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 facilitate automobile transaction and related services focusing on the
ride-hailing industry in People’s Republic of China (the “PRC” or “China”) through our majority owned
subsidiary, Hunan Ruixi Financial Leasing Co., Ltd., a PRC limited liability company (“Hunan Ruixi”), its wholly owned
subsidiary, Hunan Ruixi Automobile Leasing Co., Ltd. (“Ruixi Leasing”) and variable interest entity (“VIE”),
Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”) (the “Automobile Transaction and Related Services”).
Our Automobile Transaction
and Related Services are mainly comprised of (i) facilitation of automobile transaction and financing where we connect the prospective
ride-hailing drivers to financial institutions to buy, or get financing on the purchase of, cars to be used to provide ride-hailing
services (the “auto financing and transaction facilitation”); (ii) automobile sales where we procure new cars from
dealerships and sell them to our customers in the automobile financing facilitation business (the “auto sales”); (iii)
automobile operating lease where we provide car rental services to individual customers to meet their personal needs with lease
term no more than twelve months (the “auto leasing”); and (iv) automobile financing where we provide our customers
with auto finance solutions through financing leases (the “auto financing”).
We previously operated
an online peer-to-peer (“P2P”) lending platform through Sichuan Senmiao Ronglian Technology Co., Ltd., another VIE
of our company (“Sichuan Senmiao”), and in connection therewith facilitated loan transactions between Chinese investors
and individual and small-to-medium-sized enterprise (“SME”) borrowers (our “Online Lending Services”).
Our Online Lending Services were discontinued in October 2019 as we determined that the continued operation of our online lending
business was not viable given that the online peer-to-peer lending industry in China had been experiencing a continuous decline
in total transaction volume and facing an increasingly tighter regulatory environment.
Since we ceased our
Online Lending Services, we have reallocated our resources to focus on our Automobile Transaction and Related Services segment
of our business. During the year ended March 31, 2020, we generated revenue of $15.6 million from our Automobile Transaction and
Related Services and $0.11 million from our Online Lending Services.
Our executive offices
are located in Chengdu City, Sichuan Province, China. Substantially all of our operations are conducted in China.
Our Corporate History
We were incorporated
in the State of Nevada on June 8, 2017. We established a wholly owned subsidiary, Sichuan Senmiao Zecheng Business Consulting Co.,
Ltd. (“Senmiao Consulting”), in China in July 2017. As of the date of this Report, Senmiao Consulting provides services
to Sichuan Senmiao, one of our VIEs, pursuant to the VIE Agreements as defined below.
Sichuan Senmiao was
established in China in June 2014. We have entered into a series of contractual arrangements (the “VIE Agreements”)
with Sichuan Senmiao and each of its equity holders through Senmiao Consulting to obtain control and become the primary beneficiary
of Sichuan Senmiao. The contractual arrangements have been in place since the establishment of Senmiao Consulting (the “Restructuring”).
On September 25,
2016, Sichuan Senmiao acquired a P2P platform (including website, internet content provider (“ICP”) registration, operating
systems, servers, management system, employees and users) from Sichuan Chenghexin Investment and Asset Management Co., Ltd. (“Chenghexin”),
which had established and operated the platform for two years prior to our acquisition (the “Acquisition”), for a total
cash consideration of RMB69,690,000 (approximately US$10.1 million).
Prior to the Acquisition,
Sichuan Senmiao was a holding company that owned a 60% equity interest in an equity investment fund management company. Sichuan
Senmiao sold its 60% equity interest for a cash consideration of RMB 60 million (approximately US$8.9 million) immediately following
the Acquisition, in order to focus on the online marketplace lending business.
On November 21, 2018,
we entered into an Investment and Equity Transfer Agreement (the “Investment Agreement”) with Hunan Ruixi and all the
shareholders of Hunan Ruixi, pursuant to which we acquired an aggregate of 60% of the equity interest of Hunan Ruixi for no consideration.
We closed the acquisition on November 22, 2018 and agreed to make a cash contribution of $6,000,000 to Hunan Ruixi, representing
60% of its registered capital, in accordance with the Investment Agreement. We have made the full cash contributions (in the aggregate
amount of $6,000,000) to Hunan Ruixi.
Hunan Ruixi has a wholly
owned subsidiary, Ruixi Leasing, a PRC limited liability company formed in April 2018 with a registered capital of RMB 10 million
(approximately US$1.5 million). Ruixi Leasing is licensed to engage in automobile sales and leasing and has not commenced operations
as of the date of this Report.
Hunan Ruixi also owns
35% equity interest in Jinkailong and control the remaining 65% equity interest through two voting agreements with another four
shareholders of Jinkailong. Jinkailong is an automobile transaction and related services company in Chengdu City, Sichuan Province,
China, which primarily targets drivers in the ride-hailing service sector and facilitates automobile sales and financing transactions
for its clients and provides relevant after-transaction services to them.
In May 2019, we formed
Yicheng Financial Leasing Co., Ltd. (“Yicheng”), a PRC limited liability company and wholly owned subsidiary of our
company, with a registered capital of $50 million in Chengdu City, Sichuan Province, China. Yicheng obtained its business licenses
for automobiles sale and financial leasing and has engaged in the sales of automobiles since June 2019. As of the date of this
Report, we have made contributions in the aggregate amount of $4,250,000 to Yicheng.
Our Corporate Structure
The following diagram illustrates our corporate
structure, including our subsidiaries and our VIEs as of the date of this Report:
VIE Agreements with Sichuan Senmiao
According to the VIE
Agreements, Sichuan Senmiao is obligated to pay Senmiao Consulting service fees equal to its net income. Sichuan Senmiao’s
entire operations are controlled by the Company. There are no unrecognized revenue-producing assets that are held by Sichuan Senmiao.
Although we discontinued
Sichuan Senmiao’s Online Lending Services commencing in October 2019, the VIE Agreements remain in place, and such agreements
are described in detail below:
Equity Interest Pledge Agreement
Senmiao Consulting,
Sichuan Senmiao and all the shareholders of Sichuan Senmiao (the “Sichuan Senmiao Shareholders”) entered into an Equity
Interest Pledge Agreement, pursuant to which the Sichuan Senmiao Shareholders pledged all of their equity interest in Sichuan Senmiao
to Senmiao Consulting in order to guarantee the performance of Sichuan Senmiao’s obligations under the Exclusive Business
Cooperation Agreement as described below. During the term of the pledge, Senmiao Consulting is entitled to receive any dividends
declared on the pledged equity interest of Sichuan Senmiao. The Equity Interest Pledge Agreement terminates when all contractual
obligations under the Exclusive Business Cooperation Agreement have been fully performed.
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.
Voting Agreement with Jinkailong’s
Other Shareholders
In addition to
obtaining a 35% equity interest in Jinkailong, Hunan Ruixi, Jinkailong and another four shareholders of Jinkailong holding an
aggregate of 65% equity interests entered into two voting agreements on August 26, 2018 and February 13, 2020, respectively
(as amended, collectively, the “Voting Agreement”), pursuant to which all other Jinkailong’s shareholders
will vote in concert with Hunan Ruixi on numerous corporate matters including all fundamental corporate transactions in the
event of a disagreement, ending on August 25, 2038.
We have consolidated
the financial statements of Jinkailong into our financial statements because we are Jinkailong’s primary beneficiary based
on the Voting Agreement. Though not explicit in the business cooperation agreement by and among Jinkailong, Hunan Ruixi, and other
shareholders of Hunan Ruixi, we may provide financial support to Jinkailong to meet its working capital requirements and required
capitalization purposes. The terms of the Voting Agreement and our plan to provide financial support to Jinkailong were considered
in determining that we are the primary beneficiary of Jinkailong. Accordingly, the financial statements of Jinkailong are consolidated
in our consolidated financial statements. Although we are able to consolidate the financial statements of Jinkailong, we are only
entitled to distribution of dividends and assets based on our ownership of 35% of the equity interest of Jinkailong.
Recent Developments
June 2019 Registered Offering
On June 17, 2019,
we entered into a securities purchase agreement with certain accredited investors (the “Investors”) in connection
with a registered direct public offering (the “June 2019 Offering”) of 1,781,361 shares of our common stock at a
price of $3.38 per share (the “Share Purchase Price”) for a purchase price of approximately $6,000,000. On June
21, 2019, we closed the June 2019 Offering. In connection with the June 2019 Offering, we also issued to the Investors for no
consideration, Series A common stock purchase warrants (the “Series A Warrants”) and for nominal consideration,
pre-funded Series B common stock purchase warrants (the “Series B Warrants”; and together with the Series A
Warrants, the “Warrants”).
The shares and warrants
sold in the June 2019 Offering were issued pursuant to a prospectus supplement filed with the SEC on June 20, 2019 to our effective
shelf registration statement on Form S-3 (Registration No. 333-230397), which was initially filed with the SEC on March 19, 2019,
and was declared effective on April 15, 2019.
We used all of the
proceeds for general corporate purposes, including automobile purchases, the costs of providing leasing and other automobile transaction
services, including financial leasing, costs of developing other types of financing businesses, investments in other entities,
costs of technology development, costs of new hires, capital expenditures, working capital and the costs of operating as a public
company.
FT
Global Capital, Inc. (“FT Global”) acted as the exclusive placement agent for the June 2019 Offering. Pursuant to an
engagement letter between our company and FT Global, FT Global received cash compensation of approximately $480,000 and
warrants which are exercisable into 142,509 shares of common stock at an exercise price of $3.38 per share and will expire on the
four year anniversary of their issuance.
Coronavirus (COVID-19) Update
Beginning in late 2019,
an outbreak of a novel strain of coronavirus and related respiratory illness (which we refer to as COVID-19) was first identified
in China and has since spread rapidly globally. The COVID-19 pandemic has resulted in quarantines, travel restrictions, and the
temporary closure of stores and business facilities in China and globally. In March 2020, the World Health Organization (the “WHO”)
declared COVID-19 a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because all of our business operations
and our workforce are concentrated in China, our business, results of operations and financial condition have been and will continue
to be adversely affected. The extent of the potential going forward impact to our results of operations will also depend on future
developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic (or any recurrences
of the pandemic, as have been experienced in China and elsewhere) and the actions taken by government authorities and other entities
to contain COVID-19 or mitigate its impact, almost all of which are beyond our control.
The impacts of COVID-19
on our business, financial condition, and results of operations include, but are not limited to, the following (for more background
information on our business generally, see “Our Automobile Transaction and Related Services” below):
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We temporally closed our corporate headquarters and other offices
to adhere to the lockdown policy in China from January 19 to February 23, 2020, as required by relevant PRC regulatory authorities.
A large number of our employees were in mandatory self-quarantine and our entire business operations were restricted during such
period. We reopened our offices in both Chengdu and Changsha on February 24, 2020, but only resumed full operations beginning
near the end of March 2020.
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Due to the lockdown policy and travel restrictions, the demand for ride-hailing services has been materially and adversely impacted in our areas of operation in China, which reduced the demand of our Automobile Transaction and Related Services. As a result, our revenue and income for the three months ended March 31, 2020 has been negatively impacted to a significant extent.
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Our ability to collect the monthly installment payments we receive from ride-hailing drivers during February and March 2020 was adversely impacted. As of March 31, 2020, approximately 840 drivers exited the online ride-hailing business and tendered their automobiles to us for sublease or sales, while approximately 380 drivers postponed their monthly installment payments. As a result, we recorded bad debt expenses of $3,406,215. This situation may worsen if the COVID-19 pandemic reoccurs in China. We will continue to closely monitor our collections throughout 2020.
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Our daily cash flow has also been adversely impacted as a result of the unsatisfied collection from the online ride-hailing drivers and our potential guarantee expenditure pursuant to the financial leasing agreements or the loan agreements (the “Financing Agreements”) we guaranteed. Our cash flow will continue to be adversely impacted if the online ride-hailing market in China recovers slower than anticipated. This compromised cash flow situation is likely to continue during our first and second quarters of the fiscal year ending March 31, 2021 and may worsen if the COVID-19 pandemic reoccurs.
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We cannot foresee whether
the outbreak of COVID-19 will continue to be effectively contained in China, nor can we predict the severity and duration of its
impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may
continue to be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and
national economic growth in China, weakened liquidity and financial conditions of our customers or other factors that we may not
be able to foresee. Any of these factors and other factors beyond our control could have an adverse effect on our overall business
environment, cause uncertainties in the regions in China where we conduct business, cause our business to suffer in ways that we
cannot predict and materially and adversely impact our business, financial condition and results of operations.
JKL Investment Agreement
On July 4, 2020, Hunan
Ruixi, Jinkailong and the other shareholders of Jinkailong entered into an agreement (the “JKL Investment Agreement”)
with Hongyi Industrial Group Co., Ltd. (“Hongyi”), an affiliate of the largest shareholder of Chengdu Road & Bridge
Engineering Co., Ltd., a construction engineering company publicly listed on the A-Share market in China.
Pursuant to the JKL
Investment Agreement, Jinkailong agreed to issue and Hongyi agreed to subscribe for a 27.03% equity interest in Jinkailong in consideration
of RMB50 million (approximately $7.0 million) (the “Investment”). The Investment will be made in two payments: (i)
the first payment of RMB10 million (approximately $1.4 million) is due no later than September 30, 2020 and (ii) the remaining
RMB40 million (approximately $5.6 million) is due within 30 days after the record-filing of the Investment has been made with the
local PRC government and the other shareholders of Jinkailong having made their respective capital contributions in full in cash,
but no later than December 31, 2020. As a result, Hunan Ruixi will be required to pay RMB3.5 million (approximately $0.5 million)
to Jinkailong as a capital contribution. Upon the full payment of the consideration, the Investment will be deemed to be closed
(the “Closing”).
As a result of the
Investment, the original shareholders’ ownership percentage will be proportionally diluted but Hunan Ruixi will continue
to control Jinkailong pursuant to the Voting Agreements.
The JKL Investment
Agreement sets performance targets for Jinkailong during a three-year performance commitment period following the Closing. During
the performance commitment period, Jinkailong has agreed, and its original shareholders have agreed to cause Jinkailong, to seek
to achieve annual revenue for Jinkailong of no less than RMB52 million (approximately $7.4 million), RMB90 million (approximately
$12.7 million) and RMB110 million (approximately $15.6 million), respectively, and annual net profit of no less than RMB10 million
(approximately $1.4 million), RMB20 million (approximately $2.8 million) and RMB25 million (approximately $3.5 million), respectively,
during the first, second and third year of the performance commitment period.
The JKL Investment
Agreement also provides Hongyi certain shareholder rights, including, but not limited to, the right to receive any undistributed
dividends, a right of first refusal for any equity transfer from the other shareholders of Jinkailong, a tag-along right during
the performance commitment period, anti-dilution rights, redemption rights, subscription rights and priority in liquidation or
dissolution of Jinkailong. Specifically, pursuant to the redemption right provision in the JKL Investment Agreement, in the event
that Jinkailong (i) fails to become public through an IPO for a valuation of no less than RMB350 million (approximately $49.5 million)
or merge with a public company for a valuation of no less than RMB300 million (approximately $42.5 million) within the six months
following the performance commitment period, (ii) fails to achieve an accumulated net profit of RMB24 million (approximately $3.4
million) for the first two years of the performance commitment period or a net profit of RMB20 million (approximately $2.9 million)
for the third year of the performance commitment period, or (iii) has any material and adverse change to its core business, including
but not limited to being included in the list of dishonest persons and loss of over one third of its online ride-hailing taxi operating
licenses, as well as bankruptcy, liquidation or cessation of operations, Hongyi shall have the right to require certain shareholders
of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in Jinkailong. Based on a repurchase formula provided
for in the JKL Investment Agreement, the maximum repurchase amount that Hunan Ruixi would be subject to is RMB28,320,000 (approximately
$4.0 million).
Under the JKL Investment
Agreement, the other shareholders of Jinkailong, except one individual shareholder, are prohibited from disposing of their equity
interest in Jinkailong until six months after the performance commitment period. In addition, all parties have acknowledged and
agreed to comply with relevant U.S. securities regulations on confidentiality of material nonpublic information regarding the Company
that they may receive on account of their ownership of Jinkailong.
