process large numbers
of transactions and support the loan/lease payment collection process, all of which involve the use and disclosure of personal
information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly
executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing
of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations
or systems. In addition, the manner in which we store and use certain personal information and interact with our customers is governed
by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers,
and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks
or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to
follow protocol when interacting with customers, we could be liable for damages and subject to regulatory actions and penalties.
We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or
the failure to follow protocol, and therefore be subject to civil or criminal liability. Aggressive practices or misconduct by
any of our third-party service providers in the course of collecting loans could damage our reputation.
Furthermore, as we
rely on certain third-party service providers, such as third-party payment platforms and custody and settlement service providers,
to conduct our business, if these third-party service providers failed to function properly, we cannot assure you that we would
be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in our diminished
ability to operate our business, potential liability to borrowers and investors, inability to attract borrowers and investors,
reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition
and results of operations.
A severe or prolonged downturn in
the Chinese or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown
in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In
particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and
unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. Economic
conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions
since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows
of 2008 and 2009 has been uneven and there are new challenges, including the escalation of the European sovereign debt crisis from
2011 and the slowdown of China's economic growth since 2012 which may continue. There is considerable uncertainty over the long-term
effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the
world's leading economies, including the United States and China. There have also been concerns over unrest in Ukraine, the Middle
East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic
effect of the tensions in the relationship between China and the United States. If present Chinese and global economic uncertainties
persist, our business partners may suspend their collaboration or reduce their business with us or investors may delay or reduce
their investment in the loans facilitated through our platform. Adverse economic conditions could also reduce the number of customers
seeking to utilize our services. Should any of these situations occur, our transaction volume will decline, and our business and
financial conditions will be negatively impacted. Additionally, continued turbulence in the international markets may adversely
affect our ability to access the capital markets to meet liquidity needs.
Our ability to protect the confidential
information of our customers may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or
similar disruptions.
We collect, store and
process certain personal and other sensitive data from our customers, which makes it an attractive target and potentially vulnerable
to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect
the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage
or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target,
we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security
breaches or other unauthorized access to our operation systems could cause confidential user information to be stolen and used
for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related
to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached
because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are
exposed and exploited, our relationships with borrowers and investors could be severely damaged, we could incur significant liability
and our business and operations could be adversely affected.
We have identified material weaknesses
in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over
financial reporting, we may be unable to accurately report our financial results or prevent fraud.
In connection with
the audits of our financial statements for the years ended March 31, 2019, we have identified “material weaknesses”
and other control deficiencies including significant deficiencies in our internal control over financial reporting. As defined
in the standards established by the Public Company Accounting Oversight Board of the United States (the “PCAOB”),
a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not
be prevented or detected on a timely basis.
The
material weaknesses that have been identified include: (i) insufficient financial reporting and accounting with appropriate knowledge
of U.S. generally accepted accounting principles (“U.S. GAAP”) and SEC reporting requirements to properly address complex
U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill
U.S. GAAP and SEC financial reporting requirements; (ii) lack of comprehensive accounting policies and procedures manual in accordance
with U.S. GAAP; (iii) lack of proper procedures in place to identify certain related party transaction; (iv) ineffective entity
level control; (v) lack of sufficient resources with technical competency to review and record non-routine or complex transactions;
and (vi) failure to obtain proper board approval on a material agreement in time.
We have implemented, and
continue to implement, measures designed to improve our internal control over financial reporting and remediate the control deficiencies
that led to these material weaknesses. We plan to engage a qualified consulting firm to review and improve renew and improve our
framework of internal controls, including setting up risk and control matrix, drawing flowcharts of significant transactions,
evaluating controls effectiveness, preparing manual of internal control, tracing rectifications and performing control testing;
(ii) hire additional accounting staffs with comprehensive knowledge of U.S. GAAP and SEC reporting requirements; (iii) hire additional
internal audit staffs to increase segregation of duties and (iv) invest in technology infrastructure to support our financial
reporting function.
We cannot assure you
that the measures we have taken to date, and actions we intend to take in the future, will be sufficient to remediate material
weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses.
In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal
control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been
required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial
reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified.
If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial
reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely
affected, potentially resulting in restatements of our financial statements, we may be unable to maintain compliance with securities
law requirements regarding timely filing of periodic reports and applicable Nasdaq listing requirements, investors may lose confidence
in our financial reporting, and our share price may decline as a result.
We may not be able to prevent others
from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks,
domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on
a combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements
with our employees and others to protect our proprietary rights. We have 15 software copyrights, six trademarks and five trademark
applications pending at the PRC Trademark Office. See “Business — Intellectual Property” and “Business
— Regulations — Regulations on Intellectual Property.” Thus, we cannot assure you that any of our intellectual
property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient
to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industries, parts
of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain
licenses and technologies from these third parties on reasonable terms, or at all.
It is often difficult
to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial
interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation.
Confidentiality and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available
to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce
our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the
steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation
to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial
and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may
be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees
or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related
know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse
effect on our business, financial condition and results of operations.
We may be subject to intellectual
property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain
that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents,
copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject
to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party
trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or
other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual
property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought
against us, we may be forced to divert management's time and other resources from our business and operations to defend against
these claims, regardless of their merits.
Additionally, the
application and interpretation of China’s intellectual property right laws and the procedures and standards for granting
trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain,
and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated
the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited
from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result,
our business and results of operations may be materially and adversely affected.
Some aspects of our digital operations
include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively
affect our business.
Some aspects of our
digital operations include software covered by open source licenses. The terms of various open source licenses have not been interpreted
by PRC courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or
restrictions on our online and mobile-based channels. If portions of our proprietary software are determined to be subject to
an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or
a portion of our technologies if required so by the license, or otherwise be limited in the licensing of our technologies, each
of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to license requirements,
usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors
generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use of open source
software cannot be eliminated, and could adversely affect our business.
From time to time we may evaluate
and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt
our business and adversely affect our financial results.
Although we do not
currently have any plans to consummate any acquisitions, we may in the future evaluate and consider strategic investments, combinations,
acquisitions or alliances to further increase the value of our services and better serve our customers. These transactions could
be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business
opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we
may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments
or acquisitions will involve risks commonly encountered in business relationships, including:
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difficulties in assimilating and integrating the operations,
personnel, systems, data, technologies, products and services of the acquired business;
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inability of the acquired technologies, products or businesses
to achieve expected levels of revenue, profitability, productivity or other benefits;
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difficulties in retaining, training, motivating and integrating
key personnel;
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diversion of management's time and resources from our normal
daily operations;
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difficulties in successfully incorporating licensed or acquired
technology and rights into our business;
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difficulties in maintaining uniform standards, controls, procedures
and policies within the combined organizations;
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difficulties in retaining relationships with customers, employees
and suppliers of the acquired business;
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risks of entering markets in which we have limited or no prior
experience;
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regulatory risks, including remaining in good standing with
existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new
regulators with oversight over an acquired business;
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assumption of contractual obligations that contain terms that
are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
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failure to successfully further develop the acquired technology;
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liability for activities of the acquired business before the
acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities
and other known and unknown liabilities;
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potential disruptions to our ongoing businesses; and
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unexpected costs and unknown risks and liabilities associated with strategic investments
or acquisitions.
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We may not make any
investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy,
may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.
In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the
successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if
developed, will achieve market acceptance or prove to be profitable.
Our business depends on the continued
efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions,
our business may be severely disrupted.
