PART
I
Item
1. Identity of Directors, Senior Management and Advisers
Not
applicable.
Item
2. Offer Statistics and Expected Timetable
Not
applicable.
Item
3. Key Information
A.
|
Selected
financial data
|
The
following table presents the selected consolidated financial information for our company. The selected consolidated statements
of comprehensive income data for the three years ended December 31, 2016, 2017 and 2018 and the consolidated balance
sheets data as of December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements,
which are included in this annual report beginning on page F-1.
Our
historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data
should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements
and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial
statements are prepared and presented in accordance with U.S. GAAP.
|
|
Year
Ended
December 31, 2018
|
|
|
Year
Ended
December 31, 2017
|
|
|
Year
Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Third parties
|
|
$
|
14,402,329
|
|
|
$
|
25,116,139
|
|
|
$
|
15,821,980
|
|
-
Related parties
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
revenue
|
|
|
14,402,329
|
|
|
|
25,116,139
|
|
|
|
15,821,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
654,979
|
|
|
|
729,752
|
|
|
|
380,072
|
|
Gross
profit
|
|
|
13,747,350
|
|
|
|
24,386,387
|
|
|
|
15,441,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
576,526
|
|
|
|
371,383
|
|
|
|
245,246
|
|
General
and administrative expenses
|
|
|
11,664,394
|
|
|
|
3,169,855
|
|
|
|
1,348,862
|
|
Research
& Development Expense
|
|
|
3,512,512
|
|
|
|
92,683
|
|
|
|
-
|
|
Donation
expenses
|
|
|
-
|
|
|
|
148,108
|
|
|
|
301,101
|
|
Total
Operating expenses
|
|
|
15,753,432
|
|
|
|
3,782,029
|
|
|
|
1,895,209
|
|
(Loss)
i
ncome
from
operations
|
|
|
(2,006,082
|
)
|
|
|
20,604,358
|
|
|
|
13,546,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income on bank deposit
|
|
|
16,182
|
|
|
|
13,600
|
|
|
|
1,273
|
|
Loss
on disposal of a subsidiary
|
|
|
(2,062,155
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
expenses
|
|
|
(510,200
|
)
|
|
|
(7,058
|
)
|
|
|
(517
|
)
|
Interest
income from loans to third parties
|
|
|
6,465,042
|
|
|
|
4,070,600
|
|
|
|
2,794,134
|
|
Impairment
loss on loans to third parties
and property and equipment
|
|
|
(7,423,651
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
other (expenses) income, net
|
|
|
(3,514,782
|
)
|
|
|
4,077,142
|
|
|
|
2,794,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income before income tax expenses
|
|
|
(5,520,864
|
)
|
|
|
24,681,499
|
|
|
|
16,341,589
|
|
Income
tax (benefit) expenses
|
|
|
(1,702,127
|
)
|
|
|
633,315
|
|
|
|
2,452,822
|
|
Net
(loss) i
ncome
|
|
$
|
(3,818,737
|
)
|
|
$
|
24,048,184
|
|
|
$
|
13,888,767
|
|
Other
comprehensive
(
loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation (loss) gain
|
|
|
(2,415,919
|
)
|
|
|
2,382,488
|
|
|
|
(1,468,548
|
)
|
Comprehensive
(loss)
Income
|
|
$
|
(6,234,656
|
)
|
|
$
|
26,430,672
|
|
|
$
|
12,420,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares, basic and diluted
|
|
|
22,114,188
|
|
|
|
20,880,706
|
|
|
|
20,000,000
|
|
Basic
and diluted (loss) earnings per share
|
|
$
|
(0.1
7
|
)
|
|
$
|
1.152
|
|
|
$
|
0.694
|
|
B.
|
Capitalization
and indebtedness
|
Not
applicable.
C.
|
Reasons
for the offer and use of proceeds
|
Not
applicable.
Risks
Related to Our Business and Industry
We
have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.
The
market for China’s financial services is new and may not develop as expected. The regulatory framework for this market is
also evolving and may remain uncertain for the foreseeable future. Potential borrowers may not be familiar with this market and
may have difficulty distinguishing our services from those of our competitors. Convincing potential new borrowers of the value
of our services is critical to the expansion of our operations.
We
launched our services in October 2014 and have a limited operating history. As our business develops or in response to competition,
we may continue to introduce new services or make adjustments to our existing services, or make adjustments to our business model.
Any significant change to our business model, such as our offering of entrusted loan services, may not achieve expected results
and may have a material and adverse impact on our financial conditions and results of operations. It is therefore difficult to
effectively assess our future prospects. You should consider our business and prospects in light of the risks and challenges we
encounter or may encounter in this developing and rapidly evolving market. These risks and challenges include our ability to,
among other things:
|
●
|
navigate
an evolving regulatory environment;
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|
|
|
|
●
|
maintain
and deepen the relationship our senior management have with the banks and working with
a broader base of commercial banks and/or financial institutions;
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|
|
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|
●
|
expand
the base of borrowers;
|
|
|
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|
●
|
broaden
our operation geographically;
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|
|
|
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●
|
enhance
our risk management capabilities;
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|
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|
●
|
improve
our operational efficiency;
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|
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●
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attract,
retain and motivate talented employees; and
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●
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defend
ourselves against regulatory, litigation, privacy or other claims.
|
If
we fail to educate potential borrowers and banks about the value of our services, if the market for our services does not develop
as we expect, or if we fail to address the needs of our target market, or other risks and challenges, our business and results
of operations will be harmed.
Our
historical financial results may not be indicative of our future performance.
Our
business has achieved rapid growth since our inception although our business had underperformed for the financial year ended
December 31, 2018. Our net revenue increased from $0 for the period from September 16, 2014 (Inception) through December 31,
2014 to $7,781,686 for the year ended December 31, 2015, $15,821,980 for the year ended December 31, 2016, $25,116,139 for the
year ended December 31, 2017 and decreased to $14,402,329 for the year ended December 31, 2018. Our net loss was $164,250
for the period from September 16, 2014 (Inception) through December 31, 2014, and increased to a net income of $5,612,025 for
the year ended December 31, 2015, $13,888,767 for the year ended December 31, 2016, $24,048,184 for the year ended December 31,
2017 and a net loss of $3,818,737 for the year ended December 31, 2018. Save for the fiscal year of 2018,
our historically high growth rate and the limited history of financial leasing business make it difficult to evaluate our prospects.
We may not be able to sustain our historically rapid growth or may not be able to grow our business at all.
If
we are unable to maintain or increase the volume of loan transactions facilitated through us or if we are unable to retain existing
clients or attract new clients, our business and results of operations will be adversely affected.
The
volume of financing facilitated through us has grown rapidly since our inception although we underperformed during the financial
year ended December 31, 2018. The total amount of loans facilitated through us was RMB659 million (approximately $996 million)
in 2018 compared to RMB 16.4 billion (approximately $2,429 million) in 2017, RMB9.8 billion (approximately $1,471 million)
in 2016 and RMB 4.5 billion (approximately $728 million) in 2015, which increased substantially from zero in 2014 (we only began
operations in October 2014). To resume our high growth momentum of growth, we must increase the volume of loan transactions
by retaining current customers and attracting more customers.
We
intend to continue to dedicate significant resources to our customer acquisition efforts, including providing a wider variety
of wealth management products and establishing relationships with more banks. If there are insufficient qualified loan requests,
we may be unable to deploy banks’ lending capital in a timely or efficient manner. If there are insufficient bank commitments,
borrowers may be unable to obtain capital through us and may turn to other sources for their borrowing needs.
The
overall transaction volume may be affected by several factors, including our brand recognition and reputation, the interest rates
offered to borrowers relative to market rates, the effectiveness of our risk control, the repayment rate of our borrowers, the
efficiency of our services, the macroeconomic environment and other factors. In connection with the introduction of new products
or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality
of borrowers referred by us, which may negatively affect the growth of loan volume.
If
we are unable to attract qualified borrowers and sufficient bank commitments or if borrowers do not continue to use our services
at the current rates, we might be unable to increase our transaction volume and revenues as we expect, and our business and results
of operations may be adversely affected.
If
we are unable to maintain low default rates for loans facilitated by us, our business and results of operations may be materially
and adversely affected.
Investments
in loans referred by us involve inherent risks as the return of the principal on a loan investment made through us is not guaranteed,
although we aim to limit losses due to borrower defaults to within an industry acceptable range through various preventive measures
we have taken or will take.
Our
ability to attract borrowers and banks, and build trust in, our services is significantly dependent on our ability to effectively
evaluate a borrower’s credit profile and maintain low default rates. To conduct this evaluation, we have employed a series
of risk management procedures and developed a proprietary credit assessment and decisioning model. Our credit scoring model aggregates
and analyzes the data submitted by a borrower as well as the data we collect from a number of internal and external sources, and
then generates a score for the prospective borrower. The score will be used to determine the credit-worthiness of a borrower and
whether we should sign a service contract with that borrower.
If
we are unable to efectively and accurately assess the credit profiles of borrowers, we may either be unable to offer attractive
fee rates or returns to borrowers, or unable to maintain low default rates of loans facilitated by us. If we expand to serve new
borrower groups beyond prime borrowers in the future, we may find it difficult or unable to maintain low default rates of loans
facilitated through us. If widespread borrower defaults were to occur, banks will incur losses and lose confidence in our services
and our business and results of operations may be materially and adversely affected.
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
operations are heavily dependent on the relationship our executive management, particularly Jianxin Lin and Jinchi Xu, have with
our bank partners. We do not have any formal agreement with our bank partners for the provision of commercial payment advisory
services, intermediary bank loan advisory services or the international corporate financing advisory service.
While
Mr. Jianxin Lin is currently our largest shareholder and Chairman of the Board and Mr. Xu is our Chief Operating Officer and Chief
Financial Officer. Although we have provided different incentives to them, we cannot assure you that we can continue to retain
their services. If either of Mr. Lin or Mr. Xu were unable or unwilling to continue in their present positions, we may not be
able to replace them easily or at all, 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.
Our
business is dependent on the continued efforts of our senior management, some of whom have interests and responsibilities outside
of our business. Apart from the possibility of a conflict of interest, if one or more of them is/are unable to devote sufficient
time and effort to our business, our business may be adversely impacted.
Our
business is still in its infancy and our growth is dependent on the availability and efforts of our senior management. However
certain members of our management, in particular, our Chief Executive Officer and Chairman, Mr. Jianxin Lin, has commitments and
responsibilities outside of our Company. Apart from the possibility of a conflict of interest, if he or any of our management
is unable to provide sufficient time, and effort to our business, our business may be adversely impacted.
Successful
strategic relationships with the banks are important for our future success.
Our
operations are heavily dependent on the relationship our senior management has with our bank partners. We anticipate that we will
continue to leverage our strategic relationships with the existing bank partners to grow our business while we will also pursue
new relationships with other banks or financial institutions. Identifying, negotiating and documenting relationships with these
partners require significant time and resources. We do not have any current agreements with our present banking partners and accordingly
are not prohibited from working with their competitors or from offering competing services and vice versa. Our competitors may
be effective in providing incentives to our partners to favor their products or services. Certain types of partners may devote
more resources to support their own competing businesses. In addition, these partners may not perform as expected under our “agreements”
with them and we may have disagreements or disputes with such partners, which could adversely affect our brand and reputation.
If we cannot successfully maintain effective strategic relationships with these bank partners, our business will be harmed.
We
may not be familiar with new regions or markets we enter and may not be successful in offering new products and services.
We
may expand our business and enter other regional markets in the future. However, we may be unable to replicate our success in
Fujian province in new markets. In expanding our business, we may enter markets in which we have limited, or no, experience. We
may not be familiar with the local business and regulatory environment and we may fail to attract a sufficient number of customers
due to our limited presence in that region. In addition, competitive conditions in new markets may be different from those in
our existing market and may make it difficult or impossible for us to operate profitably in these new markets. If we are unable
to manage these and other difficulties in our expansion into other regions in China, our prospects and results of operations may
be adversely affected.
As
we continuously adjust our business strategies in response to the changing market and evolving customer needs, our new business
initiatives will likely lead us to offer new products and services. However, we may not be able to successfully introduce new
products or services to address our customers’ needs because we may not have adequate capital resources or lack the relevant
experience or expertise or otherwise. In addition, we may be unable to obtain regulatory approvals for our new products and services.
Furthermore, our new products and services may involve increased and unperceived risks and may not be accepted by the market and
they may not be as profitable as we anticipated, or at all. If we are unable to achieve the intended results for our new products
and services, our business, financial condition, results of operations and prospects may be adversely affected.
Our
business model could be negatively affected by changes and fluctuation in the banking industry.
Our
business model is premised on the fact that SMEs and microenterprises are generally underserved by the banking industry because
commercial banks in China have been reluctant to lend to SMEs and microenterprises without credit support, such as third-party
guarantees, or adequate collateral of tangible assets, and we believe that they will remain so in the foreseeable future. This
has created opportunities for us to develop and expand our business. However, new trends in the banking industry or the applicable
regulatory requirements may alleviate the high transaction costs or the lack of collateral and public information generally associated
with bank financing to our target clients or otherwise make this business more attractive to banks. In the event that commercial
banks begin to compete with us by making loans directly to our target clients without our facilitation, we may experience less
demand for and greater competition with respect to our financial leasing business. Furthermore, any such direct competition with
our cooperating banks will undermine our relationship with them and may adversely affect our business, results of operations and
prospects.
In
addition, our business may be subject to factors affecting the banking industry generally, such as the abrupt spike in China’s
interbank rates and the subsequent fears of tightened liquidity as experienced by Chinese banks in the second and third quarters
of 2013, as well as the increasing non-performing loan ratios as reported by the banking industry in 2014. Such factors adversely
affecting China’s banking industry may result in constraints on the banking system’s liquidity and subsequent reductions
in the amount of, or tightened approval requirements for, loans available to our clients. As a result, we may experience reduced
demand for our services as the banks may have less available funding.
Fraudulent
activity associated with borrowers referred by us could negatively impact our operating results, brand and reputation and cause
the use of our financing products and services to decrease.
We
are subject to the risk of fraudulent activity associated with borrowers and third parties handling borrower 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 brand and reputation, reduce the volume of loan 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 materially and
adversely affected.
Misconduct,
errors and failure to function by our management and employees could harm our business and reputation.
We
are exposed to many types of operational risks, including the risk of misconduct and errors by our management and employees. Our
business depends on our management and employees to interact with potential borrowers, conduct due diligence review and collect
borrowers’ information, 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 borrowers and banks is governed by various PRC laws. It is not
always possible to identify and deter misconduct or errors by management and employees, 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 management and
employees take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors,
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
we could be subject to civil liability and our relevant management and employees could be subject to criminal liability.
The
laws and regulations governing the financial advisory service industry in China are developing and evolving and subject to changes.
If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations
would be materially and adversely affected.
Due
to the relatively short history of the financial advisory service industry in China, the regulatory framework governing our industry
is under development by the PRC government.
As
of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations
including those governing the financial advisory service industry in China. However, if our practice is deemed to violate any
rules, laws or regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other
penalties as determined by the relevant government authorities as well. If such situations occur, our business, financial condition
and prospects would be materially and adversely affected. In addition, given the evolving regulatory environment in which we operate,
we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry. 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
had previously
made several direct loans to selected corporate clients in contravention of the PRC Lending
General Provisions and may be subject to fines by the People’s Bank of China (“PBOC”).
From
the inception of the Company to the end of its fiscal year of 2018, we made a total of $45,514,815 in direct loans to 6
clients with interest rates from 8% to 16%. The terms of these loans were generally for six to twelve months. We earned $6,182,343
in interest for making these loans.
As
advised by our PRC legal counsel, Sino-Integrity Law Firm, such direct lending activities with corporate clients are not in compliance
with certain provisions of the Lending General Provisions, under which, the PBOC could impose fines on us and the amount of the
potential fine would be no less than one time but no more than five times the gains that we obtained from such direct lending
activities. The gains from said lending activities that were subject to PBOC’S regulation were approximately $6.1 million
and accordingly, the potential fine would be no less than $6.1 million and no more than $30.5 million However, pursuant to Provisions
of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases,
private lending contracts relating to direct private lending activities between companies (such as ours) are effective if such
lending activities are not part of the ordinary business of the lender. Therefore, according to our PRC legal counsel and based
on past practices and recent interpretation of the Supreme People’s Court, it is unlikely PBOC will impose any fines or
penalties on us. However, we cannot assure that no such fines or other punitive actions will be taken against us.
If
our financial advisory services do not achieve sufficient market acceptance, our financial results and competitive position will
be harmed.
We
incur expenses and consume resources upfront to develop, acquire and market new financial advisory services. New services must
achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to
market.
Our
existing or new loan or wealth management products that we refer our customers and changes to our services could fail to attain
sufficient market acceptance for many reasons, including but not limited to:
|
●
|
our
failure to predict market demand accurately and supply loan and wealth management products that meet this demand in a timely
fashion;
|
|
|
|
|
●
|
borrowers
and investors using our services may not like, find useful or agree with any changes;
|
|
|
|
|
●
|
our
failure to properly price new loan and wealth management products;
|
|
|
|
|
●
|
defects,
errors or failures in our services;
|
|
|
|
|
●
|
negative
publicity about our services or our effectiveness;
|
|
|
|
|
●
|
views
taken by regulatory authorities that the new products or our services do not comply with PRC laws, rules or regulations applicable
to us; and
|
|
|
|
|
●
|
the
introduction or anticipated introduction of competing products by our competitors.
|
If
our new loan products or service changes do not achieve adequate acceptance in the market, our competitive position, results of
operations and financial condition could be harmed.
If
we do not compete effectively, our results of operations could be harmed.
The
financing service industry in China is intensely competitive and evolving. We compete with a large number of companies that provide
financing services. We also compete with financial products and companies that attract borrowers, investors or both. With respect
to borrowers, we primarily compete with traditional financial institutions, such as finance business units in commercial banks,
and other finance companies. With respect to borrowers to purchase wealth management products, we primarily compete with other
investment products and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate
and alternative asset classes.
Our
competitors operate with different business models, have different cost structures or participate selectively in different market
segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments.
Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than
we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors
may also have longer operating histories, more extensive borrower or investor bases, greater brand recognition and brand loyalty
and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing
competitors or form a strategic alliance with one or more of our competitors. Our competitors may be better at developing new
products, offering more attractive investment returns or lower fees, responding faster to new technologies and undertaking more
extensive and effective marketing campaigns. In response to competition and in order to grow or maintain the volume of loan transactions
facilitated through us, we may have to offer higher investment return to investors or charge lower transaction fees, which could
materially and adversely affect our business and results of operations. If we are unable to compete with such companies and meet
the need for innovation in our industry, the demand for our services could stagnate or substantially decline, we could experience
reduced revenues or we could fail to achieve or maintain more widespread market acceptance, any of which could harm our business
and results of operations.
Our
direct lending/entrusted loan activities are subject to greater credit risks than larger lenders, which could adversely affect
our results of operations.
There
are inherent risks associated with our direct lending activities, including credit risk, which is the risk that borrowers may
not repay the outstanding loans balances in our direct loan activities. So far, our direct lending clients have all been SMEs.
These borrowers generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may
have fewer financial resources to weather a downturn in the economy. Such borrowers may expose us to greater credit risks than
lenders lending to larger, better-capitalized state-owned businesses with longer operating histories. Conditions such as inflation,
economic downturn, local policy change, adjustment of industrial structure and other factors beyond our control may increase our
credit risk more than such events would affect larger lenders.
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 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 ordinary shares.
In
addition, we may experience seasonality in our business, reflecting seasonal fluctuations in SME’s bank financing patterns.
For example, we may experience lower transaction value during national holidays in China, particularly during the Chinese New
Year holiday season in the first quarter of each year.
We
may be involved in legal proceedings arising from our operations.
We
may become involved in disputes with borrowers, bank lenders and/or other parties in connection with provision of our financial
advisory services. In particular, the bank lenders may name us as a defendant in its collection proceeding against the borrowers
we introduced. These disputes may lead to legal proceedings, and may cause us to suffer costs. Such legal proceedings may also
adversely affect our reputation which in turn could lead to a slowdown in our new business opportunities.
If
we fail to promote and maintain our brand 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 brand effectively is critical to attracting new and retaining existing
borrowers and investors to us. Successful promotion of our brand and our services depend largely on the effectiveness of our marketing
efforts and the success of the channels we use to promote our services. Our 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 brand while incurring substantial expenses, our results of operations and financial condition
would be adversely affected, which may impair our ability to grow our business.
A
severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial
condition.
Any
prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial
condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment
and unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. Economic
conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions
since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows
of 2008 and 2009 has been uneven and there are new challenges. There is considerable uncertainty over the long-term effects of
the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s
leading economies, including the United States and China. There have also been concerns about the economic effect of the tensions
in the relationship between China and surrounding Asian countries. Adverse economic conditions could also reduce the number of
qualified borrowers seeking loans through us. Should any of these situations occur, the amount of loans facilitated through us
and our net revenues 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.
We
may need additional capital, and financing may not be available on terms acceptable to us, or at all.
We
have received proceeds from our initial public offering and capital contributions from Mr. Jianxin Lin, our founder in the past.
Although we believe that our anticipated cash flows from operating activities will be sufficient to meet our anticipated working
capital requirements and capital expenditures in the ordinary course of business for the next 12 months, 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 shareholders. 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.
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.
We
may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our
services and better serve borrowers and investors. 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 platform and loan products;
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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.
The
future development and implementation of anti-money laundering laws in China may increase our obligation to supervise and report
transactions with our customers, thereby increasing our compliance efforts and costs and exposing us to criminal measures or administrative
sanctions for non-compliance.
We
believe that we are not currently subject to PRC anti-money laundering laws and regulations and are not required to establish
specific identification and reporting procedures relating to anti-money laundering. PRC laws and regulations relating to anti-money
laundering have evolved significantly in recent years and may continue to develop. In the future, we may be required to supervise
and report transactions with our customers for anti-money laundering or other purposes, which may increase our compliance efforts
and costs and may expose us to potential criminal measures or administrative sanctions if we fail to establish and implement the
required procedures or otherwise fail to comply with the relevant laws and regulations.
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, software engineering, 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
users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.
We
do not have any 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. 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. Furthermore, we do not maintain key man life insurance on any of members of key management including Mr. Jianxin Lin and
Mr. Jinchi Xu. In the event any key member were to be unable to continue their services for any reason including death or disability,
our operations will be severely impacted which, in turn, will severely impact our revenue and profitability.
Our
ability to protect the confidential information of our borrowers 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 borrowers, which makes our computer systems 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 computer systems could cause confidential
borrower 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.
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 Ministry of Industry and Information Technology, or 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. After our platform is established and with the expansion of our business, we may be required
to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. 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 service on our computer systems, including events beyond our control, could prevent us from processing
loans, reviewing borrowers’ applications and materials, reduce the attractiveness of our services and result in a loss of
borrowers.
In
the event of an outage and physical data loss, our ability to perform our servicing obligations, process applications or make
loans available would be materially and adversely affected. The satisfactory performance, reliability and availability of our
computer system and the material information save therein are critical to our operations, customer service, reputation and our
ability to retain existing and attract new borrowers. Much of our system hardware is hosted in a leased facility located in Beijing
that is operated by our IT Staff. We also maintain a real-time backup system at a separate facility also located in Beijing. Our
operations depend on our ability to protect our 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. If there is a lapse in service or damage to our leased Beijing facilities, we could experience interruptions in our service
as well as delays and additional expense in arranging new facilities.
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 our borrowers and our reputation. Additionally, in the event
of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster
recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data
and services in the event of an outage. These factors could prevent us from processing or posting payments on loans, damage our
brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers to abandon our services,
any of which could adversely affect our business, financial condition and results of operations.
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, invention
assignment and non-compete agreements with our employees and others to protect our proprietary rights. We have made application
for thirteen trademarks, six of which have been approved and the remaining seven are pending with the Trademark Office under the
State Administration for Industry and Commerce. 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 industry, 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, invention assignment 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.
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
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 on our platform.
Our
business could also be adversely affected by the effects of Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe
Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is
suspected of having Zika virus, 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
If
the PRC government deems that the contractual arrangements in relation to our variable interest entity do not comply with PRC
governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes
in the future, we could be subject to penalties or be forced to relinquish our interests in those operations.
Foreign
ownership of certain types of internet businesses, such as internet information services, is subject to restrictions under applicable
PRC laws, rules and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity
interests in a value-added telecommunication service provider. Any such foreign investor must also have experience and a good
track record in providing value-added telecommunications services overseas. Accordingly, under current and applicable PRC laws,
it is possible that we acquire up to 50% equity interests in Sheng Ying Xin. However, if we were to acquire more than 50% of the
equity interests in Sheng Ying Xin, Sheng Ying Xin will lose its ICP License. Under current PRC laws, any foreign-invested entity
providing value-added telecommunication services is required to demonstrate to the relevant branch of the Ministry of Industry
and Information Technology (the “MIIT”), namely in our case, the Beijing Communication Administration, that its foreign
investors have a positive track of, and operation experience in operating value-added telecommunication services outside the PRC.
In practice, the Beijing Communication Administration makes a determination after sixty (60) days after receiving the complete
set of application documents. We believe that we presently do not have the necessary experience and track record in providing
value- added telecommunications services overseas and intend to take steps to build a track record and accumulate the requisite
experience in anticipation that we may acquire the equity interests in Sheng Ying Xin when the restrictions on percentage of foreign
ownership are eased or lifted. There is however no guarantee that we will be successful in this endeavor and if we are unsuccessful,
we will not be able to acquire the equity interests in Sheng Ying Xin.
All
our revenue is generated by contractually controlled and managed entity, Sheng Ying Xin and its wholly-owned subsidiaries, Kashgar
SYX and Fu Hui (Shenzhen) Commercial Factoring Co., Ltd., and Fuhui (Xiamen) Commercial Factoring Co., Ltd. Sheng Ying
Xin is 99% directly owned by our Chief Executive Officer, Mr. Jianxin Lin and 1% indirectly owned by Mr. Lin through his nominee,
Mr. Shaoyong Huang. On December 30, 2018, Sheng Ying Xin disposed one of its wholly-owned subsidiaries, Beijing
Anytrust Science & Technology Co., Ltd to reduce operating losses.
The
contractual arrangements give us effective control over Sheng Ying Xin and enable us to obtain substantially all of the economic
benefits arising from it as well as consolidate the financial results of it in our results of operations. Although the structure
we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the
PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements,
with existing policies or with requirements or policies that may be adopted in the future.
In
the opinion of Sino-Integrity Law firm, our PRC counsel, the ownership structures of our wholly-foreign owned enterprise and our
variable interest entity in China, both currently and immediately after giving effect to this offering, do not and will not violate
any applicable PRC law, regulation or rule currently in effect based on the current interpretation of those law, regulation or
rule; and the contractual arrangements between our wholly-foreign owned enterprise, our variable interest entity and their respective
equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and
regulations currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect based on the
current interpretation of those law, regulation or rule. However, Sino-Integrity Law Firm has also advised us that there are substantial
uncertainties regarding the interpretation and application of current PRC laws, rules and regulations. Accordingly, the PRC regulatory
authorities and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal 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 we or our variable interest entity are found to be in violation of any existing or future
PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory
authorities would have broad discretion to take action in dealing with such violations or failures, including revoking the business
and operating licenses of our PRC subsidiary or variable interest entity, requiring us to discontinue or restrict our operations,
restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or
taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material
adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact
the PRC government actions would have on us and on our ability to consolidate the financial results of our variable interest entity
in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements
to be in violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose
our right to direct the activities of our variable interest entity or otherwise separate from it and if we are not able to restructure
our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results
of our variable interest entity in our consolidated financial statements. Any of these events would have a material adverse effect
on our business, financial condition and results of operations.
Substantial
uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft
PRC
Foreign Investment Law.
The
Ministry of Commerce, or the MOFCOM, published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming
to, upon its enactment, replace the major existing laws and regulations governing foreign investment in China While the MOFCOM
solicited comments on this draft earlier last year, substantial uncertainties exist with respect to its enactment timetable, interpretation
and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework
regulating foreign investments in China.
Among
other things, the draft Foreign Investment Law purports to introduce the principle of “actual control” in determining
whether a company is considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides
that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity
organized in a foreign jurisdiction, but cleared by the MOFCOM as “controlled” by PRC entities and/or citizens, would
nonetheless be treated as a PRC domestic entity for investment in the “restriction category” on the “negative
list.” In this connection, “control” is broadly defined in the draft law to cover any of the following summarized
categories:
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holding
50% or more of the voting rights or similar equity interest of the subject entity;
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holding
less than 50% of the voting rights or similar equity interest of the subject entity but having the power to directly or indirectly
appoint or otherwise secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the
voting power to materially influence the board, the shareholders’ meeting or other equivalent decision making bodies;
or
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having
the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations,
financial, staffing and technology matters.
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Once
an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within
a “negative list” purported to be separately issued by the State Council in the future, market entry clearance by
the MOFCOM or its local counterparts would be required.
The
“variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us,
to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China.
Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangements would also
be deemed as FIEs, if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure
in an industry category that is in the “restriction category” on the “negative list,” the existing VIE
structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned
enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then
the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list”
without market entry clearance may be considered as illegal.
Based
on the definition of “control” in the draft Foreign Investment Law as currently proposed, we believe that there are
strong basis for a determination that we and our variable interest entity is ultimately controlled by PRC citizens for the following
reasons:
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74.12%
of issued shares of CIFS are held and beneficially owned by PRC citizens or nationals;
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Because
CIFS indirectly controls WFOE which, in turn, via a series of VIE Agreements, has the exclusive right to nominate and appoint
all the members of the board of directors of Sheng Ying Xin and therefore effectively controls the board and all management
decisions of Sheng Ying Xin and also has the power to exert decisive influence over its operations, financial, staffing and
technology matters.
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However,
there are significant uncertainties as to how the control status of our company, our variable interest entity and our equity investees
with a VIE structure would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain
whether any of the businesses that we currently operate or plan to operate in the future through our consolidated entities and
the businesses operated by our equity investees with a VIE structure would be on the to-be-issued “negative list”
and therefore be subject to any foreign investment restrictions or prohibitions. We also face uncertainties as to whether the
enacted version of the Foreign Investment Law and the final “negative list” would mandate further actions, such as
MOFCOM market entry clearance, to be completed by companies with existing VIE structure and whether such clearance can be timely
obtained, or at all. If we or our equity investees with a VIE structure were not considered as ultimately controlled by PRC domestic
investors under the enacted version of the Foreign Investment Law, further actions required to be taken by us or such equity investees
under the enacted Foreign Investment Law may materially and adversely affect our business and financial condition.
In
addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not
considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance,
the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements
on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that
would be required for each investment and alteration of investment specifics, a prospectus would be mandatory, and large foreign
investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with
these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and
the persons directly responsible could be subject to criminal liabilities.
Our
contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We
rely on contractual arrangements with our variable interest entity to operate our electronic platform in China and other businesses
in which foreign investment is restricted or prohibited. For a description of these contractual arrangements, see “Item
4. Information on the Company -- C. Organization structure— Contractual Arrangements among Our Wholly-foreign Owned Enterprise,
Variable Interest Entity and the Variable Interest Entity Equity Holders.” These contractual arrangements may not be as
effective as direct ownership in providing us with control over our variable interest entity.
If
we had direct ownership of the variable interest entity, we would be able to exercise our rights as an equity holder directly
to effect changes in the boards of directors of the entity, which could effect changes at the management and operational level.
Under our contractual arrangements, we may not be able to directly change the members of the boards of directors of the entity
and would have to rely on the variable interest entity and the variable interest entity equity holders to perform their obligations
in order to exercise our control over the variable interest entity. The variable interest entity equity holders may have conflicts
of interest with us or our shareholders, and they may not act in the best interests of our Company or may not perform their obligations
under these contracts. For example, our variable interest entity and its equity holders could breach their contractual arrangements
with us by, among other things, failing to conduct their operations, including maintaining our website and using our domain names
and trademarks which the relevant variable interest entity has exclusive rights to use, in an acceptable manner or taking other
actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the variable
interest entity at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute
relating to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under
the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming
and will be subject to uncertainties in the PRC legal system. See “Any failure by our variable interest entity or its equity
holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business,
financial condition and results of operations.” Consequently, the contractual arrangements may not be as effective in ensuring
our control over the relevant portion of our business operations as direct ownership.
Any
failure by our variable interest entity or its equity holders to perform their obligations under the contractual arrangements
would have a material adverse effect on our business, financial condition and results of operations.
If
our variable interest entity or its 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. Although our wholly-owned
PRC subsidiary, WFOE, has entered into an exclusive option agreement in relation to our variable interest entity, which provides
that WFOE may exercise an option to acquire, or nominate a person to acquire, ownership of the equity in that entity or, in some
cases, its assets, to the extent permitted by applicable PRC laws, rules and regulations, the exercise of the call option is subject
to the review and approval of the relevant PRC governmental authorities. WFOE has also entered into a share pledge agreement with
respect to the variable interest entity to secure certain obligations of such variable interest entity or its equity holders to
WFOE under the contractual arrangements. However, the enforcement of such agreement through arbitral or judicial agencies may
be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the share
pledge agreement are primarily intended to help WFOE collect debts owed to WFOE by the variable interest entity equity holders
under the contractual arrangements and may not help us in acquiring the assets or equity of the variable interest entity.
In
addition, although the terms of the contractual arrangements provide that they will be binding on the successors of the variable
interest entity equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors
in case of the death, bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing
to honor the obligations of such variable interest entity equity holder under the contractual arrangements. If the relevant variable
interest entity or its equity holder (or its successor), as applicable, fails to transfer the shares of the variable interest
entity according to the relevant exclusive option agreement or share pledge agreement, we would need to enforce our rights under
the exclusive option agreement or share pledge agreement, which may be costly and time-consuming and may not be successful.
The
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings
in China. Accordingly, these contracts would be interpreted in accordance with PRC law 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. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of
a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how
an arbitration panel or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could
limit our ability to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration
awards or court judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court
judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual
arrangements, we may not be able to exert effective control over the variable interest entities, and our ability to conduct our
business, as well as our financial condition and results of operations, may be materially and adversely affected.
We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entity,
which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our
growth.