The principal use of
proceeds from the Investment will be to support Jinkailong’s automobile purchase and finance business, provided that Hongyi’s
prior consent is required if the proceeds are to be used for any automobile business investment that exceeds RMB1 million (approximately
$0.7 million) or for any non-automobile business investment (regardless of the amount). Jinkailong plans to use the proceeds from
the Investment to expand its auto business in Chengdu, China. Specifically, Jinkailong plans to purchase more automobiles for its
car rental business and open additional retail stores to provide auto financing and transaction facilitation services to ride-hailing
drivers in Chengdu.
Our Automobile Transaction and Related
Services
We started our auto
financing and transaction facilitation business in November 2018. The auto sales business began in January 2019, and auto leasing
business and auto-financing business in March 2019. As of March 31, 2020, we have provided auto financing and transaction
facilitation services for an aggregate of 1,626 automobiles with a total value of approximately $23.2 million, sold an aggregate
of 1,388 automobiles with a total value of approximately $13.4 million and delivered 557 automobiles under operating leases and
97 automobiles under financing leases, respectively, to customers, the vast majority of whom are ride-hailing drivers. During the
fiscal year ended March 31, 2020, our auto financing and transaction facilitation business, auto sales business and operating leases
accounted for 12.3%, 73.7% and 8.3% % of our total revenue from our Automobile Transaction and Related Services, respectively,
for the year ended March 31, 2020 while our auto financial leasing business generated about 1.1% of our revenue from our Automobile
Transaction and Related Services, respectively.
Auto Financing and Transaction Facilitation
Leveraging the growing
popularity of ride-hailing services in China, we facilitate the auto financing transactions between the ride-hailing drivers and
financial institutions. As of the date of this Report, over 95% of the ride-hailing drivers we service are affiliated Didi Chuxing
Technology Co., Ltd., a major transportation company operating the largest ride-hailing platform in China (“Didi”).
Our services simplify the transaction process for both the Didi drivers and the financial institutions. Specifically, our facilitation
services include purchase services and management and guarantee services.
Our purchase services
cover a wide range of services provided to Didi drivers during the process of an automobile financing transaction, including but
not limited to (i) credit assessment, (ii) preparation of financing application materials, (iii) assistance with closing of financing
transactions, (iv) license and plate registration, (v) payment of taxes and fees, (vi) purchase of insurance, (vii) installment
of GPS devices, (viii) ride-hailing driver qualification and (ix) other administrative procedures. Our service fees are based on
the sales price of the automobiles and relevant services provided. Our service fees for automobiles purchase services ranged from
$89 to $3,600 per vehicle during the year ended March 31, 2020.
Our management and
guarantee services are provided to Didi drivers after the delivery of automobiles, covering (i) management services including,
without limitation, ride-hailing driver training, assisting with purchase of insurances, insurance claims and after-sale automobile
services, handling traffic violations and other consulting services; and (ii) guarantee services for the obligations of Didi drivers
under their financing arrangement with financial institutions. As of March 31, 2020, the maximum contingent liabilities we would be exposed to was approximately $18.6 million (including
approximately $497,400 related to the discontinued P2P business), assuming all the automobile purchasers were in default, which may cause an increase in guarantee expense and cash outflow in financing activities. As of
March 31, 2020, approximately $1.4million, including interests of $84,000, due to financial institutions, of all the automobile
purchases we serviced were past due because of the COVID-19 epidemic in China. Our management and guarantee fees are based on the
costs of our services and the results of our credit assessment of the automobile purchasers. Our fees average approximately $583
per automobile for the affiliation period and are paid by the Didi drivers on a monthly basis during the affiliation period during
the year ended March 31, 2020.
Transaction
Process
The following chart
illustrates our typical process of auto financing facilitation.
Financing Partners
We have
established collaborations with a number of financial institutions in China, including commercial banks, financial leasing
companies as well as online peer-to-peer lending platforms, which finance the purchase of automobiles by our automobile
purchasers through the Financing Agreements. Under our arrangements with our financing partners, we refer
prospective automobile purchasers and are generally responsible for collecting information on such purchasers, conducting
credit assessment of them, registration of the cars as collateral with government and providing guarantee on their payments
under the Financing Agreements. To secure the interests of the financing partners, each automobile is mortgaged in favor of
the financing partner which is registered with relevant local government agencies.
We typically prepay
the purchase price and expenses on behalf of the automobile purchasers when we provide purchase services and collect all the advance
payment and relevant services fees from the proceeds disbursed by the financial institutions upon the closing of the financing
and/or when the monthly installment payment made by automobile purchasers during the term of the Financing Agreements. We are required
under our arrangements with the financing partners to make payments on behalf of the automobile purchasers in the event of default.
As of March 31, 2020, the outstanding payments we made on behalf of approximately 146 defaulted purchasers who remained in the
online ride-hailing business even after the COVID-19 epidemic were approximately $109,000, all of which were due within two months
from the default date. For the year ended March 31, 2020, we recognized estimated provisions loss of approximately $225,000 for
the guarantee services we provided to the online ride-hailing drivers who exited the industry. After we make payments,
we request the defaulted purchasers to pay us back. If we are unable to recover the payments within a certain period of time, we
commence a collection process.
During the year ended
March 31, 2020, our top three financing partners were Haitong Unitrust International Leasing Co., Ltd., Fengbang Financial Leasing
(Shanghai) Co., Ltd. and Cherry HuiYin Motor Finance Service Co., Ltd., which collectively financed an aggregate of 1,118 cars
with a total value of approximately $12.1 million, representing approximately 83.8% of the transaction value financed by our financing
partners as of March 31, 2020. All of these financing partners are unaffiliated third parties.
Partnership
with Didi
To capitalize on the
large and rapidly expanding fleet of Didi, we have established collaboration with Didi through both Hunan Ruixi and Jinkailong.
Under Jinkailong’s consulting service agreement with Didi, which was renewed in March 2019, Jinkailong provides automobile
financing and leasing solutions and consulting services to Didi drivers in Chengdu City, Sichuan Province. Hunan Ruixi also entered
into cooperation agreements with Didi in December 2018 (which was renewed in December 2019) pursuant to which Hunan Ruixi agreed
to source automobiles for and provide automobile financing/leasing solutions to Didi drivers in Changsha City, Hunan Province.
Our relationship with Didi is crucial to our business as it enables us to attract more automobile purchasers who are interested
in working as Didi drivers and becoming affiliated with us.
Auto Transaction Facilitation Services
Through Hunan Ruixi
and Jinkailong, we also facilitate automobile purchase transactions between dealers, our cooperative third party sales teams and
the automobile purchasers, primarily Didi drivers. We provide sales venue and vehicle sourcing for the transactions. We charge
third party sales teams and automobile purchasers a facilitation fee based on the type of vehicle and negotiation with each dealer,
third party sales team and purchaser, generally no more than $2,000 per automobile from third party sales team and $2,160 from
the purchaser.
We also provide a series
of services for the purchasers throughout the automobile purchase transaction process, including registration of license plates
and permits from the relevant government authorities, insurance facilitation and assistance with applications to financial institutions
to finance the purchase. Our service fees are based on the sales price of the automobiles and relevant services provided. Our service
fees ranged from approximately $89 to $3,600 per vehicle. As of March 31, 2020, we provided facilitation services for an aggregate
of 1,626 automobiles. During the year ended March 31, 2020, we provided facilitation services for 1,315 automobiles.
Auto Sales
We are also engaged
in the sales of automobiles through Hunan Ruixi and Yicheng. As we are targeting to sell cars to Didi drivers, Hunan Ruixi and
Yicheng procure new cars of model and specification acceptable to Didi. Hunan Ruixi and Yicheng typically sets up periodic procurement
plans based on the estimated transaction volume of Hunan Ruixi and Jinkailong and buy in bulk to obtain better pricing. Hunan Ruixi
and Yicheng will then mark up the price and sell the cars to the ride-hailing drivers who are typically customers in our auto financing
facilitation services. All the new cars Ruixi and Yicheng procured are parked in our warehouses in Chengdu or Changsha City.
Substantially all of
the cars are sold through a financing arrangement, under which we will receive a majority of the purchase price (ranging from approximately
58% to 100%) from the financing proceeds and the remainder from monthly installment payments of the Didi drivers.
Auto Leasing
We have also generated
revenue since March 2019 from operating lease services, where we lease our own automobiles or sublease automobiles from certain
online ride-hailing drivers we served before to other individuals, including new online ride-hailing drivers. With the authorization
from ride-hailing drivers who exited the online ride-hailing business, we sublease their automobiles to new ride-hailing drivers
for a lease term no more than twelve months. Due to the intense competition and the COVID-19 pandemic, during the year ended March
31, 2020, approximately 840 online ride-hailing drivers (primarily in Chengdu City) exited the online ride-hailing business. We
are authorized to sublease or sell these drivers’ automobiles in order to offset the repayments those drivers owed to us
and the financial institutions. We subleased approximately 540 automobiles from these ride-hailing drivers and 19 of our own automobiles
with an average monthly rental income of $475 per automobile, resulting in a rental income of $1,303,639 for the year ended March
31, 2020.
Auto Financing
We began offering auto
financing services in March 2019. In our self-operated financing, we act as a lessor and a customer (i.e., Didi driver) acts as
a lessee. We offer to the lessee a selection of automobiles that were purchased by us in advance. The lessee will choose the desirable
automobile to be purchased and enter into a financing lease with us. During the term of the financing lease, the lessee will have
use rights with respect to the automobile. We will obtain title to the automobile upfront and retain such title during the term
of the financing lease, as lessor. At the end of the lease term, the lessee will pay a minimal price and obtain full title to the
automobile after the financing lease is repaid in full. In connection with the financing lease, the lessee will enter into a service
agreement with us. Pursuant to this service agreement, the lessee will pay us a service fee ranging from approximately $790 to
approximately $1,900 for our services, which covers, among others, payment of purchase taxes and insurance, license and plate registration,
and training of ride-hailing drivers.
As of March 31, 2020,
we have financed the purchase of 97 automobiles with an average financing amount per customer of approximately $15,000 and lease
terms ranging from 36 to 48 months. The interest rates of our auto financing are fixed and range from 5.5 % to 16.0 % per annum.
No down payment is required under our financing leases.
Customers
The significant majority
of our customers are Didi drivers. Due to the complexity and difficulty of obtaining registration of various licenses required
for driving a ride-hailing car, our customers choose to become affiliated with us who offer them a simplified and smooth process
to become qualified. Our automobile purchasers, who are mostly Didi drivers, typically become affiliated with us through affiliation
agreements pursuant to which we, as a qualified management company, provide them post-transaction management services during the
affiliation period, which is usually the same as the term of the Financing Agreements.
We acquire customers
for our Automobile Transaction and Related Services through the network of third-party sales teams, referral from Didi and our
own efforts including online advertising and billboard advertising. We also send out fliers and participate in trade shows to advertise
our services. Since our acquisition of Hunan Ruixi through the date of this Report, we have serviced approximately 3,200 customers,
including approximately 3,100 Didi drivers.
Risk Management
To mitigate risk associate
with our Automobile Transaction and Related Services, we conduct an assessment and evaluation of prospective Didi drivers or leasees. In our auto financing facilitation
business, assessment on a prospective buyer typically involves three parties: financial institutions, Didi and us. As the financial
institution makes the ultimate decision on the financing application and the financing terms, and Didi determines the outcome of
the driver qualification process, we do not maintain our own a credit grading system. We believe our manual review and verification
process is sufficient for the requirements of our current operations.
We conduct an initial
screening when we receive an application from a prospective Didi driver based on credit reports from People’s Bank of China
(“PBOC”) and third party credit rating companies, and personal information including residence, ethnicity group, driving
history and involvement in legal proceeding. An automobile buyer must meet the following preliminary criteria:
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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 demonstrated intention to purchase an automobile; and
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the value of purchased automobile matches the income of the candidate.
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An automobile leasee
must meet the following preliminary 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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have a demonstrated intention to lease an automobile; and
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the value of lease obligations 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 for:
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engaging in illegal or criminal activities;
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involvement 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. Under Didi’s standards, a qualified driver must meet certain minimum criteria:
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be 21 to 60 years old for males; 21 to 55 years old for females;
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have a driving history of at least three years with driving license of (i) A1, A2, A3, B1, B2, C1 and C2 (referring to the different classes of driver’s license in China based on vehicle types), or (ii) C5 with an online reservation taxi driver's license and meeting the physical requirements for a driver's license above C2;
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must not have committed any hit-and-run accidents;
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have no record of dangerous driving, drug use, driving under alcoholic influence, and violent crime;
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have no traffic violation of 12 demerit points or more in any year of the past three 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 payment due date. If a driver fails to pay on the due day, we will pay
the financial institution on behalf of the defaulted automobile purchaser but continue to contact the automobile purchaser and
request for payments. If the delinquency continues for more than 15 days, we then seek to repossess the car. Every car purchased
through us has a GPS device installed, which helps us locate the car. After a car is repossessed, we store it in a warehouse and
later dispose of the automobile in accordance with law and relevant financing documents. If we are unable to repossess collateral
from a delinquent automobile purchaser, we may commence a lawsuit against such purchaser.
Competition
The automobile financing
industry in China is large and evolving. According to Didi, there were approximately 120 automobile financing and leasing companies
that have established business relationships with Didi in Chengdu City as of June 2020. We face significant competition primarily
from companies that operate in Chengdu City, such as Chengdu Jingtengjian Business Consulting Co., Ltd., FAW Huidi Automotive Technology
Co., Ltd. and Chengdu Yudeng Automobile Service Co., Ltd. As of June 2020, there were approximately 80 automobile financing and
leasing companies that have established business relationships with Didi in Changsha City and are engaged in the same business
as ours. We face significant competition primarily from companies that operate in Changsha City, such as Hunan Zuxing Tianxia Automobile
Leasing Co., Ltd., and Hunan Qiguang Automobile Service Co., Ltd.
Regulations
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China or the rights of our stockholders
to receive dividends and other distributions from us.
Regulations Related to Ride-Hailing
Services
In order to manage
the rapidly growing ride-hailing service market and control relevant risks, on July 27, 2016, seven ministries and commissions,
including the Ministry of Transport, jointly promulgated the Interim Measures for the Administration of Online Taxi Booking Business
Operations and Services and amended on December 28, 2019, which legalizes ride-hailing services such as Didi and requires
the ride-hailing services to meet the requirements set out by the Interim Measures and obtain requisite service licenses.
On November 5, 2016,
the Municipal Communications Commission of Chengdu City and a number of municipal departments jointly issued the Implementation
Rules for the Administration of Taxi Management Services for Chengdu Network. On August 10, 2017, the Transportation Commission
of Chengdu further issued guidelines on compliance requirements for ride-hailing businesses, including Working Process for the
Online Appointment of Taxi Drivers Qualification Examination and Issuance and Online Appointment Taxi Transportation Certificate
Issuance Process. According to these regulations and guidelines, three licenses or certificates are required for operating the
ride-hailing business: (1) the ride-hailing service platform such as Didi is required to obtain the online reservation taxi operating
license; (2) the automobiles used for online ride-hailing are required to obtain the online reservation taxi transport certificate
(the “automobile certificate”); (3) the drivers are required obtain the online reservation taxi driver's license (the
“driver’s license”).
On July 23, 2018,
the General Office of Changsha Municipal People's Government issued the “Detailed Rules for the Administration of Online
Booking Taxi Management Services for Changsha.” According to those regulations and guidelines, licenses, which are online
reservation taxi operating license, automobile certificate and driver’s licenses, are required to operate a ride-hailing
business in Changsha, and automobiles used for online ride-hailing services are required to meet certain standards, including that
the sales price (including taxes) of the qualified automobile is over RMB120,000.
Without a requisite
automobile certificate or driver’s license, ride-hailing drivers may be suspended from providing ride-hailing services, their
illegal income may be confiscated and they may be subject to fines amounting to RMB5,000 (US$730) to RMB30,000 (US$4,370) for each
offense.
