Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of
“large accelerated filer,"accelerated filer,” and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In this Annual
Report on Form 20-F, or the “Annual Report”, unless the context indicates otherwise, all references to the terms
“Wins Finance” “we,” “us,” “our company,” “the Company” and
“our,” refer to Wins Finance Holdings Inc. and its wholly-owned subsidiaries, Wins Holdings
LLC(“WHL”),Wins Finance Group Limited (“WFG”), Full Shine Capital Resources Limited (“Full
Shine”), Jinshang International Financial Leasing Co., Ltd. (“Jinshang Leasing”), Tianjin Jinshang Jiaming
Financial Leasing Co. Ltd. (“Tianjin Jiaming”), Shanxi Jinchen Agriculture Co., Ltd. (“Jinchen Agriculture)
and Shanxi Dongsheng Finance Guarantee Co., Ltd. (“Dongsheng Guarantee”)., all references to “China”
or “PRC” and the “Chinese government” refer to the People’s Republic of China and its
government. In this Annual Report, all references to “Renminbi,” or “RMB” are to the legal currency
of China and all references to “USD”. “U.S. dollars,” “dollars,” “$” or
“US$” are to the legal currency of the United States.
The Company’s
functional currency is USD. The functional currency of Jinshang Leasing,Tianjin Jiaming, Jinchen Agriculture and Dongsheng Guarantee
is Chinese Yuan, or RMB. For financial reporting purposes, the financial statements of Jinshang Leasing,Tianjin Jiaming,Jinchen
Agriculture and Dongsheng Guarantee are prepared using RMB and translated into the Company’s functional currency, USD at
the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates prevailing during each reporting period, and owners’ equity
is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of
accumulated other comprehensive income in shareholders’ equity.
The audited financial
statements for the years ended June 30, 2017, 2016 and 2015 in this Annual Report have been prepared in accordance with accounting
principles generally accepted in the United States, or “U.S. GAAP”.
This Annual Report contains statements that
may be deemed to be “forward-looking statements” within the meaning of the federal securities laws. These statements
relate to anticipated future events, future results of operations and/or future financial performance. In some cases, you can identify
forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,”
“estimate,” “expect,” “future,” “intend,” “may,” “ought to,”
“plan,” “possible,” “potentially,” “predicts,” “project,” “should,”
“will,” “would,” negatives of such terms or other similar terms. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking
statements in this Annual Report include, without limitation, statements relating to:
The preceding list is not intended to be
an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect
to future events and are based on assumptions and subject to risks and uncertainties, including those described in Item 3D “Key
Information - Risk Factors.”
You should not unduly rely on any forward-looking
statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will
be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements
for any reason after the date of this Annual Report, to conform these statements to actual results or to changes in our expectations.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
A.
|
Directors and Senior Management
|
Not required.
Not required.
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3. KEY INFORMATION
A.
Selected financial data
The following selected
financial data should be read in conjunction with Item 5 - “Operating and Financial Review and Prospects” and the Financial
Statements and Notes thereto included elsewhere in this Annual Report.
The selected consolidated
statements of operations data for the fiscal years ended June 30, 2017, 2016, 2015, 2014 and 2013 and the selected balance sheet
data as of June 30, 2017, 2016, 2015, 2014 and 2013 are derived from the audited consolidated financial statements of Wins Finance
for those fiscal years.
The audited consolidated
financial statements for the fiscal years ended June 30, 2017, 2016, 2015, 2014 and 2013 are prepared and presented in accordance
with U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical
consolidated financial statements and related notes. The historical financial statements are not necessarily indicative of our
future performance.
Statements of Income and Comprehensive Income
|
|
For the Years ended June 30,
|
|
(US$ except share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee service income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees on financial guarantee services
|
|
|
2,839,194
|
|
|
|
6,193,225
|
|
|
|
7,860,629
|
|
|
|
8,240,866
|
|
|
|
3,948,048
|
|
Reversal of provision (provision) on financial guarantee services
|
|
|
3,208,827
|
|
|
|
(2,907,999
|
)
|
|
|
576,456
|
|
|
|
(1,190,387
|
)
|
|
|
(778,594
|
)
|
Commission and fees on guarantee services, net
|
|
|
6,048,021
|
|
|
|
3,285,226
|
|
|
|
8,437,085
|
|
|
|
7,050,479
|
|
|
|
3,169,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease interest income
|
|
|
6,047,172
|
|
|
|
3,164,317
|
|
|
|
3,547,273
|
|
|
|
1,926,380
|
|
|
|
1,366,274
|
|
Interest expense for direct financing lease
|
|
|
(2,094,587
|
)
|
|
|
(524,409
|
)
|
|
|
(188,173
|
)
|
|
|
(164,354
|
)
|
|
|
(135,222
|
)
|
Business collaboration fee and commission expenses for leasing projects
|
|
|
(603,873
|
)
|
|
|
(222,206
|
)
|
|
|
(265,829
|
)
|
|
|
-
|
|
|
|
-
|
|
Provision for lease payment receivable
|
|
|
(27,332
|
)
|
|
|
(597,444
|
)
|
|
|
(70,467
|
)
|
|
|
(130,745
|
)
|
|
|
(71,030
|
)
|
Net direct financing lease income after provision for receivables
|
|
|
3,321,380
|
|
|
|
1,820,258
|
|
|
|
3,022,804
|
|
|
|
1,631,281
|
|
|
|
1,160,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial advisory and agency income
|
|
|
357,284
|
|
|
|
402,800
|
|
|
|
3,386,586
|
|
|
|
873,927
|
|
|
|
55,762
|
|
Net revenue
|
|
|
9,726,685
|
|
|
|
5,508,284
|
|
|
|
14,846,475
|
|
|
|
9,555,687
|
|
|
|
4,385,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term investment
|
|
|
13,752,538
|
|
|
|
13,958,540
|
|
|
|
16,657,246
|
|
|
|
1,584,163
|
|
|
|
89,219
|
|
Total non-interest income
|
|
|
13,752,538
|
|
|
|
13,958,540
|
|
|
|
16,657,246
|
|
|
|
1,584,163
|
|
|
|
89,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business taxes and surcharge
|
|
|
(4,406
|
)
|
|
|
(167,867
|
)
|
|
|
(200,223
|
)
|
|
|
(136,528
|
)
|
|
|
(133,614
|
)
|
Salaries and employees surcharge
|
|
|
(879,595
|
)
|
|
|
(1,524,720
|
)
|
|
|
(424,872
|
)
|
|
|
(323,618
|
)
|
|
|
(264,217
|
)
|
Rental expenses
|
|
|
(247,684
|
)
|
|
|
(271,357
|
)
|
|
|
(190,239
|
)
|
|
|
(195,133
|
)
|
|
|
(176,087
|
)
|
Other operating expenses
|
|
|
(46,258
|
)
|
|
|
(4,621,038
|
)
|
|
|
(1,468,741
|
)
|
|
|
(997,811
|
)
|
|
|
(621,695
|
)
|
Total non-interest expense
|
|
|
(1,177,943
|
)
|
|
|
(6,584,982
|
)
|
|
|
(2,284,075
|
)
|
|
|
(1,653,090
|
)
|
|
|
(1,195,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
22,301,280
|
|
|
|
12,881,842
|
|
|
|
29,219,646
|
|
|
|
9,486,760
|
|
|
|
3,278,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
(1,951,489
|
)
|
|
|
(764,445
|
)
|
|
|
(3,146,993
|
)
|
|
|
(1,967,855
|
)
|
|
|
(807,931
|
)
|
Net income
|
|
|
20,349,791
|
|
|
|
12,117,397
|
|
|
|
26,072,653
|
|
|
|
7,518,905
|
|
|
|
2,470,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(5,130,963
|
)
|
|
|
(19,361,292
|
)
|
|
|
1,757,840
|
|
|
|
174,404
|
|
|
|
832,752
|
|
Comprehensive income (loss)
|
|
|
15,218,828
|
|
|
|
(7,243,895
|
)
|
|
|
27,830,493
|
|
|
|
7,693,309
|
|
|
|
3,303,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
|
19,926,510
|
|
|
|
20,012,356
|
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
Diluted (1)
|
|
|
20,082,089
|
|
|
|
20,012,356
|
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
|
1.02
|
|
|
|
0.61
|
|
|
|
1.55
|
|
|
|
0.45
|
|
|
|
0.15
|
|
Diluted (1)
|
|
|
1.01
|
|
|
|
0.61
|
|
|
|
1.55
|
|
|
|
0.45
|
|
|
|
0.15
|
|
|
(1)
|
These data have been retrospectively adjusted giving effect to the reverse merger between WFG and Sino, completed on October 26, 2015. More information about the reverse merger is contained in our Consolidated Financial Statements.
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
17,002,282
|
|
|
|
47,163,965
|
|
|
|
9,883,091
|
|
|
|
5,329,454
|
|
|
|
104,235
|
|
Total assets
|
|
|
312,764,090
|
|
|
|
304,627,280
|
|
|
|
251,005,424
|
|
|
|
225,461,193
|
|
|
|
54,292,002
|
|
Total liabilities
|
|
|
54,956,215
|
|
|
|
60,572,349
|
|
|
|
13,741,316
|
|
|
|
16,027,578
|
|
|
|
18,246,423
|
|
Total equity
|
|
|
257,807,875
|
|
|
|
244,054,931
|
|
|
|
237,264,108
|
|
|
|
209,433,615
|
|
|
|
36,045,579
|
|
_____________________
|
B.
|
Capitalization and Indebtedness
|
Not required.
|
C
.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
In conducting our business, we face many
risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business,
financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic,
political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely
affect our business operations.
You should carefully consider the following
factors and other information in this annual report before you decide to invest in our ordinary shares. If any of the risks referred
to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of
our ordinary shares could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Operations
We rely heavily on cooperation with commercial banks.
Our business relies heavily on cooperation
with commercial banks. Our cooperation arrangements with banks generally have a term of one year and are renewable upon expiration.
If we are not able to renew any of these existing arrangements on commercially reasonable terms, or at all, when they expire, the
ability to provide bank financing guarantees to clients would be negatively impacted. In addition, regulatory policies and other
factors are beyond our control. Furthermore, our cooperation arrangements are concentrated in a small number of commercial banks
locally. The proportion of security deposits the banks require from us largely depends on our business relationship and track record
with them. As a result, if our relationship with one or more key cooperating banks deteriorates materially or terminates, our business,
financial condition and results of operations may be materially and adversely affected.
Our business is subject to greater credit risks than if we
provided guarantees and leases to larger and more established clients, and our proprietary risk management system may not be adequate
to protect against client defaults.
The business of providing financial guarantees
or leasing involves a variety of risks, including the risk that the loans we guaranteed or made will not be repaid on time or at
all, and our risk management procedures may not fully eliminate these risks. We mainly focus on providing services to Chinese small
& medium enterprises (“SMEs”), including microenterprises, which have limited access to financing, and microcredit
companies in China. Some of our clients are at the early stage of their business and have limited financial resources, making them
vulnerable to adverse competitive, economic or regulatory conditions. These customers may expose us to greater credit risks than
larger or more established businesses with longer operating histories. We seek to manage our credit risk exposure through client
due diligence, credit approvals, establishing credit limits, requiring security measures and portfolio monitoring. While these
procedures are designed to provide us with the information needed to implement adjustments where necessary, and to take proactive
corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.
Our historical financial results may not be indicative of
our future performance.
Our business has achieved rapid growth during
recent years. However, our financial leasing business commenced in 2009 and therefore has a limited operating history. Our net
revenue increased from $1.3 million for the year ended June 30, 2012 to $9.7 million for the year ended June 30, 2017, representing
an increase of 672.6%. However, our historical growth rate and the limited history of our financial leasing business make it difficult
to evaluate our prospects. We may not be able to sustain our historically rapid growth or may not be able to grow our business
at all.
We may face increasing competition from existing and new
market participants.
China’s financial services industry
for SMEs and microenterprises has experienced substantial growth in recent years, following the rapid development of the Chinese
economy and the emergence of a large number of SMEs and microenterprises. For our guarantee business, our major competitors include
state-owned or foreign-invested guarantee companies which have a strong presence in the regions in which we operate. For our financial
leasing business, our major competitors include independent China leasing companies and foreign-owned leasing companies. Some of
our competitors may benefit from lower pricing, a larger customer base, a more established business reputation, more solid business
relationships with banks and government authorities, a more mature risk control mechanism or more extensive experience than we
might. As we expand our presence, we expect to compete with competitors from other regions, some of which have better knowledge
of the target customers and may enjoy stronger relationships with local banks than we do.
Our business model could be negatively affected by changes
and fluctuation in the banking industry.
Our business model is premised on the fact
that SMEs and microenterprises are generally underserved by the banking industry because commercial banks in China have been reluctant
to lend to SMEs and microenterprises without credit support, such as third-party guarantees, or adequate collateral of tangible
assets, and we believe that they will remain so in the foreseeable future. This has created opportunities for us to develop and
expand our business. However, new trends in the banking industry or the applicable regulatory requirements may alleviate the high
transaction costs or the lack of collateral and public information generally associated with bank financing to our target clients
or otherwise make this business more attractive to banks. In the event that commercial banks begin to compete with us by making
loans to our target clients on an unsecured basis or require a lower level of credit guarantee in return for higher risk-based
interest rates, we may experience less demand for our guarantee services and greater competition with respect to our financial
leasing business. Furthermore, any such direct competition with our cooperating banks will undermine our relationship with them
and may adversely affect our business, results of operations and prospects.
In addition, our business may be subject
to factors affecting the banking industry generally, such as the abrupt spike in China’s interbank rates and the subsequent
fears of tightened liquidity, as well as the increasing non-performing loan ratios as reported by the banking industry. Such factors
adversely affecting China’s banking industry may result in constraints on the banking system’s liquidity and subsequent
reductions in the amount of, or tightened approval requirements for, loans available to our customers or us. As a result, we may
experience reduced demand for our guarantees and less available funding. Furthermore, if our customers’ business is negatively
affected due to any such factors, our customer default risk may increase, which may materially and adversely affect our financial
condition or results of operations.
Our business is concentrated in Jinzhong City, Shanxi Province,
and our financial condition and results of operations may be materially and adversely affected by a significant deterioration in
our business in such city.
Our business is concentrated in Jinzhong
City, Shanxi Province, with over 46.7% of our revenues being generated by clients in this city for the year ended June 30, 2017.
The economies of Jinzhong City specifically and Shanxi Province generally historically have provided significant business opportunities
for our target clients, and accordingly driven our business growth and financial performance. A significant economic downturn in
Jinzhong City or Shanxi Province, however, may undermine the financial condition of our customers in these areas and their ability
to repay their loans which we have guaranteed, and our financial condition and results of operations may be materially and adversely
affected as a result.
We may not be familiar with new regions or markets we enter
and may not be successful in offering new products and services.
We may expand our business and enter other
regional markets in the future. However, we may be unable to replicate our success in Jinzhong City in new markets. In expanding
our business, we may enter markets in which we have limited, or no, experience. We may not be familiar with the local business
and regulatory environment and we may fail to attract a sufficient number of customers due to our limited presence in that region.
In addition, competitive conditions in new markets may be different from those in our existing market and may make it difficult
or impossible for us to operate profitably in these new markets. If we are unable to manage these and other difficulties in our
expansion into other regions in China, our prospects and results of operations may be adversely affected.
As we continuously adjust our business strategies
in response to the changing market and evolving customer needs, our new business initiatives will likely lead us to offer new products
and services. However, we may not be able to successfully introduce new products or services to address our customers’ needs
because we may not have adequate capital resources or lack the relevant experience or expertise or otherwise. In addition, we may
be unable to obtain regulatory approvals for our new products and services. Furthermore, our new products and services may involve
increased and unperceived risks and may not be accepted by the market and they may not be as profitable as we anticipated, or at
all. If we are unable to achieve the intended results for our new products and services, our business, financial condition, results
of operations and prospects may be adversely affected.
If the counter-guarantees obtained from our customers are
not sufficient to cover our corresponding exposure under the guarantees given by us on our customers’ behalf in the event
of a default by the customer, it could negatively impact our results of operations.
We guarantee the repayment of loans granted
to our customers. We are required to provide cash deposits for the loans granted by such banks to its customers, from which the
banks may recover defaulted loan payments by its customers. In order to protect our interest, we do, and will in the future, require
our customers, their owners and/or third parties to provide counter-guarantees to us to secure our obligations under the guarantees
given by us. Such counter-guarantees may include 1) charges over fixed assets such as properties, vehicles and machinery; 2) charges
over movable and intangible assets such as income rights, accounts receivable, inventories and land use rights; and/or 3) guarantee(s)
from the owners or directors of the customer and their spouse or other third parties. Such counter-guarantees would be discharged
after our obligations under the guarantee given by us are discharged. If our customers default on a loan or fail to perform their
contractual obligations, we would have to pay to the bank or a contractual counter-party the amount guaranteed by us under the
relevant guarantee given by us. When we are called upon to make payment under the guarantees given by us, we would in turn seek
to recover such liabilities from liquidating the collateral provided to us or from funds obtained from guarantors, under the counter-guarantees
given to us by the relevant customers. It is possible that collateral provided to us under such counter-guarantee(s) could not
be realized, or could not be realized in time, or could not be realized at prices that are equal to or above the amount of our
liability under the guarantees given by us, or the relevant guarantor(s) may fail to perform the obligations under the counter-guarantee(s)
provided to us. In the event of liquidation or bankruptcy of our customers, we may not be able to claim priority on such collateral
over other creditors of our customer, and we may not be able to recover the full value of that collateral under the counter-guarantees
or at all. In addition, the procedures for liquidating or otherwise realizing the value of collateral of borrowers in China may
be protracted or ultimately unsuccessful, and the enforcement process in China may be difficult for legal and practical reasons.
Any of the foregoing may adversely impact our results of operations and profitability.
Our provisions for guarantee losses and impairment losses
may not be adequate to cover actual losses and any increase to the allowance for guarantee losses and impairment losses may cause
our net income to decrease.
As of June 30, 2017, our provision for guarantee
losses was $0.7 million and our allowance for impairment losses was $0.9 million in respect of investment in financial leasing.
The amount of provisions or allowances has been based on our management’s assessment of, and expectations concerning, various
factors affecting the quality of our guarantee and loan portfolio, such as the customers’ financial condition, repayment
ability, historical default rates, the anticipated realizable value of any collateral, regional economic conditions, government
policies, interest rates and other factors, and the applicable PRC rules and regulations governing provisions for losses. If our
assessment and expectations differ from actual events, or if the quality of our guarantee and loan portfolios deteriorates, our
provisions or allowance may not be adequate to cover our actual losses and we may need to set aside additional provisions or allowance,
which could materially and adversely affect our profitability. Our business is subject to fluctuations based on local economic
conditions. These fluctuations are neither predictable nor within our control and may have a material adverse impact on our operations
and financial condition. We may increase our allowance for guarantee losses and impairment losses for investment in financial leases
based on any such change of economic conditions and the change of management’s assessment. Regulatory authorities may also
require an increase in the provision or allowance for guarantee or loan losses. Any increase in the allowance for guarantee or
loan losses would result in a decrease in net income and may have a material adverse effect on our financial condition and results
of operations.
Our business is concentrated in financial guarantees and
financial leasing, and therefore lacks product and business diversification. Accordingly, our future revenues and earnings may
be more susceptible to fluctuations than a more diversified company.
Currently, our primary business activities
include providing guarantee services and offering financial lease as well financial advisory services to our customers. If we are
unable to maintain and grow the operating revenues from our business or develop additional revenue streams, our future revenues
and earnings are not likely to grow and could decline. Our lack of significant product and business diversification could inhibit
the opportunities for growth of our business, revenues and profits.
The commission rate in the guarantee business and interest
rate in financial leasing business may decrease due to changes in the Chinese economic environment or industry competitiveness,
which could negatively affect our revenue and net profit.
If China’s economy does not maintain
the same growth rate as it has in previous years, or China’s macro-economy slows down, the government could tighten money
supply, and banks could be less inclined to incur credit risk and extend loans to Chinese SMEs, which could negatively affect our
guarantee business. China has cut its interest rate three times during the last 12 months, and further cuts in interest rates may
be implemented in the near future. New participants may enter the financial sector and our business could face intense competition
within our current region, and in the regions into which we plan to expand, due to these new entrants. We might be unable to maintain
the same level of commission rates or interest rates charged for our guarantee service or financial leasing service, in which case
our revenue and net profit may decrease.
We hold a significant amount of short term investments in
assets management products. It is possible that we could lose the principal and interest of these assets, or the current return
may not be maintained. Furthermore, it is possible that the banks and financial institutions that manage the short-term investments
may not be able to redeem the short-term investments at our request, resulting in our being unable to utilize the related funds
to support our business.
As of June 30, 2017, we hold $187.9 million
of short-term investments in assets management products managed by banks and financial institutions, which have invested in fixed-income
financial products permitted by the China Securities Regulatory Commission (“SRC”) such as government bonds, corporate
bonds and central bank notes. We believe that the risk of loss of principal and interest on these assets is very low. However,
if the Chinese economic environment changes significantly, for instance, if China’s economy enters a serious recession resulting
in many enterprises being unable to repay their bonds and other obligations, or if China’s central bank cuts interest rates
significantly, China’s asset management companies may be unable to protect their interests in the assets under management.
In such event, we might lose any return or even the principal from these investments. The current annualized return rate for assets
held by these asset management companies on behalf of us is between 5% and 9% annually. The return on these funds is highly dependent
on the management ability of the asset management companies, and on the market interest rate of the investment products. Current
levels of return may not be sustainable if the market interest rate continues to decrease in the near future. Further, the banks
and financial institutions that manage the short term investments may be unable to redeem such investments at a price equal to
the principal and undistributed interests due to market events or, in extreme circumstances, such as significant redemptions or
a deterioration of liquidity in the financial markets, may be unable to redeem them at all. As a result, we may not have access
to the capital related to the short-term investments for our business when needed.
We failed to comply with certain laws and regulations and
the non-compliance may expose us to potential penalties or legal actions imposed by relevant government authorities.
We failed to comply with certain social
insurance contributions and Provident Housing Fund requirements under PRC regulations (collectively “Social Benefit Regulations”).
Dongsheng Guarantee failed to make social insurance contributions and Provident Housing Fund contributions for some of its employees.
As of the latest practicable date, we had not received any notice from any of the relevant government authorities regarding our
non-compliance with Interim Measures for our guarantee business and the Social Benefit Regulations. However, we cannot assure that
the relevant regulatory authorities will not impose penalties and/or bring legal action against us retrospectively, which may adversely
affect our business and cause a significant penalty payment.
Our risk management framework, policies and procedures and
internal controls may not fully protect us against various risks inherent in our business.
We have established an internal risk management
framework, policies and procedures to manage our risk exposures, primarily credit risk, operational risk, compliance risk and legal
risk as well as liquidity risk. These risk management policies and procedures are based upon historical behaviors and our experience
in the industry. They may not be adequate or effective in managing our future risk exposures or protecting us against unidentified
or unanticipated risks, which could be significantly greater than those historically experienced. Although we are continuously
updating our policies and procedures, we may fail to predict future risks due to rapid changes in the market and regulatory conditions,
and new markets we enter. Although we have established internal controls to ensure our risk management policies and procedures
are adhered to by our employees as we conduct our business, our internal controls may not effectively prevent or detect any non-compliance
of our policies and procedures, which may have a material adverse effect on our business, financial condition and results of operations.
Effective implementation of our risk management and internal controls also depends on our employees. Human error or other mistakes
may significantly undercut the effectiveness and performance of our risk management and internal controls, resulting in a material
adverse effect on our business, results of operations and financial position.
We had material weaknesses in our internal control in
financial reporting as of June 30, 2017 and such material weaknesses could adversely affect our ability to report our results of
operations and financial condition accurately and in a timely manner.
Our management identified material weaknesses
and concluded that our internal control over financial reporting were not effective as of June 30, 2017. A material weakness is
a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis.
The specific material weaknesses we identified
in our internal control over financial reporting as of June 30, 2017 related to:
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lack of sufficient accounting personnel qualified in US GAAP and SEC reporting; and
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insufficient accounting staff, which results in a failure to segregate duties sufficiently to ensure a timely and proper preparation
and review of the financial statements.
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Although we plan to take steps to address
the foregoing material weaknesses, we can provide no assurance that they will be remediated in a timely manner.
Any failure to maintain effective internal
controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements
are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are
not filed on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either
case, there could result a material adverse effect on our business. Inferior internal control could also cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our stock. We can
give no assurance that additional material weaknesses or restatements of financial results will not arise in the future due to
a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition,
even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be
adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
We may be subject to employee misconduct which is often difficult
to detect and could harm our reputation and business.
Employee misconduct may include approving
a transaction beyond authorized credit limits, hiding key customer information in the due diligence process, engaging in fraudulent
or other improper activities, or otherwise not complying with laws or our risk management procedures. Employee misconduct is often
difficult to detect and could take significant time to uncover. We cannot assure you that future incidents of employee misconduct
will not subject us to serious penalties or limitations on our business activities. We could also suffer from negative publicity,
reputational damage, monetary losses or litigation losses as a result of the misconduct of our employees.
There is often limited information regarding our customers
and our ability to perform customer due diligence or detect customer fraud may be compromised as a result.
The information available on SMEs including
microenterprises is often limited. Our credit evaluation depends primarily on customer due diligence. We cannot assure you that
our customer due diligence will uncover all material information necessary to make a fully informed decision, nor can we assure
you that our due diligence efforts will be sufficient to detect fraud committed by our customers. If we fail to perform thorough
due diligence or discover customer fraud or intentional deceit, the quality of our credit evaluation may be compromised. A failure
to effectively measure and limit the credit risk associated with our guarantee and loan portfolio could have a material adverse
effect on our business, financial condition, results of operations and prospects. In addition, we may be unable to monitor our
customers’ actual use of the financing we guaranteed or provided, or verify if our customers have other undisclosed private
money or borrowings. We may not be able to detect our customers’ suspicious or illegal transactions, such as money laundering
activities, in our business and we may suffer financial and/or reputational damage as a result.
Our continued success is dependent on senior management and
our ability to attract and retain qualified personnel.