Our business operations
depend on the continued services of our senior management, particularly the executive officers named in this Report. While we
have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one
or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them
easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and
results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain
qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management,
there is no assurance that any member of our management team will not join our competitors or form a competing business. If any
dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to
enforce such agreements in China or we may be unable to enforce them at all.
Competition for employees is intense,
and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success
depends on the efforts and talent of our employees, including risk management, driver and automobile management, post-financing
management, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate
and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is
extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation
and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have
and may be able to offer more attractive terms of employment.
In addition, we invest
significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them.
If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality
of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our
business.
Increases in labor costs in the PRC
may adversely affect our business and results of operations.
The economy in China
has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue
to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments
to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees,
fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to control our labor costs or pass on these increased labor costs to our customers by increasing the fees of
our services, our financial condition and results of operations may be adversely affected.
Certain data and information in
this Report were obtained from third-party sources and were not independently verified by us.
This Report contains
certain data and information that we obtained from various government and private entity publications. Statistical data in these
publications also include projections based on a number of assumptions. If any one or more of the assumptions underlying the market
data is later found to be incorrect, actual results may differ from the projections based on these assumptions.
We have not independently
verified the data and information contained in such third-party publications and reports. Data and information contained in such
third-party publications and reports may be collected using third-party methodologies, which may differ from the data collection
methods used by us. In addition, these industry publications and reports generally indicate that the information contained therein
was believed to be reliable, but do not guarantee the accuracy and completeness of such information.
If we cannot maintain our corporate
culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a
critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates
creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these
valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including
our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate
objectives.
We have limited business insurance
coverage.
Insurance companies
in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies.
Currently, we do not have any business liability or disruption insurance to cover our operations other than the accident insurance
and commercial liability insurance, which are mandatory, on all the automobiles we purchase for sales or financing. We have determined
that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial
costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to
natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins,
war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology
platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware
as well as adversely affect our ability to provide products and services.
Our business could
also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome
(“SARS”), or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having
Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined
and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any
of these epidemics harms the Chinese economy in general.
Risks Related to Our Corporate Structure
Our current corporate structure and business operations
may be affected by the newly enacted Foreign Investment Law.
On March 15, 2019,
the NPC approved the Foreign Investment Law, which will take effect on January 1, 2020. Since it is relatively new, uncertainties
exist in relation to its interpretation and its implementation rules that are yet to be issued. The Foreign Investment Law does
not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed
as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision
under definition of “foreign investment” that includes investments made by foreign investors in China through other
means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future laws,
administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment.
Therefore, there can be no assurance that our control over Sichuan Senmiao through contractual arrangements will not be deemed
as foreign investment in the future.
The Foreign Investment
Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in
industries specified as either “restricted” or “prohibited” from foreign investment in a “negative
list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from
the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law
provides that foreign-invested entities operating in “restricted” or “prohibited” industries will
require market entry clearance and other approvals from relevant PRC government authorities. If our control over Sichuan Senmiao
through contractual arrangements are deemed as foreign investment in the future, and any business of Sichuan Senmiao is “restricted”
or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed
to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over Sichuan Senmiao
may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business
operations, any of which may have a material adverse effect on our business operation.
Furthermore, if future
laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure and business operations.
We rely on the Voting Agreement with
other shareholders of Jinkailong to operate our automobile transaction and related services business, and such Voting Agreement
is subject to various risks, the realization of which may impact our ability to control Jinkailong and consolidate its financial
statements.
We holds 35% of the
equity interest of Jinkailong while the other three shareholders of Jinkailong hold 65% in the aggregate. Although we are the largest
shareholder and through the Voting Agreement, control the corporate matters of Jinkailong including fundamental corporate transactions,
the other shareholders of Jinkailong may breach the Voting Agreement, or act in concert and exert control over Jinkailong through
their majority equity ownership, which would have a material adverse effect on our ability to effectively control Jinkailong and
receive economic benefits from it.
Under the Voting Agreement,
the other shareholders may not dispose of their equity interest in Jinkailong unless the new shareholder agrees to be bound by
the Voting Agreement. However, as the Voting Agreement is neither registered with any government authority nor publicly disclosed,
a good faith third party purchaser may refuse to recognize the Voting Agreement and become a party to such agreement, which will
impact our ability to control Jinkailong. Likewise, if the equity interest of Jinkailong held by other shareholders is sold to
any third party in satisfaction of the debt of such shareholders, our ability to enforce our rights under the Voting Agreement
may be impaired.
If any of the events
occurs, we may not effectively control the operations of Jinkailong and may lose the ability to consolidate the financial statements
of Jinkailong under US GAAP, which will materially and adversely affect our results of operations and financial conditions.
If the PRC government deems that
the contractual arrangements in relation to Sichuan Senmiao do not comply with PRC regulatory restrictions on foreign investment
in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of
internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations.
For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications
services overseas and maintain a good track record in accordance with the Provisions on the Administration of Foreign-invested
Telecommunication Enterprises, the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version)
and the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) (which will come into
force on July 30, 2019 and replace the 2018 Version).
We are a Nevada corporation
and our PRC subsidiaries are considered foreign invested enterprises. To comply with PRC laws and regulations, we conduct our
operations of Online Lending Services in China through a series of contractual arrangements entered into among Senmiao Consulting,
Sichuan Senmiao and the Sichuan Senmiao Shareholders. As a result of these contractual arrangements, we exert control over Sichuan
Senmiao and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these
contractual arrangements, see “Business — Our Corporate Structure.”
In the opinion of
our PRC counsel, Yuan Tai Law Offices, our current ownership structure, the ownership structure of Senmiao Consulting and Sichuan
Senmiao, and the contractual arrangements among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders are not
in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable
in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Yuan Tai Law Offices has
also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC
laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with
the opinion of our PRC counsel.
It is uncertain whether
any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If the ownership structure, contractual arrangements and business of our company, Senmiao Consulting or Sichuan
Senmiao are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of
the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation,
including levying fines, confiscating our income or the income of Senmiao Consulting or Sichuan Senmiao, revoking the business
licenses or operating licenses of Senmiao Consulting or Sichuan Senmiao, shutting down our servers or blocking our online platform,
discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive
restructuring, restricting or prohibiting our use of proceeds from our public offerings to finance our business and operations
in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could
cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and
adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability
to direct the activities of Sichuan Senmiao, and/or our failure to receive economic benefits from Sichuan Senmiao, we may not be
able to consolidate its results into our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements with
Sichuan Senmiao, Jinkailong and their respective equity holders for our business operations, which may not be as effective as direct
ownership in providing operational control.
We have relied and expect
to continue to rely on contractual arrangements with Sichuan Senmiao, Jinkailong and their respective equity holders to operate
our online lending business and a substantially part of our automobile transaction and related services. For a description
of these contractual arrangements, see “Business — Our Corporate Structure.” These contractual arrangements may
not be as effective as direct ownership in providing us with control over Sichuan Senmiao or Jinkailong. For example, Sichuan Senmiao,
Jinkailong and their respective equity holders could breach their contractual arrangements with us by, among other things, failing
to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership
of Sichuan Senmiao or own over 50% equity interest of Jinkailong, we would be able to exercise our rights as an equity holder
to effect changes in the board of directors of Sichuan Senmiao or Jinkailong, which in turn could implement changes, subject to
any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements,
we rely on the performance by Sichuan Senmiao, Jinkailong and their respective equity holders of their obligations under the contracts
to exercise control over Sichuan Senmiao or Jinkailong. The equity holders of Sichuan Senmiao or Jinkailong may not act in the
best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period
in which we intend to operate our business through the contractual arrangements with Sichuan Senmiao or Jinkailong. If any equity
holder of Sichuan Senmiao or Jinkailong is uncooperative or any dispute relating to these contracts remains unresolved, we will
have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal
proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors — Any failure
by Sichuan Senmiao or its equity holders to perform their obligations under our contractual arrangements with them would have
a material adverse effect on our business.” Therefore, our contractual arrangements with Sichuan Senmiao may not be as effective
in ensuring our control over the relevant portion of our business operations as direct ownership would be.
