Sino Fortune Holding Corporation (“Sino
Fortune” or the “Company”) was incorporated in the State of Nevada on April 18, 2014 under the name Tapioca Corp.
Effective April 18, 2016, we amended our name from Tapioca Corp. to Sino Fortune Holding Corporation.
On May 13, 2016, the Company entered into
a share exchange agreement (the “Share Exchange Agreement”) and on September 14, 2016, the Company entered into an
amendment to the Share Exchange Agreement (the “Amendment”) with Benefactum Alliance Holdings Company Limited (“Benefactum
Alliance”), a British Virgin Islands company, and all the shareholders of Benefactum Alliance, namely, Mr. Bodang Liu, Avis
Genesis Inc. and Manor Goldie Inc. (each a “Shareholder” and collectively the “Shareholders”), to acquire
all the issued and outstanding capital stock of Benefactum Alliance in exchange for the issuance to the Shareholders an aggregate
of 337,500,000 restricted shares of our common stock (the “Reverse Merger”). The Reverse Merger closed on September
29, 2016. As a result, Benefactum Alliance became our wholly owned subsidiary and after the Reverse Merger, Sino Fortune had a
total of 342,960,000 shares of common stock outstanding and former shareholders of Benefactum Alliance owned 98.41% of the issued
and outstanding shares.
The acquisition of Benefactum Alliance
was accounted for as a recapitalization effected by a share exchange, wherein Benefactum Alliance is considered the acquirer for
accounting and financial reporting purposes (legal acquiree) with no adjustment to the historical basis of its assets and liabilities.
Benefactum Alliance’s Shareholders become the majority shareholders and have control of the Company. Sino Fortune was a non-operating
public shell prior to the acquisition and as a result of the acquisition of Benefactum Alliance, the Company is no longer a shell
company. Pursuant to Securities and Exchange Commission (“SEC”) rules, the merger or acquisition of a private operating
company into a non-operating public shell with nominal net assets is considered a capital transaction in substance, rather than
a business combination. The historical financial statements for periods prior to September 29, 2016 are those of Benefactum Alliance
except that the equity section and earnings per share have been retroactively restated to reflect the recapitalization.
Benefactum Alliance is a holding company
incorporated under the laws of British Virgin Islands on March 15, 2016. On April 7, 2016, Benefactum Alliance incorporated Benefactum
Sino Limited (“Benefactum Sino”) in Hong Kong SAR. Benefactum Sino, in turn, incorporated Benefactum Alliance (Shenzhen)
Investment Consulting Company Limited (“Benefactum Shenzhen” or “WFOE”) in the People’s Republic
of China (“PRC” or “China”) with a registered capital of RMB 100,000 on April 21, 2016. Benefactum Shenzhen
entered into a series of contractual agreements with Benefactum Alliance Business Consultant (Beijing) Co., Ltd. (“Benefactum
Beijing”), a company incorporated in the People’s Republic of China on September 10, 2013 with a registered capital
of RMB 50,000,000. Benefactum Beijing is engaged in operating an electronic online financial platform, www.hyjf.com, as well as
mobile apps, which are designed to match investors with small and medium-sized enterprises (“SMEs”) and individual
borrowers in China and generate its revenue from services in connection with matching investors with these borrowers.
Due to PRC legal restrictions on foreign
ownership and investment in, among other areas, value-added telecommunications services, which include internet content providers,
or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China,
have to operate our internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC
through wholly foreign-owned enterprises, majority-owned entities and variable interest entities. The contractual arrangements
between WFOE and Benefactum Beijing allow us to:
The Trademarks, Technologies & Management
and Consulting Service Agreement remains effective until the date when the WFOE terminates this agreement or when Benefactum Beijing
ceases to exist.
Under the terms of the agreement, WFOE,
as pledgee, will be entitled to all the dividends generated by the pledged equity interests.
When WFOE considers it necessary, feasible
under the laws and regulations of PRC and mandatory at the request of the U.S. Securities and Exchange Commission, WFOE shall exercise
this exclusive right and option. When excising its exclusive right, WFOE shall serve written notice to the Benefactum Beijing Shareholders.