Our
variable interest entity holds licenses and approvals and assets that are necessary for our business operations, to which foreign
investments are typically restricted under applicable PRC law. The contractual arrangements contain terms that specifically obligate
variable interest entity equity holders to ensure the valid existence of the variable interest entities and restrict the disposal
of material assets of the variable interest entities. However, in the event the variable interest entity equity holders breach
the terms of these contractual arrangements and voluntarily liquidate our variable interest entity or our variable interest entity
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 conduct some or all of our business operations or otherwise benefit from
the assets held by the variable interest entity, which could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, if our variable interest entity undergoes a voluntary or involuntary liquidation proceeding,
its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest
entity, thereby hindering our ability to operate our business as well as constrain our growth.
The
equity holders, directors and executive officers of our variable interest entity, as well as our employees who execute other strategic
initiatives may have potential conflicts of interest with our company.
PRC
laws provide that a director and an executive officer owes a fiduciary duty to the company he or she directs or manages. The directors
and executive officers of the variable interest entity, including Jianxin Lin, our lead founder and executive chairman, must act
in good faith and in the best interests of the variable interest entity and must not use their respective positions for personal
gain. On the other hand, as a director of our Company, Mr. Lin has a duty of care and loyalty to act in the best interests of
our Company, which in the ordinary course will include acting in the best interests of our shareholders as a whole under British
Virgin Islands law. We control our variable interest entity through contractual arrangements and the business and operations of
our variable interest entity are closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts
of interests for these individuals may arise due to dual roles both as directors and executive officers of the variable interest
entity and as directors or employees of our Company, and may also arise due to dual roles both as variable interest entity equity
holders and as directors or employees of our Company.
We
cannot assure you that these individuals will always act in the best interests of our Company should any conflicts of interest
arise, or that any conflicts of interest will always be resolved in our favor. We also cannot assure you that these individuals
will ensure that the variable interest entity will not breach the existing contractual arrangements. If we cannot resolve any
such conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or
take enforcement action under the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal
proceedings. See “Any failure by our variable interest entity or its equity holders to perform their obligations under the
contractual arrangements would have a material and adverse effect on our business, financial condition and results of operations.”
The
contractual arrangements with our variable interest entity may be subject to scrutiny by the PRC tax authorities. Any adjustment
of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income
and the value of your investment.
The
tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted
in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entity
or their equity holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular,
under applicable PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual
arrangements with our variable interest entity, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax
authorities determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute
a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entity and/or variable
interest entity equity holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax
authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities increase.
Risks
Related to Doing Business in the People’s Republic of China
Changes
in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition
and results of operations and may result in our inability to sustain our growth and expansion strategies.
All
of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. Accordingly, our financial
condition and results of operations are affected to a significant extent by economic, political and legal developments in the
PRC.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC 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 PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control over China’s economic
growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating
financial services and institutions and providing preferential treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on
us. Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past
certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased
economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse
effect on our businesses, financial condition and results of operations.
There
are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most
of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject
to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on
written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential
value.
In
1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters
in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded
to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently
enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to
significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations
are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions,
and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the
interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable.
In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published
on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these
policies and rules until after the occurrence of the violation.
Any
administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and
management attention. 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. These uncertainties may impede our ability to enforce
the contracts we have entered into and could materially and adversely affect our business, financial condition and results of
operations.
PRC
regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult
for us to pursue growth through acquisitions.
Under
the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of
any transaction where the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control
of, or decisive influence over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM,
the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities
Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September
8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where
overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC
enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions
to be subject to security review. Our proposed acquisition of control of, or decisive influence over, at least any two participating
companies (including us) with a turnover within the PRC of more than RMB400 million (approximately $60.15 million) in the fiscal
year prior to any proposed acquisition and all of the participating companies (including us)with a turnover within the PRC of
more than RMB2 billion (approximately $0.30 billion) or with a global turnover of RMB10 billion (approximately $ 1.50 billion)
in the fiscal year prior to any proposed acquisition, would be subject to MOFCOM merger control review. Certain transactions we
may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete
such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity
structure. If MOFCOM’s practice remains unchanged, our ability to carry out our investment and acquisition strategy may
be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake
would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large
acquisitions in the future in a timely manner or at all.
PRC
regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our
PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits.
SAFE,
promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced
the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special
purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. 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 making profit distributions 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 subsidiary. 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. For further discussion on SAFE Circular 37 and its impact on dividend distribution, please
see below “Regulations Relating to Foreign Exchange and Dividend Distribution – SAFE Circular 37” on page 60.
We
have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However,
we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial
owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation
rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner
pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who
are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules,
may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February 28, 2015, SAFE promulgated
a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13,
which became effective on June 1, 2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply for foreign
exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular
37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, will directly review the applications
and conduct the registration. Furthermore, since it is unclear how those new SAFE regulations, and any future regulation concerning
offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities,
we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply
with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC
subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business,
financial condition and results of operations.
Any
failure to comply with PRC regulations regarding our employee equity incentive plans, should we have one, may subject the PRC
plan participants or us to fines and other legal or administrative sanctions.
Pursuant
to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit
applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies.
Our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for
a continuous period of not less than one year, subject to limited exceptions, and who have been granted restricted shares, RSUs
or options may follow SAFE Circular 37 and the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, to apply for the foreign
exchange registration. According to those regulations, employees, directors, supervisors and other management members participating
in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in
China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through
a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures.
Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make
payment under our equity incentive plans (should we have one) or receive dividends or sales proceeds related thereto, or our ability
to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’
ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional
equity incentive plans for our directors and employees under PRC law.
In
addition, the State Administration for Taxation has issued circulars concerning employee share options, restricted shares or RSUs.
Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will
be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents
related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of
those employees related to their share options, restricted shares or RSUs. Although we currently withhold income tax from our
PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, if the employees
fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the
PRC subsidiaries may face sanctions imposed by the tax authorities.
We
rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China
to fund offshore cash and financing requirements.
We
are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating
subsidiary and on remittances from the variable interest entity, for our offshore cash and financing requirements, including the
funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt
we may incur outside of China and pay our expenses. When our principal operating subsidiary or the variable interest entity incurs
additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or
remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiary and certain other subsidiaries
permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting
standards and regulations.
Under
PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside a portion of its net
income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable
as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in
their ability to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered
share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held
in each operating subsidiary. As of December 31, 2018, these restricted assets totaled RMB 70,438,226 (approximately $11,316,561).
Limitations
on the ability of the variable interest entity to make remittance to WFOE to pay dividends to us could limit our ability to access
cash generated by the operations of those the variable interest entity, including to make investments or acquisitions that could
be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.
PRC
regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using
proceeds from this offering and/or future financing activities to make loans or additional capital contributions to our PRC operating
subsidiaries.
Under
PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiary by making loans
to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and filing requirements.
Any
loans to our PRC subsidiary, which is 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 subsidiary to finance their activities cannot exceed
statutory limits and must be registered with the local counterpart of the SAFE. The statutory limit for the total amount of foreign
debts of a foreign-invested company is the difference between the amount of approved total investment and the amount of registered
capital of such foreign-invested company. We may also decide to finance our PRC subsidiary by means of capital contributions.
These capital contributions must be filed with the MOFCOM or its local counterpart.
In
addition, on March 30, 2015, SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Settlement of
the Foreign Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, prohibiting foreign-invested enterprise from
using an RMB fund converted from its foreign exchange capital for expenditure beyond its business scope, providing entrusted loans
or repaying loans between non-financial enterprises or purchasing real estate not for self-use.
If
we fail to comply with such regulations, our ability to use the proceeds we expect to receive from this offering 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.
We
may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be
subject to PRC income tax on our global income.
Under
the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established
under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered
PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their
global income. “De facto management body” refers to a managing body that exercises substantive and overall management
and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration
of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific
criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise
is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled
by foreign enterprises or individuals, the determining criteria set forth in Circular 82 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 offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we do not
generate any revenue offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise,
we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and
cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe
that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. 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.”
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or
other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a
non-PRC company.
On
February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax and Indirect Transfers
of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice
on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698,
issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin 7, an “indirect transfer”
of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and
treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was
established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer
may be subject to PRC enterprise income tax.
According
to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties
located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct
holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is
a “reasonable commercial purpose” of the transaction arrangement, factors to be taken into consideration include:
whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the
assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives
from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial
nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational
structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect
transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment,
the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being
transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates
to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a
PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to
available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to
make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor
shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax
will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through
a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
Bulletin
7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the
shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may
be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiaries may be requested to assist
in the filing. Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources
to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our
previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect
on our financial condition and results of operations.
The
PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference
between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments
to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions or
disposals will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions
on currency exchange may limit our ability to utilize our revenue effectively.
Presently
all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans. Currently, our PRC subsidiary, which is a wholly-foreign owned enterprise,
may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to
us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities
may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant
amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit
our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign
currencies to our shareholders, including holders of our ordinary shares, or pay principal and interest in foreign currencies
to the holders of the notes. Foreign exchange transactions under the capital account remain subject to limitations and require
approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain
foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
Fluctuations
in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes
in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC
government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar
peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June
2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since
June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more
than 10% since June 2010. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation.
On August 11, 2015, the PRC government set the central parity rate for the RMB nearly 2% lower than that of the previous day and
announced that it will begin taking into account previous day’s trading in setting the central parity rate. It is difficult
to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar
in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy,
which could result in greater fluctuation of the Renminbi against the U.S. dollar. Substantially all of our revenues and costs
are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while a significant
portion of our debt is denominated in U.S. dollars. We are a holding company and we rely on dividends paid by our operating subsidiaries
in China for our cash needs. Any significant revaluation of the Renminbi may materially and adversely affect our liquidity and
cash flows. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert
our Renminbi into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amount we would receive.
Risks
Related to our Ordinary Shares
The
trading price of our ordinary shares and is likely to be volatile, which could result in substantial losses to our shareholders.
The
trading price of our ordinary shares is likely to continue to be volatile and could fluctuate widely in response to a variety
of factors, many of which are beyond our control. In addition, the performance and fluctuation of the market prices of other companies
with business operations located mainly in China that have listed their securities in the United States may affect the volatility
in the price of and trading volumes for our ordinary shares. Some of these companies have experienced significant volatility,
including significant price declines after their initial public offerings. The trading performances of these PRC companies’
securities at the time of or after their offerings may affect the overall investor sentiment towards other PRC companies listed
in the United States and consequently may impact the trading performance of our ordinary shares. In addition to market and industry
factors, the price and trading volume for our ordinary shares may be highly volatile for specific business reasons, including:
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variations
in our results of operations;
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announcements
about our earnings that are not in line with analyst expectations;
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publication
of operating or industry metrics by third parties, including government statistical agencies, that differ from expectations
of industry or financial analysts;
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changes
in financial estimates by securities research analysts;
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announcements
made by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures
or capital commitments;
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press
reports, whether or not true, about our business;
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regulatory
allegations or actions or negative reports or publicity against us, regardless of their veracity or materiality to our company;
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changes
in pricing made by us or our competitors;
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conditions
in the financial advisory market;
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additions
to or departures of our management;
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fluctuations
of exchange rates between the Renminbi and the U.S. dollar;
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release
or expiry of transfer restrictions on our outstanding ordinary shares or ordinary shares;
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sales
or perceived potential sales or other disposition of existing or additional ordinary shares or ordinary shares or other equity
or equity-linked securities, including by our principal shareholders, directors officers and other affiliates;
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actual
or perceived general economic and business conditions and trends in China and globally; and
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changes
or developments in the PRC or global regulatory environment.
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Any
of these factors may result in large and sudden changes in the volume and trading price of our ordinary shares. In addition, the
stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance
of particular companies and industries. These fluctuations may include a so-called “bubble market” in which investors
temporarily raise the price of the stocks of companies in certain industries, such as the e-commerce industry, to unsustainable
levels. These market fluctuations may significantly affect the trading price of our ordinary shares. In the past, following periods
of volatility in the market price of a company’s securities, shareholders have often instituted securities class named as
a defendant in shareholder class action lawsuits. The litigation process may utilize a material portion of our cash resources
and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. If
adversely determined, the class action suits may have a material adverse effect on our financial condition and results of operations.
We
are vulnerable to predatory short selling practices.
We
are vulnerable to predatory short sellers who publish false or negative reports on us alleging, among other things, market manipulation,
false or misleading statements and misleading or deceptive conduct. While we will expend every reasonable effort to refute such
negative reports, there is no guarantee that our efforts will be successful and in the event that our efforts are unsuccessful,
this could result in a suspension on the trading of our shares, a decline in the trading price of our shares, investigations or
inquiries by governmental and regulatory agencies, increased costs and expenses in responding to such investigations or inquiries
and/or even a delisting of our shares from the national exchange. Any and all of the foregoing would have a negative impact on
us and to our shareholders.
You
must rely on the judgment of our management as to the use of its cash and assets, and such use may not produce income or increase
our ordinary shares price.
Our
management has considerable discretion in the application of the company’s cash and assets. You will not have the opportunity,
as part of your investment decision, to assess whether its cash and assets are being used appropriately, which may be used for
corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ordinary shares price.
The company may place its cash in investments that do not produce income or that lose value.
Substantial
future sales or perceived potential sales of our ordinary shares, ordinary shares or other equity or equity-linked securities
in the public market could cause the price of our ordinary shares to decline significantly.
Sales
of our ordinary shares or other equity or equity-linked securities in the public market, or the perception that these sales could
occur, could cause the market price of our ordinary shares to decline significantly. As of December 31, 2018, we had 22,114,188
ordinary shares outstanding. All of our ordinary shares were freely transferable by persons other than our affiliates without
restriction or additional registration under the Securities Act. However sale of ordinary shares or their perceived potential
sale by any other substantial shareholder in the public market could cause the price of our ordinary shares to decline significantly.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
market price for our ordinary shares and trading volume could decline.
The
trading market for our ordinary shares 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 covers us downgrades our ordinary shares or publishes inaccurate or unfavorable research about our business, the
market price for our ordinary shares 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 ordinary shares to decline significantly.
As
a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NASDAQ corporate governance standards
applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ordinary shares.
We
are exempted from certain corporate governance requirements of the NASDAQ by virtue of being a foreign private issuer. We are
required to provide a brief description of the significant differences between our corporate governance practices and the corporate
governance practices required to be followed by domestic U.S. companies listed on the NASDAQ. The standards applicable to us are
considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:
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have
a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S.
Securities Exchange Act of 1934, as amended, or the Exchange Act);
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have
a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors;
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have
regularly scheduled executive sessions for non-management directors; or
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We
have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders may not be provided with
the benefits of certain corporate governance requirements of the NASDAQ.
As
a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection
to our shareholders than they would enjoy if we were a domestic U.S. company.
As
a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements
under the Exchange Act and the rules relating to selective disclosure of material nonpublic information under Regulation FD. In
addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and
recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered
under the Exchange Act. As a result, our shareholders may be afforded less protection than they would under the Exchange Act rules
applicable to domestic U.S. companies.
If
and when permitted by law, we may conduct a public offering and listing of our shares in China, which may result in increased
regulatory scrutiny and compliance costs as well as increased fluctuations in the prices of our ordinary shares and ordinary shares
listed in overseas markets.
Although
not currently allowed under PRC law, if and when permitted by law, we may conduct a public offering and/or listing of our shares
on a stock exchange in China in the future. We have not set a specific timetable or decided on any specific form for an offering
in China. The precise timing of the offering and/or listing of our shares in China would depend on a number of factors, including
relevant regulatory developments and market conditions. If we complete a public offering or listing in China, we would become
subject to the applicable laws, rules and regulations governing public companies listed in China, in addition to the various laws,
rules and regulations that we are subject to in the United States as a reporting company. The listing and trading of our securities
in multiple jurisdictions and multiple markets may lead to increased compliance costs for us, and we may face the risk of significant
intervention by regulatory authorities in these jurisdictions and markets.
In
addition, under current PRC laws, rules and regulations, our ordinary shares will not be interchangeable or fungible with any
shares we may decide to list on a PRC stock exchange, and there is no trading or settlement between these markets in the United
States and mainland China. Furthermore, these two markets have different trading characteristics and investor bases, including
different levels of retail and institutional participation. As a result of these differences, the trading prices of our ordinary
shares may not be the same as the trading prices of any shares we may decide to list on a PRC stock exchange. The issuance of
a separate class of shares and fluctuations in its trading price may also lead to increased volatility in, and may otherwise materially
decrease, the prices of our ordinary shares.
Our
shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal
courts may be limited because we are incorporated under British Virgin Islands law, we conduct substantially all of our operations
in China and most of our directors and substantially all of our executive officers reside outside the United States.
We
are incorporated in the British Virgin Islands and conduct substantially all of our operations in China through our wholly-foreign
owned enterprise and the variable interest entity. Most of our directors and substantially all of our executive officers reside
outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it
may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the British
Virgin Islands or in China in the event that they believe that their rights have been infringed under the securities laws of the
United States or otherwise. Even if shareholders are successful in bringing an action of this kind, the laws of the British Virgin
Islands and China may render them unable to enforce a judgment against our assets or the assets of our directors and officers.
There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States of China, although
the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits.
Our
corporate affairs will be governed by our Memorandum and Articles of Association, the BVI Act and the common law of the British
Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the
fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law
of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively
limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding,
authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some
jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as
compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies
of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests
through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company and
whose management, directors and/or major shareholders were also incorporated, resident, or otherwise established in a United States
jurisdiction.
As
a result of the foregoing, our public shareholders may have more difficulty in protecting their interests through actions against
us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction
in the United States.
The
laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders may have limited
or no recourse if they are dissatisfied with the conduct of our affairs.
Under
the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than
the provisions of the BVI Act dealing with shareholder remedies (as summarized under “Item 10. Additional Information –
B. Memorandum and articles of association — Material Differences in BVI Law and our Amended and Restated Memorandum and
Articles of Association and Delaware Law”). The principal protection under statutory law is that shareholders may bring
an action to enforce the constituent documents of the company and are entitled to have the affairs of the company conducted in
accordance with the BVI Act and the memorandum and articles of association of the company. As such, if those who control the company
have disregarded the requirements of the BVI Act or the provisions of the company’s memorandum and articles of association,
or oppose to do so, then the courts will likely grant relief. Generally, the areas in which the courts will intervene are the
following: (i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification
by the majority; (ii) acts that constitute fraud on the minority where the wrongdoers control the company; (iii) acts that infringe
on the personal rights of the shareholders, such as the right to vote or breach of a duty owed to the shareholder by the Company;
and (iv) acts where the company has not complied with provisions requiring approval of a special or extraordinary majority of
shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United
States.
British
Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue
to protect their interests.
British
Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
The circumstances in which any such an action may be brought, and the procedures and defenses that may be available in respect
of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to
them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize
or enforce judgments of courts in the United States based on certain liability provisions of United States securities law or to
impose liabilities, in original actions brought in the British Virgin Islands, based on certain liability provisions of the United
States securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments
obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal
judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were
to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The
requirements of being a public company may strain our resources and distract our management.
We
are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with
these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us, either or both
of which could have a negative effect on our business, financial condition and results of operations.
As
a public company, we will be subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley
Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current
reports with respect to our business and financial performance. The Sarbanes-Oxley Act requires that we maintain disclosure controls
and procedures and internal control over financial reporting. To improve the effectiveness of our disclosure controls and procedures
and our internal control over financing reporting, we will need to commit significant resources, hire additional staff and provide
additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the
standards and requirements applicable to public companies. These activities may divert management’s attention from other
business concerns and we will incur significant legal, accounting and other expenses that we did not have as a private company
prior to this offering, which could have a material adverse effect on our business, financial condition and results of operations.
There
could be adverse United States federal income tax consequences to United States investors if we were or were to become a passive
foreign investment company.
While
we do not believe we are or will become a passive foreign investment company, or PFIC, there can be no assurance that we were
not a PFIC in the past and will not become a PFIC in the future. The determination of whether or not we are a PFIC is made on
an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified
as a PFIC for United States federal income tax purposes if either: (1) 75% or more of our gross income in a taxable year is passive
income, or (2) the average percentage of our assets by value in a taxable year which produce or are held for the production of
passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the
quarterly market value of our ordinary shares, which is subject to change. See “Item 10. Additional Information— E.
Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
Although
we do not believe we were or will become a PFIC, it is not entirely clear how the contractual arrangements between us and our
variable interest entities will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock
of our variable interest entities for United States federal income tax purposes (for instance, because the relevant PRC authorities
do not respect these arrangements), we may be treated as a PFIC. See “Item 10. Additional Information— E. Taxation
— Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
If
we were or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences
to our shareholders that are United States investors. For example, if we are a PFIC, our United States investors will become subject
to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome
reporting requirements. We cannot assure you that we were not or will not become a PFIC for any taxable year. Further, if we are
a PFIC for any year during which a U.S. investor holds our ordinary shares, we generally will continue to be treated as a PFIC
with respect to that investor for all succeeding years during which he is a shareholder. You are urged to consult your own tax
advisors concerning United States federal income tax consequence on the application of the PFIC rules. See “Item 10. Additional
Information— E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment
Company.”
Item
4. Information on the Company
A.
History and development of the company.
Our
Major Corporate Milestones
Our
Corporate Stru
cture
China
Internet Nationwide Financial Services Inc. (“we” or “CIFS”) is a holding company incorporated under the
laws of British Virgin Islands on September 28, 2015. On October 7, 2015, we incorporated Hongkong Internet Financial Services
Limited (“HKIFS) in Hong Kong SAR. HKIFS, in turn, incorporated Beijing Yingxin Yijia Network Technology Co., Ltd (“WFOE”)
in the People’s Republic of China with a registered capital of RMB1,000,000 (approximately $150,375.94) on December 31,
2015. WFOE has entered into a series of contractual agreements with Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“Sheng
Ying Xin” or “SYX”), a company incorporated in the People’s Republic of China on September 16, 2014. Sheng
Ying Xin was originally incorporated as Ding Zhi Tai Da Investment Management (Beijing) Co. Ltd and later changed its name to
Sheng Ying Xin (Beijing) Management Consulting Co., Ltd on February 17, 2016. Ding Zhi Tai Da Investment Management (Beijing)
Co. Ltd, as it was then known, was initially incorporated with a registered capital of RMB 45,000,000 (approximately $6,766,917.29).
Its registered capital was later increased to RMB 150,000,000(approximately $22,556,390.98) on June 30, 2015 but later reduced
to RMB 50,000,000 (approximately $7,518,796.99) on April 25, 2016. On December 29, 2016, Sheng Ying Xin incorporated Kashgar Sheng
Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”) in the People’s Republic of China with a registered
capital of RMB 5,000,000 (approximately, $ 726,665), which capital has to be contributed in full by December 31, 2026. The legal
representative of Kashgar SYX is Mr. Shaoyong Huang, who is also a 1% nominee equity shareholder of Sheng Ying Xin on behalf of
Mr. Jianxin Lin.
The
contractual agreements between WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits
of Sheng Ying Xin onto WFOE.
We
presently provide almost all our financial advisory services through Sheng Ying Xin and Kashgar SYX. In 2018, we generated a small
portion of our total revenue (approximately $546,303
) from the provision of technical services by Anytrust, through
the provision of financial data services to financial institutions.
Also
i
n 2018, we generated $499,187 in revenue from providing
factoring services by Fu Hui (Shenzhen) Commercial Factoring Co., Ltd. (“FuhuiSZ”), and our newly
formed subsidiary, Fuhui (Xiamen) Commercial Factoring Co., Ltd. (“FuhuiXM”). We expect to further develop
our factoring business in 2019.
On
July 28, 2017, we announced the pricing and closing of our initial public offering (“IPO”) of 2,023,146 of our ordinary
shares at a price to the public of $10.00 per share for a total of $20,231,460 before underwriting discounts and commissions and
offering expenses. Boustead Securities, LLC acted as the Lead Underwriter for the offering and Network 1 Financial Securities,
Inc. participated as a Selected Dealer. Our shares began trading on NASDAQ Global Market on August 8, 2017 under the symbol “CIFS.”
On
March 10, 2017, Sheng Ying Xin incorporated FuhuiSZ in the People’s
Republic of China. FuhuiSZ mainly provides supply chain financing services to commercial enterprises. On September 19, 2017,
Sheng Ying Xin Incorporated Yingda Xincheng (Beijing) Insurance Broker Co., Ltd. (“Ying Da Xin Cheng”) in the People’s
Republic of China with a registered capital of RMB 50,000,000 (approximately, $7,518,797). Ying Da Xin Cheng will mainly focus
on providing insurance brokerage services.
On
November 23, 2017, Sheng Ying Xin acquired Beijing Anytrust Science & Technology Co., Ltd. (“Anytrust”). Anytrust
is a limited company incorporated on June 9, 2014 in the People’s Republic of China with a registered capital of RMB 7.5
million (approximately $1.15 million). Anytrust was a “big data” company providing data infrastructure design, big
data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset
Management, Yinhua Fund Management and BAIC Motor, etc.
Our
acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage
of growth. In early 2018, Anytrust launched the beta version of AnyInfo, a vertical search engine and big data platform covering
a broad range of publicly available data of over 30 million enterprises in China. In September 2018, Anytrust launched the AnyInfo
Enterprise Edition of its big data analysis and A.I. report services to promote its ability to generate customized segment/industry
and company profiles to its users.
However,
in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately only
$546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3
million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it
was technically insolvent. We had tried to stem our losses through 2018 and by then, we had only 3 employees from an original
89 when we acquired Anytrust.
We
also determined it in our best interest to transfer our equity interest in Anytrust to our Chief Executive Officer, Mr. Jianxin
Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided to
write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring
the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable.
The equity transfer was completed on December 30, 2018.
On
May 25, 2018, Hongkong Internet Financial Services Limited incorporated CIFS (Xiamen) Financial Leasing Company to
provide financial leasing services and equipment purchase financing to commercial enterprises. CIFS (Xiamen) Financial
Leasing Company did not have any revenue in 2018.
On
May 25, 2018, Sheng Ying Xin incorporated FuhuiXM to
factoring services to commercial enterprises in Xiamen.
On
July 11, 2018, Sheng Ying Xin incorporated Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd
(“Zhizhen”), to provide investment research services. Zhizhen did not have any operations in 2018.
On
July 25, 2018, Sheng Ying Xin formed Hangzhou Yuchuang Investment Partnership (“Hangzhou Yuchuang”), in which
it owns 100% of the equity interest. Hangzhou Yuchuang is an investment vehicle for our strategic investing activities.
Below
is a diagrammatic representation of our present corporate structure:
B.
Business overview.
Our
Mission
Our
mission is to be the one-stop shop for providing financial solutions to small-to-medium sized enterprises.
Our
founders started our company to champion small-to-medium sized enterprises, in the belief that the growth of such enterprises
will form the backbone of and spur China’s transformation from a middle-class country to a high income economy. Meeting
the capital needs of the small-to-medium sized enterprises will be integral to their growth.
Our
Business
We
are in the business of providing financial advisory services to meet the financial and capital needs of our clients, which comprise
largely of small-to-medium sized enterprises (“SMEs”). Through our wholly-owned subsidiaries, Hongkong Internet Financial
Services Limited (“HKIFS”) and Beijing Yingxin Yijia Network Technology Co., Ltd (“WFOE”) and our contractually
controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“Sheng Ying Xin” or “SYX”)
and its wholly owned subsidiary, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”), we offer commercial
payment advisory services, international corporate financing advisory services and intermediary bank loan advisory services. Historically,
we have also made direct loans to certain qualified borrowers. We do not anticipate making any more direct loans but instead,
we will be depositing our funds in trust accounts with certain bank lenders, who will, in turn, make loans to borrowers. Be that
as it may, we had made the “direct loans” to better utilize our excess cash on hand at that time. Although we made
more entrusted loans in 2017, we anticipate that future “entrusted loans” will be infrequent, if at all.
We
generate revenues from service fees in connection with our (i) commercial payment advisory services, (ii) international corporate
financing advisory services, (iii) intermediary bank loan advisory services and (iv) factoring services. Additionally we earn
interest income from our direct or entrusted lending activities. As returns from these (entrusted) loans are limited and
infrequent, we do not regard such loan activities as a separate line of business. We do not expect the balance of such loans to
increase significantly in the future and we may gradually cease the conduct of this form of investment when there are better investment
options of our cash.
We
used to provide technical services through Anytrust and generated approximately $546,303 in 2018 from the provision of
technical services by Anytrust. On December 30, 2018, we disposed Anytrust to reduce our operating overheads and are no longer in
the business of providing technical services.
On
September 19, 2017, Sheng Ying Xin Incorporated Ying Da Xin Cheng, which will focus on providing insurance brokerage services.
As of the date of this annual report, no actual business has been conducted by this company.
On
October 25, 2017 we expanded our service offerings with the launch of our supply chain financing services, or factoring services.
The factoring services provide owners of SMEs with holistic supply chain financing solutions and value-added services in order
to reduce financing costs and improve efficiency during a business transaction. With an initial focus on the medical supplies
and medical equipment, airline catering and bulk commodity supply chains, the factoring services are operated through FuhuiSZ
and FuhuiXM.
We
presently provide all our financial advisory services though Sheng Ying Xin and Kashgar SYX although we have historically generated
all our revenue through Sheng Ying Xin. We have been advised that there are no PRC regulations limiting the transition of our
financial advisory services to Beijing Yingxin Yijia Network Technology Co., Ltd.
On
December 18, 2015, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd received an Internet Content Provider (“ICP”)
license to provide value-added Internet information services. We are now implementing our “Plus Internet” strategy
by developing an online electronic platform in stages. It will at first, allow our clients to access information regarding available
financial products and services and then later track their loan application status. The ICP license is a permit issued by the
Chinese Ministry of Industry and Information Technology to permit China-based websites to operate in China.
Competitive
Strengths
Although
we operate in a highly-competitive industry, we believe that the following strengths contribute to our success and are differentiating
factors that set us apart from our peers.
|
●
|
Experienced
and committed management team.
Key members of our management team, including Mr. Jianxin Lin and Mr. Jinchi Xu, have
had extensive experience in the financial advisory service industry. Mr. Lin and Mr. Xu have provided financial advisory services
similar to our services to many small-to-medium sized enterprises (“SMEs”) since 2008 and collectively have over
15 years’ experience. Their experience has provided them with the skills and expertise that are essential in approaching
and selecting appropriate banks, dealing with bank personnel, identifying and evaluating appropriate financial products and
services, structuring tailored financial solutions and bargaining with banks on behalf of our clients. In addition, they also
have extensive experience directly operating SMEs. Such experience has provided our key management team with a large and diverse
industry client base and first-hand understanding of SMEs’ various financing needs.
|
|
●
|
Substantial
potential client base.
Prior to establishing our company, Mr. Jianxin Lin and Mr. Jinchi Xu have worked together to
offer financial advisory services to small – to – medium sized enterprises since early 2008 and over the years,
they accumulated a substantial client base and forged strong relationships with these clients through a proven track record
of successfully advising on their financing needs. We believe that these clients will continue to be a source of business
as well as a good referral source to new clients.
|
|
|
|
|
●
|
Strong
Relationships with Domestic and Overseas Banks.
We have forged strong, on-going relationships with domestic and oversea
banks over the years. As the primary goal of financial advisory services offered by us is to facilitate the successful execution
of financial transactions by our clients with third-party banks, we have, through the course of our representation, come to
familiarize ourselves with the financial products and services of these banks. We have also successful promoted these financial
products and services to our clients as part of structuring their financing needs and as a result, enabled the banks and their
personnel to meet their business goals such as monthly deposits, loan and wealth management products sales targets. We believe
this incentivizes banks and their employees to continue their relationship with us, updating us on new products and services
and even offering preferential terms to our clients. It is through leveraging this relationship with many banks that we believe
we are able to provide a unique value-added service to our clients and will be able to grow our client base. These banks may
also refer us clients that they are unable to serve either due to their internal client assessment requirements or availability
of financial product and offerings.
|
|
|
|
|
●
|
Innovative
Financial Solutions.
We believe that because of our various suite of advisory services, we are able to come up with
creative business solutions for our clients. Our services largely involve combining already existing, available financial
products and services offered by banks (including bank deposits, wealth management products, letters of guarantee, acceptance
bills and loans) to form a customized financing solution for both our clients and the banks with whom we work with. This innovative
business model, in turn, allows us to meet our clients’ different needs by accessing high quality and highly sought-after
financial products which may be offered only to selective clients of the bank and not to general public.
|
Our
Strategies
The
key elements of our strategy to grow our business include:
|
●
|
Strengthen
our service capabilities with a focus on higher margin commercial payment advisory service.
We plan to focus on strengthening
and developing commercial payment advisory services as our core business which we believe is a fast growing segment and has
great growth potential. In Financial Year 2018, our most profitable revenue segments are in providing commercial payment advisory
services and intermediary bank loan advisory services where our profit margins were 99% and 98.7%, for International corporate
financing advisory services, our profit margin was 87%.
As
a percentage of revenue, our revenue from commercial payment advisory services is the largest and we believe that this segment
will continue to be our main source of revenue. We plan to expand our commercial payment advisory services to large state-owned
enterprise
|
|
|
|
|
●
|
Expand
geographical coverage.
We aim to serve more clients from economically fast-developing areas such as Tianjin, Shandong,
Hubei, Yangtze River Delta and the Pearl River Delta. When we first started operations, the bulk of our clients were from
the Fujian province because of legacy relationships with their clients with management, particularly, Mr. Jianxin Lin and
Mr. Jinchi Xu. In 2018, our client base expanded and less than 50% of them hailed from the Fujian province
.
We believe we have significant growth potential in these areas because (i) there are a large number of small-to-medium sized
enterprises there that have greater demand for financing and alternative payment methods, and (ii) local banks based in these
areas offer more diverse financial products and flexible services.
|
|
●
|
Enhance
our ability to attract, incentivize and retain talented professionals.
We believe our success greatly depends on our
ability to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive
advantage in the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level
personnel, including formulating a market-oriented employee compensation structure and implementing a standardized multi-level
performance review mechanism. We implemented a key performance indicator, or KPI mechanism to assess the performance of departments
and individuals and help determine compensation structures for each department and individual. We believe this KPI mechanism
will enable us to monitor and keep track of the contributions and efforts of each employee and to help us efficiently identify
and appropriately compensate our most valuable employees in the Company.
|
|
|
|
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●
|
Expand
our service portfolio.