Our success has been, and in the future
will be, dependent on the continued services of our executive directors and senior management. There is no assurance that any or
all of our senior management will continue their employment with us. If any senior management personnel are unable or unwilling
to continue their service, we may not be able to find a suitable replacement quickly or at all. The loss of the services of any
senior management personnel and the failure to locate a suitable replacement might disrupt our business and could have an adverse
impact on our ability to manage or operate our business effectively.
Our performance is also dependent on the
talents and efforts of highly-skilled individuals. As a result, our continued ability to effectively compete, manage and expand
our business depends on our ability to retain and motivate our existing employees and attract new talented and diverse employees.
Given our relatively lean human resources structure, the loss of services of any employee holding an important position or possessing
industry expertise or experience could have a material adverse effect on our results of operations, business and prospects. Competition
in the financial services industry for qualified employees has often been intense, and we may also need to offer higher compensation
and other benefits to attract new personnel. A failure to attract and retain qualified personnel and any significant increase in
staffing costs could have a negative impact on our ability to maintain our competitive position and grow our business.
The future development and implementation of anti-money laundering
laws in China may increase our obligation to supervise and report transactions with our customers, thereby increasing our compliance
efforts and costs and exposing us to criminal measures or administrative sanctions for non-compliance.
We believe that we are not currently subject
to PRC anti-money laundering laws and regulations and are not required to establish specific identification and reporting procedures
relating to anti-money laundering. PRC laws and regulations relating to anti-money laundering have evolved significantly in recent
years and may continue to develop. In the future, we may be required to supervise and report transactions with our customers for
anti-money laundering or other purposes, which may increase our compliance efforts and costs and may expose us to potential criminal
measures or administrative sanctions if we fail to establish and implement the required procedures or otherwise fail to comply
with the relevant laws and regulations.
Failure to maintain our reputation and brand name could materially
and adversely affect our business.
We believe that the reputation and brand
name that we have built over the years plays a significant role in enabling us to obtain business from referrals as well as to
attract new customers. A large portion of our new guarantee services were referred to us by our past or existing customers or by
banks or other financial institutions. We believe that the building up and the enhancement of our reputation and brand name depend
largely on, among others, our credibility among finance providers and other players in the financial services industry which has
been developed over the years of our business operations, and our ability to provide diversified services to meet the requirements
of our customers and their counter-parties. If we fail to maintain our reputation or our customers or their counter-parties no
longer perceive our services to be of high quality or if they should no longer perceive us as a guarantee company with high credibility
for whatever reason, our reputation and brand name could be adversely affected which, in turn, could affect our ability to maintain
existing or capture future business opportunities. There is also no assurance that our past or existing customers or banks or financial
institutions with whom we have business relationships will continue to work with us or to refer new or potential customers to us.
In the event our existing or past customers or banks or financial institutions with whom we have business relationships cease to
work with us or stop referring new or potential customers to us or substantially reduce their referrals to us, our business, financial
condition and results of operations would be adversely affected.
We are heavily dependent on the performance of SMEs, particularly
those in Jinzhong City, and any decrease in demand for services to SME’s in Jinzhong City or the PRC may adversely impact
our business operations.
The rapid growth of the economy of the PRC
in recent years has triggered a surge in the number of new SMEs and the escalation of their respective businesses in general. Despite
the growth of SMEs and the growing demand for funding from these SMEs in recent years, there can be no assurance that the demand
for financial guarantee services and financial leasing from SMEs will continue to grow. Any adverse development in national or
local economic conditions may affect the businesses or funding demands of SMEs which, in turn, may reduce the demand or depress
the amount of fees we charge for our services. Any decrease in such demand would have a material adverse effect on our result of
operations and financial condition.
Our financial guarantee, financial leasing
and financial consultancy services are provided to SMEs and their shareholders for the benefit of SMEs in the PRC, mainly in Jinzhong
City, Shanxi Province. Our business and prospects are particularly dependent on the performance of SMEs in Jinzhong City which
operate in a multitude of different industries. If the economy of Shanxi Province, in particular Jinzhong City, significantly deteriorates,
performance of SMEs in such area will be adversely affected which, in turn, could have an adverse effect on our business. If there
is any downturn in the industries of any of our customers and potential customers in the PRC generally or in Jinzhong City specifically,
our business, financial condition and results of operations could also be adversely affected.
We may not be able to keep pace with changing demands in
the guarantee business industry.
A significant factor of our competitiveness
in the markets for guarantee services is our ability to develop our services so that we are able to continuously tailor our services
to the needs and demands of our customers and their counter-parties. Due to the changes in the global economy, the national economy
in the PRC or the local economy in Shanxi Province, the changes in the business environment of the SMEs in the PRC and the development
of different financial products, there may be changes in the market needs for guarantee services in terms of, among others, the
type of services and the scale of guarantees provided. We cannot assure that we will be able to obtain sufficient financial and
human resources to develop our business in view of such changes. The scale and expertise of our management team may not be able
to meet such market needs and we may not be able to attract suitable personnel for the development of our business. In addition,
our risk management system may not keep up with changes in the business requirements of our cooperating institutions and customers.
Further, there is no assurance that our new services will be well accepted by the market, or such services can be developed and
put into the market in a timely manner or at all. In the event that we are not able to develop new services that meet the needs
of our customers or their counter-parties or that our competitors have developed new service offerings that are more accepted by
the market than ours, our business, financial condition and results of operations may be materially and adversely affected.
We may be involved in legal proceedings arising from our
operations.
We may become involved in disputes with
customers, financial providers and/or other parties. These disputes may lead to legal proceedings, and may cause us to suffer costs
and delays to our operations. Such legal proceedings may also adversely affect our reputation which in turn could lead to a slowdown
in our new business opportunities.
We are subject to certain foreign exchange risks.
We receive all of our revenue in Renminbi,
which is currently not a freely convertible currency. A portion of our revenue must be converted into other currencies in order
to meet our foreign currency obligations from time to time. For example, we will be required to obtain foreign currency (i.e. US
dollars) to make payments of declared cash dividends, if any. The value of Renminbi against the U.S. dollar and other currencies
fluctuates and is affected by, among other things, changes in the PRC and international political and economic conditions. The
value of any declared cash dividends in the future may be affected by fluctuations in exchange rates.
We have no insurance coverage for our guarantee and financial
leasing business, investment assets or deposits in our bank accounts, which could expose us to significant costs and business disruption.
We do not maintain any credit insurance,
business interruption insurance, general third-party liability insurance, nor do we maintain key man life insurance or any other
insurance coverage except the mandatory social insurance for employees. If we incur any lost that is not covered by our loss reserve,
our business, financial condition and results of operations could be materially and adversely affected. Additionally, our major
assets are cash deposit in banks and short-term investments in assets management products. These assets are not insured or otherwise
protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw
funds, we could lose the cash on deposit with that particular bank or trust company.
The proportion of the financial leasing revenue to our revenue
has gradually increased, but this growth may not continue.
We are still developing our financial leasing
business. The success of our financial leasing operations will be highly dependent upon our ability to successfully develop and
market our financial leasing services to targeted customers. We may not be able to develop our financial leasing business as planned
and generate revenues or profits. The revenue and income potential of our proposed financial leasing business is unproven and the
lack of operating history makes it difficult to evaluate the future prospects of this business.
Our knowledge of the Chinese financial leasing industry and
market may be limited. Our perception of potential customers’ needs and their acceptance of our financial leasing services
may not be accurate.
We may not be able to work with equipment
providers to successfully purchase qualified equipment identified by our customers on terms acceptable to us. We may not be able
to establish sound financial modeling in the calculation of the interest rate and residual value. Such inexperience and lack of
active knowledge may lead to failure of our financial leasing business.
Lack of knowledge of financial leasing benefits among potential
customers may make it difficult for us to market our services.
Many people in the PRC still perceive leasing
companies as a “second-class bank”, and very few recognize the flexibility and benefits that financial leasing provides.
We may need to invest a tremendous amount of time and effort toward education people of the benefits of such business so that potential
customers can fully appreciate the flexibility leasing offers to deploy their assets. Failure in such education may make it difficult
for us to market our financial leasing services.
Our dividend policy is determined by the Board of Directors
based the consideration of our performance, cash flow position and future growth strategy. We cannot assure you of declaring dividend
at any time in the future.
In the future, we may not have sufficient
net income or cash flow for dividend distribution, and we may retain profits to cover cash flow required for further business growth.
There is no assurance that we will pay any dividends in the future. If we do not pay dividends, shareholders will not experience
investment returns except through the sale of their stock.
Failure to manage our growth could result in a negative impact
on our future performance, results of operation and financial condition.
We intend to seek strategic acquisitions
in the future in order to further expand our business and service offerings. It is our intention to seek acquisition targets that
have the potential to complement our existing business or our business model or to broaden our service offerings. Any failure to
successfully acquire or merge with such targets or to successfully integrate newly acquired or merged businesses into our business
could have a negative impact on our future performance, results of operations and financial condition.
Our financial performance may fluctuate from period to period
and the fluctuations may make it difficult to predict our future performance. The adjustment of our business development strategies
according to the new environment may have significantly adverse effect on our performance.
Our financial performance fluctuates with
our business volume. For our guarantee and financial consultancy service, the level of revenue that we can achieve is subject to
fluctuations and is dependent on, among others, the business and performance of our customers and the overall economic condition
of the PRC. Accordingly, we are susceptible to revenue volatility between financial periods.
Our financial performance is affected by
the market conditions of the vastly diverse industries in which our customers operate and the overall economic conditions of the
PRC, which are factors beyond our control. In the event that we are not able to continually and consistently secure new guarantee
contracts from customers, our future financial performance will be adversely affected.
In order to achieve our long term mission,
we may balance our efforts and capital to some newly developed segments, such as leasing or other newly acquired business. This
could negatively affect our current guarantee financial performance.
Our business strategy could be adjusted
subject to various circumstances, such as market opportunity, overall economic condition of the PRC, changes in the government
regulations, and so on. Such adjustment could shift our future business focus and demand a large number of resource support, which
could negatively affect our future financial performance.
Risk relating to doing business in the PRC
China’s economic, political and social conditions,
as well as regulatory policies, significantly affect the financial markets in China, as well as our liquidity, access to capital
and ability to operate our business.
Our operating subsidiaries are incorporated,
and our operations and assets are primarily located, in the PRC. Accordingly, our results of operations, financial condition and
prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies
of developed countries in many respects, including the amount of government involvement, level of development, growth rate, control
of foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past few
decades, growth has been uneven across different regions and economic sectors and there is no assurance that such growth can be
sustained or is sustainable. The PRC government has implemented various measures to encourage economic development and guide the
allocation of resources. Some of these measures benefit the overall PRC economy, but may negatively affect us. For example, our
financial condition and results of operations may be adversely affected by the following factors:
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an economic downturn in China or any regional market in China;
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inaccurate assessment of the economic conditions of the markets in which we operate;
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economic policies and initiatives undertaken by the PRC government;
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changes in the PRC or regional business or regulatory environment affecting the SME and microenterprise sector;
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changes to prevailing market interest rates;
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a higher rate of bankruptcy; and
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the deterioration of the creditworthiness of SMEs and microenterprises in general.
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In addition, an unfavorable financial and
economic environment in recent years, including as a result of continued global financial uncertainties and the Eurozone sovereign
debt crisis, have had and may continue to have an adverse impact on investors’ confidence and financial markets in China.
Moreover, concerns over capital market volatility, issues of liquidity, inflation, geopolitical issues, the availability and cost
of credit and concerns about the rate of unemployment have resulted in adverse market conditions in China, which may materially
and adversely affect our business and operations.
We may not in all cases be able to capitalize
on the economic reform measures adopted by the PRC government. Changes in the economic, political and social conditions or the
relevant policies of the PRC government, such as changes in laws and regulations or restrictive financial measures, could have
an adverse effect on the overall economic growth of the PRC, which could subsequently hinder our current or future business, growth
strategies, financial condition and results of operations.
Substantial uncertainties and restrictions with respect to
the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the
business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.
Our business operations may be adversely
affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic
reform policies that encourage private economic activities and greater economic decentralization. However, the government of the
PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.
There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing
our business, or the enforcement and performance of our arrangements with borrowers in the event of the imposition of statutory
liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive
system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law
has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not
sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and
because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these
laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses
may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the
past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts
provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating
new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business. Consequently,
we cannot clearly foresee the future direction of Chinese legislative activities with respect to either business with foreign investment
or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and
changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas,
may cause possible problems to foreign investors.
Lack of financial leasing regulations could negatively impact
our business.
Currently, there is no uniform equipment
title registration process and system in China, as each municipality adopts different procedures. The pending China Financial Leasing
Law is expected to unify the registration procedures and protect the lessor against a “good-faith” third-party claim
if the leased assets are registered in the lessor’s name. In the absence of such central title registration system, the lessors’
ownership interest on the leased equipment may be threatened. Loss of ownership to the leased equipment will have a negative effect
on our financial position.
Interpretation of PRC laws and regulations involves uncertainty
and the current legal environment in the PRC could limit the legal protections available to shareholders.
PRC laws and regulations govern our operation
in the PRC. Most of our subsidiaries are organized under PRC laws. The PRC legal system is a civil law system based on written
statutes, and prior court decisions have little precedent value and can only be used as a reference. Additionally, PRC written
statutes are often principle-oriented and require detailed interpretations by the enforcement bodies to further apply and enforce
such laws. Since 1979, the PRC legislature has promulgated laws and regulations in relation to economic matters such as foreign
investment, corporate organization and governance, commercial transactions, taxation and trade, with a view to developing a comprehensive
system of commercial law, including laws relating to property ownership and development. However, due to the fact that these laws
and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature
of prior court decisions, interpretations of the PRC laws and regulations involves a degree, sometimes a significant degree, of
uncertainty. Depending on the governmental agency or how an application or case is presented to such agency, we may receive less
favorable interpretations of laws and regulations than our competitors. In addition, any litigation in the PRC may be protracted
and result in substantial costs and diversion of resources and management attention. All of these uncertainties may limit the legal
protections available to our investors and shareholders.
Foreign ownership in financial guarantee and financial leasing
businesses may be changed due to the uncertainty of evolving PRC laws and regulations.
We operate our financial guarantee and financial
leasing business under foreign ownership structures in China. According to the Catalogue for the Guidance of Foreign Investment
Industries (“Foreign Investment Catalogue”) promulgated by the Ministry of Commerce of the PRC (“MOFCOM”)
and the National Development and Reform Commission (“NDRC”) on March 10, 2015 and effective as of April 10, 2015, our
operation of financial guarantee and financial leasing businesses with foreign ownership is permitted under current PRC laws and
regulations. However, the PRC laws and regulations are not fully developed and the Chinese government has been revising the laws
and regulations since the Reform and Opening-up in 1979. There is still significant uncertainty resulting from the evolving PRC
laws and regulations. As a result, foreign investment in these financial industries may be restricted or prohibited in the future
if PRC laws and regulations are changed or revised due to the evolving political or economic conditions.
The national and regional economies in the PRC and our prospects
may be adversely affected by natural disasters, acts of God and the occurrence of epidemics.
Our business is subject to general economic
and social conditions in the PRC. Natural disasters, epidemics and other acts of God which are beyond our control may adversely
affect the economy, infrastructure and livelihood of the people in the PRC. Some regions in the PRC are under the threat of earthquake,
sandstorm, snowstorm, fire, drought, or epidemics such as Severe Acute Respiratory Syndrome, SARS, H5N1 avian flu, the human swine
flu, also known as influenza A (H1N1) or the recent cases of H7N9. For instance, two serious earthquakes hit Sichuan province in
May 2008 and April 2013, and resulted in significant loss of lives and destruction of assets in the region. In addition, past occurrences
of epidemics, depending on their scale, have caused different degrees of damage to the national and local economies in the PRC.
A recurrence of SARS or an outbreak of any other epidemics in the PRC, such as the H5N1 or the H7N9 avian flu, especially in the
cities where we have operations, may result in material disruption of our business, which in turn may adversely affect our financial
condition and results of operations.
Our shareholders may experience difficulties in effecting
service of legal process and enforcing judgments against us, our Directors or senior management and to take action on the basis
of violations of the listing rules.
Our major operations are located in the
PRC, and almost all of our assets and subsidiaries are located in the PRC. Most of our directors and senior management reside within
the PRC. The assets of these Directors and senior management are also located within the PRC. As a result, it may not be possible
to effect service of process upon most of our Directors and senior management outside the PRC. Moreover, the PRC does not have
treaties providing for reciprocal recognition and enforcement of court judgments in the United States. As a result, in the PRC,
recognition and enforcement of court judgments from the jurisdictions mentioned above may be difficult or impossible in relation
to any matter that is not subject to a binding arbitration provision.
We are a holding company located outside China and rely on
dividend payments from our subsidiaries. Our ability to pay upstream dividends may be restricted due to foreign exchange controls
and other Chinese regulations.
We are a holding company and a significant
part of our business is carried out through our operating subsidiaries in the PRC. As a result, our ability to pay dividends depends
on dividends and other distributions received from our operating subsidiaries. If any of our subsidiaries incurs debt or losses,
it may impair its ability to pay dividends or other distributions to us, which could adversely affect our ability to pay dividends
to our Shareholders.
PRC law requires any foreign invested enterprises,
such as our subsidiaries in the PRC, to set aside part of its net profit as statutory reserves. Our PRC subsidiaries are required
to set aside each year at least 10% of their after-tax profits for such year, as reported in its PRC statutory financial statements,
to the statutory surplus reserve of such PRC subsidiary. Such reserve may not be discontinued until the accumulated amount has
reached 50% of the registered capital of the PRC subsidiary. These statutory reserves are not available for distribution to us,
except in liquidation. The calculation of distributable profits is based on PRC Accounting Standards and Regulations, which differ
in many aspects from US GAAP. As a result, our subsidiary in the PRC may not be able to pay any dividend in a given year to us
if it does not have distributable profits as determined under the PRC Accounting Standards and Regulations, even if it has profits
for that year as determined under US GAAP.
Limitations on the ability of our PRC operating
subsidiary to remit its entire after-tax profits to us in the form of dividends or other distributions could adversely affect our
ability to grow, make investments that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
We cannot assure that our subsidiaries will generate sufficient earnings and cash flow to pay dividends or otherwise distribute
sufficient funds to us to enable us to pay dividends to our Shareholders.
The PRC Enterprise Income Tax Law (“PRC
EIT Law”) and its implementation rules stipulate that if an entity is deemed to be a non-PRC resident enterprise without
an establishment or place of business in the PRC, withholding tax at the rate of 10% will be applicable to any dividends paid to
it by its PRC subsidiary, unless it is entitled to reduction or elimination of such tax, including by tax treaties.
In addition, restrictive covenants in bank
credit facilities or other arrangements that we or our subsidiaries may enter into in the future may also restrict the ability
of our subsidiaries to pay dividends or make distributions to us. These restrictions could reduce the amount of dividends or other
distributions we receive from our subsidiaries, which in turn would restrict our ability to pay dividends to our shareholders.
Failure by our operating subsidiaries to
pay us dividends could negatively impact our cash flow and our ability to make dividend distributions to our shareholders, including
during periods in which we are profitable.
Risks Related to the Company
We are a foreign private issuer and, as a result, we are
not be subject to U.S. proxy rules and are subject to the Exchange Act reporting obligations that, to some extent, are more lenient
and less frequent than those applicable to a U.S. issuer.
We report under the Exchange Act as a foreign
private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of
the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation
of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange
Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit
from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly
reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence
of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to
the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same
as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic
issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within
90 days after the end of each fiscal year, in the fiscal years ending on or after December 15, 2011, foreign private issuers will
not be required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers
are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material
information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the
same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted, and intend,
to follow certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result
in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted,
and intend, to follow certain home country corporate governance practices instead of those otherwise required under the Listing
Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in the Cayman
Islands with regard to, among other things, director nomination procedures, the approval of compensation of officers, and quorum
requirements at general meetings of our shareholders. In addition, we intend to follow our home country law instead of the Listing
Rules of the NASDAQ Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment
or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain
transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions
of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that
would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is accorded to investors
under the Listing Rules of the NASDAQ Stock Market applicable to domestic U.S. issuers.
Our management team’s lack of experience as officers
of publicly-traded companies may hinder our ability to comply with the Sarbanes-Oxley Act.
It may be time-consuming, difficult and
costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may
need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal
controls requirements, we may not be able to obtain the independent auditor certifications that the Sarbanes-Oxley Act requires
publicly-traded companies to obtain.
We may be classified as a passive foreign investment company
(“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors.
In general, assuming we are treated as a
foreign corporation for U.S. federal income tax purposes, we will be treated as a PFIC for any taxable year in which either (1)
at least 75% of our gross income (including our pro rata share of the gross income of certain 25% or more-owned corporate subsidiaries)
is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of certain
25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income.
Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of
passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period
of a U.S. Holder (as defined in the section of this Annual Report captioned “Taxation—United States Federal Income
Taxation—General” under Item 10.E.) of our ordinary shares, the U.S. Holder may be subject to increased U.S. federal
income tax liability and may be subject to additional reporting requirements. Based on the composition (and estimated values) of
our assets and the nature of our income and that of our subsidiaries during our taxable year ended June 30, 2017, we believe that
we may be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status for
such taxable year, there can be no assurance in respect to our PFIC status for such year. There also can be no assurance in respect
to our status as a PFIC for our current taxable year or any future taxable year. U.S. Holders of our ordinary shares are urged
to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion in the section of this
Annual Report under Item 10.E entitled “Taxation—United States Federal Income Taxation—U.S. Holders—Passive
Foreign Investment Company Rules.”
Additional financing may result in dilution to our shareholders.
We may need to raise additional funds in
the future to finance internal growth, to make acquisitions or for other reasons. Any required additional financing may not be
available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant
dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary
shares. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements
may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also
require us to fund additional interest expense. If additional financing is not available when required or is not available on acceptable
terms, we may be unable to successfully commercialize our product or continue our research and development.
Future resales of our ordinary shares may cause the market
price of our securities to drop significantly, even if our business is doing well.
Pursuant to the merger agreement with
Wins Finance Group Ltd. (“WFG”) we issued 16,800,000 or our ordinary shares to the former shareholders of WFG.
Pursuant to the merger agreement, the WFG shareholders are restricted from selling any of the ordinary shares that they
received as a result of the merger during the twelve-month period after the closing date of the merger, subject to certain
exceptions, and the former shareholders of WFG were required to enter into lock-up agreements to such effect.
Subject to these restrictions, the company
entered into an amended and restated registration rights agreement at the closing of the merger with the former shareholders of
WFG pursuant to which such holders were granted certain demand and “piggy-back” registration rights with respect to
their securities. Furthermore, the former shareholders of WFG may sell our ordinary shares pursuant to Rule 144 under the Securities
Act, if available, rather than under a registration statement. In these cases, the resales must meet the criteria and conform to
the requirements of that rule, including waiting until one year after our filing with the SEC of a Current Report on Form 8-K containing
Form 10 type information reflecting the transactions with WFG.
Upon expiration of the applicable lock-up
periods, and upon effectiveness of any registration statement we file pursuant to the amended and restated registration rights
agreement or upon satisfaction of the requirements of Rule 144 under the Securities Act, the former shareholders of WFG may sell
large amounts of our ordinary shares in the open market or in privately negotiated transactions, which could have the effect of
increasing the volatility in our stock price or putting significant downward pressure on the price of our stock.
Also pursuant to the amended and restated
registration rights agreement, the initial shareholders of Sino Mercury Acquisition Corp. (“Sino”) are entitled to
make a demand that we register the resale of their initial shares at any time commencing three months prior to the date on which
their shares may be released from escrow. The presence of these additional ordinary shares trading in the public market may have
an adverse effect on the market price of our securities.
If securities or industry analysts do not publish research
or reports about us or our business or publish unfavorable research about us or our business, the price of our securities and their
trading volume could decline.
The trading market for our securities will
depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more
of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these
analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease,
which could cause the price of our securities and their trading volume to decline.
Our stock price may be volatile, there is limited liquidity
in our ordinary shares and purchasers of our securities could incur substantial losses.
Our stock price has been and is likely to
continue to be volatile. The stock market in general has, and we in particular have, experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. This volatility may be due, in part, to the small number of
our ordinary shares which are publicly tradeable. As a result of this volatility, investors may not be able to sell their securities
at or above the price at which they purchased such securities. Broad market and industry factors may negatively affect the market
price of our ordinary shares, regardless of our actual operating performance. Further, a systemic decline in the financial markets
and related factors beyond our control may cause our share price to decline rapidly and unexpectedly. Finally, because of the significant
volatility in our stock price, Nasdaq halted trading in our stock in June 2017. If volatility in our stock price continues after
trading recommences, Nasdaq could again halt trading in our stock.
Due to the recent extreme fluctuations in our stock price,
we have been the subject of regulatory proceedings and lawsuits, which, if determined against us, could adversely affect our operating
results.
Beginning in November 2016 and through June
2017, our stock price experienced extreme price and volume fluctuations having nothing to do with the performance of our business.
We do not know the cause of such fluctuations, but such fluctuations have resulted in significant adverse consequences to us. Trading
in our ordinary shares was halted by the Nasdaq Stock Market in June 2017 due to the fluctuations, and class action litigations
have been filed against us due to such fluctuations and the trading halt. Although we do not believe that the class action litigations
have any merit and we believe that that the halt on our ordinary shares will soon be lifted, we cannot predict the outcome of the
litigations or how Nasdaq, or whether other regulatory agencies (such as the SEC), will proceed against us. If a judgment is entered
against us in the class action litigations or if a regulatory agency takes action against us, our business may suffer and the value
of our ordinary shares may significantly decrease.
ITEM 4. INFORMATION ON OUR COMPANY
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A.