Within 7 days of receiving the written notice from WFOE, the Benefactum Beijing Shareholders and Benefactum Beijing shall provide
necessary assistance to transfer the equity interest and assets.
Through its 100% owned subsidiaries, Benefactum
Sino and WFOE, Benefactum Alliance controls and manages Benefactum Beijing through the series of contractual agreements discussed
above.
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States (“U.S. GAAP” or the “Standard”). In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for the fair presentation of the financial information for the
interim periods reported have been made. Results of operations for the three months ended March 31, 2017, are not necessarily
indicative of the results for the year ending December 31, 2017, or any period thereafter. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2016, filed with the
Securities and Exchange Commission on April 13, 2017.
The unaudited
condensed consolidated financial statements include the accounts of Sino
Fortune, Benefactum Alliance, including its wholly owned subsidiaries Benefactum Sino and WFOE, and its variable interest
entity Benefactum Beijing, and have been reported in U.S. dollars. All inter-company balances and transactions have been
eliminated in consolidation.
The series of contractual agreements between
WFOE and Benefactum Beijing (see Note 1) collectively enable us to exercise effective control over, and realize substantially all
of the economic risks and benefits arising from Benefactum Beijing, as well as give us an exclusive option to purchase all or part
of the equity interests and assets of Benefactum Beijing when and to the extent permitted by PRC law. As a result of these contractual
arrangements, we have become the primary beneficiary of Benefactum Beijing and determined Benefactum Beijing is our variable interest
entity subject to consolidation under U.S. GAAP. Accordingly, the financial statements of Benefactum Beijing are included in the
condensed consolidated financial statements of the Company.
Preparation of the
condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during
the reporting period. Significant estimates required to be made by management include, but are not limited to, useful lives
of property, plant and equipment, intangible assets, the recoverability of long-lived assets, allowance for doubtful
accounts, deferred revenues and deferred income tax. Actual results could differ from those estimates.
Cash and cash equivalents include cash
on hand and highly liquid investments with maturities of three months or less when purchased. The Company has no cash equivalents
as of March 31, 2017 and December 31, 2016, respectively.
Investments other than highly liquid ones
are classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments
at the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its investments
as either short-term or long-term based on each instrument’s underlying contractual maturity date, the nature of the investment
and its availability for use in current operations. The Company’s investments are carried at fair value, with unrealized
gains and losses, net of taxes, reported as a component of accumulated other comprehensive income in shareholders’ equity,
with the exception of unrealized losses believed to be other-than-temporary, which are reported in earnings in the current period.
When we sell an investment, the cost is based on the specific identification method.
Prepayments consist of amounts paid in
advance to contractors and vendors for goods and services.
Property and Equipment
Property and equipment are recorded at
cost. Depreciation is computed using the straight-line method, over the estimated useful lives of these assets. Estimated useful
lives of the assets are as follows:
Office furniture
|
3 years
|
Electronic equipment
|
5 years
|
Automobile
|
5 years
|
Leasehold improvement
|
1 to 3 years
|
Maintenance and repairs are charged directly
to expenses as incurred. Major additions and betterment to property and equipment are capitalized and depreciated over the remaining
useful life of the assets.
Long-Lived Assets
Certain assets such as property, plant
and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value
of the asset.
Fair Value of Financial Instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1 - Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 - Inputs other than quoted prices
that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3 - Inputs are unobservable inputs
which reflect management’s assumptions based on the best available information.
The Company considers the carrying amount
of cash, accounts receivable, other receivables, accounts payable, accrued liabilities, other payables and taxes payable approximate
their fair values because of the short period of time between the origination of such instruments and their expected realization
and their current market rate of interest.
The Company used
Level 3 inputs for its valuation methodology for the short-term investment in determining the fair value. The following tables
include a roll-forward of short-term investments classified within Levels 1, 2 and 3:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,274,306
|
|
Addition
|
|
|
—
|
|
|
|
—
|
|
|
$
|
166,353
|
|
Total short-term investments at March 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,440,659
|
|
Revenue Recognition
Revenues are primarily composed of fees
collected from facilitating loan originations.
