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 ( or 68,592,000 after considering the effect of 1:5 reverse stock split approved in June 2017) 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 a series of contractual agreements between our WFOE and our operating entity of Benefactum Beijing. These agreements include
Trademarks, Technologies & Management and Consulting Service Agreement
;
The Equity Interest Pledge Agreement
;
Exclusive Right and Option to Purchase Agreement; Equity Interest Holders’ Voting Rights Proxy Agreement.
All these contractual agreements, 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. Therefore, the Company believes that Benefactum Beijing should be considered as a
Variable Interest Entity (“VIE”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts of Benefactum Beijing are consolidated
with those of WFOE.
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.
Interim results are not necessarily indicative of results of a full year. 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. All inter-company balances and transactions have been eliminated in
consolidation.
Preparation of 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 unaudited 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 June 30, 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
|
|
Deductions
|
|
|
|
|
|
|
|
|
|
|
(8,274,306
|
)
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
7,420,365
|
|
Total short-term investments at June 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,420,365
|
|
Revenue Recognition
Revenues are primarily composed of fees
collected from services provided with facilitating loan originations and services provided with assisting in loan repayment process
through our online platform.
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 funds provided by the investor are transferred
to the borrower. Revenue is recognized when loan facilitation service is rendered and fee is collected from borrower upon the closing
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.
Towards the end of each loan term, the
Company also provide repayment service to ensure loan repayment process is handled smoothly through our online platform and to
assist in release of liens or collaterals if applicable. The Company charges a separate fee for loan repayment service. Loan repayment
service is rendered when a loan matures and borrower repays the principal and interest through our online platform. Revenue is
recognized when repayment service is rendered and collection of service fee from borrowers is assured. The repayment service fee
is based on an agreed upon percentage on the borrowing times the duration of a loan and is not refundable.
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 June 30, 2017 and December 31, 2016.
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 (Loss)”.
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 six months ended June 30, 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 June 30, 2017
|
|
As of December 31, 2016
|
Balance sheet items, except for equity accounts
|
|
US$1 = RMB 6.7774
|
|
US$1 = RMB 6.9448
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
Items in the statements of income and cash flows
|
|
US$1 = RMB 6.8752
|
|
US$1 = RMB 6.5624
|
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 11 –
Liabilities from risk reserve fund guarantee).
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 and remittance 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.
Reclassification
Certain reclassifications have been made
to the 2016 unaudited condensed consolidated financial statements to confirm to the 2017 unaudited condensed consolidation financial
statement presentation. These reclassifications had no effect on net income or cash flows as previously reported.
Recent Accounting Pronouncements
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.
In May 2017, the FASB issued ASU No. 2017-09
“
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
”. ASU 2017-09 clarifies
when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance,
modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as
a result of the change in terms or conditions. This ASU is effective prospectively for annual periods beginning on or after December
15, 2017, with early adoption permitted. 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 held in banks, 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 $7,377,434) and RMB 7 million (or $1,032,841), respectively, to Wenye to make investments
in principal guaranteed short-term wealth products for the Company. Balance of the short-term investments was $8,274,306 as of
December 31, 2016. The term of both contracts is for six months and upon expiration in May and June of 2017, Wenye returned to
the Company the entrusted principals with accumulated investment return of RMB 1,492,191 (or $217,041).
In May 2017, the Company entered into an
agreement with Jiangxi Bank to purchase a principal-guaranteed wealth management product. Principal of the wealth management product
is RMB 50 million (or $7,377,434) and term of the product is for 68 days from May 3 to July 10, 2017 with expected annualized rate
of return of 3.60%. Balance of the short-term investment was $7,420,365 as of June 30, 2017. Upon expiration, Jiangxi Bank returned
to the Company the investment principal with accumulated investment return of RMB 335,342 (or $49,479) on July 11, 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 June 30, 2017, with unrealized gains
and losses, net of taxes, reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Note 4 – Accounts receivable
As of June 30, 2017 and December 31, 2016,
the Company has service fee receivable balance of $360,799 and $281,038, respectively, from ChinaPnR.
ChinaPnR is a licensed third party online
payment service, who assists us in the disbursement and repayment of loans facilitated through our online platform as well as deducts
and remits service fees to us. 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. All service fee receivable are considered fully collectible
and no allowance is deemed necessary
Note 5 – Short-term loans receivable
In June 2017, the Company launched entrusted
loan service through a licensed loan provider to small and medium-sized enterprises (“SME”) and individual borrowers
in China. The Company has engaged Qingdao Weichuang Private Capital Management Co., Ltd. (“Qingdao Weichuang”)
as the trustee at launch of the service. On June 30, 2017, the Company entered into a series of entrusted loan contracts, pursuant
to which the Company, as the trustor and provider of the funds, entrusted the trustee to grant entrusted loans in the aggregate
principal amount of $7,377,434 (RMB 50 million) to five SME customers. This is our first series of transactions in which the
Company, through licensed trustee, are lending funds directly to borrowers. The loans are short-term loans between three and six
months with interest payable on a monthly basis. Interest rates charged are based on negotiation with borrowers, taking into consideration
of factors such as term of the loan, the industry in which the borrower conducts its business, its credit history, financial condition,
operating results and cash flows etc.