Any failure by our VIEs or their equity
holders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
If our VIEs or their equity
holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs
and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including
seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC
laws. For example, if the equity holders of Sichuan Senmiao were to refuse to transfer their equity interest in Sichuan Senmiao
to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if the equity holders of
Jinkailong refused to perform their obligations under these contractual arrangements, or if they were otherwise to act in bad faith
toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements under
our contractual arrangements are governed by PRC laws and provide for the resolution of disputes in China. Accordingly, these contracts
would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The
legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents
and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should
be interpreted or enforced under PRC laws. In the event that we are unable to enforce these contractual arrangements, or if we
suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert
effective control over Sichuan Senmiao, and our ability to conduct our business may be negatively affected. See “Risk Factors
— Risks Related to Doing Business in China — Uncertainties in the interpretation and enforcement of Chinese laws and
regulations could limit the legal protections available to us.”
The equity holders of our VIEs may have
potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The interests of the
equity holders in our VIEs may differ from the interests of our company as a whole. These equity holders may breach, or cause our
VIEs to breach, the existing contractual arrangements we have with them and our VIEs, which would have a material adverse effect
on our ability to effectively control our VIEs and receive economic benefits from them. For example, the equity holders may be
able to cause our agreements with our VIEs to be performed in a manner adverse to us. We cannot assure you that when conflicts
of interest arise, any or all of these equity holders will act in the best interests of our company or such conflicts will be resolved
in our favor.
Currently, we do not
have any arrangements to address potential conflicts of interest between these equity holders and our company, except that we could
exercise our purchase option under the exclusive option agreement with the Sichuan Senmiao Shareholders to request them to transfer
all of their equity interests in Sichuan Senmiao to a PRC entity or individual designated by us, to the extent permitted by PRC
laws or in the case of Jinkailong, the other shareholders of Jinkailong (except one minor shareholder) have committed not to, directly
or indirectly, engage in the same business in which the Company engages. If we cannot resolve any conflict of interest or dispute
between us and the Sichuan Senmiao Shareholders, we would have to rely on legal proceedings, which could result in the disruption
of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation
to Sichuan Senmiao may be subject to scrutiny by the PRC tax authorities and they may determine that we or Sichuan Senmiao owe
additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC
laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities
within ten years after the taxable year when the transactions are conducted. The EIT Law requires every enterprise in China to
submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant
tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions
that are inconsistent with arm's length principles. We may face material and adverse tax consequences if the PRC tax authorities
determine that the contractual arrangements among Senmiao Consulting, Sichuan Senmiao, and Sichuan Senmiao Shareholders were
not entered into on an arm's length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC
laws, rules and regulations, and adjust Sichuan Senmiao’s income in the form of a transfer pricing adjustment. A transfer
pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Sichuan Senmiao for PRC tax
purposes, which could in turn increase its tax liabilities without reducing Senmiao Consulting's tax expenses. In addition, if
Senmiao Consulting requests the Sichuan Senmiao Shareholders to transfer their equity interests in Sichuan Senmiao at nominal or
no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject Senmiao Consulting to
PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on Sichuan Senmiao for the
adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected
if Sichuan Senmiao's tax liabilities increase or if it is required to pay late payment fees and other penalties.
We may lose the ability to use and
enjoy assets held by our VIEs that are material to the operation of our business if the entity goes bankrupt or becomes subject
to a dissolution or liquidation proceeding.
Our VIEs hold certain
assets that are material to the operation of our business. Under the contractual arrangements, our VIEs may not and its equity
holders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests
in the business without our prior consent. However, in the event the equity holders of our VIEs breach the these contractual arrangements
and voluntarily liquidate our VIEs, or any of our VIEs declares bankruptcy and all or part of its assets become subject to liens
or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all
of our business activities, which could materially and adversely affect our business, financial condition and results of operations.
If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights
to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect
our business, financial condition and results of operations.
Risks Related to Doing Business in China
Our operations may need to be modified
to comply with existing and future requirements set forth by the CBRC or laws or regulations promulgated by other PRC authorities
regulating the marketplace lending industry in China.
In April 2014,
the CBRC announced four principles regarding the marketplace lending industry in China: (i) marketplace lending platforms shall
be treated as agencies, (ii) marketplace lending platforms shall not provide guarantee services, (iii) marketplace lending platforms
shall not maintain a fund pool, and (iv) marketplace lending platforms shall not illegally conduct fundraising.
In July 2015,
ten PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry of Finance, the MPS and the Cyberspace
Administration of China, together released the Guidelines, which identified the CBRC as the supervisory regulator for the online
lending industry. According to the Guidelines, online marketplace lending platforms may only serve as intermediaries to provide
information services to borrowers and investors, and may not provide credit enhancement services or illegally conduct fundraising.
The Guidelines also outlined certain regulatory propositions, which would require Internet finance companies, including online
marketplace lending platforms, to (i) complete website filing procedures with the administrative departments overseeing telecommunications;
(ii) use banking financial institutions' depository accounts to hold lending capital, and engage an independent auditor to audit
such accounts and publish audit results to customers; (iii) improve the disclosure of operational and financial information, provide
sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors; (iv) enhance
online security management to protect customers' personal and transactional information; and (v) take measures against anti-money
laundering and other financial crimes.
In August 2016,
the CBRC and other regulators collectively announced the publication of the Interim Measures. The Interim Measures also stipulated
a twelve-month transition period from the time of their effectiveness for online lending intermediaries to make necessary adjustments.
Apart from what had already been emphasized in the Guidelines and other previously released principles, the Interim Measures also
include: (i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection
measures for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and
(vii) legal liabilities. See “Business — Regulations — Regulations Related to the Marketplace Lending Industry.”
In November 2016,
the CBRC, the MIIT and the SAIC jointly issued the Guidance of Administration, which provides the general filing rules for online
lending intermediaries and delegates the filing authority to the local financial authorities. See “Business — Regulations
— Regulations Related to the Marketplace Lending Industry.” Since 2017, local financial regulators have been conducting
investigations on the online lending intermediaries, and if we failed to be in full compliance with any regulations, we may be
required to rectify mistakes within a certain period as stipulated in the rectification order of local financial regulators. After
local financing regulators have completed their investigation and examination, we may be permitted to submit a filing application.
In February 2017,
the CBRC released the Guidance to regulate funds depositories for online lending intermediaries, which defines several obligations
and responsibilities of online lending intermediaries and commercial banks involved in the online funds depository business. See
“Business — Regulations — Regulations Related to the Marketplace Lending Industry.” To the extent our current
arrangements with commercial banks are deemed to be not-compliant with any of the Guidance's requirements, we may need to adjust
our operations within the six-month grace period, and as a result, our business may be materially and adversely impacted. See “Business
— Risk Factors — Risks Related to Our Online Lending Services — If we are unable to maintain relationships with
our third-party service providers, our business will suffer.”