The Company recognizes revenues under ASC
605 when the following four revenue recognition criteria are met for each revenue type: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability
is reasonably assured.
Loan facilitation service is rendered when
a loan is successfully matched between the lenders and the borrowers; and when a loan is originated. The origination of a loan
takes place when the fund provided by the investor is transferred to the borrower. Revenue is recognized when loan facilitation
service fee is charged and collected from borrower upon the origination of the loan. The aforementioned fee is an agreed upon percentage
of the total principal which varies based on the terms of the loan. The borrower has to agree upfront to such service fee and such
service fee is not refundable.
The Company also charges account management
fee when borrower repays the loan through the Company’s online platform. Management service is considered rendered when proceeds
have been transferred to lenders. The fee is charged to borrowers and is paid by borrowers separately. The Company recognizes the
revenue when a loan has been repaid and the service fee is collected. A service fee of an agreed upon percentage on the total borrowing
is collected from the borrowers and recognized as revenues when the loan is repaid.
Income Taxes
Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including
the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on
the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that
there was any uncertain tax position at March 31, 2017 and December 31, 2016.
Common Control Transaction
A business combination involving entities
under common control is a business combination in which all of the combining entities are ultimately controlled by the same party,
both before and after the business combination, and control is not transitory. The accounting requires financial statements to
be prepared using predecessor book values without any step up to fair value. The difference between any consideration given and
the aggregate book value of the assets and liabilities of the acquired entity are recorded as an adjustment to equity.
Foreign Currency Translation
Benefactum Beijing maintains its accounting
records in Renminbi (“RMB”), which is the primary currency of the economic environment in which its operations are
conducted. The Company’s principal country of operations is the PRC. The financial position and results of its operations
are determined using RMB, the local currency, as its functional currency. The results of operations and the statement of cash flows
denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that
date. The equity denominated in the functional currency is translated at historical rate of exchange.
Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation
adjustments arising from the use of different exchange rates from period to period are included as a component of shareholders’
equity as “Accumulated Other Comprehensive Income (Deficit)”.
Translation gains and losses
that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency
are included in the results of operations as incurred. Gains and losses from foreign currency transactions are included in
the results of operations. No material transaction gains or losses were recognized for the three months ended March
31, 2017 and 2016.
The value of RMB against U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic
conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of
financial reporting in U.S. dollars. The following table outlines the currency exchange rates that were used in creating the
condensed consolidated financial statements in this report:
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
Balance sheet items, except for equity accounts
|
|
US$1 = RMB 6.8912
|
|
US$1 = RMB 6.9448
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2017
|
|
2016
|
Items in the statements of income and cash flows
|
|
US$1 = RMB 6.8891
|
|
US$1 = RMB 6.5574
|
Comprehensive Income (Loss)
Comprehensive income (loss) consists
of two components, net income (loss) and other comprehensive income (loss). The foreign currency translation gain or loss
resulting from translation of the financial statements expressed in RMB to USD and unrealized gain or loss
from available-for-sale investment are reported in other comprehensive income (loss) in the condensed consolidated statements
of income and other comprehensive income (loss) and the condensed consolidated statements of shareholders’ equity.
Earnings per Share (“EPS”)
Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Risks and Uncertainties
Default risk
Investments in
loans on our online marketplace involve inherent risks as the return of the principal on a loan investment made through our platform
is not guaranteed. Although we are not liable for default loss, we aim to limit investor 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
investors to, and build trust in, our marketplace 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 review and assessment procedures.
Default risk is controlled by the
application of credit approvals, limits and monitoring procedures. The Company manages default risk through in-house research
and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize default risk, we
offer a risk reserve fund which is 2-5% of the credit extended to the third-party guarantors or borrowers who do not have
a guarantor (See Note 9).
The Company identifies default risk collectively
based on industry, geography and customer type. This information is monitored regularly by management.