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History and Development of the Company
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Our History
Sino Mercury Acquisition Corp. (“Sino”)
was incorporated in the State of Delaware on March 28, 2014. Sino was a blank check company formed in order to effect a merger,
capital stock exchange, asset acquisition or other similar business combination with one or more businesses or entities. On September
2, 2014, Sino closed its initial public offering of 4,000,000 units, with each unit consisting of one share of its common stock
and one right to receive one-tenth of one share of common stock upon consummation of an initial business combination. On September
24, 2014, Sino consummated the sale of an additional 80,100 units which were subject to an over-allotment option granted to the
underwriter of its initial public offering. The units from the initial public offering (including the over-allotment option) were
sold at an offering price of $10.00 per unit, generating total gross proceeds of $40,801,000. Simultaneously with the consummation
of the initial public offering, Sino consummated the private sale of 210,000 units to one of its initial shareholders at $10.00
per unit (the “Private Units”) for an aggregate purchase price of $2,100,000. $38,701,000 of the net proceeds from
the initial public offering, together with $2,100,000 raised from the private sale of units, for a total of $40,801,000, was deposited
into the trust account and the remaining proceeds became available to be used as working capital to provide for business, legal
and accounting due diligence on prospective business combinations and continuing general and administrative expenses. The initial
public offering was conducted pursuant to a registration statement on Form S-1 (Reg. No. 333-197515) that became effective on August
26, 2014.
Wins Finance Holdings Inc. (the “Company”)
was incorporated in the Cayman Islands as an exempted company on February 17, 2015 and organized as a wholly-owned subsidiary of
Sino, for the purposes of changing the jurisdiction of Sino from Delaware to the Cayman Islands through a merger in which the Company
would be the surviving corporation and, immediately following that merger, simultaneously acquiring all of the outstanding equity
of Wins Finance Group Limited, a British Virgin Islands international business company (“WFG”), by means of an exchange
by the shareholders of WFG(the “WFG Shareholders”) of 100% of the ordinary shares of WFG for cash and ordinary shares
of the Company.
WFG is a holding company that was incorporated
under the laws of the British Virgin Islands on July 27, 2014. After several recapitalizations and restructurings, WFG holds 100%
of the interests of Jinshang Leasing, Jinchen Agriculture, Dongsheng Guarantee and Tianjin Jiaming through its wholly owned subsidiary,
Full Shine. WFG is an integrated financing solution provider with operations located primarily in Jinzhong City, Shanxi Province
and Beijing, China. WFG’s goal is to assist Chinese small & medium enterprises, including microenterprises, which have
limited access to financing, in improving their overall fund-raising capability and enable them to obtain funding for business
development.
Effective October 26, 2015, the Company
consummated the merger and share exchange transactions (the “Business Combination”) contemplated by the Agreement and
Plan of Reorganization (the “Merger Agreement”), dated as of April 24, 2015 and amended on May 5, 2015, by and among
the Company, Sino, WFG and the WFG Shareholders.
Upon the closing of the Business Combination
(the “Closing”), the former security holders of Sino were issued an aggregate of 4,726,756 ordinary shares of the Company,
including 429,010 ordinary shares of the Company issued in exchange for Sino’s then outstanding rights. In connection with
the Business Combination, holders of 1,012,379 shares of Sino common stock sold in its initial public offering (“public shares”)
exercised their rights to convert those shares to cash at a conversion price of $10.00 per share, or an aggregate of $10,123,790.
As consideration for their outstanding ordinary
shares of WFG at Closing, the WFG Shareholders received an aggregate of 16,800,000 ordinary shares of the Company, which includes
2,500,000 ordinary shares issued at the election of the WFG Shareholders to receive such shares in lieu of cash consideration.
The WFG Shareholders elected to receive no cash consideration.
Upon the Closing, Sino’s common stock,
rights and units ceased trading and the Company’s ordinary shares began trading on the NASDAQ Capital Market under the symbol
“WINS”.
As noted above, the conversion price for
holders of public shares electing conversion was paid out of the Company’s trust account, which had a balance immediately
prior to the Closing of approximately $30,677,210. Of the remaining funds in the trust account, $1,057,882 was used to pay transaction
expenses and the balance of $29,619,328 was released to the Company to be used for working capital purposes.
Of the ordinary shares of the Company issued
to the WFG Shareholders, an aggregate of 1,680,000 of such shares (“Escrow Shares”) were placed in escrow pursuant
to an escrow agreement (“Indemnity Escrow Agreement”) entered into by the Company, Continental Stock Transfer &
Trust Company, as escrow agent, the WFG Shareholders and a representative of WFG at Closing. The Escrow Shares provide a fund of
payment to the Company with respect to its post-closing rights to indemnification under the Merger Agreement for breaches of representations
and warranties and covenants by WFG and its subsidiaries and the WFG Shareholders. The escrow is the sole remedy for the Company
for its rights to indemnification under the Merger Agreement. Claims for indemnification may be asserted against the escrow fund
by the Company once its damages exceed a $2,000,000 threshold and are reimbursable to the full extent of the damages in excess
of such amount, subject to certain exceptions. The 1,680,000 shares held in escrow shall be released on the earlier of (a) the
30th day after the date the Company has filed with the SEC its Annual Report for the year ending June 30, 2016 and (b) March 31,
2017, subject to reduction based on shares cancelled for claims ultimately resolved and those still pending resolution at the time
of the release. As of June 30, 2017, all of the 1,680,000 shares held in escrow have been released.
We are subject to the provisions of the
exempted company incorporated under the Companies Law (2013 Revision) of the Cayman Islands. Our principal executive offices are
located at
1F, Building 7, No. 58 Jianguo Road, Chaoyang District, Beijing 100024, People’s Republic of China, and our
US office is located at
641Lexington Ave, 29
th
Floor, New York, NY 10022. Our telephone number is 646-694-838
and our website is located at winsfinance.com (the information contained therein or linked thereto shall not be considered incorporated
by reference in this annual report).
Principal Capital Expenditures
For a discussion of our capital expenditures,
see Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
Overview
Our company is an integrated financing solution
provider with operations located primarily in Jinzhong City, Shanxi Province and Beijing, China. Our goal is to assist Chinese
SMEs, which have limited access to financing, to improve their overall fund-raising capability and enable them to obtain funding
for business development. WFG principally operates in the following business lines:
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Financial Guarantees — facilitating SMEs’ financing opportunities by acting as a guarantor to secure credit facilities from lending banks and other financial institutions.
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Financial Leasing — providing direct equipment leasing or purchase-lease-back services to SMEs, to satisfy SMEs’ working capital needs.
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Financial Advisory Services — providing financial advisory services to our clients.
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At June 30, 2017, Dongsheng Guarantee, our
operating subsidiary in the PRC, with approximately $47.7 million (or RMB300 million) of registered capital, was ranked as one
of the top 10 financing guarantee companies in Shanxi Province, in terms of registered capital (Source: State Administration of
Industry and Commerce).
Financial Guarantees
Our company has a 10- year operating history
in the financial guarantee business, which was started in 2006. We facilitate financing from banks to SMEs by providing a guarantee
to the lenders such that, in the event of a borrower’s default, we will repay the principal, interest and related fees and
expenses in connection with the underlying debt. We believe our guarantee services enable our SME customers to obtain financing
from banks on better terms, more conveniently, easily and quickly than in the absence of such guarantees.
Financial Leasing
Our financial leasing business was started
as a way to supplement its financial guarantee business. Most of the financial leasing business at that time was derived from our
established guarantee clients, serving as an alternative financing solution for SME clients that owned unencumbered valuable equipment.
In 2009, due to growing needs of SMEs outside
our guarantee clients’, we expanded our financial leasing business, forming a separate subsidiary within our company in Beijing.
Financial Advisory and Agency Services
In addition to the provision of guarantee
services and financial leasing, we also enter into separate financial consultancy services agreements with customers, under which
the customer pays us consultancy fees. We provide tailor-made financial consultancy services by proposing various customized financing
methods or products to customers and assisting customers in acquiring financing. In connection with these consultancy arrangements,
our customers may utilize our guarantee services depending on individual circumstances and if the customer satisfies our requirements
and risk assessment criteria. Under certain circumstances, our company could also act as a financing dealer between other financial
leasing companies who need capital and financial institutions who are willing to provide capital, in which case it would record
a net of interest income for the transactions.
Industry Background
SMEs are A Major Driver of China’s Economy
SMEs have become an indispensable driver
in promoting economic and employment growth in the PRC, driving technological and enterprise system innovation and contributing
to China’s economic transformation.
Lack of Financing for SMEs
The financing needs of SMEs have been largely
underserved by traditional financial institutions. Chinese SMEs have:
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very limited financing sources. Chinese SMEs largely rely on bank loans. For the purpose of establishing market dominance through control of national resource allocation, most commercial banks in China principally target large, state-owned companies and focus their financial services on key clients, industries, regions and products;
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very limited access to capital markets. China’s capital markets primarily support state-owned companies and large private companies, which meet the established criteria of asset scale, revenue and net profit. Most SMEs in China are not qualified to go public and raise capital through China’s capital markets.
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Credit Gap between Banks and SMEs in China
Historically, traditional banks have been
reluctant to lend to SMEs. Although in recent years, under government guidance, traditional banks are attaching greater importance
to serving SMEs, they are still reluctant to lend to SMEs for several reasons including:
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bank loans usually require borrowers to provide a full set of credit and asset ownership records, which SMEs generally lack;
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commercial banks, which are mostly government owned, are able to maintain relatively high profit margins and avoid default risk by taking advantage of the implicit government support provided to state enterprise borrowers, thereby having no incentive to serve SMEs;
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SMEs usually have limited operating history and credit profiles, are vulnerable to economic downturns, and have a higher percentage of defaults compared with large, state-owned companies; it is therefore difficult for banks to justify the risk when lending to SMEs; and
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smaller regional or local banks, which have the potential to provide lending to SMEs, are still in an early stage of development and lack vision and energy to aggressively enter this market.
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As a result, there remains a significant
unmet need for financial services to SMEs in China.
Financial Guarantee — Intermediary between Banks and
SMEs
The history of China’s financial guarantee
industry began in 1993, when the State Council approved the establishment of China National Investment and Guaranty Co., Ltd. Although
the financial guarantee industry grew slowly before 2000 with a limited number of guarantee companies (most of which were owned
by the government), it has since evolved into an established, regulated, well-recognized and fast-growing segment of China’s
financial services industry, dominated by private sector entities. In recent years, the financial guarantee industry played an
active role in supporting SME financing.
Financial Leasing — Rapid Growth
As financial leasing has increased in China,
financial leasing companies devoted to expanding SME financial leasing services have emerged and played an important role in SMEs
upgrading their equipment and adopting new technologies. Manufacturer-dependent financial leasing companies (i.e. captive leasing
companies, owned by equipment manufacturers) are the major supplier of SME financial leasing services at present. Independent financial
leasing companies are expanding into the SME financial leasing field but have been constrained in their expansion due to financial
limitations associated with the significant capital requirements of the sector and immobilization of leased assets.
Our Strengths
We believe that the following competitive
strengths have contributed to its success and establishes a solid platform for future growth:
Primary focus on Chinese SMEs
We believe that our primary focus on meeting
the financing needs of China SMEs has:
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given us specialized insight into the needs and behaviors of SMEs in China, and into the complexities of providing customized financing solutions to specific customers as well as providing industry-wide financing solutions to SMEs in general, thereby enabling us to better understand the business and credit environment customers face;
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contributed to our strong brand reputation locally as a preferred partner for SMEs seeking financing solutions in China as well as for banks which intend to increase their exposure to the SME lending market in China;
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allowed us to utilize our industry knowledge and expertise to better meet the diverse financing needs of China SMEs by developing and offering customized financing solutions that are more flexible and efficient compared to those offered by traditional commercial banks; and
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allowed us to build long-term and enduring relationships with our SME customers.
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Effective and practical risk management system for Chinese
SME lending
With more than ten years of operating history
in serving the financing needs of SMEs, which has sharpened our specialized insight into the business and credit environment SMEs
face, we can provide innovative financing solutions based upon the financing needs and creditworthiness of our customers. As most
SMEs lack collateral at a level required by traditional commercial banks and are therefore excluded from mainstream bank financing
sources, our financing solutions (including financial guarantees and financial leasing) help bridge the “credit-gap”
between otherwise creditworthy SMEs and traditional commercial banks in China. Our risk control system, built upon “Trusted
Business Circles” of core customers, has proven to be extremely cost-effective, practical and efficient under current conditions
in China. Historically in China, due to the fact that the legal system is not fully developed, business trust and honoring of business
commitments exists in small circles of personal relationships rather than in a more objective environment. Lending through core
enterprises’ “Trusted Business Circles” resolves the information asymmetry in SME lending and provides transparency
into customers’ business operations. See the section titled “Our Risk Management” below for additional information
on our risk management policies.
Experienced and motivated management team
We attribute our success to our experienced,
dedicated, and motivated management team. Most of our management team members have over 10 years of experience in the financial
industry. Certain senior management members also have extensive professional experience in highly regarded multinational financial
institutions, which contributes valuable industry awareness and risk management skills and enhances management capability. Our
company is committed to maintaining a capable and motivated leadership team which cultivates a market-oriented corporate culture,
encourages innovation and operating efficiency and focuses on staying sensitive to changing conditions in the SME sector and regulatory
developments in the financial services industry.
We maintain regular professional training
programs for employees, and maintain a performance-based and career-driven corporate culture. We provide a significant amount of
personal autonomy to employees and encourage sales and marketing staff to source and service their customers as if it were their
own personal business. Our ability to retain professional and motivated employees has contributed to our success by maintaining
and improving upon the strict standards of our risk management system, as well as by providing trustworthy and professional financing
solutions to customers.
Our products
We currently offer the following principal
products and services to our customers, which primarily constitute SMEs: (1) financial guarantees; (2) financial leasing; and (3)
financial advisory and agency services. The following table shows the components of revenue, their respective percentages of our
net fee and interest income for the period indicated:
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|
For the year ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
Guarantee service income
|
|
|
2,839
|
|
|
|
31
|
%
|
|
|
6,193
|
|
|
|
64
|
%
|
|
|
7,861
|
|
|
|
53
|
%
|
Direct financing lease income
|
|
|
6,047
|
|
|
|
65
|
%
|
|
|
3,164
|
|
|
|
32
|
%
|
|
|
3,547
|
|
|
|
24
|
%
|
Financial advisory and agency
income
|
|
|
357
|
|
|
|
4
|
%
|
|
|
403
|
|
|
|
4
|
%
|
|
|
3,387
|
|
|
|
23
|
%
|
Total revenues
|
|
|
9,243
|
|
|
|
100
|
%
|
|
|
9,760
|
|
|
|
100
|
%
|
|
|
14,795
|
|
|
|
100
|
%
|
Financial Guarantees
We provide credit enhancement to SMEs in
the form of guarantees in order to make various forms of financing more accessible to the SMEs and to generate guarantee and consulting
fee income to the company. The principal type of guarantee which our company provides is a commitment to repay to a lender (usually
a commercial bank) principal, interest and associated fees in the event that a customer defaults on a loan obligation to that lender.
We select SME customers that we determine to be creditworthy but that lack the necessary credit histories or collateral to obtain
financing independently.
The following is a typical financial guarantee
transaction with a commercial bank:
Our company is released from its guarantee
obligation after the SME client has fully repaid the principal, interest and other fees on the applicable loan. However, if the
customer defaults and the lending bank elects to call our guarantee, we repay the financing on the defaulting client’s behalf
and become subrogated to the lender’s claim against the borrower.
Typically, we require our guarantee client
to provide one or more personal guarantors, referred to as “counter-guarantors,” so that such personal guarantors are
jointly and severally liable for the repayment of the financing guaranteed with the borrower. Counter-guarantors generally include
the following categories:
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Business owners and controlling persons of the borrower;
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·
|
Persons having substantial influence over the borrower’s business, usually its management team, such as the chief executive officer or chief financial officer; and
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·
|
Other third parties closely related to the foregoing persons, such as spouses, children or relatives and other affiliates.
|
In addition, depending on the results of
our evaluation of the borrower’s credit, we may require the borrower and/or counter-guarantors to post collateral, primarily
land use rights and building ownership and to a lesser extent, accounts receivable and equity interests.
Different from asset-based collateral, a
counter-guarantee is a form of a credit-based security measure which we consider an effective risk management measure as it imposes
additional costs of default at a personal level and creates positive pressure on the borrower to honor its repayment obligations.
When we act as a guarantor for a bank financing,
the lending bank generally requires us to deposit a certain amount of cash in a segregated account, as a form of security. Typically,
the amount of such deposit is equivalent to a minimum 10% to 20% of the financing guarantee, depending on our reputation and credibility
with the lending bank. The security deposit is returned to us with interest upon the release of our guarantee obligation. If the
borrower does not repay the loan at the maturity date, the lending bank will send WFG a notice about the delinquent payment and
we will then negotiate with the borrower to arrive at a plan to repay the loan. If the borrower cannot repay the loan within 30
days after the notice, the borrower is determined to have defaulted on its loan and the lending bank would withdraw funds directly
from our security deposit account to offset the default of principal and the interest. After the withdrawal, if the total security
deposits are not sufficient to cover all the outstanding guarantee loans, we will be requested to transfer more funds into the
security deposit account.
Cooperation with commercial banks in China
is key to our bank financing guarantee business. Before establishing a cooperation arrangement with a bank, our company is generally
required to provide key business, financial and legal documents to the bank for review, including, among others:
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basic corporation information;
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·
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the latest financial statements;
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·
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details of our bank accounts;
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·
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our internal operation and risk management guidelines;
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·
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operating data on existing credit guarantee business; and
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·
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information about cooperation with other banks.
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If the bank is satisfied with our business,
financial and risk management performance, it will consider partnering with us. A cooperation arrangement generally constitutes
a framework agreement under which our company is permitted to guarantee up to a specified maximum amount of credit lines provided
by the banks. Our cooperating banks will also approve each guarantee it provides to customers on an individual basis, subject to
the terms and conditions of the framework agreements.
Our framework agreements with banks usually
include the following key provisions:
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·
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Term of guarantee: usually one year.
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·
|
Guarantee Scope: usually covers the principle amount and interest.
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·
|
Guarantee fee rate: usually calculated with reference to the principle amount, annual guarantee fee rate and the term of the
guarantee, ranged from 2% to 6%.
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|
·
|
Collateral: We may request assets collateral or counter-guarantee usually based upon the client’s qualifications.
|
We believe that we have a good relationship
with commercial banks. During the last five years, none of our cooperating banks has terminated its business relationship with
us, and no cooperating bank has tightened their cooperating terms with us.
In exchange for our guarantee and consulting
services, customers pay a guarantee commission, which is generally payable upon the execution of a guarantee contract. The guarantee
commission depends on a number of factors, such as the type of guarantee, the creditworthiness and industry of the customer, prevailing
market conditions, the quality of the counter-guarantee, the type and quality of the collateral, and the amount and term of the
financing. Our guarantee commission rates range from 2% to 6% of the loan guaranteed. We also charge a one-time evaluation fee
for new clients for due diligence, risk assessment and valuation. The rates of the evaluation fee range from 1% to 4% of the first
loan guaranteed.
Financial Leasing
Our financial leasing business was registered
in 2009 for the purpose of providing financing through equipment leasing or equipment-purchase-lease-back services to qualified
SME clients. Our leasing operation has executed an aggregate of US$192.9 million leasing contracts since its establishment. But
our business in financial leasing is still at an early stage of development, with significant opportunity for expansion.
In order to take advantage of strong growth
in the leasing industry, we are expanding our leasing operation outside of the guarantee business. We look for leasing opportunities
and clients across China rather than on a regional or local basis. We are currently applying two business strategies for our leasing
operation: (1) focusing on a few specific industries with experience and connections, including but not limited to new energy,
vehicles, education equipment, and medical devices; and (2) increasing fee revenue through advisory services.
We purchase the applicable asset (typically
manufacturing equipment, but also other tangible assets including factory buildings) from the client, and take ownership. We then
lease the applicable asset back to the client and charge rent. Upon the expiration of the lease, the client pays a nominal fee
(e.g. US $1) to purchase the applicable asset and thereafter takes title and ownership of the asset.
Typical leasing terms include:
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·
|
Asset: Equipment, or some other tangible assets including factory buildings
|
|
·
|
Typical Leasing Terms:3 – 5 years
|
|
·
|
Leasing Rate:10 – 30% over the current bench mark lending rate of PBOC
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|
·
|
Deposit: Based upon the client’s qualifications
|
|
·
|
Transaction Fee: Based upon the client’s qualifications
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|
·
|
Advisory Fee: Based upon the services provided to clients
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|
·
|
Lease Payment Term: Quarterly or semi-annually
|
Financial Advisory and Agency Services
We also provide tailor-made financial consultancy
services to clients by entering into consultancy services agreements. We may, at the customers’ request, provide (1) consultancy
services alone, or (2) consultancy services together with financial guarantee services or financial leasing. We typically propose
customized methods of financing to customers according to their needs and circumstances and then assists customers to apply for
financing. We may introduce customers to the guarantee services depending on individual circumstances and if customers satisfy
our requirements and risk assessment criteria. We may also recommend other financing methods or financial products to customers.
During the term of the financial consultancy services agreement, and within the services scope prescribed in such agreement, we
provide a variety of financial consultancy services including investigation, research, and locating the source of financing and
closing of financing. We also provide advice on financing and cash flow planning and management to better align customers’
cash generation activities with their required repayment schedule, thereby improving their liquidity and reducing their default
risk.
Most customers for financial consultancy services
are SMEs. Many SMEs in China, due to their size of operation, lack experienced staff in handling loan applications, and may not
be familiar with compliance matters including relevant rules and regulations or lending bank’s requirements. With our established
cooperation with lending banks, experience in the financial services field and understanding of the requirements of lending banks,
market trends as well as financial products offerings in the market, we are able to provide all-round financial consultancy services
to customers. In addition, our financial consultancy services provide an attractive opportunity to expand and diversify our business
and client base.
Under certain circumstances, we could also act
as a dealer for other financing leasing companies, by providing short-term bridge loans (usually 90 days) against the leasing contracts
and leasing receivables of these leasing company borrowers; and in the meantime, we would obtain a bridge loan from other financial
institutions at a discounted rate. Typically, the above processes occur simultaneously, and therefore, our resell risk is largely
mitigated. In very rare cases, if the leasing borrowers are in default, we will have to use our principal capital to repay the
bridge loan to the financial institutions, and hold the leasing contracts and leasing receivables. Therefore, we are very careful
in selecting these types of transactions, and only accept a limited number of transactions of this nature.
Provision of financial consultancy and agency
services is within the scope of our business license.
Our Risk Management
Risk management is integral to the success of
our business. Our risk operation model is based upon a “Trusted Business Circle” concept. China has not yet developed
sophisticated credit databases or credit reporting structures, which means that decisions to lend to Chinese SMEs frequently involve
reliance on company-provided information which is difficult to independently verify. Our Trusted Business Circle concept involves
identifying potential credit-worthy customers through their ongoing participation in an existing supply chain or other relationship
with an existing core customer. The Trusted Business Circle is embedded into each customer’s ongoing business activity, forming
an ecosystem around that existing business activity. The Trusted Business Circle contains core enterprises’ business partners,
transaction partners, lending banks, major shareholders’ friends circle, etc., which provides an opportunity for information
verification and cross-referencing and some protection from default as new customers will want to preserve their relationships
within the Trusted Business Circle. The system can be scaled as each new participant creates its own Trusted Business Circle.
Principal of Our Risk Management
Our “Trusted Business Circle” refers
to two types of relationships: (1) “industry chain”, meaning a core enterprise surrounded by a business circle which
has an industry chain upstream and downstream trading networks; and (2) “Business Connection”, meaning core enterprises’
business partners, transaction partners, lending banks, major shareholders’ friends circle, etc. which can provide cross-referenced
and additional information, transactional history, and business performance regarding potential SME customers.
Typically, SMEs have a relatively high risk
profile. Especially in the context of an economic downturn, SMEs have less capability to withstand cyclical challenges compared
with large privately-owned companies or state-owned enterprises. In addition, the regulatory and tax frameworks for SMEs are not
standardized, which creates some regulatory and tax risk exposure. SMEs also frequently have very limited credit profile and transaction
data available for evaluation during the lending process.
Our “Trusted Business Circle” model
can, to a certain extent, resolve the issues inherent in SME loans, such as information asymmetry, risk control difficulties and
high borrowing costs. Within WFG’s operating history, this model has proved extremely effective and efficient in risk control,
and has enabled WFG to take on SME clients which would not normally have been accepted during a standard review process.
The “Industry Chain” model refers
to our reliance on core industry chain enterprises to evaluate all participants of an industry chain and design customized and/or
standardized financial services and products, offering integrated solutions to all enterprises within the industry chain. We typically
target one core enterprise in the targeted industry chain, which is either an existing trusted client of our company or a verifiably
reputable or creditworthy company, such as a state-owned enterprise. Surrounding this core enterprise, there are numbers of upstream
and downstream SMEs. Through a comprehensive analysis of the information flow, capital flow and logistics among the industry chain’s
participants from downstream to upstream, we pick qualified SMEs as clients.
The “Business Connection” model
refers to our reliance on business “acquaintances” to crosscheck information to mitigate risks. For example, potential
clients may be directly referred by lending banks with which we are already working closely. Typically, “acquaintance”
banks are able to share additional information relating to those referred clients with us for risk assessment. Moreover, those
SMEs referred by banks naturally value their relationship with the banks, and would like to maintain good standing during and after
any transaction with us.