Some elements of our platform
may not currently be operating in full compliance with the Guidelines, the Interim Measures, the Guidance and the other principles
that have been announced in recent years. For example, the Guidelines, the Interim Measures, the Guidance and other regulations
are not clear about the definition of “credit enhancement service,” nor do they address whether a marketplace
lending platform's affiliated enterprises could provide a “credit enhancement service.” Additionally, the Interim Measures
provide upper limits on the loan balance of a single borrower. While our business mainly involves lending small amounts to a large
number of borrowers, we still may not be in full compliance with the upper limits set forth in the Interim Measures. We have adjusted
the upper limits of our loans as necessary. We may need to rely on the information provided by borrowers to determine whether their
lending amounts from all intermediaries have reached the upper limits, and the information they provide us may contain misrepresentation
or omission or otherwise be unreliable. Moreover, the Interim Measures require online lending intermediaries to file with the local
financial regulators and to include serving as an Internet lending information intermediary in their business scope. We plan to
make all requisite filings and changes to our business scope to the extent necessary when such filing procedures are clarified
by the relevant authorities. Although we do not anticipate any material difficulties in making the requisite filings or changing
our business scope, any failure to do so within the specified twelve-month transition period may result in the violation of the
Interim Measures. In addition, the Interim Measures stipulate that online lending intermediaries shall not operate businesses other
than risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge
management in accordance with online-lending regulations, via offline physical locations. However, the Interim Measures do not
clearly set forth the types of business process that are not permitted to operate through offline physical locations.
Furthermore, the Interim
Measures proposed requirements including with respect to certain prohibited activities, risk disclosure, borrower information
disclosure and online dispute resolution, examination and verification functions, anti-fraud measures, risk education and training,
information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service fees, electronic
signatures, loan management, risk assessment, auditing and authentication, reporting obligations and information security. To
the extent that our business is deemed to be non-compliant with any of these requirements of the Interim Measures, we may need
to make necessary adjustments to comply within the specified twelve-month transition period and, as a result, our business may
be materially and adversely affected. If we fail to rectify the non-compliance within the specified twelve-month transition period
or the period set forth by relevant regulatory authorities, the relevant governmental authorities would have broad authorities
in dealing with our failure of compliance, the business license or operating licenses of Senmiao Consulting or affiliated entity
may be revoked, our online platform may be ordered to close and if a crime constitutes, criminal responsibility will be investigated
as well.
In May 2017, the CBRC,
the Ministry of Education and Ministry of Human Resources and Social Security issued the Notice on Further Strengthening the Regulation
and Management Work of Campus Online Lending Business (the “CBRC Circular 26”). The CBRC Circular 26 provides that
all campus online lending business conducted by the online lending information intermediaries shall be suspended and the outstanding
balance of online campus lending loans shall be gradually reduced until reaching a zero balance.
On December 1, 2017,
the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued Circular 141, which reiterates
requirements of the Interim Measures and further imposes measures to strengthen the regulation of online lending information intermediary
platform.
Circular 141 provides,
with respect to online lending information intermediary platforms:
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Loan business not in compliance with the provisions of the law
on interest rates shall not be matched directly or in a disguised manner; and it is forbidden to deduct interests, commission
fees, management fees, and deposit from the loan principal in advance, set high overdue interest, late fee and interest penalty
and the like.
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Comprehensive capital costs collected from borrowers in the
form of interest rates and various fees shall be in compliance with the provisions on interests of private lending (i.e. the
sum of interest rate and various fees cannot exceed the annual interest rate at 36%).
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Various loan conditions, overdue information and other information
shall be disclosed comprehensively and publicly, and risks shall be pointed out to borrowers.
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Clients’ information collection, selection, credit rating,
account opening and other core work shall not be outsourced.
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Participation in P2P online lending with the funds from banking
financial institutions shall not be matched.
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Loan matching services shall not be provided to any students
at school or any borrower without source of repayment or repayment capacity. “Down payment loans”, real estate
off-floor financing and other house purchasing financing loans matching services shall not be provided.
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Loan matching services without designated use shall not be provided.
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We believe we are
currently in compliance with the requirements Circular 141. However, there is a risk that relevant PRC authorities will take a
view contrary to ours, which could create regulatory challenges for our business and impact our results of operations. Any violation
of Circular 141 may result in penalties, including but not limited to, suspension of operation, orders to make rectification,
condemnation, revocation of license, order to cease business operation and criminal liabilities.
Additionally, if the
regulatory authorities in the PRC adopt new regulations and rules applicable to online lending platforms such as further requirements
on disclosure of designated use of loan proceeds or other aspects of our business operations in future, or interpret or apply
existing rules and regulations differently in the future, we may need to amend our business practices which could cause us to
incur additional expenses or could impair our ability to operate. If we were unable to effectively implement or comply with new
measures to comply with new regulations, our business, financial condition and results of operations would be materially and adversely
affected.
Further, in December
2017, the Online Lending Rectification Office issued Circular 57, providing further clarification on several matters in connection
with the rectification and record-filing of online lending information intermediaries. The local governmental authorities shall
conduct and complete acceptance inspection of the rectification with the following timetable: (i) completion of record-filing
for major online lending information intermediaries by the end of April 2018; (ii) with respect to online lending information
intermediaries with substantial outstanding balance of those loans prohibited under the relevant laws and regulations and timely
reduction of those balance is difficult, the relevant business and outstanding balance shall be disposed and/or carved out, and
record-filing shall be completed by the end of May 2018; (iii) with respect to those online lending information intermediaries
with complex and extraordinary circumstances and substantial difficulties exist to complete rectification, the “relevant
work” shall be completed by the end of June 2018. Online lending information intermediaries that fail to complete the record-filing
within the prescribed time shall not carry out online lending information intermediary business.
Despite our efforts
to comply with the newly promulgated regulations on P2P lending companies, there is a risk that we may be unable to complete the
record-filing for our platform in time as prescribed under relevant regulations. If there is a delay in completing our record-filing
or if we fail to complete the record- filing, our operations may be suspended or even ceased. Our business, financial condition
and results of operations may be materially and adversely affected.
Moreover, to the extent
that we are not able to fully comply with any existing or new regulations when they are promulgated, our business, financial condition
and results of operations may be materially and adversely affected. We are unable to predict with certainty the impact, if any,
that future legislation, judicial precedents or regulations relating to the online consumer finance industry will have on our
business, financial condition and results of operations.
For a further description
of the laws and regulations applicable to us, see “Business — Regulations.”
As the regulatory framework for
our business evolves, domestic and foreign governments may draft and propose new laws, regulations, notices or interpretive releases
to regulate marketplace lending, including our online and mobile-based channels, which may negatively affect our business.