Regulations Related to Financial
Leasing
In September 2013, the
Ministry of Commerce of the People’s Republic of China (“MOFCOM”) issued the Administration Measures of Supervision
on Financing Lease Enterprises (the “Leasing Measures”), to regulate and administer the business operations of financial
leasing enterprises. According to the Leasing Measures, financial leasing enterprises are allowed to carry out financial leasing
businesses in such forms as direct lease, sublease, sale-and-lease-back, leveraged lease, entrusted lease and joint lease in accordance
with the provisions of relevant laws, regulations and rules. However, the Leasing Measures prohibit financial leasing enterprises
from engaging in financial businesses such as accepting deposits, and providing loans or entrusted loans. Without the approval
from relevant authorities, financial leasing enterprises may not engage in inter-bank borrowing and other businesses. In addition,
financial leasing enterprises are prohibited from carrying out illegal fund-raising activities in the name of financial leases.
The Leasing Measures require financial leasing enterprises to establish and improve their financial and internal risk control systems,
and a financial leasing enterprise’s risk assets may not exceed ten times that of its total net assets.
In April 2018, China
Banking and Insurance Regulatory Commission (“CBIRC”) took over the authority over supervision of financing lease companies
from MOFCOM.
On May 26, 2020, CBIRC
issued the Interim Measures for Supervision and Administration of Financial Leasing Companies, which clarified the business scope,
the scope of the leased property and the prohibited business or activity of the financial leasing company, as well as other business-related
definitions, such as purchase, registration, retrieval and value management of financial leasing products. Financial leasing companies
may conduct some or all of the following businesses: (1) financial leasing business; (2) leasing business; (3) purchase, disposal
of residual value and repair of leased assets related to financial leasing and leasing business, consulting of the leasing transaction,
receipt of leasing deposit; (4) transfer of financial leases or leased assets or acceptance of financial leases or leased assets
transferred; (5) fixed income securities investment business. The measures have also discussed certain regulatory standards, including
the proportion of financial leasing assets, the proportion of fixed income securities investment business, business concentration
and so on. Financial leasing companies shall not conduct the following businesses or activities: (1) illegal fund-raising, acceptance
or disguised acceptance of deposits; (2) extension of loans or entrusted loans; (3) placements with or from other financial leasing
companies or in disguise; (4) financing or transferring assets through Internet Lending Information Intermediaries, private equity
funds; (5) other businesses or activities prohibited by laws and regulations, the CBIRC and local financial regulatory authorities
in provinces, autonomous regions and municipalities.
Financial leasing companies
are required to comply with the following regulatory indicators: (1) degree of concentration of single client financing, meaning
the balance of all financial leasing business of a financial leasing company to a single lessee shall not exceed 30% of its net
assets; (2) degree of concentration of single group client financing, meaning the balance of all financial leasing business of
a financial leasing company to a single group shall not exceed 50% of its net assets; (3) ratio of a single related client, meaning
the balance of all financial leasing business of a financial leasing company to a related party shall not exceed 30% of its net
assets; (4) ratio of all related parties, meaning the balance of all financial leasing business of a financial leasing company
to all related parties shall not exceed 50% of its net assets, and (5) ratio of a single related shareholder, meaning the financing
balance to a single shareholder and all its related parties shall not exceed the shareholder’s capital contribution in the
financial leasing company, and at the same time meet the provisions of the measures on the ratio of a single related client. The
CBIRC may make adjustments to the above indicators according to regulatory needs.
Financial leasing companies
that were established before the implementation of the Interim Measures for the Supervision and Administration of Financial Leasing
Companies are required meet the requirements stipulated in the Measures within the transition period prescribed by the provincial
local financial supervision department. In principle, the transition period shall not exceed three years. Provincial local financial
supervision departments can appropriately extend the transition period arrangement according to the actual situation of specific
industries.
Regulation Related to Financing Guarantee
Companies
The State Council of
China promulgated the Regulations on the Administration of Financing Guarantee Companies on August 2, 2017, and on April 2, 2018,
the CBIRC, together with several other governmental authorities, jointly adopted four supplemental rules over the Administration
of Financing Guarantee Companies: (i) the Administrative Measures for the Financing Guarantee Business Permit, (ii) Measures for
Measuring the Outstanding Amount of Financing Guarantee Liabilities, (iii) Administrative Measures for the Asset Percentages of
Financing Guarantee Companies and (iv) Guidelines on Business Cooperation between Banking Financial Institutions and Financing
Guarantee Companies, or the Four Supporting Measures of the Financing Guarantee Rules. In addition, the CBIRC, together with several
other governmental authorities, jointly issued the Supplementary Provisions on the Supervision and Administration of Financing
Guarantee Companies on October 9, 2019.
According to the above
rules on financing guarantee companies, or the Financing Guarantee Rules, “financing guarantee” refers to the activities
that guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, including, among
other things, the activities whereby a guarantor provides guarantee for loans, online lending, financial leasing, commercial factoring,
bill acceptance, letters of credit or other forms of debt financing. “Financing guarantees companies” refer to companies
legally established and engaged in financing guarantee business. According to those rules, the establishment of a financing guarantee
company is subject to the approval by the competent government authority, and unless otherwise stipulated, no entity may operate
financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business
without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000,
and confiscation of illegal gains, if any. If the violation constitutes a criminal offense, criminal liability will be imposed
in accordance with the law.
In connection with
our automotive financing facilitation business, we provide guarantees to our financing partners in connection with the financing
of the purchase of automobiles and such guarantee business is not our principal business. It is uncertain whether this practice
would be deemed as operations in financing guarantee business. See “Risk—Risks Relating to Our Industry and Business—We
are required to obtain certain licenses and permits for our business operations, and we may not be able to obtain or maintain such
licenses or permits.”
Regulations Related to Value-Added
Telecommunication Business Certificates and Foreign Investment Restrictions
PRC regulations impose
sanctions for engaging in Internet information services of a commercial nature without having obtained an ICP certificate or engaging
in the operation of online data processing and transaction processing (“ODPTP”) without having obtained an ODPTP certificate.
These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation
of illegal gains and, in the case of significant infringements, the websites may be ordered to close. The website used for our
previous P2P online lending services business which website continue to contain our historical information, has not been fully
shut down and remains accessible to the public. The PRC regulatory authorities' enforcement of such regulations in the context
of our discontinued business remains unclear.
According to the Provisions
on the Administration of Foreign-invested Telecommunication Enterprises, the ratio of investment by foreign investors in a foreign-invested
telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%. The
Circular of Ministry of Industry and Information Technology Concerning Lifting Restrictions on the Proportion of Foreign Equity
in Online Data Processing and Transaction Processing Business (E-commerce) (the “Circular 196”), which was promulgated
on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered capital in a foreign-invested
telecommunication enterprise engaging in the operation of online data processing and transaction processing (E-commerce). However,
foreign investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise
that engages in the operation of Internet information services. Under either circumstance, the largest foreign investor will be
required to have a satisfactory business track record and operational experience in the value-added telecommunications business.
While
Circular 196 permits foreign ownership, in whole or in part, of online data and deal processing businesses (E-commerce), a sub-set
of value-added telecommunications services, it is not clear whether our existing online lending website would be deemed
as online data and deal processing. See “Risk Factors — Risks Related to Doing Business
in China — We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related
businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material
adverse effect on our business and results of operations.”
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.
On November 28, 2019,
the Security Bureau of the Cyberspace Administration of China, the General Office of the MIIT, the General Office of the Ministry
of Public Security and the General Office of the State Market Supervision and Administration (the “MSA”) jointly issued
the Notice on Measures for Determining the Illegal Collection and Use of Personal Information through Mobile Applications, which
aims to provide reference for supervision and administration departments of the PRC government and provide guidance for mobile
applications operators’ self-examination and self-correction and social supervision by avid internet users (so called “netizens”),
and further elaborates the forms of behavior constituting the illegal collection and use of personal information through mobile
applications including: (i) failing to publish the rules on the collection and use of personal information; (ii) failing to explicitly
explain the purposes, methods and scope of the collection and use of personal information; (iii) collecting and using personal
information without the users’ consent; (iv) collecting personal information unrelated to the services the collector of the
information provides and beyond the necessary principle of such services; (v) providing personal information to others without
the users’ consent; (vi) failing to provide the function of deleting or correcting personal information according to PRC
laws or failing to publish information such as ways for internet users to file complaints and reports.
Regulations Related to Company Establishment
and Foreign Investment
The
establishment, operation and management of corporate entities in China is governed by the Company Law of the PRC (the
“Company Law”). All of our subsidiaries and VIEs in China are subject to the Company Law. According to the
Company Law, companies established in the PRC are either limited liability companies or joint stock limited liability
companies. The Company Law applies to both PRC domestic companies and foreign-invested companies. The establishment
procedures, approval procedures, registered capital requirements, foreign exchange matters, accounting practices, taxation
and labor matters of a wholly foreign-owned enterprise are regulated by the Wholly Foreign-Owned Enterprise Law of the PRC
and the Implementation Regulation of the Wholly Foreign-Owned Enterprise Law. According to these regulations,
foreign-invested enterprises in the PRC may only pay dividends out of their accumulated profit, if any, determined in
accordance with PRC accounting standards and regulations. A PRC company is required to set aside general reserves of at least
10% of its after-tax profit, until the cumulative amount of such reserves reaches 50% of its registered capital unless the
provisions of laws regarding foreign investment provide otherwise. In addition, PRC companies may allocate a portion of their
after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves
and employee welfare and bonus funds are not distributable as cash dividends. A PRC company may not distribute any profits
until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed
together with distributable profits from the current fiscal year. In September 2016, the National People's Congress
Standing Committee published its decision to revise the laws relating to wholly foreign-owned enterprises and other
foreign-invested enterprises. Such decision, which became effective on October 1, 2016, changes the “filing or
approval” procedure for foreign investments in China such that foreign investments in business sectors not subject to
special administrative measures will only be required to complete a filing instead of the existing requirements to apply for
approval. The special entry management measures shall be promulgated or approved to be promulgated by the State Council.
Pursuant to a notice issued by the National Development and Reform Commission (“NDRC”) and MOFCOM on
October 8, 2016, the special entry management measures shall be implemented with reference to the relevant regulations
as stipulated in the Catalogue of Industries for Guiding Foreign Investment in relation to the restricted foreign investment
industries, prohibited foreign investment industries and encouraged foreign investment industries. Pursuant to the
Provisional Administrative Measures on Establishment and Modifications Filing for Foreign Investment Enterprises promulgated
by MOFCOM on October 8, 2016, establishment and changes of foreign investment enterprises not subject to the approval
under the special entry management measures shall be filed with the relevant commerce authorities.
The Provisions on Guiding
the Orientation of Foreign Investment and the 2015 revision of the Catalogue of Industries for Guiding Foreign Investment classify
foreign investment projects into four categories: encouraged projects, permitted projects, restricted projects and prohibited projects.
The purpose of these regulations is to direct foreign investment into certain priority industry sectors and restrict or prohibit
investment in other sectors. If the industry sector in which the investment is to occur falls into the encouraged category, foreign
investment can be conducted through the establishment of a wholly foreign-owned enterprise. If a restricted category, foreign investment
may be conducted through the establishment of a wholly foreign-owned enterprise, provided certain requirements are met, and, in
some cases, the establishment of a joint venture enterprise is required with varying minimum shareholdings for the Chinese party
depending on the particular industry. If a prohibited category, foreign investment of any kind is not allowed. Any industry not
falling into any of the encouraged, restricted or prohibited categories is classified as a permitted industry for foreign investment.
Our prior Online Lending Services are classified as permitted foreign investment projects.
The Special
Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version) (the “2018 Negative List”),
which was promulgated jointly by the MOFCOM and the NDRC on June 28, 2018 and became effective on July 28, 2018, replaced and
partly abolished the Guidance Catalogue of Industries for Foreign Investment (2017 Revision) regulating the access of foreign
investors to China. Foreign investors should refrain from making investing in any of prohibited sectors specified in the 2018
Negative List, and foreign investors are required to obtain the permit for access to other sectors that are listed in the 2018
Negative List but not classified as “prohibited.”
On June 30, 2019, the
MOFCOM and the NDRC promulgated the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version)
which will become effective on July 31, 2019 (the “2019 Negative List”) to replace the 2018 Negative List.
On June 23, 2020, the
MOFCOM and the NDRC promulgated the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version)
which will be effective from July 23, 2020 (the “2020 Negative List”) and will abolish the 2019 Negative List on the
same date. The 2020 Negative List further reduces the scope under the access management of foreign investment and expands the foreign
investment scope.
Our Automobile Transaction
and Related Services is not listed in 2018 Negative List, 2019 Negative List or 2020 Negative List.
According to the PRC
Foreign Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted by one
or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign
investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually
or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires
stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign
investor, individually or collectively with other investors, invests in a new project within China; and (iv) investments in other
means as provided by laws, administrative regulations, or the State Council. Since we are incorporated in Nevada, our activities
in China are subject to the PRC Foreign Investment Law.
According to the PRC
Foreign Investment Law, the State Council will publish or approve to publish the “negative list” for special administrative
measures concerning foreign investment. The PRC Foreign Investment Law grants national treatment to foreign-invested enterprises
(“FIEs”), except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited”
in the “negative list”. Because the “negative list” has yet to be published, it is unclear whether it will
differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The PRC Foreign
Investment Law provides that FIEs operating in foreign restricted or prohibited industries will require market entry clearance
and other approvals from relevant PRC governmental authorities. If a foreign investor is found to invest in any prohibited industry
in the “negative list”, such foreign investor may be required to, among other aspects, cease its investment activities,
dispose of its equity interests or assets within a prescribed time limit and have its income confiscated. If the investment activity
of a foreign investor is in breach of any special administrative measure for restrictive access provided for in the “negative
list”, the relevant competent department shall order the foreign investor to make corrections and take necessary measures
to meet the requirements of the special administrative measure for restrictive access.
In addition, the PRC
government has established a foreign investment information reporting system, according to which foreign investors or foreign-invested
enterprises are required to submit investment information to the competent department for commerce concerned through the enterprise
registration system and the enterprise credit information publicity system, and a security review system under which the security
review shall be conducted for foreign investment affecting or likely affecting the state security.
Furthermore, the PRC
Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign
investment may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment
Law.
In addition, the PRC
Foreign Investment Law provides several protective rules and principles for foreign investors and their investments in the PRC,
including, among others, that a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency, its
contributions, profits, capital gains, income from disposition of assets, royalties of intellectual property rights, indemnity
or compensation lawfully acquired, and income from liquidation, among others, within China; local governments shall abide by their
commitments to the foreign investors; governments at all levels and their departments shall enact local normative documents concerning
foreign investment in compliance with laws and regulations and shall not impair legitimate rights and interests, impose additional
obligations onto FIEs, set market access restrictions and exit conditions, or intervene with the normal production and operation
activities of FIEs; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable
compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited;
and mandatory technology transfer is prohibited.
On March 15, 2019,
the National People’s Congress approved the Foreign Investment Law, and on December 26, 2019, the State Council promulgated
the Implementing Rules to Further Clarify and Elaborate the Relevant Provisions of the PRC Foreign Investment Law (the “Implementing
Rules”). The PRC Foreign Investment Law and the Implementing Rules both took effect on January 1, 2020 and replaced three
major previous laws on foreign investments in China, namely, the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative
Joint Venture Law and the Wholly Foreign-owned Enterprise Law, and their respective implementing rules. Pursuant to the Foreign
Investment Law, “foreign investments” refer to investment activities conducted by foreign investors (including foreign
natural persons, foreign enterprises or other foreign organizations) directly or indirectly in the PRC, which include any of the
following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC solely or jointly with other
investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights and interests of
enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with other investors,
and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council. The
Implementing Rules introduce a see-through principle and further provide that foreign-invested enterprises that invest in the PRC
are also governed by the PRC Foreign Investment Law and the Implementing Rules.
According to the
Implementing Rules, the registration of foreign-invested enterprises is processed by the MSA or its authorized local counterparts.
Where a foreign investor invests in an industry or field subject to licensing in accordance with laws, the relevant competent government
department responsible for granting such license shall review the license application of the foreign investor in accordance with
the same requirements and procedures applicable to PRC domestic investors unless it is stipulated otherwise by the laws and administrative
regulations, and the competent government department may not apply discriminatory standards to the foreign investor in terms of
licensing requirements, application materials, reviewing steps, deadlines and so on.