In measuring the default risk of extending
loans to corporate borrowers, the Company mainly reflects the “probability of default” by the borrower on its contractual
obligations and considers the current financial position of the borrowers and the exposures to the borrowers and its likely future
development. The Company uses standard approval procedures to manage default risk for their loans.
Political and economic risk
The Company’s operations are located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s
operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and
foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social
conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Foreign currency risk
The value of RMB 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. It is difficult to predict how market forces or PRC or U.S. government policy
may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant international pressure
on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the
U.S. dollar. 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 RMB may materially and adversely affect our liquidity and cash flows. To the extent that we
need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse
effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S. dollars for other business purposes,
appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount we would receive.
Recent Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue
from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between
the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon
its effective date, replaces almost all exiting revenue recognition guidance, including industry-specific guidance, in current
U.S. generally accepted accounting principles.
The core principle
of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve that core principle, an entity should apply the following steps:
●
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Step 1: Identify the contract(s) with a customer.
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|
|
●
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Step 2: Identify the performance obligations in the contract.
|
●
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Step 3: Determine the transaction price.
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|
|
●
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Step 4: Allocate the transaction price to the performance obligations in the contract.
|
|
|
●
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Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
|
The amendments
in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date for ASU 2014-09. The guidance is now
effective for annual and interim periods beginning after December 15, 2017. The guidance allows for either a retrospective or cumulative
effect transition method. Early application is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period. The Company is in the process of evaluating the impact of adoption
of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes the existing guidance for lease accounting,
Leases (Topic 840)
. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting
largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods
within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach
for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition
relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which simplifies
several aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies,
the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures,
the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of
those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December
15, 2016 with early adoption permitted. The guidance will be applied either prospectively, retrospectively or using a modified
retrospective transition method, depending on the area covered in this update. The Company adopted this guidance during the three
months ended March 31, 2017 and the adoption had no impact on the Company’s consolidated financial statements.
In April 2016, the FASB issued ASU No.
2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. The amendments
clarify the following two aspects of Topic 606:
(a)
identifying performance obligations; and
(b)
the licensing implementation
guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements
for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the
amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January
1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating
the impact of this new standard on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
which provides clarifying
guidance and adds some practical expedients in the areas of assessing collectability, presentation of sales taxes received from
customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU
2014-09. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging
Issues Task Force),
which addresses the following eight specific cash flow issues with the objective of reducing the existing
diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing;
(3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims;
(5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned; (6) life insurance policies;
(7) distributions received from equity method investees; (8) beneficial interests in securitization transactions; and (9) separately
identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for annual and interim periods
beginning after December 15, 2017 with early adoption permitted. The guidance is to be applied using a retrospective transition
method to each period presented. We are currently evaluating the impact of this new standard on our consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-17,
Consolidation (Topic 810): Interests held through related parties that are under common control
, which requires
the reporting entity, in determining if satisfying the second characteristic of a primary beneficiary, to include all of its direct
variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties,
including related parties that are under common control with the reporting entity. The amendments are effective for public business
entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. The Company adopted this guidance during the three months ended March 31,
2017 and the adoption had no impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No.
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which addresses diversity in practice that exists in the
classification and presentation of restricted cash on the statement of cash flows. The amendment is effective for public companies
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management does not believe
the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-04 “
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
” ASU 2017-04
eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the
fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit
with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill
impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. The Company is currently
evaluating the impact of this new standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01 “
Business Combinations (Topic 805): Clarifying the Definition of a Business.
” Which provides guidance
to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets,
the assets acquired (or disposed of) are not considered a business. Management does not believe the adoption of this ASU would
have a material effect on the Company’s consolidated financial statements.
Note 3 – Short-term investments
On November 7 and December 16, 2016, to
increase return of the Company’s excess cash in bank, the Company entered into two short-term entrusted financial management
contracts (the “Contracts”) with Shandong Wenye Investment Co., Ltd. (“Wenye”). The contracts provide that
the Company will entrust RMB 50 million (or $7,255,672) and RMB 7 million (or $1,015,794), respectively, to Wenye to make investments
in principal guaranteed short-term wealth products for the Company. The term of both contracts is six months and can be automatically
extended for six months with both parties’ consent. As of March 31, 2017, Wenye, on behalf of our entrusted investment portfolio,
made equity investments in two privately held companies with make-good provision guaranteeing minimum investment return at 5%.