The marketplace lending
industry in China has historically been largely unregulated. In July 2015, ten PRC central government ministries and regulators,
including the PBOC, the CBRC, the Ministry of Finance, the MPS and the Cyberspace Administration of China, together released the
Guidelines, which provide regulatory principles for Internet financing businesses, including those in the online marketplace lending
industry. In August 2016, the CBRC and other regulators collectively announced the Interim Measures, which proposed the implementation
of new requirements including, among others, filing, reporting, fund depository, risk and information disclosure, loan management
and the permitted business scope for participants in the online marketplace lending industry. In November 2016, the CBRC,
the MIIT and the SAIC, jointly issued the Guidance to the Administration of Filling and Registration of Online Lending Information
Intermediaries, or the Guidance of Administration, which provides general filing rules for online lending intermediaries, and
authorizes local financial regulators to make detailed implementation rules regarding filing procedures according to their local
practices. See “Business — Regulations — Regulations Related to the Marketplace Lending Industry.” Since
2017, local financial regulators have been conducting thorough investigations and inspections of online lending intermediaries
and require a rectification if any illegality is discovered. After local financing regulators have completed their investigation
and examination, we may be permitted to submit a filing application. In February 2017, the CBRC released the Guidance to
regulate funds depositories for online lending intermediaries, which defines several obligations and responsibilities of online
lending intermediaries and commercial banks involved in the online funds depository business. See “Business — Regulations
— Regulations Related to the Marketplace Lending Industry.” Nevertheless, it is uncertain as to how the Interim Measures
will be further interpreted and implemented. The relevant local authorities are also in the process of making detailed implementation
rules regarding filing procedures. However, the final content and timing of the final implementation rules and other related new
rules are uncertain. To the extent that we are not able to fully comply with the new regulations in the grace period of twelve
months or any new regulations differ from our expectations, we may be materially and adversely affected. The relevant governmental
authorities would have broad authorities in dealing with our failure of compliance, including levying fines, confiscating our
income or the income of Senmiao Consulting or Sichuan Senmiao, revoking the business license or operating licenses of Senmiao
Consulting or Sichuan Senmiao, shutting down our servers or blocking our online platform, discontinuing or placing restrictions
or onerous conditions on our operation, requiring us to undergo a costly and disruptive restructuring, and taking other regulatory
or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business
operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition
and results of operations. We are unable to predict with certainty the impact, if any, that future legislation, judicial precedents,
or regulations relating to the marketplace lending industry will have on our business, financial condition and results of operations.
Furthermore, the increasing growth in popularity of marketplace lending and borrowing increases the likelihood that the PRC government
will seek to further regulate the marketplace lending industry.
In addition, the regulatory
framework for Internet commerce, including online marketplaces such as our platform, with respect to our platform's online and
mobile-based channels, is evolving, and it is possible that new laws and regulations will be adopted domestically and internationally,
or existing laws and regulations may be interpreted in new ways, which, along with possible changes needed to fully comply with
any newly released regulation, could affect the operation of our platform and the way in which we interact with borrowers and
investors. The cost to comply with such laws or regulations would increase our operating expenses, and we may be unable to pass
those costs on to borrowers and investors in the form of increased fees. In addition, governmental or regulatory agencies may
decide to impose taxes on services provided over the Internet or by online marketplaces. These taxes could discourage the use
of our platform, which would adversely affect the viability of our business.
The facilitation of loans through
our platform could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising.
PRC laws and regulations
prohibit persons and companies from raising funds through advertising to the public a promise to repay premium or interest payments
over time through payments in cash or in kind except with the prior approval of the applicable government authorities. Failure
to comply with these laws and regulations may result in penalties imposed by the PBOC or AIC, and other governmental authorities,
and can lead to civil or criminal lawsuits.
To date, our platform
has not been subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. Our
platform only acts as an information service provider in the facilitation of loans between borrowers and investors, our platform
has not been subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. In
this regard, as advised by our PRC counsel, the business operation of our platform does not violate the current existing PRC laws
and regulations prohibiting illegal fundraising Nevertheless, considerable uncertainties exist with respect to the PBOC, AIC and
other governmental authorities' interpretations of the fundraising-related laws and regulations. While our agreements with investors
require investors to guarantee the legality of all funds investors put on our platform, we do not verify the source of investors'
funds separately, and therefore, to the extent that investors' funds are obtained through illegal fundraising, we may be negligently
liable as a facilitator of illegal fundraising. In addition, we do not monitor the borrowers' use of funds on an on-going basis,
and therefore, to the extent that borrowers use proceeds from the loans for illegal activities, we may be negligently liable as
a facilitator of an illegal use. Although we have designed and implemented procedures to identify and eliminate instances of fraudulent
conduct on our platform, as the number of borrowers and investors on our platform increases, we may not be able to identify all
fraudulent conduct that may violate illegal fundraising laws and regulations.
The facilitation of loans through
our platform could give rise to liabilities under PRC laws and regulations that prohibit unauthorized public offerings.
The PRC Securities
Law stipulates that no organization or individual is permitted to issue securities for public offering without obtaining prior
approval in accordance with the provisions of the law. The following offerings are deemed the be public offerings under the PRC
Securities Law: (i) offering of securities to non-specific targets; (ii) offering of securities to more than 200 specific targets;
and (iii) other offerings provided by the laws and administrative regulations. Additionally, private offerings of securities shall
not be carried out through advertising, open solicitation and disguised publicity campaigns. If any transaction between one borrower
and multiple investors on our platform is identified as a public offering by PRC government authorities, we may be subject to
sanctions under PRC laws and our business may be adversely affected.
We are required to obtain a value-added
telecommunication business certificate and be subject to foreign investment restrictions.
PRC regulations impose
sanctions for engaging in Internet information services of a commercial nature without having obtained an ICP certificate. PRC
regulations also impose sanctions for engaging in the operation of online data processing and transaction processing without having
obtained an online data processing and transaction processing, or ODPTP, certificate (ICP and ODPTP are both sub-sets of value-added
telecommunication business certificates). These sanctions include corrective orders and warnings from the PRC communication administration
authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered
to cease operation. Nevertheless, the PRC regulatory authorities' enforcement of such regulations in the context of marketplace
lending platforms remains unclear. The Interim Measures provide that online lending information intermediaries must apply for
value-added telecommunications business licenses in accordance with the relevant provisions of telecommunications authorities
after filing with a local financial regulator. However, PRC regulatory authorities to date have not explicitly stipulated whether
the operator of a marketplace lending platform (including in the form of a website or mobile Internet application) is engaging
in Internet information services requiring an ICP certificate or an ODPTP certificate. If we could not obtain such value-added
telecommunication certificates pursuant to the relevant regulations, we may not be able to conduct online lending intermediaries'
services, but it is unclear whether online lending intermediaries would be deemed to be engaged in a commercial information provider
business or online data processing and transaction processing business or whether an ICP certificate or an ODPTP certificate is
required. To the extent that the PRC regulatory authorities require such value-added telecommunication certificate to be obtained
or set forth rules that impose additional requirements, and we do not obtain such certificate, we may be subject to the sanctions
described above. We plan to apply for filing immediately after the filing procedures are clarified by the relevant authorities,
and apply for the corresponding value-added telecommunication business certificates after completing the filing, provided that
the relevant telecommunication authority clarify which sub-set of telecommunication business certificates need to be obtained
by market lending platforms and how to apply for such certificate.
According to the Provisions
on the Administration of Foreign-Invested Telecommunication Enterprises, the ratio of investment by foreign investors in a foreign-invested
telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%. Foreign
investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise
that engages in the operation of commercial Internet information services or general online data processing and transaction processing
services.
As an exception, Circular
196, which was promulgated on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered
capital in a foreign-invested telecommunication enterprise engaging in the operation of online data processing and transaction
processing (E-commerce). While Circular 196 permits foreign ownership, in whole or in part, of online data processing and transaction
processing businesses (E-commerce), a sub-set of value-added telecommunications services, there is still uncertainty regarding
whether foreign investment restrictions may be applied to our business and industry.
Further, under either
circumstance, the largest foreign investor will be required to have a satisfactory business track record and operational experience
in the value-added telecommunication business. If regulatory authorities were to treat marketplace lending businesses as Internet
information services of a commercial nature, which is a form of a value-added telecommunication business, our platform may be
subject to such foreign investment restrictions and we may be required to restructure our operations by establishing a joint venture
with foreign capital equal to no more than 50% of its total capital or a domestic enterprise with no foreign capital through variable
interest entities to obtain a telecommunication business certificate. Any such restructuring may be costly and may involve interruptions
to our business. If we are unable to obtain the telecommunication business certificate in a timely fashion, our business may be
materially and adversely affected.