Pursuant to the Foreign
Investment Law, the Implementing Rules, and the Information Reporting Measures for Foreign Investment jointly promulgated by the
MOFCOM and the MSA, which took effect on January 1, 2020, a foreign investment information reporting system was established and
foreign investors or foreign-invested enterprises must report investment information to competent commerce departments of the PRC
government through the enterprise registration system, the enterprise credit information publicity system and the foreign investment
information reporting system, and the relevant government authorities shall share such investment information to the competent
commerce departments in a timely manner. We are subject to these regulatory requirements.
Regulations Related to Labor and
Social Security
Pursuant to the PRC
Labor Law, the PRC Labor Contract Law and the Implementing Regulations of the Employment Contracts Law, labor relationships between
employers and employees must be executed in written form. Wages may not be lower than the local minimum wage. Employers must establish
a system for labor safety and sanitation, strictly abide by state standards and provide relevant education to its employees. Employees
are also required to work in safe and sanitary conditions.
On December 28,
2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch.
Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of dispatched
workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry
of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or
substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social
Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched workers hired by an employer
shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched workers). The
Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this regard to reduce
the number of its dispatched workers to below 10% of the total number of its employees prior to March 1, 2016. In addition,
an employer is not permitted to hire any new dispatched worker until the number of its dispatched workers has been reduced to below
10% of the total number of its employees.
Under PRC laws, rules
and regulations, including the Social Insurance Law, the Interim Regulations on the Collection and Payment of Social Security Funds
and the Regulations on the Administration of Housing Accumulation Funds, employers are required to contribute, on behalf of their
employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical
insurance, occupational injury insurance, maternity leave insurance and housing accumulation funds. These payments are made to
local administrative authorities and any employer who fails to contribute may be fined and ordered to pay the deficit amount. See
“Risk Factors — Risks Related to Doing Business in China — Failure to make adequate
contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
Anti-money Laundering
Regulation
The PRC Anti-money Laundering
Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial
institutions, as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary
and supervisory measures, establishment of various systems for client identification, retention of clients’ identification
information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money
Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment
companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed
and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will
be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations
to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment
institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money laundering
obligations.
Regulations on Intellectual Property
The PRC has adopted
legislation governing intellectual property rights, including copyrights, trademarks and patents. The PRC is a signatory to major
international conventions on intellectual property rights and is subject to the Agreement on Trade Related Aspects of Intellectual
Property Rights as a result of its accession to the World Trade Organization in December 2001.
The National People's
Congress amended the Copyright Law in 2001 and 2010 to widen the scope of works and rights that are eligible for copyright protection.
The amended, the Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and
software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.
To address copyright infringement related to content posted or transmitted over the Internet, the National Copyright Administration
and former Ministry of Information Industry jointly promulgated the Administrative Measures for Copyright Protection Related to
the Internet in April 2005. These measures became effective in May 2005.
On December 20,
2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from January 1, 2002, and
revised in 2013, which are intended to protect the rights and interests of the computer software copyright holders and encourage
the development of software industry and information economy. In the PRC, software developed by PRC citizens, legal persons or
other organizations is automatically protected immediately after its development, without an application or approval. Software
copyrights may be registered with the designated agency and if registered, the certificate of registration issued by the software
registration agency will be the primary evidence of the ownership of the copyright and other registered matters. On February 20,
2002, the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright Registration, which
outline the operational procedures for registration of software copyright, as well as registration of software copyright license
and transfer contracts. The Copyright Protection Center of China is mandated as the software registration agency.
The PRC Trademark Law,
adopted in 1982 and revised in 1993, 2001, 2013 and 2019, respectively, protects the proprietary rights to registered trademarks.
The Trademark Office under the SAIC handles trademark registrations and may grant a term of ten years for registered trademarks,
which may be extended for another ten years upon request. Trademark license agreements shall be filed with the Trademark Office
for record. In addition, if a registered trademark is recognized as a well-known trademark, the protection of the proprietary right
of the trademark holder may reach beyond the specific class of the relevant products or services.
The Patent Law of the
PRC and its Implementation Rules provide for three types of patents: invention, utility model and design. The duration of a patent
right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Regulations Related to Foreign Exchange
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most recently amended
in August 2008. Payments of current account items, such as profit distributions and trade and service-related foreign exchange
transactions, can usually be made in foreign currencies without prior approval from the State Administration of Foreign Exchange
(“SAFE”) by complying with certain procedural requirements. By contrast, approval from or registration with appropriate
PRC authorities or banks authorized by appropriate PRC authorities is required where RMB capital is to be converted into foreign
currency and remitted out of China to pay capital expenses.
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 “Risk
Factors — Risks Related to Doing Business in China — PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiaries' ability to increase their registered capital or distribute
profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.”
SAFE Regulations Relating to Employee
Stock Incentive Plans
On February 15,
2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Stock Incentive Plans of Overseas Publicly-Listed Companies (the “Stock Option Rules”), which replaced the Application
Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock
Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other
relevant rules and regulations, PRC residents who participate in a stock incentive plan in an overseas publicly listed company
are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive
plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed
company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures
with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted
institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding shares
or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to our share
incentive plans if there are any material changes to the share incentive plans, the PRC agent or the overseas entrusted institution
or other material changes. In addition, SAFE Circular 37 provides that PRC residents who participate in a share incentive plan
of an overseas unlisted special purpose company may register with SAFE or its local branches before exercising rights. See “Risk
Factors — Risks Related to Doing Business in China — Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.”
Regulations Related to Tax
Under the PRC Enterprise
Income Tax Law (the “EIT Law”), which became effective on January 1, 2008, an enterprise established outside the
PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise
income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. In 2009, the
State Administration of Taxation (the “SAT”) issued the Notice Regarding the Determination of Chinese-Controlled Overseas
Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies (the “SAT Circular 82”),
which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled
enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, in 2011, the SAT issued the Administrative
Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial) (the “SAT Bulletin
45”) to provide more guidance on the implementation of SAT Circular 82.
According to SAT Circular
82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC resident
enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income
tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments
in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions
are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals,
and minutes and files of its board of directors and shareholders' meetings are located or kept in the PRC; and (d) more than half
of the enterprise's directors or senior management with voting rights habitually reside in the PRC.
Although SAT Circular
82 and SAT Bulletin 45 only apply to offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and
not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s
general position on how the term “de facto management body” could be applied in determining the tax resident status
of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
The State Administration
of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including
the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (the “SAT
Circular 698”), the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises (the “SAT Circular
24”) and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises
(the “SAT Circular 7”). Pursuant to these rules and notices, if a non-PRC resident enterprise transfers its equity
interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax authorities at the place where
the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%. In addition, if a non-PRC resident
enterprise indirectly transfers so-called PRC Taxable Properties, referring to properties of an establishment or a place of business
in China, real estate properties in China and equity investments in a PRC tax resident enterprise, by disposition of the equity
interests in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of PRC
enterprise income tax, the transfer will be re-characterized as a direct transfer of the PRC Taxable Properties and gains derived
from the transfer may be subject to a PRC withholding tax of up to 10%. SAT Circular 7 has listed several factors to be taken into
consideration by the tax authorities in determining if an indirect transfer has a reasonable commercial purpose. However, regardless
of these factors, an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial purpose
and be taxable in the PRC: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly
or indirectly from PRC Taxable Properties; (ii) at any time during the one year period before the indirect transfer, 90% or more
of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC,
or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by
the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC Taxable Properties are limited
and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect
transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those assets. On the other
hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to PRC tax. The safe
harbors include qualified group restructurings, public market trades and exemptions under tax treaties.
Under SAT Circular
7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price
to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price. If they fail
to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities. If neither party complies with the tax
payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest on
the seller. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300% of the
unpaid tax on them. The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted the
relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.
In January 2019, the
SAT issued Announcement on the Implementation of the Preferential Income Tax Reduction Policy for Small and Low Profit Enterprises
(the “SAT 2019 Circular 2”). Pursuant to SAT 2019 Circular 2, from January 1, 2019 to December 31, 2021, for small
low profit enterprises, (i) the tax rate for the first RMB 1 million the annual income does not exceed RMB1 million is 20% and
the taxable income is 25% of the annual taxable income; (ii) the tax rate for the portion of annual income that exceeds RMB1 million
but does not exceed RMB3 million is 20% and the taxable income is 50% of the annual income. SAT 2019 Circular 2 also defines "small
low profit enterprises" as enterprises who are engaged in industries not restricted or prohibited and meet the three conditions
of (i) annual taxable income of RMB3 million or lower, (ii) employees number of 300 or lower; and (iii) total assets of RMB50 million
or lower. During the year ended March 31, 2020, all our subsidiaries and VIEs in China met the three criteria and enjoyed the preferential
tax rates.
Regulations Related to PRC Value-Added
Tax
In March 2016, the
Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for
Replacing Business Tax by Value-Added Tax (“VAT”), which became effective on May 1, 2016. Pursuant to the pilot plan
and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the value-added
telecommunication services, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern
services. Certain small taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%. Unlike business tax, a
taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern
services provided.
On April 4, 2018,
the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which came into
effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17% and 11%
respectively become subject to lower VAT rates of 16% and 10% respectively starting from May 1, 2018. Furthermore, according to
the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the
State Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable
goods previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively
starting from April 1, 2019.
Pursuant to applicable
PRC regulations promulgated by the Ministry of Finance of China and the SAT, we are required to pay a VAT at a rate of 6% for our
services and 13% for our automobile sales, operating lease and financial leasing, with respect to revenues derived from the provision
of Automobile Transaction and Related Services. All revenues derived from Online Lending Services are subject to the rate of 3%
as Sichuan Senmiao is a small taxpayer. A taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against
the output VAT chargeable on the revenue from services provided.
Regulations Related to Mergers and
Acquisitions
On August 8, 2006,
six PRC regulatory agencies, including China Securities Regulatory Commission (the “CSRC”), promulgated the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective
on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, require offshore special
purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC domestic
enterprises or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
On September 21, 2006, the CSRC published a notice specifying the documents and materials that are required to be submitted
for obtaining CSRC approval.
The M&A Rules,
and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A
Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact
or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which
holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the
National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which
are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed.
In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security
Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Circular 6”), which officially
established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25,
2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic
Enterprises by Foreign Investors (the “MOFCOM Security Review Regulations”), which became effective on September 1,
2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors
having “national defense and security” concerns and mergers and acquisitions by which foreign Investors may acquire
the “de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM Security
Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger
or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review,
it will submit it to the Inter-Ministerial Panel, an authority established under Circular 6 led by the NDRC and MOFCOM under the
leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors from bypassing the
security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements
or offshore transactions. There is no explicit provision or official interpretation stating that the merger or acquisition of a
company engaged in the marketplace lending business requires security review.
Employees
As of the date of this
Report, we had a total of 179 full-time employees.
The following table
sets forth the breakdown of our employees by function:
Function
|
|
Number of Employees
|
Management
|
|
4
|
Legal & Risk Management
|
|
21
|
Operations
|
|
7
|
Marketing
|
|
59
|
Drivers & Automobile Management and Services
|
|
39
|
Technology
|
|
14
|
Human Resources & Administration
|
|
17
|
Finance and Accounting
|
|
17
|
Internal Audit
|
|
1
|
Total
|
|
179
|
All of our employees
are based in the cities of Chengdu and Changsha, where our operations are located.
We believe we offer
our employees competitive compensation packages and a work environment that encourages initiative and is based on merit, and as
a result, we have generally been able to attract and retain qualified personnel and maintain a stable core management team. We
plan to hire additional employees as we expand our business.
As required by PRC
regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a
pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a
maternity insurance plan and a housing provident fund. We are required under PRC law to make contributions to employee benefit
plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified
by the local government from time to time. We have not made adequate employee benefit payments, and may be required to make up
the contributions for these plans as well as to pay late fees and fines. See “Risk Factors — Risks
Related to Doing Business in China — Failure to make adequate contributions to various employee benefit plans
as required by PRC regulations may subject us to penalties.”
We enter into standard
labor and confidentiality agreements with each of our employees. We believe that we maintain a good working relationship with our
employees, and we have not experienced any major labor disputes.
Seasonality
We have observed seasonal
trends or patterns in revenues related to our Automobile Transaction and Related Services. Because of the PRC National Holiday
and close to the year end, there is a seasonal decrease in our facilitated new automobiles during the three months ended December
31 (our third fiscal quarter).
Research and Development
With an aim to standardize
our transaction process and achieve higher operating efficiency, we are developing an integrated information system for our Automobile
Transaction and Related Services. The system comprises modules for procurement, qualification assessment, delivery and post-transaction
management which covers the whole transaction process. We have completed the development of certain functions such as information
entry and delivery which are being tested by us. We launched the system in March 2020 and we will upgrade the system to support
our business expansion, when necessary.
Intellectual Property
We regard our trademarks,
domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on
PRC trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and
others to protect our proprietary rights. We own 15 software copyrights and eleven trademarks. We have three trademark applications
pending at the PRC Trademark Office. We have also registered numerous domain names, including www.51ruixi.com, www.jklqc.com,
www.ihongsen.com, www.senmiaotech.com and http://senmiaotechir.com/. The information on our websites is not
a part of, or incorporated in, this Report.
Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property
rights, which could result in substantial costs and diversion of our resources.
In addition, third
parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement
of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop
non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover,
even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect
our results of operations.
See “Risk
Factors — Risks Related to Our Business — We may not be able to prevent others from unauthorized
use of our intellectual property, which could harm our business and competitive position.” and “— We may be subject
to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.”
Insurance
We obtain accident
insurance and commercial liability insurance, which are mandatory, on all the automobiles we purchase for sales or financing and
pass on the costs of such insurance to our customers in the sale/financing transaction. We provide social security insurance including
pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We do no maintain
any property insurance policies, business interruption insurance or general third-party liability insurance, nor do we maintain
product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations
in China.
An investment in our company is subject
to a high degree of risk. The risk factors described below and similar risk factors we may face are important to understanding
other statements in this Report and should be reviewed carefully. The following information should be read in conjunction with
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and related notes in Part II, Item 8, “Financial Statements and Supplementary Data”
of this Form 10-K.
Our business, financial condition and
operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those
described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results
to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole
or in part, could materially and adversely affect our business, financial condition, operating results and stock price.
Because of the following factors, as
well as other factors affecting our financial condition and operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends
in future periods.
Risks Related to Our Business and Industry
We voluntarily assumed all the outstanding
loans due to the investors on our online lending platform for our discontinued Online Lending Services but may not have enough
cash to pay for the liabilities.
On October 17, 2019,
our Board of Directors approved a plan submitted by management to wind down and discontinue our online P2P lending business. In
connection with the plan, we have ceased facilitation of loan transactions on our online lending platform and voluntarily assumed
all the outstanding loans due to the investors on the platform since October 17, 2019. As of the date of this Report, the aggregate
balance of the loans we assumed was approximately $5.6 million.
There is no regulation
or law in China which requires the online lending platform to take the responsibility on behalf of the borrowers to pay for investors.
Pursuant to the Notice on the Risks of Online Lending Industry issued by the Leading Group Office of Online Lending Risk Response
of Sichuan on December 4, 2019, any disputes between investors and a P2P online lending platform, investors and borrowers, and
between borrowers and a P2P online lending platform can be resolved through legal actions, such as conciliation, application for
arbitration and litigation. In common practice, in order to protect the rights of investors and avoid further conflicts, certain
online lending platforms, such as Mintou Financial Service in Shenzhen and Juyouqian in Beijing, have decided to take responsibility
to pay the outstanding balance due to investors.
As of March 31, 2020,
we have used cash generated from our Automobile Transaction and Related Services and payments collected from borrowers in the
aggregate of approximately $1.9 million to repay our platform investors. Based on recent repayments collected from borrowers,
we also recognized bad debt expenses of approximately $3.7 million for those receivables. We expect to make 90% of repayment due
to investors by December 31, 2021.
However, if we could
not generate enough cash flow to pay investors on time in accordance with the plan, we may incur additional commitment liabilities
before we fully fulfill the commitment. The amount and timing of the actual allowance for bad debt may change based on collectability
of the subject loans during the execution of the plan.