In lien of the Contracts, Wenye and its shareholders provided an irrevocable guaranty on the return of principal and payment of
investment return and will be jointly and severally liable for the payment.
Balance
of the short-term investments was $8,440,659 and $8,274,306 as of March 31, 2017 and December 31, 2016, respectively. The increase
of $166,353 was due to exchange rate effect of $64,376 and unrealized gain of $101,977 during the first quarter of 2017.
Management determines appropriate classification
of its investments at the time of purchase and reevaluates the classification at each balance sheet date. The short-term investments
have been classified and accounted for as available-for-sale, and carried at fair value as of March 31, 2017, with unrealized gains
and losses, net of taxes, reported as a component of accumulated other comprehensive income in shareholders’ equity. The
cost of short-term investments is based upon specific identification method. We did not have such investments for the period ended
March 31, 2016.
Note 4 – Accounts receivable
The following is a summary of accounts receivable
as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Hui Fu Tian Xia Limited Company (“ChinaPnR”)
|
|
$
|
131,196
|
|
|
$
|
281,038
|
|
Accounts receivable
|
|
$
|
131,196
|
|
|
$
|
281,038
|
|
ChinaPnR, a licensed third party online
payment service, assists us in the disbursement and repayment of loans facilitated through our online platform as well as deducts
and remits service fees to us. As of March 31, 2017 and December 31, 2016, service fees receivable from ChinaPnR were $131,196
and $281,038, respectively. ChinaPnR usually remits our service fee to our bank account on the next day. The receivable balance
from ChinaPnR is due to the timing difference at end of the periods.
Note 5 – Prepayments
The following is a summary of prepayments
as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid service fee
|
|
$
|
2,082,847
|
|
|
$
|
2,071,013
|
|
Prepayment for rent
|
|
|
58,427
|
|
|
|
—
|
|
Down payment for fixed asset
|
|
|
—
|
|
|
|
7,200
|
|
Others
|
|
|
2,169
|
|
|
|
713
|
|
Prepayments
|
|
$
|
2,143,443
|
|
|
$
|
2,078,926
|
|
We pay a service fee to third-party service providers based on the amount of loans the service provider
refers to us. In order to negate the impact of regulation limitation on online P2P platform’s off-line sales activities,
in April 2016, the Company entered into a cooperation agreement with Shanghai Nami Financial Consulting Co., Ltd (“Nami”),
pursuant to which Nami will refer potential investors to us, and in turn we will pay Nami a service fee based on the amount of
loans extended by the investors it refers to us. As of March 31, 2017, balance of prepaid service fee to Nami was $1,516,904. Balance
of prepaid service fee to other service providers amounted to $565,943 as of March 31, 2017.
Prepayment for rent amounted to $58,427
as of March 31, 2017, mostly for offices in Beijing, Shanghai and Shandong province.
Note 6 – Other receivable and
deposit
The following is a summary of other receivables
and deposit as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Security deposit
|
|
$
|
178,867
|
|
|
$
|
106,489
|
|
Advances and loans
|
|
|
598,077
|
|
|
|
686,360
|
|
Other receivable and deposit
|
|
$
|
776,944
|
|
|
$
|
792,849
|
|
Security deposit represents various deposits
made to vendors for lease, renovation and other services.
Advances and loans are amounts advanced
or lent without interest to employees and vendors for out-of-pocket expenses and business transactions.