Business Process Risk Management
We have a standard business process for reviewing,
processing and approving a guarantee or leasing application.
|
·
|
Application Acceptance: We consider whether to accept a client’s application for a guarantee or lease based upon an initial
assessment of the customer’s background and purpose of the request. Typically, potential SMEs clients falling into one of
our “Trusted Business Circles” will have much larger probability of acceptance.
|
|
·
|
Due Diligence: Typically, we review but do not fully rely on a client’s financial statements, which in China are sometimes
of questionable accuracy.
|
We like to access first-hand information which
cannot be influenced by the clients. We usually conduct due diligence on the following aspects:
|
·
|
Credit History: although the credit history of SMEs is often limited, we will deny those clients who have any default history
with a bank or other financial source;
|
|
·
|
On-Site Investigation: We determine from direct sources a client’s utility usage, which can help verify their level of
business activity (with quarterly monitoring of clients’ utility usage during the term of any transaction);
|
|
·
|
Public Information: We review employee hiring history in the prior 6 months. Increase in SME hiring typically correlates directly
with working capital requirements to expand production capacity. This information is easy to obtain from governmental sources;
|
|
·
|
Net Worth of Controlling Party: We typically limit transaction value to an amount which is smaller than the net worth of any
controlling party of the SME target;
|
|
·
|
Reputation of the Controlling Party: Typically, there is less risk is less if the reputation of controlling party is good;
|
|
·
|
Lifestyle of Controlling Party: Lifestyle of controlling party in the past 6 months is also important. Any changes could raise
a concern; and
|
|
·
|
Counter-guarantee: We assess the quality and quantity of the above security measures to determine the extent to which a counter-guarantee
is required. Similar due diligence measures and standards are applied to any counter-guarantor.
|
Based upon the results of the due diligence
review, our project manager prepares and submits a credit evaluation report for internal review and approval.
|
·
|
Signing, Closing and Auction Agreements: After internal authorization procedures have been approved, we will proceed with signing
and closing. At closing, we sign a pre-authorized auction agreement with any counter-guarantor and the client company pursuant
to which, in the event of a default, pledged collateral and/or other specified assets can be sold at auction immediately, at our
discretion.
|
|
·
|
Portfolio Management: In cases where heightened risk is detected in the guarantee business, such as material changes to the
customer’s business or difficulties in repaying the underlying financing, our risk management team steps in and participates
in any loan modification and related discussions. If a customer defaults, we proceed with the collection process, through which
we seek repayment of any defaulted payment which is covered under the guarantee.
|
|
·
|
Collection: We have a standard collection procedure in its credit guarantee and financial leasing businesses. Our company initiates
the collection process when it covers defaulted payments or a customer defaults on the leasing facility grantees. Our business
team and risk management team negotiate the terms of a repayment plan with the defaulting customer and enter into a repayment agreement
with such defaulting customer. If the defaulting customer fails to make full repayment according to the repayment plan or we are
unable to reach an agreement with the defaulting customer regarding the repayment plan, we approach the third party counter-guarantors
regarding the payment of the loan (including default payment receivables) or, upon approval from the Risk Management Department
at the group level, may take necessary legal action, or directly put counter-guarantee assets in auction.
|
Operational Risk Management
Operational risk is the risk resulting from
inadequate or failed internal controls and systems, human error or external events. We consider operational risk to be one of the
major risks in the business sector and believes that this inherent risk can be controlled or mitigated through adequate and comprehensive
operational policies and procedures. We have applied the following measures:
|
·
|
Established a vertical risk management system to ensure the independence of its risk management;
|
|
·
|
Continuously improve operational procedures and internal control systems, and utilizes IT systems to monitor and control the
performance of each procedure. In particular, we have adopted and have strictly implemented measures to prevent and detect potential
employee fraud, such as two-person investigation teams, segregation of business team and credit review team, multiple approval
layers, onsite visits and inspection, and interviews conducted by our high-level managers with the owner or management of the borrowers;
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|
·
|
To seek proper damages and pursue legal proceedings, if necessary, if any misconduct by an employee is discovered; and
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|
·
|
Continuously provides ethical education to all employees.
|
Our SME Clients and Clients’ Expansion Strategy
Clients
Most of our existing clients are SMEs located
in Jinzhong, Shanxi Province.
As of June 30, 2017, two customers accounted
for 13.2% and 11.0%, respectively, of the aggregate balances of loans guaranteed by Dongsheng Guarantee. As of June 30, 2016, one
customer accounted for 10.5% of the aggregate balances of loans guaranteed by Dongsheng Guarantee.
For the year ended June 30,
2017, there were two customers that accounted for 19% and 13% of our revenue, respectively. For the year ended June 30, 2016, there
were no customers that individually accounted for 10% or more of our revenue.
Client Expansion Strategy
Our principal client expansion strategies are
through referrals and existing clients.
Referrals inside our “Business Connection”
network. We maintain good relationships with a wide array of business entities, including lending banks as well as past or
existing SME clients. Some potential clients were referred by the lending banks which have existing cooperation relationships with
us. From time to time, some of our potential clients approach us through past or existing clients. Referrals are not subject to
any referral fees or rebate arrangements between us and our clients or lending banks.
Transaction partners inside the “Industry
Chain” network. We identify well-qualified clients through past or existing clients as trusted members and core enterprises
of each industry chain in our network. We approach the supplier companies of these core enterprises as potential clients. As an
additional security component, we sometimes provide guarantees supported by supplier companies’ accounts receivables where
the obligor is a core enterprise customer. Through intervention by us with our existing trusted core enterprise, the supplier SME
might receive faster turn-around on cash as working capital, thereby mitigating the risk to us. In addition to our existing trusted
SME clients, we look to well-regarded state-owned enterprises or large private companies as potential core enterprise candidates.
Government Regulations
Foreign Investments
According to the Catalogue for the Guidance
of Foreign Investment Industries (“Foreign Investment Catalogue”) promulgated by the Ministry of Commerce of the PRC
(“MOFCOM”) and the National Development and Reform Commission (“NDRC”) on March 10, 2015 and effective
as of April 10, 2015, investments by non-Chinese entities and individuals in financial guarantee and financial leasing business
are permitted activities to be undertaken through foreign investments.
Financial Guarantee Businesses
According to Interim Measures for the Administration
of Financing Guarantee Companies (“Interim Measures”) promulgated by the Chinese Banking Regulatory Commission, NDRC,
the Ministry of Industry and Information Technology, the Ministry of Finance, MOFCOM, the People’s Bank of China and the
State Administration for Industry and Commerce, effective March 8, 2010:
|
·
|
The regulatory department shall stipulate the minimum registered capital of a financing guarantee company in accordance with the local condition, which shall not be less than RMB 5 million. The registered capital shall be paid-in monetary capital;
|
|
·
|
The balance of the financing guarantee liabilities provided by a financing guarantee company for any single individual guaranteed party shall not exceed 10% of the net assets of the company, the balance of the financing guarantee liabilities provided for any single individual guaranteed party and the affiliated parties thereof shall not exceed 15% of the net assets of the company, and the balance of the guarantee liabilities provided for bond issuance by any single individual guaranteed party shall not exceed 30% of the net assets of the company;
|
|
·
|
The balance of the financing guarantee liabilities of a financing guarantee company shall not be more than 10 times its net assets;
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|
·
|
A financing guarantee company shall make a provision for the unearned liability reserves in an amount equal to 50% of the income from guarantee fees of the year and make a provision for the guarantee indemnity reserves in an amount equal to no less than 1% of the year-end balance of the guarantee liabilities of the year. If the accumulative guarantee indemnity reserves reach 10% of the balance of the guarantee liabilities of the year, provision shall be made for the guarantee indemnity reserves on the basis of the difference; and
|
|
·
|
Where a financing guarantee company violates any law, regulation or Interim Measures and if there are provisions on punishment in the relevant laws and regulations, it shall be punished in accordance with the provisions in Interim Measures. Otherwise, the regulatory department shall order it to make rectifications and may give it a warning or fine. If a crime is constituted, it shall be subject to criminal liabilities.
|
Financial Leasing Businesses
According to Measures for the Administration
of Foreign-funded Lease Industry promulgated by the Ministry of Commerce, effective as of March 5, 2005:
|
·
|
The total foreign-invested assets of a foreign-funded lease company or foreign-funded financing lease company may not be less than US$5 million;
|
|
·
|
A foreign-funded financing lease company must have a registered capital of not less than US$10 million;
|
|
·
|
For the purposes of preventing risks and guaranteeing the business operation security, generally, the risk assets of a financing lease company shall not exceed 10 times of the total amount of the net assets of the company. Risk assets shall be determined on the basis of residue assets, namely, the result after deducting the cash, bank deposits, national debts and entrusted lease assets from the total assets of the company.
|
Employment Matters
Laws and Regulations on Social Insurance
As required under Regulation of Insurance for
Labor Injury which was amended on December 8, 2010 and effective January 1, 2011, Provisional Insurance Measures for Maternity
of Employees which were took effect on January 1, 1995, Regulation of Unemployment Insurance which was promulgated on and took
effect on January 22, 1999, the Interim Regulations on the Collection and Payment of Social Insurance Premiums which was promulgated
on and took effect on January 22, 1999 and the Interim Provisions on Registration of Social Insurance which was promulgated on
and took effect on March 19, 1999, enterprises are required to provide their employees in the PRC with welfare schemes covering
pension insurance, unemployment insurance, maternity insurance, injury insurance and medical insurance. An enterprise that fails
to make social insurance contributions in accordance with the relevant regulations may be ordered to rectify the non-compliance
and pay the required contributions within a stipulated deadline. If the enterprise fails to rectify the noncompliance by the stipulated
deadline set out by the government authorities, it can be assessed a late fee by the relevant authority in the amount of 0.2% of
the amount overdue per day from the original due date.
In addition, on October 28, 2010, National People’s
Congress Standing Committee promulgated the PRC Social Insurance Law, which became effective on July 1, 2011, to clarify the contents
of the social insurance system in the PRC. According to the PRC Social Insurance Law, employees within the PRC must participate
in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the
employers must, together with their employees or separately, pay the social insurance premiums for such employees. According to
this law, employees who come from rural area shall participate in social insurance and foreigners working in the PRC may also participate
in social insurance. An employer that fails to make social insurance contributions may be ordered to pay the required contributions
within a stipulated deadline and be subject to a late fee of 0.05% of the amount overdue per day from the original due date by
the relevant authority. If the employer still fails to rectify the failure to make social insurance contributions within such stipulated
deadline, it may be subject to a fine ranging from one to three times the amount overdue.
Laws and Regulations on Housing Provident Fund
According to the Regulations on Management of
Housing Provident Fund, which became effective on April 3, 1999 and was amended on March 24, 2002, enterprises in the PRC must
undertake registration at the appropriate managing center of Housing Provident Fund and then, upon examination by such managing
center of Housing Provident Fund, undergo the procedures of opening an account of Housing Provident Fund for their employees at
a relevant bank. Enterprises are also obliged to pay and deposit required amounts with Housing Provident Fund in the full amount
in a timely manner. An enterprise that fails to make Housing Provident Fund contributions may be ordered to rectify the non-compliance
and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory
enforcement.
Legal Proceedings
Except as described below, we are not and have
not been involved in any legal proceedings which may have, or have had, a significant effect on our business, financial position
and results of operations or liquidity, and we are not aware of any proceedings that are pending or threatened which may have a
significant effect on our business, financial position, results of operations, or liquidity. From time to time, we may be subject
to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. We
expect that these claims would be covered by insurance, subject to customary deductibles. Any such claims, even if lacking merit,
could result in the expenditure of managerial resources and materially adversely affect its business, financial condition and results
of operations.
The Company is involved in various legal actions
arising in the ordinary course of its business. As of June 30, 2017, the Company was involved in 3 lawsuits in China, of which
2 of the legal actions were initiated by the Company as plaintiff in relation to the guarantee business, and in the other of which
the Company is a defendant in relation to its financing lease business (see below). The Company initiated legal proceedings to
collect delinquent balances, interest and penalties from guarantees. 2 of these cases with an aggregated claim of $624,169 have
been adjudicated by the Court in favor of the Company and these cases are in the process of being enforced.
On October 31, 2014,
King & Wood Mallesons filed a complaint in Xicheng District People's Court of Beijing on behalf of its client for breach of
contract against Jinshang Leasing, our subsidiary. On February 3, 2015, the court agreed with Jinshang Leasing that it did not
have jurisdiction over the proceeding, and the case was transferred to the court in Beijing, Haidian. There has been no activity
in the case since it was transferred to the Beijing Haidian court. We believe that resolution of this matter will not result in
any payment that, in the aggregate, would be material to our financial position or results of operations.
As of June 30, 2017, the
Company and certain of its executive officers have been named as defendants in one civil securities lawsuit filed in U.S. District
Courts. On April 20, 2017, Michel Desta filed a securities class action complaint in the District Court for the Central District
of California seeking monetary damages against us, Jianming Hao, Renhui Mu, Peiling (Amy) He, and Junfeng Zhao (entitled Desta
v. Wins Finance Holdings, Inc., et al.; C.D. Cal. Case No. 2:17-cv-02983) (hereafter, the “California Action”). On
June 26, 2017, the Court issued an Order appointing lead plaintiffs and lead counsel, and on August 25, 2017 lead plaintiffs filed
an Amended Class Action Complaint. The Amended Complaint (which did not name Peiling (Amy) He as a defendant), alleges a claim
against us for securities fraud purportedly arising from alleged misrepresentations concerning Wins’ principal executive
offices (which alleged misrepresentations resulted in Wins being added to, and then removed from, the Russell 2000 index). On October
24, 2017, we moved to dismiss the Amended Complaint for failure to state a claim as against us. That motion remains pending. The
Amended Complaint does not specifically allege the damages purportedly suffered by the class, and we are not yet able to provide
a reliable estimate of any such damage claim. We believe that the claims from this proceeding are without merit and we are vigorously
defending this proceeding.
C. Organizational Structure
The following is an organizational chart setting forth the ownership
of our company’s subsidiaries:
Our Current Corporate Structure
D. Property, Plants and Equipment
Our company office space at (a) 641 Lexington
Ave., 29
th
Floor, New York, NY 10022, (b) 1F, Building 7, No. 58. Jianguo Road, Chaoyang District, Beijing, 100024,
the PRC, and (c) No. 229.Yutai Road, Yuci District, Jinzhong City, Shanxi Province, 030600, the PRC. We believe that its office
space is sufficient for its current purposes.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes
included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking statements
that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information
- Risk factors.” and elsewhere in this Annual Report.
Overview
Wins Finance, a Cayman Island holding company with
business operations in China, is a leading and integrated lending solution provider mainly serving small-and-medium sized enterprises
(SMEs) in Jinzhong City, Shanxi Province and Beijing, China. We are currently providing two financial products and one supplementary
service:
|
·
|
Financial Guarantees: We act as a guarantor both to access and share credit risks and to facilitate financing arrangements between SMEs and banks; we will repay principal, interest and fees and expenses related to the guaranteed loan in the event that a customer defaults;
|
|
·
|
Financial Leasing (or Capital Leasing): We provide direct equipment leasing or purchase-leaseback services to SMEs, to satisfy SMEs’ cash flow needs;
|
|
·
|
Financing advisory: We structure suitable financing solutions for SME clients based upon their needs and qualifications, designed to help SMEs save on taxes, lower financing costs, and provide other benefits.
|
Our financial guarantee business was started in
2006, and is currently one of the top 10 financing guarantee operations in Shanxi Province in terms of registered capital (Source:
State Administration of Industry and Commerce). We typically provide a one-year term of guarantee for customers’ loans and
the guarantee scope typically covers the principle amount and interest. Our guarantee fee, which is calculated with reference to
the principle amount, annual guarantee fee rate and the term of the guarantee, ranges from 2% to 6%. As of June 30, 2017 and 2016,
our outstanding guarantee balance was $67.3 million and $86.3 million, respectively. The decrease in outstanding guarantee balance
at June 30, 2017 compared to June 30, 2016 was primarily attributable to fewer clients passing our risk control assessment.
We make short term investments in asset management
products issued by banks and financial institutions with original maturities of one, three or five years but which could be redeemed
at any time. The balance was $187.9 million and $149.8 million on June 30, 2017 and 2016, respectively, with annualized interest
rates from 5% to 13%.
Credit risks, including customer defaults from the
guarantee business and impairment losses on the investment in financial leases, are inherent in our business. Our risk control
system, based upon our “Trusted Business Circle” of core enterprises, has proved practical and efficient given the
limitations in the current credit system in China. Our default rates were 2.3%, and 2.9% in our guarantee business for the years
ended June 30, 2017 and 2016, respectively. During these periods there were several financial leasing contracts outstanding. The
impaired losses of our lease receivables were $0.03 million and $0.6 million for the years ended June 30, 2017 and 2016, respectively.
Our net revenue, which consists primarily of guarantee
commissions, direct financing lease interest income, and financial advisory and lease agency income, was $9,726,685 for the year
ended June 30, 2017, representing an increase of $4,218,401, or 76.6%, from $5,508,284 for the year ended June 30, 2016. Interest
on short-term investments was $13,752,538 for the year ended June 30, 2017, representing a decrease of $206,002 from $13,958,540
for the year ended June 30, 2016. Net income for the year ended June 30, 2017 was $ 20,349,791, representing an increase of $8,232,394,
or 68.0%, from $12,117,397 for the year ended June 30, 2016.
Key Factors that Affect Operating Results
Our operating subsidiaries are incorporated, and
our operations and assets are primarily located, in the PRC. Accordingly, our results of operations, financial condition and prospects
are affected by China’s economic and regulation conditions in the following factors: (a) an economic downturn in China or
any regional market in China;(b) economic policies and initiatives undertaken by the PRC government; (c) changes in the PRC or
regional business or regulatory environment affecting the SME and microenterprise sector; (e) changes to prevailing market interest
rates; (f) a higher rate of bankruptcy; (g) the deterioration of the creditworthiness of SMEs and microenterprises in general;
and (h) the change of currency exchange rate of RMB to USD. Unfavorable changes could affect demand for the services that we provide
and could materially and adversely affect the results of operations. Although we have generally benefited from China’s economic
growth and the policies to encourage lending to SMEs, we are also affected by the complexity, uncertainties and changes in the
PRC economic conditions and regulations governing the non-banking financial industry.
Our results of operations are also affected by the
provision for guarantee losses and impairment allowance for the investment in financial leases which are a noncash item and represent
an assessment of the risk of future guarantee losses and impairment losses. The amount of provisions or allowances has been recorded
based on management’s assessment. We may increase or decrease the allowance for guarantee losses and impairment losses for
investment in financial leases based on any such change of economic conditions and the change of management’s assessment.
Any change in the allowance for guarantee or loan losses would have an effect on our financial condition and results of operations.
We hold a significant amount of short-term investments
in assets management products issued by banks and financial institutions, including government bonds, corporate bonds and central
bank notes. The interest income on these assets highly depends on market interest rate in the market of investment products especially
government bonds and corporate bonds, and the management ability of the asset management companies. Any changes on the market conditions
will affect our interest income from those investments and then the financial results.
Results of Operations
Year Ended June 30, 2017 Compared to
Year Ended June 30, 2016
|
|
For the years ended June 30,
|
|
|
Changes
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Guarantee service income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees on financial guarantee services
|
|
$
|
2,839,194
|
|
|
$
|
6,193,225
|
|
|
$
|
(3,354,031
|
)
|
|
|
(54.2
|
)%
|
Reversal of provision (provision) on financial guarantee services
|
|
|
3,208,827
|
|
|
|
(2,907,999
|
)
|
|
|
6,116,826
|
|
|
|
210.3
|
%
|
Commission and fees on guarantee services, net
|
|
|
6,048,021
|
|
|
|
3,285,226
|
|
|
|
2,762,795
|
|
|
|
84.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease interest income
|
|
|
6,047,172
|
|
|
|
3,164,317
|
|
|
|
2,882,855
|
|
|
|
91.1
|
%
|
Interest expense for direct financing lease
|
|
|
(2,094,587
|
)
|
|
|
(524,409
|
)
|
|
|
1,570,178
|
|
|
|
299.4
|
%
|
Business collaboration fee and commission expenses for leasing projects
|
|
|
(603,873
|
)
|
|
|
(222,206
|
)
|
|
|
381,667
|
|
|
|
171.8
|
%
|
Provision for lease payment receivable
|
|
|
(27,332
|
)
|
|
|
(597,444
|
)
|
|
|
(570,112
|
)
|
|
|
(95.4
|
)%
|
Net direct financing lease interest income after provision for receivables
|
|
|
3,321,380
|
|
|
|
1,820,258
|
|
|
|
1,501,122
|
|
|
|
82.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial advisory and agency income
|
|
|
357,284
|
|
|
|
402,800
|
|
|
|
(45,516
|
)
|
|
|
(11.3
|
)%
|
Net revenue
|
|
|
9,726,685
|
|
|
|
5,508,284
|
|
|
|
4,218,401
|
|
|
|
76.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term investment
|
|
|
13,752,538
|
|
|
|
13,958,540
|
|
|
|
(206,002
|
)
|
|
|
(1.5
|
)%
|
Total non-interest income
|
|
|
13,752,538
|
|
|
|
13,958,540
|
|
|
|
(206,002
|
)
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business taxes and surcharge
|
|
|
(4,406
|
)
|
|
|
(167,867
|
)
|
|
|
(163,461
|
)
|
|
|
(97.4
|
)%
|
Salaries and employees surcharge
|
|
|
(879,595
|
)
|
|
|
(1,524,720
|
)
|
|
|
(645,125
|
)
|
|
|
(42.3
|
)%
|
Rental expenses
|
|
|
(247,684
|
)
|
|
|
(271,357
|
)
|
|
|
(23,673
|
)
|
|
|
(8.7
|
)%
|
Other operating expenses
|
|
|
(46,258
|
)
|
|
|
(4,621,038
|
)
|
|
|
(4,574,780
|
)
|
|
|
(99.0
|
)%
|
Total non-interest expense
|
|
|
(1,177,943
|
)
|
|
|
(6,584,982
|
)
|
|
|
(5,407,039
|
)
|
|
|
(82.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
22,301,280
|
|
|
|
12,881,842
|
|
|
|
9,419,438
|
|
|
|
73.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(1,951,489
|
)
|
|
|
(764,445
|
)
|
|
|
1,187,044
|
|
|
|
155.3
|
%
|
Net Income
|
|
$
|
20,349,791
|
|
|
$
|
12,117,397
|
|
|
$
|
8,232,394
|
|
|
|
67.9
|
%
|
Net Revenue
Our net revenue consists of commissions and fees
on our financial guarantee services, direct financing lease interest income, and financial advisory and lease agency income. Net
revenue increased by $4.2 million, or 76.6% to $9.7 million for the year ended June 30, 2017, compared to $5.5 million for the
year ended June 30, 2016. The increase was primarily attributable to the increase of $2.8 million in net commissions and fees on
financial guarantee services and an increase of $1.5 million in net direct financing lease interest income, partially offset by
a decrease of $0.05 million in financial advisory and lease agency income.
Net commissions and fees on financial guarantee
services, net direct financing lease interest income, and financial advisory and lease agency income for the year ended June 30,
2017 were $6.0 million, $3.3 million and $0.4 million, respectively, accounting for 62.2%, 34.1% and 3.7% of the net revenue, respectively.
|
|
For the years ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Changes
|
|
|
|
USD
|
|
|
Percentage
of Revenue
|
|
|
USD
|
|
|
Percentage
of Revenue
|
|
|
$
|
|
|
%
|
|
Net commission and fees on guarantee services
|
|
$
|
6,048,021
|
|
|
|
62.2
|
%
|
|
$
|
3,285,226
|
|
|
|
59.7
|
%
|
|
$
|
2,762,795
|
|
|
|
84.1
|
%
|
Net direct financing lease interest income
|
|
|
3,321,380
|
|
|
|
34.1
|
%
|
|
|
1,820,258
|
|
|
|
33.0
|
%
|
|
|
1,501,122
|
|
|
|
82.5
|
%
|
Financial advisory and agency income
|
|
|
357,284
|
|
|
|
3.7
|
%
|
|
|
402,800
|
|
|
|
7.3
|
%
|
|
|
(45,516
|
)
|
|
|
(11.3
|
)%
|
Total
|
|
$
|
9,726,685
|
|
|
|
100.0
|
%
|
|
$
|
5,508,284
|
|
|
|
100.0
|
%
|
|
$
|
4,218,401
|
|
|
|
76.6
|
%
|
Guarantee Service Income
Commissions and fees on financial guarantee services
Commissions and fees on financial guarantee services
decreased by $3.4 million, or 54.2%, to $2.8 million for the year ended June 30, 2017, compared to $6.2 million for the year ended
June 30, 2016. The decrease was primarily attributable to reduced lending activity due to the economic recession in Shanxi province
and our increased scrutiny of potential clients as a result thereof.
Provision for guarantee losses
We provide a “Specific Allowance” for
the financial guarantee services if any specific collectability risk is identified, and a “General Allowance”, based
on total guarantee contract amount of those transactions with no specific risk identified, to be used to cover unidentified probable
loss. Based on historical experience and analysis of the economic environment, we estimate the General Allowance to be 1% of guarantee
contract amount balances.
On March 21, 2016, Jinzhong Bank Co., Ltd. withdrew
$0.9 million for interest and penalties from the Company's deposit account for the default on a loan of $4.5 million (RMB 30 million)
borrowed by JinzhongHoufeng Trading Co., Ltd., one of our clients. We evaluated the potential default losses based on JinzhongHoufeng
Trading Co., Ltd.'s financial position and counter-guarantee collateral and accrued approximately $3.3 million (RMB 21 million)
as a Specific Allowance of guarantee losses.
In December 2016 and February 2017, Jinzhong
Houfeng Trading Co., Ltd repaid the default on the loan of $4.5 million (RMB 30 million), and also repaid the compensation to
our company of $0.9 million (RMB 6 million), so we reversed the Specific Allowance of the guarantee losses of $3.1 million
(RMB 21 million).
The following table shows changes of allowance on
financial guarantee services for the years ended June 30, 2017 and 2016:
|
|
For the years ended June 30
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
Reversal of general allowance
|
|
|
(126,211
|
)
|
|
|
(355,313
|
)
|
Specific allowance (reversal)
|
|
|
(3,082,616
|
)
|
|
|
3,263,312
|
|
Direct write-off against the allowance
|
|
|
|
|
|
|
|
|
- Direct write-down for guarantees paid on behalf
|
|
|
-
|
|
|
|
(932,375
|
)
|
- Reversal - recoveries by cash
|
|
|
880,747
|
|
|
|
-
|
|
Effect of foreign exchange rate
|
|
|
(78,457
|
)
|
|
|
(157,808
|
)
|
Ending balance
|
|
$
|
673,147
|
|
|
$
|
3,079,684
|
|
Commissions and fees on guarantee services, net
Net commissions and fees on guarantee services increased
by $2.8 million, or 84.1%, to $6.0 million for the year ended June 30, 2017, compared to $3.3 million for the year ended June 30,
2016.
Direct financing lease income
Direct financing lease interest income
Direct financing lease interest income
increased by $2.9 million, or 91.1%, to $6.0 million for the year ended June 30, 2017, compared to $3.2 million for the year
ended June 30, 2016. The increase was primarily attributable to new leasing contracts of approximately $35.6 million
(principal and contractual interest) during the year of June 30, 2017.
Interest expense for capital lease
Interest expense for capital leases represents the
interest incurred on the long-term loans from banks and other financial institutions for financial support for capital leases.