We face
intense competition, which may lead to loss of market share, reduced service fees and revenue, increased expenses, departures of
qualified employees, and disputes with competitors.
We face intense competition
in the automobile transaction and financing industry. Our competitors may have significantly more resources than we do, including
financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of
their services. As a result, they may have deeper relationships with automobile dealers, automobile financing partners and other
third-party service providers than we do. This could allow them to develop new services, adapt more quickly to changes in technology
and to undertake more extensive marketing campaigns, which may render our services less attractive to consumers and cause us to
lose market share. Moreover, intense competition in the markets we operate in may reduce our service fees and revenue, increase
our operating expenses and capital expenditures, and lead to departures of our qualified employees. We may also be harmed by negative
publicity instigated by our competitors, regardless of its validity. We may in the future continue to encounter disputes with our
competitors, including lawsuits involving claims asserted under unfair competition laws and defamation which may adversely affect
our business and reputation. Failure to compete with current and potential competitors could materially harm our business, financial
condition and our results of operations.
Our relationship
with Didi, a leading Chinese ride-hailing service platform, third party sales teams and financing partners is crucial to our ability
to grow our business, results of operations and financial condition.
Our strategic relationship
with Didi, a leading ride-hailing service platform in China, is crucial to our business as most of the cars we provide services
to are used as ride-hailing vehicles for Didi. Our cooperative arrangement with Didi is on a non-exclusive basis, and Didi may
have cooperative arrangements with our competitors. If our collaboration with Didi was terminated, we may not be able to maintain
our existing customers or attract new customers who are and will be Didi drivers, which could materially and adversely affect our
business and impede our ability to continue our operations.
We also cooperate with
third party sales teams, automobile dealers and financial institutions and others to provide automobile transaction and financing
services. Our ability to acquire consumers depends on our own marketing efforts through online advertising and billboard advertising,
as well as the network of different third party sales teams. Our ability to attract and maintain customers also depends on whether
our financing partners provide timely and sufficient funding to automobile purchase. We intend to strengthen relationships with
existing financing partners and develop new relationships for our automobile transaction and financing business. If we are not
able to attract or retain cooperative third party sales teams or financing partners as new business partners on acceptable terms,
our business growth will be hindered and our results of operations and financial condition will suffer.
Under the terms of the JKL Investment
Agreement, we may be required to sell Jinkailong or take it public in the future, and failing that, or if other redemption triggers
occur, we may be required to participate in a repurchase of the investor’s interest in Jinkailong.
On July 4, 2020, we
entered into the JKL Investment Agreement with Jinkailong’s other shareholders and Hongyi, pursuant to which Hongyi agreed
to subscribe a 27.03% equity interest of Jinkailong for a consideration of RMB 50 million (approximately $7 million) with the payments
to be made in tranches. The JKL Investment Agreement provides Hongyi certain shareholder rights, including a redemption right which
provides that the other shareholders of Jinkailong may be required to purchase Hongyi’s equity interest in Jinkailong in
the event that Jinkailong (i) fails to become public through an IPO for a valuation of no less than RMB350 million (approximately
$49.5 million) or merge with a public company for a valuation of no less than RMB300 million (approximately $42.5 million) within
the six months following the performance commitment period, (ii) fails to achieve an accumulated net profit of RMB24 million (approximately
$3.4 million) for the first two years of the performance commitment period or a net profit of RMB20 million (approximately $2.9
million) for the third year of the performance commitment period, or (iii) has any material and adverse change to its core business,
including but not limited to being included in the list of dishonest persons and loss of over one third of its online ride-hailing
taxi operating licenses, as well as bankruptcy, liquidation or cessation of operations, Hongyi shall have the right to require
certain shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in Jinkailong. Based on a repurchase
formula provided for in the JKL Investment Agreement, the maximum repurchase amount that Hunan Ruixi would be subject to is RMB28,320,000
(approximately $4.0 million).
There is no assurance
that Jinkailong will be able to become listed or merged with a public company with the stipulated valuation within the timeframe
provided in the JKL Investment Agreement, and even if we are forced into such transactions, there is a risk that such merger or
going public event might not be in the interests of our shareholders at that time. Moreover, there is a risk if such merger or
going public event does not occur, or that the other redemption triggers occur, we may be required to participate in the repurchase
Hongyi’s equity interest in the future. We may not have the funds to participate in such redemption at the required time,
which would leave us subject to claims of breach of contract by Hongyi or force to us to raise new funding to meet our obligations,
which funding might not be available to us on commercially reasonable terms or at all.
Moreover, our ability
to dispose of our equity interest in Jinkailong is restricted. Specifically, under the JKL Investment Agreement, we are prohibited
from disposing of our equity interest in Jinkailong until six months after the performance commitment period. These limitations
could further prevent us from obtain the funding necessary to meet our redemption obligations under the JKL Investment Agreement.
Our business operations have been
and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).
An outbreak of respiratory
illness caused by COVID-19 emerged in China in late 2019 and has expanded within the rest of China and globally. Our principal
operations are located in China. COVID-19 is considered to be highly contagious and poses a serious public health threat. On March 11,
2020, the WHO declared the outbreak of COVID-19 a pandemic, expanding its assessment of the threat beyond the global health emergency
it had announced in January 2020. The COVID-19 pandemic has materially and adversely affected the global economy, our markets
in China and our business. Restrictions on the movement of people and goods in certain regions may require us to adjust certain
of our service processes in the future. Our offices in Chengdu, Sichuan and Changsha, Hunan were closed from late January
2020 to late February, 2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could result in decrease of
client demand for our services, restrictions on our travel to support our clients, and delays in our services. All these factors
adversely impacted our results of operations during our fourth fiscal quarter ended March 31, 2020 and may adversely affect our
business and results of operations during 2020 and beyond, although we cannot quantify the overall impact at this time.
We cannot foresee whether
the outbreak of COVID-19 will continue to be effectively contained in China, nor can we predict the severity and duration of its
impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may
continue to be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and
national economic growth, weakened liquidity and financial condition of our customers and other factors that we cannot foresee.
Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause
uncertainties in the regions in China where we conduct business, cause our business to suffer in ways that we cannot predict and
materially and adversely impact our business, financial condition and results of operations.
We do not have written agreements
in place with certain financing partners and adverse change in our relationship with such financing partners may materially and
adversely impact our business and results of operations.
We rely on a limited
number of financing partners to fund automobile transactions for automobile purchasers. However, we do not have written agreements
in place with these financing partners obligating them to provide financing. For example, one of our top financing partners has
been funding the automobile purchases by purchasers referred by us through an agreement with a related party of Jinkailong. Because
such financing partners are not contractually bound by any specific commitment to provide financing, they may determine not to
collaborate with us or limit the funding that is available for financing transactions we facilitate, which will materially and
adversely affect our business, financial condition and results of operations.
Our customers’
failure to fully comply with PRC taxi-related laws may expose us to potential penalties and negatively affect our operations.
According to the guidelines
issued by the Municipal Communications Commission of Chengdu in November 2016, online reservation taxi operating license, automobile
certificate and online reservation taxi driver’s license are required to operate the online ride-hailing business. Approximately
5% of the automobiles used for online ride-hailing that are affiliated with us do not have the automobile certificates and approximately
68% of our ride-hailing drivers have not obtained the online reservation taxi driver’s licenses as of March 31, 2020. We
are in the process of assisting the drivers to obtain the required certificate and license. However, there is no guarantee that
all of the drivers affiliated without us would be able to obtain all the certificate and license. Our ability and method to provide
the automobile transaction related services might be affected or restricted if our affiliated drivers or automobiles do not possess
the requisite license. Our business and results of operations will be materially affected if our affiliated drivers are suspended
from providing ride-hailing services or imposed substantial fines.
We advance
payments for over 90% of the automobile purchases for our customers and we can provide no assurances that our current financial
resources will be adequate to support this operation.
We prepay all the purchase
price and expenses on behalf of the automobile purchasers when we provide purchase services and collect all the advance payment
and relevant services fees from the proceeds disbursed by the financial institutions upon the closing of the financing and/or when
the monthly installment payment made by automobile purchasers during the lease term. As of March 31, 2020, we had advanced payments
of approximately RMB12.3 million (approximately $1.7 million) for the automobile purchases. We funded those advance payments by
proceeds of our initial public offering, the June 2019 Offering, loans from financial institutions and capital contributions from
shareholders.
Our liquidity may be
negatively impacted as a result of the increases in advance payments for automobile purchases in addition to general economic and
industry factors. We anticipate that, to the extent that we require additional liquidity, it will be funded through the incurrence
of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. If we raise additional
funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our
ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The covenants
under future credit facilities may limit our ability to obtain additional debt financing. We cannot be certain that additional
funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact
on our financial condition and our ability to pursue our business strategies.
Our failure to raise
additional capital and in sufficient amounts may significantly impact our ability to maintain and expand our business.
Prior consent from financial institutions
which provided financing to our online ride-hailing driver customers for the purchase of automobiles has not been obtained for
us to sublease or sell the drivers’ automobiles.
As described in the
section titled “Business” above, due to the intense competition and the COVID-19 pandemic, during the year ended
March 31, 2020, certain ride-hailing drivers (primarily in Chengdu, our principal area of operations in China) exited the online
ride-hailing business and tendered their purchased automobile to us for sublease or sales in order to offset monthly payment owed
to us and the financial institutions. Their Financing Agreements with the financial institutions are still valid and in effect.
Pursuant to the Financing Agreements, the right of the automobile collateral to the financial institution belongs to the financial
institution and without their consent, we may not dispose of, use, or take possession of those automobiles. To prevent the default
in payments to the financial institutions and us, the drivers authorized us orally or in writing to sublease or sell the automobiles
to other parties, and use the cash generated from the sublease or sales to cover the monthly installment payments to the financial
institution and the monthly installment service fees as well as the automobile registration related fees that we previously advanced
during the remaining original lease terms to us. As prior consent from the financial institutions have not been obtained, the financial
institutions may require us to stop sublease and return the automobiles immediately. We may also be required to pay penalties to
the financial institutions. Although we have not received any demand from any financial institution to stop the sublease practice,
there is no assurance that future demand to stop such practice may not come along; if so, we may experience economic loss and reputation
damage as a result.
Jinkailong uses the bank accounts
of its related parties for daily operations and inability to use such accounts may have an adverse impact on our operations.
Jinkailong has been
using the bank accounts of its shareholder or companies owned by its shareholders (other than us) to receive and remit payments
during its daily operations. Jinkailong has authorization from these related parties to use the bank accounts and has designated
its own accounting staff to manage such accounts. However, if owners of the bank accounts revoke their authorization, prohibit
or limit Jinkailong’s access to the bank accounts, we may not receive payments timely or at all from financial institutions
or the automobile purchasers, which may adversely affect our operations. Jinkailong may lose all or part of the funds in the accounts
in the event that such accounts are subject to creditor’s claims and frozen or closed by court order.
We may need
additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances,
and financing may not be available on terms acceptable to us, or at all.
We have been financing
our Automobile Transaction and Related Services through borrowing from third parties and related parties and proceeds from our
IPO and follow-on public offering. As we intend to continue to make investments to support the growth of our automobile business,
we may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen
circumstances, including developing new solutions and services, increasing the amount of financing transactions we facilitate,
further enhance our risk management capabilities, increasing our sales and marketing expenditures to improve brand awareness and
engage automobile purchasers through expanded online channels, enhancing our operating infrastructure and acquiring complementary
businesses and technologies. We plan to expand our Automobile Transaction and Related Services, and we may need to make additional
capital contribution as a result. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However,
additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Repayment of the debts
may divert a substantial portion of cash flow to repay principal and service interest on such debt, which would reduce the funds
available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default and
foreclosure on our assets if our operating cash flow is insufficient to service debt obligations, which could in turn result in
acceleration of obligations to repay the indebtedness and limit our sources of financing.
Volatility in the credit
markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities
we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain
adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business
objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and
our business, financial condition, results of operations and prospects could be adversely affected.
Our automobile
financing facilitation services may subject us to regulatory and reputational risks, each of which may have a material adverse
effect on our business, results of operations and financial condition.
We provide automobile
financing facilitation services to finance consumers’ car purchases. The PRC laws and regulations concerning financial services
are evolving and the PRC government authorities may promulgate new laws and regulations in the future. We cannot assure you that
our practices would not be deemed to violate any PRC laws or regulations either now or in the future. The financing products of
our financial partners referred by us may be deemed to exceed the stipulated cap on the financing amount relative to the car purchase
price, in which case we may be required to make adjustments to our cooperation arrangements or cease to cooperate with these financing
partners. If we are required to make adjustments to our automobile financing facilitation referral business model or withdraw,
discontinue or change some of our automobile financing facilitation referral services, our business, financial condition and results
of operations would be materially and adversely affected. In addition, if the financing products referred by us and our cooperation
with financing partners were to be deemed as in violation of applicable PRC laws or regulations, our reputation would suffer.
Moreover, developments
in the financial service industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application
of existing laws, regulations and policies, which may limit or restrict consumer financing or related facilitation services like
those we offer. We may, from time to time, be required to adjust our arrangement with third-party financing partners, which could
materially and adversely affect our business, results of operations and financial condition. Furthermore, we cannot rule out the
possibility that the PRC government will institute a new licensing regime covering services we provide in the future. If such a
licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner,
or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
We are exposed
to credit risk in our auto financing facilitation and auto financing businesses. Our current risk management system may not be
able to accurately assess and mitigate all risks to which we are exposed, including credit risk.
We are exposed to credit
risk as we provide automobile financing facilitation to automobile purchasers and are required to provide guarantees to most of
our financing partners on the financing for automobile purchases facilitated by us. As of March 31, 2020, the maximum contingent liabilities we would be exposed to was approximately $18.6 million, assuming
all the automobile purchasers were in default, and for the year ended
March 31, 2020, we recognized estimated provisions loss of approximately $225,000 for the guarantee services as a result of default
by the automobile purchasers. Customers may default on their lease/loan payments for a number of reasons including those outside
of their or our control. The credit risk may be exacerbated in automobile financing due to the relatively limited credit history
and other available information of many consumers in China.
If we are
unable to repossess the car collateral for delinquent financing payments of the automobile purchasers referred by us or do so in
a cost-effective manner or if our ability to collect delinquent financing payments is impaired, our business and results of operations
would be materially and adversely affected. We may also be subject to risks relating to third-party debt collection service providers
who we engage for the recovery and collection of loans.
Under most of the
Financing agreements between the automobile purchasers and third-party financing partners, we guarantee the lease/loan payments
including principal and the accrued and unpaid interest for the automobile purchase funded by these financing partners. Therefore,
failure to collect lease/loan payments or to repossess the collateral may have a material adverse effect on our business operations
and financial positions. Although the lease/loan payments are secured by the cars, we may not be able to repossess the car collateral
when our customers default. Our measures to track the cars include installing GPS trackers on cars. We cannot assure you that
we will be able to successfully locate and recover the car collateral. We have in the past failed to repossess one car as the
GPS trackers failed to function properly or had been disabled, and we cannot assure you that this incident will not happen again
the future. We also cannot assure you that there will not be regulatory changes that prohibit the installation of GPS trackers,
or the realized value of the repossessed cars will be sufficient to cover our customers' payment obligations. If we cannot repossess
some of these cars or the residual values of the repossessed cars are lower than we expected and not sufficient to cover the automobile
purchaser' payment obligation, our business, results of operations and financial condition may be materially and adversely affected.
Moreover, the current
regulatory regime for debt collection in the PRC remains unclear. We aim to ensure our collection efforts carried out by our asset
management department comply with the relevant laws and regulations in the PRC. However, if our collection methods are viewed by
the automobile purchasers or regulatory authorities as harassments, threats or other illegal means, we may be subject to risks
relating to our collection practice, including lawsuits initiated by the borrowers or prohibition from using certain collection
methods by the regulatory authorities. Any perception that our collection practices are aggressive and not compliant with the relevant
laws and regulations in the PRC may result in harm to our reputation and business, decrease in the willingness of prospective customers
to apply for and utilize our service, or fines and penalties imposed by the relevant regulatory authorities, any of which may have
a material adverse effect on our business, financial condition and results of operations.
We may not
be able to enforce our rights against our automobile purchaser clients.