Note 7 – Property and equipment,
net
The following is a summary of property and
equipment as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office furniture
|
|
$
|
128,258
|
|
|
$
|
41,855
|
|
Electronic equipment
|
|
|
231,463
|
|
|
|
310,769
|
|
Automobile
|
|
|
236,535
|
|
|
|
—
|
|
Leasehold improvement
|
|
|
390,311
|
|
|
|
387,298
|
|
Subtotal
|
|
|
986,567
|
|
|
|
739,922
|
|
Less: accumulated depreciation
|
|
|
(491,993
|
)
|
|
|
(460,514
|
)
|
Property and equipment, net
|
|
$
|
494,574
|
|
|
$
|
279,408
|
|
Depreciation expense for the three months ended March 31, 2017 and 2016 were $29,695 and $34,362, respectively.
We paid $240,959 and $268,221 for fixed asset acquisition and leasehold improvement during the first quarter of 2017 and 2016,
respectively.
There were no events or changes in circumstances
that necessitated a review of impairment of long-lived assets as of March 31, 2017.
Note 8 – Taxes payable
The following is a summary of taxes payable
as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Value-added tax
|
|
$
|
44,330
|
|
|
$
|
194,178
|
|
Corporate income tax
|
|
|
1,476,282
|
|
|
|
996,274
|
|
Withholding tax
|
|
|
9,000
|
|
|
|
27,505
|
|
Business & related taxes etc.
|
|
|
40,960
|
|
|
|
67,203
|
|
Taxes payable
|
|
$
|
1,570,572
|
|
|
$
|
1,285,160
|
|
Note 9 – Other payable
The following is a summary of other payable
as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Private loan risk reserve
|
|
$
|
8,885,584
|
|
|
$
|
7,297,123
|
|
Due to various other parties
|
|
|
268,804
|
|
|
|
219,911
|
|
Other payable
|
|
$
|
9,154,388
|
|
|
$
|
7,517,034
|
|
To minimize default risk, we offer a
private loan risk reserve fund which is 2-5% of the credit extended to the third-party guarantors or borrowers who do not
have a guarantor, though a risk reserve fund is not regulatory requirement. The private loan risk reserve is deposited
directly into a bank account owned by the company and refunded directly from such bank account. Prior to an application for
credit being made on our platform, borrower (or if a guarantor is needed for the borrower, the guarantor) is required to
provide an amount equal to 2-5% of the amount being loaned, which shall be deposited directly into the risk reserve account.
Under our risk reserve fund arrangement, the risk reserve fund will be refunded to the borrowers (or guarantors) if the loan
is paid in full at maturity. If a loan is delinquent for a certain period of time, usually within 3 business days, we will
withdraw a sum, equal to the overdue principal and interest, from the risk reserve fund to
repay the investor (up to the total amount of reserve fund maintained with us by the guarantor or the borrower who does not have
a guarantor). No such payments were made from the risk reserve fund during the three months end March 31, 2017 and 2016.
Due to various other parties are amounts
payable for rent, property management fee, internet service fee and computers etc.
Note 10 – Income taxes
The Company accounts
for income taxes in accordance with ASC 740: Income Taxes, which requires that the Company recognizes deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results
from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion
of management, it is more likely than not that some or all of any deferred tax assets will not be realized.
United States
Sino Fortune is
subject to the U.S. Tax law at tax rate of 34%. No provision for the U.S. federal income taxes has been made as the Company had
no U.S. taxable income for the periods presented, and its earnings are permanently invested in PRC.
BVI
Benefactum Alliance
is a holding company incorporated under the laws of British Virgin Islands (“BVI”) and under the current laws of BVI,
it is not subject to income tax.
Hong Kong
Benefactum Alliance
incorporated Benefactum Sino in Hong Kong SAR, which is subject to Hong Kong profit tax. The applicable statutory tax rate is 16.5%.
No provision for Hong Kong income taxes has been made as Benefactum Sino had no taxable income for the periods presented.
China
Benefactum Shenzhen and Benefactum Beijing
were incorporated in PRC and are subject to income taxes on income arising in or derived from the PRC in which they are domiciled.
The applicable statutory tax is 25%.