In connection with execution of the entrusted
loan contracts, we also entered into entrusted loan guarantee contracts with financing guarantors, pursuant to which the guarantors
have agreed to guarantee the obligations under the entrusted loan contracts. The Company pays a processing fee equal to 1.5‰
of the aggregate loan amount to Qingdao Weichuang for facilitating the entrusted loans. The sister of Mr. Bodang Liu, our chief
executive officer and chairman, owns 48.41% of the outstanding equity interests in Qingdao Weichuang.
Note 6 – Prepayments
The following is a summary of prepayments
as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid service fee
|
|
$
|
572,650
|
|
|
$
|
2,071,013
|
|
Prepayment for rent
|
|
|
55,866
|
|
|
|
—
|
|
Down payment for fixed asset
|
|
|
257,377
|
|
|
|
7,200
|
|
Others
|
|
|
18,583
|
|
|
|
713
|
|
Prepayments
|
|
$
|
904,476
|
|
|
$
|
2,078,926
|
|
We pay a service fee to third-party service
providers based on the amount of loans the service providers refer 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 June 30,
2017, balance of prepaid service fee was $572,650, with $571,175 paid to Nami and $1,475 to another service provider.
Prepayment for rent amounted to $55,866
as of June 30, 2017 for offices in Beijing and Shanghai. The Company made down payment of $257,377 and $7,200 as of June 30, 2017
and December 31, 2016, respectively, for acquisition of fixed assets.
Note 7 – Deposit for business
acquisition
In June 2017, the Company entered into
a share transfer framework agreement (the “Agreement”) with Shenzhen TouZhiJia Financial Information Service Co., Ltd.
(“Shenzhen TouZhiJia Financial”) and certain shareholders of Shenzhen TouZhiJia Financial (the “Shareholders”),
pursuant to which the Company will acquire a 4.45% equity interest in Shenzhen TouZhiJia Financial from the Shareholders for an
aggregate purchase price of RMB 19,100,008 (or $2,818,181). Fifty percent of the purchase price or $1,409,091 was paid in cash
as a deposit by the Company in accordance with the Agreement and balance of the purchase price is payable upon the closing of the
transaction, which we expect will be consummated within 90 days after execution of the Agreement. In the event the transaction
does not close, the deposit made to the Shareholders shall be promptly returned to the Company.
Note 8 – Other receivables
The following is a summary of other receivables
as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Security deposit
|
|
$
|
244,012
|
|
|
$
|
106,489
|
|
Advances and loans
|
|
|
529,443
|
|
|
|
686,360
|
|
Proceeds from issuance of convertible notes
|
|
|
3,007,346
|
|
|
|
—
|
|
Other receivable and deposit
|
|
$
|
3,780,801
|
|
|
$
|
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.
Proceeds from issuance of convertible notes
represent the remaining amount as of June 30, 2017 in the escrow account maintained by Shandong Keyu Law Firm for the issuance
of the three-year convertible notes, which was closed on June 30, 2017 (See Note 12 – Convertible notes payable). We
received the funds subsequently on July 10, 2017.
Note 9 – Property and equipment,
net
The following is a summary of property
and equipment as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office furniture
|
|
$
|
107,557
|
|
|
$
|
41,855
|
|
Electronic equipment
|
|
|
260,409
|
|
|
|
310,769
|
|
Automobile
|
|
|
240,504
|
|
|
|
—
|
|
Leasehold improvement
|
|
|
403,813
|
|
|
|
387,298
|
|
Subtotal
|
|
|
1,012,284
|
|
|
|
739,922
|
|
Less: accumulated depreciation
|
|
|
(545,805
|
)
|
|
|
(460,514
|
)
|
Property and equipment, net
|
|
$
|
466,479
|
|
|
$
|
279,408
|
|
Depreciation expense for the six months
ended June 30, 2017 and 2016 were $76,458 and $65,547, respectively. We paid $250,479 and $117,438 for fixed asset acquisition
and leasehold improvement during the first half 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 June 30, 2017.
Note 10 – Taxes payable
The following is a summary of taxes payable
as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Value-added tax
|
|
$
|
167,342
|
|
|
$
|
194,178
|
|
Corporate income tax
|
|
|
2,154,501
|
|
|
|
996,274
|
|
Withholding tax
|
|
|
9,963
|
|
|
|
27,505
|
|
Business & related taxes etc.
|
|
|
57,432
|
|
|
|
67,203
|
|
Taxes payable
|
|
$
|
2,389,238
|
|
|
$
|
1,285,160
|
|
Note
11 – Liabilities from risk reserve fund guarantee
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 a regulatory requirement. 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. The private loan risk reserve is
deposited directly into a bank account owned by the company and refunded directly from such bank account. The Company is not restricted
to use any of these loan risk reserve fund if needed.