We offer automobile
purchasers desiring to enter the ride-hailing business in our areas of operation in China various value-added services associated
with purchasing a car with financing. Such services include, among others, credit assessment, preparation of financing application
materials, assistance with closing of financing transactions, license and plate registration, payment of taxes and fees, purchase
of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures. We charge automobile
purchaser fees for such services, but we do not enter into agreements with such automobile purchaser regarding the provision and
payment of the purchase services. In the event a legal dispute arises between the purchaser and us, we may not be able to enforce
our rights against the purchaser, which may materially and adversely affect our business, results of operation and financial condition.
We are required
to obtain certain licenses and permits in China for our business operations, and we may not be able to obtain or maintain such
licenses or permits.
We may be deemed to
operate financing guarantee business by the PRC regulatory authorities. Under certain arrangements in our services, we provide
guarantees to our customers who apply for financing with certain of our financing partners. In August, 2017, the PRC State Council
promulgated the Regulations on the Administration of Financing Guarantee Companies (the “Financing Guarantee Rules”),
which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers
to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing,
and “financing guarantee companies” refer to companies legally established and operating financing guarantee business.
According to the Financing Guarantee Rules, the establishment of financing guarantee companies are subject to the approval by the
relevant governmental authority, and unless otherwise stipulated, no entity may operate financing guarantee business without such
approval.
We do not believe that
the Financing Guarantee Rules apply to our car financing facilitation business as we provide guarantees to our financing partners
in connection with the financing of the purchase of automobiles and such guarantees are not provided independently as our principal
business. However, due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee
business” under the Financing Guarantee Rules is unclear. It is uncertain whether we would be deemed to operate financing
guarantee business in violation of relevant PRC laws or regulations because of our current arrangements with certain financial
institutions. If the relevant regulatory authorities determine that we are operating financing guarantee business, we may be required
to obtain approval or license for financing guarantee business to continue our collaboration arrangement with certain financial
institutions.
In addition, based
on our current business model, we prepay the purchase price of automobiles and all service related expenses and collect the advance
payment (without any interest) through monthly installment payments from the automobile purchaser.
Pursuant to Provisions
on Several Questions Concerning the Application of Law in the Trial of Private Lending Cases released by the Supreme People's Court
in June 2015, private lending refers to the act of financing between natural persons, legal persons and other organizations and
among them. According to the Approval on How to Confirm the Effectiveness of Lending Behavior between Citizens and Enterprises
issued by the PRC Supreme People’s Court in 1999, the private lending refers to the lending between citizens and non-financial
enterprises (hereinafter referred to as enterprises). As long as all parties' declaration of intention is true, it can be recognized
as valid (the “Private Lending Rules”).
We do not believe that
the Private Lending Rules apply to our automobile purchase services business as we need to pay in advance to different suppliers
to complete our services such as preparation of financing application materials, assistance with closing of financing transactions,
license and plate registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver
qualification and other administrative procedures. We have no intention to lend money to and gain interest from automobile purchasers.
We collect payments in a period longer than 12 months based on current product designs.
However, it is uncertain
whether we would be deemed to operate private lending business in violation of relevant PRC laws or regulations because we prepay
on behalf of automobile purchasers and collect payments over a period of more than 12 months. If the relevant regulatory authorities
determine that we are operating private lending business, we may be penalized for engaging in businesses out of the scope of our
business license. Pursuant to the Regulations on the Registration of Enterprise Legal Persons, we may be given warnings, fined,
confiscated of illegal income, required to suspension and rectification, or our business license might be withheld and revoked
by relevant regulatory authorities.
Consequently, we may
be required to obtain approval or license for financing business to continue our current collection method of payments. If we are
no longer able to maintain our current collection method of payments, or become subject to penalties, our business, financial condition,
results of operations and prospects could be materially and adversely affected.
Our failure
to sell cars that we purchased from dealers may have a material and adverse effect on our business, financial condition and results
of operations.
In January 2019, we
started to purchase automobiles from automotive dealers for sales. We primarily purchase automobile models that are reliable, affordable
and based on the preference of Didi, feedback from and market analysis as to perception and demand for such models, and that will
appeal to car buyers in lower-tier cities. We price automobiles based on our automotive transaction data associated with providing
automotive transaction services. We have limited experience in the purchase of automobiles for sale to purchasers, and there is
no assurance that we will be able to do so effectively. Demand for the type of automobiles that we purchase can change significantly
between the time the automobiles are purchased and the date of sale. Demand may be affected by new automobile launches, changes
in the pricing of such automobiles, defects, changes in consumer preference and other factors, and dealers may not purchase them
in the quantities that we expect. We may also need to adopt more aggressive pricing strategies for these cars than originally anticipated.
We also face inventory risk in connection with the automobiles purchased, including the risk of inventory obsolescence, a decline
in values, and significant inventory write-downs or write-offs. If we were to adopt more aggressive pricing strategies, our profit
margin may be negatively affected as well. We may also face increasing costs associated with the storage of these automobiles.
Any of the above may materially and adversely affect our financial condition and results of operations.
We assist
automobile purchasers in obtaining financing from financing institutions, which may constitute provision of intermediary service,
and our agreements with these financial institutions may be deemed as intermediation contracts under the PRC Contract Law.
We assist automobile
purchasers in obtaining financing from financing institutions, which may constitute an intermediary service, and such services
may be deemed as intermediation contracts under the PRC Contract Law. Under the PRC Contract Law, an intermediary may not claim
for service fee and is liable for damages if it conceals any material fact intentionally or provides false information in connection
with the conclusion of an intermediation contract, which results in harm to the client’s interests. Therefore, if we fail
to provide material information to financial institutions, or if we fail to identify false information received from automobile
purchasers or others and in turn provide such information to financial institutions, and in either case if we are also found to
be at fault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or
employee supervision, we could be held liable for damage caused to financial institutions as an intermediary pursuant to the PRC
Contract Law. In addition, if we fail to complete our obligations under the agreements entered into with financial institutions,
we could also be held liable for damages caused to financial institutions pursuant to the PRC Contract Law.
If data
provided by automobile purchasers and other third-party sources or collected by us are inaccurate, incomplete or fraudulent, the
accuracy of our credit assessment could be compromised, customer trust in us could decline, and our business, financial position
and results of operations would be harmed.
China’s credit
infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in 2002 has been
the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference Center
only records limited credit information, such as tax payments, civil lawsuits, foreclosures and bankruptcies. Moreover, this credit
database is only accessible to banks and a limited number of market players authorized by the Credit Reference Center and does
not support sophisticated credit scoring and assessment. In 2015, the PBOC announced that it would open the credit reporting market
to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a widely-applicable,
reliable and sophisticated credit infrastructure in the market we operate.
For the purpose of
credit assessment, we obtain credit information from prospective automobile buyers, and with their authorization, obtain credit
data from external parties to assess applicants’ creditworthiness. We may not be able to source credit data from such external
parties at a reasonable cost or at all. Such credit data may have limitations in measuring prospective automobile purchasers’
creditworthiness. If there is an adverse change in the economic condition, credit data provided by external parties may no longer
be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk management capabilities.
As a result, our assessment of an automobile purchaser’s credit profile may not reflect that particular car buyer’s
actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information.
To the extent that
automobile purchasers provide inaccurate or fraudulent information to us, or the data provided by third-party sources is outdated,
inaccurate or incomplete, our credit evaluation may not accurately reflect the associated credit risks of automobile purchasers.
Among other things, we rely on data from external sources, such as the personal credit report from PBOC. These checks may fail
and fraud may occur as we may fail to discover or reveal fake documents or identities used by fraudulent automobile purchasers.
Additionally, once we have obtained an automobile purchaser's information, the automobile purchaser may subsequently (i) become
delinquent in the payment of an outstanding obligation; (ii) default on a pre-existing debt obligation; (iii) take on additional
debt; or (iv) experience other adverse financial events, making the information we previously obtained inaccurate. We also collect
car collateral location data by installing GPS trackers for lease/loan payment monitoring purposes. The location data we collected
may not be accurate. As a result, our ability to repossess the car collateral could be severely impaired. If we are unable to collect
the lease/loan payments we facilitated or repossess the car collateral due to inaccurate or fraudulent information, our results
of operations and profitability would be harmed.
We may be
subject to product liability claims if people or property are harmed by vehicles purchased through us.
Vehicles purchased
through us may be defectively designed or manufactured. As a result, we may be exposed to product liability claims relating to
personal injury or property damage. Third parties subject to such injury or damage may bring claims or legal proceedings against
us because we facilitate the financing/purchase of the product. Although we would have legal recourse against the automobile manufacturers
or dealers under PRC law, attempting to enforce our rights against the automobile manufacturers or dealers may be expensive, time-consuming
and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance
in relation to vehicles purchased through us. As a result, any material product liability claim or litigation could have a material
and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the
expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.
If the ride-hailing
drivers engage in, or are subject to, criminal, violent, inappropriate, or dangerous activity that results in major safety incidents,
our ability to attract and retain new customers may be harmed, which could have an adverse impact on our reputation, business,
financial condition, and operating results.
We are not able to
control or predict the actions of the ride-hailing drivers and third parties, either during the process of providing services or
otherwise. Such actions may result in injuries, property damage, or loss of life for passengers and third parties, or business
interruption, brand and reputational damage, or significant liabilities for us. Our screen and evaluation of the drivers may not
expose all potentially relevant information and may fail to disclose information that could be relevant to a determination of eligibility.
In addition, we do not independently test drivers’ driving skills.
If the ride-hailing
drivers engage in criminal activity, misconduct, or inappropriate conduct, and we may receive negative press coverage as a result
of our business relationship with such drivers, which would adversely impact our brands, reputation, and business. There have been
numerous incidents and allegations of Didi drivers sexually assaulting, abusing, and kidnapping consumers, or otherwise engaging
in criminal activity. If other criminal, inappropriate, or other negative incidents occur due to the conduct of ride-hailing drivers
or third parties, our ability to attract customers may be harmed, and our business and financial results could be adversely affected.
Further, we may be
subject to claims of significant liability based on traffic accidents, deaths, injuries, or other incidents that are caused by
ride-hailing drivers, consumers, or third parties. Our auto liability and general liability insurance policies may not cover all
potential claims to which we are exposed, and may not be adequate to indemnify us for all liabilities. These incidents may subject
us to liability and negative publicity, which would increase our operating costs and adversely affect our business, operating results,
and future prospects. Even if these claims do not result in liability, we will incur significant costs in investigating and defending
against them.
Government
policies on automobile purchases and ownership may materially affect our results of operations.
Government policies
on automobile purchases and ownership may have a material effect on our business due to their influence on consumer behaviors.
Since 2009, the PRC government has changed the purchase tax on automobiles with 1.6 liter or smaller engines several times. In
addition, in August 2014, several PRC governmental authorities jointly announced that from September 2014 to December 2017, purchases
of new energy automobiles designated on certain catalogs will be exempted from the purchase taxes. In April 2015, several PRC governmental
authorities also jointly announced that from 2016 to 2020, purchasers of new energy automobiles designated on certain catalogs
will enjoy subsidies. In December 2016, relevant PRC governmental authorities further adjusted the subsidy policy for new energy
automobiles. On March 26, 2019, the PRC governmental authorities updated government subsidy policy for new energy automobiles which
raises the threshold for the subsidy and reduces the amount of subsidies. On April 23, 2020, relevant PRC governmental authorities
issue a notice, amongst others, that the subsidy policy for new energy automobiles will be extended to the end of 2022, while the
amount of subsidies will be reduced year by year. We cannot predict whether government subsidies will remain in the future or whether
similar incentives will be introduced, and if they are, their impact on automobile retail transactions in China. It is possible
that automobile retail transactions may decline significantly upon expiration of the existing government subsidies if consumers
have become used to such incentives and delay purchase decisions in the absence of new incentives. If automobile retail transactions
indeed decline, our revenues may fluctuate and our results of operations may be materially and adversely affected.
Some local governmental
authorities also issued regulations and relevant implementation rules in order to control urban traffic and the number of automobiles
within particular urban areas. For example, local Beijing governmental authorities adopted regulations and relevant implementing
rules in December 2010 to limit the total number of license plates issued to new automobile purchases in Beijing each year. Local
Guangzhou governmental authorities also announced similar regulations, which came into effect in July 2013. There are similar policies
that restrict the issuance of new automobile license plates in Shanghai, Tianjin, Hangzhou, Guiyang and Shenzhen. In September
2013, the State Council released a plan for the prevention and remediation of air pollution, which requires large cities, such
as Beijing, Shanghai and Guangzhou, to further restrict the number of motor vehicles. In March 2018, the Beijing government issued
an additional regulation to limit the total number of vehicles in Beijing to no more than 6.1 million, 6.2 million and 6.3 million
by the end of 2018, 2019 and 2020, respectively. We cannot assure you that similar measures will not be adopted in Sichuan and
Hunan Provinces. Such regulatory developments, as well as other uncertainties, may adversely affect the growth prospects of China’s
automobile industry, which in turn may have a material adverse impact on our business.
The ride-hailing
service market is still in a relatively early stage of growth with intense competition in metropolitan cities in China and if such
market does not continue to grow, grow more slowly than we expect or fail to grow as large as we expect, our business, financial
condition and results of operations could be adversely affected.
According to the Chinese
Academy of Industry Economy Research Institute, the ride-hailing service market in China has grown rapidly since 2015. However,
it is still relatively new, and it is uncertain to what extent market acceptance will continue to grow, if at all. Our success
will depend to a substantial extent on the willingness of people to widely-adopt ride-hailing. If the public does not perceive
ridesharing as beneficial, or chooses not to adopt it as a result of concerns regarding safety, affordability or for other reasons,
whether as a result of incidents on the ride-hailing service platform or otherwise, then the ride-hailing service market may not
further develop, or may develop more slowly than we expect or may not achieve the growth potential we expect, any of which could
adversely affect our business, financial condition and results of operations.
Our business
is subject to risks related to China's automobile leasing and financing industry, including industry-wide and macroeconomic risks.
We operate in China’s
automobile leasing and financing industry. We cannot assure you that this market will continue to grow rapidly in the future. Further,
the growth of China’s automobile leasing and financing industry could be affected by many factors, including:
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general economic conditions in China and around the world;
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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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changes in demographics and preferences of car purchasers;
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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.
Fraudulent
activity in our Automobile Transaction and Related Services could negatively impact our operating results,
brand and reputation and cause the use of our loan products and services to decrease.
We are subject to
the risk of fraudulent activity associated with users and third parties handling user information. Our resources, technologies
and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity
could negatively impact our brands and reputation, reduce the automobile transactions facilitated through us and lead us to take
additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory
intervention, and may divert our management's attention and cause us to incur additional expenses and costs. Although we have not
experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the
possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If any of the foregoing
were to occur, our results of operations and financial conditions could be adversely affected. We have incurred net losses and
may continue to incur net losses in the future.
We have incurred net losses and
may continue to incur net losses in the future.
We had net losses
of $9,935,802 and $4,542,525 in the years ended March 31, 2020 and 2019, respectively, and may continue to incur losses in the
future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our business,
attract more customers and further enhance and develop our Automobile Transaction and Related Services. These efforts may prove more expensive than we currently
anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Our net revenue growth
may slow, our net income margins may decline or we may incur additional net losses in the future and may not be able to achieve
and maintain profitability on a quarterly or annual basis. In addition, our net revenue growth rate will likely decline as our
net revenue grows to higher levels.
We may need additional capital, and financing may not
be available on terms acceptable to us, or at all.
In
the fiscal years ended March 31, 2020 and 2019, our principal sources of liquidity were proceeds from our IPO, the June 2019 Offering,
capital contribution from our stockholders and borrowings from financial institutions. As of March 31, 2020, we had cash and cash
equivalents of $844,027, compared with cash and cash equivalents of approximately $5,020,510 as of March 31, 2019. With the
proceeds from our June 2019 Offering and anticipated cash flows from operating activities, we have been able to meet our anticipated
working capital requirements and capital expenditures in the ordinary course of business to the date of the Report. If we fail
to do so due to unexpected situations, we anticipate to receive loans from our stockholders to fund our operations. However, we
cannot assure you this will be the case. We may need additional cash resources in the future if we experience changes in business
conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities
for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount
of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities.