We plan to further expand our service portfolio by merging with or acquiring entities already
holding other such financial service licenses, such as factoring, microcredit, financial leasing, pawn mortgage and rural
banking licenses so that we may expand into providing such services.
|
|
|
|
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●
|
Enhance
our IT infrastructure.
We received an Internet Content Provider (“ICP”) license for value-added Internet
information services on December 18, 2015. We are implementing our “Plus Internet” strategy by developing our
electronic platform in stages to allow our clients to firstly access information regarding available financial products and
services and then later track their loan application status. We believe this will allow us to expand client reach beyond the
physical boundaries of our office(s), and to efficiently match our clients’ financing needs with financing products
offered by various financial sources online
|
Our
Services
We
currently provide financial advisory services including (i) commercial payment advisory services, (ii) international corporate
financing advisory services, (iii) intermediary bank loan advisory services and (iv) supply chain financing services, or factoring
services. We used to provide technical services through Anytrust and generated approximately $546,303 in 2018 from the provision
of technical services by Anytrust. On December 30, 2018, we disposed Anytrust to reduce our operating overheads and are no longer
in the business of providing technical services. As a result, we no longer provide technical service.
Additionally
we earn interest income from our direct lending activities.
Previously we made direct loans to our customers
but we now make loans mainly by depositing (“entrusting”) these funds into accounts with banks, which in turn will
make loans to our clients.
Such
loan balance decreased
in 2018, we do not expect the balance of such loans to increase significantly in the future and the interest income
from such loans would not become a significant portion of our net income. We may gradually cease the conduct of this form
of investment when there are better investment options of our cash. Therefore, we do not regard such loan activities as a separate
line of business and instead we record the interest from these loans under “Other Income” in our financial statements.
The
following table set forth our major service lines in terms of transaction value through present date:
Service
Line
|
|
Revenue
|
|
|
|
(For
the year ended December 31, 2018)
|
|
Commercial
payment advisory services
|
|
$
|
6,091,830
|
|
International
corporate financing advisory service
|
|
$
|
1,111,991
|
|
Intermediary
bank loan advisory services
|
|
$
|
6,153,018
|
|
Factoring
Service
|
|
$
|
499,187
|
|
Technical
service
|
|
$
|
546,303
|
|
Total
|
|
$
|
14,402,329
|
|
Commercial
payment advisory services
We
provide commercial payment advisory services to our clients so that they may to obtain acceptance bills from banks.
A
banker’s acceptance bill or banker’s acceptance, is a promised future payment, or time draft, which is accepted and
guaranteed by a bank and drawn on a deposit at the bank. The banker’s acceptance specifies the amount of money, the date,
and the person to which the payment is due. After acceptance, the draft becomes an unconditional liability of the bank. But the
holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for
the funds in the deposit.
A
banker’s acceptance starts as a time draft drawn on a bank deposit by a bank’s customer to pay money at a future date,
typically within six months to one year, analogous to a post-dated check. Next, the bank accepts (guarantees) payment to the holder
of the draft, analogous to a post-dated check drawn on a deposit with over-draft protection.
The
party that holds the banker’s acceptance may keep the acceptance until it matures, and thereby allow the bank to make the
promised payment, or it may sell the acceptance at a discount today to any party willing to wait for the face value payment of
the deposit on the maturity date. The rates at which they trade, calculated from the discount prices relative to their face values,
are called banker’s acceptance rates or simply discount rates. The banker’s acceptance rate with a financial institution’s
commission added in is called the all-in rate.
Banker’s
acceptances make a transaction between two parties who do not know each other safer, because they allow the parties to substitute
the bank’s credit worthiness for that who owes the payment. They are used widely in international trade for payments that
are due for a future shipment of goods and services. For example, an importer may draft a banker’s acceptance when it does
not have a close relationship with and cannot obtain credit from an exporter. Once the importer and bank have completed an acceptance
agreement, whereby the bank accepts liabilities of the importer and the importer deposits funds at the bank (enough for the future
payment plus fees), the importer can issue a time draft to the exporter for a future payment with the bank’s guarantee.
Acceptance
bills are one of the most popular means of settlement used by SMEs in China as they allow SMEs to obtain working capital at a
relatively low interest rate. In addition, such acceptance bills are generally acceptable to counter parties because such instrument
can be further endorsed to meet such parties’ own payment needs or presented to banks to be cashed. During the course of
providing commercial payment advisory services to our clients, we are also able to forge and maintain good relationships with
banks because for banks, issuance of acceptance bills is not only a way to extend credit without using cash, but also a way to
increase deposits by requesting the applicants to pay initial deposits as security for issuance of acceptance bills.
The
following diagram illustrates the different parties and roles in the transaction process for our commercial payment advisory services.
For
the period from October 1, 2014 through December 31, 2017, we had helped 27 SMEs obtain acceptance bills from banks in 28 transactions
with a total transaction amount of RMB 8.3 billion (approximately $1.3 billion). For the period from January 1, 2017 through December
31, 2017, we helped 31 SMEs obtain acceptance bills from banks in 31 transactions with a total transaction amount of RMB 9,963
million (approximately $ 1,476 million). For the period from January 1, 2018 through December 31, 2018, we helped 22 SMEs obtain
acceptance bills from banks in 22transactions with a total transaction amount of RMB3,610 million (approximately $ 545 million).
Below
are the steps in the provision of commercial payment advisory services:
Review
of client application
:
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●
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Members
of our key management receive a client’s enquiry about our commercial payment advisory services. Based on initial discussions,
they determine the client’s requirements for financing payments to suppliers/payees (including amount and timing for
such payments) and determine, on a preliminary basis, whether there would be available financial products and services offered
by banks;
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●
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The
client’s contact information is given to a client manager for preliminary application review by our deputy general manager;
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●
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The
client manager collects necessary materials and information from the potential borrower, as typically required by a bank for
such transactions. The client manager then analyzes such materials to verify the client’s financing needs and whether
the client’s credit and asset status would meet the relevant banks’ requirements for issuance of acceptance bills.
Results of such analysis is given to members of our key management for their consideration; and
|
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●
|
If
members of our key management decide to accept such client and proceed to provide our commercial payment advisory services,
we then enter into a financial advisory service contract with such client, specifying the subject amount of cash to be deposited
with the banks or to be used for purchasing wealth management products from the banks, our service fees and other rights and
obligations of such client and us, typically including scope of our services and confidentiality obligations;
|
Structuring
the transaction
|
●
|
Members
of our key management narrow down the possible banks based on the client’s needs regarding amount and timing of payments
to be made, interest rate for deposit, availability and annualized rate of return on wealth management products, costs and
other considerations. Management will discuss the potential transaction with the banks and generally select two to three for
further consideration;
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|
●
|
Members
of our key management counsel the client on whether to either deposit the funds with the bank or purchase the bank’s
wealth management products with a similar maturity as the acceptance bill;
|
|
●
|
Members
of our key management then work with the selected bank to structure the transaction for the issuance of acceptance bills to
our client(including applying for lines of credit and opting to either deposit the funds and/or purchase wealth management
products), and negotiate preliminary terms (including interest rate for cash deposits, availability and annualized rate of
return of wealth management products and application and processing fees) with such bank;
|
Application
|
●
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A
product and service advisor is then assigned to handle further communication with the bank regarding the application;
|
|
●
|
When
ready, the full set of application materials for the relevant line of credit based on the client’s needs is passed to
the product and service advisor for submission to the bank;
|
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●
|
After
submission of the application materials, our product and service advisor communicates with our contact at the bank on an on-going
basis regarding the status of the application, and works with various departments of the bank to facilitate the transaction
to closure;
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●
|
After
the line of credit is given, the client is able to drawdown on it on an “when-needed” basis;
|
|
●
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The
relevant client manager then further assists the client in making repayments to the bank either in the form of a cash deposit
or the purchase of wealth management products.
|
Our
clients have typically been able to realize interest rates exceeding 4% p.a. for wealth management products, which they can immediately
use, along with the principal to fulfill their payment obligations when they mature.
We
charge our clients a service fee which is calculated at a percentage (typically ranging from 0.5% to 2%) of the amount of cash
deposited with the bank or the value of the wealth management products purchased from the bank.
International
corporate financing advisory services
We
help our clients that have overseas financing needs obtain financing to support their overseas business development. We work closely
with overseas and domestic banks to identify appropriate facilities for our clients or their offshore affiliates. The overseas
investments we help finance are typically made through offshore affiliates of our clients.
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●
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After
we receive a client’s enquiry about our international corporate financing advisory services, our key management team
determines the client’s financing needs to support its overseas investments (including the amount needed, term of the
loan, location and currency of the loan, the amount of interest the client is able to bear and what security (if any) the
client can provide);
|
|
●
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A
client manager is assigned to help conduct a preliminary application examination;
|
|
●
|
The
client manager collects necessary materials, as typically required by a bank for such transactions, and analyzes such materials
to determine whether the client would meet the risk profile of the banks;
|
|
●
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Results
of such analysis are given to members of our key management for their consideration. If members of our key management decide
to accept the client and proceed to provide our international corporate financing advisory services, we then enter into a
financial advisory service contract with such client. The agreement would specify the subject amount of facilities to be obtained
from the overseas bank for the client’s offshore affiliate, our service fees, and the scope of our services;
|
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●
|
Members
of our key management narrow down the banks and ultimately select one based on amount of funds needed, term of the loan sought,
the amount of interest the borrowing party is able to bear and what security (if any) the client can provide. This would typically
be an overseas bank or an affiliate branch of a PRC bank;
|
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●
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Members
of our key management communicate with the selected overseas bank to confirm interest rates, identify domestic banks with
which it would prefer to work and the available transaction limits it has with such domestic banks;
|
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●
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We
negotiate terms on behalf of our client’s offshore affiliate, including loan interest rate, term of loan, and guarantee
required;
|
|
●
|
We
facilitate the execution of a loan contract by the offshore affiliate of our client and the overseas bank;
|
|
●
|
A
product and service advisor is then appointed to handle further communication with the bank regarding application materials
and other aspects of the application;
|
|
●
|
The
client manager continues to assist our client in preparing the full set of application materials according to the bank’s
requirements. This may include obtaining it incorporation certificate, business registration certificate, articles of association
and audited financial statements;
|
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●
|
When
ready, the full set application materials is passed to the product and service advisor for submission to the bank. The client
manager further assists our client in transferring the agreed amount of cash to the bank either in the form of a cash deposit
or purchase of wealth management products;
|
|
●
|
After
submission of application materials to the banks, our product and service advisor communicates with our contacts at the banks
on an on-going basis regarding the application review status, and works with various departments of the bank to facilitate
the steps needed to close the financing, including the issuance of certificates of deposit or executing the wealth management
purchase agreements with such client, acceptance of certificates of deposit or wealth management purchase agreement as security
and issuance of letter of guarantee, acceptance of letter of guarantee, and ultimately, obtaining approval for the extending
facilities to our client’s offshore affiliate.
|
We
charge our clients a service fee which is calculated at a percentage (typically ranging from 0.2% to 0.4%) of the amount of facilities
obtained by our client’s offshore affiliate
For
the period from September 16, 2014 through December 31, 2016, we had helped 6 SMEs obtain facilities from overseas banks in the
amount of $550 million for their offshore affiliates. For the period from January 1, 2017 through December 31, 2017, we had helped
5 SMEs obtain facilities from overseas banks in the amount of $ 650 million for their offshore affiliates. For the period from
January 1, 2018 through December 31, 2018, we had helped 2 SMEs obtain facilities from overseas banks in the amount of $110 million
for their offshore affiliates.
We
plan to continue providing international corporate financing advisory services to our clients to support their overseas development
in various areas of the world, including Europe, the United States, South Asia and the Middle East.
The
following diagram illustrates the different parties and roles in the transaction process for our international corporate financing
advisory services.
Intermediary
bank loan advisory services
We
help our clients (typically SMEs) obtain loan financing from PRC banks. We work closely with banks to help identify and negotiate
loan financing packages for such clients.
For
the period from October 1, 2014 through December 31, 2016, we provided bank loan advisory services to 15 clients, comprising 11
SMEs and 4 individuals in 19 loan financings, with a total loan amount of RMB2.5 billion (approximately $379 million).
For
the period from January 1, 2017 through December 31, 2017, we provided bank loan advisory services to 11 SME clients in 11 loan
financings with a total loan amount of RMB 2,045 million (approximately $ 303 million). For the period from January 1, 2018 through
December 31, 2018, we provided bank loan advisory services to 23 SME clients in 23 loan financings with a total loan amount of
RMB 2,255 million (approximately $ 341 million).
Going
forward, we intend to focus solely on SMEs and do not intend to continue to provide such services to individuals.
Because
we have extensive bank loan-related information of a variety of PRC banks, including their loan interest rates, requirement for
security and collateral, discount rates, loan application procedures and application materials required, we are able to expeditiously
and effectively locate the most suitable bank to meet our clients’ needs.
A
typical transaction involves the following steps:
|
●
|
We
first communicate with our clients regarding their financing needs, including the loan amount needed, term of the loan they
are seeking, amount of interest they are able to bear and what security(if any) they are able provide and what guarantors
may be available;
|
|
●
|
We
collect required documents as typically required by a bank for such transactions to review their credit status based on our
internal requirements;
|
|
●
|
Upon
their acceptance, we enter into a financial advisory service contract with our clients specifying the subject amount of the
loan, our service fees and scope of our services;
|
|
●
|
Next
we engage in talks with various banks to identify the most appropriate banks for our clients in terms of collateral discount
rates and interest rates;
|
|
●
|
We
further assist our clients in preparing application materials, coordinate with the banks in their due diligence, negotiate
terms on behalf of our clients to help them obtain the best terms (typically including accelerated application processing,
lower interest rates and higher discount rates) for their financings from banks; and
|
|
●
|
We
track the application approval process and keep our clients updated as to their status.
|
Through
our bank loan advisory services, our clients are able to obtain loans on more favorable terms or in a more efficient manner. We
charge our clients an introduction fee which is calculated at a percentage (typically ranging from 1% to 3%) of the loa
n
amount when our clients successfully receive the facilities from the banks.
Technical
service
We,
through Anytrust, our wholly-owned subsidiary, provide data infrastructure design, big data access and analytics, and document
automation for enterprises and government agencies with customers including Tianhong Asset Management, Yinhua Fund Management
and BAIC Motor, etc. In 2018, we generated approximately $546,303 from the provision of technical services, which are essentially
financial data services provided to financial institutions by Anytrust. To reduce operating losses, we disposed Anytrust on December
30, 2018. As a result, we no longer provide technical services.
Supply
Chain Financing Services, or Factoring Services
On
October 25, 2017 we expanded our service offerings with the launch of our factoring services, provided by FuhuiSZ. These services
provide owners of SMEs with holistic supply chain financing solutions and value-added services in order to reduce financing costs
and improve efficiency during a business transaction. FuhuiSZ’s business was initially focused on the medical supplies and
medical equipment, airline catering and bulk commodity supply chains. On May 25, 2018, we incorporated FuhuiXM to further grow
our supply chain financing services.
As
of December 31, 2018, FuhuiSZ and FuhuiXM has generated a revenue of $0.5 million.
We
charge our clients a service fee which is calculated at a percentage (typically ranging from 5% to 15%) of the amount we factor.
We also collect a management fee of 0 to 3.5% of the amount we factored. As our factoring services are still in the initial
stages, our service fee rate and management fee rate are still subject to review and adjustment.
A
typical transaction involves the following steps:
|
●
|
We
first communicate with our clients regarding their needs and then we collect and review the clients’ general information,
contracts and invoices that will allow us to evaluate and determine the clients’ credit worth, authenticity of their
business contracts and the collectability of receivables;
|
|
●
|
Upon
their acceptance, we enter into a factoring service contract with our clients specifying the subject amount, our service fees
and scope of our services;
|
|
●
|
Next
we will wire the factored amount to the client’s designated party and will collect our service fee along with such wire;
|
|
●
|
At
the end of each month we record the factoring service revenue based on the service fee ratio and the amount we factored.
|
Other
Income Sources
Entrusted
loans/
direct loans
In
2018, we made three direct loans amounting to $12 million with terms of from 6 and 12 months. We charged interest at from
5
% to
15% per annum, and as a result, earned $1,133,407 in interest from these
loans, Management assessed the collectability of loans to third parties and determined that a loan provision of $1,000,000
was made as of December 31, 2018.
Despite
such lucrative returns, we are making a conscious effort to avoid making direct loans with our funds. Going forward, we plan to
lend funds to our clients in the form of entrusted loans instead. Entrusted loans are commonly found in China, which restricts
direct borrowing and lending between commercial enterprises. The loans offer companies with idle funds the chance to earn interest
by allowing an agent bank to loan the funds out, while still letting the companies choose whom the agent bank lends the funds
to. The People’s Bank of China, China’s central bank, has allowed entrusted loans since 2001. However, as revenue
from these (entrusted) loans is limited and infrequent, we do not regard such loan activities as a separate line of business.
In
2018, we made a total of $34,969,111 in entrusted loans to four clients at an interest rate of 16% per annum. The term of these
loans was for 12 months and we earned $5,109,237 in interest for making these loans in 2018.
According
to a report by the Wall Street Journal, entrusted loans increased by a net RMB 2.55 trillion (approximately$407.38 billion) from
2013 to 2014, equivalent to 29% of all new RMB bank loans issued during the year compared to only 16% of bank loans the year before
(Source: http://blogs.wsj.com/chinarealtime/2014/05/02/a-partial-primer-to-chinas-biggest-shadow-entrusted-loans/).
We
plan to continue to entrust our excess funds to commercial banks to be loaned in the form of short-term loans to select clients
of ours upon repayment of these currently outstanding direct loans. We anticipate to receive interest income at an annual interest
rate generally ranging from 15% to 20%, as exemplified by our rate of return in 2018. We do not expect the balance of such loans
to increase significantly in the future and the interest income from such loans would not become a significant portion of our
net income, we may gradually cease the conduct of this form of investment when there are better investment options of our cash.
The
process with regard to how entrusted loan applications will be reviewed, processed and approved is described below:
Before
granting loans
:
|
●
|
Client
managers conduct initial assessment of clients’ credit status, review of application materials (including, but not limited
to, corporate information, licenses and permits held for their operations, capital verification reports, credit reports, audited
financial statements for the recent three years, identification of management and shareholders, list of fixed assets, list
of receivables and payables, land use certificate, lease contract, list of intellectual properties, tax payment proofs, material
contracts and documents relating to any guarantees and pledges provided by such clients);
|
|
●
|
Client
managers then submit the application materials together with the initial review results and assessment for further review
by the client manager group leader to ensure completeness and compliance with internal policies;
|
|
●
|
Loan
applications are then submitted to our risk management personnel for review from a risk control perspective. Special attention
is paid to whether the mortgages, guarantees provided and accounts receivables pledged are sufficient to fully secure the
loans;
|
|
●
|
Our
product and service advisors assist in conducting thorough due diligence regarding clients’ and guarantor’s credit
status, repayment capacity, production and operation conditions;
|
|
●
|
Product
and service advisors then complete a client and family information form and credit assessment form based on their due diligence
results, including their own opinion as to whether such client satisfies our internal requirements. This information is uploaded
onto our credit management system;
|
|
●
|
The
person in charge of our entrusted loan activities, our deputy general manager, conducts a final review of the application,
and if he approves, he sends the application to designated personnel of commercial banks for review and processing.
|
Granting
of loans:
|
●
|
Our
product and service advisors track the bank’s due diligence and review processes and notify our clients and their
guarantors (if applicable) to come to the bank to sign the entrusted loan contracts and complete required procedures when
the bank has completed its review process and approves the loan;
|
|
●
|
Product
and service advisors then work with the bank to grant the loan to our client. Funds for the loans granted to our client will
be transferred from us to the participating bank, and then transferred from such bank to the client’s account.
|
After
granting loans
:
|
●
|
Our
product and service advisors conduct on-going monitoring and inspections (including initial inspection after granting loans,
regular inspections and special inspections after granting the loans) of our clients’ credit status and operations status;
|
|
●
|
Our
product and service advisors report any potential risks or red flags uncovered through such monitoring and inspections to
the person in charge of entrusted loan activities or our key management in a timely manner, and propose measures to address
any of such risks or red flags;
|
|
●
|
We
send repayment alerts to clients through SMS messages and telephone calls when the loans are due;
|
|
●
|
If
our clients do not repay the loans when they become due, we, together with the commercial bank, on the day following the due
date, contact them to inquire about the reasons repayment has not been made, and take appropriate measures, including working
with guarantors to ensure prompt repayment;
|
|
●
|
If
our client is still unable to repay a loan within ten days of the due date, our general policy is to, together with the bank,
visit the errant client and formulate a collection and repayment plan;
|
|
●
|
After
30 days of non-payment, our general policy is to exercise our rights over the collateral or submit such disputes to the People’s
Court for adjudication and enforcement.
|
From
the inception of the Company to the end of its fiscal year of 2018, we made a total of $45,514,815
,
equivalent to the figure at the end of fiscal year 2017 since all loans made in 2018 were entrusted bank loans and US$ direct
loans which are not subject to this PBOC restriction, in direct loans to 6 clients with interest rates from 8% to 16%. The terms
of these loans were generally for six to twelve months. We earned $6,182,343 in interest for making these loans.
As
advised by our PRC legal counsel, Sino-Integrity Law Firm, such direct lending activities with corporate clients are not in compliance
with certain provisions of the Lending General Provisions, under which, the PBOC could impose fines on us and the amount of the
potential fine would be no less than one time but no more than five times the gains that we obtained from such direct lending
activities. The gains from said lending activities that were subject to PBOC’S regulation were approximately $6.1 million
and accordingly, the potential fine would be no less than $6.1 million and no more than $30.5 million However, pursuant
to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private
Lending Cases, private lending contracts relating to direct private lending activities between companies (such as ours) are effective
if such lending activities are not part of the ordinary business of the lender. Therefore, according to our PRC legal advisors
and based on past practices and recent interpretation of the Supreme People’s Court, it is unlikely PBOC will impose any
fines or penalties on us. However, we cannot assure that no such fines or other punitive actions will be taken against us.
We
do not foresee interest income from entrusted loans being a major source of revenue for us. As revenue from these (entrusted)
loans is historically limited and infrequent, we do not regard such loan activities as a separate line of business. We record
the revenue from these loans under “Other Income” in our financial statements.
Our
Clients
Our
clients are mainly SMEs that need financing to either support or expand their businesses or those of their affiliates overseas.
We plan to further expand our client base to large state-owned enterprises. Additionally, we plan to further expand our service
portfolio by merging with or acquiring entities already holding other such financial service licenses, such as factoring, microcredit,
financial leasing, pawn mortgage and rural banking licenses so that we may expand into providing such services.
During
the fiscal year of 2018, less than half of our revenue was originated from clients located in Fujian province because of the relationships
our key management has with these clients . Since then, our client base has diversified and presently, less than half our
clients are from the Fujian province.
There
were no customers contributing more than 10% to the total revenue of the Company for the year ended December 31, 2018. Three
customers have outstanding accounts receivable balances that accounts for 20.88%, 19.34% and 11.63% of the total accounts receivable
balance as of December 31, 2018, respectively.
Our
Relationships with Partner Banks
By
facilitating financial transactions, we help banks and their personnel to their business goals (such as monthly deposit, loan
and wealth management products sales targets). We believe this incentivizes banks and their employees to continue their relationship
with us and even offer preferential terms to the clients we bring them. Key members of our management have therefore been able
to forge and maintain strong relationships with some domestic and overseas banks, including large PRC national banks.
Seasonality
Although
we have been in business for only four calendar years since October 2014 and it is difficult to determine the cyclical nature
of our business with any certainty, the financial advisory services sector typically slows down towards the end of the calendar
year through Chinese New Year where banks and lending institutions typically wind down their lending activities. The financial
advisory services business is fairly constant the rest of the year.
IT
Infrastructure
We
received an ICP license for value-added Internet information services on December 18, 2015. We plan to develop an electronic online
platform in stages to initially allow our clients to access to information regarding available financial products, then to track
the status of their applications online. Please refer to “Our Strategies” for further information.
We
are in the process of establishing an integrated online electronic platform to efficiently match our clients with financing needs
with financing products offered by various financial sources online. We started to build this internet platform in December 2014
and we are still in the process of building it.
Marketing
When
the Company first started, approximately 40% of our then existing clients were clients that had previously accepted financial
advisory services from Mr. Jianxin Lin and Mr. Jinchi Xu or who had been referred to us directly by such clients. As the Company’s
business grows, we are now also relying on our marketing staff to bring in new clients. We believe we are able to obtain new clients
through referrals from our existing clients and banks with which we have an ongoing relationship. We intend to continue to focus
on referrals as the primary method of new client development. We also intend to enhance our brand recognition and attract potential
clients through a variety of marketing methods, including online publicity activities, such as posting information regarding our
services and available financial products and services provided by banks on our website, and onsite promotion activities in branches
of the banks with whom we work, such as placing promotional pamphlets about our services.
Competition
We
operate in an increasingly competitive environment and compete for clients on the basis of service offerings and client services.
According to Beijing Han Ding Century Consulting Co., Ltd, a third-party market research firm we commissioned to prepare a report
about the financial advisory services in China and our market position therein. It is difficult to locate companies that are providing
exactly the same services as we do. However, as a supplement to their primary businesses, many companies, including asset management
companies, investment consulting services providers, commercial banks and international factoring companies also provide services
similar some of our service segments.
Based
on the report by Beijing Heading Century Consulting Co., Ltd, we believe the following companies are our competitors in the various
service lines set forth below:
Generally
SanMei
Financial Services Ltd (“SanMei”) –SanMei is a financial service platform that provides financial services such
as financial product consulting, customer financial advisory, management consulting, financial information consulting and human
resources services. Currently, its business model includes three main modules, namely agency service, financial institutions outsourcing
and consulting services. The company mainly provides financial intermediation services to SMEs in Nanan City and small and medium
banks in Quanzhou.
Guanqun
Chi Cheng Investment Management (Beijing) Co., Ltd (“GCC”) – GCC operates a nationwide platform that provides
internet financing, mergers and acquisitions and angel investments to SMEs. Because SMEs usually have limited resources and sales
channels, GCC use a method called “combined debt and equity”, which is a combination of financing, equity investment
and securitization.
Commercial
Payment Advisory Service
Shanghai
Lujiazui International Financial Assets Trading Market Inc. (“Lujin”) - Lujin is the only financial assets trading
information service platform that runs its practice through the trading platform of the State Counsel of China. It provides investment
and financing service to SMEs and individuals. As of January 2014, it had more than 5.7 million registered users. Lujin offers
financial instruments beneficial rights transfer information services to financial and non-financial companies. Financial instruments
beneficial rights transfer is a process in which the borrowers (usually companies) pledge their bank acceptance bills, and then
transfer the beneficial interests to investors. Lujin’s role is an informational intermediary between the holders of bank
acceptance bills and the investors.
Shanghai
Pulan Financial Service Ltd (“Pulan”) - Pulan is the pilot entity of “financial instrument broker” appointed
by the Pudong New Area government. It mainly provides financial instrument brokerage services to SMEs. It provides its clients
with discount rates based on regions and banks.
Bida
Holdings Group (“Bida”)–Bida invests in various areas, including money brokerage, investment banking, inter-bank
bonds, factoring, and pawn shops. Bida aims to build the most efficient capital chain service to connect companies directly with
the capital market. Bida has developed many online and offline financial instruments.
International
Corporate Financing Advisory Services
China
Export & Credit Insurance Corporation (“SinoSure”) - SinoSure is the only contract policy credit insurance business
financial institution. SinoRating is SinoSure’s professional consulting entity that provides domestic and overseas clients
with financial products and services. Since its establishment in 2002, SinoRating has provided its clients with various high-quality
professional credit investigation reports, industry analysis reports, credit rating and risk management consulting services, and
overseas investment advisory services. SinoRating uses “Stepping Out” as its service motto to launch its international
investment advisory services. Its services include providing information about potential overseas projects, advising on “Stepping
Out” policy, estimating risks of overseas projects, providing financing consulting services regarding overseas projects
and training services for its “Stepping Out” strategy.
JRF
International Factoring Ltd (“JRF”) - JRF focuses its practice on providing services such as account receivable acquisitions,
trade finance, receivables collection and management, buyer credit guarantees and other comprehensive international factoring
services. JRF joined the International Factors Group in 2009, and in the same year, it became a member of Commercial Finance Associate.
In 2012, JRF joined Factors Chain International (FCI), becoming one of the FCI members with other 22 Chinese banks and the first
Chinese commercial factoring company that is a member of FCI.
Xinyin
International Commercial Factoring Company (“Xinyin”) - Xinyin mainly provides factoring services that combines trade
financing, sales ledger management, accounts receivable management and collection, customer credit investigation and assessment,
and credit risk guarantees.
CubeTech
Global Asset Information Technology Ltd (“CubeTech”) – CubeTech’s core practice is to provide Chinese
institutional investors with a one-stop solution in cross-border investments. The company now has offices in Beijing, Shanghai,
New York and London. CubeTech applies mature asset management information technology to cross-border investment management by
using the big data method.
Intermediary
loan advisory services
The
major competitors in this industry include asset management companies and investment guarantees enterprises:
Beijing
Liuxing Juntong Information Technology Co., Ltd (Juntong) - Juntong focuses its practice on asset management, investment management
and investment consulting services. Juntong first created the real domestic “financial supermarket” model, relying
on online loans, financing, investment and financing, insurance, internet banking, as well as offline stores, franchisees, direct
sales team and other systems, creating a complete integration of online and offline O2O business model.
Beijing
Jiaoguang Yidai Investment Management Ltd (Yidai) -Yidai is a professional investment guarantee company that provides its clients
with services such as enterprise operating fund loan, credit loan, consumption loan secured by real properties and second-hand
house loan etc.
Lianrong
Weiye Investment Guarantee (Beijing) Ltd (Lianrong)-Lianrong specializing in economic contract loan (not including financing loan),
investment consulting and investment management services.
Entrusted
Loans
We
have no data on entrusted loans and who our competitors are as these are largely private loans between commercial entities through
banks. These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China’s shadow-banking
system, which provides credit outside of formal banking channels. Banks make money by charging fees to both the lending company
and the borrower, and they do not record the loans on their balance sheets. (Source:
http://www.wsj.com/articles/SB10001424052702304163604579531383712290244
)
Factoring
Services
We
are facing strong competition in the China factoring industry. According to the 2017 Development Report of the Commercial Factoring
Industry in China, as of December 31, 2017, there were 8,261 registered factoring companies in China. We expect that the factoring
business will continue developing fast in China in the future.
Risk
Control
We
place great emphasis on risk management and are committed to enhancing our risk management capabilities.
Risk
Management Procedures for Commercial Payment Advisory Services, International Corporate Financing Advisory Services and Intermediary
Bank Loan Advisory Services
Although
we do not bear any economic risk or credit risk for the loans and/or acceptance bills issued by the bank to our clients, we may
be exposed to reputation risk if the borrowers default. The domestic and international banks implement their own risk management
procedures in the underwriting of the loans and acceptance bill to the borrowers. The following diagram sets forth our risk management
policies and procedures relating to various stages of our commercial payment advisory services, international corporate financing
advisory services, and intermediary bank loan advisory services:
Our
risk management procedures primarily include the following steps:
|
●
|
Examination
of preliminary applications by a client manager
: A client manager is appointed to collect client materials to verify whether
a potential client is in good standing and further understand its credit and asset status. The manager will determine whether
such client could meet the bank’s requirements for the financing products the potential client requires. Such materials
include, but are not limited to business licenses, organization code certificates, tax registration certificates, bank account
opening permits, articles of association, capital verification reports, financial reports and credit report on SAIC’s
system;
|
|
●
|
Review
by review committee
: Our review committee, led by Mr. Jianxin Lin, further reviews the materials collected by the client
manager to assess the client’s repayment capability and determines whether to accept the client’s application.
|
Review
and execution of service contract:
The
client manager prepares our service contract and sends it to our risk management personnel for review from a legal compliance
and risk management perspective. Special attention to made to certain provisions such as payment schedule and dispute resolution.
The client manager, together with our finance department sign our service contract with the client upon approval by our deputy
general manager in charge and general manager. The approval from our deputy general manager and general manager may be dispensed
with if the review committee does not report any client deficiencies after two days.
Review
of application materials to be submitted to banks to ensure completeness
:
In
order to facilitate banks’ review and approval process, a product and service advisor is appointed to assist our client
in preparing and submitting application materials or any supplementary documents required by banks. The product and service advisor
carefully reviews and checks such documents based on the bank’s requirements to ensure the completeness; and
Payment
notification and resolution of any overdue payment
:
The
client manager tracks the repayment schedule, and sends repayment notices to the client before the due date. In case of any overdue
payment, the client manager would contact the client to enquire about the reasons for overdue repayment, and will discuss with
clients regarding possible solutions. If the client is still unable to pay our service fees and/or the principal as further agreed,
we will, together with the bank, take action, including exercising our rights over collaterals or submitting the dispute to the
relevant court for enforcement.
Risk
Management Procedures for Loan Activities
We
have adopted a set of more stringent risk management procedures for our entrusted loan activities. In addition to the procedures
described above which are also applicable to our entrusted loan activities, the risk management procedures for entrusted loan
activities also includes:
Registration
of collateral
: To ensure we are able to exercise our rights over the collateral when a client defaults on repayment of loans,
our risk management personnel prepares registers the collateral with the relevant authorities;
Compulsory
enforcement notarization
: We also arrange to have our entrusted loan agreement notarized so that we are entitled to immediate
compulsory enforcement when client is unable to repay our loans;
On-going
monitoring and inspections of client’s credit status
: A client manager is appointed to conduct on-going monitoring and
inspection of our client’s credit status and use of loan proceeds to ensure timely discovery of any potential credit risks;
and
Risk
early-warning
: The client manager will sends risk alerts to our management when a client’s credit status deteriorates,
or if loan proceeds are not used in the way that has been agreed in the contract or a client fails to collect any large amount
of receivables.
To
control our credit risk and have a better understanding of our client’s credit and operation status, we typically ask a
client applying for entrusted loans to provide more supporting documentations to be examined and reviewed by our client manager
and review committee. Please see “Item 4. Information on the Company – B. Business overview – Other Income Sources”
for further information.