Interest expense for capital leases increased by $1.6 million, or 299.4%, to $2.1 million for the year ended June 30, 2017, compared
to $0.5 million for the year ended June 30, 2016. The increase was primarily attributable to the increase in the average balance
of outstanding loans from banks and other financial institutions.
Business collaboration fee and commission expenses
for leasing projects
We pay fees and commissions on collaboration
for leasing projects for services rendered during the transaction process. Such fee and commissions increased by $0.4
million, or 171.8%, to $0.6 million for the year ended June 30, 2017, compared to $0.2 million for the year ended June 30,
2016. The increase was primarily attributable to new leasing contracts in 2017.
Provision for lease payment receivable
We accrue allowances for the impairment on its
investment in direct financing leases based on historical experience and an estimate of collectability of the lease
receivables. Provision for lease payment receivable decreased by $0.6 million, or 95.4%, to $0.03 million for the year ended
June 30, 2017, from $0.6 million for the year ended June 30, 2016. The provision for the year ended June 30, 2016 was caused
by an increase of $56 million in minimum lease payments receivable. There was no significant inter-year change in minimum
lease payment receivable in the year ended June 30, 2017, resulting in only a $0.03 million provision charged as expenses in
the year.
Net direct financing lease interest income after
provision for receivables
Net direct financing lease interest income after
provision for receivables increased by $1.5 million, or 82.5%, to $3.3 million for the year ended June 30, 2017, compared to $1.8
million for the year ended June 30, 2016.
Financial advisory and agency income
Financial advisory and lease agency income decreased
by $0.05 million to $0.36 million for year ended June 30, 2017, from $0.4 million for the year ended in June 30, 2016.
Non-interest income
Interest on short-term investments
Interest on short-term investments decreased by
$0.2 million to $13.8 million for the year ended June 30, 2017, compared to $14.0 million for the year ended June 30, 2016. The
decrease was primarily attributable to the decreased return on short-term investments in the local capital markets.
Non-interest expenses
Non-interest expenses mainly consisted of
business tax and surcharges, salary and benefits for employees, office rental expenses, traveling costs, share-based
compensation, depreciation of equipment, professional fees, consultation fee and office supplies. Non-interest expenses
decreased by $5.4 million, or 82.1%, to $1.2 million for the year ended June 30, 2017, compared to $6.6 million for the year
ended June 30, 2016. Share-based compensation charged as non-interest expenses in the prior year was $1.9 million, relating
to the options granted to our directors and executive officers. We recorded a negative amount of $1.5 million share-based
compensation in the current year, primarily resulted from the reversal of such expense due to the termination of the options
prior to vesting. In addition, salaries and employee surcharges decreased by $0.6 million primarily due to a reduction in
headcount. Professional fees were high in the year ended June 30, 2016 due in part to the Business Combination in October
2015, and these expenses decreased $0.4 million in the year ended June 30, 2017 as compared to the same period last year.
Income taxes
The income tax rate of our PRC subsidiaries is 25%
pursuant to the Enterprise Income Tax (“EIT”) Law. According to the Tax Regulation Caishui [2012] No. 25 issued by
the Ministry of Finance of the People’s Republic of China, credit guarantee institutions for SMEs are subject to a pre-tax
deduction for the provision of default losses equal to 1% of the outstanding guarantee balance, and 50% of guarantee income in
current year should be deferred and taxable in the next year. According to Tax Regulation Caishui [2008] No.1, the income from
investment in assets management products is subject to a tax-exemption.
Income taxes increased by $1.2
million, to $2.0 million, for the year ended June 30, 2017, compared to $0.8 million for the year ended June 30, 2016. The
increase was primarily attributable to the increase in taxable income, which mainly consisted of income before taxes
excluding the interest on short-term investments that was tax-exempt.
For the years ended June 30, 2017 and 2016,
i
ncome before taxes excluding the interest on short-term investments and non-deductible
share-based compensation and offshore expenses was
$7.8 million and $2.6 million respectively.
Net income
As a result of the above, net income increased by
$8.2 million, or 67.9%, to $20.3 million for the year ended June 30, 2017, compared to $12.1 million for the year June 30, 2016.
Year Ended June 30, 2016 Compared to Year
Ended June 30, 2015
|
|
For the years ended June 30,
|
|
|
Changes
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Guarantee service income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees on financial guarantee services
|
|
$
|
6,193,225
|
|
|
$
|
7,860,629
|
|
|
$
|
(1,667,404
|
)
|
|
|
(21.2
|
)%
|
(Provision) reversal of provision on financial guarantee services
|
|
|
(2,907,999
|
)
|
|
|
576,456
|
|
|
|
(3,484,455
|
)
|
|
|
(604.5
|
)%
|
Commission and fees on guarantee services, net
|
|
|
3,285,226
|
|
|
|
8,437,085
|
|
|
|
(5,151,859
|
)
|
|
|
(61.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct financing lease interest income
|
|
|
3,164,317
|
|
|
|
3,547,273
|
|
|
|
(382,956
|
)
|
|
|
(10.8
|
)%
|
Interest expense for direct financing lease
|
|
|
(524,409
|
)
|
|
|
(188,173
|
)
|
|
|
336,236
|
|
|
|
178.7
|
%
|
Business collaboration fee and commission expenses for leasing projects
|
|
|
(222,206
|
)
|
|
|
(265,829
|
)
|
|
|
(43,623
|
)
|
|
|
(16.4
|
)%
|
Provision for lease payment receivable
|
|
|
(597,444
|
)
|
|
|
(70,467
|
)
|
|
|
526,977
|
|
|
|
747.8
|
%
|
Net direct financing lease interest income after provision for receivables
|
|
|
1,820,258
|
|
|
|
3,022,804
|
|
|
|
(1,202,546
|
)
|
|
|
(39.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial advisory and agency income
|
|
|
402,800
|
|
|
|
3,386,586
|
|
|
|
(2,983,786
|
)
|
|
|
(88.1
|
)%
|
Net revenue
|
|
|
5,508,284
|
|
|
|
14,846,475
|
|
|
|
(9,338,191
|
)
|
|
|
(62.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term investment
|
|
|
13,958,540
|
|
|
|
16,657,246
|
|
|
|
(2,698,706
|
)
|
|
|
(16.2
|
)%
|
Total non-interest income
|
|
|
13,958,540
|
|
|
|
16,657,246
|
|
|
|
(2,698,706
|
)
|
|
|
(16.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business taxes and surcharge
|
|
|
(167,867
|
)
|
|
|
(200,223
|
)
|
|
|
(32,356
|
)
|
|
|
(16.2
|
)%
|
Salaries and employees surcharge
|
|
|
(1,524,720
|
)
|
|
|
(424,872
|
)
|
|
|
1,099,848
|
|
|
|
258.9
|
%
|
Rental expenses
|
|
|
(271,357
|
)
|
|
|
(190,239
|
)
|
|
|
81,118
|
|
|
|
42.6
|
%
|
Other operating expenses
|
|
|
(4,621,038
|
)
|
|
|
(1,468,741
|
)
|
|
|
3,152,297
|
|
|
|
214.6
|
%
|
Total non-interest expense
|
|
|
(6,584,982
|
)
|
|
|
(2,284,075
|
)
|
|
|
4,300,907
|
|
|
|
188.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
12,881,842
|
|
|
|
29,219,646
|
|
|
|
(16,337,804
|
)
|
|
|
(55.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
(764,445
|
)
|
|
|
(3,146,993
|
)
|
|
|
(2,382,548
|
)
|
|
|
(75.8
|
)%
|
Net income
|
|
$
|
12,117,397
|
|
|
$
|
26,072,653
|
|
|
$
|
(13,955,256
|
)
|
|
|
(53.5
|
)%
|
Net Revenue
Our net revenue consists of commissions and fees
on our financial guarantee services, direct financing lease interest income, and financial advisory and lease agency income. Net
revenue decreased by $9.3 million or 62.9% to $5.5 million for the year ended June 30, 2016, compared to $14.8 million for the
year ended June 30, 2015. The decrease was primarily attributable to the decrease of $5.2 million in net commissions and fees on
financial guarantee services, a decrease of $1.2 million in net direct financing lease interest income and a decrease of $3.0 million
in financial advisory and lease agency income.
Net commissions and fees on financial
guarantee services, net direct financing lease interest income, and financial advisory and lease agency income for the year
ended June 30, 2016 were $3.3 million, $1.8 million and $0.4 million, respectively, accounting for 59.6%, 33.0% and 7.3% of
the net revenue, respectively.
The following table breaks down the components of
net revenue:
|
|
For the years ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Changes
|
|
|
|
USD
|
|
|
Percentage
of Revenue
|
|
|
USD
|
|
|
Percentage
of Revenue
|
|
|
$
|
|
|
%
|
|
Net commission and fees on guarantee services
|
|
$
|
3,285,226
|
|
|
|
59.7
|
%
|
|
$
|
8,437,085
|
|
|
|
56.8
|
%
|
|
$
|
(5,151,859
|
)
|
|
|
(61.1
|
)%
|
Net direct financing lease interest income
|
|
|
1,820,258
|
|
|
|
33.0
|
%
|
|
|
3,022,804
|
|
|
|
20.4
|
%
|
|
|
(1,202,546
|
)
|
|
|
(39.8
|
)%
|
Financial advisory and agency income
|
|
|
402,800
|
|
|
|
7.3
|
%
|
|
|
3,386,586
|
|
|
|
22.8
|
%
|
|
|
(2,983,786
|
)
|
|
|
(88.1
|
)%
|
Total
|
|
$
|
5,508,284
|
|
|
|
100.0
|
%
|
|
$
|
14,846,475
|
|
|
|
100.0
|
%
|
|
$
|
(9,338,191
|
)
|
|
|
(62.9
|
)%
|
Guarantee Service Income
Commissions and fees on financial guarantee services
Commissions and fees on financial guarantee services
decreased by $1.7 million, or 21.2%, to $6.2 million for the year ended June 30, 2016, compared to $7.9 million for the year ended
June 30, 2015. The decrease was primarily attributable to reduced lending activity due to the economic recession in Shanxi province
and our increased scrutiny of potential clients as a result thereof.
Provision for guarantee losses
We provide a “Specific Allowance” for
the financial guarantee services if any specific collectability risk is identified, and a “General Allowance”, based
on total guarantee contract amount of those transactions with no specific risk identified, to be used to cover unidentified probable
loss.
Based on historical experience and analysis of the
economic environment, we estimate the General Allowance to be 1% of guarantee contract amount balances, and we made reversals of
guarantees in the amount of $0.4 million, and made a Specific Allowance of $3.3 million for the year ended June 30, 2016. $0.9
million was written-off during the year ended June 30, 2016.
On March 21, 2016, Jinzhong Bank Co., Ltd.
withdrew $0.9 million for interest and penalties from the Company's deposit account for the default on a loan of $4.5 million
(RMB 30 million) borrowed by JinzhongHoufeng Trading Co., Ltd., one of our clients in its guarantee business. We evaluated
the potential default losses based on JinzhongHoufeng Trading Co., Ltd.'s financial position and counter-guarantee collateral
and accrued approximately $3.3 million (RMB 21 million) as Specific Allowance of guarantee losses.
The following table shows changes of allowance on
financial guarantee services for the years ended June 30, 2016 and 2015:
|
|
For the years ended June 30
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
1,261,868
|
|
|
$
|
1,826,768
|
|
Reversal of general allowance
|
|
|
(355,313
|
)
|
|
|
(576,456
|
)
|
Specific allowance
|
|
|
3,263,312
|
|
|
|
-
|
|
Direct write-off against the allowance
|
|
|
(932,375
|
)
|
|
|
-
|
|
Effect of foreign exchange rate
|
|
|
(157,808
|
)
|
|
|
11,556
|
|
Ending balance
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
Commissions and fees on guarantee services, net
Net commissions and fees on guarantee services decreased
by $5.1 million, or 61.1%, to $3.3 million for the year ended June 30, 2016, compared to $8.4 million for the year ended June 30,
2015.
Direct financing lease income
Direct financing lease interest income
Direct financing lease interest income
decreased by $0.3 million, or 10.8%, to $3.2 million for the year ended June 30, 2016, compared to $3.5 million for the year
ended June 30, 2015. The decrease was primarily attributable to a decrease in interest rates due to market conditions and
fewer new contracts at the beginning of fiscal year ended June 30, 2016 due to difficult economic conditions.
Interest expense for capital lease
Interest expense for capital leases represents the
interest incurred on the long-term loans from banks and other financial institutions for financial support for capital leases.
Interest expense for capital leases increased by $0.3 million, or 178.7%, to $0.5 million for the year ended June 30, 2016, compared
to $0.2 million for the year ended June 30, 2015. The increase was primarily attributable to the increase in the balance of outstanding
loans from banks and other financial institutions.
Business collaboration fee and commission expenses
for leasing projects
We paid fees and commissions total $0.2 million
and $0.3 million on collaboration for services rendered during the transaction process for leasing projects for the years ended
June 30, 2016 and 2015, respectively.
Provision for lease payment receivable
We accrue allowances for the impairment on its
investment in direct financing leases based on historical experience and an estimate of collectability of the lease
receivables. Provision for lease payment receivable increased by $0.5 million, or 747.8%, to $0.6 million for the year ended
June 30, 2016, from $0.07 million for the year ended June 30, 2015. The increase in the year ended June 30, 2016 was the
result of an increase in minimum lease payment receivable of $56 million for the year.
Net direct financing lease interest income after
provision for receivables
Net direct financing lease interest income after
provision for receivables decreased by $1.2 million, or 39.8%, to $1.8 million for the year ended June 30, 2016, compared to $3.0
million for the year ended June 30, 2015.
Financial advisory and agency income
Financial advisory and lease agency income decreased
by $3.0 million to $0.4 million for year ended June 30, 2016, from $3.4 million for the year ended in June 30, 2015. The decrease
was primarily attributable to there being no new advisory and lease agency contracts from 2016.
Non-interest income
Interest on short-term investments
Interest on short-term investments decreased
by $2.7 million to $14.0 million for the year ended June 30, 2016, compared to $16.7 million for the year ended June 30,
2015. The decrease was primarily attributable to the decrease in the balance of short-term investments, which decreased by
$34.3 million.
Non-interest expenses
Non-interest expenses mainly consisted of business
tax and surcharges, salary and benefits for employees, office rental expenses, traveling costs, Share-based compensation, depreciation
of equipment, professional fees, consultation fee and office supplies. Non-interest expenses increased by $4.3 million, or 188.3%,
to $6.6 million for the year ended June 30, 2016, compared to $2.3 million for the year ended June 30, 2015. The increase was primarily
attributable to an increase of $1.9 million in share-based compensation to our directors and executive officers for options granted
in the year and increases in salaries, legal fees, auditing fees and consulting fees for investor relations in connection with
being a public company.
Income taxes
The income tax rate of our PRC subsidiaries is 25%
pursuant to the Enterprise Income Tax (“EIT”) Law. According to the Tax Regulation Caishui [2012] No. 25 issued by
the Ministry of Finance of the People’s Republic of China, credit guarantee institutions for SMEs are subject to a pre-tax
deduction for the provision of default losses equal to 1% of the outstanding guarantee balance, and 50% of guarantee income in
current year which should be reversed in the next year. According to Tax Regulation Caishui [2008] No.1, the income from investment
in assets management products is subject to a tax-exemption.
Income taxes decreased by $2.4 million,
or 75.7%, to $0.8 million for the year ended June 30, 2016, compared to $3.1 million for the year ended June 30, 2015. The decrease
was primarily attributable to the decrease in taxable income, which mainly consisted of income before taxes excluding the interest
on short-term investments that was tax-exempt.
For the years ended June 30, 2016 and 2015, income before taxes excluding
the interest on short-term investments and non-deductible share-based compensation and offshore expenses was $2.6 million and $12.6
million respectively.
Net income
As a result of the above, net income decreased by
$14.0 million or 53.5% to $12.1 million for the year ended June 30, 2016, compared to $26.1 million for the year June 30, 2015.
Critical Accounting Policies and Estimates
Use of estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, management
reviews these estimates using information then currently available. Changes in facts and circumstances may cause Wins Finance to
revise its estimates. Material estimates that are particularly susceptible to significant change in the near-term include the determination
of the allowances for doubtful accounts receivable and for guarantee losses.
Significant accounting estimates reflected in the
financial statements include, but are not limited to: (i) the allowance for doubtful receivables; (ii) estimates of losses on unexpired
contracts and financial guarantee service contracts; (iii) accrual of estimated liabilities; (iv) useful lives of long-lived assets;
(v) impairment of long-lived assets; (vi) valuation allowance for deferred tax assets; (vii) contingencies; and (viii) share-based
compensation.
Operating segments
ASC 280, Segment Reporting, requires companies to
report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain
specific revenue and expense items, and segment assets. All of our activities are interrelated, and each activity is dependent
and assessed based on how each of our activities supports the others.
Our chief operating decision-maker (“CODM”)
has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources
and assessing performance for both the financing lease business and the guarantee business. The Company’s net revenues are
all generated from customers in the PRC. Hence, we operate and manage our business within one reportable segment, which is to provide
financial services in the PRC domestic market.
For the year ended June 30, 2017, there were two
customers that accounted for 19% and 13% of our revenue, respectively. For the year ended June 30, 2016, there were no customers
that individually accounted for 10% or more of our revenue. For the year ended June 30, 2015, there were three customers that accounted
for 18%, 14% and 11% of our revenue, respectively. There were no other customers that each accounted for 10% or more of our revenue
during the year ended June 30, 2015.
As of June 30, 2017, two customers accounted for
13.2% and 11.0%, respectively, of the aggregate balances of loans guaranteed by Dongsheng Guarantee. As of June 30, 2016, one customer
accounted for 10.5% of the aggregate balances of loans guaranteed by Dongsheng Guarantee.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand,
cash in banks and all highly liquid investments with original maturities of three months or less that are unrestricted as to withdrawal
and use.
Restricted Cash
Restricted cash represents cash pledged to banks
by our subsidiary Dongsheng Guarantee, as guarantor for guarantee business customers. The banks providing loans to our guarantee
service customers generally require Dongsheng Guarantee, as the guarantor of the loans, to pledge a cash deposit of a minimum of
10% to 20% of the guaranteed amount to an escrow account that is restricted from use. The deposit is released after the guaranteed
bank loan is paid off and Dongsheng Guarantee’s guarantee obligations expire, which is usually within 12 months from the
time the loan and guarantee are initiated.
Short-term investments
Investments in non-marketable asset management products
issued by banks and financial institutions (the issuers) with original maturities of one year to five years that could be redeemed
or are transferrable at any time are classified as short-term investments under the cost method. Our asset management products
are managed by banks and financial institutions and invested in fixed-income financial products that are permitted by the China
Securities Regulatory Commission (“SRC”), such as government bonds, corporate bonds and central bank notes. The investment
portfolios of these products are not disclosed to us by the banks or financial institutions. If the banks and financial institutions
are required to redeem these investments, they will redeem them at a price equal to the outstanding principal plus accrued and
unpaid interest. We carry these cost method investments at cost and only adjust for other-than-temporary impairments and distributions
of earnings. Management regularly evaluates the impairment of theses cost method investments at the individual security level.
If the fair value of an investment is less than its amortized cost basis at the balance sheet date of the report period for which
impairment is being assessed, management will determine whether the decline in fair value is temporary or permanent. If the decline
in fair value is other than temporary, the cost basis of the individual security is written down to fair value as the new cost
basis, and the amount of the write-down is included in current earnings. There is no impairment noted for either of the reporting
periods presented herein.
Interest income from short-term investments is recognized
when our right to receive payment is established. Accrued but unpaid interest income is recorded as interest receivable in the
accompanying consolidated balance sheets.
Financial guarantee service contract
Our financial guarantee service
contracts protect lenders by providing Dongsheng Guarantee’s agreement to pay an obligor’s obligations to a holder
of the debt if the obligor fails to pay the obligations when they become due. Dongsheng Guarantee makes payment if the obligor
fails in making payment when due. If the debtor defaults, the creditor would perform a direct claim on the guarantor. The financial
guarantee service contract is classified as direct guarantee of indebtedness
The contract amounts reflect
the extent of involvement we have in the guarantee transaction and also represents Dongsheng Guarantee’s maximum exposure
to credit loss. Under PRC regulations, the maximum amount Dongsheng Guarantee may provide to its financial guarantee customers
is 10 times its net assets. As of June 30, 2017 and 2016, the net assets of Dongsheng Guarantee were $205 million and $195 million,
respectively.
Dongsheng Guarantee is a party to off-balance-sheet
financial instruments in the normal course of business to meet the financing needs of its customers. Financial instruments whose
contract amounts represent credit risk are as follows:
|
|
June 30, 201
7
|
|
|
June 30, 201
6
|
|
|
|
|
|
|
|
|
|
|
Guarantee
|
|
$
|
67,314,661
|
|
|
$
|
86,289,058
|
|
Where Dongsheng Guarantee issues a guarantee, the
fair value of the guarantee contract issued is initially recognized as unearned income from financial guarantee services within
liabilities. The fair value of guarantees issued at the time of issuance is determined by reference to commissions charged in an
arm’s length transaction for similar services, adjusted for transaction costs that are directly attributable to the issuance
of the guarantee.
The fair value of the guarantee initially recognized
as unearned income is amortized in profit or loss over the term of the guarantee as commissions and fees on financial guarantee
services. In addition, provisions are recognized in accordance with Note 2(i) to the accompanying financial statements if and when
(i) it becomes probable that the holder of the guarantee will call upon Dongsheng Guarantee under the guarantee, and (ii) the amount
of that claim on Dongsheng Guarantee is expected to exceed the amount currently carried in unearned income in respect of that guarantee
i.e. the amount initially recognized, less accumulated amortization.
Guarantee paid on behalf of guarantee service
customers
As guarantor of guarantee service
customers’ loans from banks and financial institutions, Dongsheng Guarantee is obligated to repay to the banks or financial
institutions for the unpaid principal and accrued interest of the loans when customers default on their loans. Repayments on behalf
of guarantee service customers are recorded as guarantees paid on behalf of guarantee service customers in our consolidated balance
sheets. As of June 30, 2017 and 2016, uncollected guarantees paid on behalf of guarantee service customers from guarantee service
customers on whose behalf Dongsheng Guarantee had repaid the loans were $1,560,615 and $2,039,684, respectively. Management performs
an evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and
inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value
of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. As of
June 30, 2017 and 2016, the Company accrued allowance on the balance in “Allowance on financial guarantee services”.
.
Provision for Guarantee Losses
A provision for possible losses to be absorbed by
Dongsheng Guarantee for financial guarantees it provides is recorded as an accrued liability when the guarantees are made and recorded
as “Allowance on financial guarantee services” in the consolidated balance sheets. This accrued liability represents
probable losses and is increased or decreased by accruing a “Provision/(reversal of provision) on financial guarantee services”
against commission and fee income from guarantee services throughout the terms of the guarantees as necessary when additional relevant
information becomes available.
The methodology used to estimate the liability for
possible guarantee losses considers the guarantee contract amounts and a variety of factors, which include, depending on the counterparty,
the latest financial position and performance of the borrowers, actual defaults, estimated future defaults, historical loss experience,
estimated value of collateral or guarantees the customers or third parties offered, and other economic conditions, such as economic
trends in the area and the country. The estimates are based upon information available at the time the estimates are made. It is
possible that prior experience and default history of the borrowers are not indicative of future losses on guarantees made. Any
increase or decrease in the provision would affect our consolidated income statements in future years.
Dongsheng Guarantee provides “Specific
Allowance” for the financial guarantee services if any specific collectability risk is identified, and a “General Allowance”,
based on total guarantee contract amount of those transactions with no specific risk identified, to be used to cover unidentified
probable loss.
Dongsheng Guarantee performs periodic and systematic detailed reviews to identify credit risks and to assess
the overall collectability, and may adjust its estimates on allowance when new circumstances arise.
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance on financial guarantee at the beginning of period
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
|
$
|
1,826,768
|
|
Provision (reversal) of general allowance
|
|
|
(126,211
|
)
|
|
|
(355,313
|
)
|
|
|
(576,456
|
)
|
Specific allowance (reversal)
|
|
|
(3,082,616
|
)
|
|
|
3,263,312
|
|
|
|
-
|
|
Direct write-downs against the allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
- Direct write-down for guarantees paid on behalf
|
|
|
-
|
|
|
|
(932,375
|
)
|
|
|
-
|
|
- Reversal - recoveries by cash
|
|
|
880,747
|
|
|
|
-
|
|
|
|
-
|
|
Effect of foreign currency translation
|
|
|
(78,457
|
)
|
|
|
(157,808
|
)
|
|
|
11,556
|
|
Allowance on financial guarantee at the end of year
|
|
$
|
673,147
|
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
The risk classification of outstanding guarantee
contracts is as follows:
|
|
Jun 30, 2017
|
|
|
Jun 30, 2016
|
|
Normal
|
|
$
|
67,314,661
|
|
|
$
|
86,289,058
|
|
Abnormal
|
|
|
-
|
|
|
|
-
|
|
Total outstanding guarantee loans
|
|
$
|
67,314,661
|
|
|
$
|
86,289,058
|
|
Collateral held for the guarantee
Depending on the results of our evaluation of the
borrower’s credit, Dongsheng Guarantee may require the borrower and/or counter-guarantors to post collateral, primarily land
use rights and building ownership and to a lesser extent, accounts receivable and equity interests. Usually, the collateral would
have the value that can cover over 100% of the amount of the guarantee loans. We review the status and value of the collateral
as one of the factors while determining the provision of guarantee losses. The value of the collateral is not recorded in the consolidated
financial statements, for it is not our assets or liabilities. The value of the collateral held for the outstanding guarantee loans
were approximately $99 million and $126 million as of June 30, 2017 and 2016, respectively.
Net investment in direct financing lease
Lease contracts that Jinshang Leasing enters with
financing lease customers transfer substantially all the rewards and risks of ownership of the leased assets, other than legal
title, to the customers. These financing lease contracts are accounted for as direct financing leases in accordance with ASC 840-10-25
and ASC 840-40-25. At the inception of a transaction, the cost of the leased property is capitalized at the present value of the
minimum lease payment receivables and the unguaranteed residual value of the property at the end of the lease. The difference between
the sum of (i) the minimum lease payment receivables and the unguaranteed residual value and (ii) the cost of the leased property
is recognized as unearned income. Unearned income is recognized over the period of the lease using the effective interest rate
method.