Changes in China's economic, political
or social conditions or government policies could have a material adverse effect on our business and results of operations.
Substantially all
of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may
be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic
growth in China as a whole.
The Chinese economy
differs from the economies of most developed countries in many respects, including the amount of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in
China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating
industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic
growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy,
and providing preferential treatment to particular industries or companies.
While the Chinese
economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by government control over capital investments or
changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest
rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since
2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our
products and services and materially and adversely affect our business and results of operations.
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to us.
The PRC legal system
is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are
relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are
not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time,
we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more
developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely
affect our business and impede our ability to continue our operations.
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
The PRC government
extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining
to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their
interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We own their websites
for automobile transaction and related services while we only have contractual control over our website for online lending services.
We do not directly own the website for online lending services due to the restriction of foreign investment in businesses providing
value-added telecommunication services in China, including internet information provision services. This may significantly disrupt
our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects
on us.
The evolving PRC regulatory
system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the
State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of
the State Council Information Office, the MIIT, and the MPS). The primary role of this new agency is to facilitate the policy-making
and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content
administration and to deal with cross-ministry regulatory matters in relation to the internet industry.
Our online platform,
operated by our consolidated variable interest entity, Sichuan Senmiao, may be deemed to be providing commercial internet information
services, which would require Sichuan Senmiao to obtain an ICP certificate. An ICP certificate is a value-added telecommunications
business operating license required for provision of commercial internet information services. See “Business — Regulations
— Regulations Related to Value-Added Telecommunication Business Certificates and Foreign Investment Restrictions.”
Sichuan Senmiao, our PRC consolidated variable interest entity, has obtained an ICP certificate as an internet information provider.
Furthermore, as we are providing mobile applications to mobile device users, it is uncertain if Sichuan Senmiao will be required
to obtain a separate operating license in addition to the ICP certificate. Although we believe that not obtaining such separate
license is in line with the current market practice, there can be no assurance that we will not be required to apply for an operating
license for our mobile applications in the future.
The Circular on Strengthening
the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MIIT in July 2006,
prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunications business operating
licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their
illegal operation of a telecommunications business in China. According to this circular, either the holder of a value-added telecommunication
services operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in
their provision of value-added telecommunication services. The circular also requires each license holder to have the necessary
facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by
its license. Sichuan Senmiao owns the relevant domain names in connection with our value-added telecommunications business and
has the necessary personnel to operate our website. However, if operating telecommunications business without operating licenses,
the relevant governmental authority will order to rectify, confiscate illegal gains and impose a fine equal to three to five times
of the illegal gains. If no illegal gains or the illegal gain is less than RMB 50,000, a fine amounting to RMB 100,000 to RMB
1,000,000 will be imposed. In case of gross violation, the business shall be suspended and rectification will be carried out.
The interpretation
and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the
internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in,
and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have
obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses
or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or
promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation
of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material adverse effect on our business and results of operations.
Any failure by us or our third-party
service providers to comply with applicable anti-money laundering laws and regulations could damage our reputation.
In cooperation with
our partnering custody banks and payment companies, we have adopted various policies and procedures, such as internal controls
and “know-your-customer” procedures, for anti-money laundering purposes. In addition, we rely on our financing partners,
custody banks and payment companies, to have their own appropriate anti-money laundering policies and procedures. The financing
partners, custody banks and payment companies are subject to anti-money laundering obligations under applicable anti-money laundering
laws and regulations and are regulated in that respect by the PBOC. If any of our financing partners, custody banks and payment
companies fail to comply with applicable anti-money laundering laws and regulations, our reputation could suffer and we could
become subject to regulatory intervention, which could have a material adverse effect on our business, financial condition and
results of operations. Any negative perception of the industry, such as that arises from any failure of other finance marketplaces
to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise
our image or undermine the trust and credibility we have established.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to comply with certain anti-money laundering requirements, including the establishment
of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information
and transaction records, and the provision of assistance to the public security department and judicial authority in investigations
and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the
anti-money laundering obligations of internet finance service providers. We cannot assure you that the anti-money laundering policies
and procedures we have adopted will be effective in protecting our platform from being exploited for money laundering purposes
or will be deemed to be in compliance with applicable anti-money laundering implementing rules if and when adopted.
We rely on dividends and other distributions
on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability
of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company,
and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our stockholders and service any debt we may incur.
If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Senmiao Consulting to adjust
its taxable income under the contractual arrangements it currently has in place with Sichuan Senmiao in a manner that would materially
and adversely affect its ability to pay dividends and other distributions to us. See “Risk Factors — Risks Related
to Our Corporate Structure — Contractual arrangements in relation to Sichuan Senmiao may be subject to scrutiny by the PRC
tax authorities and they may determine that we or Sichuan Senmiao owe additional taxes, which could negatively affect our financial
condition and the value of your investment.”
Under PRC laws and
regulations, our PRC subsidiaries, as a wholly foreign-owned enterprise in China, may pay dividends only out of their respective
accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion,
a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Our PRC subsidiaries
are currently unable to pay us any dividend given their financial condition. If our PRC subsidiaries’ financial condition
improves, the above discussed PRC laws will likely limit their ability to pay dividends or make other distributions to us. Such
limitations could materially and adversely impact our cash flows and limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “Risk Factors
— Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for PRC income tax
purposes, such classification could result in unfavorable tax consequences to us and our non-PRC stockholders.”
PRC regulation of loans to and direct
investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent
us from using the proceeds of from our public offerings to make loans to or make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Under PRC laws and regulations,
we are permitted to utilize the proceeds from our public offerings to fund our PRC subsidiaries by making loans to or additional
capital contributions to our PRC subsidiaries, subject to applicable government registration and approval requirements.
Any loans to our PRC subsidiaries,
which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations.
For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered
with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is
the difference between the amount of total investment as approved by the MOFCOM or its local counterpart and the amount of registered
capital of such foreign-invested company.
We have financed and expect
to continue to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved by
the MOFCOM or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating
the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted
RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless
otherwise provided by law, may not be used for equity investments within the PRC. On July 4, 2014, the SAFE issued the Circular
of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of
Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration
of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4,
2014 and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of
the foreign-invested enterprises established within the designate areas and such enterprises are allowed to use its RMB capital
converted from foreign exchange capitals to make equity investment. On March 30, 2015, SAFE promulgated Circular 19, to expand
the reform nationwide. Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular
19 allows foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. However,
Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign
exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial
enterprises. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE's approval, and
such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of
these Circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use
RMB converted from the net proceeds of our public offerings to fund the establishment of new entities in China by our PRC subsidiaries,
to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new variable interest entities in
the PRC.
In light of the various
requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot
assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future capital contributions or future loans by us to our PRC subsidiaries. If we
fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our public
offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely
affect our liquidity and our ability to fund and expand our business.
Fluctuations in exchange rates could
have a material adverse effect on our results of operations and the value of your investment.
Substantially all
of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations
in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar
assets and the proceeds from our public offerings. Our reporting currency is the U.S. dollar while the functional currency for
our PRC subsidiaries and consolidated variable interest entities is RMB. Gains and losses from the remeasurement of assets and
liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement
has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value
of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative
to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars
in our financial statements. This could have a negative impact on our business, financial condition or results of operations as
reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on
our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect
on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings
are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.
The value of the RMB
against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions
and China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years.