Intellectual
Property
Trademark
Our
brand, trade names, trademarks, trade secrets, proprietary database and other intellectual property rights distinguish our products
and services from those of our competitors and contribute to our competitive advantage in the financial advisory services industry.
We rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our key employees.
We are in the process of applying for three trademarks in China.
Set
forth below is a detailed description of our trademarks as of the date of this annual report.
Country
|
|
Trademark
|
|
Application
Number
|
|
Classes
**
|
|
Status
|
Mainland
China
|
|
|
|
23258881
|
|
35
|
|
In
process
|
Mainland
China
|
|
|
|
20358381
|
|
35
|
|
Approved
|
Mainland
China
|
|
|
|
16899757
|
|
36
|
|
Approved
|
Mainland
China
|
|
|
|
16899762
|
|
36
|
|
Approved
|
Mainland
China
|
|
|
|
27400350,
27400349,
27400348,
27400387,
27400386,
27400385,
27400384,
27400383,
27400382,
27400381,
27400380,
27400379,
27400378,
27400377,
27400376,
27400375,
27400374,
27400373,
27400372,
27400371,
27400370,
27400369,
27400368,
27400367,
27400366,
27400365,
27400364,
27400363,
27400362,
27400361,
27400360,
27400359,
27400358,
27400357,
27400356,
27400355,
27400354,
27400353,
27400352,
27400351,
27421113,
27403009,
27407443,
27414112,
27415183.
|
|
1,
2,
3,
4,
5,
6,
7,
8,
9,
10,
11,
12,
13,
14,
15,
16,
17,
18,
19,
20,
21,
22,
23,
24,
25,
26,
27,
28,
29,
30,
31,
32,
33,
34,
35,
36,
37,
38,
39,
40,
41,
42,
43,
44,
45.
|
|
In
process
|
Mainland
China
|
|
|
|
21639200
|
|
35
|
|
In
process
|
Mainland
China
|
|
|
|
20358382
|
|
35
|
|
In
process
|
Mainland
China
|
|
|
|
29381503
|
|
35
|
|
In
process
|
Mainland
China
|
|
|
|
29392250
|
|
35
|
|
In
process
|
Mainland
China
|
|
|
|
29772050,
29772049
|
|
9,
36
|
|
In
process
|
Mainland
China
|
|
|
|
17728734
|
|
42
|
|
Approved
|
**
Class
1:
|
Chemical
Products: Chemicals used in industry, science and photography; unprocessed artificial resins; fire extinguishing compositions,
etc.
|
|
|
Class
2:
|
Paint:
paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants, etc.
|
|
|
Class
3:
|
Cosmetics
and Cleaning Preparations: bleaching preparations and other substances for laundry use, etc.
|
|
|
Class4:
|
Lubricants
and Fuels: industrial oils and greases; lubricants; dust absorbing, wetting and binding compositions, etc.
|
|
|
Class
5:
|
Pharmaceuticals:
pharmaceutical and veterinary preparations; sanitary preparations for medical purposes; dietetic substances adapted for medical
use, food for babies, etc.
|
|
|
Class
6:
|
Metal
Goods: common metals and their alloys; metal building materials; transportable buildings of metal; materials of metal for
railway tracks, etc.
|
|
|
Class
7:
|
Machinery:
Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except
for land vehicles); agricultural implements other than hand-operated; incubators for eggs.
|
|
|
Class
8:
|
Hand
Tools: hand tools and implements (hand-operated); cutlery; side arms; razors.
|
|
|
Class
9:
|
Electrical
and Scientific Apparatus: scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signaling,
checking (supervision), life-saving and teaching apparatus and instruments, etc.
|
|
|
Class
10:
|
Medical
Apparatus: surgical, medical, dental and veterinary apparatus and instruments, artificial limbs, eyes and teeth; orthopedic
articles; suture materials.
|
|
|
Class
11:
|
Environmental
Control Apparatus: apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply
and sanitary purposes.
|
|
|
Class
12:
|
Vehicles:
vehicles; apparatus for locomotion by land, air or water.
|
|
|
Class
13:
|
Firearms:
firearms; ammunition and projectiles; explosives; fireworks.
|
|
|
Class
14:
|
Jewelry:
precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry,
precious stones; horological and chronometric instruments.
|
Class
15:
|
Musical
Instruments: musical instruments.
|
|
|
Class
16:
|
Paper
Goods and Printed Matter: Paper, cardboard and goods made from these materials, not included in other classes; printed matter,
etc.
|
|
|
Class
17:
|
Rubber
Goods: Rubber, gutta-percha, gum, asbestos, mica and goods made from these materials and not included in other classes; plastics
in extruded form for use in manufacture; packing, stopping and insulating materials; flexible pipes, not of metal.
|
|
|
Class
18:
|
Leather
and imitations of leather, and goods made of these materials and not included in other classes; animal skins, hides; trunks
and travelling bags; umbrellas, parasols and walking sticks; whips, harness and saddlery.
|
|
|
Class
19
:
|
Nonmetallic
Building Materials: building materials (non-metallic); non-metallic rigid pipes for building; asphalt, pitch and bitumen;
non-metallic transportable buildings; monuments, not of metal.
|
|
|
Class
20:
|
Furniture
and Articles not Otherwise Classified: Furniture, mirrors, picture frames; goods (not included in other classes) of wood,
cork, reed, cane, wicker, horn, bone, ivory, whalebone, etc.
|
|
|
Class
21:
|
Housewares
and Glass: Household or kitchen utensils and containers; combs and sponges; brushes (except paint brushes); brush-making materials;
articles for cleaning purposes; steel wool, etc.
|
|
|
Class
22:
|
Cordage
and Fibers: Ropes, string, nets, tents, awnings, tarpaulins, sails, sacks and bags (not included in other classes); padding
and stuffing materials (except of rubber or plastics); raw fibrous textile materials.
|
|
|
Class
23:
|
Yarns
and Threads: Yarns and threads, for textile use.
|
|
|
Class
24:
|
Fabrics:
Textiles and textile goods, not included in other classes; bed and table covers.
|
|
|
Class
25:
|
Clothing:
clothing, footwear, headgear.
|
|
|
Class
26:
|
Fancy
Goods: Lace and embroidery, ribbons and braid; buttons, hooks and eyes, pins and needles; artificial flowers.
|
|
|
Class
27:
|
Floor
Coverings: Carpets, rugs, mats and matting, linoleum and other materials for covering existing floors; wall hangings (non-textile).
|
|
|
Class
28:
|
Toys
and Sporting Goods: Games and playthings; gymnastic and sporting articles not included in other classes; decorations for Christmas
trees.
|
|
|
Class
29:
|
Meats
and Processed Foods: Meat, fish, poultry and game; meat extracts; preserved, frozen, dried and cooked fruits and vegetables;
jellies, jams, compotes; eggs, milk and milk products; edible oils and fats.
|
|
|
Class
30:
|
Staple
Foods: Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread,
pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices;
ice.
|
|
|
Class
31:
|
Natural
Agricultural Products: Agricultural, horticultural and forestry products and grains not included in other classes; live animals;
fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals, malt.
|
|
|
Class
32:
|
Light
Beverages: Beers; mineral and aerated waters and other non-alcoholic drinks; fruit drinks and fruit juices; syrups and other
preparations for making beverages.
|
|
|
Class
33:
|
Wine
and Spirits: Alcoholic beverages (except beers).
|
Class
34:
|
Smokers’
Articles: Tobacco; smokers’ articles; matches.
|
|
|
Class
35:
|
Advertising;
business management; business administration; office functions.
|
|
|
Class
36:
|
Insurance
and Financial: Insurance; financial affairs; monetary affairs; real estate affairs.
|
|
|
Class
37:
|
Building
Construction and Repair: Building construction; repair; installation services.
|
|
|
Class
38:
|
Telecommunications:
telecommunications.
|
|
|
Class
39:
|
Transportation
and Storage: Transport; packaging and storage of goods; travel arrangement.
|
|
|
Class
40:
|
Treatment
of Materials: Treatment of materials.
|
|
|
Class
41:
|
Education
and Entertainment: Education; providing of training; entertainment; sporting and cultural activities.
|
|
|
Class
42:
|
Computer
and Scientific: Scientific and technological services and research and design relating thereto; industrial analysis and research
services; design and development of computer hardware and software.
|
|
|
Class
43:
|
Hotels
and Restaurants: Services for providing food and drink; temporary accommodation.
|
|
|
Class
44:
|
Medical,
Beauty & Agricultural: Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture,
horticulture and forestry services.
|
|
|
Class
45:
|
Personal:
Legal services; security services for the protection of property and individuals; personal and social services rendered by
others to meet the needs of individuals.
|
Copyrights
We
have registered our copyrights with the National Copyright Administration of the People’s Republic of China. Set forth below
is a detailed description of our copyrights as of the date of this annual report.
Country
|
|
Copyrights
|
|
Registration
Number
|
|
Status
|
Mainland
China
|
|
Quantum
Compass Supply Chain Financial Credit Audit System V2.0
|
|
2018SR403735
|
|
Approved
|
|
|
|
|
|
|
|
Mainland
China
|
|
Quantum
Compass Supply Chain Financial Business Support System V2.0
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2018SR40479
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Approved
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|
|
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|
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Mainland
China
|
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Quantum
Compass Medical Enterprise Invoicing Management System V1.0
|
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2018SR405088
|
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Approved
|
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|
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Mainland
China
|
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Fuhui
Factoring Online Supply Chain Finance Investment and Financing Platform Computer Software
V2.0
|
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2018SR405073
|
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Approved
|
|
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|
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Mainland
China
|
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Fuhui
Factoring Online Supply Chain Finance Investment and Finance IOS Platform System V1.0.4
|
|
2018SR403752
|
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Approved
|
|
|
|
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Mainland
China
|
|
Fuhui
Factoring Online Supply Chain Finance Investment and Financing Android Platform System
V1.0.4
|
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2018SR403741
|
|
Approved
|
|
|
|
|
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Mainland
China
|
|
Sheng
Yin Enterprises Public Financing Transactions Consulting Platform V1.0
|
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2018SR480963
|
|
Approved
|
|
|
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Mainland
China
|
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Fei
Hai Big Data Assets Integration Commercial Platform (Fei Hai) V2.0
|
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2018SR480280
|
|
Approved
|
|
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Mainland
China
|
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Ying
Xin STEAM Education Social Advertising Platform V2.0
|
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2018SR480274
|
|
Approved
|
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|
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Mainland
China
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Ying
Xin Content Publication Management Platform (Ying Xin Publication Platform) V2.0
|
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2018SR478786
|
|
Approved
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Domain
Name
We
have one registered domain name,
www.cifsp.com
. We have registered our website with Beijing City Communications Control
Bureau and received an ICP license (ICP Number: 151135). In addition, FuhuiSZ maintains a website at http://www.fhfactoring.cn/.
Insurance
We
participate in government sponsored social security programs including pension, unemployment insurance, childbirth insurance,
work-related injury insurance, medical insurance and housing insurance. We do not maintain business interruption insurance, casualty
insurance on our assets or key-man life insurance. We consider our insurance coverage to be in line with that of other financial
advisory service companies of similar size in China.
REGULATION
We
operate in an increasingly complex legal and regulatory environment. We are subject to a variety of PRC and foreign laws, rules
and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations
relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include
data protection and privacy, consumer protection, content regulation, intellectual property, competition, taxation, anti-money
laundering and anti-corruption. See “Risk Factors — Risks Related to Our Business and Industry — the laws and
regulations governing the financial advisory service industry in China are developing and evolving and subject to changes. If
our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would
be materially and adversely affected.”
Our
online commerce business is classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules
and regulations restrict foreign ownership in value-added telecommunication services. As a result, we operate our online commerce
business and other business in which foreign investment is restricted or prohibited through our variable interest entity, Sheng
Ying Xin (Beijing) Management Consulting Co., Ltd, which is owned by PRC citizens and holds all licenses associated with these
businesses.
The
applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be
required to obtain additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from
time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws,
rules and regulations. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China
— There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”
Regulation
on Wholly Foreign Owned Enterprises and Foreign Investment Restrictions
The
Wholly Foreign owned Enterprise Law of the PRC promulgated by the Standing Committee of the Nation People’s Congress (“SCNPC”),
effective in 1986 and as amended in 2000 and 2016, and the Implementation Rules of the Wholly Foreign Owned Enterprise Law of
the PRC promulgated by the State Council, effective in 1990 and as amended in 2001 and 2014, regulate the establishment, approval,
registered capital and day-to-day operational matters of wholly foreign owned enterprises, such as our PRC subsidiary, WFOE.
On
September 3, 2016, SCNPC promulgated the Decision on Revising the Law of the PRC on Foreign-invested Enterprises and Other Three
Laws, effective on October 1, 2016. Accordingly, on October 8, 2016, the MOFCOM promulgated the Interim Measures for Record-filing
Administration of the Establishment and Change of Foreign-invested Enterprises. Pursuant to above decision and the interim measure,
for establishment and change of foreign-invested enterprises (including wholly foreign owned enterprises) not involving special
market entry management measures, the filing administration shall replace previous examination and approval administration.
The
Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which is promulgated by the Ministry of Commerce and
the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue
divides industries into three categories — “encouraged,” “restricted,” and “prohibited”
for foreign investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, “permitted.”
Our
financial advisory services fall under the permitted category. Our variable interest entity, Sheng Ying Xin (Beijing) Management
Consulting Co., Ltd holds all material approvals required for our financial advisory services operations.
However,
industries such as value-added telecommunication services, including internet information services, are restricted from foreign
investment. As such, our ICP license is held by our variable interest entity, Sheng Ying Xin (Beijing) Management Consulting Co.,
Ltd, which is owned by Mr. Jianxin Lin and Mr. Shaoyong Huang (collectively, the “SYX Shareholders”), both of whom
are PRC nationals.
The
Catalogue does not apply to our companies registered and domiciled in the British Virgin Islands and Hong Kong and operate outside
China.
On
December 23, 2018, the State Council submitted the draft version of the Foreign Investment Law to the Standing Committee of the
National People’s Congress, which was promulgated by the National People’s Congress on its official site on December
26, 2018 for public consultation until February 24, 2019. On March 15, 2019, the National People’s Congress approved the
Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign
investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.
The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in
line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and
implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities
directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly
classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual
arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In
addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated
in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for
future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements
as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed
to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if
future laws, administrative regulations or provisions prescribed by the State Council 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, corporate governance and business
operations
Regulation
of Telecommunications and Internet Information Services
Regulation
of Telecommunications Services
Under
the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the
State Council of the PRC, a telecommunication services provider in China must obtain an operating license from the Ministry of
Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize
all telecommunication services in China as either basic telecommunications services or value-added telecommunications services.
Our online electronic platform commerce business is classified as value-added telecommunications services.
Foreign
investment in telecommunications businesses is governed by the State Council’s Administrative Rules for Foreign Investments
in Telecommunications Enterprises, issued by the State Council on December 11, 2001 and amended on September 10, 2008, under which
a foreign investor’s beneficial equity ownership in an entity providing value-added telecommunications services in China
is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added
telecommunications services in China, it must demonstrate a positive track record and experience in providing such services. The
MIIT’s Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses,
or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling
their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such
businesses in China.
In
addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable
to holders of value-added telecommunications services licenses, including that license holders or their shareholders must directly
own the domain names and trademarks used in their daily operations and each license holder must possess the necessary facilities
for its approved business operations and maintain such facilities in the regions covered by its license, including maintaining
its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial counterpart
has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license
holders fail to take such steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications
services licenses.
Regulation
of Internet Information Services
As
a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on
Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January
8, 2011. “Internet information services” are defined as services that provide information to online users through
the internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial
services are required to obtain an operating license from the MIIT or its provincial counterpart.
To
the extent the internet information services provided relate to certain matters, including news, publication, education or medical
and health care (including pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry
regulators in accordance with the laws, rules and regulations governing those industries.
Regulation
of Internet Content
The
PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT,
the News Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition
to various approval and license requirements, these measures specifically prohibit internet activities that result in the dissemination
of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality
or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted
on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report
to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business
operation licenses.
Regulation
of Internet Security
The
Decision in Relation to Protection of the Internet Security enacted by the SCNPC on December 28, 2000 provides that the following
activities conducted through the Internet are subject to criminal punishment:
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gaining
improper entry into a computer or system of strategic importance;
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disseminating
politically disruptive information or obscenities;
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leaking
State secrets;
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spreading
false commercial information; or
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infringing
intellectual property rights.
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The
Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the
Ministry of Public Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner
that would result in the leakage of State secrets or the spread of socially destabilizing content. If a value-added telecommunications
services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its
operating license and shut down its websites.
Regulation
Relating to Privacy Protection
Under
the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory
to others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may
face criminal charges or sanctions by PRC security authorities for such acts, and may be ordered to suspend temporarily their
services or have their licenses revoked.
Under
the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011,
ICPs are also prohibited from collecting any user personal information or providing any such information to third parties without
the consent of a user. ICPs must expressly inform the users of the method, content and purpose of the collection and processing
of such user personal information and may only collect such information necessary for its services. ICPs are also required to
properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, ICPs
must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In
addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People’s
Congress on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information
and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal
electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage
or loss. Furthermore, MIIT’s Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated
on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures
to be taken by ICPs.
The
PRC government retains the power and authority to order ICPs to provide an Internet user’s personal information if such
user posts any prohibited content or engages in any illegal activities through the Internet.
Regulations
Relating to Intellectual Property Rights
Patent.
Patents in the PRC are principally protected under the Patent Law of the PRC. 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.
Copyright.
Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and
related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark.
Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are
registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to
another trademark which has already been registered or given preliminary examination and approval for use in the same or similar
category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations
are effective for a renewable ten-year period, unless otherwise revoked.
Domain
names.
Domain name registrations are handled through domain name service agencies established under the relevant regulations,
and applicants become domain name holders upon successful registration.
Anti-counterfeiting
Regulations
According
to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person’s registered trademark,
or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive
right to use a registered trademark. The infringing party may also be held liable for damages suffered by the owner of the intellectual
property rights, which will be equal to the gains obtained by the infringing party or the losses suffered by such owner as a result
of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
In
addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of a commercial
platform, we must adopt measures to ensure safe online transactions, protect consumers’ rights and prevent trademark infringement.
Regulations
on Tax
PRC
Enterprise Income Tax
The
PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation
rules, which became effective on January 1, 2008. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident
enterprises in China, including foreign-invested enterprises.
Uncertainties
exist with respect to how the EIT Law applies to our tax residence status and our offshore subsidiaries. Under the EIT Law, an
enterprise established outside of China with a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
Although the implementation rules of the EIT Law define “de facto management body” as a managing body that exercises
substantive and overall management and control over the production and business, personnel, accounting books and assets of an
enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore
incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that
has a PRC enterprise or enterprise group as its primary controlling shareholder.
According
to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having
a “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 criteria are met:
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the
primary location of the day-to-day operational management is in the PRC;
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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;
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the
enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes
are located or maintained in the PRC; and
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50%
or more of voting board members or senior executives habitually reside in the PRC.
|
We
believe that we meet the conditions outlined in the immediately preceding paragraph and should be treated as a “resident
enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in Circular 82
were deemed applicable to us. However, as the tax residency 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
applicable to our offshore entities, we will continue to monitor our tax status. See “Risk Factors — Risks Related
to Doing Business in the People’s Republic of China — We may be treated as a resident enterprise for PRC tax purposes
under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
In
the event that we or any of our offshore subsidiaries is considered to be a PRC resident enterprise: (1) we or our offshore subsidiaries,
as the case may be, may be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income; (2) dividend
income that we or our offshore subsidiaries, as the case may be, receive from our PRC subsidiaries may be exempt from the PRC
withholding tax; and (3) dividends paid to our overseas shareholders who are non-PRC resident enterprises as well as gains realized
by such shareholders from the transfer of our shares may be regarded as PRC-sourced income and as a result be subject to PRC withholding
tax at a rate of up to 10%, and similarly, dividends paid to our overseas shareholders who are non-PRC resident individuals, as
well as gains realized by such shareholders from the transfer of our shares, may be regarded as PRC-sourced income and as a result
be subject to PRC withholding tax at a rate of 20%, subject to the provision of any applicable agreement for the avoidance of
double taxation.
Under
SAT Circular 698 and Bulletin 7, if a non-resident enterprise transfers “PRC taxable assets” of a PRC resident enterprise
indirectly by disposition of the equity interests of an overseas non-public holding company without reasonable commercial purpose,
the parties involved in the indirect transfer of the PRC taxable assets and the PRC resident enterprise whose equity is transferred
indirectly, may report such equity transfer matter to the PRC competent tax authority of the PRC resident enterprise. 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 disposition may
be subject to a PRC withholding tax 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 which is not on an arm’s length basis
and results in reducing the taxable income, the relevant tax authority has the power to make a reasonable adjustment as to the
taxable income of the transaction. Circular 698 was retroactively effective on January 1, 2008. On February3, 2015, the State
Administration of Taxation released SAT Bulletin 7 to amend and clarify several issues related to Circular 698. According to SAT
Bulletin7, the term “PRC taxable assets” includes assets attributed to an establishment in China, immoveable properties
located in China, and equity investments in PRC resident enterprises; and when determining whether there is a “reasonable
commercial purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value
of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant
offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether
the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which
is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure;
the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer
and applicable tax treaties or similar arrangements. If Circular 698 and Bulletin 7 were determined by the tax authorities to
be applicable to us, our offshore subsidiaries and our non-resident enterprise investors, we, our offshore subsidiaries and our
non-resident enterprise investors might be required to expend valuable resources to comply with this circular, which may materially
and adversely affect us or our non-resident enterprise investors. See “Risk Factors — Risks Related to Doing Business
in the People’s Republic of China — We and our shareholders face uncertainties with respect to indirect transfers
of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other
assets attributable to a PRC establishment of a non-PRC company.”
Under
applicable PRC laws, payers of PRC-sourced income to non-PRC residents are generally obligated to withhold PRC income taxes from
the payment. In the event of a failure to withhold, the non-PRC residents are required to pay such taxes on their own. Failure
to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes
owed, fines and default interest on those taxes.
PRC
Value-added Tax
Pursuant
to the Pilot Measure for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Some of
the Modern Service Industries, promulgated by the Ministry of Finance and the State Administration of Taxation on November 16,
2011 (the “PilotMeasure”),any entity or individual conducting business in some modern service industry, such as the
service we are engaging in, is generally required to pay a value-added tax, or VAT, at the rate of 6% on the revenues generated
from providing such services. 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
March 30, 2016, the Ministry of Finance and the State Administration of Taxation promulgated the Notice of the Ministry of Finance
and the State Administration of Taxation on Overall Implementation of the Pilot Program of Replacing Business Tax with Value-added
Tax. Pursuant to this notice, from May 1, 2016, a value-added tax will generally be imposed to replace the business tax in the
construction industry, real estate industry, finance industry, consumer service industry and other industries on a nationwide
basis.
Regulations
Relating to Foreign Exchange and Dividend Distribution
Foreign
Exchange Regulation
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under
the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, 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 foreign currency-denominated
loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency
loans to our PRC subsidiaries.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange
capital accounts and guarantee 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, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible
previously. In addition, SAFE 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. The Circular on Further Simplifying and Improving the Administration of the Foreign Exchange
Concerning Direct Investment promulgated by SAFE on February 28, 2015, or SAFE Circular 13, further abolished SAFE’s administrative
examination and approval with respect to the verification and approval of foreign exchange registration under domestic direct
investment and overseas direct investment. Instead, banks shall directly examine and process the said foreign exchange registration
in accordance with relevant regulations issued by SAFE. Thereafter, SAFE and its branches shall indirectly administer the said
foreign exchange registration via banks.
On
March 30, 2015, SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Settlement of the Foreign
Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, regulating the conversion by a foreign-invested enterprise
of foreign currency-registered capital into RMB by restricting following purposes that the converted RMB may not be used:(i)the
converted RMB cannot be used for expenditure beyond business scope of the foreign-invested enterprise or expenditure prohibited
by PRC laws and regulations; (ii) the converted RMB cannot be used for investment in securities, unless otherwise prescribed by
PRC laws and regulations; (iii) the converted RMB cannot be used for disbursing RMB entrusted loans (unless permitted under its
business scope), repaying inter-corporate borrowings (including third-party advances) and repaying RMB bank loans that have been
sub-lent to third parties; or (iv) the converted RMB cannot be used for the expenses related to the purchase of real estate not
for self-use, unless the foreign-invested enterprise is a foreign-invested real estate enterprise.
We
typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will
apply to conduct the relevant procedure of SAFE and other PRC government authorities as necessary.
SAFE
Circular 37
SAFE
promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced
the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special
purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. 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 making profit distributions 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 subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
We
have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However,
we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control
over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular
37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner
pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the
registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and
legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to
our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of
our PRC subsidiaries, or we may be penalized by SAFE.
Share
Option Rules
Under
the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange
matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from
SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas
non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with
respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules,
issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock
exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC
agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary,
to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants,
and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale
of shares or interests and funds transfers. We will make efforts to comply with these requirements upon completion of our initial
public offering.
Regulation
of Dividend Distribution
The
principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company
Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign
Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises
may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and
regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves
at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital.
A PRC company is not permitted to 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.
M&A
Rules and Overseas Listings
The
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, issued by six PRC
governmental and regulatory agencies, including the MOFCOM and the CSRC, on August 8, 2006 and amended on June 22, 2009, require
that a SPV formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval
of the CSRC in the event that the SPV acquires equity interests in the PRC companies in exchange for the shares of offshore companies.
The
application of the M&A Rules remains unclear. Our PRC counsel, Sino-Integrity Law Firm, has advised us that, under current
PRC laws, rules and regulations and the M&A Rules, prior approval from the CSRC is not required under the M&A Rules for
our initial public offering because (i) WFOE was established by means of direct investment, rather than by merger or acquisition
of the equity interest or assets of any “Domestic Company” as defined under the M&A Rules, and (ii) no provision
in the M&A Rules classifies the contractual arrangements between WFOE and Sheng Ying Xin as a type of transaction which is
subject to the M&A Rules. However, as there has been no official interpretation or clarification of the M&A Rules, there
is uncertainty as to how these rules will be implemented in practice. See “Risk Factors — Risks Related to Doing Business
in the People’s Republic of China — Any requirement to obtain prior approval under the M&A Rules and/or any other
regulations promulgated by relevant PRC regulatory agencies in the future could delay this offering and failure to obtain any
such approvals, if required, could have a material adverse effect on our business, operating results and reputation as well as
the trading price of our ordinary shares, and could also create uncertainties for this offering.”
Labor
Laws and Social Insurance
Pursuant
to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees.
All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may
result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In
addition, according to the PRC Social Insurance Law, employers in China must provide employees with welfare schemes covering pension
insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
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C.
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Organization
structure
.
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The
following is a list of our principal subsidiaries and consolidated affiliated entities as of the date of this annual report on
Form 20-F:
Name
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Place
of Formation
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Relationship
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Hongkong
Internet Financial Services Limited
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|
Hong
Kong
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Wholly-owned
subsidiary
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Beijing
Yingxin Yijia Network Technology Co., Ltd
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People’s
Republic of China
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Wholly-owned
subsidiary
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Sheng
Ying Xin (Beijing) Management Consulting Co., Ltd
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People’s
Republic of China
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Consolidated
affiliated entity
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Kashgar
Sheng Yingxin Enterprise Consulting Co., Ltd
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People’s
Republic of China
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Consolidated
affiliated entity
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Fu
Hui (Shenzhen) Commercial Factoring Co., Ltd
|
|
People’s
Republic of China
|
|
Consolidated
affiliated entity
|
|
|
|
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Yingda
Xincheng (Beijing) Insurance Broker Co., Ltd
|
|
People’s
Republic of China
|
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Consolidated
affiliated entity
|
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CIFS
(Xiamen) Financial Leasing Co., Ltd.
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People’s
Republic of China
|
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Consolidated
affiliated entity
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Fuhui
(Xiamen) Commercial Factoring Co., Ltd.
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People’s
Republic of China
|
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Consolidated
affiliated entity
|
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Zhizhen
Investment & Research (Beijing) Information Consulting Co., Ltd.
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People’s
Republic of China
|
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Consolidated
affiliated entity
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Hangzhou
Yuchuang Investment Partnership
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People’s
Republic of China
|
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Consolidated
affiliated entity
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We
are a holding company incorporated under the laws of British Virgin Islands on September 28, 2015. On October 7, 2015, we incorporated
Hongkong Internet Financial Services Limited (“HKIFS) in Hong Kong SAR. HKIFS, in turn, incorporated Beijing Yingxin Yijia
Network Technology Co., Ltd (“WFOE”) in the People’s Republic of China with a registered capital of RMB1,000,000
(approximately $150,375.94) on December 31, 2015. WFOE has entered into a series of contractual agreements with Sheng Ying Xin
(Beijing) Management Consulting Co., Ltd (“Sheng Ying Xin” or “SYX”), a company incorporated in the People’s
Republic of China on September 16, 2014. Sheng Ying Xin was originally incorporated as Ding Zhi Tai Da Investment Management (Beijing)
Co. Ltd and later changed its name to Sheng Ying Xin (Beijing) Management Consulting Co., Ltd on February 17, 2016. Ding Zhi Tai
Da Investment Management (Beijing) Co. Ltd, as it was then known, was initially incorporated with a registered capital of RMB
45,000,000 (approximately $6,766,917.29). Its registered capital was later increased to RMB 150,000,000(approximately $22,556,390.98)
on June 30, 2015 but later reduced to RMB 50,000,000 (approximately $7,518,796.99) on April 25, 2016. On December 29, 2016, Sheng
Ying Xin incorporated Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”) in the People’s
Republic of China with a registered capital of RMB 5,000,000 (approximately, $ 726,665), which capital has to be contributed in
full by December 31, 2026. The legal representative of Kashgar SYX is Mr. Shaoyong Huang, who is also a 1% nominee equity shareholder
of Sheng Ying Xin on behalf of Mr. Jianxin Lin.
On
March 10, 2017, Sheng Ying Xin incorporated Fu Hui (Shenzhen) Commercial Factoring Co., Ltd. (“FuhuiSZ”) in the People’s
Republic of China. FuhuiSZ mainly provides supply chain financing services to commercial enterprises. On September 19,
2017, Sheng Ying Xin Incorporated Yingda Xincheng (Beijing) Insurance Broker Co., Ltd. (“Ying Da Xin Cheng”) in the
People’s Republic of China with a registered capital of RMB 50,000,000 (approximately, $7,518,796.99). Ying Da Xin Cheng
will mainly focus on providing insurance brokerage services.
On
November 23, 2017, Sheng Ying Xin acquired Beijing Anytrust Science & Technology Co., Ltd. (“Anytrust”). Anytrust
is a limited company incorporated on June 9, 2014 in the People’s Republic of China with a registered capital of RMB 7.5
million (approximately $1.15 million). Anytrust was a “big data” company providing data infrastructure design, big
data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset
Management, Yinhua Fund Management and BAIC Motor, etc.
Our
acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage
of growth. In early 2018, Anytrust launched the beta version of AnyInfo, a vertical search engine and big data platform covering
a broad range of publicly available data of over 30 million enterprises in China. In September 2018, Anytrust launched the AnyInfo
Enterprise Edition of its big data analysis and A.I. report services to promote its ability to generate customized segment/industry
and company profiles to its users.
However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust
was approximately only $
546,303 in
2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per
month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically
insolvent. We had tried to stem our losses through 2018 and by then, we had only 3 employees from an original 89 when we acquired
Anytrust.
We
also determined it in our best interest to transfer our equity interest in Anytrust to our Chief Executive Officer, Mr. Jianxin
Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided to
write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring
the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable.
The equity transfer was completed December 30, 2018.
On
May 25, 2018, Hongkong Internet Financial Services Limited incorporated CIFS (Xiamen) Financial Leasing Company to provide financial
leasing services and equipment purchase financing to commercial enterprises. CIFS (Xiamen) Financial Leasing Company did not have
any revenue in 2018.
On May 25, 2018, Sheng
Ying Xin incorporated Fuhui (Xiamen) Commercial Factoring Co., Ltd. (“FuhuiXM”) to provide factoring services to commercial
enterprises in Xiamen.
On
July 11, 2018, Sheng Ying Xin incorporated Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd (“Zhizhen”),
to provide investment research services. Zhizhen did not have any operations in 2018.
On
July 25, 2018, Sheng Ying Xin formed Hangzhou Yuchuang Investment Partnership (“Hangzhou Yuchuang”), in which
it owns 100% of the equity interest. Hangzhou Yuchuang is an investment vehicle for our strategic investing activities.
The
contractual agreements between WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits
of Sheng Ying Xin (and its subsidiaries) onto WFOE.
We
presently provide almost all our financial advisory services through Sheng Ying Xin and Kashgar SYX although we have historically
generated all our revenue through Sheng Ying Xin. In 2018, we generated a small portion of our total revenue (approximately $0.54
million) from the provision of technical services by Anytrust, which is basically the provision of financial data services to
financial institutions, and $0.5 million from the provision of factoring services by FuhuiSZ and FuhuiXM.
Contractual
Arrangements among Our Wholly-foreign Owned Enterprise, Variable Interest Entity and the Variable Interest Entity Equity Holders
We
are a British Virgin Islands company and our wholly owned PRC subsidiary, Beijing Yingxin Yijia Network Technology Co., Ltd is
a wholly foreign-owned enterprise (“WFOE”). British Virgin Islands companies and wholly foreign owned PRC enterprises
are restricted from holding certain licenses related to the online information service and conduct of value-added telecommunication
services in China.
We
are implementing our “Plus Internet” strategy by developing an online electronic platform in stages to allow our clients
to firstly access information regarding available financial products and services and then later track their loan application
status. Because this would fall under the provision of online information service and conduct of value-added telecommunication
services in China, we would be subject to significant restrictions under current PRC laws and regulations. The PRC government
regulates internet access, the distribution of online information in China through strict business licensing requirement and other
government regulations.
Accordingly,
we, through Sheng Ying Xin (Beijing) Management Consulting Co., Ltd, applied for and received an Internet Content Provider (“ICP”)
license for value-added Internet information services on December 18, 2015.
The
registered shareholders of Sheng Ying Xin are Mr. Jianxin Lin and Mr. Shaoyong Huang (collectively, the “SYX Shareholders”).