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 funds 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 six months June 30, 2017 and 2016.
As of June 30, 2017 and December 31, 2016,
the balance of the risk reserve fund amounted to $10,078,847 and $7,297,123, respectively.
Note 12 – Convertible notes payable
On June 30, 2017, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”), pursuant
to which we issued and sold senior convertible promissory notes in the aggregate principal amount of $13,189,164 (RMB 90,357,317)
(the “Notes”), convertible into shares of the Company’s common stock (the “Common Stock”) following
June 30, 2018 at a conversion price of $2.00 per share (the “Conversion Price”) in a private placement (the “Private
Placement”). The Notes mature on June 30, 2020 and accrue interest at a rate of 6%, 7% and 8% per annum for each of the first,
second and third year, respectively, with such interest payable annually. In event of a conversion of the Notes, the Investors
have agreed to a one year lock-up period with respect to the shares of Common Stock issuable upon conversion of the Notes commencing
on the applicable conversion date of the Notes.
Following the first anniversary of the
issuance date of Notes, if the closing price of the Common Stock is equal to or greater than 130% of the Conversion Price for 20
business days within a 30 consecutive business day period, the principal and accrued interest under the Notes may be repaid at
the option of the Company without penalty or premium. Following the second anniversary of the issuance date of the Notes, if the
closing price of the Common Stock is less than 70% of the Conversion Price for 20 business days within a 30 consecutive business
day period, and (i) the Company has an effective current registration statement and (ii) the average trading volume of the Common
Stock for such prior 30 consecutive business days is at least 10,000 shares, then the Investors may redeem and declare due any
or all of the Notes. If this right of redemption is exercised, the interest rate shall be reduced to 3% per annum. The Notes contain
various events of default provisions which if breached, may result in the acceleration of all obligations under the Notes.
The Notes are secured by a pledge of shares
of the Common Stock pursuant to a stock pledge agreement (the “Stock Pledge Agreement”) between Avis Genesis Inc.,
a majority shareholder of the Company, and the Investors on the basis of one share of Common Stock per $1 loaned under the Note.
Other than the shares pledged pursuant to the Stock Pledge Agreement, there is no recourse against the Company upon a default of
the Notes.
Since the fair value of the common stock
into which the above-mentioned note is converted at the date of the Purchase Agreement is same as the conversion price and the
average stated interest rate is in line with the market rate, the Company concludes that there is no beneficial conversion feature
associated with the Notes.
Note 13 – 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 and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Current:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
874,377
|
|
|
|
—
|
|
|
|
1,516,105
|
|
|
|
121,489
|
|
Total current provision
|
|
$
|
874,377
|
|
|
$
|
—
|
|
|
$
|
1,516,105
|
|
|
$
|
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 and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income before provision for income taxes
|
|
$
|
3,767,128
|
|
|
$
|
(414,710
|
)
|
|
$
|
6,402,144
|
|
|
$
|
1,172,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC statutory rate of 25%
|
|
$
|
941,782
|
|
|
$
|
—
|
|
|
$
|
1,600,536
|
|
|
$
|
293,120
|
|
Non-deductible expense and adj. per PRC tax code
|
|
|
(67,405
|
)
|
|
|
—
|
|
|
|
(84,431
|
)
|
|
|
125,526
|
|
Net loss carry forward
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(297,156
|
)
|
Income tax provision
|
|
$
|
874,377
|
|
|
$
|
—
|
|
|
$
|
1,516,105
|
|
|
$
|
121,489
|
|
|
|
Three
Months Ended June 30,
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred
provision
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 14 – Stockholders’
equity
In June 2017, the Board of Directors approved
a reverse stock split of the Company’s issued and outstanding shares of common stock at a ratio of 1-for-5. The reverse stock
split was effected by the Company filing a Certificate of Change with the Secretary of State of the State of Nevada on June 20,
2017. The issued and outstanding number of shares has been retroactively restated to reflect this reverse stock split.
Note 15 – Subsequent event
On July 6, 10 and 20, 2017, the Company,
as the trustor and provider of funds to the trustee, entered into various entrusted loan contracts with Qingdao Weichuang, as trustee
and direct lender to the borrowers, to grant entrusted loans in the aggregate principal amount of $19,181,329 (RMB 130 million)
to thirteen SME borrowers. The entrusted loans are short-term loans between three and six months with interest payable on a monthly
basis. Each of the loans are guaranteed by financing guarantors and the Company pays a processing fee equal to 1.5‰ of the
aggregate loan amount to Qingdao Weichuang for issuing the entrusted loans.
For purpose of preparing these unaudited
condensed consolidated financial statements, the Company considered events through August 14, 2017, which is the date the consolidated
financial statements were available for issuance. Except for those disclosed above, there were no material subsequent events that
required recognition or additional disclosure in these consolidated financial statements.