Net investment in direct financing leases is recorded
at net realizable value consisting of minimum lease payments to be received less allowance for uncollectible, as needed, and less
the unearned income. The allowance for lease payment receivable losses is maintained at a level considered adequate to provide
for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The
allowance is based on Jinshang Leasing’s loss history, known and inherent risks in the transactions, adverse situations that
may affect the lessee’s ability to repay, the estimated value of any underlying asset, current economic conditions and other
relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant
revision as more information becomes available. While management uses the best information available upon which to base estimates,
future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used for
the purposes of analysis.
Jinshang Leasing provides “Specific
Allowance” for the lease payment receivable of lease transactions if any specific collectability risk is identified, and
a “General Allowance”, based on total minimum lease payment receivable balance of those transactions with no specific
risk identified, to be used to cover unidentified probable loss.
Jinshang Leasing performs periodic and systematic detailed
reviews to identify credit risk and to assess the overall collectability of a liability, and may adjust its estimates on allowance
when new circumstances arise.
The General Allowance Jinshang
Leasing provided as of June 30, 2017 and 2016 were $867,316 and $858,362, respectively; and Specific Allowance were both nil. Jinshang
Leasing made $27,332, $597,444 and $70,467 provision for General Allowance, and nil, nil and $1,011,999 were written off against
Specific Allowance, during the years ended June 30, 2017, 2016 and 2015, respectively.
Revenue recognition
Revenue is recognized when there are probable economic
benefits to us and when the revenue can be measured reliably, on the following:
Commission income and evaluation income on guarantee
service
Commission income on guarantee services is recognized
when guarantee contracts have been made whereby the related guarantee obligations have been accepted, the economic benefits associated
with the guarantee contracts will probably be realized, and the amount of revenue associated with the guarantee contracts can be
measured reliably. Commission income is determined based on the total fees provided for in the guarantee contracts, is recorded
in full at inception as unearned income and is recognized as commission income in the income statement over the period of the guarantee
using the straight-line method. The agreed commission is generally 2% to 6% of the guaranteed amount for 12 months, which represents
the estimated fair value of the non-contingent guarantee liability at the inception of the guarantee.
Dongsheng Guarantee charges its financial guarantee
customers a one-time fee for evaluations Dongsheng Guarantee performs as to the likelihood that customers are qualified to apply
for loans from banks and other financial institutions. Evaluation income is recognized upon the completion of the evaluation.
Direct financing lease interest income
Direct financing lease interest income is recognized
on an accrual basis using the effective interest method over the term of the lease by applying the rate that discounts the estimated
future minimum lease payment receivables through the period of the lease to the amount of the net investment in the direct financing
lease at inception.
The accrual of financing lease interest income is
discontinued when a customer becomes 90 days or more past due on its lease or interest payments to Jinshang Leasing, unless we
believe the interest is otherwise recoverable. Leases may be placed on non-accrual earlier if we have significant doubt about the
ability of the customer to meet its lease obligations, as evidenced by consistent delinquency, deterioration in the customer’s
financial condition or other relevant factors. Payments received while the lease is on non-accrual are applied to reduce the amount
of the recorded value. We resume accruing the interest income when we determine that the interest has again become recoverable,
as, for example, if the customer resumes payment of the previous interest, and shows material improvement in its operating performance,
financial position, and similar indicators.
Financial advisory and agency income
Jinshang Leasing and Dongsheng Guarantee provide
financing solutions to customers and receive advisory fees as compensation. The advisory fees are recognized as income during the
service period as the related service obligations are completed.
As a licensed finance lease company, Jinshang Leasing
acts as agent in finance lease transactions between other finance lessors and lessees, or between banks and lessees. Jinshang Leasing
neither receives the benefit of receiving the lease payments nor assumes the repayment obligations in these transactions. The lease
agency income and advisory fees received in these transactions are recognized as income on a net basis during the service period
as the related service obligations are completed.
Jinshang Leasing acts as a financing agency between other financial
leasing companies that need capital and financial institutions that are willing to provide capital. Other financial leasing companies
factor to Jinshang Leasing their right to collect capital lease receivables in order to obtain capital from Jinshang Leasing, and
Jinshang Leasing factors to other financial institutions its right to collect debts from these financial leasing companies in order
to finance entirely the capital that Jinshang Leasing provides to other financial leasing companies. All of these factoring transactions
are structured with recourse rights to the assignor of the receivable. Specifically, the financial institutions bear the credit
risk should the financial leasing companies fail to repay capital lease receivables. Financial agency income that Jinshang Leasing
earns from factoring transactions is accrued monthly as net interest income and payments that Jinshang Leasing makes on factoring
loans from financial institutions are accrued monthly as interest cost, in each case in accordance with the terms of the factoring
loan contracts. Jinshang Leasing recorded net interest income of nil in each of the years ended June 30, 2017, 2016, and 2015 on
these financing agency transactions.
Property and equipment
Plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, with 3% to
5% salvage value. The average estimated useful lives of property and equipment are discussed in Note 7 to the accompanying consolidated
financial statements.
We eliminate the cost and related accumulated depreciation
of assets sold or otherwise retired from the corresponding accounts and includes any gain or loss in the statements of income.
We charge maintenance, repairs and minor renewals directly to expenses as incurred; major additions and improvements of equipment
are capitalized.
Impairment of long-lived assets
We apply the provisions of ASC No. 360 Sub topic
10, “Impairment or Disposal of Long-Lived Assets” (ASC 360-10) issued by the Financial Accounting Standards Board (“FASB”).
ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the
use and eventual disposition of the asset. Whenever any such impairment exists, an impairment loss will be recognized for the amount
by which the carrying value exceeds the fair value.
We test long-lived assets, including property and
equipment and finite-lived intangible assets, for impairment at least annually or more frequently upon the occurrence of an event
or when circumstances indicate that the net carrying amount of the assets is greater than their fair value. Assets are grouped
and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups
of assets. We consider historical performance and future estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash flows, we measure the amount of impairment by comparing
the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected
future cash flows at the rate we utilize to evaluate potential investments. We estimate fair value based on the information available
in making whatever estimates, judgments and projections are considered necessary. There were no impairment losses on long-lived
assets in the years ended June 30, 2017, 2016 and 2015.
Fair value measurements
ASC Topic 825, Financial Instruments (“Topic
825”) requires disclosure of fair value information for financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Topic 825 excludes certain financial instruments and all non-financial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying value of our company.
|
Level 1 -
|
inputs are based upon quoted prices (unadjusted) for
identical assets or liabilities in active markets.
|
|
Level 2 -
|
inputs are based upon quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
Level 3 -
|
inputs are generally unobservable and typically reflect
management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques.
|
As of June 30, 2017 and 2016, our financial
instruments primarily consisted of cash, restricted cash, accounts receivables, other receivables, and bank loans, loans receivable
and loans payable which were carried at cost on the consolidated balance sheets, and carrying amounts approximated their fair values
because of their generally short maturities
or the rate of interest of these instruments approximate the market rate of
interest
.
Foreign currency translation
Our functional currency is the United States Dollar
(“USD”). The functional currency of our subsidiaries in the PRC is the Chinese Yuan, or Renminbi (“RMB”).
For financial reporting purposes, the financial
statements of Jinshang Leasing and Dongsheng Guarantee are prepared using RMB and translated into our functional USD currency at
the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders' equity
is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of
accumulated other comprehensive income in shareholders’ equity.
Income taxes
We account for income taxes in accordance with FASB
ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income
taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment of the changes.
Under ASC 740, a tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.
Under the Corporate Income Tax Law of the PRC and
related regulations (collectively, (the “CIT Law”), small business credit guarantee institutions are allowed to deduct
from taxable income an allowance for guarantee losses as follows:
(i) Guarantee
Compensation Reserve - up to 1% of the balance of liabilities guaranteed by us as of the end of each year; the Guarantee Compensation
Reserve of the end of the previous year is required to be added to the current year’s taxable income.
(ii) Unexpired
Liability Reserve - up to 50% of the current year’s guarantee income; the Unexpired Liability Reserve as of the end previous
year is required to be added to the current year’s taxable income
(iii) Actual
guarantee compensation losses incurred by small business credit guarantee institutions are required to be first applied as a write-off
of the Guarantee Compensation Reserve, and any amount in excess of the Guarantee Compensation Reserve deductible from the current
year’s taxable income.
Commitments and contingencies
In the normal course of business, we are subject
to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including,
among other things, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss Contingencies”,
we record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of the loss
can be reasonably estimated.
Liquidity and Capital Resources
We have funded working capital and other capital
requirements primarily by equity contribution from shareholders, cash flow from operations, and bank and other loans. Cash is required
to maintain security deposits at banks, to issue capital leases to customers, to repay debts, to make default payments, salaries,
office rental expenses, income taxes and other operating expenses.
Our management believes that current levels of cash
and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However,
we may need additional cash resources in the future if we experience changed business conditions or other developments, and may
also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation
or other similar actions. If it is determined that the cash requirements exceed the amount of cash and cash equivalents on hand,
we may seek to issue debt or equity securities or obtain a credit facility.
The following summarizes the key components of our
cash flows for the years ended June 30, 2017 and 2016:
|
|
For the years ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by (used in) operating activities
|
|
$
|
13,201,598
|
|
|
$
|
(35,611,981
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(37,849,962
|
)
|
|
|
18,229,592
|
|
Net cash (used in) provided by financing activities
|
|
|
(4,559,561
|
)
|
|
|
56,637,156
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(953,758
|
)
|
|
|
(1,973,893
|
)
|
Net (decrease) increase in cash and cash
equivalents
|
|
$
|
(30,161,683
|
)
|
|
$
|
37,280,874
|
|
Net cash provided by operating activities
was approximately $13.2 million for the year ended June 30, 2017, while net cash used in operating activities was $35.6 million
for the year ended June 30, 2016. The net cash provided by operating activities for the year ended June 30, 2017 mainly consisted
of $20.3 million of cash provided by the net income of current year and $1.7 million of deposits from direct financing leases,
offset by $3.6 million of cash used in minimum lease payment receivable and $3.2 million of
reversal of provision for guarantee
.
The net cash used in operating activities for the year ended June 30, 2016 mainly consisted of $53.1 million of cash used in the
minimum lease payment receivable, offset by $12.1 million of cash generated from the net income.
Net cash used in investing activities was approximately
$37.8 million for the year ended June 30, 2017, while net cash provided by investing activities was $18.2 million for the year
ended June 30, 2016. Net cash used in investing activities for the year ended June 30, 2017 mainly consisted of (a) $73.4 million
of purchases of short-term investments, offset by $32.3 million of proceeds from maturities of short-term investments; and (b)
$19.8 million of deposits paid to and $22.8 million of deposits released from banks for financial guarantee services. Net cash
provided by investing activities for the year ended June 30, 2016 mainly consisted of (a) $44.3 million of proceeds from maturities
of short-term investments, offset by $23.9 million of purchases of short-term investments; (b) $26.6 million of deposits released
from and $24.2 million of deposits paid to banks for financial guarantee services; and (c) placement of pledged deposits of $4.7
million.
Net cash used in financing activities was approximately
$4.6 million for the year ended June 30, 2017, while net cash provided by financing activities was $56.6 million for the year as
ended June 30, 2016. Net cash used in financing activities for the year ended June 30, 2017 mainly consisted of $16.3 million to
repay long term loans, offset by $11.8 million of proceeds from long term loans. Net cash provided by financing activities for
the year ended June 30, 2016 mainly consisted of $46.6 million of proceeds from long term loans and $29.7 million of capital paid
in by owners, offset by $17.0 million payment to Bluesky LLC for the repurchase of 1,480,000 ordinary shares and $2.5 million repayment
of long term loans.
The following summarizes the key components of our
cash flows for the years ended June 30, 2016 and 2015:
|
|
For the years ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(35,611,981
|
)
|
|
$
|
31,180,609
|
|
Net cash provided by (used in) investing activities
|
|
|
18,229,592
|
|
|
|
(26,208,001
|
)
|
Net cash provided by (used in) financing activities
|
|
|
56,637,156
|
|
|
|
(481,686
|
)
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(1,973,893
|
)
|
|
|
62,715
|
|
Net increase in cash and cash equivalents
|
|
$
|
37,280,874
|
|
|
$
|
4,553,637
|
|
Net cash used in operating activities was approximately
$35.6 million for the year ended June 30, 2016, while net cash provided by operating activities was $31.2 million for the year
ended June 30, 2015. The net cash used in operating activities for the year ended June 30, 2016 mainly consisted of $53.1 million
of cash used in the minimum lease payment receivable, offset by $12.1 million of cash generated from the net income of current
year. The net cash provided by operating activities for the year ended June 30, 2015 mainly consisted of $26.1 million of cash
generated from the net income and $5.5 million of cash collected from commission receivables.
Net cash provided by investing activities was approximately
$18.2 million for the year ended June 30, 2016, while net cash used in investing activities was $26.2 million for the year ended
June 30, 2015. Net cash provided by investing activities for the year ended June 30, 2016 was mainly consisted of (a) $44.3 million
of proceeds from maturities of short-term investments, offset by $23.9 million of purchases of short-term investments, (b) $26.6
million of deposits released from banks and $24.2 million of deposits paid to banks for financial guarantee services; and (c) placement
of pledged deposits of $4.7 million. Net cash used in investing activities for the year ended June 30, 2015 mainly consisted of
(a) $183.3 million for the purchase of short-term investment, offset by $143.4 million of proceeds from the maturity of short-term
investments, (b) $27.9 million of deposits paid to and $15.9 million of deposits released from banks for financial guarantee services,
and (c) $21.6 million of cash lent to owners and $47.6 million of cash repaid by owners.
Net cash provided by financing activities was approximately $56.6
million for the year ended June 30, 2016, while net cash used in financing activities was $0.5 million for the year as ended June
30, 2015. Net cash provided by financing activities for the year ended June 30, 2016 mainly consisted of $46.6 million of proceeds
of long term loans and $29.7 million of capital paid in by owners, offset by $17.0 million payment to Bluesky LLC for the repurchase
of 1,480,000 ordinary shares, and $2.5 million repayment of long term loans. Net cash used in financing activities for the year
ended June 30, 2015 was mainly consisted of $0.4 million of loans repaid to owners.
Commitments and Contractual Obligations
The following table presents our material contractual
obligations as of June 30, 2017:
Contractual Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1 – 3 years
|
|
|
3 – 5
years
|
|
|
5+
years
|
|
Bank loans for capital lease business–principal amount
|
|
$
|
28,281,541
|
|
|
$
|
14,905,027
|
|
|
$
|
13,376,514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other loans for capital lease business– principal amount
|
|
|
9,509,597
|
|
|
|
4,846,657
|
|
|
|
4,662,940
|
|
|
|
-
|
|
|
|
-
|
|
Due to a related party
|
|
|
464,000
|
|
|
|
464,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease obligations
|
|
|
186,721
|
|
|
|
186,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
38,441,859
|
|
|
$
|
20,402,405
|
|
|
$
|
18,039,454
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-balance Sheet Arrangements
We enter into financial guarantee contracts with
bank lenders pursuant to which we provide guarantees on behalf of borrowers to help them obtain loans from banks. The aggregate
contract amount reflects the extent of involvement we have in the guarantee business and also represents its maximum exposure to
credit loss. We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of our borrowers. Financial instruments representing credit risk are as follows:
|
|
Jun 30, 2017
|
|
|
Jun 30, 2016
|
|
Guarantee Balance
|
|
$
|
67,314,661
|
|
|
$
|
86,289,058
|
|
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and senior management
|
The following table sets forth information for
our executive officers, directors and director nominees as of the date of this Annual Report. Unless otherwise stated, the address
for our directors and executive officers is c/o WINS Finance Holdings Inc. 1F, Building 7, No. 58 Jianguo Road, Chaoyang District,
Beijing 100024, PRC.
Name
|
|
Age
|
|
Position(s)
|
Renhui Mu
|
|
45
|
|
Chairman, Chief Executive Officer, Chief Operating Officer and Director
|
Junfeng Zhao
|
|
47
|
|
Chief Financial Officer and director
|
Haiming Guo(1)(2)(3)
|
|
43
|
|
Director
|
Guo Chen (1)(2)(3)
|
|
42
|
|
Director
|
Jingxiao Zhang(1)(2)(3)
|
|
40
|
|
Director
|
|
(1)
|
Member of our Audit Committee.
|
|
(2)
|
Member of our Compensation Committee.
|
|
(3)
|
Member of our Nominating Committee
|
Executive Officers and Directors
Renhui Mu
has served as Chief Operating
Officer since October 2015 and as a Chairman and Chief Executive Officer since April 2017. Mr Mu has served as our Co-Chief Executive
Officer from October 2015 to April 2017. Mr. Mu joined the Company in October 2013 and served as its Chief Executive Officer and
Chief Operating Officer since such date. Previously, Mr. Mu served as a Deputy General Manager of China CITIC Bank (China) Enterprise
Bank Department and General Manager of CITIC Bank (China) Enterprise Bank Beijing Branch from January 2010 to September 2013. From
December 2006 to December 2009, Mr. Mu served as Vice President of ABN Beijing Branch Enterprise Bank Department. From January
2005 to December 2006, Mr. Mu served as Vice President of Energy and Resource Department in HSBC Bank. From 2000 to January 2005,
Mr. Mu served as investment director in the water business department of Hong Kong Inter China Holdings Company. Mr. Mu is a licensed
attorney. He got his Master of civil law and commercial law from Tsinghua University and his Bachelor of Arts in English from Tsinghua
University in the PRC.
Junfeng Zhao
has served as our Chief
Financial Officer since August 2016 and served as a member of our board of directors since April 2017. Mr, Zhao served as our financial
controller from May 2010 to August 2016. Prior to that, Mr. Zhao served as financial controller at Agria Corporation, a NYSE listed
company (stock code: GRO), from 2006 to 2010. Prior to Agria, he served as financial controller at Shanxi Foodstuffs and Oils Import
and Export Company from 1993 to 2006. Mr. Zhao obtained his Bachelor degree from Shanxi University of Finance and Economics in
accounting.
Haiming Guo
has served as a member
of our board of directors since May 2016. Mr. Guo has served as Chief Data Officer of Beijing TianYao Information Technology
Company, an internet consumer finance company since July 2015 and Vice Director of Finance Department of School of Business,
Changzhou University, China since September 2012. He served as Technical Director of Rongxu Information Technology Company
from August 2008 to August 2012. He received his Ph.D in Applied Mathematics from University of Maryland, Master of Arts in
Economics from Nankai University, and Bachelor of Science in Mathematics from Nankai University.
Guo Chen
has served as a member of our
board of directors since May 2016. Mr. Chen has served as Vice President of Quantitative Research of ZM Financial Systems Limited,
a technology company, since 2004. He obtained his Ph.D degree in applied mathematics from North Carolina State University in 2003,
his Master degree of applied mathematics from Beijing University, China and his Bachelor degree of mathematics from Nankai University,
China.
Jingxiao Zhang
has served as a member
of our board of directors since October 2015. Dr. Zhang has served as a professor of statistics and a doctoral supervisor at the
Statistics Institute of Renmin University in China since May 2005. Dr. Zhang is also a senior researcher of Application of statistical
science research center of Renmin University in China. Dr. Zhang focuses on big data analysis, credit risk analysis and finance
stochastic analysis. Dr. Zhang obtained her Ph.D. of Sciences Degree from Academy of Mathematics and Systems Science, Chinese Academy
of Sciences, her Masters degree from Renmin University, and her Bachelor Degree from Nankai University. She worked as a visiting
scholar in University of Georgia and University of Michigan in 2006. From 2013 to 2014, Dr. Zhang worked as a visiting scholar
in Hong Kong University of Science and Technology.
Arrangements Concerning Election of Directors; Family Relationships
Our current board of directors consists of five
directors. We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no
family relationships among our executive officers and directors.
The aggregate compensation paid and share-based
compensation and other payments expensed by us to our directors and executive officers with respect to the year ended June 30,
2017 was $454,778. This amount includes approximately $181,903 set aside or accrued to provide pension, severance, retirement or
similar benefits or expenses, but does not include business travel, professional and business association dues and expenses reimbursed
to office holders, and other benefits commonly reimbursed or paid by companies in our industry.
Employment Agreements with Executive Officers
We have entered into a written employment agreement
with Renhui Mu and Junfeng Zhao. These agreements contain provisions customary for a company in our industry regarding non-competition
and confidentiality of information, but do not provide for a minimum term of employment. The enforceability of covenants not to
compete in China and the United States may be subject to limitations.
Our agreement with each of Mr. Mu and Mr. Zhao
does not provide for benefits upon the termination of his employment with us, other than payment of salary and benefits during
the required notice period for termination of the agreement
.
Board of Directors
Independence of Directors
As a result of our ordinary shares being listed
on Nasdaq we adhere to the rules of Nasdaq in determining whether a director is independent. The Nasdaq listing standards define
an “independent director” as a person, other than an executive officer of a company or any other individual having
a relationship which, in the opinion of the issuer’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. Consistent with these considerations, our board of directors has determined
that Messrs. Guo, Chen and Zhang are independent directors of our company. Our independent directors have regularly scheduled meetings
at which only independent directors are present.
Board Leadership Structure and Role in Risk
Oversight
Mr. Mu serves as Chairman of the Board of Directors
and as Chief Executive Officer of our company. We believe in the importance of independent oversight and we will endeavor to ensure
that this oversight is truly independent and effective through a variety of means, including:
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Having a majority of the board be considered independent.
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At each regularly scheduled Board meeting, all independent directors will typically be scheduled to meet in an executive session without the presence of any management directors.
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The charters for each of standing committees of the Board will require that all of the members of those committees be independent.
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Given the small size of the Board of Directors,
we do not believe that Mr. Mu’s combined role of Chief Executive Officer and Chairman impact the independent oversight of
our majority independent board.
Meetings and Committees of the Board of Directors
Audit Committee Information
The audit committee of our board of directors
is comprised of Haiming Guo, Guo Chen and Dr. Jinxiao Zhang. Guo Chen serves as the chairman of the audit committee. Each of the
members of the audit committee is independent under the applicable Nasdaq listing standards. The purposes of the audit committee,
as specified in our Audit Committee Charter, include, but are not limited to:
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reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 20-F;
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discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements;
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discussing with management major risk assessment and risk management policies;
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monitoring the independence of the independent auditor;
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verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
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reviewing and approving all related-party transactions;
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inquiring and discussing with management our compliance with applicable laws and regulations;
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pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed;
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appointing or replacing the independent auditor;
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determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work;
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establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and
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approving reimbursement of expenses incurred by our management team in identifying potential target businesses.
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Financial Experts on Audit Committee
Our audit committee will at all times be composed
exclusively of “independent directors,” as defined for audit committee members under the Nasdaq listing standards and
the rules and regulations of the SEC, who are “financially literate,” as defined under Nasdaq’s listing standards.
Nasdaq’s listing standards define “financially literate” as being able to read and understand fundamental financial
statements, including a company’s balance sheet, income statement and cash flow statement. We are required to certify to
Nasdaq that the audit committee has, and will continue to have, at least one member who has past employment experience in finance
or accounting, requisite professional certification in accounting, or other comparable experience or background that results in
the individual’s financial sophistication. The Board of Directors has determined that Guo Chen satisfies Nasdaq’s definition
of financial sophistication and also qualify as an “audit committee financial expert” as defined under rules and regulations
of the SEC.
Nominating Committee Information
The nominating committee of our board of directors
is comprised of HaimingGuo, Guo Chen and Dr. Jinxiao Zhang. Each of the members of the nominating committee is independent under
the applicable Nasdaq listing standards. The nominating committee is responsible for overseeing the selection of persons to be
nominated to serve on our board of directors.
Guidelines for Selecting Director Nominees
The nominating committee will consider persons
identified by its members, management, shareholders, investment bankers and others. The guidelines for selecting nominees, which
are specified in our Nominating Committee Charter, generally provide that persons to be nominated:
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should have demonstrated notable or significant achievements in business, education or public service;
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should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
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should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the shareholders.
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The nominating committee will consider a number
of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating
a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes,
such as financial or accounting experience, to meet specific board needs that arise from time to time and will also consider the
overall experience and makeup of its members to obtain a broad and diverse mix of board members. The nominating committee will
not distinguish among nominees recommended by shareholders and other persons.
Compensation Committee Information
The compensation committee of our board of directors
is comprised of Haiming Guo, Guo Chen and Dr. Jinxiao Zhang. The compensation committee’s duties, which are specified in
our Compensation Committee Charter, include, but are not limited to:
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reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer’s based on such evaluation;
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reviewing and approving the compensation of all of our other executive officers;
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reviewing our executive compensation policies and plans;
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implementing and administering our incentive compensation equity-based remuneration plans;
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assisting management in complying with our annual report disclosure requirements;
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approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees;
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if required, producing a report on executive compensation to be included in our annual report or proxy statement; and
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reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
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Indemnification of Directors and Officers
The Companies Law (2013 Revision) of the Cayman
Islands permits the Company to indemnify its directors, officers, employees and agents, subject to limitations imposed by the Companies
Law. Our Memorandum and Articles of Association require us to indemnify directors and officers to the full extent permitted by
the Companies Law. We have also entered into indemnification agreements with its officers and directors that provide for indemnification
to the maximum extent allowed under the Companies Law.
D. Employees
As of June 30, 2017, we had 39 full-time employees.
We recruit personnel from the open market and enter into employment contracts with employees. We offer competitive remuneration
packages to employees, including salaries and bonuses to qualified employees. We provide staff training on a regular basis to enhance
employees’ knowledge of financial products in the market and the applicable laws and regulations in relation to the industry
in which we operate.
E. Share Ownership
Share Ownership of Executive Officers and Directors
For information concerning the beneficial ownership
of our ordinary shares by our executive officers and directors, see the table in Item 7A. “Major Shareholders and Related
Party Transactions—Major shareholders.”
On February 14, 2017, Wins Finance terminated
the option agreements with our directors and executive officers for no consideration.