The provision
for income taxes consists of the following for the three months ended March 31, 2017 and 2016:
Current:
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
641,728
|
|
|
|
121,489
|
|
Total current provision
|
|
$
|
641,728
|
|
|
$
|
121,489
|
|
Benefactum Shenzhen had no taxable income for the periods presented, while significant components
of income tax provision for Benefactum Beijing were as follows for the three months ended March 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Income before provision for income taxes
|
|
$
|
2,635,017
|
|
|
$
|
1,587,189
|
|
|
|
|
|
|
|
|
|
|
PRC statutory rate of 25%
|
|
$
|
658,754
|
|
|
$
|
396,797
|
|
Non-deductible expense and adj. per PRC tax code
|
|
|
(17,026
|
)
|
|
|
22,075
|
|
Net loss carry forward
|
|
|
—
|
|
|
|
(297,383
|
)
|
Income tax provision
|
|
$
|
641,728
|
|
|
$
|
121,489
|
|
Deferred:
|
|
|
2017
|
|
|
|
2016
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
—
|
|
|
|
—
|
|
Total deferred provision
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 11 – Net income per common share
– basic and diluted
The following demonstrates calculation
of basic and diluted earnings per common share for the three months ended March 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,993,288
|
|
|
$
|
1,465,700
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted shares outstanding - Basic & diluted
|
|
|
361,820,246
|
|
|
|
337,500,000
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - Basic & diluted
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Note 12 – Concentrations and risks
The Company maintains certain bank accounts
in the PRC which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.
We have contracted with a licensed third
party online payment service, ChinaPnR, to assist in the disbursement and repayment of loans. Both investor and borrower would
open accounts with ChinaPnR and authorize ChinaPnR to manage their accounts. The investor will fund the loan amount in his/her
account under ChinaPnR, which would then disburse this loan amount to the borrower net of our service fees which it will remit
to us.
When the borrower repays the loan to ChinaPnR,
he/she will deposit the monthly account maintenance fee along with the principal loan amount and interest. ChinaPnR will then disburse
the principal loan amount and interest back to investor and account maintenance fee to us.
Currently, investors are not charged for
the service provided by ChinaPnR. However, individual borrowers are charged a processing fee by ChinaPnR in the amount of 0.11%
to 0.25% (which varies depending on the bank they use) of the loan amount when it is deposited in their ChinaPnR account. For SME
borrowers, they pay RMB 10 per deposit. When borrowers withdraw money from their ChinaPnR account, they would have to pay a processing
fee of 0.05% of the withdrawing amount plus RMB1 or just RMB1, depending on how soon they wish for the withdrawal to be effected.
When the loan is repaid to ChinaPnR, it will disburse the loan and interest back to investor.
Cash and cash equivalents balance held
in the PRC bank accounts was $12,176,944 and $8,561,695 as of March 31, 2017 and December 31, 2016, respectively, of which no deposits
were covered by insurance. The cash balance included cash held in private loan risk reserve accounts of $8,885,584 and $7,297,123
as of March 31, 2017 and December 31, 2016, respectively.
For the three months ended March 31, 2017
and December 31, 2016, all of the Company’s assets were located in the PRC and all of the Company’s revenues were derived
from the PRC.
No customer accounted for more than 10%
of revenues for the three months ended March 31, 2017 and 2016. 89% of loans facilitated through our platform for the three months
ended March 31, 2017 were extended by investors referred to us by one service provider, and no service provider accounted for referral
of more than 10% of loans facilitated through our platform for the three months ended March 31, 2016.
Balance of short-term investments
were $8,440,659 as of March 31, 2017, all of which were held by one investment company (see Note 3 – Short-term
investments) and not insured.
Note 13 – Subsequent event
On November 7, 2016, the Company entered
into a short-term entrusted financial management contract (the “Contract”) with Shandong Wenye Investment Co., Ltd.
(“Wenye”) for entrusting RMB 50 million (or $7,255,672) to Wenye to make investments in principal guaranteed short-term
wealth products for the Company (See Note 3 – Short-term investments). The term of the Contract is for six months and upon
expiration, Wenye returned to the Company the principal of RMB 50 million (or $7,255,672) on May 8, 2017 and accumulated investment
return of RMB 1,321,917.81 (or $191,828) on May 9, 2017.