Neither we nor our subsidiaries own any equity interest in Sheng Ying Xin. Instead, we control and receive the economic benefits
of Sheng Ying Xin’s business operation through a series of contractual arrangements. WFOE, Sheng Ying Xin and its shareholders
entered into a series of contractual arrangements, also known as VIE Agreements, on April 26, 2016. The VIE agreements are designed
to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole
equity holder of Sheng Ying Xin, including absolute control rights and the rights to the assets, property and revenue of Sheng
Ying Xin. According to our Chinese counsel, Sino-Integrity Law Firm,, the VIE Agreements constitute valid and binding obligations
of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC. According to the Exclusive
Business Cooperation Agreement, Sheng Ying Xin is obligated to pay service fees to WFOE approximately equal to the net income
of Sheng Ying Xin.
Other
than the ICP license and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held
by our variable interest entity, Sheng Ying Xin, we hold our material assets in, and conduct our material operations through Sheng
Ying Xin and generate all our revenue from it. We plan to gradually transition our financial advisory services, which is not subject
to foreign ownership restrictions to WFOE over time. Presently, we rely on the VIE Agreements to capture the profits and associated
cash flow from operations to transfer such cash flow from the Sheng Ying Xin to WFOE.
The
following diagram is a simplified illustration of the ownership structure and contractual arrangements that we have in place for
our variable interest entity:
Each
of the VIE Agreements is described in detail below:
Contract
that enables us to receive substantially all of the economic benefits from the variable interest entity
Exclusive
Business Cooperation Agreement
Pursuant
to the Exclusive Business Cooperation Agreement between Sheng Ying Xin and WFOE, WFOE provides Sheng Ying Xin with technical support,
financing support, consulting services and other management services relating to its day-to-day business operations and management,
on an exclusive basis and to the extent permissible under the PRC laws, utilizing its advantages in technology, human resources,
and information. For services rendered to Sheng Ying Xin by WFOE under this agreement, WFOE is entitled to collect a service fee
on a monthly basis, which is approximately equal to the net income of Sheng Ying Xin.
The
Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior
notice. Sheng Ying Xin does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term
of this agreement with prior written notice.
The
sole director and president of WFOE, Mr. Jianxin Lin, is currently managing Sheng Ying Xin pursuant to the terms of the Exclusive
Business Cooperation Agreement. WFOE has absolute authority relating to the management of Sheng Ying Xin, including but not limited
to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions.
Contracts
that give us effective control of the variable interest entity
Share
Pledge Agreement
Under
the Share Pledge Agreement between the SYX Shareholders and WFOE, the SYX Shareholders pledged all of their equity interests in
Sheng Ying Xin to WFOE to guarantee the performance of Sheng Ying Xin’s obligations under the Exclusive Business Cooperation
Agreement. Under the terms of the agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited
to, the right to collect dividends generated by the pledged equity interests. The SYX Shareholders also agreed that upon occurrence
of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest
in accordance with applicable PRC laws, and the funds collected by WFOE by enforcing the pledge will be used for satisfying all
obligations secured under the Share Pledge Agreement. The SYX Shareholders further agreed not to dispose of the pledged equity
interests or take any actions that would prejudice WFOE’s interest. All of the equity interest pledges with respect to the
equity interests of Sheng Ying Xin according to the Share Pledge Agreement have been registered with relevant office of the Administration
for Industry and Commerce in China.
The
Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been
paid by Sheng Ying Xin. WFOE shall cancel or terminate the Share Pledge Agreement upon Sheng Ying Xin’s full payment of
fees payable under the Exclusive Business Cooperation Agreement.
Exclusive
Option Agreement
Under
the Exclusive Option Agreement, the SYX Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase,
to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Sheng
Ying Xin at the exercise price of RMB1.00. The agreement remains effective for a term of ten years and may be renewed at WFOE’s
election. Once WFOE exercises the option, the parties shall enter into a separate equity interest transfer or similar agreement.
Power
of Attorney
Under
the Power of Attorney, the SYX Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect
to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the
shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association,
including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating
and appointing on behalf of shareholders the legal representative, the director, supervisor, the chief executive officer and other
senior management members of Sheng Ying Xin.
Although
it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same term as the Exclusive
Option Agreement.
This
Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this
Power of Attorney, so long as the SYX Shareholder is a shareholder of company, unless WFOE instructs the SYX Shareholder in writing
to terminate the Power of Attorney in whole or in part.
In
the opinion of Sino-Integrity Law Firm, our PRC legal counsel:
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●
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the
ownership structures of our wholly-foreign owned enterprise and our variable interest entity in China, both currently and
immediately after giving effect to this offering, do not and will not violate any applicable PRC law, regulation, or rule
currently in effect based on current interpretation of those law, regulation or rule; and
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●
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the
contractual arrangements between our wholly-foreign owned enterprise, our variable interest entity and the variable interest
entity equity holders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable
PRC laws, rules, and regulations currently in effect, and will not violate any applicable PRC law, regulation, or rule currently
in effect.
|
However,
we have been further advised by our PRC legal counsel, Sino-Integrity Law Firm, that there are substantial uncertainties regarding
the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities
may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC
legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based
business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could
be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors — Risks Related
to Our Corporate Structure.”
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D.
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Property,
plants and equipment.
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Facilities
We
currently maintain two physical office in Beijing, China
.
We believe that our existing facilities are adequate for our current requirements and we will be
able to enter into lease arrangements on commercially reasonable terms for future expansion.
In
Beijing, we lease approximately 127 square meters (approximately 1,367 square feet) of office space at Unit 1102 on the
11st Floor of No.6 Building located at Jianguo Road, Chaoyang District, Beijing. The lease started on March 5, 2019 and expired
on March 04, 2020. Under this new lease, the Company shall pay a monthly rent of RMB 22,572.00 (approximately $3,320 ).
Kashgar
SYX leases approximately 204 square meters (approximately 2,194.55 square feet) of office space at Unit 1513-1514 of the East
Tower of Global Financial Center located at No.1 East Third Ring Middle Road, Chaoyang District, Beijing. The lease started on
May 24, 2017 and will expire on September 23, 2019. The rent under this lease is RMB 149,240 (approximately $22,960) per year,
which was paid in full upon execution of the lease agreement. Kashgar SYX also paid a deposit of RMB 10,000 (approximately $1,538.46),
which is refundable at the end of the lease, subject to certain conditions set forth in this lease agreement.
Each
of subsidiaries has a registered office address, which is subject to renewal on a yearly basis.
Item
4A. Unresolved Staff Comments
Not
applicable.
Item
5. Operating and Financial Review and Prospects
The
following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with,
our audited consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains
forward-looking statements. See “Forward-Looking Information.” In evaluating our business, you should carefully consider
the information provided under the caption “Item 3 Key Information — D. Risk Factors” in this annual report
on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
Overview
We
are mainly in the business of providing financial advisory services to meet the financial and capital needs of our clients, which
comprise largely of small-to-medium sized enterprises (“SMEs”). Through our wholly-owned subsidiaries, Hongkong Internet
Financial Services Limited, CIFS (Xiamen) Financial Leasing Co., Ltd and Beijing Yingxin Yijia Network Technology Co., Ltd and
our contractually controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“SYX” or
“Sheng Ying Xin”), and its wholly-owned subsidiaries, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar
SYX”), Fu Hui (Shenzhen) Commercial Factoring Co., Ltd (“FuhuiSZ”), Yingda Xincheng (Beijing) Insurance Broker
Co., Ltd (“ Yin Da Xin Cheng”), Fuhui (Xiamen) Commercial Factoring Co., Ltd (“FuhuiXM”), Zhizhen Investment
& Research (Beijing) Information Consulting Co., Ltd. and Hangzhou Yuchuang Investment Partnership. We primarily offer
commercial payment advisory services, international corporate financing advisory services, intermediary bank loan advisory services
and
supply chain financing services
.
We
generate revenue from service fees in connection with our (i) commercial payment advisory services, (i) international corporate
financing advisory services,(iii) intermediary bank loan advisory services, and (iv) supply chain financing services (factoring
services) . Additionally we earn interest income from our direct or entrusted lending activities. Our total net revenue increased
from $15.82 million in 2016 to $25.12 million in 2017, and reduced to $14.4 million in 2018. We had a net income of $13.89
million, $23.46 million and a net loss of $4.04 million in 2016, 2017 and 2018, respectively. Our business has fluctuated in
recent years. The main reason is that the number of clients we served and the amount of services we provided have grown rapidly
in 2015, 2016 and 2017. However, due to the economic downturn in China in 2018, our clients’ financial needs significantly
decreased. We served 29, 47 and 47 customers and arranged approximately $1,471 million, $2,429 million and $996 million in
financing in 2016, 2017 and 2018, respectively. The Company used to provide technical services through our subsidiary, Beijing
Anytrust Science & Technology Co., Ltd (“Anytrust). In 2018, we generated $0.54 million from the
provision of technical services. However, in order to reduce our operating losses, we disposed Anytrust on December
30, 2018 and therefore we no longer provide such technical services.
We
received an Internet Content Provider (“ICP”) license for value-added Internet information services in December 2015.
We plan to develop our electronic platform in stages to allow our clients to firstly access information regarding available financial
products and services and then later track their loan application status, and ultimately, complete the entire application and
approval process online. The ICP license is a permit issued by the Chinese Ministry of Industry and Information Technology to
permit China-based websites to operate in China. Due to PRC legal restrictions on foreign ownership of companies that engage in
value-added telecommunication businesses and certain other businesses in China, we conduct such business through one consolidated
variable interest entity. We have contractual arrangements with these entities and their shareholders that enable us to effectively
control and receive substantially all of the economic benefits from the entities, which we have consolidated in our financial
statements.
Key
Factors Affecting Our Results of Operations
Major
factors affecting our results of operations include the following:
Economic
Conditions in China
The
demand for financial advisory services from borrowers is dependent upon overall economic conditions in China. General economic
factors, including the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek loans
and investors’ ability and desire to invest in loans. For example, significant increases in interest rates could cause potential
borrowers to defer obtaining loans as they wait for interest rates to become stable or decrease. Additionally, a slowdown in the
economy, such as from a rise in the unemployment rate and a decrease in real income, may affect individuals’ level of disposable
income. This may negatively affect borrowers’ repayment capability, which in turn may decrease their willingness to seek
loans and potentially cause an increase in default rates. If actual or expected default rates increase generally in China or the
finance market, investors may delay or reduce their investments in loan products in general, including those provided by us.
Ability
to Acquire Borrowers Effectively
Our
ability to increase the loan volume facilitated through us largely depends on our ability to attract potential borrowers through
sales and marketing efforts. Presently, we are largely dependent on key members of our management team, including Mr. Jianxin
Lin and Mr. Jinchi Xu, who have extensive experience in the financial advisory service industry and important relationships with
borrowers, banks and lending institutions for our business.
Our
future sales and marketing efforts will include those related to borrower acquisition and retention, and general marketing. We
intend to continue to dedicate significant resources to our sales and marketing efforts and constantly seek to improve the effectiveness
of these efforts, in particular with regard to borrower and investor acquisition.
Effectiveness
of Risk Management
Our
ability to effectively segment borrowers into appropriate risk profiles affects our ability to match them with attractive products
and services offered by the relevant bank or lending institution in terms of offering attractive pricing to borrowers as well
as our ability to offer them attractive returns on financial products, both of which directly relate to the level of user confidence
in our services.
Ability
to Innovate
Our
growth to date has depended on, and our future success will depend in part on, successfully meeting borrower demand with new and
innovative loan and investment products customized for their needs. We have made and intend to continue to make efforts to source
loan and investment products to meet the individualized needs of our borrowers. We constantly evaluate the popularity of existing
product offerings and services that cater to the ever evolving needs of our borrowers. We also seek to negotiate better terms
for our customers based on our relationships with banks and lending institutions.
Over
time we will continue to expand our offerings by introducing new products. We plan to expand our service portfolio by merging
with or acquiring entities already holding other such financial service licenses, such as factoring, microcredit, financial leasing,
pawn mortgage and rural banking licenses so that we may expand into providing such services.
From
the borrower perspective, we will continue to tailor credit products to meet their specific needs.
Ability
to Compete Effectively
Our
business and results of operations depend on our ability to compete effectively in the markets in which we operate. The financial
advisory services industry in China is intensely competitive, and we expect that competition to persist and intensify in the future.
In addition to competing with other finance companies, we also compete with other types of financial products and companies that
attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions,
such as finance business units in commercial banks and other finance companies. If we are unable to compete effectively, the demand
for our services could stagnate or substantially decline, we could experience reduced revenues or our services could fail to maintain
or achieve more widespread market acceptance, any of which could harm our business and results of operations.
Regulatory
Environment in China
The
regulatory environment for the financial advisory services industry in China is developing and evolving, creating both challenges
and opportunities that could affect our financial performance. Due to the relatively short history of the financial advisory services
industry in China, the PRC government has not adopted a clear regulatory framework governing our industry. We will continue to
make efforts to ensure that we are compliant with the existing laws, regulations and governmental policies relating to our industry
and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future. While
new laws and regulations or changes to existing laws and regulations could make loans more difficult to be accepted by borrowers
on terms favorable to us, or at all, these events could also provide new product and market opportunities.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in
the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and
that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our
experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from
these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation
of our financial statements require significant judgments and estimates. For additional information relating to these and other
accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report.
Principle
of consolidation and combination
The
consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets
and liabilities. Management makes its estimates based on historical experience and on various other assumptions it believes to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s
consolidated financial statements mainly include the allowance for doubtful accounts, the valuation allowance of deferred tax
assets, the estimated useful lives of long-lived assets, the impairment assessment of goodwill, intangibles and other long-lived
assets, the fair value of identifiable assets and liabilities acquired through business combination.
Revenue
Recognition
Revenue
principally consists of consulting service and factoring service revenue. Revenue comprises the fair value of the consideration
received or receivable for the provision of services in the ordinary course of the Company’s activities and is recorded
net of value added tax (“VAT”). Consistent with the criteria of ASC 605 “Revenue Recognition” (“ASC
605”), the Company recognizes revenue when the following four revenue recognition criteria are met: (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable,
and (iv) collectability is reasonably assured.
The
Company’s services include commercial payment advisory services, intermediary bank loan advisory services, international
corporate financing advisory services and supply chain financing services (factoring business). We used to provide technical services
through Anytrust. However, we disposed Anytrust on December 30, 2018 to reduce our operating losses. As a result, we no
longer provide technical services.
For
commercial payment advisory services, after signing contracts with the client, the Company starts to identify and select banks
and financial products, coordinate with banks to structure financing solutions for the client. Then the client prepares application
materials and sends them to the bank. When approved by the bank, the client will deposit cash with the bank or purchase wealth
management products sold by the bank. After this step, the bank will issue a letter of guarantee, which the client will pledge
as security for the acceptance bills. The letter of guarantee is a document that the bank provides certifying itself as guarantor.
The Company’s service fee is a percentage of the amount of cash deposited with or wealth management products purchased from
the bank by the client. The Company recognizes revenue after the client receives a bank credit contract from the bank and when
the Company receives a contract completion confirmation from the client.
For
intermediary bank loan advisory services, the Company matches small-to-medium sized enterprises (“SMEs”) with financing
sources. The Company charges borrowers an introduction fee which is calculated at a percentage of the loan. The Company recognizes
revenue after the client receives a bank credit contract from the bank and when the Company receives a contract completion confirmation
from the client. The Company typically receives the contract completion confirmation when the client receives the bank financing
and signs off on the contract completion confirmation.
For
international corporate financing advisory services, the Company works with overseas banks to structure and provide clients with
financing solutions to obtain facilities from overseas banks for the clients’ offshore affiliates. After signing contracts
with the client, the Company starts to identify potential overseas banks and domestic banks to provide the client’s financing
needs, structure financing solutions and facilitate the application process. After the client provides security to the domestic
bank, the domestic bank will issue a letter of guarantee to the overseas bank. The overseas bank will provide credit to the affiliate
designated by client. The Company’s service fee is a percentage of credit granted by the overseas bank to the offshore affiliate.
The Company recognizes revenue after the offshore affiliate receives a credit approval notice from the offshore bank and when
the Company receives a contract completion confirmation from the client. The Company typically receives the contract completion
confirmation when the affiliate receives the bank financing and the client signs off on the contract completion confirmation.
For
technical services, after signing the contract, and we have provided the clients with the technical services and
charged our clients the relevant fees, we recognize revenue when the services are rendered.
Our
factoring services provide owners of SMEs with holistic supply chain financing solutions and value-added services in order to
reduce financing costs and improve efficiency during a business transaction.
There
are no claw back provisions or other guarantees. Full service fee are due upon the contract completion confirmation from the client.
Interest
income from loans to a third party
The
Company accepts clients’ application for short-term loans and conducts a review of their credit status and application materials.
The Company lends its own funds in the form of direct and entrusted loans to the eligible clients and receives interest income,
which is calculated at a percentage of the amount of fund the Company lent. The Company recognized interest income monthly on
accrued basis as interest income.
Fair
Value of Financial Instruments
The
Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair
value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the
source of the information.
Its
establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be
used to measure fair value and include the following:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The
carrying value of cash and cash equivalents, accounts receivable, other current assets and prepaid expenses, short term loans,
other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments.
The
Company does not have any level 2 or level 3 assets and liabilities as of December 31, 2017 and 2016.
Goodwill
Goodwill
is the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business
combination. The Company tests goodwill for impairment at the reporting unit level on an annual basis as of December 31, 2018
and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired.
The Company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If the Company decides, as a result of its qualitative assessment, that
it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment
test is mandatory. Otherwise, no further testing is required.
Results
of Operations
Results
for the Year ended December 31, 2018 compared to the Year ended December 31, 2017
Operating
Metrics for the year ended December 31, 2018
We
regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in
developing and refining our growth strategies and making strategic decisions.
|
|
For
the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in
Million)
|
|
Amount
of financing advised:
|
|
|
7,630
|
|
|
|
1,153
|
|
|
|
16,397
|
|
|
|
2,429
|
|
Commercial
Payment
|
|
|
3,610
|
|
|
|
545
|
|
|
|
9,963
|
|
|
|
1,476
|
|
International
Corporate Financing
|
|
|
1,950
|
|
|
|
295
|
|
|
|
4,389
|
|
|
|
650
|
|
Intermediary
Loan
|
|
|
2,070
|
|
|
|
313
|
|
|
|
2,045
|
|
|
|
303
|
|
Amount
of financing factored:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factoring
Business
|
|
|
82
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Number
of clients advised
(1)
|
|
|
47
|
|
|
|
47
|
|
Commercial
Payment
|
|
|
22
|
|
|
|
31
|
|
International
Corporate Financing
|
|
|
2
|
|
|
|
5
|
|
Intermediary
Loan
|
|
|
23
|
|
|
|
11
|
|
(1)
|
The
number of clients for a specified period represents the number of clients whose financing were funded during such period.
|
|
|
For
the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
US$ thousands)
|
|
Advisory
fees billed to clients
(2)
|
|
|
14,402
|
|
|
|
25,116
|
|
(2)
|
Represent
amounts net of VAT.
|
The
amount of financing advised is calculated by summing up the financing amount indicated on the financing advisory contracts. The
revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
The
following tables set forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts
and as percentages of variance. The operating results in any period are not necessarily indicative of the results that may be
expected for any future period.
|
|
Years
ended December 31,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
%
|
|
Revenue
|
|
$
|
14,402,329
|
|
|
$
|
25,116,139
|
|
|
$
|
(10,713,810
|
)
|
|
|
(42.7
|
)%
|
Cost
of revenue
|
|
|
654,979
|
|
|
|
729,752
|
|
|
|
(74,773
|
)
|
|
|
(10.2
|
)%
|
Gross
profit
|
|
|
13,747,350
|
|
|
|
24,386,387
|
|
|
|
(10,639,037
|
)
|
|
|
(43.6
|
)%
|
General
and administrative expense
|
|
|
11,664,394
|
|
|
|
3,169,855
|
|
|
|
8,494,539
|
|
|
|
268.0
|
%
|
Selling
and distribution expense
|
|
|
576,526
|
|
|
|
371,383
|
|
|
|
205,143
|
|
|
|
55.2
|
%
|
Research
& Development Expense
|
|
|
3,512,512
|
|
|
|
92,683
|
|
|
|
3,419,829
|
|
|
|
3,689.8
|
%
|
Donation
expense
|
|
|
-
|
|
|
|
148,108
|
|
|
|
(148,108
|
)
|
|
|
(100
|
)%
|
(Loss)
income
from operations
|
|
|
(2,006,082
|
)
|
|
|
20,604,358
|
|
|
|
(22,610,440
|
)
|
|
|
(109.7
|
)%
|
Interest
income on bank deposit
|
|
|
16,182
|
|
|
|
13,600
|
|
|
|
2,582
|
|
|
|
19.0
|
%
|
Other
expenses
|
|
|
(510,200
|
)
|
|
|
(7,058
|
)
|
|
|
(503,144
|
)
|
|
|
7,128.7
|
%
|
Interest
income from loans to third parties
|
|
|
6,465,042
|
|
|
|
4,070,600
|
|
|
|
2,172,044
|
|
|
|
53.4
|
%
|
Loss
on disposal of a subsidiary
|
|
|
(2,062,155
|
)
|
|
|
-
|
|
|
|
(2,005,514
|
)
|
|
|
|
|
Impairment
loss on loans to third parties and property and equipment
|
|
|
(7,423,651
|
)
|
|
|
-
|
|
|
|
(7,423,651
|
)
|
|
|
|
|
(Loss)
income
before income taxes
|
|
|
(5,520,864
|
)
|
|
|
24,681,499
|
|
|
|
(30,368,122
|
)
|
|
|
(123.3
|
)%
|
Income
tax (benefit) expenses
|
|
|
(1,702,127
|
)
|
|
|
633,315
|
|
|
|
(2,278,801
|
)
|
|
|
(359.8
|
)%
|
Net
(loss) income
|
|
$
|
(3,818,737
|
)
|
|
$
|
24,048,184
|
|
|
$
|
(28,089,321
|
)
|
|
|
(116.8
|
)%
|
Comprehensive
loss (income)
|
|
$
|
(6,234,656
|
)
|
|
$
|
26,430,672
|
|
|
$
|
(32,879,763
|
)
|
|
|
(124.4
|
)%
|
Revenue
A
breakdown of our revenue for the year ended December 31, 2018 versus the year ended December 31, 2017 is set forth below:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Intermediary
Bank Loan Advisory Services
|
|
$
|
6,091,830
|
|
|
|
42.3
|
%
|
|
$
|
5,714,758
|
|
|
|
22.8
|
%
|
|
$
|
377,072
|
|
|
|
6.6
|
%
|
International
Corporate Financing Advisory Services
|
|
|
1,111,991
|
|
|
|
7.7
|
%
|
|
|
2,468,943
|
|
|
|
9.8
|
%
|
|
|
(1,356,952
|
)
|
|
|
(55.0
|
)%
|
Commercial
Payment Advisory Services
|
|
|
6,153,018
|
|
|
|
42.7
|
%
|
|
|
16,868,860
|
|
|
|
67.2
|
%
|
|
|
(10,715,842
|
)
|
|
|
(63.5
|
)%
|
Factoring
Service
|
|
|
499,187
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
499,187
|
|
|
|
-
|
|
Technical
service
|
|
|
546,303
|
|
|
|
3.8
|
%
|
|
|
63,578
|
|
|
|
0.3
|
%
|
|
|
482,725
|
|
|
|
759.3
|
%
|
Total
Amount
|
|
$
|
14,402,329
|
|
|
|
100
|
%
|
|
$
|
25,116,139
|
|
|
|
100
|
%
|
|
$
|
(10,713,810
|
)
|
|
|
(42.7
|
)%
|
Net
revenue for the year ended December 31, 2018 decreased by 43% year-over-year to $14,402,329 from $25,116,139 in the same period
in 2017.
Approximately
42.7% of our revenue or $6,153,018, a decrease of 63.5% from $16,868,860 in the year ended December 31, 2017, was generated by
providing commercial payment advisory services to 22 customers which we assisted in helping them obtain acceptance bills from
banks with total financing of $545 million compared to $1,476 million for the same period last year, representing a decrease
of 63% due to economic slowdown.
Approximately
42.3% of our revenue or $6,091,830 was derived from providing intermediary bank loan advisory services to 23 customers, a 7% increase
from $ 5,714,758 in the year ended December 31, 2017.
Approximately
7.7% of our revenue or $1,111,991 was derived from providing international corporate financing advisory services for year ended
December 31, 2018. International corporate financing advisory revenue decreased by 55% from $ 2,468,943 in the year ended
December 31, 2017 mainly due to the decrease in financing of $355 million compared to $650 million in 2017.
Although
our revenue from the provision of technical services, which are essentially financial data services provided to financial institutions
by Anytrust, increased by 7.5 times in 2018, we disposed of it in December 2018 due to large losses incurred. Our acquisition
of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage of growth.
However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately
only $546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately
$0.3 million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as
it was technically insolvent.
We
first announced the implementation of our supply chain financing services in 2017 through our subsidiary, FuhuiSZ. We incorporated
FuhuiXM in 2018 to further grow our supply chain financing services. We realized a revenue of approximately $0.5 million in
2018.
Overall,
our revenue decreased substantially for the year ended December 31, 2018 compared to the same period in 2017 mainly due to a decrease
in the amounts financed.
Cost
of Revenue
Total
cost of revenue, which comprises mainly revenue-generating staffing costs, was $ 654,979 for the year ended December 31, 2018
compared to $ 729,752 for the year ended December 31, 2017. The main reasons for the decrease in cost of revenue was the
reduction of employees in the second half of 2018 as a result of the reduction in our business and revenues.
Our
cost of revenue is broken down by service lines as follows:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Intermediary
Bank Loan Advisory Services
|
|
$
|
142,784
|
|
|
|
21.8
|
%
|
|
$
|
89,838
|
|
|
|
12.3
|
%
|
|
$
|
52,946
|
|
|
|
58.9
|
%
|
International
Corporate Financing Advisory Services
|
|
|
5,617
|
|
|
|
0.9
|
%
|
|
|
39,522
|
|
|
|
5.4
|
%
|
|
|
(33,905
|
)
|
|
|
(85.8
|
)%
|
Commercial
Payment Advisory Services
|
|
|
78,562
|
|
|
|
12.0
|
%
|
|
|
260,125
|
|
|
|
35.6
|
%
|
|
|
(181,563
|
)
|
|
|
(69.8
|
)%
|
Technical
services
|
|
|
330,995
|
|
|
|
50.5
|
%
|
|
|
147,610
|
|
|
|
20.2
|
%
|
|
|
183,385
|
|
|
|
124.2
|
%
|
Sales
tax and surcharges
|
|
|
97,021
|
|
|
|
14.8
|
%
|
|
|
192,657
|
|
|
|
26.5
|
%
|
|
|
(95,636
|
)
|
|
|
(49.6
|
)%
|
Total
Amount
|
|
$
|
654,979
|
|
|
|
100
|
%
|
|
$
|
729,752
|
|
|
|
100
|
%
|
|
$
|
(74,773
|
)
|
|
|
(10.2
|
)%
|
Gross
Profit and Gross Margin
Gross
profit for the year ended December 31, 2018 decreased by 44% to $ 13,747,350 from $ 24,386,387 in the year ended December 31,
2017. The decrease is in line with the revenue decrease of 43% over the same periods.
Gross
margin, or gross profit as a percentage of total revenue, was 95% for the year ended December 31, 2018, which is a slight decrease
compared to 97% for the year ended December 31, 2017.
Operating
Expenses
The
following table sets forth the breakdown of our operating expenses for the year ended December 31, 2018 and 2017, respectively:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
General
and administrative expenses
|
|
$
|
11,664,394
|
|
|
|
74
|
%
|
|
$
|
3,169,855
|
|
|
|
83.8
|
%
|
|
$
|
8,494,539
|
|
|
|
268
|
%
|
Selling
and marketing expenses
|
|
|
576,526
|
|
|
|
3.7
|
%
|
|
|
371,383
|
|
|
|
9.8
|
%
|
|
|
205,143
|
|
|
|
55.2
|
%
|
Research
& Development Expense
|
|
|
3,512,512
|
|
|
|
22
|
%
|
|
|
92,683
|
|
|
|
2.5
|
%
|
|
|
3,419,829
|
|
|
|
3,689.8
|
%
|
Donation
expense
|
|
|
-
|
|
|
|
-
|
%
|
|
|
148,108
|
|
|
|
3.9
|
%
|
|
|
(
148,108
|
)
|
|
|
(
100
|
)
%
|
Total
Amount
|
|
$
|
15,753,432
|
|
|
|
100
|
%
|
|
$
|
3,782,029
|
|
|
|
100
|
%
|
|
$
|
11,971,403
|
|
|
|
316.5
|
%
|
Total
operating expenses for the year ended December 31, 2018 increased 316.5% to $15,753,432 from $3,782,029 in the year ended December
31, 2017.
General
and administrative expenses consist primarily of staff costs, rental expenses and office related expenses. General and administrative
expenses were $11,664,394, or 81.0% of total revenue for the year ended December 31, 2018, as compared to $3,169,855 or 12.6%
of total revenue in the year ended December 31, 2017, an increase of $8,494,539. The increase in general and administrative expenses
is mainly due to an increase in rental and office related expenses and the increase of staff cost since we only began to lay off
staff and terminated lease agreements towards the year’s end of 2018.
Selling
and marketing expenses for the year ended December 31, 2018 increased by 55.2% to $576,526 from $371,383 in the year ended December
31, 2017. The year-over-year increase primarily resulted from an increase in marketing and advertising efforts.
Research
& Development expenses mainly consist of staffing costs accrued in the process of researching and developing financial data
software by Anytrust. We disposed Anytrust in December 2018 due to substantial loss incurred by Anytrust.
Donation
expenses mainly include $148,108 donation to China Social Welfare Foundation in the year ended December 31, 2017.
Income
from Operations and Operating Margin
Loss
from operations in the year ended December 31, 2018 was $2,006,082, compared with income from operations of $20,604,358
in the year ended December 31, 2017.
Operating
margin, or income from operations as a percentage of total revenue was negative 13.9% for the year ended December 31, 2018, compared
with 82% for the year ended December 31, 2017 due to the previously discussed changes.
Other
income/(expenses)
The
following table sets forth the breakdown of our other income for the year ended December 31, 2018 and the year ended December
31, 2017:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Interest
income on loans to third parties
|
|
$
|
6,465,042
|
|
|
|
(183.9
|
)%
|
|
$
|
4,070,600
|
|
|
|
99.8
|
%
|
|
$
|
2,394,442
|
|
|
|
58.8
|
%
|
Interest
income on bank deposits
|
|
|
16,182
|
|
|
|
(0.5
|
)%
|
|
|
13,600
|
|
|
|
0.4
|
%
|
|
|
2,582
|
|
|
|
19.0
|
%
|
Other
expenses
|
|
|
(510,200
|
)
|
|
|
14.5
|
%
|
|
|
(7,058
|
)
|
|
|
(0.2
|
)%
|
|
|
(503,143
|
)
|
|
|
7,128.7
|
%
|
Loss
on disposal of a subsidiary
|
|
|
(2,062,155
|
)
|
|
|
58.7
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,062,155
|
)
|
|
|
-
|
|
Impairment
loss on loans to third parties and property and equipment
|
|
|
(7,423,651
|
)
|
|
|
211.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,423,651
|
)
|
|
|
-
|
|
Total
Amount
|
|
$
|
(3,514,782
|
)
|
|
|
100.0
|
%
|
|
$
|
4,077,142
|
|
|
|
100
|
%
|
|
$
|
(7,591,924
|
)
|
|
|
(186.2
|
)%
|
O
ther
income principally consist of interest income on loans to third parties which was $6,465,042 and $4,070,600 for
the years ended December 31, 2018 and 2017, respectively, an increase of 58.8% year over year. This increase is
in line with the increase of average loan balances to third parties, which were $40.8 million and $30.5 million for the
year ended December 31, 2018 and 2017, respectively.
Loss
on disposal of a subsidiary refers to the loss incurred as a result of the disposal of Anytrust on December 30, 2018,
as a result of Anytrust incurring substantial operating losses.
Impairment
loss on loans to third parties and property and equipment amounted to $7.4 million. Management assessed the collectability
of its assets by the end of the year and determined that a provision of $7.4 million was made against entrusted loans,
direct loans and office equipment.
Income
tax (benefit) expense
Income
tax benefit was $1,702,127 for the year ended December 31, 2018, compared with income tax expense of $633,315
for the year ended December 31, 2017.
Foreign
Currency Translation Gain/(Loss)
Foreign
currency translation loss was $2,415,919 in the year ended December 31, 2018, compared with a gain of $2,382,488 in the
year ended December 31, 2017 as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net
(Loss) Income
Net
loss for the year ended December 31, 2018 was $3,818,737, as compared to our net income of $24,048,185 for the year ended
December 31, 2017. The decrease in net income is mainly due to the decrease in our revenue, a substantial increase in operating
expenses, losses arising from our disposal of Anytrust and impairment made against loans and property and equipment.
Liquidity
and Capital Resources
As
of December 31, 2018 and December 31, 2017, we held cash of $1,578,828 and $27,165,262 respectively.
The
following table summarizes our cash flows for the year ended December 31, 2018 and for the same period in 2017.
|
|
Year
ended
December
31, 2018
|
|
|
Year
ended
December
31, 2017
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(17
,266,382
|
)
|
|
$
|
27,603,542
|
|
Net
cash used in investing activities
|
|
|
(7,723,259
|
)
|
|
|
(22,308,207
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(128
,407
|
)
|
|
|
19,641,129
|
|
Effect
of exchange rate change on cash and cash equivalents
|
|
|
(468
,386
|
)
|
|
|
348,373
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(25,586,434
|
)
|
|
|
25,284,837
|
|
Cash
and cash equivalents, beginning balance
|
|
|
27,165,262
|
|
|
|
1,880,425
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
1,578,828
|
|
|
$
|
27,165,262
|
|
Operating
activities
Net
cash used in operations was $17.3 million for the year ended December 31, 2018, representing a decrease of $44.9
million from cash provided by operating activities of $27.6 million for the year ended December 31, 2017. The decrease
was mainly because we realized a net loss of $3.8 million in 2018, and an increase of accounts receivable by $13.3 million.
Investing
activities
Net
cash used in investing activities for year ended December 31, 2018 was $7.7 million, a decrease of $14.6 million from net cash
used in investing activities of $22.3 million for the year ended December 31, 2017. This is mainly due to the decrease
of our loans to third parties by $14 million compared to 2017.