However, the People's Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in
RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between
the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the RMB fluctuated significantly during
that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has started
to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated against the
RMB. On August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. dollar. It is difficult
to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB
and the U.S. dollar may change again.
There remains significant
international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation
of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends
payable on, our securities in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from our
public offerings into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse
effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S.
dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of
our securities.
Very limited hedging
options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately
hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse
effect on your investment.
Governmental control of currency
conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government
imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out
of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, we rely on dividend
payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange
regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore,
our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition
that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation,
such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from
or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may
also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be
able to pay dividends in foreign currencies to our stockholders.
Failure to make adequate contributions
to various employee benefit plans as required by PRC regulations may subject us to penalties.
We are required under
PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance,
housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages
of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from
time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented
consistently by the local governments in China given the different levels of economic development in different locations. We have
not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay
late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition
and results of operations may be adversely affected.
The M&A Rules and certain other
PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors, which could make it
more difficult for us to pursue growth through acquisitions in China.
The M&A Rules
discussed in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions established additional
procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex,
including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which
a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall
be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review
rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors
that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may
acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review
by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction
through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses.
Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could
be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts
may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share.
PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiaries' ability to increase their registered capital or distribute
profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.
SAFE promulgated the
SAFE Circular 37 in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection
with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition,
such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material
events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term),
increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued
to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and
Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying
and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect
on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks
rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the
purpose of overseas investment or financing.
If our stockholders
who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
To our knowledge, all
of our PRC stockholders are subject to the registration requirements of Circular 37 have completed the required foreign exchange
registrations.
In addition, we may
not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor
can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of
our stockholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain
any applicable registrations or approvals required by, SAFE regulations. Failure by such stockholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make
distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
If the chops of our PRC subsidiaries
and consolidated variable interest entities are not kept safely, are stolen or are used by unauthorized persons or for unauthorized
purposes, the corporate governance of these entities could be severely and adversely compromised.
In China, a company
chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each
legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security
Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes.
The chops of our PRC subsidiaries and consolidated variable interest entities are generally held securely by personnel designated
or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen
or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely
and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if
they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused
by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal
action, which could involve significant time and resources to resolve while distracting management from our operations.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.
In February 2012,
SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant
to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate
in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with
SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain
other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise
or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who
are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options
or other awards under our 2018 Equity Incentive Plan will be subject to these regulations. Failure to complete the SAFE registrations
may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries
and limit our PRC subsidiaries' ability to distribute dividends to us. We also face regulatory uncertainties that could restrict
our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Business
— Regulations — SAFE Regulations Relating to Employee Stock Incentive Plans.”
If we are classified as a PRC resident
enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC
stockholders.
Under the EIT Law
and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within
the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate
of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial
control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009,
the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in
China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not
those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration
of Taxation's general position on how the “de facto management body” test should be applied in determining the tax
resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC
enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management
body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions
are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise's
financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise's
primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained
in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe none of
our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Business — Regulations —
Regulations Related to Tax.” However, the tax resident status of an enterprise is subject to determination by the PRC tax
authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As
substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our
case. If the PRC tax authorities determine that the Company or any of our subsidiaries outside of China is a PRC resident enterprise
for PRC enterprise income tax purposes, then the Company or such subsidiary could be subject to PRC tax at a rate of 25% on its
world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income
tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise
income tax purposes, gains realized on the sale or other disposition of our securities may be subject to PRC tax, at a rate of
10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any
applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC stockholders of our company
would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we
are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our securities.
Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities
have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity
interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular
698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698,
which became effective in February 2015.
Under Circular 698,
where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident
enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use
of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject
to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015,
the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new
tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore
transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how
to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and
sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an
“indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas
holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the
taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle,
the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose
and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of
being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend
valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises
should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of
operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based
on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have
no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve
complex corporate structures. If we are considered a non-resident enterprise under the EIT Law and if the PRC tax authorities
make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular 7, our income tax
costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition
and results of operations.
Risks Related to Our Securities
The market price for our common
stock may be volatile.
The trading prices
of our common stock are likely volatile and could fluctuate widely due to factors beyond our control. This may happen because
of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating
financial results of internet or other companies based in China that have listed their securities in the United States in recent
years. The securities of some of these companies have experienced significant volatility since their initial public offerings,
including, in some cases, substantial decline in their trading prices. The trading performances of other Chinese companies' securities
after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently
may impact the trading performance of our common stock, regardless of our actual operating performance. In addition, any negative
news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters
of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including
us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time
experience significant price and volume fluctuations that are not related to our operating performance, which may have a material
adverse effect on the market price of our common stock.
In addition to the
above factors, the price and trading volume of our common stock may be highly volatile due to multiple factors, including the
following:
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regulatory developments affecting us, our customers, or our industry;
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regulatory uncertainties with regard to our variable interest
entity arrangements;
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announcements of studies and reports relating to our loan products
and service offerings or those of our competitors;
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changes in the economic performance or market valuations of
other online finance marketplaces;
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actual or anticipated fluctuations in our quarterly results
of operations and changes or revisions of our expected results;
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changes in financial estimates by securities research analysts;
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conditions in the internet and marketplace lending industries;
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announcements by us or our competitors of new product and service
offerings, acquisitions, strategic relationships, joint ventures or capital commitments;
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additions to or departures of our senior management;
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detrimental negative publicity about us, our management or our
industry;
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fluctuations of exchange rates between the RMB and the U.S.
dollar;
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release or expiry of lock-up or other transfer restrictions
on our outstanding shares of common stock; and
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sales or perceived potential sales of additional shares of common
stock.
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A significant portion of our total
outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause
the market price of our common stock to drop significantly, even if our business is performing well.
Sales of a substantial
number of shares of our common stock in the public market could occur at any time, subject to certain restrictions described below.
These sales, or the perception in the market that holders of a large number of shares intend to sell shares, could reduce the market
price of our common stock. As of June 28, 2019, we had outstanding 27,726,615 shares of common stock, 5,226,615 of which may be
resold in the public market immediately without restriction, other than shares owned by our affiliates, which may be sold pursuant
to Rule 144. However, the resale of an aggregate of 22,500,000 shares are restricted until March 20, 2020, except for permitted
transfers, as a result of lock-up agreements executed in conjunction with our IPO. We may register all shares of common stock that
we may issue under our equity compensation plans on a Registration Statement on Form S-8. These shares can be freely sold in the
public market upon issuance, subject to volume limitations applicable to affiliates.
We have a significant number of outstanding
warrants, some of which contain full-ratchet anti-dilution protection and reset provisions, which may cause significant dilution
to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to
raise funds through future equity offerings.
As more fully described
in the section herein titled “Recent Developments—June 2019 Registered Direct Offering,” pursuant to the June
2019 Offering and the Purchase Agreement, we issued to the Investors Series A Warrants to purchase an aggregate of 1,336,021 shares
of common stock and Series B Warrants to purchase a maximum aggregate of 1,116,320 shares of common stock.
Among other provisions,
the Series A Warrants provide the Investors with full ratchet anti-dilution protection in the event that we issue any equity or
equity-linked securities at a price lower than the exercise price of the Series A Warrants (subject to certain exceptions) and
on the six month anniversary of the initial exercise date of the Series A Warrants, if the New Exercise Price is less than the
Series A Exercise Price, then the Series A Exercise Price shall have one-time price adjustment equal to the New Exercise Price;
provided, however, in no event, shall the New Exercise Price be less than $1.50 per share.