As a result of the termination of
such options and the automatic termination of options upon the previously announced departures of executive officers and directors
of the Company, as of June 30, 2017, the Company did not have any options outstanding.
2015 Long Term Incentive Equity Plan
General
On April 10, 2015, our board of directors adopted
the 2015 Long-Term Equity Incentive Plan (the “2015 Plan”), subject to the approval of Sino’s shareholders. The
2015 Plan was approved by Sino’s shareholders on October 16, 2015. The purpose of the 2015 Plan is to assist in attracting,
retaining, motivating, and rewarding certain key employees, officers, directors, and consultants of the Company and its affiliates
and promoting the creation of long-term value for shareholders of the Company by closely aligning the interests of such individuals
with those of such shareholders. The 2015 Plan authorizes the award of share-based incentives to encourage eligible employees,
officers, directors, and consultants, as described below, to expend maximum effort in the creation of shareholder value.
Summary of the 2015 Plan
The 2015 Plan may be administered by the
board of directors or a committee of the board. All references in the 2015 Plan to “committee” mean the board, if no
committee has been designated to administer the plan. If administered by a committee, such committee shall be composed of at least
two directors, all of whom are “outside directors” within the meaning of the regulations issued under Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “IRC”) and “non-employee” directors within the meaning
of Rule 16b-3 under the Exchange Act. Initially, the compensation committee will administer the 2015 Plan.
Subject to the provisions of the 2015 Plan,
the committee determines, among other things, the persons to whom from time to time awards may be granted, the specific type of
awards to be granted, the number of shares subject to each award, share prices, any restrictions or limitations on the awards,
and any vesting, exchange, deferral, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions related
to the awards.
Shares Subject to the Plan
10% of our ordinary shares have been reserved
for issuance in accordance with the plan’s terms. Ordinary shares subject to other awards that are forfeited or terminated
will be available for future award grants under the plan. Ordinary shares that are surrendered by a holder or withheld by the Company
as full or partial payment in connection with any award under the plan, as well as any ordinary shares surrendered by a holder
or withheld by the Company or one of its subsidiaries to satisfy the tax withholding obligations related to any award under the
plan, shall not be available for subsequent awards under the plan.
Under the plan, on a change in the number
of ordinary shares outstanding as a result of a dividend on ordinary shares payable in ordinary shares, share forward split or
reverse split or other extraordinary or unusual event that results in a change in the ordinary shares as a whole, the terms of
the outstanding award will be proportionately adjusted.
Eligibility
The Company may grant awards under the plan
to employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services
to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success
of the Company. An incentive share option may be granted under the plan only to a person who, at the time of the grant, is an employee
of the Company or a related company.
Types of Awards
Options
. The plan provides both
for “incentive” share options as defined in Section 422 of the IRC, and for options not qualifying as incentive options,
both of which may be granted with any other share based award under the plan.
The board or committee determines the exercise
price per ordinary share purchasable under an incentive or non-qualified share option, which may not be less than 100% of the fair
market value on the day of the grant or, if greater, the par value of an ordinary share. However, the exercise price of an incentive
share option granted to a person possessing more than 10% of the total combined voting power of all classes of the Company’s
share capital may not be less than 110% of the fair market value on the date of grant. The aggregate fair market value of all ordinary
shares with respect to which incentive share options are exercisable by a participant for the first time during any calendar year
(under all of the Company’s plans), measured at the date of the grant, may not exceed $100,000 or such other amount as may
be subsequently specified under the IRC or the regulations thereunder.
An incentive share option may only be granted
within a ten-year period from the effective date of the plan and may only be exercised within ten years from the date of the grant,
or within five years in the case of an incentive share option granted to a person who, at the time of the grant, owns ordinary
shares possessing more than 10% of the total combined voting power of all classes of the Company’s share capital.
Subject to any limitations or conditions
the board or committee may impose, share options may be exercised, in whole or in part, at any time during the term of the share
option by giving written notice of exercise to the Company specifying the number of ordinary shares to be purchased. The notice
must be accompanied by payment in full of the purchase price, either in cash or, if provided in the agreement, in the Company’s
securities or in combination of the two.
Generally, share options granted under the
plan may not be transferred other than by will or by the laws of descent and distribution and all share options are exercisable,
during the holder’s lifetime, only by the holder (or in the event of legal incapacity or incompetency, the holder’s
guardian or legal representative). However, a holder, with the approval of the board or committee, may transfer a non-qualified
share option by gift to a family member of the holder, by domestic relations order to a family member of the holder or by transfer
to an entity in which more than 50% of the voting interests are owned by family members of the holder or the holder.
Generally, if the holder is an employee,
no share options granted under the plan may be exercised by the holder unless he or she is employed by the Company or one of its
subsidiaries at the time of the exercise and has been so employed continuously from the time the share options were granted. However,
in the event the holder’s employment is terminated due to disability, the holder may still exercise his or her vested share
options for a period of 12 months or such other greater or lesser period as the board or committee may determine, from the date
of termination or until the expiration of the stated term of the share option, whichever period is shorter. Similarly, should a
holder die while employed by the Company or a subsidiary, his or her legal representative or legatee under his or her will may
exercise the decedent holder’s vested share options for a period of 12 months from the date of his or her death, or such
other greater or lesser period as the board or committee may determine or until the expiration of the stated term of the share
option, whichever period is shorter. If the holder’s employment is terminated due to normal retirement, the holder may still
exercise his or her vested share options for a period of 12 months from the date of termination or until the expiration of the
stated term of the share option, whichever period is shorter. If the holder’s employment is terminated for any reason other
than death, disability or normal retirement, the share option will automatically terminate, except that if the holder’s employment
is terminated by the Company without cause, then the portion of any share option that is vested on the date of termination may
be exercised for a period of three months (or such other greater or lesser period as the committee may specify in the award agreement)
from the date of such termination or until the expiration of the stated term of the share option, whichever period is shorter.
Share Appreciation Rights.
Under
the plan, the committee may grant share appreciation rights in tandem with a share option or alone and unrelated to a share option.
The committee may grant share appreciation rights to participants who have been, or are being, granted share options under the
plan as a means of allowing the participants to exercise their share options without the need to pay the exercise price in cash.
In conjunction with non-qualified share options, share appreciation rights may be granted either at or after the time of the grant
of the non-qualified share options. In conjunction with incentive share options, share appreciation rights may be granted only
at the time of the grant of the incentive share options. A share appreciation right entitles the holder to receive a number of
ordinary shares having a fair market value equal to the excess fair market value of one ordinary share over the exercise price
of the related share option, multiplied by the number of shares subject to the share appreciation right. The granting of a share
appreciation right in tandem with a share option will not affect the number of ordinary shares available for awards under the plan.
The number of shares available for awards under the plan will, however, be reduced by the number of ordinary shares acquirable
upon exercise of the share option to which the share appreciation right relates.
Restricted Shares
. Under the
plan, the committee may award restricted shares either alone or in addition to other awards granted under the plan. The board or
committee determines the persons to whom grants of restricted shares are made, the number of shares to be awarded, the price if
any to be paid for the restricted shares by the person receiving the shares, the time or times within which awards of restricted
shares may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions
of the restricted share awards.
The plan requires that all restricted shares
awarded to a holder remain in The Company’s physical custody until the restrictions have terminated and all vesting requirements
with respect to the restricted shares have been fulfilled. The Company will retain custody of all dividends or distributions made
or declared with respect to the restricted shares during the restriction period. A breach of any restriction regarding the restricted
shares will cause a forfeiture of the restricted shares and any retained distributions. Except for the foregoing restrictions,
the holder will, even during the restriction period, have all of the rights of a shareholder, including the right to vote the shares.
Other Share-Based Awards
. Under
the plan, the committee may grant other share-based awards, subject to limitations under applicable law, that are denominated or
payable in, valued in whole or in part by reference to, or otherwise based on, or related to, ordinary shares, as deemed consistent
with the purposes of the plan. These other share-based awards may be in the form of purchase rights, ordinary shares awarded that
are not subject to any restrictions or conditions, convertible or exchangeable debentures or other rights convertible into ordinary
shares and awards valued by reference to the value of securities of, or the performance of, one of the Company’s subsidiaries.
These other share-based awards may include performance shares or options, whose award is tied to specific performance criteria.
These other share-based awards may be awarded either alone, in addition to, or in tandem with any other awards under the plan or
any of the Company’s other plans.
Accelerated Vesting and Exercisability
If any one person, or more than one person
acting as a group, acquires the ownership of our ordinary shares that, together with the shares held by such person or group, constitutes
more than 50% of the total fair market value or combined voting power of our ordinary shares, and the Company’s board of
directors does not authorize or otherwise approve such acquisition, then the vesting periods of any and all share options and other
awards granted and outstanding under the plan shall be accelerated and all such share options and awards will immediately and entirely
vest, and the respective holders thereof will have the immediate right to purchase and/or receive any and all ordinary shares subject
to such share options and awards on the terms set forth in the plan and the respective agreements respecting such share options
and awards. An increase in the percentage of shares owned by any one person, or persons acting as a group, as a result of a transaction
in which the Company acquires its shares in exchange for property is not treated as an acquisition of shares.
The committee may, in the event of an acquisition
by any one person, or more than one person acting as a group, together with acquisitions during the 12-month period ending on the
date of the most recent acquisition by such person or persons, of assets from the Company that have a total gross fair market value
equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately before such acquisition
or acquisitions, or if any one person, or more than one person acting as a group, acquires the ownership of the Company ordinary
shares that, together with the shares held by such person or group, constitutes more than 50% of the total fair market value or
combined voting power of the Company ordinary shares, which has been approved by the Company’s board of directors, (i) accelerate
the vesting of any and all share options and other awards granted and outstanding under the plan, or (ii) require a holder of any
award granted under the plan to relinquish such award to the Company upon the tender by the Company to the holder of cash in an
amount equal to the repurchase value of such award. For this purpose, “gross fair market value” means the value of
the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated
with such assets and “repurchase value” means the aggregate fair market value of the shares (if the award to be settled
is comprised of ordinary shares) or the aggregate difference between the fair market value of the shares and the exercise price
of the award (if the award is a share option or share appreciation right).
Notwithstanding any provisions of the plan
or any award granted thereunder to the contrary, no acceleration shall occur with respect to any award to the extent such acceleration
would cause the plan or an award granted thereunder to fail to comply with Section 409A of the IRC.
Award Limitation
No participant may be granted awards for
more than 1% of the outstanding shares of the Company in any calendar year.
Other Limitations
The board or committee may not modify or
amend any outstanding option or share appreciation right to reduce the exercise price of such option or share appreciation right,
as applicable, below the exercise price as of the date of grant of such option or share appreciation right. In addition, no option
or share appreciation right may be granted in exchange for the cancellation or surrender of an option or share appreciation right
or other award having a higher exercise price.
Withholding Taxes
Upon the exercise of any award granted under
the plan, the holder may be required to remit to the Company an amount sufficient to satisfy all federal, state and local withholding
tax requirements prior to delivery of any certificate or certificates for ordinary shares.
Term and Amendments
Unless terminated by the board, the plan
shall continue to remain effective until no further awards may be granted and all awards granted under the plan are no longer outstanding.
Notwithstanding the foregoing, grants of incentive share options may be made only until ten years from the date of the consummation
of the acquisition. The board may at any time, and from time to time, amend the plan, provided that no amendment will be made that
would impair the rights of a holder under any agreement entered into pursuant to the plan without the holder’s consent.
United States Federal Income Tax Consequences
The following discussion of the United States
federal income tax consequences of participation in the plan is only a summary of the general rules applicable to the grant and
exercise of share options and other awards and does not give specific details or cover, among other things, state, local and foreign
tax treatment of participation in the plan. The information contained in this section is based on present law and regulations,
which are subject to being changed prospectively or retroactively. This summary also assumes that participants are individual citizens
or residents of the United States and does not address the passive foreign investment company rules of the IRC, which are discussed
generally in the section of this Annual Report under Item 10.E “Taxation – United States Federal Income Taxation –
U.S. Holders – Passive Foreign Investment Company Rules.”
Incentive Share Options
. Participants
will recognize no taxable income upon the grant of an incentive share option. The participant generally will realize no taxable
income when the incentive share option is exercised. The excess, if any, of the fair market value of the shares on the date of
exercise of an incentive share option over the exercise price will be treated as an item of adjustment for a participant’s
taxable year in which the exercise occurs and may result in an alternative minimum tax liability for the participant. The Company
will not qualify for any deduction in connection with the grant or exercise of incentive share options. Upon a disposition of the
shares after the later of two years from the date of grant or one year after the transfer of the shares to a participant, the participant
will recognize the difference, if any, between the amount realized and the exercise price as long-term capital gain or long-term
capital loss, as the case may be, if the shares are capital assets.
If ordinary shares acquired upon the exercise
of an incentive share option is disposed of prior to the expiration of the holding periods described above, the participant will
recognize ordinary compensation income in the taxable year of disposition in an amount equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the exercise price paid for the shares; and the Company will qualify for
a deduction equal to any amount recognized, subject to the limitation that the compensation be reasonable.
Non-Qualified Share Options
. With
respect to non-qualified share options:
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upon grant of the share option, the participant will recognize no income provided that the exercise price was not less than
the fair market value of the Company ordinary shares on the date of grant;
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upon exercise of the share option, if the ordinary shares are not subject to a substantial risk of forfeiture, the participant
will recognize ordinary compensation income in an amount equal to the excess, if any, of the fair market value of the shares on
the date of exercise over the exercise price, and the Company will qualify for a deduction in the same amount, subject to the requirement
that the compensation be reasonable; and
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The Company will be required to comply with applicable federal income tax withholding requirements with respect to the amount
of ordinary compensation income recognized by the participant.
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On a disposition of the shares, the participant
will recognize gain or loss equal to the difference between the amount realized and the sum of the exercise price and the ordinary
compensation income recognized. The gain or loss will be treated as capital gain or loss if the shares are capital assets and as
short-term or long-term capital gain or loss, depending upon the length of time that the participant held the shares.
If the shares acquired upon exercise of
a non-qualified share option are subject to a substantial risk of forfeiture, the participant will recognize ordinary income at
the time when the substantial risk of forfeiture is removed, unless the participant timely files under Section 83(b) of the IRC
to elect to be taxed on the receipt of shares, and the Company will qualify for a corresponding deduction at that time. The amount
of ordinary income will be equal to the excess of the fair market value of the shares at the time the income is recognized over
the amount, if any, paid for the shares.
Share Appreciation Rights
. Upon
the grant of a share appreciation right, the participant recognizes no taxable income and the Company receives no deduction. The
participant recognizes ordinary income and the Company receives a deduction at the time of exercise equal to the cash and fair
market value of ordinary shares payable upon the exercise.
Restricted Shares
. A participant
who receives restricted shares will recognize no income on the grant of the restricted shares and the Company will not qualify
for any deduction. At the time the restricted shares are no longer subject to a substantial risk of forfeiture, a participant will
recognize ordinary compensation income in an amount equal to the excess, if any, of the fair market value of the restricted shares
at the time the restriction lapses over the consideration paid for the restricted shares. A participant’s shares are treated
as being subject to a substantial risk of forfeiture so long as his or her sale of the shares at a profit could subject him or
her to a suit under Section 16(b) of the Exchange Act. The holding period to determine whether the participant has long-term or
short-term capital gain or loss begins when the restriction period expires, and the tax basis for the shares will generally be
the fair market value of the shares on this date.
A participant may elect under Section 83(b)
of the IRC, within 30 days of the transfer of the restricted shares, to recognize ordinary compensation income on the date of transfer
in an amount equal to the excess, if any, of the fair market value on the date of transfer of the restricted shares, as determined
without regard to the restrictions, over the consideration paid for the restricted shares. If a participant makes an election and
thereafter forfeits the shares, no ordinary loss deduction will be allowed. The forfeiture will be treated as a sale or exchange
upon which there is realized loss equal to the excess, if any, of the consideration paid for the shares over the amount realized
on such forfeiture. The loss will be a capital loss if the shares are capital assets. If a participant makes an election under
Section 83(b), the holding period will commence on the day after the date of transfer and the tax basis will equal the fair market
value of shares, as determined without regard to the restrictions, on the date of transfer.
On a disposition of the shares, a participant
will recognize gain or loss equal to the difference between the amount realized and the tax basis for the shares.
Whether or not the participant makes an
election under Section 83(b), the Company generally will qualify for a deduction, subject to the reasonableness of compensation
limitation, equal to the amount that is taxable as ordinary income to the participant, in the taxable year in which the income
is included in the participant’s gross income. The income recognized by the participant will be subject to applicable withholding
tax requirements.
Dividends paid on restricted shares that
are subject to a substantial risk of forfeiture generally will be treated as compensation that is taxable as ordinary compensation
income to the participant and will be deductible by the Company subject to the reasonableness limitation. If, however, the participant
makes a Section 83(b) election, the dividends will be treated as dividends and taxable as ordinary income to the participant, but
will not be deductible by the Company.
Other Share-Based Awards
. The
federal income tax treatment of other share-based awards will depend on the nature and restrictions applicable to the award.
Section 162(m) Limits
. Section
162(m) of the IRC places a limit of $1,000,000 on the amount of compensation that a publicly traded company may deduct in any one
year with respect to each of its chief executive officer and 4 most highly paid executive officers. Certain performance-based compensation
approved by shareholders is not subject to the deduction limit. The plan is qualified such that awards under the plan may constitute
performance-based compensation not subject to Section 162(m) of the IRC. One of the requirements for equity compensation plans
is that there must be a limit to the number of shares granted to any one individual under the plan. Accordingly, the plan provides
that the maximum number of shares for which awards may be made to any employee in any calendar year is 40,000. The maximum amount
payable pursuant to that portion of a cash award granted under the plan for any fiscal year to any employee that is intended to
satisfy the requirements for “performance-based compensation” under Section 162(m) of the IRC may not exceed $500,000.
Under the plan the board of directors or the compensation committee has the power to impose restrictions on awards to ensure that
such awards satisfy the requirements for performance-based compensation under Section 162(m) of the IRC.
Certain Awards Deferring or Accelerating
the Receipt of Compensation.
Section 409A of the IRC, enacted as part of the American Jobs Creation Act of 2004, imposes
certain new requirements applicable to “nonqualified deferred compensation plans.” If a nonqualified deferred compensation
plan subject to Section 409A fails to meet, or is not operated in accordance with, these new requirements, then all compensation
deferred under the plan may become immediately taxable. Share appreciation rights and deferred share awards that may be granted
under the plan may constitute deferred compensation subject to the Section 409A requirements. It is our intention that any award
agreement governing awards subject to Section 409A will comply with these rules.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major shareholders
The following table sets forth information
with respect to the beneficial ownership of our ordinary shares as of September 30, 2017 by (i) each person or entity known to
us to beneficially own more than 5% of our outstanding ordinary shares; (ii) each of our executive officers and directors individually;
and (iii) all of our executive officers and directors as a group.
The percentage of beneficial ownership of
our ordinary shares is based on 19,837,642 ordinary shares outstanding as of September 30, 2017. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting power or investment power with respect to securities. All
options and warrants currently exercisable or exercisable into ordinary shares within 60 days of September 30, 2017 are deemed
to be outstanding and beneficially owned by the shareholder holding such options or warrants for the purpose of computing the number
of shares beneficially owned by such shareholder. Such shares are also deemed outstanding for purposes of computing the percentage
ownership of the person holding the option or warrant. They are not, however, deemed to be outstanding and beneficially owned for
the purpose of computing the percentage ownership of any other shareholder.
Except as indicated in the footnotes below,
we believe that the persons named in the table below have sole voting and investment power with respect to the ordinary shares
indicated in the table as being beneficially owned by them.
As of September 30, 2017, based on information
provided to us by our transfer agent in the United States and other information reasonably available to us, we had 352 holders
of record. Such holders of record held, as of that date, 98.8% of our outstanding ordinary shares, the vast majority of which are
held outside the United States. The number of record holders is not representative of the number of beneficial holders of our ordinary
shares, as 1.2% of our outstanding ordinary shares are recorded in the name of Cede & Co. as nominee for the Depository Trust
Company, in whose name all shares held in “street name” are held in the United States.
|
|
Ordinary Shares
Beneficially Owned
|
|
Name and Address of Beneficial Owner
(1)
|
|
Number
|
|
|
Percent
(2)
|
|
5% or Greater Shareholders (other
than directors and executive officers)
|
|
|
|
|
|
|
|
|
Peilin Zhao
|
|
|
1,009,000
|
(3)
|
|
|
5.1
|
%
|
Great Finance Holdings Limited
|
|
|
1,100,000
|
(4)
|
|
|
5.5
|
%
|
Spectacular Bid Limited
|
|
|
13,440,000
|
(5)
|
|
|
67.7
|
%
|
Cosmic Expert Ltd.
|
|
|
1,620,000
|
(6)
|
|
|
8.2
|
%
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
Renhui Mu
|
|
|
110
|
|
|
|
|
*
|
Junfeng Zhao
|
|
|
840,000
|
(7)
|
|
|
4.2
|
%
|
All director and executive officers as a group (3 persons)
|
|
|
840,110
|
|
|
|
4.2
|
%
|
*Less than 1% of our ordinary shares.
|
(1)
|
Unless otherwise indicated
the business address for the above individuals and entities is c/o Wins Finance Holdings Inc., 1F, Building 7, No. 58 Jianguo
Road, Chaoyang District, Beijing 100024.
|
|
(2)
|
The percentage of beneficial
ownership is calculated based on 19,837,642 outstanding ordinary shares, as of September 30, 2017.
|
|
(3)
|
Peilin Zhao’s business
address is 1908, 19/F, Block 2, No. 116 Guanganmenneidajie, Xuanwu Qu, Beijing China.
|
|
(4)
|
Represents shares held by
Jing Zhao and Great Finance Holdings Limited, of which Ms. Zhao controls and therefore has voting and disposition power over such
shares. The foregoing is based on a Schedule 13D/A filed October 16, 2015.
|
|
(5)
|
Freeman FinTech Corporation
Limited controls Spectacular Bid Limited. Freeman FinTech Corporation Limited is a publicly traded company on the Hong Kong Stock
Exchange.
|
|
(6)
|
Represents shares held by
Cosmic Expert Ltd, which Wenyu Li controls. As such, she has voting and dispositive power over such shares.
|
|
(7)
|
Represents shares held by
Glowing Assets Holdings Ltd, of which Mr. Zhao is the sole officer and director and as such controls the voting and disposition
of such shares.
|
None of our shareholders have voting rights
different from the voting rights of other shareholders. To the best of our knowledge, we are not owned or controlled, directly
or indirectly, by another corporation or by any government. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of our company.
B.
Related Party Transactions
The Company has adopted a Related Person
Policy that requires it (and its subsidiaries) to avoid, wherever possible, all related party transactions that could result in
actual or potential conflicts of interests, except as approved by unconflicted executives, the board of directors, or audit committee
in accordance with guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined
as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2)
the Company or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as
a director, (b) greater than 5% beneficial owner of WFG’s shares of common stock, or (c) immediate family member, of the
persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result
of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person
takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of
interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or
her position.
Our audit committee, pursuant to its written
charter, is responsible for reviewing and approving related-party transactions to the extent the Company enters into such transactions.
The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including
whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party
under the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may
participate in the approval of any transaction in which he is a related party, but that director is required to provide the audit
committee with all material information concerning the transaction. Additionally, the Company requires each of its directors and
executive officers to complete an annual directors’ and officers’ questionnaire that elicits information about related
party transactions. These procedures are intended to determine whether any such related party transaction impairs the independence
of a director or presents a conflict of interest on the part of a director, employee or officer.
Other than the executive and director compensation
arrangements and the indemnification agreements and arrangements with respect to directors and officers discussed in Item 6“Directors,
Senior Management and Employees,” and the transaction described below, we have not entered into any transactions since July
1, 2014 to which we have been or are a party to and in which any of our directors, executive officers or holders of more than 5%
of our share capital, or any immediate family member of, or person sharing the household with, any of these individuals or entities,
had or will have a direct or indirect material interest.
On April 10, 2015, the Company, Sino, WFG
and the WFG Shareholders, including Renhui Mu, Hong Wang and Junfeng Zhao entered into the Agreement and Plan of Reorganization,
dated as of April 24, 2015 and amended on May 5, 2015 with respect to the Business Combination. The Business Combination was consummated
on October 26, 2015. Mr. Mu, Mr. Wang and Mr Zhao, respectively, exchanged 1,833,968, 25,358,575 and 2,807,557 shares of WFG for
972,000, 13,440,000 and 1,488,000 shares of the Company.
On May 29, 2015, Mr. Jianming Hao, then
the Company’s Chairman and Co-Chief Executive Officer, loaned Sino $300,000 in order to meet Sino’s working capital
needs. This loan made by Mr. Hao was evidenced by a promissory note. The promissory note was repaid upon the consummation of the
Business Combination in cash.
Each of the WFG Shareholders, including
Renhui Mu, Hong Wang and Junfeng Zhao entered into a Lock-Up Agreement with the Company dated as of October 26 2015 (the “Lock-Up
Agreements”). Pursuant to the Lock-Up Agreements, the WFG Shareholders will not be able to sell any of the ordinary shares
of the Company that they receive as a result of the consummation of the Business Combination until the day preceding the day that
is twelve months the closing date of the Business Combination (subject to limited exceptions). The restriction on sales will end
earlier than such date with respect to 50% of the shares if the closing price of the Company’s ordinary shares exceeds $13.00
per share for any 20 trading days within a 30-trading day period following the consummation of the Business Combination.
On October 26, 2015, the Company entered
into an Amended and Restated Registration Rights Agreement with the initial shareholders of Sino including Jianming Hao, Richard
Xu, and Peiling He and the WFG Shareholders including Renhui Mu, Hong Wang and Junfeng Zhao. Pursuant to the Amended and Restated
Registration Rights Agreement, the initial shareholders of Sino and the WFG Shareholders have certain “demand” and
“piggyback” registration rights under the Securities Act of 1933, as amended (“Securities Act”), with respect
to the resale of ordinary shares of the Company issued to them in connection with the initial public offering and concurrent private
sale of units of Sino and the consummation of the Business Combination, respectively.