Financing
activities
Net
cash used in financing activities for the year ended December 31, 2018 was $0.13 million, a decrease of approximately $20
million from cash provided by financing activities of $19.6 million for the year ended December 31, 2017. The decrease was mainly
attributable to proceeds from our IPO of approximately $20 million in July 2017.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
COMMITMENTS
AND CONTINGENCIES
The
following table sets forth the Company’s operating lease commitment as of December 31, 2018:
|
|
Office
Rental
|
|
|
|
|
|
Year
ending December 31,
|
|
|
|
2019
|
|
$
|
92,366
|
|
2020
|
|
|
30,789
|
|
Total
|
|
$
|
123,155
|
|
For
the years ended December 31, 2018, 2017 and 2016, rental expenses under operating leases were approximately $2,516,053, $ 975,868
and $453,667, respectively.
Operating
Metrics for the year ended December 31, 2017
We
regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in
developing and refining our growth strategies and making strategic decisions.
|
|
For
the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in
Million)
|
|
Amount
of financing advised:
|
|
|
16,397
|
|
|
|
2,429
|
|
|
|
9,770
|
|
|
|
1,471
|
|
Commercial
Payment
|
|
|
9,963
|
|
|
|
1,476
|
|
|
|
6,126
|
|
|
|
922
|
|
International
Corporate Financing
|
|
|
4,389
|
|
|
|
650
|
|
|
|
2,192
|
|
|
|
330
|
|
Intermediary
Loan
|
|
|
2,045
|
|
|
|
303
|
|
|
|
1,452
|
|
|
|
219
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Number
of clients advised
(1)
|
|
|
47
|
|
|
|
29
|
|
Commercial
Payment
|
|
|
31
|
|
|
|
19
|
|
International
Corporate Financing
|
|
|
5
|
|
|
|
4
|
|
Intermediary
Loan
|
|
|
11
|
|
|
|
6
|
|
(1)
|
The
number of clients for a specified period represents the number of clients whose financing were funded during such period.
|
|
|
For
the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
US$ thousands)
|
|
Advisory
fees billed to clients
(2)
|
|
|
25,116
|
|
|
|
15,822
|
|
(2)
|
Represent
amounts net of VAT.
|
The
amount of financing advised is calculated by summing up the financing amount indicated on the financing advisory contracts. The
revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
The
following tables set forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts
and as percentages of variance. The operating results in any period are not necessarily indicative of the results that may be
expected for any future period.
|
|
Years
ended December 31,
|
|
|
Variance
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Revenue
|
|
$
|
25,116,139
|
|
|
$
|
15,821,980
|
|
|
$
|
9,294,159
|
|
|
|
59
|
%
|
Cost
of revenue
|
|
|
729,752
|
|
|
|
380,072
|
|
|
|
349,680
|
|
|
|
92
|
%
|
Gross
profit
|
|
|
24,386,387
|
|
|
|
15,441,908
|
|
|
|
8,944,479
|
|
|
|
58
|
%
|
General
and administrative expense
|
|
|
3,169,855
|
|
|
|
1,348,862
|
|
|
|
1,820,993
|
|
|
|
135
|
%
|
Selling
and distribution expense
|
|
|
371,383
|
|
|
|
245,246
|
|
|
|
126,137
|
|
|
|
51
|
%
|
Research
& Development Expense
|
|
|
92,683
|
|
|
|
-
|
|
|
|
92,683
|
|
|
|
-
|
|
Donation
expense
|
|
|
148,108
|
|
|
|
301,101
|
|
|
|
439,442
|
|
|
|
146
|
%
|
Income
from operations
|
|
|
20,604,358
|
|
|
|
13,546,699
|
|
|
|
6,465,224
|
|
|
|
48
|
%
|
Interest
income on bank deposit
|
|
|
13,600
|
|
|
|
1,273
|
|
|
|
12,327
|
|
|
|
968
|
%
|
Other
expenses
|
|
|
(7,058
|
)
|
|
|
(517
|
)
|
|
|
(6,541
|
)
|
|
|
1,265
|
%
|
Interest
income from loans to third parties
|
|
|
4,070,600
|
|
|
|
2,794,134
|
|
|
|
1,276,466
|
|
|
|
46
|
%
|
Income
before income taxes
|
|
|
24,681,499
|
|
|
|
16,341,589
|
|
|
|
7,747,476
|
|
|
|
47
|
%
|
Income
tax expenses
|
|
|
633,315
|
|
|
|
2,452,822
|
|
|
|
(1,819,507
|
)
|
|
|
(74
|
)%
|
Net
income
|
|
$
|
24,048,184
|
|
|
$
|
13,888,767
|
|
|
$
|
9,566,983
|
|
|
|
69
|
%
|
Comprehensive
income
|
|
$
|
26,430,672
|
|
|
$
|
12,420,219
|
|
|
$
|
13,398,290
|
|
|
|
108
|
%
|
Revenue
A
breakdown of our revenue for the year ended December 31, 2017 versus the year ended December 31, 2016 is set forth below:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Intermediary
Bank Loan Advisory Services
|
|
$
|
5,714,758
|
|
|
|
22.8
|
%
|
|
$
|
4,124,509
|
|
|
|
26
|
%
|
|
$
|
1,590,249
|
|
|
|
39
|
%
|
International
Corporate Financing Advisory Services
|
|
|
2,468,943
|
|
|
|
9.8
|
%
|
|
|
1,256,101
|
|
|
|
8
|
%
|
|
|
1,212,842
|
|
|
|
97
|
%
|
Commercial
Payment Advisory Services
|
|
|
16,868,860
|
|
|
|
67.2
|
%
|
|
|
10,441,370
|
|
|
|
66
|
%
|
|
|
6,427,490
|
|
|
|
62
|
%
|
Technical
service
|
|
|
63,578
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
63,578
|
|
|
|
-
|
|
Total
Amount
|
|
$
|
25,116,139
|
|
|
|
100
|
%
|
|
$
|
15,821,980
|
|
|
|
100
|
%
|
|
$
|
9,294,159
|
|
|
|
59
|
%
|
Net
revenue for the year ended December 31, 2017 increased 59% year-over-year to $25,116,139 from $15,821,980 in the same period in
2016.
Approximately
67% of our revenue or $16,868,860, an increase of 62% from $10,441,370 in the year ended December 31, 2016, was generated by providing
commercial payment advisory services to 31 customers which we assisted in helping them obtain acceptance bills from banks with
a total financing amount of $1,476 million compared to $922 million for the same period of 2016.
Approximately
23% of our revenue or $5,714,758 was derived from providing intermediary bank loan advisory services to 11 customers, a 39% increase
from $ 4,124,509 for the year ended December 31, 2016.
Approximately
10% of our revenue or $2,468,943 was derived from providing international corporate financing advisory services for year ended
December 31, 2017. International corporate financing advisory revenue increased 97% from $ 1,256,101 in the year ended December
31, 2016 mainly due to the increase in the financing amount of $650 million compared to $330 million in 2016.
We
also generated a small portion of revenue from the provision of technical services, which are essentially financial data services
provided to financial institutions by Anytrust, a subsidiary which we acquired in November 2017.
The
Company announced the implementation of its supply chain financing services in 2017 through its subsidiary, FuhuiSZ. However,
as of December 31, 2017, FuhuiSZ has conducted no material business and generated no revenue.
Overall,
our revenue increased substantially for the year ended December 31, 2017 compared to the same period in 2016 mainly due to an
increase in the financing amounts and number of clients advised. Our advisory fee rates remained unchanged year over year.
Cost
of Revenue
Total
cost of revenue, which comprises mainly revenue-generating staffing costs, was $729,752 for the year ended December 31, 2017 compared
to $380,072 for the year ended December 31, 2016. The main reasons for the increase in cost of revenue are basic salary increments
in July 2017 and an increase in performance-related salaries as a result of improved revenue.
Our
cost of revenue is broken down by service lines as follows:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Intermediary
Bank Loan Advisory Services
|
|
$
|
89,838
|
|
|
|
12.3
|
%
|
|
$
|
64,966
|
|
|
|
17.1
|
%
|
|
$
|
24,872
|
|
|
|
38.3
|
%
|
International
Corporate Financing Advisory Services
|
|
|
39,522
|
|
|
|
5.4
|
%
|
|
|
25,035
|
|
|
|
6.6
|
%
|
|
|
14,487
|
|
|
|
57.9
|
%
|
Commercial
Payment Advisory Services
|
|
|
260,125
|
|
|
|
35.6
|
%
|
|
|
160,764
|
|
|
|
42.3
|
%
|
|
|
99,361
|
|
|
|
61.8
|
%
|
Technical
service
|
|
|
147,610
|
|
|
|
20.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
147,610
|
|
|
|
-
|
|
Sales
tax and surcharge
|
|
|
192,657
|
|
|
|
26.5
|
%
|
|
|
129,307
|
|
|
|
34.0
|
%
|
|
|
63,350
|
|
|
|
49.0
|
%
|
Total
Amount
|
|
$
|
729,752
|
|
|
|
100
|
%
|
|
$
|
380,072
|
|
|
|
100
|
%
|
|
$
|
349,680
|
|
|
|
100
|
%
|
Gross
Profit and Gross Margin
Gross
profit for the year ended December 31, 2017 increased 58% to $24,386,387 from $15,441,908 in the year ended December 31, 2016.
The increase is in line with the revenue growth of 59% over the same periods and a corresponding increase in cost of revenue.
Gross
margin, or gross profit as a percentage of total revenue, was 97% for the year ended December 31, 2017, which is a slight decrease
compared to 98% for the year ended December 31, 2016.
Operating
Expenses
The
following table sets forth the breakdown of our operating expenses for the year ended December 31, 2017 and 2016, respectively:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
General
and administrative expenses
|
|
$
|
3,169,855
|
|
|
|
83.8
|
%
|
|
$
|
1,348,862
|
|
|
|
71.2
|
%
|
|
$
|
1,820,993
|
|
|
|
135.0
|
%
|
Selling
and marketing expenses
|
|
|
371,383
|
|
|
|
9.8
|
%
|
|
|
245,246
|
|
|
|
12.9
|
%
|
|
|
126,137
|
|
|
|
51.4
|
%
|
Research
& Development Expense
|
|
|
92,683
|
|
|
|
2.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
92,683
|
|
|
|
-
|
|
Donation
expense
|
|
|
148,108
|
|
|
|
3.9
|
%
|
|
|
301,101
|
|
|
|
15.9
|
%
|
|
|
(152,993
|
)
|
|
|
(50.8
|
)%
|
Total
Amount
|
|
$
|
3,782,029
|
|
|
|
100
|
%
|
|
$
|
1,895,209
|
|
|
|
100
|
%
|
|
$
|
1,886,820
|
|
|
|
99.6
|
%
|
Total
operating expenses for the year ended December 31, 2017 increased 99.6% to $3,782,029 from $1,895,209 in the year ended December
31, 2016.
Selling
and marketing expenses for the year ended December 31, 2017 increased by 51% to $371,383 from $245,246 in the year ended December
31, 2016. The year-over-year increase primarily resulted from an increase in marketing and advertising efforts
General
and administrative expenses consist primarily of staff costs, rental expenses and office related expenses. General and administrative
expenses were $3,169,855, or 12.6% of total revenue for the year ended December 31, 2017, as compared to $1,348,862 or 9% of total
revenue in the year ended December 31, 2016, an increase of $ 1,820,993. The increase in general and administrative expenses is
mainly due to an increase in rental and office related expenses because we rented a new office rented in July that led to an increase
of $1.06 million, and due to an increase of staff cost by $0.27 million as well.
Research
& Development expenses mainly consist of staffing costs accrued in the process of researching and developing financial data
software by our newly acquired subsidiary, Anytrust.
Donation
expenses mainly include $148,108 donation to China Social Welfare Foundation in the year ended December 31, 2017. In 2016 $301,101
was made to China Warmth Project Foundation.
Income
from Operations and Operating Margin
Income
from operations in the year ended December 31, 2017 was $20,604,358, compared with $13,546,699 in the year ended December 31,
2016.
Operating
margin, or income from operations as a percentage of total revenue was 82% for the year ended December 31, 2017, compared with
86% for the year ended December 31, 2016.
Interest
income
The
following table sets forth the breakdown of our other income for the year ended December 31, 2017 and the year ended December
31, 2016:
|
|
For
the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Interest
income on loans to third parties
|
|
$
|
4,070,600
|
|
|
|
99.8
|
%
|
|
$
|
2,794,134
|
|
|
|
99.97
|
%
|
|
$
|
1,276,466
|
|
|
|
46
|
%
|
Interest
income on bank deposits
|
|
|
13,600
|
|
|
|
0.4
|
%
|
|
|
1,273
|
|
|
|
0.05
|
%
|
|
|
12,327
|
|
|
|
968
|
%
|
Other
expenses
|
|
|
(7,058
|
)
|
|
|
(0.2
|
)%
|
|
|
(517
|
)
|
|
|
(0.02
|
)%
|
|
|
(6,541
|
)
|
|
|
1265
|
%
|
Total
Amount
|
|
$
|
4,077,142
|
|
|
|
100
|
%
|
|
$
|
2,794,890
|
|
|
|
100
|
%
|
|
$
|
1,282,252
|
|
|
|
46
|
%
|
The
other income principally consist of interest income on loans to third parties which were $4,070,600 and $2,794,134 for the years
ended December 31, 2017 and 2016, an increase of 46% year over year. This increase is in line with the increase of loan balances
to third parties, which was $41,690,640 and 19,237,422 as of December 31, 2017 and 2016, respectively.
Income
tax expense
Income
tax expense was $633,315 for the year ended December 31, 2017, compared with $2,452,822 for the year ended December 31, 2016.
The sharp decrease of income tax expense was mainly due to the transition of our operating business during 2016 from one subsidiary,
Sheng Ying Xin, which is subject to a 25% income tax rate, to another subsidiary, Kashgar SYX, which is exempted from income tax
from its inception through December 31, 2020.
Foreign
Currency Translation Gain/(Loss)
Foreign
currency translation gain was $2,382,488 in the year ended December 31, 2017, compared with a loss of $1,468,548 in the year ended
December 31, 2016 as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net
Income
Net
income for the year ended December 31, 2017 was $24,048,184, as compared to $13,888,767 for the year ended December 31, 2016.
The increase in net income is mainly due to our business expansion and growth in our revenue.
Liquidity
and Capital Resources
As
of December 31, 2017 and December 31, 2016, we held cash of $27,165,262 and $1,880,425 respectively.
The
following table summarizes our cash flows for the year ended December 31, 2017 and for the same period in 2016.
|
|
Year
ended
December
31, 2017
|
|
|
Year
ended
December
31, 2016
|
|
Net
cash provided by operating activities
|
|
$
|
27,603,542
|
|
|
$
|
14,470,829
|
|
Net
cash (used in) provided by investing activities
|
|
|
(22,308,207
|
)
|
|
|
2,491,607
|
|
Net
cash provided by (used in) financing activities
|
|
|
19,641,129
|
|
|
|
(15,746,323
|
)
|
Effect
of exchange rate change on cash and cash equivalents
|
|
|
348,373
|
|
|
|
209,111
|
|
Net
increase in cash and cash equivalents
|
|
|
25,284,837
|
|
|
|
1,425,224
|
|
Cash
and cash equivalents, beginning balance
|
|
|
1,880,425
|
|
|
|
455,201
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
27,165,262
|
|
|
$
|
1,880,425
|
|
Operating
activities
Net
cash generated from operations was $27,603,542 for the year ended December 31, 2017, an increase of $13,132,713 from cash provided
by operating activities of $14,470,829 for the year ended December 31, 2016. The increase was mainly because we realized a net
profit $23.5 million in 2017.
Investing
activities
Net
cash used in investing activities for year ended December 31, 2017 was $ 22,308,207, a decrease of $ 24,799,814 from net cash
provided by investing activities of $2,491,607 for the year ended December 31, 2016. This is mainly due to the increase of our
loans to third parties by $22.5 million compared to 2016 and also due to our investment of $1.78 million to acquire Anytrust in
November 2017.
Financing
activities
Net
cash provided by financing activities for the year ended December 31, 2017 was $19,641,129, an increase of $35,387,452 from cash
used in financing activities of $15,746,323 for the year ended December 31, 2016. The increase was mainly attributable to proceeds
from our IPO of approximately $20 million in July 2017.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
COMMITMENTS
AND CONTINGENCIES
The
following table sets forth the Company’s operating lease commitment as of December 31, 2017:
|
|
Office
Rental
|
|
|
|
|
|
Year
ending December 31,
|
|
|
|
2018
|
|
$
|
1,819,302
|
|
2019
|
|
|
1,738,700
|
|
2020
|
|
|
823,372
|
|
Total
|
|
$
|
4,381,374
|
|
For
the years ended December 31, 2017, 2016 and 2015, rental expenses under operating leases were approximately $ 975,868, $453,667
and $483,970, respectively.
Item
6. Directors, Senior Management and Employees
A.
Directors and senior management.
The
following table sets forth information regarding our executive officers and directors as of the date of this annual report.
Directors
and Executive Officers
|
|
Age
|
|
Position/Title
|
|
|
|
|
|
Jianxin
Lin
|
|
35
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
|
|
|
Jinchi
Xu
|
|
40
|
|
Director
and Chief Financial Officer
|
|
|
|
|
|
Sheve
Li Tay
|
|
46
|
|
Independent
Director
|
|
|
|
|
|
Hong
Huang
|
|
47
|
|
Independent
Director
|
|
|
|
|
|
Buting
Yang
|
|
74
|
|
Independent
Director
|
Mr.
Jianxin Lin
is our founder and has served as Chairman of the board of directors and Chief Executive Officer since our inception.
In 2006, Mr. Lin expanded his business practice into the textile industry and founded Shishi City Sheng Qi Textile Trading Co.,
Ltd and has been its Chief Executive Officer and General Manager since then. In 2011, Mr. Lin founded Nanchang Hansheng Industry
& Trade Co., Ltd in Jiangxi Province, serving as its Chief Executive Officer and General Manager. He then founded Sheng Qi
(Fujian) Investment Co. Ltd, in 2012 and serves as its Chief Executive Officer and General Manager of a company. In 2014, Mr.
Lin founded Ding Zhi Tai Da Investment Management (Beijing) Co., Ltd (later changed its name to Sheng Ying Xin (Beijing) Management
Consulting Co., Ltd on February 17, 2016) and serves as its Chief Executive Officer and General Manager. Mr. Lin received his
Bachelor degree in Business Management in 2015. Mr. Lin also serves as Vice President of the Shishi Cloth Industry Association,
Honorary President of Shishi Cultural Exchange Association, Executive Director of the Chamber of Commerce in Quanzhou Nanchang,
and Standing Director at Jiangxi Industrial and Commercial Association.
He currently devotes
30 hours a week as our Chairman and Chief Executive Officer.
Mr.
Jinchi Xu
is our founder and has served as our director since our inception. Effective April 12, 2019, Mr. Xu was appointed
as the Company’s new Chief Financial Officer to replace Ms. Lu Sun, who resigned on April 11, 2019. Mr. Xu is a senior investment
manager with more than 10 years of progressive experience in finance management. He has been working as the Deputy General Manager
at Hongkong Fucheng International Investment Co. Ltd since 2006. Mr. Xu graduated from Fujian Medical University in 2002 with
a Bachelor Degree in Iconography.
Ms.
Sheve Li Tay
has over 17 years of experience in accounting and auditing. She has been working as a Senior Manager in Audit
Assurance at Ernst & Young (HongKong) from November, 1997 to September, 2007 and as a Senior Manager in Finance from October,
2007 to September, 2010. During her time working at Ernst & Young (Hong Kong), she served as an auditor for several public
companies that are listed on NASDAQ and New York Stock Exchange (NYSE). Ms. Tay worked as the President of Finance and Capital
Management Department at Centron Telecom International Holding Limited from October, 2010 to June, 2011. Ms. Tay also served as
an independent non-executive director of Grand Concord International Holding Limited from August, 2011 to November, 2016, and
she was in the same position at Natural United Resources Holdings Limited from November, 2011 to January, 2014. Ms. Tay currently
serves as an independent non-executive director of China 33 Media Group Limited. Ms. Tay has been a certified public accountant
of the Hong Kong Institute of Certified Public Accountants and the fellow member of Association of Chartered Certified Accountants
since 2002. She graduated from the University of Strathclyde, United Kingdom, in 1994 with a bachelor’s degree in Arts majoring
in Accounting and Finance. In 2004, she obtained a Master’s degree in Applied Finance from University of Western Sydney.
Mr.
Hong Huang
is one of our three independent directors. He worked as an attorney at Beijing Zhanda Law Firm from April, 2005
to March, 2014. Mr. Huang then joined Dentons Beijing and has been serving as a Partner since April, 2014. Mr. Huang graduated
from East China University of Political Science and Law in 1993 with a degree in Bachelor of Law. He also attended the University
of Trier, Germany, in 2002 and graduated in 2003 with a Master Degree of Law.
Mr.
Buting Yang
, has held a number of senior leadership positions in a variety of institutions in the media industry of China.
He has been a director of and technology counsel to the China Film Association since 2000. From 2000 to 2007, Mr. Yang served
as president of China Film Group Corporation. From 2000 to 2017, he served as independent director of Zhejiang Talent Television
& Film Co., Ltd., a Shenzhen Stock Exchange listed company. From 2007 to 2009, Mr. Yang was independent director of Beijing
Galloping Horse Media Co., Ltd. From 2007 to 2015, Mr. Yang also served as chairman of China Film Promotion International Corp.
and president of China Film Distribution & Screening Association. In addition, Mr. Yang has been serving as a member of the
Film Committee of State Administration of Radio, Film and Television of China since 2012. Mr. Yang also has been serving as independent
director of SkyOcean International Holdings Limited since 2014, which is a company listed on Hong Kong Exchange. Mr. Yang’s
leadership positions also include serving as independent director of Zhejiang Times Cinema Chain Co., Ltd. since 2015 and honorary
chairman of Chinese Creative Culture Organization since 2012. Mr. Yang received his Bachelor degree in Geology from Jilin University
in 1969.
B.
Compensation.
Executive
Compensation
The
following table sets forth the amount of compensation that was paid, earned and/or accrued during the fiscal year ended December
31, 2018, to each of the individuals identified in Item 6.A. above.
Name
|
|
Compensation
($)
|
|
Directors
and Officers
|
|
|
|
|
Jianxin
Lin
|
|
|
104,820
|
|
Jinchu
Xu
|
|
|
297,007
|
|
Sheve
Li Tay
|
|
|
30,000
|
|
Hong
Huang
|
|
|
30,000
|
|
Buting
Yang
|
|
|
30,000
|
|
|
|
|
|
|
Senior
Management
|
|
|
|
|
Lu
Sun*
|
|
|
148,400
|
|
*
Effective April 11, 2019, Ms. Lu Sun resigned as Chief Financial Officer of the Company. On April 12, 2019, the Board appointed
Mr. Jinchi Xu to replace Ms. Sun as the Company’s new Chief Financial Officer, effective immediately.
We
have not set aside or accrued any amounts to provide pension, retirement or similar benefits to our executive officers and directors.
Our PRC subsidiaries and consolidated variable interest entity are required by law to make contributions equal to certain percentages
of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory
benefits and a housing provident fund.
C.
Board practices.
Board
of Directors
Our
board of directors consists of five directors. A director is not required to hold any shares in our company to qualify to serve
as a director. A director may vote with respect to any contract, proposed contract or arrangement in which he is interested, and
if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such
contract or proposed contract or arrangement is considered, provided (a) such director, if his interest in such contract or arrangement
is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to
do so, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related
party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to
borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities
whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party. None of
our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees
of the Board of Directors
We
established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate
governance committee. We will adopt a charter for each of the three committees. Each committee’s members and functions are
described below.
Audit
Committee
. Our audit committee consists of Ms. Sheve Li Tay, Messrs. Hong Huang and Buting Yang. Ms. Sheve Li Tay is the chairman
of our audit committee. We have determined that Ms. Sheve Li Tay, and Messrs. Hong Huang and Buting Yang Leong satisfy the “independence”
requirements of NASDAQ Rule 5605 and Rule 10A-3 under the Securities Exchange Act of 1934. Our board of directors has determined
that Ms. Tay qualifies as an audit committee financial expert and has the accounting or financial management expertise as required
under Item 407(d)(5)(ii) and (iii) of Regulation S-K. The audit committee will oversee our accounting and financial reporting
processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other
things:
|
●
|
appointing
the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;
|
|
|
|
|
●
|
reviewing
with the independent auditors any audit problems or difficulties and management’s response;
|
|
|
|
|
●
|
discussing
the annual audited financial statements with management and the independent auditors;
|
|
|
|
|
●
|
reviewing
the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor
and control major financial risk exposures;
|
|
|
|
|
●
|
reviewing
and approving all proposed related party transactions;
|
|
|
|
|
●
|
meeting
separately and periodically with management and the independent auditors; and
|
|
|
|
|
●
|
monitoring
compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures
to ensure proper compliance.
|
A
copy of the audit committee’s current charter is available at our corporate website at: http://www.cifsp.com/zaixian/web/Audit%20Committee%20Charter.html
Compensation
Committee
. Our compensation committee consists of Mr. Hong Huang, Ms. Sheve Li Tay and Mr. Buting Yang. Mr. Hong Huang is
the chairman of our compensation committee. We have determined that Mr. Hong Huang, Ms. Sheve Li Tay and Mr. Buting Yang satisfy
the “independence” requirements under NASDAQ Rule 5605. The compensation committee will assist the board in reviewing
and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers.
Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation
committee will be responsible for, among other things:
|
●
|
reviewing
and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive
officers;
|
|
|
|
|
●
|
reviewing
and recommending to the board for determination with respect to the compensation of our non-employee directors;
|
|
|
|
|
●
|
reviewing
periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
|
|
|
|
|
●
|
selecting
compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that
person’s independence from management.
|
A
copy of the compensation committee’s current charter is available at our corporate website at:
http://www.cifsp.com/zaixian/web/Compensation%20Committee%20Charter.html
Nominating
and Corporate Governance Committee.
Our nominating and corporate governance committee consists of Messrs. Buting Yang, Hong
Huang and Ms. Sheve Li Tay. Mr. Buting Yang is the chairperson of our nominating and corporate governance committee. Messrs. Buting
Yang, Hong Huang and Ms. Sheve Li Tay and satisfy the “independence” requirements under NASDAQ Rule 5605. The nominating
and corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors
and in determining the composition of the board and its committees. The nominating and corporate governance committee will be
responsible for, among other things:
|
●
|
selecting
and recommending to the board nominees for election by the shareholders or appointment by the board;
|
|
●
|
reviewing
annually with the board the current composition of the board with regards to characteristics such as independence, knowledge,
skills, experience and diversity;
|
|
|
|
|
●
|
making
recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board;
and
|
|
|
|
|
●
|
advising
the board periodically with regards to significant developments in the law and practice of corporate governance as well as
our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance
and on any remedial action to be taken.
|
A
copy of the nominating and corporate governance committee’s current charter is available at our corporate website at: http://www.cifsp.com/zaixian/web/Nominating%20and%20Corporate%20Governance%20Committee%20Charter.html
Duties
of Directors
Under
British Virgin Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly
and a duty to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise
the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association,
as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has
the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances
have the right to seek damages in our name if a duty owed by the directors is breached.
Our
board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions
and powers of our board of directors include, among others:
|
●
|
convening
shareholders’ meetings;
|
|
|
|
|
●
|
declaring
dividends and distributions;
|
|
|
|
|
●
|
appointing
officers and determining the term of office of the officers;
|
|
|
|
|
●
|
exercising
the borrowing powers of our company and mortgaging the property of our company; and
|
|
|
|
|
●
|
approving
the transfer of shares in our company, including the registration of such shares in our share register.
|
Terms
of Directors and Officers
Our
directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Each of
our directors will hold office until the expiration of his or her term as provided in the written agreement with our company,
if any, and until his or her successor has been elected or appointed. A director will cease to be a director if, among other things,
the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company
to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave
of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated.
Our officers are elected by and serve at the discretion of the board of directors.
Employment
Agreements and Indemnification Agreements
We
have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers
is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration,
for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude,
negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive
officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we will provide
severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer
is based and in accordance with Section 7(a)(iii) of the form of Employment Agreement filed as exhibit 4.1 hereto, namely (1)
a lump sum cash payment equal to 3 months of the executive officer’s base salary as of the date of such termination; (2)
a lump sum cash payment equal to a pro-rated amount of his target annual bonus for the year immediately preceding the termination,
if any; (3) payment of premiums for continued health benefits under the Company’s health plans for 3 months fo1lowing the
termination, if any; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding equity awards held by the
executive officer. The executive officer may resign at any time with a three-month advance written notice.
Each
executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict
confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant
to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our
clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which
we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs
and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and
to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other
legal rights for these inventions, designs and trade secrets.
In
addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of
his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has
agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive
officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that
will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of
our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express
consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after
the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.
We
have entered into director agreements with each of our independent director appointees. These agreements set forth the services
to be provided and compensation to be received by our independent directors, as well as the independent directors’ obligations
in terms of confidentiality, non-competition and non-solicitation. Pursuant to these agreements, the directorship of our independent
director appointees will last until the earlier of (i) the date on which the director ceases to be a member of our board of directors
for any reason or (ii) the date of termination of these agreements. Each party to a director agreement may terminate the agreement
through a 30-day prior written notice or such shorter period as the parties may agree upon.
NASDAQ
Requirements
Our
common shares are currently listed on the NASDAQ Global Market and, for so long as our securities continue to be listed, we will
remain subject to the rules and regulations established by NASDAQ Stock Market as being applicable to listed companies. NASDAQ
has adopted, and from time-to-time adopts, amendments to its Marketplace Rule 5600 that imposes various corporate governance requirements
on listed securities. Section (a)(3) of Marketplace Rule 5615 provides that foreign private issuers such as our company are required
to comply with certain specific requirements of Marketplace Rule 5600, but, as to the balance of Marketplace Rule 5600, foreign
private issuers are not required to comply if the laws of their home jurisdiction do not otherwise mandate compliance with the
same or substantially similar requirement.
We
currently comply with those specifically mandated provisions of Marketplace Rule 5600. In addition, we have elected to voluntarily
comply with certain other requirements of Marketplace Rule 5600, notwithstanding that our home jurisdiction does not mandate compliance
with the same or substantially similar requirements; although we may in the future determine to cease voluntary compliance with
those provisions of Marketplace Rule 5600 that are not mandatory. However, we have elected not to comply with the following provisions
of Marketplace Rule 5600, since the laws of the British Virgin Islands do not require compliance with the same or substantially
similar requirements:
|
●
|
our
independent directors do not hold regularly scheduled meetings in executive session (rather, all board members may attend
all meetings of the Board of Directors);
|
|
●
|
the
compensation of our executive officers is recommended but not determined by an independent committee of the board or by the
independent members of the Board of Directors; and our CEO is not prevented from being present in the deliberations concerning
his compensation;
|
|
|
|
|
●
|
related
party transactions are not required to be reviewed and we are not required to solicit member approval of stock plans, including:
those in which our officers or directors may participate; stock issuances that will result in a change in control; the issuance
of our stock in related party acquisitions or other acquisitions in which we may issue 20% or more of our outstanding shares;
or, below market issuances of 20% or more of our outstanding shares to any person; and
|
|
|
|
|
●
|
we
are not required to hold an in-person annual meeting to elect directors and transact other business customarily conducted
at an annual meeting (rather, we complete these actions by written consent of holders of a majority of our voting securities).
|
We
may in the future determine to voluntarily comply with one or more of the foregoing provisions of Marketplace Rule 5600. For example,
we have voluntarily decided to compose of the majority of our board of directors with independent directors as defined by the
NASDAQ rules.
D.
Employees.
As
of December 31, 2018, we had 20
employees,
all located in Beijing, China. The following table sets forth the number of our employees by function as of the same date:
Functional
Area
|
|
Number
of
Employees
|
|
|
%
of Total
|
|
Senior
management
|
|
|
3
|
|
|
|
15.00
|
%
|
Administrative
staff
|
|
|
1
|
|
|
|
5.00
|
%
|
Accounting
staff
|
|
|
2
|
|
|
|
10.00
|
%
|
Product
and service advisors
|
|
|
8
|
|
|
|
40.00
|
%
|
Human
resources and administrative personnel
|
|
|
1
|
|
|
|
5.00
|
%
|
IT
staff
|
|
|
2
|
|
|
|
10.00
|
%
|
Risk
management
|
|
|
3
|
|
|
|
15.00
|
%
|
Total
|
|
|
20
|
|
|
|
100
|
%
|
As
required by regulations in China, we participate in various employee social security plans that are organized by local governments,
including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing
insurance. We are required under Chinese 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
believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes.
E
.
Share ownership.
Except
as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares
as of the date of this annual report by:
|
●
|
each
of our directors and executive officers; and
|
|
|
|
|
●
|
each
of our principal shareholders who beneficially own more than 5% of our total outstanding ordinary shares;
|
The
calculations in the table below are based on 22,114,188 ordinary shares outstanding as of May 9, 2019.
U
nless
otherwise indicated, each person has sole investment and voting power with respect to all shares shown as beneficially owned.
The term “beneficial owner” of securities refers to any person who, even if not the record owner of the securities,
has or shares the underlying benefits of ownership. These benefits include the power to direct the voting or the disposition of
the securities or to receive the economic benefit of ownership of the securities. A person also is considered to be the “beneficial
owner” of securities that the person has the right to acquire within 60 days by option or other agreement. Beneficial owners
include persons who hold their securities through one or more trustees, brokers, agents, legal representatives or other intermediaries,
or through companies in which they have a “controlling interest”, which means the direct or indirect power to direct
the management and policies of the entity. The Company’s directors and executive officers do not have different voting rights
than other shareholders of the Company.