The issuance and sale of additional equity would result in further dilution to our stockholders. The incurrence of indebtedness
would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot
assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Fluctuations in interest rates could
negatively affect our results of operations.
We charge service
fees to automobile purchasers for facilitating financing transactions. If prevailing market interest rates increase, automobile
purchasers would be less likely to finance automobile purchases with credit or we may need to reduce our service fees to mitigate
the impact of increased interest rates. If we do not sufficiently lower our service fees and keep our fees competitive in such
instances, automobile purchasers may decide not to utilize our services because of our less competitive service fees and may take
advantage of lower service fees offered by other companies, and our ability to attract prospective automobile purchasers as well
as our competitive position may be severely undermined. On the other hand, if prevailing market interest rates decline, the operating
margins of financial institutions may decrease, which may make the financial institutions less likely to finance automobile purchases.
Under either circumstance, our financial condition and profitability could also be materially and adversely affected.
Our quarterly results may fluctuate
significantly and may not fully reflect the underlying performance of our business.
Our quarterly results
of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary significantly
in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating
results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are
not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our common
stock. Factors that may cause fluctuations in our quarterly financial results include:
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our ability to attract new customers and maintain relationships with existing customers;
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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 us on reasonable terms;
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changes in our services 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 automobile financing or ride-hailing industries
in China may materially and adversely affect our business and results of operations.
Maintaining and enhancing
the recognition and reputation of our brands is critical to our business and competitiveness. Factors that are vital to this objective
include but are not limited to our ability to:
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maintain and develop relationships with dealers, ride-hailing platforms and financial institutions;
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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 and ride-hailing
are new and the regulatory framework for these market is also evolving, negative publicity about these markets may arise from time
to time. Negative publicity about China’s automobile financing and ride-hailing industries in general may also have a negative
impact on our reputation, regardless of whether we have engaged in any inappropriate activities.
In addition, certain
factors that may adversely affect our reputation are beyond our control. Negative publicity about our partners, outsourced service
providers or other counterparties, such as negative publicity about any failure by them to adequately protect the information of
users, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our
reputation. Furthermore, any negative development in any of the automobile financing or ride-hailing industries, such as bankruptcies
or failures of other companies in any of this these, and especially a large number of such bankruptcies or failures, or negative
perception of any of the industries as a whole, could compromise our image, undermine the trust and credibility we have established
and impose a negative impact on our ability to attract new clients. Negative developments in these industries, such as widespread
automobile purchaser/borrower defaults, unethical or illegal activities by industry players and/or the closure of companies providing
similar services, may also lead to tightened regulatory scrutiny of these sectors and limit the scope of permissible business activities
that may be conducted by us. If any of the foregoing takes place, our business and results of operations could be materially and
adversely affected.
Our reputation may be harmed if information
supplied by customers is inaccurate, misleading or incomplete.
Our customers supply
a variety of information that is in the applications to financing partners. We do not verify all the information we receive from
our customers, and such information may be inaccurate or incomplete. If financing partners provide funding to the automobile purchasers
based on information supplied by automobile purchasers that is inaccurate, misleading or incomplete, those financing partners
may not receive their expected returns and our reputation may be harmed. Moreover, inaccurate, misleading or incomplete customer
information could also potentially subject us to liability as an intermediary under the PRC Contract Law. See “Business
— Regulations.”
Our operations depend on the performance
of the internet infrastructure and fixed telecommunications networks in China.
Almost all access to
the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory
supervision of the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications
capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative
networks or services in the event of disruptions, failures or other problems with China's internet infrastructure or the fixed
telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required
to upgrade our technology and infrastructure to keep up with the requirements of our operations. We cannot assure you that the
internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with
the continued growth in internet usage.
In addition, we have
no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications
and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access
fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.
Any significant disruption in our
IT systems, including events beyond our control, could prevent us from offering our solutions and services or reduce their attractiveness
and result in a loss of car buyers or leases and financial institutions.
In the event of a
system outage, malfunction or data loss, our ability to provide services would be materially and adversely affected. The satisfactory
performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations,
user service, reputation and our ability to attract new and retain existing car buyers and financial institutions. Our IT systems
infrastructure is currently deployed, and our data is currently maintained through a customized cloud computing system. Our servers
are housed at third-party data centers, and our operations depend on the service providers’ ability to protect our systems
in their facilities as well as their own systems against damage or interruption from natural disasters, power or telecommunications
failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar
events, many of which may be beyond our control. Many of our mobile applications are also provided through third-party app stores
and any disruptions to the services of these app stores may negatively affect the delivery of our mobile applications to users.
Moreover, if our arrangement with these service providers are terminated or if there is a lapse of service or damage to their facilities
or if the services are no longer cost-effective to us, we could experience interruptions in our solutions and service as well as
delays and additional expense in arranging new automotive financing solutions for car buyers and to serve our other platform participants.
Our ability to exchange information with financial institutions and obtain credit data from third parties could also be interrupted.
Any
interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security
breaches, whether accidental or willful, could harm our relationships with car buyers and financial institutions and our
reputation. We may not have sufficient capacity to recover all data and services lost in the event of an outage. These
factors could prevent us from processing credit applications and other business operations, damage our brands and reputation,
divert our employees’ attention, reduce our revenue, subject us to liability and cause car buyers and financial
institutions to abandon our solutions and services, any of which could adversely affect our business, financial condition
and results of operations.
Misconduct, errors and failure to
function by our employees and third-party service providers could harm our business and reputation.
We are exposed to many
types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our
business depends on our employees and third-party service providers to interact with potential customers, process large numbers
of transactions and support the loan/lease payment collection process, all of which involve the use and disclosure of personal
information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly
executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing
of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations
or systems. In addition, the manner in which we store and use certain personal information and interact with our customers is governed
by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers,
and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks
or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to
follow protocol when interacting with customers, we could be liable for damages and subject to regulatory actions and penalties.
We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or
the failure to follow protocol, and therefore be subject to civil or criminal liability. Aggressive practices or misconduct by
any of our third-party service providers in the course of collecting loans could damage our reputation.
Furthermore, as we
rely on certain third-party service providers, such as third-party payment platforms and custody and settlement service providers,
to conduct our business, if these third-party service providers failed to function properly, we cannot assure you that we would
be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in our diminished
ability to operate our business, potential liability to borrowers and investors, inability to attract borrowers and investors,
reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition
and results of operations.
A severe or prolonged downturn in
the Chinese or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown
in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In
particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and
unemployment rates, may affect automobile purchasers’ willingness to seek financing and financing partners’ ability
and desire to provide financing. Economic conditions in China are sensitive to global economic conditions. The global financial
markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced
periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and there are new challenges, including the
escalation of the European sovereign debt crisis from 2011 and the slowdown of China's economic growth since 2012 which may continue.
There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central
banks and financial authorities of some of the world's leading economies, including the United States and China. In particular,
general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment
rates, may affect consumers’ demand for cars, car buyers’ willingness to seek credit and financial institutions’
ability and desire to fund financing transactions we facilitate. Economic conditions in China are sensitive to global economic
conditions. The outbreak of COVID-19 coronavirus has resulted in declines in economic activities in China and other parts of the
world and raised concerns about the prospects of the global economy. As of the date of this Report, we are unable to assess the
full impact of the outbreak on our business, results of operations and financial condition. There have also been concerns over
unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also
been concerns about the economic effect of the tensions in the relationship between China and the United States. If present Chinese
and global economic uncertainties persist, our business partners may suspend their collaboration or reduce their business with
us. Adverse economic conditions could also reduce the number of customers seeking to utilize our services. Should any of these
situations occur, our transaction volume will decline, and our business and financial conditions will be negatively impacted.
Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets
to meet liquidity needs.
Our ability to protect the confidential
information of our customers may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or
similar disruptions.
We collect, store and
process certain personal and other sensitive data from our customers, which makes it an attractive target and potentially vulnerable
to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect
the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage
or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target,
we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security
breaches or other unauthorized access to our operation systems could cause confidential user information to be stolen and used
for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related
to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached
because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are
exposed and exploited, our relationships with borrowers and investors could be severely damaged, we could incur significant liability
and our business and operations could be adversely affected.
We have identified material weaknesses
in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over
financial reporting, we may be unable to accurately report our financial results or prevent fraud.
In connection with
the audits of our financial statements for the year ended March 31, 2020, we have identified “material weaknesses”
and other control deficiencies including significant deficiencies in our internal control over financial reporting. As defined
in the standards established by the Public Company Accounting Oversight Board of the United States (the “PCAOB”), a
“material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not
be prevented or detected on a timely basis.
The material weaknesses that have been identified include: (i)insufficient personnel with appropriate levels of accounting
knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements and
related disclosures under U.S. GAAP; (ii) lack of adequate policies and procedures in internal audit function to ensure that
our policies and procedures have been carried out as planned; (iii) lack of appropriate backup and restoration plan; and (iv)
failure to establish and perform periodic review and security monitoring of unauthorized access to the financial system.
We have
implemented, and continue to implement, measures designed to improve our internal control over financial reporting and
remediate the control deficiencies that led to these material weaknesses. We hired Deloitte to help with improvements on our
framework of internal controls, including setting up a risk and control matrix, drawing flowcharts of significant
transactions, evaluating controls effectiveness and preparing manual of internal control. As of March 31, 2020, we improved
the communication to the Board and obtained proper approval for the material transactions and retained an experienced U.S.
GAAP consultant to assist us with the financial reporting and complex accounting issues. We also hired an internal audit
staff to start our internal audit work. We plan to (i) hire additional accounting staffs with comprehensive knowledge of U.S.
GAAP and SEC reporting requirements; (ii) improve our internal audit function, internal control policies and monitoring
controls based on the work of our internal audit staff and (iii) improve our system security environment and conducting
regular backup plan and penetration testing to ensure the network and information security.
We cannot assure you
that the measures we have taken to date, and actions we intend to take in the future, will be sufficient to remediate material
weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses.
In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal
control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been
required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial
reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified.
If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial
reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely
affected, potentially resulting in restatements of our financial statements, we may be unable to maintain compliance with securities
law requirements regarding timely filing of periodic reports and applicable Nasdaq listing requirements, investors may lose confidence
in our financial reporting, and our share price may decline as a result.
We may not be able to prevent others
from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks,
domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on
a combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements
with our employees and others to protect our proprietary rights. We have 15 software copyrights, eleven trademarks and three trademark
applications pending at the PRC Trademark Office. See “Business — Intellectual Property” and “Business
— Regulations — Regulations on Intellectual Property.” Thus, we cannot assure you that any of our intellectual
property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient
to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industries, parts
of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain
licenses and technologies from these third parties on reasonable terms, or at all.
It is often difficult
to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial
interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation.
Confidentiality and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available
to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce
our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps
we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation
to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial
and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may
be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees
or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how
and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on
our business, financial condition and results of operations.
We may be subject to intellectual
property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain
that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights,
know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal
proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks,
patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects
of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property
rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against
us, we may be forced to divert management's time and other resources from our business and operations to defend against these claims,
regardless of their merits.
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 COVID-19, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory
Syndrome (“SARS”), or other epidemics. Our business operations could be disrupted if any of our employees is suspected
of having COVID-19, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees
to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the
extent that any of these epidemics harms the Chinese economy in general.
Risks Related to Our Corporate Structure
Our current corporate structure and business operations
may be affected by the newly enacted Foreign Investment Law.
On March 15, 2019,
the NPC approved the Foreign Investment Law, which has taken effect on January 1, 2020. Since it is relatively new, uncertainties
exist in relation to its interpretation and its implementation rules that are yet to be issued. The PRC Foreign Investment Law
does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed
as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision
under definition of “foreign investment” that includes investments made by foreign investors in China through other
means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future laws, administrative
regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore,
there can be no assurance that our control over Sichuan Senmiao through contractual arrangements will not be deemed as foreign
investment in the future.
The PRC Foreign Investment
Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in
industries specified as either “restricted” or “prohibited” from foreign investment in a “negative
list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from
the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The PRC Foreign Investment
Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will
require market entry clearance and other approvals from relevant PRC government authorities. If our control over Sichuan Senmiao
through contractual arrangements are deemed as foreign investment in the future, and any business of Sichuan Senmiao is “restricted”
or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed
to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over Sichuan Senmiao
may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business
operations, any of which may have a material adverse effect on our business operation.
Furthermore, if future
laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure and business operations.
We rely on the Voting Agreement with
other shareholders of Jinkailong to operate our automobile transaction and related services business, and such Voting Agreement
is subject to various risks, the realization of which may impact our ability to control Jinkailong and consolidate its financial
statements.
We hold 35% of the
equity interest of Jinkailong and control the remaining 65% equity interest through the Voting Agreement with the other four shareholders
of Jinkailong. Although we are the largest shareholder and through the Voting Agreement, control the corporate matters of Jinkailong
including fundamental corporate transactions, the other shareholders of Jinkailong may breach the Voting Agreement, or act in concert
and exert control over Jinkailong through their majority equity ownership, which would have a material adverse effect on our ability
to effectively control Jinkailong and receive economic benefits from it.
Under the Voting Agreement,
the other shareholders may not dispose of their equity interest in Jinkailong unless the new shareholder agrees to be bound by
the Voting Agreement. However, as the Voting Agreement is neither registered with any government authority nor publicly disclosed,
a good faith third party purchaser may refuse to recognize the Voting Agreement and become a party to such agreement, which will
impact our ability to control Jinkailong. Likewise, if the equity interest of Jinkailong held by other shareholders is sold to
any third party in satisfaction of the debt of such shareholders, our ability to enforce our rights under the Voting Agreement
may be impaired.
If any of the events
occurs, we may not effectively control the operations of Jinkailong and may lose the ability to consolidate the financial statements
of Jinkailong under US GAAP, which will materially and adversely affect our results of operations and financial conditions.
If the PRC government deems that
the contractual arrangements in relation to Sichuan Senmiao do not comply with PRC regulatory restrictions on foreign investment
in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of
internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations.
For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications
services overseas and maintain a good track record in accordance with the Provisions on the Administration of Foreign-invested
Telecommunication Enterprises, the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version),
the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) and the Special Administrative
Measures for Entrance of Foreign Investment (Negative List) (2020 Version) (which will come into force on July 23, 2020 and replace
the 2019 Version).
We are a Nevada corporation
and our PRC subsidiaries are considered foreign invested enterprises. To comply with PRC laws and regulations, we conduct our operations
of Online Lending Services in China through a series of contractual arrangements entered into among Senmiao Consulting, Sichuan
Senmiao and the Sichuan Senmiao Shareholders. As a result of these contractual arrangements, we exert control over Sichuan Senmiao
and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual
arrangements, see “Business — Our Corporate Structure.”
In the opinion of our
PRC counsel, Yuan Tai Law Offices, our current ownership structure, the ownership structure of Senmiao Consulting and Sichuan Senmiao,
and the contractual arrangements among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders are not in violation
of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance
with their terms and applicable PRC laws and regulations currently in effect. However, Yuan Tai Law Offices has also advised us
that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations
and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC
counsel.
It is uncertain whether
any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If the ownership structure, contractual arrangements and business of our company, Senmiao Consulting or Sichuan
Senmiao are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of
the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation,
including levying fines, confiscating our income or the income of Senmiao Consulting or Sichuan Senmiao, revoking the business
licenses or operating licenses of Senmiao Consulting or Sichuan Senmiao, , discontinuing or placing restrictions or onerous conditions
on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds
from our public offerings to finance our business and operations in China, and taking other regulatory or enforcement actions that
could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely
damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.
If any of these occurrences results in our inability to direct the activities of Sichuan Senmiao, and/or our failure to receive
economic benefits from Sichuan Senmiao, we may not be able to consolidate its results into our consolidated financial statements
in accordance with U.S. GAAP.
We rely on contractual arrangements
with Sichuan Senmiao, Jinkailong and their respective equity holders for our business operations, which may not be as effective
as direct ownership in providing operational control.