The Series B
Warrants initially won’t be exercisable for any shares of common stock. In the event that on the Adjustment Measuring
Time, the closing price of the common stock is less than the Share Purchase Price, then the number of shares of common stock
issuable upon exercise of the Series B Warrants shall be adjusted (upward or downward, as applicable) to the greater of (i)
zero (0) and (ii) such aggregate number of shares of common stock equal to 50% of the difference of (A) the quotient of (x)
the Share Purchase Price divided by (y) the Market Price (as defined in the Purchase Agreement) as of the Adjustment
Measuring Time, less (B) the aggregate number of Shares issued to the Investors at the closing (as adjusted for share splits,
share dividends, share combinations, recapitalizations and similar events).
The issuance of shares
of common stock upon the exercise of the Series A Warrants and Series B Warrants would dilute the percentage ownership interest
of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded
shares, which could depress the market price of our common stock.
In
addition, the so-called full-ratchet anti-dilution protections and reset provisions, subject to limited exceptions, would reduce
the exercise price of the warrants in the event that we in the future issue common stock, or securities convertible into or exercisable
to purchase common stock, at a lower price per share.
In addition to the
dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants
may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the
price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price
could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our
common stock. The fact that our stockholders, warrant holders and option holders can sell substantial amounts of our common stock
in the public market, whether or not sales have occurred or are occurring, as well as the existence of full-ratchet anti-dilution
provisions and reset provisions in a substantial number of our outstanding warrants could make it more difficult for us to raise
additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable
or appropriate, or at all.
We have broad discretion in the use of
our cash, including the net proceeds from our IPO and our June 2019 Offering, and might not use them effectively.
Our management will have
broad discretion in the application of our cash, including the net proceeds from our IPO and our June 2019 Offering, and could
spend our cash in ways that do not improve our results of operations or enhance the value of our common stock. The failure by
our management to apply these funds effectively could result in financial losses that could have a material adverse effect on
our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their
use, we may invest our cash, including the net proceeds from our IPO and June 2019 Offering, in a manner that does not produce
income or that loses value.
Raising additional capital may cause
dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.
We may seek additional
capital through a combination of public and private equity offerings, debt financings, collaborations and licensing arrangements.
To the extent that we raise additional capital through the sale of equity or debt securities, your ownership interest will be
diluted and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence
of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations
on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other
operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic
partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies
or grant licenses on terms unfavorable to us.
Certain judgments obtained against
us by our stockholders may not be enforceable.
We conduct substantially
all of our operations in China and substantially all of our assets are located in China. In addition, most of our directors and
executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may
be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an
action against us or against these individuals in the United States in the event that you believe your rights have been infringed
under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of
the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Our articles of incorporation and
by-laws could deter a change of our management, which could discourage or delay offers to acquire us.
Certain provisions
of our articles of incorporation (the “Articles of Incorporation”) and by-laws could discourage or make it more difficult
to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount
of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter transactions
that stockholders may otherwise consider to be in their best interests or in our best interests. These provisions include:
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requiring stockholders who wish to request a special meeting
of the stockholders to disclose certain specified information in such request and to deliver such request in a specific way
within a certain timeframe, which may inhibit or deter stockholders from requesting special meetings of the stockholders;
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requiring that stockholders who wish to act by written consent
request a record date from us for such action and such request must include disclosure of certain specified information, which
may inhibit or deter stockholders from acting by written consent;
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establishing the board as the sole entity to fill vacancies
of the board, which lengthens the time needed to elect a new majority of the board;
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establishing a two-thirds majority vote of the stockholders
to remove a director from the board, as opposed to a simple majority, which lengthens the time needed to elect a new majority
of the board; and
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establishing that any person who acquires equity in us shall
be deemed to have notice and consented to the forum selection provision of our Bylaws requiring actions to be brought only
in Nevada, which may inhibit or deter stockholders actions (i) on behalf of us; (ii) asserting claims of breach of fiduciary
duty by officers or directors of us; or (iii) arising out of the Nevada Revised Statutes, and establishing more detailed disclosure
in any stockholder's advance notice to nominate a new member of the board, including specified information regarding such
nominee, which may inhibit or deter such nomination and lengthen the time needed to elect a new majority of the board.
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We are an emerging growth company
within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging
growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable
to other public companies that are not emerging growth companies including, most significantly, not being required to comply with
the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company.
As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain
information they may deem important.
The JOBS Act also
provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until
such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have
elected not to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards
as required when they are adopted for private companies. This decision to take advantage of the extended transition period under
the JOBS Act is irrevocable.
We will incur increased costs as
a result of operating as a smaller reporting public company, and our management will be required to devote substantial time to
new compliance initiatives.
As a smaller reporting
public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented
by the SEC and Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective
disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a
substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and
financial compliance costs and will make some activities more time consuming and costly. For example, we expect that these rules
and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which
in turn could make it more difficult for us to attract and retain qualified members of our board of directors.
For as long as we
remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies as described in the preceding risk factor. We might remain an
emerging growth company until March 31, 2023, although if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.07 billion or
more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also
would cease to be an emerging growth company if we issue more than $1 billion of nonconvertible debt over a three-year period.
Pursuant to Section 404,
we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation
report on internal control over financial reporting issued by our independent registered public accounting firm. However, while
we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial
reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the
prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which
is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside
consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue
steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement
a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a
risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe
that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, the market price for our common stock
and trading volume could decline.
The trading market
for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or
our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts
who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the market price for
our common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports
on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume
for our common stock to decline.
Because we do not expect to pay
dividends in the foreseeable future, you must rely on price appreciation of our common stock for return on your investment.
We currently intend
to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.
As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment
in our common stock as a source for any future dividend income.
Our board of directors
has discretion as to whether to distribute dividends, subject to certain restrictions under Nevada law. Even if our board of directors
decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things,
our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received
by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of
directors. Accordingly, the return on your investment in our common stock will likely depend entirely upon any future price appreciation
of our common stock.
The exercise of outstanding warrants
to acquire shares of our common stock would cause additional dilution, which could cause the price of our common stock to decline.
In the past, we have issued
options and warrants to acquire shares of our common stock. As of the date of this Report, there were 1,374,561 shares of common
stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.75 per share, and we may issue
additional options, warrants and other types of equity in the future as part of stock-based compensation, capital raising transactions
or other strategic transactions. To the extent these options and warrants are ultimately exercised, existing holders of our common
stock would experience dilution which may cause the price of our common stock to decline.
The Company may need additional
financing while the Warrants from the June 2019 Offering are still outstanding and certain of the terms of the Offering could
severely limit the types of financings the Company can enter into.
Under the terms of
the Purchase Agreement we are prohibited from, among other things, (i) entering into any variable rate transactions so long as
any of the Warrants are still outstanding, (ii) directly or indirectly offering or issuing any securities, or entering into any
agreement to offer or issue any securities, other than customary exception, for a period of ninety (90) days after the closing
of the June 2019 Offering. Such restrictions are severe limitation on the types of financings we can seek should we need it in
the near future. In the event we will require such a financing, we may be required to obtain the consent of the Investors, whom
may withhold such consent at their reasonable discretion. Our inability, under the terms of the June 2019 Offering, to raise additional
funds, could have a material adverse effect on our operations should we need such additional funds. Further, even if the Investors
did provide us with their consent to obtain such additional financing, the terms of the financing may be under terms that are
less advantageous due to the restrictions and protections provided under the terms of the June 2019 Offering.