Name
of Beneficial owner*
|
|
Amount
and Nature of
Beneficial Ownership
|
|
|
Percent
of Class
1
|
|
Jianxin
Lin
|
|
|
14,540,000
|
|
|
|
65.75
|
%
|
Jinchu
Xu
|
|
|
-
|
|
|
|
-
|
|
Lu Sun
|
|
|
-
|
|
|
|
-
|
|
Sheve
Li Tay
|
|
|
-
|
|
|
|
-
|
|
Hong
Huang
|
|
|
-
|
|
|
|
-
|
|
Buting
Yang
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as Group
|
|
|
14,540,000
|
|
|
|
65.75
|
%
|
|
|
|
|
|
|
|
|
|
Notes:
*
The business address for our directors and officers is 93 Jianguo Road, No. 6 Building, 11
th
Floor, Chaoyang District,
Beijing, People’s Republic of China 100020.
(1)
|
For
each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially
owned by such person or group by the sum of (i)
22,114,188
being the number of
shares outstanding as of the date of this annual report and (ii) the number of ordinary shares underlying share options held
by such person or group that are exercisable within 60 days after the date of this annual report.
|
Item
7. Major Shareholders and Related Party Transaction
A.
Major Shareholders.
Please
refer to “Item 6.E. Directors, Senior Management and Employees—Share Ownership.”
B.
Related party transactions.
Contractual
Arrangements between WFOE and Sheng Ying Xin
On
February 17, 2016, WFOE entered into certain contractual arrangements with Sheng Ying Xin and the SYX Shareholders, as amended
and re-signed on April 26, 2016. Pursuant to these contractual arrangements, WFOE shall have the power, rights and obligations
equivalent in all material respects to those it would possess if it were the sole equity holder of Sheng Ying Xin, including absolute
control rights and the rights to the assets, property and revenue of Sheng Ying Xin and the receipt of, approximately 100% of
the net income of Sheng Ying Xin as a service fee to WFOE. SYX Shareholders did not receive any consideration in exchange for
their agreements to give up their control over Sheng Ying Xin.
Each
of the VIE Agreements is described in detail below:
Exclusive
Business Cooperation Agreement
Pursuant
to the Exclusive Business Cooperation Agreement between Sheng Ying Xin and WFOE, WFOE provides Sheng Ying Xin with technical support,
consulting services and other management services relating to its day-to-day business operations and management, on an exclusive
basis and to the extent permissible under the PRC laws, utilizing its advantages in technology, human resources, and information.
For services rendered to Sheng Ying Xin by WFOE under this agreement, WFOE is entitled to collect a service fee on a monthly basis,
which is approximately equal to the net income of Sheng Ying Xin.
The
Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior
notice. Sheng Ying Xin does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term
of this agreement with prior written notice.
The
sole director and president of WFOE, Mr. Jianxin Lin, is currently managing Sheng Ying Xin pursuant to the terms of the Exclusive
Business Cooperation Agreement. WFOE has absolute authority relating to the management of Sheng Ying Xin, including but not limited
to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions.
Contracts
that give us effective control of the variable interest entity
Share
Pledge Agreement
Under
the Share Pledge Agreement between the two SYX Shareholders and WFOE, the SYX Shareholders pledged all of their equity interests
in Sheng Ying Xin to WFOE to guarantee the performance of Sheng Ying Xin’s obligations under the Exclusive Business Cooperation
Agreement. Under the terms of the agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited
to, the right to collect dividends generated by the pledged equity interests. The SYX Shareholders also agreed that upon occurrence
of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest
in accordance with applicable PRC laws. The SYX Shareholders further agreed not to dispose of the pledged equity interests or
take any actions that would prejudice WFOE’s interest. All of the equity interest pledges with respect to the equity interests
of Sheng Ying Xin according to the Share Pledge Agreement have been registered with relevant office of the Administration for
Industry and Commerce in China.
The
Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been
paid by Sheng Ying Xin. WFOE shall cancel or terminate the Share Pledge Agreement upon Sheng Ying Xin’s full payment of
fees payable under the Exclusive Business Cooperation Agreement.
Exclusive
Option Agreement
Under
the Exclusive Option Agreement, the SYX Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase,
to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Sheng
Ying Xin at the exercise price of RMB1.00. The agreement remains effective for a term of ten years and may be renewed at WFOE’s
election. Once WFOE exercise such option, the parties shall enter into a separate equity interest transfer or similar agreement.
Power
of Attorney
Under
the Power of Attorney, the SYX Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect
to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the
shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association,
including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating
and appointing on behalf of shareholders the legal representative, the director, supervisor, the chief executive officer and other
senior management members of Sheng Ying Xin.
Although
it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that
of the Exclusive Option Agreement.
This
Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this
Power of Attorney, so long as the SYX Shareholder is a shareholder of Company.
Related
party transactions
Transaction
and balances from related parties:
In
order to reduce the operating losses, on December 30, 2018, Sheng Ying Xin, the sole shareholder of Anytrust, entered
into an equity transfer agreement with Jianxin Lin, the Company’s Chief Executive Officer and Chairman of the Board. Because
Anytrust was insolvent, Sheng Ying Xin sold 100% of the equity interest it owned in Anytrust to Jianxin Lin for no consideration.
We also determined it in our best interest to transfer our equity interest in Anytrust to our Chief Executive Officer, Mr.
Jianxin Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided
to write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring
the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable.
The equity transfer was completed December 30, 2018.
For
the year ended December 31, 2018, 2017 and 2016, the Company recorded revenue from related parties of nil, nil and nil,
respectively. The trade balance due from a related party is nil, nil and nil as of December 31, 2018, 2017 and 2016, respectively
The Company provides consulting services to these related parties in its normal course of business on the same terms as those
provided to its unrelated clients.
Related
parties of the Company represented entities that are directly or indirectly owned by directors and officers of the Company or
in which the directors and officers of the Company has significant influence.
Due
from related party:
As of December
31, 2018, the Company has related party receivable of $184,961, due to advances made on behalf of related parties, including $44,128
due from Sheng Ying Xin (Beijing) Film Industry Co., Ltd., $28,724 from Beijing Zhiping Science and Technology Development Co.,
Ltd. and $112,109 from Anytrust.
Due
to related party:
As
of December 31, 2018 and 2017, the Company has related party payables of $32,005 and $163,659, respectively, due to Mr. Jianxin
Lin, the Company’s Chief Executive Officer, who lent funds to the Company to support its operations. The payables are unsecured,
non-interest bearing and due on demand.
Review,
approval or ratification of transactions with related persons.
Our
Audit Committee, consisting of independent directors, is charged with reviewing and approving all agreements and transactions
which had been entered into with related parties, as well as reviewing and approving all future related party transactions.
C.
Interests of experts and counsel.
No
disclosure is required in response to this Item.
Item
8. Financial Information
A.
Consolidated Statements and Other Financial Information
See
“Item 18. Financial Statements.”
Legal
Proceedings
We
are currently not a party to any legal, arbitration or administrative proceedings that, in the opinion of our management, are
likely to have a material and adverse effect on our business, financial condition or results of operations, and we are not aware
of any threat of any of the above-mentioned proceedings. However, we may from time to time become a party to various legal, arbitration
or administrative proceedings arising.
Dividend
Policy
Our
board of directors has discretion on whether to distribute dividends, subject to certain restrictions under British Virgin Islands
law, namely that our company may only pay dividends if the value of the company’s assets exceed its liabilities and the
company is able pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary
resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board
of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors
may deem relevant.
We
do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We
currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
B.
Significant Changes
We
have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
Item
9. The Offer and Listing.
A.
Offer and listing details.
Our
shares began trading on NASDAQ Global Market on August 8, 2017 under the symbol “CIFS.” Prior to that there was no
market for our ordinary shares.
The
following table sets forth the annual high and low last trade prices of our ordinary shares as reported by The NASDAQ Stock Market
during the fiscal year 2018 and from August 8, 2017 through December 31, 2017. The prices are inter-dealer prices, without retail
markup, markdown or commission.
Period
|
|
High
|
|
|
Low
|
|
Fiscal
Year ended December 31, 2017
|
|
$
|
61.00
|
|
|
$
|
11.13
|
|
Fiscal
Year ended December 31, 2018
|
|
$
|
47.98
|
|
|
$
|
0.635
|
|
The
following table sets forth the high and low last trade prices of our common shares as reported by The NASDAQ Stock Market for
each fiscal quarter of 2018 and 2017. The prices are inter-dealer prices, without retail markup, markdown or commission.
Period
|
|
High
|
|
|
Low
|
|
Fiscal
Year 2017, quarter ended
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
$
|
20.04
|
|
|
$
|
11.13
|
|
December
31, 2017
|
|
$
|
61.00
|
|
|
$
|
20.85
|
|
Fiscal
Year 2018, quarter ended
|
|
|
|
|
|
|
|
|
March
31, 2018
|
|
$
|
47.98
|
|
|
$
|
31.57
|
|
June
30, 2018
|
|
$
|
34.85
|
|
|
$
|
14.95
|
|
September
30, 2018
|
|
$
|
16.65
|
|
|
$
|
7.99
|
|
December
31, 2018
|
|
$
|
8.55
|
|
|
$
|
0.635
|
|
The
following table sets forth the monthly high and low last trade prices of our ordinary shares as reported by The NASDAQ Stock Market
for each month during the six months preceding the date of this Annual Report. The prices are inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily reflect actual transactions.
Period
|
|
High
|
|
|
Low
|
|
Month
Ended:
|
|
|
|
|
|
|
|
|
May 9,
2019
|
|
$
|
2.79
|
|
|
$
|
2.02
|
|
April
30, 2019
|
|
$
|
4.07
|
|
|
$
|
3.36
|
|
March
31, 2019
|
|
$
|
6.44
|
|
|
$
|
2.30
|
|
February
28, 2019
|
|
$
|
3.58
|
|
|
$
|
0.83
|
|
January
31, 2019
|
|
$
|
1.15
|
|
|
$
|
0.82
|
|
December
31, 2018
|
|
$
|
1.95
|
|
|
$
|
0.635
|
|
November
30, 2018
|
|
$
|
2.60
|
|
|
$
|
1.42
|
|
B.
Plan of distribution.
No
disclosure is required in response to this Item.
C.
Markets.
Our
shares have been listed on The NASDAQ Global Market since August 8, 2017 under the symbol “CIFS.” Prior to that there
was no market for our ordinary shares.
D.
Selling Shareholders.
No
disclosure is required in response to this Item.
E.
Dilution.
No
disclosure is required in response to this Item.
F.
Expenses of the Issue.
No
disclosure is required in response to this Item.
Item
10. Additional Information.
A.
Share Capital.
No
disclosure is required in response to this Item.
B.
Memorandum and articles of association.
General
China
Internet Nationwide Financial Services Inc. is a BVI business company incorporated on September 28, 2015 and our affairs are governed
by the provisions of our memorandum and articles of association, as amended and restated from time to time, the BVI Act, and the
applicable laws of the British Virgin Islands, or the BVI (including applicable common law).
Our
amended and restated memorandum and articles of association authorizes us to issue an unlimited number of shares of a single class
each with a par value of $0.001.
The
following description of our share capital and our constitutional rules under our memorandum and articles of association is qualified
in its entirety by reference to our amended and restated memorandum and articles of association, which have been filed as an exhibit.
Memorandum
and Articles of Association
The
following discussion describes our amended and restated memorandum and articles of association that (subject to any limitations,
restrictions or modifications in our memorandum or articles of association; and subject to any rights or restrictions attaching
to any shares) will be in effect upon the completion of this offering:
Objects
and Purposes, Register, and Shareholders.
Subject to the BVI Act and BVI law, our objects and purposes are unlimited.
Our register of members will be maintained by our transfer agent, Island Stock Transfer. Under the BVI Act, a BVI company may
treat the registered holder of a share as the only person entitled to (a) exercise any voting rights attaching to the share, (b)
receive notices, (c) receive a distribution in respect of the share and (d) exercise other rights and powers attaching to the
share. Consequently, as a matter of BVI law, where a shareholder’s shares are registered in the name of a nominee such as
Cede & Co, the nominee is entitled to receive notices, receive distributions and exercise rights in respect of any such shares
registered in its name. The beneficial owners of the shares registered in a nominee’s name will therefore be reliant on
their contractual arrangements with the nominee in order to receive notices and dividends and ensure the nominee exercises voting
and other rights in respect of the shares in accordance with their directions.
Directors’
Powers.
Under the BVI Act, subject to any modifications or limitations in a company’s memorandum and articles of
association, a company’s business and affairs are managed by, or under the direction or supervision of, its directors; and
directors generally have all powers necessary to manage a company. A director must disclose any interest he has on any proposal,
arrangement or contract not entered into in the ordinary course of business and on usual terms and conditions. An interested director
may (subject to the memorandum and articles) vote on a transaction in which he has an interest. In accordance with, and subject
to, our memorandum and articles, the directors may by resolution of directors exercise all the powers of the Company to incur
indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any
third party.
Rights,
Preferences and Restrictions of Ordinary Shares.
Subject to the restrictions described under the section titled “Dividend
Policy” above, our directors may (subject to the memorandum and articles) authorize dividends at such time and in such amount
as they determine. Each ordinary share is entitled to one vote on any resolution of shareholders. In the event of a liquidation
or dissolution of the Company, our shareholders are (subject to the memorandum and articles) entitled to share ratably in all
surplus assets remaining available for distribution to them after payment and discharge of all claims, debts, liabilities and
obligations of the Company and after provision is made for each class of shares (if any) having preference over the ordinary shares.
There are no sinking fund provisions applicable to our ordinary shares. Holders of our ordinary shares have no pre-emptive rights.
Subject to the provisions of the BVI Act, we may, (subject to the memorandum and articles) the consent of the shareholder whose
shares are to be purchased, repurchase our ordinary shares in certain circumstances provided that the Company will, immediately
after the repurchase, satisfy the solvency test. The Company will satisfy the solvency test, if (i) the value of the Company’s
assets exceeds its liabilities; and (ii) the Company is able to pay its debts as they fall due.
In
accordance with the BVI Act:
(i)
the Company may purchase, redeem or otherwise acquire its own shares in accordance with either (a) Sections 60, 61 and 62 of the
BVI Act (save to the extent that those Sections are negated, modified or inconsistent with provisions for the purchase, redemption
or acquisition of its own shares specified in the Company’s memorandum and articles); or (b) such other provisions for the
purchase, redemption or acquisition of its own shares as may be specified in the Company’s memorandum and articles. The
Company’s memorandum and articles provide that such Sections 60, 61 and 62 do not apply to the Company; and
(ii)
where a company may purchase, redeem or otherwise acquire its own shares otherwise than in accordance with Sections 60, 61 and
62 of the BVI Act, it may not purchase, redeem or otherwise acquire the shares without the consent of the member whose shares
are to be purchased, redeemed or otherwise acquired, unless the Company is permitted by the memorandum and articles to purchase,
redeem or otherwise acquire the shares without that consent; and
(iii)
unless the shares are held as treasury shares in accordance with Section 64 of the BVI Act, any shares acquired by the Company
are deemed to be cancelled immediately on purchase, redemption or other acquisition.
Variation
of the Rights of Shareholders.
As permitted by the BVI Act and our memorandum and articles, the rights attached to shares
of the Company may (subject to the memorandum and articles) only, whether or not the Company is being wound up, be varied with
the consent in writing of or by a resolution passed at a meeting by the holders of more than fifty percent of the issued shares
of that class, except where a different majority is required under our memorandum and articles or the BVI Act. A greater majority
is required in relation to a scheme of arrangement and may be required in relation to a plan of arrangement, as described under
“—Summary of Certain Significant Provisions of BVI Law—Mergers, Consolidations and Similar Arrangements”
below.
Shareholder
Meetings.
In accordance with, and subject to, our memorandum and articles, (a) any director of the Company may convene
meetings of the shareholders at such times as the director considers necessary or desirable (and the director convening a meeting
of shareholders may fix as the record date for determining those shareholders that are entitled to vote at the meeting the date
notice is given of the meeting, or such other date as may be specified in the notice, being a date not earlier than the date of
the notice); and (b) upon the written request of shareholders entitled to exercise 30% or more of the voting rights in respect
of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders. Under BVI law, the memorandum
and articles of association may be amended to decrease but not increase the required percentage to call a meeting above 30%. In
accordance with, and subject to, our memorandum and articles, (a) the director convening a meeting shall give not less than 7
days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear as shareholders
in the register of members of the Company and are entitled to vote at the meeting; and the other directors; (b) a meeting of shareholders
held in contravention of the requirement to give notice is valid if shareholders holding at least 90% of the total voting rights
on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a
shareholder at the meeting shall constitute waiver in relation to all of the ordinary shares that that shareholder holds; (c)
a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy
not less than 50%of the votes of the ordinary shares or class or series of ordinary shares entitled to vote on resolutions of
shareholders to be considered at the meeting; and (d) if within two hours from the time appointed for the meeting a quorum is
not present, the meeting, if convened upon the request of the shareholders, shall be dissolved; in any other case it shall stand
adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or
to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour
from the time appointed for the meeting in person or by proxy not less than one third of the votes of the ordinary shares entitled
to vote on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall
be dissolved.
Dividends.
Subject to the BVI Act and our memorandum and articles, our directors may, by resolution, declare dividends at a time
and amount as they think fit if they are satisfied, based on reasonable grounds, that, immediately after distribution of the dividend,
the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due. There is no further
BVI law restriction on the amount of funds which may be distributed by us by dividend, including all amounts paid by way of the
subscription price for ordinary shares regardless of whether such amounts may be wholly or partially treated as share capital
or share premium under certain accounting principles. Shareholder approval is not (except as otherwise provided in our memorandum
or articles) required to pay dividends under BVI law. In accordance with, and subject to, our memorandum and articles, no dividend
shall bear interest as against the Company (except as otherwise provided in our memorandum or articles).
Disclosure
of the Securities and Exchange Commission’s Position on Indemnification for Securities Act Liabilities.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer
of Shares
.
Subject to any applicable restrictions or limitations arising pursuant to (i) our memorandum and articles;
or (ii) the BVI Act, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the
usual or common form or in any other form which our directors may approve (such instrument of transfer being signed by the transferor
and containing the name and address of the transferee). Our memorandum and articles also (save as otherwise provided therein)
provide that shares may be dealt with by means of a system utilized for the purposes of holding and transferring of shares in
uncertificated form.
Summary
of Certain Significant Provisions of BVI Law
The
BVI Act differs from laws applicable to US corporations and their shareholders. Set forth below is a summary of certain significant
provisions of the BVI Act applicable to us (save to the extent that such provisions have been, to the extent permitted under the
BVI Act, negated or modified in our memorandum and articles in accordance with the BVI Act).
Mergers,
Consolidations and Similar Arrangements.
The BVI Act provides for mergers as that expression is understood under US corporate
law. Common law mergers are also permitted outside of the scope of the BVI Act. Under the BVI Act, two or more companies may either
merge into one of such existing companies, or the surviving company, or consolidate with both existing companies ceasing to exist
and forming a new company, or the consolidated company. The procedure for a merger or consolidation between the Company and another
company (which need not be a BVI company, and which may be the Company’s parent, but need not be) is set out in the BVI
Act. The directors of the BVI company or BVI companies which are to merge or consolidate must approve a written plan of merger
or consolidation which must also be authorized by a resolution of members (and the outstanding shares of every class of shares
that are entitled to vote on the merger or consolidation as a class if the memorandum or articles so provide or if the plan of
merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would
entitle the class to vote on the proposed amendment as a class) of the shareholders of the BVI company or BVI companies which
are to merge. A foreign company which is able under the laws of its foreign jurisdiction to participate in the merger or consolidation
is required by the BVI Act to comply with the laws of that foreign jurisdiction in relation to the merger or consolidation. The
Company must then execute articles of merger or consolidation, containing certain prescribed details. The plan and articles of
merger or consolidation are then filed with the Registrar of Corporate Affairs in the BVI, or the Registrar. If the surviving
company or the consolidated company is to be incorporated under the laws of a jurisdiction outside BVI, it shall file the additional
instruments required under Section 174(2)(b) of the BVI Act. The Registrar then (if he is satisfied that the requirements of the
BVI Act have been complied with) registers, in the case of a merger, the articles of merger or consolidation and any amendment
to the memorandum and articles of the surviving company and, in the case of a consolidation, the memorandum and articles of association
of the new consolidated company and issues a certificate of merger or consolidation (which is conclusive evidence of compliance
with all requirements of the BVI Act in respect of the merger or consolidation). The merger or consolidation is effective on the
date that the articles of merger or consolidation are registered by the Registrar or on such subsequent date, not exceeding thirty
days, as is stated in the articles of merger or consolidation but if the surviving company or the consolidated company is a company
incorporated under the laws of a jurisdiction outside the BVI, the merger or consolidation is effective as provided by the laws
of that other jurisdiction.
As
soon as a merger or consolidation becomes effective (inter alia), (a) the surviving company or consolidated company (so far as
is consistent with its amended memorandum and articles, as amended or established by the articles of merger or consolidation)
has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies; (b) the memorandum
and articles of any surviving company are automatically amended to the extent, if any, that changes to its amended memorandum
and articles are contained in the articles of merger; (c) assets of every description, including choses-in-action and the business
of each of the constituent companies, immediately vest in the surviving company or consolidated company; (d) the surviving company
or consolidated company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e)
no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against
a constituent company or against any shareholder, director, officer or agent thereof, is released or impaired by the merger or
consolidation; and (f) no proceedings, whether civil or criminal, pending at the time of a merger or consolidation by or against
a constituent company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by the merger
or consolidation, but: (i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company
or consolidated company or against the shareholder, director, officer or agent thereof, as the case may be or (ii) the surviving
company or consolidated company may be substituted in the proceedings for a constituent company but if the surviving company or
the consolidated company is incorporated under the laws of a jurisdiction outside the BVI, the effect of the merger or consolidation
is the same as noted foregoing except in so far as the laws of the other jurisdiction otherwise provide.
The
Registrar shall strike off the register of companies each constituent company that is not the surviving company in the case of
a merger and all constituent companies in the case of a consolidation (save that this shall not apply to a foreign company).
If
the directors determine it to be in the best interests of the Company, it is also possible for a merger to be approved as a court
approved plan of arrangement or as a scheme of arrangement in accordance with (in each such case) the BVI Act. The convening of
any necessary shareholders meetings and subsequently the arrangement must be authorized by the BVI court. A scheme of arrangement
requires the approval of 75% of the votes of the shareholders or class of shareholders, as the case may be. If the effect of the
scheme is different in relation to different shareholders, it may be necessary for them to vote separately in relation to the
scheme, with it being required to secure the requisite approval level of each separate voting group. Under a plan of arrangement,
a BVI court may determine what shareholder approvals are required and the manner of obtaining the approval.
Continuation
into a Jurisdiction Outside the BVI.
In accordance with, and subject to, our memorandum and articles, the Company may
by resolution of shareholders or by a resolution passed unanimously by all directors of the Company continue as a company incorporated
under the laws of a jurisdiction outside the BVI in the manner provided under those laws. The Company does not cease to be a BVI
company unless the foreign law permits continuation and the BVI company has complied with the requirements of that foreign law.
Where a company that wishes to continue as a company incorporated under the laws of a jurisdiction outside the BVI has a charge
registered in respect of the property of the company undersection 163 of the BVI Act which has not been released or satisfied,
it shall, before continuing and provided that the charge does not contain a covenant prohibiting continuation of the company outside
the BVI, provide a written declaration addressed to the Registrar specifying that: (a) a notice of satisfaction or release in
respect of the charge has been filed and registered under section 165 of the BVI Act; (b) where paragraph (a) has not been complied
with, the chargee to whom the registered charge relates has been notified in writing of the intention to continue the company
as a company incorporated under the laws of a jurisdiction outside the BVI and the chargee has given his or her consent or has
not objected to the continuation; or (c) where paragraph (a) has not been satisfied and the chargee, after notification under
paragraph (b), has not given his or her consent or objected to the continuation, the chargee’s interest secured by the registered
charge shall not be diminished or in any way compromised by the continuation and the charge shall operate as a liability of the
continued company incorporated under the laws of a jurisdiction outside of the BVI. Where a company is continued under the laws
of a jurisdiction outside the BVI, (a) the company continues to be liable for all of its claims, debts, liabilities and obligations
that existed prior to its continuation, (b) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or
to become due, and no cause existing, against the company or against any shareholder, director, officer or agent thereof, is released
or impaired by its continuation as a company under the laws of the jurisdiction outside the BVI, (c) no proceedings, whether civil
or criminal, pending by or against the company, or against any shareholder, director, officer or agent thereof, are abated or
discontinued by its continuation as a company under the laws of the jurisdiction outside the BVI, but the proceedings may be enforced,
prosecuted, settled or compromised by or against the Company or against the shareholder, director, officer or agent thereof, as
the case may be; and (d) service of process may continue to be effected on the registered agent of the company in the BVI in respect
of any claim, debt, liability or obligation of the Company during its existence as a company under the BVI Act.
Directors.
In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights
or restrictions attaching to any ordinary shares), (a) the directors are elected by resolution of shareholders or by resolution
of directors for such term as the shareholders or directors determine; (b) each director holds office for the term, if any, fixed
by the resolution of shareholders or resolution of directors appointing him, or until his earlier death, resignation or removal.
If no term is fixed on the appointment of a director, the director serves indefinitely until his earlier death, resignation or
removal: (c) a director may be removed from office (i) with or without cause, by a resolution of shareholders passed at a meeting
of shareholders called for the purposes of removing the director or for purposes including the removal of the director or by a
written resolution passed by a least 75% of the shareholders of the Company entitled to vote or (ii) with cause, by a resolution
of directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal
of the director; (d) a director may resign his office by giving written notice of his resignation to the Company and the resignation
has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as
may be specified in the notice and a director shall resign forthwith as a director if he is, or becomes, disqualified from acting
as a director under the BVI Act; (e) the directors may at any time appoint any person to be a director either to fill a vacancy
or as an addition to the existing directors and where the directors appoint a person as director to fill a vacancy, the term shall
not exceed the term that remained when the person who has ceased to be a director ceased to hold office; (f) a vacancy in relation
to directors occurs if a director dies or otherwise ceases to hold office prior to the expiration of his term of office; and (g)
a director is not required to hold ordinary shares as a qualification to office.
In
accordance with, and subject to, our memorandum and articles, (a) any one director of the Company may call a meeting of the directors
by sending a written notice to each other director; (b) the directors of the Company or any committee thereof may meet at such
times and in such manner as the directors may determine to be necessary or desirable; (c) a director shall be given not less than
3 days’ notice of meetings of directors, but a meeting of directors held without 3 days’ notice having been given
to all directors shall be valid if all the directors entitled to vote at the meeting who do not attend waive notice of the meeting,
and for this purpose the presence of a director at a meeting shall constitute waiver by that director and the inadvertent failure
to give notice of a meeting to a director, or the fact that a director has not received the notice, does not invalidate the meeting;
(d) a meeting of directors is duly constituted for all purposes if at the commencement of the meeting there are present in person
or by alternate not less than one-half of the total number of directors, unless there are only 2 directors in which case the quorum
is two; (e) a director may by a written instrument appoint an alternate who need not be a director and the alternate shall be
entitled to attend meetings in the absence of the director who appointed him and to vote or consent in place of the director until
the appointment lapses or is terminated; (f) a resolution of directors is passed if either (i) the resolution is approved at a
duly convened and constituted meeting of directors of the Company or of a committee of directors of the Company by the affirmative
vote of a majority of the directors present at the meeting who voted except that where a director is given more than one vote,
he shall be counted by the number of votes he casts for the purpose of establishing a majority; or (ii) the resolution is consented
to in writing by a majority of directors or by a majority of members of a committee of directors of the Company, as the case may
be, unless (in either case) the BVI Act or our memorandum and articles require a different majority.
Indemnification
of Directors.
In accordance with, and subject to, our memorandum and articles (including the limitations detailed therein),
the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement
and reasonably incurred in connection with legal, administrative or investigative proceedings any person who (a) is or was a party
or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request
of the Company, serving as a director of, or in any other capacity is or was acting for, another company or a partnership, joint
venture, trust or other enterprise.
In
accordance with, and subject to, our memorandum and articles (including the limitations detailed therein), (a) the indemnity referred
to above only applies if the person acted honestly and in good faith with a view to the best interests of the Company and, in
the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful; (b) the decision
of the directors as to whether the person acted honestly and in good faith and with a view to the best interests of the Company
and as to whether the person had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient
for the purposes of the articles, unless a question of law is involved; and (c) the termination of any proceedings by any judgment,
order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the person did
not act honestly and in good faith and with a view to the best interests of the Company or that the person had reasonable cause
to believe that his conduct was unlawful.
In
accordance with, and subject to, our memorandum and articles, the Company may purchase and maintain insurance in relation to any
person who is or was a director, officer or liquidator of the Company, or who at the request of the Company is or was serving
as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint
venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity,
whether or not the Company has or would have had the power to indemnify the person against the liability as provided in the articles.
Directors
and Conflicts of Interest.
As noted above, pursuant to the BVI Act and the Company’s memorandum and articles of
association, a director of a company who has an interest in a transaction and who has declared such interest to the other directors,
may:
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(a)
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vote
on a matter relating to the transaction;
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(b)
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attend
a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at
the meeting for the purposes of a quorum; and
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(c)
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sign
a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction,
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and,
subject to compliance with the BVI Act shall not, by reason of his office be accountable to the Company for any benefit which
he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or
benefit.
In
accordance with, and subject to, our memorandum and articles, (a) a director of the Company shall, forthwith after becoming aware
of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to
all other directors of the Company; and (b) for the purposes noted foregoing, a disclosure to all other directors to the effect
that a director is a member, director or officer of another named entity or has a fiduciary relationship with respect to the entity
or a named individual and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure,
be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.
Shareholders’
Suits.
The enforcement of the Company’s rights will ordinarily be a matter for its directors.
In
certain circumstances, a shareholder has the right to seek various remedies against the Company in the event the directors are
in breach of their duties under the BVI Act. Pursuant to Section 184B of the BVI Act, if a company or director of a company engages,
proposes to engage in, or has engaged in conduct that contravenes the provisions of the BVI Act or the memorandum or articles
of association of the Company, the BVI court may, on application of a shareholder or director of the Company, make an order directing
the Company or director to comply with, or restraining the Company or director from engaging in conduct that contravenes, the
BVI Act or the memorandum or articles.
Furthermore,
pursuant to Section 184I(1) of the BVI Act a shareholder of a company who considers that the affairs of the Company have been,
are being or are likely to be, conducted in a manner that is, or any acts of the Company have been, or are likely to be oppressive,
unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the BVI court for an order which, inter
alia, can require the Company or any other person to pay compensation to the shareholder.
The
BVI Act provides for a series of remedies available to shareholders. Where a company incorporated under the BVI Act conducts some
activity which contravenes the BVI Act or the Company’s memorandum and articles of association, the court can issue a restraining
or compliance order. Under Section 184G of the BVI Act, a shareholder of a company may bring an action against the Company for
breach of a duty owed by the Company to him as a shareholder. A shareholder also pursuant to Section 184C of the BVI Act may,
with the leave of the BVI court, bring proceedings or intervene in proceedings in the name of the Company, in certain circumstances.
Such actions are known as derivative actions. The BVI court may only grant leave to bring a derivative action where it is satisfied
that:
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the
Company does not intend to bring, diligently continue or defend or discontinue proceedings; and
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it
is in the interests of the Company that the conduct of the proceedings not be left to the directors or to the determination
of the shareholders as a whole.
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When
considering whether to grant leave, the BVI court is also required to have regard to the following matters:
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●
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whether
the shareholder is acting in good faith;
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●
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whether
a derivative action is in the Company’s interests, taking into account the directors’ views on commercial matters;
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●
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whether
the proceedings are likely to succeed;
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●
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the
costs of the proceedings in relation to the relief likely to be obtained; and
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●
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whether
an alternative remedy to the derivative claim is available.
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Any
shareholder of a company may apply to the BVI court under the Insolvency Act, 2003 of the BVI, or the Insolvency Act, for the
appointment of a liquidator to liquidate the Company and the court may appoint a liquidator for the Company if it is of the opinion
that it is just and equitable to do so.
Appraisal
Rights.
The BVI Act provides that any shareholder of a company is entitled to payment of the fair value of his shares
upon dissenting from any of the following: (a) a merger if the company is a constituent company, unless the company is the surviving
company and the shareholder continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent
company; (c) any sale, transfer, lease, exchange or other disposition of more than 50% in value of the assets or business of the
company if not made in the usual or regular course of the business carried on by the company but not including: (i) a disposition
pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially
all net proceeds to be distributed to the shareholders in accordance with their respective interests within one year after the
date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof;
(d) a compulsory redemption of 10% or fewer of the issued shares of the company required by the holders of 90% or more of the
votes of the outstanding shares of the company pursuant to the terms of Section 176 of the BVI Act; and (e) an arrangement, if
permitted by the BVI court.
Generally
any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the
BVI or their individual rights as shareholders as established by the company’s memorandum and articles of association. There
are common law rights for the protection of shareholders that may be invoked, largely derived from English common law. For example,
under the rule established in the English case known as Foss v. Harbottle, a court will generally refuse to interfere with the
management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the
company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the
affairs of the company conducted properly according to law and the constituent documents of the Company. As such, if those who
control the Company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum
and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the
following:
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a
company is acting or proposing to act illegally or beyond the scope of its authority;
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the
act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than
the number of votes which have actually been obtained;
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●
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the
individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or
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●
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those
who control the Company are perpetrating a “fraud on the minority.”
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Share
Repurchases and Redemptions.
As permitted by the BVI Act and subject to our memorandum and articles of association, shares
may be repurchased, redeemed or otherwise acquired by us by resolution of directors and with the consent of the shareholder whose
shares are being purchased. Depending on the circumstances of the redemption or repurchase, our directors may need to determine
that, immediately following the redemption or repurchase, we will be able to satisfy our debts as they fall due and the value
of our assets exceeds our liabilities. Our directors may only exercise this power on our behalf, subject to the BVI Act, our memorandum
and articles of association and to any applicable requirements imposed from time to time by the SEC, the or any other stock exchange
on which our securities are listed.
Inspection
of Books and Records
. Under the BVI Act, members of the general public, on payment of a nominal fee, can obtain copies
of the public records of a company available at the office of the Registrar, including the Company’s certificate of incorporation,
its memorandum and articles of association (with any amendments thereto), records of license fees paid to date, any articles of
dissolution, any articles of merger, and a register of charges created by the Company (if the Company has elected to file such
a register or an applicable chargee has caused the same to be filed).
A
shareholder of a company is entitled, on giving written notice to the Company, to inspect:
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(a)
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the
memorandum and articles of association;
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(b)
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the
register of members;
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(c)
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the
register of directors; and
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(d)
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the
minutes of meetings and resolutions of shareholders and of those classes of shares of which he is a shareholder.