We have relied and
expect to continue to rely on contractual arrangements with Sichuan Senmiao, Jinkailong and their respective equity holders to
a substantial part of our automobile transaction and related services. For a description of these contractual arrangements, see
“Business — Our Corporate Structure.” These contractual arrangements may not be as effective as direct
ownership in providing us with control over Sichuan Senmiao or Jinkailong. For example, Sichuan Senmiao, Jinkailong and their respective
equity holders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in
an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct
ownership of Sichuan Senmiao or own over 50% equity interest of Jinkailong, we would be able to exercise our rights as an
equity holder to effect changes in the board of directors of Sichuan Senmiao or Jinkailong, which in turn could implement
changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current
contractual arrangements, we rely on the performance by Sichuan Senmiao, Jinkailong and their respective equity holders of
their obligations under the contracts to exercise control over Sichuan Senmiao or Jinkailong. The equity holders of Sichuan
Senmiao or Jinkailong may not act in the best interests of our company or may not perform their obligations under these
contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual
arrangements with Sichuan Senmiao or Jinkailong. If any equity holder of Sichuan Senmiao or Jinkailong is uncooperative or
any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through
the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to
uncertainties in the PRC legal system. Therefore, our contractual arrangements with Sichuan Senmiao or Jinkailong may not be
as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
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
We are required to obtain a value-added
telecommunication business certificate and be subject to foreign investment restrictions.
PRC regulations impose
sanctions for engaging in Internet information services of a commercial nature without having obtained an ICP certificate. PRC
regulations also impose sanctions for engaging in the operation of online data processing and transaction processing without having
obtained an online data processing and transaction processing, or ODPTP, certificate (ICP and ODPTP are both sub-sets of value-added
telecommunication business certificates). These sanctions include corrective orders and warnings from the PRC communication administration
authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to
cease operation. To the extent that the PRC regulatory authorities require such value-added telecommunication certificate to be
obtained or set forth rules that impose additional requirements, and we do not obtain such certificate, we may be subject to the
sanctions described above.
According to the Provisions
on the Administration of Foreign-Invested Telecommunication Enterprises, the ratio of investment by foreign investors in a foreign-invested
telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%. Foreign
investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise that
engages in the operation of commercial Internet information services or general online data processing and transaction processing
services.
As an exception, Circular
196, which was promulgated on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered
capital in a foreign-invested telecommunication enterprise engaging in the operation of online data processing and transaction
processing (E-commerce). While Circular 196 permits foreign ownership, in whole or in part, of online data processing and transaction
processing businesses (E-commerce), a sub-set of value-added telecommunications services, there is still uncertainty regarding
whether foreign investment restrictions may be applied to our business and industry.
Further, under either
circumstance, the largest foreign investor will be required to have a satisfactory business track record and operational experience
in the value-added telecommunication business. Any restructuring to meet the requirements may be costly and may involve interruptions
to our business. If we are unable to obtain the telecommunication business certificate in a timely fashion, our business may be
materially and adversely affected.
Changes in China's economic, political
or social conditions or government policies could have a material adverse effect on our business and results of operations.
Substantially all of
our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be
influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth
in China as a whole.
The Chinese economy
differs from the economies of most developed countries in many respects, including the amount of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China
is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth
through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing
preferential treatment to particular industries or companies.
While the Chinese economy
has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors
of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of
resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by government control over capital investments or changes
in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases,
to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s
economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services
and materially and adversely affect our business and results of operations.
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to us.
The PRC legal system
is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively
new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time,
we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more
developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely
affect our business and impede our ability to continue our operations.
We may be adversely affected by the
complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
The PRC government
extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining
to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their
interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
The evolving PRC regulatory
system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State
Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State
Council Information Office, the MIIT, and the MPS). The primary role of this new agency is to facilitate the policy-making and
legislative development in this field, to direct and coordinate with the relevant departments in connection with online content
administration and to deal with cross-ministry regulatory matters in relation to the internet industry.
The Circular on Strengthening
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 and as of the date of this Report, the website used for our previous P2P online lending
services business (which website continues to contains historical information) has not been fully shut down and remains
accessible to the public. It is not clear whether our existing online lending website would be deemed as operating
value-added telecommunications business. However, if we were deemed to operate telecommunications business without operating
licenses, the relevant governmental authority will order us to rectify the noncompliance, confiscate illegal gains and impose
a fine equal to three to five times of the illegal gains. If no illegal gains or the illegal gain is less than RMB 50,000, a
fine of between RMB 100,000 and RMB 1,000,000 will be imposed. In case of material violation, our business may be suspended
and rectification will be carried out.
The interpretation
and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet
industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses
and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits
or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones.
If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws
and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of
our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require
us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by
the PRC government may have a material adverse effect on our business and results of operations.
We rely on dividends and other distributions
on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability
of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company,
and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our stockholders and service any debt we may incur.
If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Senmiao Consulting to adjust
its taxable income under the contractual arrangements it currently has in place with Sichuan Senmiao in a manner that would materially
and adversely affect its ability to pay dividends and other distributions to us. See “Risk Factors — Risks Related
to Our Corporate Structure — Contractual arrangements in relation to Sichuan Senmiao may be subject to scrutiny by the PRC
tax authorities and they may determine that we or Sichuan Senmiao owe additional taxes, which could negatively affect our financial
condition and the value of your investment.”
Under PRC laws and
regulations, our PRC subsidiaries, as a wholly foreign-owned enterprise in China, may pay dividends only out of their respective
accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion,
a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Our PRC subsidiaries
are currently unable to pay us any dividend given their financial condition. If our PRC subsidiaries’ financial condition
improves, the above discussed PRC laws will likely limit their ability to pay dividends or make other distributions to us. Such
limitations could materially and adversely impact our cash flows and limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “Risk Factors
— Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for PRC income tax purposes,
such classification could result in unfavorable tax consequences to us and our non-PRC stockholders.”
PRC regulation of loans to and direct
investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us
from using the proceeds of from our public offerings to make loans to or make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Under PRC laws and
regulations, we are permitted to utilize the proceeds from our public offerings to fund our PRC subsidiaries by making loans to
or additional capital contributions to our PRC subsidiaries, subject to applicable government registration and approval requirements.
Any loans to our PRC
subsidiaries, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange
loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits
and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested
company is the difference between the amount of total investment as approved by the MOFCOM or its local counterpart and the amount
of registered capital of such foreign-invested company.
We have financed and
expect to continue to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved
by the MOFCOM or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating
the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted
RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise
provided by law, may not be used for equity investments within the PRC. On July 4, 2014, the SAFE issued the Circular of the
SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign
Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration of the
settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014
and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested
enterprises established within the designate areas and such enterprises are allowed to use its RMB capital converted from foreign
exchange capitals to make equity investment. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide.
Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested
enterprises to make equity investments by using RMB fund converted from foreign exchange capital. However, Circular 19 continues
to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals
for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. In addition,
SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a
foreign-invested company. The use of such RMB capital may not be altered without SAFE's approval, and such RMB capital may not
in any case be used to repay RMB loans if the proceeds of such loans have not been used. On June 9, 2016, SAFE issued the Circular
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”),
which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign
debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign
exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary
basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited
by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular
16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain
how these rules will be interpreted and implemented. Violations of these Circulars could result in severe monetary or other penalties.
These circulars may significantly limit our ability to use RMB converted from the net proceeds of our public offerings to fund
the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our
PRC subsidiaries, or to establish new variable interest entities in the PRC.
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 pre-IPO PRC stockholders who are
subject to the registration requirements of Circular 37 have completed the required foreign exchange registrations.
In addition, we may
not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor
can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of
our stockholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain
any applicable registrations or approvals required by, SAFE regulations. Failure by such stockholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make
distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
If the chops of our PRC subsidiaries
and consolidated variable interest entities are not kept safely, are stolen or are used by unauthorized persons or for unauthorized
purposes, the corporate governance of these entities could be severely and adversely compromised.
In China, a company
chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each
legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security
Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes.
The chops of our PRC subsidiaries and consolidated variable interest entities are generally held securely by personnel designated
or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen
or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely
and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if
they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused
by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal
action, which could involve significant time and resources to resolve while distracting management from our operations.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.
In February 2012,
SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to
these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate
in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with
SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain
other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise
or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who
are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or
other awards under our 2018 Equity Incentive Plan will be subject to these regulations. Failure to complete the SAFE registrations
may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries
and limit our PRC subsidiaries' ability to distribute dividends to us. We also face regulatory uncertainties that could restrict
our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Business
— Regulations — SAFE Regulations Relating to Employee Stock Incentive Plans.”
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.
On October 17, 2017,
the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the
SAT Notice 37, which came into effect on December 1, 2017. According to SAT Notice 37, where the non-resident enterprise fails
to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required
time limits, and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax
authority. If the non-resident enterprise voluntarily declares and pays its tax payable before the tax authority orders it to do
so, it shall be deemed that such enterprise has paid its tax payable in time.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being
subject to filing obligations or being taxed, under Circular 59, Circular 7 or SAT Notice 37, and may be required to expend valuable
resources to comply with Circular 59, Circular 7 and SAT Notice 37 or to establish that we and our non-resident enterprises should
not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 7 and SAT Notice 37 to make adjustments to the taxable capital gains based
on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have
no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve
complex corporate structures. If we are considered a non-resident enterprise under the EIT Law and if the PRC tax authorities make
adjustments to the taxable income of the transactions under SAT Circular 59, Circular 7 and SAT Notice 37, our income tax costs
associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and
results of operations.
Risks Related to Our Securities
Our failure to meet the continued listing requirements
of Nasdaq could result in a delisting of our common stock.
Our common stock is
currently listed for trading on The Nasdaq Capital Market, and the continued listing of our common stock on The Nasdaq Capital
Market is subject to our compliance with a number of listing standards. On September 30, 2019 and March 31, 2020, we received notices
from Nasdaq that because the closing bid price for our common stock had fallen below $1.00 per share for 30 consecutive business
days, we no longer complied with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market under
Rule 5550(a)(2) of the Nasdaq Listing Rules. Pursuant to Nasdaq Listing Rules, as tolled for the current COVID-19 pandemic, we
have until December 11, 2020 to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid
price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days prior to December 11,
2020.
If we do not regain
compliance with the minimum bid price requirement by December 11, 2020 and the Nasdaq staff determines that we will not be able
to cure the deficiency, or if we are otherwise not eligible for such additional compliance period, Nasdaq will provide notice that
our common stock will be subject to delisting. We would have the right to appeal a determination to delist our common stock, and
the common stock would remain listed on The Nasdaq Capital Market until the completion of the appeal process. If our common stock
were no longer listed on The Nasdaq Capital Market, investors might only be able to trade on one of the over-the-counter markets.
This would impair the liquidity of our common stock not only in the number of shares that could be bought and sold at a given price,
which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media
coverage. In addition, we could face significant material adverse consequences, including:
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a limited availability of market quotations for our securities;
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a limited amount of news and analyst coverage for us; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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We may take actions
to restore our compliance with Nasdaq's listing requirements, but we can provide no assurance that any such action taken by us
would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock or
prevent future non-compliance with Nasdaq's listing requirements.
The market price for our common stock
may be volatile.
The trading prices
of our common stock are likely volatile and could fluctuate widely due to factors beyond our control. This may happen because of
broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating
financial results of internet or other companies based in China that have listed their securities in the United States in recent
years. The securities of some of these companies have experienced significant volatility since their initial public offerings,
including, in some cases, substantial decline in their trading prices. The trading performances of other Chinese companies' securities
after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently
may impact the trading performance of our common stock, regardless of our actual operating performance. In addition, any negative
news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters
of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including
us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time
experience significant price and volume fluctuations that are not related to our operating performance, which may have a material
adverse effect on the market price of our common stock.
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 automobile finance and ride-hailing industries in China;
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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 July 6, 2020, we had outstanding 28,839,803 shares of
common stock, 7,590,804 of which may be resold in the public market immediately
without restriction, other than shares owned by our affiliates, which may be sold pursuant to Rule 144. We may register
all shares of common stock that we may issue under our equity compensation plans on a Registration Statement on Form S-8.
These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to
affiliates.
We have a significant number of outstanding
warrants, some of which contain full-ratchet anti-dilution protection and reset provisions, which may cause significant dilution
to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to
raise funds through future equity offerings.
As more fully described
in the section herein titled “Business – Recent Developments—June 2019 Registered Offering,” pursuant
to the June 2019 Offering and the Purchase Agreement, we issued to the Investors Series A Warrants to purchase an aggregate of
1,336,021 shares of common stock and Series B Warrants to purchase a maximum aggregate of 1,116,320 shares of common stock.
Among other provisions,
the Series A Warrants provide the Investors with full ratchet anti-dilution protection in the event that we issue any equity or
equity-linked securities at a price lower than the exercise price of the Series A Warrants (subject to certain exceptions) and
on the six month anniversary of the initial exercise date of the Series A Warrants, the exercise price of Series A Warrants was
adjusted from $3.72 to $1.50 per share.
The Series B Warrants
initially won’t be exercisable for any shares of common stock. In the event that on the 50th day after the closing date of
the June 2019 Offering, the closing price of the common stock is less than the Share Purchase Price, then the number of shares
of common stock issuable upon exercise of the Series B Warrants shall be adjusted (upward or downward, as applicable) to the greater
of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to 50% of the difference of (A) the quotient of
(x) the Share Purchase Price divided by (y) the Market Price (as defined in the Purchase Agreement) as of the 50th day after the
closing date of the June 2019 Offering, less (B) the aggregate number of Shares issued to the Investors at the closing (as adjusted
for share splits, share dividends, share combinations, recapitalizations and similar events).
The issuance of shares
of common stock upon the exercise of the Series A Warrants and Series B Warrants would dilute the percentage ownership interest
of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded
shares, which could depress the market price of our common stock.
In addition, the so-called
full-ratchet anti-dilution protections and reset provisions, subject to limited exceptions, would reduce the exercise price of
the warrants in the event that we in the future issue common stock, or securities convertible into or exercisable to purchase common
stock, at a lower price per share.
In addition to the
dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants
may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the
price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price
could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our
common stock. The fact that our stockholders, warrant holders and option holders can sell substantial amounts of our common stock
in the public market, whether or not sales have occurred or are occurring, as well as the existence of full-ratchet anti-dilution
provisions and reset provisions in a substantial number of our outstanding warrants could make it more difficult for us to raise
additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable
or appropriate, or at all.
Raising additional capital may cause
dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.
We may seek additional
capital through a combination of public and private equity offerings, debt financings, collaborations and licensing arrangements.
To the extent that we raise additional capital through the sale of equity or debt securities, your ownership interest will be diluted
and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of
indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on
our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships
and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or grant
licenses on terms unfavorable to us.
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 warrants to acquire shares of our common stock. As of the date of this Report, there were 1,519,602 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.76 per share, and we may issue additional
options, warrants and other types of equity in the future as part of stock-based compensation, capital raising transactions or
other strategic transactions. To the extent these options and warrants are ultimately exercised, existing holders of our common
stock would experience dilution which may cause the price of our common stock to decline.
We may need additional financing
while the Warrants from the June 2019 Offering are still outstanding and certain of the terms of the June 2019 Offering could severely
limit the types of financings we can enter into.
Under the terms of
the Purchase Agreement we entered into in connection with the June 2019 Offering, we are prohibited from, among other things, (i)
entering into any variable rate transactions so long as any of the Warrants issued in such offering are still outstanding, (ii)
directly or indirectly offering or issuing any securities, or entering into any agreement to offer or issue any securities, other
than customary exception, for a period of ninety (90) days after the closing of the June 2019 Offering. Such restrictions are severe
limitation on the types of financings we can seek should we need it in the near future. In the event we will require such a financing,
we may be required to obtain the consent of the investors in the June 2019 Offering, whom may withhold such consent at their reasonable
discretion. Our inability, under the terms of the June 2019 Offering, to raise additional funds, could have a material adverse
effect on our operations should we need such additional funds. Further, even if the Investors did provide us with their consent
to obtain such additional financing, the terms of the financing may be under terms that are less advantageous due to the restrictions
and protections provided under the terms of the June 2019 Offering.