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In
addition, a shareholder may make copies of or take extracts from the documents and records referred to in (a) through (d) above.
However, subject to the memorandum and articles of association of the Company, the directors may, if they are satisfied that it
would be contrary to the Company’s interests to allow a shareholder to inspect any document, or part of any document, specified
in (b), (c) or (d) above, refuse to permit the shareholder to inspect the document or limit the inspection of the document, including
limiting the making of copies or the taking of extracts from the records. Where a company fails or refuses to permit a shareholder
to inspect a document or permits a shareholder to inspect a document subject to limitations, that shareholder may apply to the
BVI court for an order that he should be permitted to inspect the document or to inspect the document without limitation.
Our
registered agent is Start Incorp Services Limited of Start Chambers, Wickham’s Cay II,P.O. Box 2221, Road Town, Tortola,
British Virgin Islands. A company is required to keep a copy of its register of members and register of directors at the offices
of its registered agent in the BVI, and the Company is required to notify any changes to the originals of such registers (assuming
the originals are held elsewhere) to the registered agent, in writing, within 15 days of any change; and to provide the registered
agent with a written record of the physical address of the place or places at which the original register of members or the original
register of directors is kept.
Where
the place at which the original register of members or the original register of directors of the Company is changed, the Company
must provide the registered agent with the physical address of the new location of the records within 14 days of the change of
location.
A
company is also required to keep at the office of its registered agent or at such other place or places, within or outside the
BVI, as the directors may determine the minutes of meetings and resolutions of shareholders and of classes of shareholders; and
the minutes of meetings and resolutions of directors and committees of directors. If such records are kept at a place other than
at the office of the Company’s registered agent, the Company is required to provide the registered agent with a written
record of the physical address of the place or places at which the records are kept and to notify the registered agent, within
14 days, of the physical address of any new location where such records may be kept.
Dissolution;
Winding Up.
As permitted by the BVI Act and subject to our memorandum and articles of association, we may be voluntarily
liquidated and dissolved under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no
liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities.
We
also may be wound up and dissolved in circumstances where we are insolvent in accordance with the terms of the Insolvency Act.
Anti-Money
Laundering Laws.
In order to comply with legislation and regulations aimed at the prevention of money laundering we are
required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their
identity. Where permitted, and subject to certain conditions, we also may delegate the maintenance of our anti-money laundering
procedures (including the acquisition of due diligence information) to a suitable person. We reserve the right to request such
information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber
in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds
received will be returned without interest to the account from which they were originally debited.
If
any person resident in the BVI knows or suspects that another person is engaged in money laundering or terrorist financing and
the information for that knowledge or suspicion came to his or her attention in the course of his or her business the person will
be required to report his belief or suspicion to the Financial Investigation Agency of the BVI, pursuant to the Proceeds of Criminal
Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure
of information imposed by any enactment or otherwise.
Exchange
controls.
We know of no BVI laws, decrees, regulations or other legislation that limit the import or export of capital
or the payment of dividends to shareholders holders who do not reside in the BVI.
Material
Differences in BVI Law and our Amended and Restated Memorandum and Articles of Association and Delaware Law
Our
corporate affairs are governed by our amended and restated memorandum and articles of association and the provisions of applicable
BVI law, including the BVI Act and BVI common law. The BVI Act differs from laws applicable to US corporations and their shareholders.
The following table provides a comparison between certain statutory provisions of the BVI Act (together with the provisions of
our memorandum and articles of association) and the Delaware General Corporation Law relating to shareholders’ rights.
Shareholder
Meetings
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BVI
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Delaware
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In accordance with, and subject to, our memorandum and articles, (a) any director of the company may convene meetings of the
shareholders at such times and in such manner as the director considers necessary or desirable; and (b) upon the written request
of shareholders entitled to exercise 30% or more of the voting rights in respect of the matter for which the meeting is requested
the directors shall convene a meeting of shareholders
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●
May be held at such time or place as designated in the charter or the by-laws, or if not so designated, as determined by the
board of directors
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May be held inside or outside the BVI
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●
May be held inside or outside Delaware
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●
In accordance with, and subject to, our memorandum and articles, (a) the director convening a meeting shall give not less
than 7 days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear
as shareholders in the register of members of the company and are entitled to vote at the meeting; and the other directors;
and (b) the director convening a meeting of shareholders may fix as the record date for determining those shareholders that
are entitled to vote at the meeting the date notice is given of the meeting, or such other date as may be specified in the
notice, being a date not earlier than the date of the notice
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●
Whenever shareholders are required to take any action at a meeting, a written notice of the meeting shall be given which shall
state the place, if any, date and hour of the meeting, and the means of remote communication, if any
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Shareholder’s
Voting Rights
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BVI
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Delaware
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●
In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or
restrictions attaching to any shares), (a) a shareholder may be represented at a meeting of shareholders by a proxy who may
speak and vote on behalf of the shareholder; and (b) the instrument appointing a proxy shall be produced at the place designated
for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. The
notice of the meeting may specify an alternative or additional place or time at which the proxy shall be presented
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●
Any person authorized to vote may authorize another person or persons to act for him by proxy
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●
In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or
restrictions attaching to any shares), (a) a meeting of shareholders is duly constituted if, at the commencement of the meeting,
there are present in person or by proxy not less than 50% of the votes of the ordinary shares or class or series of ordinary
shares entitled to vote on resolutions of shareholders to be considered at the meeting; and (b) if within two hours from the
time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of shareholders, shall be
dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was
to have been held at the same time and place or to such other time and place as the directors may determine, and if at the
adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less
than one third of the votes of the Shares or each class or series of ordinary shares entitled to vote on the matters to be
considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved
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The charter or bylaws may specify the number to constitute a quorum but in no event shall a quorum consist of less than one-third
of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares shall constitute a quorum
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In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or
restrictions attaching to any shares), (a) at any meeting of the chairman appropriate whether any resolution proposed has
been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting.
If the chairman has any doubt as to the outcome of the vote on a proposed resolution, he shall cause a poll to be taken of
all votes cast upon such resolution. If the chairman fails to take a poll then any shareholder present in person or by proxy
who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand
that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall
be announced to the meeting and recorded in the minutes of the meeting; and (b) a resolution of shareholders is passed if
either (i) the resolution is approved at a duly convened and constituted meeting of the shareholders of the company by the
affirmative vote of a majority of the votes of the ordinary shares entitled to vote thereon which were present at the meeting
and were voted; or (ii) the resolution is consented to in writing by a majority of the votes of ordinary shares entitled to
vote thereon; unless (in either case) the BVI Act or our memorandum and articles require a different majority
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In accordance with, and subject to, our memorandum and articles, (a) the rights attached to ordinary shares as specified in
the memorandum and articles may only, whether or not the company is being wound up, be varied with the consent in writing
of or by a resolution passed at a meeting by the holders of more than 50% of the issued ordinary shares of that class, except
where some other majority is required under our memorandum and articles of association or the BVI Act
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Except as provided in the charter documents, changes in the rights of shareholders as set forth in the charter documents require
approval of a majority of its shareholders
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In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or
restrictions attaching to any shares), the company may amend its memorandum or articles by a resolution of shareholders or
by a resolution of directors, save that no amendment may be made by a resolution of directors: (i) to restrict the rights
or powers of the shareholders to amend the memorandum or articles; (ii) to change the percentage of shareholders required
to pass a resolution of shareholders to amend the memorandum or articles; (iii) in circumstances where the memorandum or articles
cannot be amended by the shareholders; or (iv) to certain specified clauses of the memorandum of association
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The memorandum and articles of association may provide for cumulative voting
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Directors
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BVI
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Delaware
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In accordance with, and subject to, our memorandum and articles, the minimum number of directors shall be one
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Board must consist of at least one member
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In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or
restrictions attaching to any shares), (a) the directors are elected by resolution of shareholders or by resolution of directors
for such term as the shareholders or directors determine; (b) each director holds office for the term, if any, fixed by the
resolution of shareholders or resolution of directors appointing him, or until his earlier death, resignation or removal.
If no term is fixed on the appointment of a director, the director serves indefinitely until his earlier death, resignation
or removal: (c) a director may be removed from office (i) with or without cause, by a resolution of shareholders passed at
a meeting of shareholders called for the purposes of removing the director or for purposes including the removal of the director
or by a written resolution passed by a least 75% of the shareholders of the company entitled to vote or (ii) with cause, by
a resolution of directors passed at a meeting of directors called for the purpose of removing the director or for purposes
including the removal of the director; (d) a director may resign his office by giving written notice of his resignation to
the company and the resignation has effect from the date the notice is received by the company at the office of its registered
agent or from such later date as may be specified in the notice and a director shall resign forthwith as a director if he
is, or becomes, disqualified from acting as a director under the BVI Act; (e) the directors may at any time appoint any person
to be a director either to fill a vacancy or as an addition to the existing directors and where the directors appoint a person
as director to fill a vacancy, the term shall not exceed the term that remained when the person who has ceased to be a director
ceased to hold office; (f) a vacancy in relation to directors occurs if a director dies or otherwise ceases to hold office
prior to the expiration of his term of office; and (g) a director is not required to hold ordinary shares as a qualification
to office.
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Number of board members shall be fixed by the by laws, unless the charter fixes the number of directors, in which case a change
in the number shall be made only by amendment of the charter
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Directors do not have to be independent
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Directors do not have to be independent
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Fiduciary
Duties
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BVI
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Delaware
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Directors owe duties at both common law and under statute including as follows:
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Duty to act honestly and in good faith and in what the director believes to be in the best interests of the company;
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Duty to exercise care, diligence and skill that a reasonable director would exercise in the same circumstances; and
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Duty to exercise powers for a proper purpose and directors shall not act, or agree to the company acting, in a manner
that contravenes the BVI Act or the memorandum and articles of association;
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Directors and officers must act in good faith, with the care of a prudent person, and
in the best interest of the corporation
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Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits
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The BVI Act provides that a director of a company shall, forthwith after becoming aware of the fact that he is interested
in a transaction entered into, or to be entered into, by the company, disclose the interest to the board of the company. However,
the failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director
or the company, so long as the transaction was not required to be disclosed because the transaction is between the company
and the director himself and is in the ordinary course of business and on usual terms and conditions. Additionally, the failure
of a director to disclose an interest does not affect the validity of the transaction entered into by the company if (a) the
material facts of the interest of the director in the transaction are known by the shareholders entitled to vote at a meeting
of shareholders and the transaction is approved or ratified by a resolution of shareholders or (b) the company received fair
value for the transaction
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Directors may vote on a matter in which they have an interest so long as the director has disclosed any interests in the transaction
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Shareholder
Derivative Actions
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BVI
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Delaware
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Generally speaking, the company is the proper plaintiff in any action. A shareholder
may, with the leave of the BVI court, bring proceedings or intervene in proceedings in
the name of the company, in certain circumstances. Such actions are known as derivative
actions. The BVI court may only grant leave to bring a derivative action where the following
circumstances apply:
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the company does not intend to bring, diligently continue or defend or discontinue the proceedings; and
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it is in the interests of the company that the conduct of the proceedings not be left to the directors or to the determination
of the shareholders as a whole when considering whether to grant leave, the BVI court is also required to have regard
to the following matters:
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In any derivative suit instituted by a shareholder of a corporation, it shall be averred in the complaint that the plaintiff
was a shareholder of the corporation at the time of the transaction of which he complains or that such shareholder’s
stock thereafter devolved upon such shareholder by operation of law
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i.
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whether
the shareholder is acting in good faith;
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Complaint shall set forth with particularity the efforts of the plaintiff to obtain the
action by the board or the reasons for not making such effort
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Such action shall not be dismissed or compromised without the approval of the Delaware Court of Chancery
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ii.
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whether
a derivative action is in the interests of the company, taking into account the directors’ views on commercial matters;
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iii.
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whether
the action is likely to succeed;
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iv.
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the
costs of the proceedings in relation to the relief likely to be obtained; and
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v.
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whether
an alternative remedy to the derivative claim is available
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C.
Material Contracts.
Other
than contracts entered into the ordinary course of business, during the two preceding fiscal years the Company has entered into
the following material contracts (which are included as exhibits to this annual report):
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1.
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Equity
Transfer Agreement entered into by and between Sheng Ying Xin (Beijing) Management Consulting Co., Ltd and Beijing Tianhuang
Tongda Technology Co., Ltd. dated November 14, 2017.
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As
discussed above, on November 14, 2017, Sheng Ying Xin entered into an Equity Transfer Agreement with Beijing Tianhuang Tongda
Technology Co., Ltd, the sole shareholder of Anytrust to acquire Anytrust for a total cash consideration of RMB 12,000,000 (approximately
$1,836,491). The acquisition finally closed on November 23, 2017 and Anytrust is now a wholly-owned subsidiary of Sheng Ying Xin.
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2.
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Strategic
Cooperation Agreement entered into by and between Sheng Ying Xin (Beijing) Management Consulting Co., Ltd and China Co-op
Foreign Trade LLC dated December 26, 2017.
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On
December 26, 2017, Sheng Ying Xin entered in to a strategic cooperation agreement with China Co-op Foreign Trade LLC, pursuant
to which both parties will explore cooperation opportunities including the joint development of a big data center for All China
Federation of Supply and Marketing Cooperatives (“China Co-op”) and agricultural-related industries, a settlement
center in support of the One Belt One Road Initiative, as well as designating the Company as a preferred partner in providing
data analytics and financing advisory services to China Co-op’s network of cooperatives and affiliated enterprises.
China
Co-op Foreign Trade LLC is a majority-owned subsidiary of All China Federation of Supply and Marketing Cooperatives, one of the
largest cooperatives in the world and a leading producer and trader of agricultural inputs, produces and related merchandise in
China.
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3.
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Various
lease agreements entered into by Company and its subsidiaries with various landlords as described in “Item 4. Information
on the Company – D. Property, plants and equipment” and incorporated herein by reference.
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4.
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Equity
Transfer Agreement entered into by and between Sheng Ying Xin (Beijing) Management Consulting Co., Ltd and Jianxin Lin dated
December 30, 2018.
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Our
acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage
of growth. In early 2018, Anytrust launched the beta version of AnyInfo, a vertical search engine and big data platform covering
a broad range of publicly available data of over 30 million enterprises in China. In September 2018, Anytrust launched the AnyInfo
Enterprise Edition of its big data analysis and A.I. report services to promote its ability to generate customized segment/industry
and company profiles to its users.
However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust
was approximately only $
546,303 in
2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per
month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically
insolvent. We had tried to stem our losses through 2018 and by then, we had only 3 employees from an original 89 when we acquired
Anytrust.
We
also determined it in our best interest to transfer our equity interest in Anytrust to our Chief Executive Officer, Mr. Jianxin
Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided to
write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring
the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable.
The equity transfer was completed December 30, 2018.
D.
Exchange controls.
There
are no material British Virgin Islands laws, decrees, regulations or other legislation that impose foreign exchange controls on
us or that affect our payment of dividends, interest or other payments to non-resident holders of our shares. British Virgin Islands
law and our Memorandum of Association and Articles of Association impose no limitations on the right of non-resident or foreign
owners to hold or vote our common shares. However, we operate through subsidiaries located in the PRC and Bolivia, and the payment
of dividends by PRC and Bolivian companies are subject to certain restrictions imposed under PRC and Bolivian law.
The
principal regulation governing foreign currency exchange in the PRC is the Foreign Currency Administration Rules (1996) as amended.
Conversion of Renminbi is strictly regulated by the PRC Government. Under PRC foreign exchange rules and regulations, payment
of routine transactions under current accounts, including trade and service transactions and payment of dividends, may be made
in foreign currencies without prior approval from the SAFE but are subject to procedural requirements. Strict foreign exchange
control continues to apply to capital account transactions, such as direct investment, loans or investments in securities outside
the PRC and capital contribution. These transactions must be approved by the SAFE.
Pursuant
to the Foreign Currency Administration Rules, foreign-invested enterprises in the PRC may purchase foreign exchange without the
approval of the SAFE for trade and service-related exchange transactions by providing commercial documents evidencing these transactions.
They may also retain foreign exchange, subject to a cap approved by the SAFE, to satisfy foreign exchange liabilities or to pay
dividends. However, the relevant PRC authorities may limit or eliminate the ability of foreign-invested enterprises to purchase
and retain foreign currencies in the future.
The
principal regulations governing distribution of dividends by foreign-invested companies include:
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The
Sino-foreign Equity Joint Venture Law (1979), as amended;
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The
Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (1983) as amended;
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The
Foreign Investment Enterprise Law (1986) as amended; and
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The
Regulations of Implementation of the Foreign Investment Enterprise Law (1990) as amended.
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Under
these regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in the PRC are required
to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such
reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends.
In
addition, our wholly owned subsidiaries are required to allocate portions of their after-tax profits to their enterprise expansion
funds and staff welfare and bonus funds at the discretion of their boards of directors. Allocations to these statutory reserves
and funds can only be used for specific purposes and are not transferable to us in the forms of loans, advances or cash dividends.
E.
Taxation
.
The
following is a summary of the material British Virgin Islands, the People’s Republic of China and United States federal
income tax consequences and considerations relevant to an investment in our ordinary shares. The discussion is not intended to
be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws
and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations,
possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions
other than the British Virgin Islands, the People’s Republic of China and the United States. To the extent the discussion
herein relates to matters of British Virgin Islands, the People’s Republic of China or United States tax law, it is the
opinion of Harneys, our counsel as to matters of British Virgin Islands law, Sino-Integrity Law Firm, our counsel as to matters
of PRC law, and Sichenzia Ross Ference Kesner LLP, our counsel as to matters of United States federal law, respectively.
British
Virgin Islands Taxation
Under
British Virgin Islands law as currently in effect, a holder of ordinary shares who is not a resident of the British Virgin Islands
is exempt from British Virgin Islands income tax on dividends paid with respect to the ordinary shares and all holders of ordinary
shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such
shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered
under the BVI Act.
There
are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered
under the BVI Act or persons not resident in the British Virgin Islands. In addition, shares of companies incorporated or re-registered
under the BVI Act are not subject to transfer taxes, stamp duties or similar charges where the company and other companies within
its group are not BVI land owning companies for the purposes of the BVI Act.
There
is no income tax treaty currently in effect between the United States and the British Virgin Islands or between China and the
British Virgin Islands.
People’s
Republic of China Taxation
Under
the PRC Enterprise Income Tax 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
at the rate of 25% on its global income. 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, 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 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 that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. We do not believe that CIFS
meets all of the conditions above. CIFS is a company incorporated outside the PRC. As a holding company, its key assets are its
ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board
of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other
entities outside of China are not PRC resident enterprises either. 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.” There can be no assurance that the PRC government will ultimately take a view that is consistent
with us.
However,
if the PRC tax authorities determine that CIFS is a PRC resident enterprise for enterprise income tax purposes, we may be required
to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident
enterprise shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares,
if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject
to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC
resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless
a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of CIFS would
be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that CIFS is
treated as a PRC resident enterprise.
Provided
that our British Virgin Islands holding company, CIFS, is not deemed to be a PRC resident enterprise, holders of our ordinary
shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the
sale or other disposition of our shares. However, under SAT Circular 698 and Bulletin 7, where a non-resident enterprise conducts
an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident
enterprise, 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 such taxable assets may report to the relevant tax authority
such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and
the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently
at a rate of 10% for the transfer of equity interests in a PRC resident enterprise,. We and our non-PRC resident investors may
be at risk of being required to file a return and being taxed under SAT Circular 698 and Bulletin 7, and we may be required to
expend valuable resources to comply with SAT Circular 698 and Bulletin 7, or to establish that we should not be taxed under these
circulars. See “Risks Related to Doing Business in China—Enhanced scrutiny over acquisition transactions by the PRC
tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
Material
United States Federal Income Tax Considerations
The
following is a general summary of material U.S. federal income tax considerations relating to the purchase, ownership and disposition
of the ordinary shares by U.S. Investors (as defined below) that purchase the ordinary shares pursuant to the public offering
and hold such ordinary shares as capital assets as defined under the Internal Revenue Code of 1986, as amended, or the Code. This
summary is based on the Code, the Treasury regulations issued pursuant to the Code, or the Treasury Regulations, and administrative
and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with
retroactive effect, or to different interpretation. Such change could materially and adversely affect the tax consequences described
below. No assurance can be given that the Internal Revenue Service, or IRS, would not assert, or that a court would not sustain,
a position contrary to any of the tax consequences described below. This summary is for general information only and does not
address all of the tax considerations that may be relevant to specific U.S. Investors in light of their particular circumstances
or to U.S. Investors subject to special treatment under U.S. federal income tax law (such as banks or other financial institutions,
insurance companies, tax-exempt organizations, retirement plans, partnerships, regulated investment companies, dealers in stock,
securities or currencies, brokers, real estate investment trusts, certain former citizens or residents of the United States, persons
who acquire ordinary shares as part of a straddle, hedge, conversion transaction or other integrated investment, persons that
have a “functional currency” other than the U.S. dollar, persons that own directly, indirectly or constructively 10.0%
or more of our company’s shares, persons that are resident in or hold ordinary shares in connection with a permanent establishment
outside the United States or persons that generally mark their securities to market for U.S. federal income tax purposes). This
summary does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative
minimum tax considerations.
As
used in this summary, the term “U.S. Investor” means a beneficial owner of ordinary shares that is, for U.S. federal
income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation, or other entity taxable as
a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state
thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of
its source or (iv) a trust, (a) if a court within the United States is able to exercise primary supervision over its administration
and one or more “U.S. persons” (within the meaning of the Code) have the authority to control all of its substantial
decisions, or (b) if a valid election is in effect for the trust to be treated as a U.S. person.
If
an entity treated as a partnership for U.S. federal income tax purposes holds the ordinary shares, the tax treatment of such partnership
and each partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that
is treated as a partnership for U.S. federal income tax purposes should consult its own tax adviser regarding the U.S. federal
income tax considerations applicable to it and its partners of the purchase, ownership and disposition of the ordinary shares.
Prospective
investors should consult their tax advisers as to the particular tax considerations applicable to them relating to the purchase,
ownership and disposition of ordinary shares, including the applicability of U.S. federal, state and local tax laws and non-U.S.
tax laws.
Taxation
of Dividends
Subject
to the PFIC discussion below, a U.S. Investor will be required to include in gross income the gross amount of any distribution
paid on the ordinary shares (including any amount of taxes withheld by our company) out of our company’s current or accumulated
earnings and profits (as determined for U.S. federal income tax purposes). Distributions in excess of our company’s current
and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of the U.S. Investor’s
adjusted tax basis in the ordinary shares and thereafter as a gain from the sale of the ordinary shares, but only if our company
calculates our earnings and profits in accordance with U.S. federal income tax principles. As our company does not at this time
intend to makes such calculations, a U.S. Investor should expect to treat the entire amount of any distribution received as a
dividend.
In
case of a U.S. Investor that is a corporation, dividends paid on the ordinary shares will be subject to regular corporate rates
and will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with respect
to dividends received from U.S. corporations.
Dividends
received by an individual, trust or estate should be subject to a maximum income tax rate of 20% (plus the tax on investment income,
discussed below). This reduced income tax rate is applicable to dividends paid by “qualified foreign corporations”
and only if certain holding period requirements and other conditions are met. A non-U.S. corporation (other than a corporation
that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will
be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with
the U.S. and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is
readily tradable on an established securities market in the U.S. As we expect to be readily tradeable on the NASDAQ, our company
should be a qualified foreign corporation paying dividends subject to a reduced rate of taxation.
Dividends
received by an individual, trust or estate will be counted as investment income that is subject to the 3.8% surtax on net investment
income. U.S. Investors should consult their own tax advisors to determine whether, based on all of their investment income, they
are subject to this tax.
As
described above in the discussion of “—People’s Republic of China Taxation,” in the event our company
is treated as a PRC “resident enterprise” under PRC law, our company may be required to withhold PRC income tax on
dividends paid on the ordinary shares under the new EIT Law. For U.S. federal income tax purposes, U.S. Investors will be treated
as having received the amount of PRC taxes withheld by our company, and as then having paid over the withheld taxes to the PRC
taxing authorities. As a result of this rule, the amount of dividend income included in gross income for U.S. federal income tax
purposes by a U.S. Investor with respect to a payment of dividends may be greater than the amount of cash actually received (or
receivable) by the U.S. Investor from our company with respect to the payment.
A
U.S. Investor may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign
withholding taxes imposed on dividends received on the ordinary shares. A U.S. Investor who does not elect to claim a foreign
tax credit for foreign income tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of
such withholding, but only for a year in which such investor elects to do so for all creditable foreign income taxes. For purposes
of calculating the foreign tax credit limitation, dividends paid by our company will, depending on the circumstances of the U.S.
investor, be either general or passive income.
Our
company expects to pay dividends, if any, in non-U.S. currency. A dividend paid in non-U.S. currency must be included in a U.S.
Investor’s income as a U.S. dollar amount based on the exchange rate in effect on the date such dividend is actually or
constructively received, regardless of whether the dividend is in fact converted into U.S. dollars. If the dividend is converted
to U.S. dollars on the date of receipt, a U.S. Investor generally will not recognize a foreign currency gain or loss. If the non-U.S.
currency is converted into U.S. dollars on a later date, however, the U.S. Investor must include in income any gain or loss resulting
from any exchange rate fluctuations. Such gain or loss will generally be ordinary income or loss, and will be from sources within
the United States for foreign tax credit limitation purposes. U.S. Investors should consult their own tax advisors regarding the
tax consequences to them if our company pays dividends in non-U.S. currency.
Taxation
of Sale, Exchange or Other Disposition of ordinary shares
Subject
to the PFIC discussion below, a U.S. Investor generally will recognize capital gain or loss upon the sale, exchange or other disposition
of ordinary shares in an amount equal to the difference, if any, between the amount realized on the sale, exchange or other disposition
and the U.S. Investor’s adjusted tax basis in such ordinary shares. This capital gain or loss will be long-term capital
gain or loss if the U.S. Investor’s holding period in the ordinary shares exceeds one year. Long-term capital gain of a
non-corporate U.S. investor is generally taxed at preferential rates. The deductibility of capital losses is subject to limitations.
The gain or loss will generally be income or loss from sources within the United States for U.S. foreign tax credit purposes.
U.S. Investors are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on the disposition
of ordinary shares, including the availability of the foreign tax credit under an investor’s own particular circumstances.
A
U.S. Investor that receives non-U.S. currency on the disposition of the ordinary shares will realize an amount equal to the U.S.
dollar value of the foreign currency received on the date of disposition (or in the case of cash basis and electing accrual basis
taxpayers, the settlement date) whether or not converted into U.S. dollars at that time. Very generally, the U.S. Investor will
recognize currency gain or loss if the U.S. dollar value of the currency received on the settlement date differs from the amount
realized with respect to the ordinary shares. Any currency gain or loss on the settlement date or on any subsequent disposition
of the foreign currency generally will be U.S. source ordinary income or loss.
Passive
Foreign Investment Company
In
general, a foreign corporation will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either
(i) at least 75.0% of its gross income is “passive income” or (ii) at least 50.0% of the average value of its total
assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income
for this purpose generally includes, among other things, dividends, interest, certain royalties, rents and gains from commodities
and securities transactions and from the sale or exchange of property that gives rise to passive income. In determining whether
a foreign corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly
or indirectly, at least a 25.0% interest (by value) is taken into account.
We
do not expect to be a PFIC for the current taxable year or any future year. The PFIC determination, however, depends upon the
application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose and
the application of these rules is uncertain in some respects. Under the income and asset tests, whether our company is a PFIC
will be determined annually based upon the composition and nature of our income and the composition, nature and valuation of our
assets, all of which are subject to change. For purposes of the asset test, any cash, including proceeds from the public offering,
will generally be treated as a passive asset and the amount of cash held by our company in any year will depend, in part, on when
our company spends the cash raised from the public offering and generated in its operations. In addition, the determination of
our company’s PFIC status will depend upon the nature of the assets acquired by our company. Moreover, the determination
of the value of our company’s assets may depend on its market capitalization, which may fluctuate, and on whether our variable
interest entities are treated as wholly-owned subsidiaries. Accordingly, there can be no assurance that we will not be a PFIC
in the current or any future year. In addition, there can be no assurance that the IRS will not challenge any determination by
our company that it does not constitute a PFIC.
If
our company is classified as a PFIC for any taxable year during which a U.S. Investor owns ordinary shares, the U.S. Investor,
absent certain elections (including a mark-to-market election discussed below), will generally be subject to adverse rules (regardless
of whether our company continues to be classified as a PFIC) with respect to (i) any “excess distributions” (generally,
any distributions received by the U.S. Investor on the ordinary shares in a taxable year that are greater than 125 percent of
the average annual distributions received by the U.S. Investor in the three preceding taxable years or, if shorter, the U.S. Investor’s
holding period for the ordinary shares) and (ii) any gain realized on the sale or other disposition of ordinary shares.
Under
these adverse rules (a) the excess distribution or gain will be allocated ratably over the U.S. Investor’s holding period,
(b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which our company
is classified as a PFIC will be taxed as ordinary income, and (c) the amount allocated to each of the other taxable years during
which our company was classified as a PFIC will be subject to tax at the highest rate of tax in effect for the applicable class
of taxpayers for that year and an interest charge will be imposed with respect to the resulting tax attributable to each such
taxable year.
If
our company is a PFIC for any taxable year during which a U.S. Investor holds the ordinary shares, our company will continue to
be treated as a PFIC with respect to that U.S. Investor for all succeeding years during which the U.S. Investor holds the ordinary
shares. The U.S. Investor may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the special
tax rules discussed above) as if the U.S. Investor’s ordinary shares had been sold on the last day of the last taxable year
for which our company was a PFIC. If our company holds or acquires an interest in an entity which is itself a PFIC, such an interest
may be treated as owned by a U.S. Investor. U.S. Investors should consult their own tax advisers regarding the consequences to
them if our company holds or acquires an interest in an entity which is itself a PFIC.
Although
the PFIC rules permit a U.S. holder of stock in a PFIC in certain circumstances to avoid some of the disadvantageous tax treatment
described above by making a “qualified electing fund,” or QEF, election, a U.S. Investor will not be able to elect
to treat our company as a QEF because our company does not intend to prepare the information that the U.S. Investor would need
to make a QEF election.
If
our company is a PFIC in any year with respect to a U.S. Investor, the disadvantageous tax treatment described above may in part
be avoided with respect to our company if a U.S. Investor validly makes a mark-to-market election as of the beginning of such
U.S. Investor’s holding period. If such election is made, such U.S. Investor generally will be required to take into account
the difference, if any, between the fair market value of, and its adjusted tax basis in, the ordinary shares at the end of each
taxable year as ordinary income or, to the extent of any net mark-to-market gains previously included in income, ordinary loss,
and to make corresponding adjustments to the tax basis of such ordinary shares. In addition, any gain from a sale, exchange or
other disposition of the ordinary shares will be treated as ordinary income, and any loss will be treated as ordinary loss (to
the extent of any net mark-to-market gains previously included in income). A mark-to-market election is available to a U.S. Investor
only if the ordinary shares are considered “marketable stock.” Generally, shares will be considered marketable stock
if the shares are “regularly traded” on a “qualified exchange” within the meaning of applicable Treasury
Regulations.
If
our company is a PFIC in any year with respect to a U.S. Investor, the U.S. Investor will be required to file an annual return
on IRS Form 8621 reporting his interest in our company and describing any distributions received on the ordinary shares and any
gain realized on the disposition of the ordinary shares (as well as reporting any mark-to-market or other elections).
U.S.
Investors should consult their tax advisors regarding the potential application of the PFIC regime, including eligibility for
and the manner and advisability of making a mark-to-market election, and any reporting requirements that arise as a result of
our classification as a PFIC.
Certain
Reporting Requirements
Certain
U.S. Investors are required to file information returns with the IRS, including IRS Form 926, Return by U.S. Transferor of Property
to a Foreign Corporation, reporting transfers of cash (in excess of $100,000) or other property to our company and information
relating to the U.S. Investor and our company. Substantial penalties may be imposed upon a U.S. Investor that fails to comply.
Certain
individual U.S. Investors (and, under Treasury regulations, certain entities) may be required to report to the IRS (on Form 8938)
information with respect to their investments in our ordinary shares not held through an account with a U.S. financial institution.
U.S. Investors who fail to report required information could become subject to substantial penalties.
U.S.
Investors are encouraged to consult with their own tax advisors regarding foreign financial asset reporting requirements with
respect to their investment in our ordinary shares.
Backup
Withholding Tax and Information Reporting Requirements
Under
certain circumstances, U.S. backup withholding tax and/or information reporting may apply to U.S. Investors with respect to dividend
payments made on or the payment of proceeds from the sale, exchange or other disposition of the ordinary shares, unless an applicable
exemption is satisfied. U.S. Investors that are corporations generally are excluded from these information reporting and backup
withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding tax rules
will be allowed as a credit against a U.S. Investor’s U.S. federal income tax liability, if any, or will be refunded, if
such U.S. Investor timely furnishes required information to the IRS.
F.
Dividends and paying agents.
No
disclosure is required in response to this Item.
G.
Statement by experts.
No
disclosure is required in response to this Item.
H.
Documents on display.
We
previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under the Securities Act of 1933,
with respect to our ordinary shares.
We
are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically,
we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31, for fiscal
years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge
and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the
Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements,
and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
In
accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at http://www.cifsp.com/.
In addition, we will provide hardcopies of our annual report free of charge to shareholders upon request.
|
I.
|
Subsidiary
Information.
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Please
refer to “Item 4. Information on the Company - C. Organization Structure.”
Item
11. Quantitative and Qualitative Disclosures About Market Risk.
Interest
Rate Risk
Interest
rate fluctuations, primarily due to the uncertain future behavior of markets, may have a material impact on the financial results
of the Company. Given the fact that the Company has no outstanding bank borrowings or loans, we believe we have not been exposed
to material risks due to changes in market interest rates. However, we cannot provide assurance that we will not be exposed to
material risks due to changes in market interest rate in the future.
Foreign
Exchange Risk
The
functional currency of our operating subsidiary is RMB, and therefore our operations are exposed to foreign exchange rate fluctuations.
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly
changes in the RMB to the U.S. dollar.
Item
12. Description of Securities Other than Equity Securities.
No
disclosure is required in response to this Item.