At the closing of the Business Combination,
10% of the ordinary shares to be issued to the former WFG Shareholders including Renhui Mu, Hong Wang and Junfeng Zhao were deposited
in escrow to provide a fund for payment to the Company with respect to its post-closing rights to indemnification under the merger
agreement for breaches of representations and warranties and covenants by WFG and its shareholders, and for certain other indemnifiable
matters. Claims for indemnification may be asserted by us once the damages exceed a $2,000,000 deductible (subject to certain exceptions),
in which event the amount payable shall be the amount of the entire loss. As of June 30, 2017, all of the 1,680,000 shares held
in escrow have been released.
On December 28, 2015, the Company, sold
$8.5 million in convertible promissory notes (the “Notes”) to Bluesky LLC, an entity controlled by Jianming Hao then
the Company’s Chairman and Co-Chief Executive Officer. The Notes bore interest at 4% per year and matured on December 28,
2016. The Notes were convertible into the Company’s ordinary shares at a price of $12.00 per share. The Notes were repaid
on April 28, 2016.
On June 21, 2016, the Company, entered into
an amendment to the Securities Escrow Agreement dated August 26, 2014 (the “Securities Escrow Agreement”), pursuant
to which the shares of Sino’s initial stockholders including Jianming Hao,
Hong Wang
and
Junfeng Zhao
placed
in escrow at the time of Sino’s initial public offering could be withdrawn from escrow no earlier than six months after the
Business Combination or April 26, 2016,(as opposed to the one-year period specified in the Securities Escrow Agreement prior the
amendment).
On June 28, 2016, the Company repurchased
5,100 of its ordinary shares from Bradley Reifler, a former director of the Company, for $60,180 and 1,480,000 shares from Bluesky
LLC for $17,464,000. Bluesky LLC is a limited liability company owned and controlled by Bluesky Family Trust, a family trust benefitting
the family of JianmingHao then the Company’s Chairman and Co-Chief Executive Officer. Of the amounts payable to Bluesky,
$17 million was paid.
On December 2, 2016, the Company repurchased
204,005 of its ordinary shares from Richard Xu, a former officer of the Company, for a consideration of $204.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information.
Financial Statements
See Item 18 –
Financial Statements.
Legal Proceedings
Except as described below, we are not and
have not been involved in any legal proceedings which may have, or have had, a significant effect on our business, financial position
and results of operations or liquidity, and we are not aware of any proceedings that are pending or threatened which may have a
significant effect on our business, financial position, results of operations, or liquidity. From time to time, we may be subject
to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. We
expect that these claims would be covered by insurance, subject to customary deductibles. Any such claims, even if lacking merit,
could result in the expenditure of managerial resources and materially adversely affect its business, financial condition and results
of operations.
The Company is
involved in various legal actions arising in the ordinary course of its business. As of June 30, 2017, the Company was
involved in 3 lawsuits in China, of which 2 of the legal actions were iinitiated by the Company as plaintiff in relation to
the guarantee business, and in the other of which the Company is a defendant in relation to its financing lease business (see
below). The Company initiated legal proceedings to collect delinquent balances, interest and penalties from guarantees. 2 of
these cases with an aggregated claim of $624,169 have been adjudicated by the Court in favor of the Company and these cases
are in the process of being enforced.
On October 31, 2014,
King & Wood Mallesons filed a complaint in Xicheng District People's Court of Beijing on behalf of its client for breach of
contract against Jinshang Leasing, our subsidiary. On February 3, 2015, the court agreed with Jinshang Leasing that it did not
have jurisdiction over the proceeding, and the case was transferred to the court in Beijing, Haidian. There has been no activity
in the case since it was transferred to the Beijing court. We believe that resolution of this matter will not result in any payment
that, in the aggregate, would be material to our financial position or results of operations.
As of June 30, 2017, the
Company and certain of its executive officers have been named as defendants in one civil securities lawsuit filed in U.S. District
Courts. On April 20, 2017, Michel Desta filed a securities class action complaint in the District Court for the Central District
of California seeking monetary damages against us, Jianming Hao, Renhui Mu, Peiling (Amy) He, and Junfeng Zhao (entitled Desta
v. Wins Finance Holdings, Inc., et al.; C.D. Cal. Case No. 2:17-cv-02983) (hereafter, the “California Action”). On
June 26, 2017, the Court issued an Order appointing lead plaintiffs and lead counsel, and on August 25, 2017 lead plaintiffs filed
an Amended Class Action Complaint. The Amended Complaint (which did not name Peiling (Amy) He as a defendant), alleges a claim
against us for securities fraud purportedly arising from alleged misrepresentations concerning Wins’ principal executive
offices (which alleged misrepresentations resulted in Wins being added to, and then removed from, the Russell 2000 index). On October
24, 2017, we moved to dismiss the Amended Complaint for failure to state a claim as against us. That motion remains pending. The
Amended Complaint does not specifically allege the damages purportedly suffered by the class, and we are not yet able to provide
a reliable estimate of any such damage claim. We believe that the claims from this proceeding are without merit and we are vigorously
defending this proceeding.
Dividend Policy
We have never declared and do not anticipate
paying cash dividends in the foreseeable future. See Item 3D “Key Information – Risk factors - Our dividend policy
is determined by the Board of Directors based the consideration of our performance, cash flow position and future growth strategy.
We cannot assure you of declaring dividend at any time in the future.” Any return on investment may be limited to the value
of our securities.” Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make
any determination to do so based on then-existing conditions, including our operating results, financial condition, current and
anticipated cash needs and other business and economic factors that our board of directors may deem relevant.
B.
Significant Changes
Except as disclosed elsewhere in this Annual
Report, there have been no other significant changes since June 30, 2016, until the date of the filing of this Annual Report.
ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our ordinary shares were listed on the NASDAQ
Capital Market on October 28, 2015 under the symbol “WINS.” Prior to that date, there was no public trading market
for our securities. Our ordinary shares have been halted by the NASDAQ since June 7, 2017. We believe that trading will begin soon
after this Annual Report on Form 20-F is filed with the SEC. The following table sets forth for the periods indicated the high
and low sales prices per ordinary share as reported on the NASDAQ Capital Market:
|
|
High
|
|
|
Low
|
|
Fiscal Quarter Ended
|
|
|
|
|
|
|
|
|
December 31, 2015 (commencing October 28, 2015)
|
|
$
|
12.23
|
|
|
$
|
6.70
|
|
March 31, 2016
|
|
$
|
12.36
|
|
|
$
|
10.05
|
|
June 30, 2016
|
|
$
|
15.60
|
|
|
$
|
11.30
|
|
September 30, 2016 (through August 31, 2016)
|
|
$
|
25.41
|
|
|
$
|
13.50
|
|
Month Ended
|
|
|
|
|
|
|
|
|
March 2016
|
|
$
|
11.83
|
|
|
$
|
10.05
|
|
April 2016
|
|
$
|
12.00
|
|
|
$
|
10.60
|
|
May 2016
|
|
$
|
12.99
|
|
|
$
|
11.40
|
|
June 2016
|
|
$
|
15.60
|
|
|
$
|
11.30
|
|
July 2016
|
|
$
|
21.65
|
|
|
$
|
13.50
|
|
August 2016
|
|
$
|
25.41
|
|
|
$
|
18.91
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
|
|
|
|
|
December 31,2016
|
|
$
|
206.02
|
|
|
$
|
25.22
|
|
March 31, 2017
|
|
$
|
452.00
|
|
|
$
|
144.99
|
|
June 30, 2017
|
|
$
|
205.01
|
|
|
$
|
20.01
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
|
|
|
|
|
|
|
March 2017
|
|
$
|
316.99
|
|
|
$
|
144.99
|
|
April 2017
|
|
$
|
140.65
|
|
|
$
|
45.84
|
|
May 2017
|
|
$
|
45.70
|
|
|
$
|
20.70
|
|
June 2017
|
|
$
|
205.01
|
|
|
$
|
20.01
|
|
On
June
7
,
2017, the last reported sale price of our ordinary shares on the NASDAQ
Capital Market was $
205.01
. We have advised NASDAQ that, once
the halt on our ordinary shares is lifted, we will seek to increase the liquidity of our ordinary shares in an attempt to limit
the volatility in the trading price of our ordinary shares. We cannot guarantee that any actions we take will have the intended
effect of reducing market volatility.
The common stock of Sino was listed on the
NASDAQ Capital Market from November 4, 2014 until October 26, 2015 under the symbol “SMAC”. The following table sets
forth for the periods indicated the high and low sales prices per share pf common stock of Sino as reported on the NASDAQ Capital
Market:
|
|
High
|
|
|
Low
|
|
Fiscal Quarter Ended
|
|
|
|
|
|
|
|
|
December 31, 2014 (commencing November 4, 2014)
|
|
$
|
10.25
|
|
|
$
|
9.89
|
|
March 31, 2015
|
|
$
|
9.94
|
|
|
$
|
9.80
|
|
June 30, 2015
|
|
$
|
9.95
|
|
|
$
|
9.20
|
|
September 30, 2015
|
|
$
|
9.95
|
|
|
$
|
9.64
|
|
December 31, 2015 (through October 27, 2015)
|
|
$
|
10.07
|
|
|
$
|
9.71
|
|
Transfer Agent
The transfer agent for our ordinary shares
is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
B.
Plan of Distribution
Not applicable.
C.
Markets for Ordinary Shares
Our ordinary shares are listed on the NASDAQ
Capital Market under the symbols “WINS.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
Registration Number and Purposes of the Company
Our registration number with the Cayman
Islands Registrar of Companies is 296825. Our purpose as set forth in our amended and restated memorandum and articles of association
is unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the laws of the Cayman
Islands.
Voting Rights and Conversion
All ordinary shares have identical voting
and other rights in all respects. Subject to any rights or restrictions attached to any shares, every shareholder who (being an
individual) is present in person or by proxy or, if a corporation or other non-natural person is present by its duly authorized
representative or by proxy, shall have one vote for every share of which he is the holder. There is no cumulative voting with respect
to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors
can elect all of the directors. Holders of ordinary shares do not have any conversion, preemptive or other subscription rights
and there is no sinking fund or redemption provisions applicable to the ordinary shares.
Ownership and Transfer of Shares
Any shareholder may transfer all or any
of his or her shares by an instrument of transfer provided that such transfer complies with applicable rules of the SEC and federal
securities laws of the United States. The instrument of transfer of any share shall be in writing and shall be executed by or on
behalf of the transferor (and if the directors so require, signed by or on behalf of the transferee). The transferor shall be deemed
to remain the holder of a share until the name of the transferee is entered in the Register of Members.
Election of Directors
The Company may by Ordinary Resolution (as
defined below) appoint any person to be a director or may by Ordinary Resolution remove any director. The directors may appoint
any person to be a director, either to fill a vacancy or as an additional director provided that the appointment does not cause
the number of directors to exceed any number fixed by or in accordance with the Articles of Association as the maximum number of
directors. The term “Ordinary Resolution” means a resolution passed by a simple majority of the shareholders as, being
entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting, and includes a unanimous written
resolution.
Powers of Directors
The Company’s Amended and Restated
Memorandum and Articles of Association provide that the quorum for the transaction of the business of the Board of Directors may
be fixed by the Board of Directors, and unless so fixed shall be two if there are two or more directors, and shall be one if there
is only one director.
Subject to the provisions of the Companies
Act, the Company’s Amended and Restated Memorandum and Articles of Association and to any directions given by Special Resolution(as
defined in the Companies Act), the business of the Company shall be managed by the Board of Directors who may exercise all the
powers of the Company. A duly convened meeting of the Board of Directors at which a quorum is present may exercise all powers exercisable
by the Board of Directors. The Company’s Amended and Restated Memorandum and Articles of Association provide that all cheques,
promissory notes, drafts, bills of exchange and other negotiable or transferable instruments and all receipts for monies paid to
the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Board of
Directors shall determine by resolution. The Board of Directors on behalf of the Company may pay a gratuity or pension or allowance
on retirement to any director who has held any other salaried office or place of profit with the Company or to his widow or dependents
and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.
The Board of Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property
and assets (present and future) and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages, bonds
and other such securities whether outright or as security for any debt, liability or obligation of the Company or of any third
party.
The Company’s Amended and Restated
Memorandum and Articles of Association do not provide for any age for the retirement or non-retirement of directors. The Company’s
Amended and Restated Memorandum and Articles of Association provide that the Company in general meeting fix a minimum shareholding
required to be held by a director, but unless and until such a shareholding qualification is fixed a director is not required to
hold shares. do not require the ownership of shares of the Company as a prerequisite for service as a director.
Approval of Interested Transactions
The Company’s Amended and Restated
Memorandum and Articles of Association provide that a director shall be at liberty to vote in respect of any contract or transaction
in which he is interested provided that the nature of the interest of any director in any such contract or transaction shall be
disclosed by him at or prior to its consideration and any vote thereon
Dividend Rights
Subject to the Companies Act and the Company’s
Amended and Restated Memorandum and Articles of Association and except as otherwise provided by the rights attached to any shares,
the Company’s Board of Directors may resolve to pay dividends and other distributions on shares in issue and authorize payment
of the dividends or other distributions out of the funds of the Company lawfully available therefor. No dividend or other distribution
shall be paid except out of the realized or unrealized profits of the Company, out of the share premium account or as otherwise
permitted by law.
The Company’s Amended and Restated
Memorandum and Articles of Association provide that except as otherwise provided by the rights attached to any shares, all dividends
and other distributions shall be paid according to the par value of the shares that a shareholder holds. The Board of Directors
may deduct from any dividend or other distribution payable to any shareholder all sums of money (if any) then payable by him to
the Company on account of calls or otherwise.
The Company’s Amended and Restated
Memorandum and Articles of Association provide that any dividend or other distribution which cannot be paid to a shareholder and/or
which remains unclaimed after six months from the date on which such dividend or other distribution becomes payable may, in the
discretion of the Board of Directors, be paid into a separate account in the Company’s name, provided that the dividend or
other distribution shall remain as a debt due to the shareholder. Any dividend or other distribution which remains unclaimed after
a period of six years from the date on which such dividend or other distribution becomes payable shall be forfeited and shall revert
to the Company.
Liquidation Rights
The Company’s Amended and Restated
Memorandum and Articles of Association provide that if the Company shall be wound up the liquidator shall apply the assets of the
Company in satisfaction of creditors’ claims in such manner and order as such liquidator thinks fit. Subject to the rights
attaching to any shares, in a winding up:
(a) if the assets
available for distribution amongst the shareholders shall be insufficient to repay the whole of the Company’s issued share
capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion
to the par value of the shares held by them; or
(b) if the assets
available for distribution amongst the shareholders shall be more than sufficient to repay the whole of the Company’s issued
share capital at the commencement of the winding up, the surplus shall be distributed amongst the shareholders in proportion to
the par value of the shares held by them at the commencement of the winding up subject to a deduction from those shares in respect
of which there are monies due, of all monies payable to the Company for unpaid calls or otherwise.
The Company’s Amended and Restated
Memorandum and Articles of Association provide that if the Company shall be wound up the liquidator may, subject to the rights
attaching to any shares and with the sanction of a Special Resolution of the Company and any other sanction required by the Companies
Act, divide among the shareholders in kind the whole or any part of the assets of the Company and may for that purpose value any
assets and determine how the division shall be carried out as between the shareholders or different classes of shareholders. No
shareholder shall be required to accept any asset upon which there is a liability.
Shareholder Meetings: Action by Written Consent
The Company’s Amended and Restated
Memorandum and Articles of Association provide that the Company may, but shall not (unless required by statute) be obliged to,
in each year hold a general meeting as its annual general meeting, and shall specify the meeting as such in the notices calling
it. Any annual general meeting shall be held at such time and place as the directors shall specify and if no other time and place
is prescribed by them, it shall be held at the Company’s registered office on the second Wednesday in December of each year
at ten o’clock in the morning. General meetings may be called by the Company’s Board of Directors or by the Board of
Directors at the request of the holder(s) or no less than 10% in par value of the Company’s issued shares. The Company’s
Amended and Restated Memorandum and Articles of Association provide that any request for a meeting made by shareholders must state
the object(s) of the meeting and must be signed by the shareholder(s) requesting the meeting and deposited at the Company’s
registered office.’
The Company’s Amended and Restated
Memorandum and Articles of Association provide that a person may participate at a general meeting by conference telephone or other
communications equipment by means of which all the persons participating in the meeting can communicate with each other. Participation
by a person in a general meeting in this manner is treated as presence in person at that meeting.
A resolution (including a Special Resolution)
in writing (in one or more counterparts) signed by or on behalf of all of the shareholders entitled to receive notice of and to
attend and vote at general meetings shall be as valid and effective as if the resolution had been passed at a general meeting of
the Company duly convened and held.
Quorum
The Company’s Amended and Restated
Memorandum and Articles of Association provide that no business shall be transacted at any general meeting of shareholders of the
Company unless a quorum is present. The Company’s Amended and Restated Memorandum and Articles of Association provide that
two shareholders being individuals present in person or by proxy or if a corporation or other non-natural person by its duly authorized
representative or proxy shall be a quorum unless the Company has only one shareholder entitled to vote at such general meeting
in which case the quorum shall be that one Member present in person or by proxy or (in the case of a corporation or other non-natural
person) by its duly authorized representative or proxy.
Approval of Mergers, Consolidations and Acquisitions
The Company’s Amended and Restated
Memorandum and Articles of Association provide that the Company shall, with the approval of a Special Resolution, have the power
to merge or consolidate with one or more constituent companies (as defined in the Companies Act), upon such terms as the Board
of Directors may determine.
Access to Corporate Records
The Board of Directors shall determine whether
and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company
or any of them shall be open to the inspection of shareholders of the Company and no shareholder (who is not a director) shall
have any right of inspecting any account or book or document of the Company except as conferred by Companies Act or authorized
by the Board of Directors or by the Company at a general meeting.
Modification of Class Rights
The Company’s Amended and Restated
Memorandum and Articles of Association provide that if at any time the share capital of the Company is divided into different classes
of shares, all or any of the rights attached to any class (unless otherwise provided by the terms of issue of the Shares of that
class) may, whether or not the Company is being wound up, be varied without the consent of the holders of the issued shares of
that class where such variation is considered by the Board of Directors not to have a material adverse effect upon such rights;
otherwise, any such variation shall be made only with the consent in writing of the holders of not less than two thirds of the
issued shares of that class, or with the sanction of a resolution passed by a majority of not less than two thirds of the votes
cast at a separate meeting of the holders of the shares of that class.
Registration Rights
For a discussion of registration rights
we have granted to our existing shareholders, please see Item 7 “Major Shareholders and Related Party Transactions—Related
Party Transactions”
Changes in Capital
Our Amended and Restated Memorandum and
Articles of Association provide that the Company may by Ordinary Resolution:
(a) increase
its share capital by such sum as the Ordinary Resolution shall prescribe and with such rights, priorities and privileges annexed
thereto, as the Company in general meeting may determine;
(b) consolidate
and divide all or any of its share capital into shares of larger amount than its existing shares;
(c) convert
all or any of its paid-up shares into stock, and reconvert that stock into paid-up Shares of any denomination;
(d) by
subdivision of its existing shares or any of them divide the whole or any part of its share capital into shares of smaller amount
than is fixed by the Memorandum or into shares without par value; and
(e) cancel
any shares that at the date of the passing of the Ordinary Resolution have not been taken or agreed to be taken by any person and
diminish the amount of its share capital by the amount of the shares so cancelled.
Our Amended and Restated Memorandum and
Articles of Association provide that, subject to the provisions of the Companies Act and the provisions of our Amended and Restated
Memorandum and Articles of Association regarding the matters to be dealt with by Ordinary Resolution, the Company may by Special
Resolution:
(a) change
its name;
(b) alter or add to its
Articles of Association;
(c) alter
or add to its Memorandum of Association with respect to any objects, powers or other matters specified therein; and
(d) reduce
its share capital or any capital redemption reserve fund.
C.
Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,”
Item 7B “Major Shareholders and Related Party Transactions - Related Party Transactions” or elsewhere in this Annual
Report
D.
Exchange controls
The principal regulations governing foreign
currency exchange in the PRC are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on
August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the RMB is freely convertible for
current account items, as long as true and lawful transaction basis is provided, but not for capital account items, such as capital
transfer, direct investments, loans, repatriation of investments, investments in securities and derivatives outside of the PRC,
unless the prior approval of the State Administration of Foreign Exchange, or the SAFE, is obtained and prior registration with
the SAFE is made.
E.
Taxation
The following description is not intended
to constitute a complete analysis of all tax consequences relating to the ownership and disposition of our securities. You should
consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that
may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Cayman Islands Taxation
The government of the Cayman Islands will
not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding
tax upon the Company or its shareholders. The Cayman Islands are not party to any double taxation treaties that are applicable
to payments made to or by us.
No Cayman Islands stamp duty will be payable
by you in respect of the issue or transfer of shares. However, an instrument transferring title to a share, if brought to or executed
in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the
Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (Revised) of the Cayman
Islands, for a period of 20 years from the date of the undertaking, being 10 March 2015, that no law which is enacted in the Cayman
Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition,
that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax
shall be payable (i) on or in respect of the shares, debentures or other obligations, of the Company or (ii) by way of the withholding
in whole or in part of a payment of a dividend or other distribution of income or capital by the Company to its shareholders or
a payment of principal or interest or other sums due under a debenture or other obligation of the Company.
U.S. Federal Income Taxation
General
The following is a summary of the material
U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. The discussion below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares
that is for U.S. federal income tax purposes:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized)
in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
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A beneficial owner of our ordinary shares
that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares is not
described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax
purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning
of Section 1221 of the Code, and does not discuss the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents of the United States;
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persons that actually or constructively own 5% or more of our voting shares;
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persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive
plans or otherwise as compensation;
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persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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controlled foreign corporations; or
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passive foreign investment companies.
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This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made)
in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or
other disposition of such ordinary shares will be in U.S. dollars. In addition, this discussion assumes that we will be treated
as a foreign corporation for U.S. federal income tax purposes.
We have not sought, and will not seek, a
ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there
can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the
accuracy of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX
ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES
TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject to the passive foreign investment
company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally will
be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated
earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not
below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally will be treated as
gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders,
any such dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see
“ — Taxation on the Disposition of Ordinary Shares” below) provided that (1) our ordinary shares are readily
tradable on an established securities market in the United States, (2) we are not a PFIC, as discussed below, for either the taxable
year in which such dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under
published IRS authority, ordinary shares are considered for purposes of clause (1) above to be readily tradable on an established
securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital
Market. Although our ordinary shares are currently listed on the NASDAQ Capital Market, U.S. Holders nevertheless should consult
their own tax advisors regarding the availability of the lower rate for any dividends paid in respect to our ordinary shares.
Taxation on the Disposition of Ordinary Shares
Upon a sale or other taxable disposition
of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary
shares.
The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding
period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will
be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the composition (and estimated
values) of our assets and the nature of our income and that of our subsidiaries during the taxable year ended June 30, 2017, we
believe that we may be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our
PFIC status for such taxable year, there can be no assurance in respect to our PFIC status for such taxable year. There also can
be no assurance in respect to our status as a PFIC for our current taxable year or any future taxable year.
If we are determined to be a PFIC for any
taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S.
Holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) our ordinary shares, a QEF election along with a purging election or a mark-to-market
election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes
in respect to:
· any gain recognized by the U.S. Holder on the sale
or other disposition of its ordinary shares; and
· any “excess distribution” made to the U.S.
Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of
the average annual distributions received by such U.S. Holder in respect of the ordinary shares during the three preceding taxable
years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ordinary shares).
Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for
the ordinary shares;
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the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which
we qualified as a PFIC, will be taxed as ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such other taxable year of the U.S. Holder.
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In general, if we are determined to be a
PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF
election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder generally will be required
to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as
ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which
or with which our taxable year ends if we are treated as a PFIC for that taxable year. A U.S. Holder may make a separate election
to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject
to an interest charge.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund),
including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that
we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election
in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because
of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares
or a QEF election along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized
on the sale or other taxable disposition of such ordinary shares generally will be taxable as capital gain and no interest charge
will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF generally are currently
taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend
to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will be increased by amounts that
are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments
apply to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning
ordinary shares in a QEF.
Although a determination as to our PFIC
status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder
who held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A
U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or
is deemed to hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above
in respect to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to
such ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are
not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during
which the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to apply to
such shares unless the holder files on a timely filed U.S. federal income tax return (including extensions) a QEF election and
a purging election to recognize under the rules of Section 1291 of the Code any gain that it would otherwise recognize if the U.S.
Holder sold shares for their fair market value on the “qualification date.” The qualification date is the first day
of our tax year in which we qualify as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S.
Holder held shares on the qualification date. The gain recognized by the purging election generally will be subject to the special
tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election,
the U.S. Holder generally will increase the adjusted tax basis in its shares by the amount of gain recognized and will also have
a new holding period in the shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the
close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market
election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for
the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary
shares as long as such shares continue to be treated as marketable stock. Instead, in general, the U.S. Holder will include as
ordinary income for each year that we are treated as a PFIC the excess, if any, of the fair market value of its ordinary shares
at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also will be allowed to take
an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value
of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously included income as
a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to
reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary
shares in a taxable year in which we are treated as a PFIC will be treated as ordinary income. Special tax rules may also apply
if a U.S. holder makes a mark-to-market election for a taxable year after the first taxable year in which the U.S. Holder holds
(or is deemed to hold) its ordinary shares and for which we are determined to be a PFIC.
The mark-to-market election is available
only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
including the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure
that the market price represents a legitimate and sound fair market value. Although our ordinary shares are currently listed on
the NASDAQ Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our ordinary shares.
If we are a PFIC and, at any time, have
a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion
of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above
if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have
disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S.
Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election in respect
to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier
PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would
not be available in respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax
issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF
election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide
such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary
shares under their particular circumstances.
Additional Taxes
U.S. Holders that are individuals, estates
or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, without limitation, dividends on, and gains from, the sale or other taxable disposition of, our ordinary shares,
subject to certain limitations and exceptions. Under applicable regulations, in the absence of a special election, such unearned
income generally would not include income inclusions under the QEF rules discussed above under “— Passive Foreign Investment
Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should consult their own
tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder
in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States).
In addition, a Non-U.S. Holder generally
will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally
is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as
applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes will apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder
(other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder
(other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected
at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain
information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether
any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS,
and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their
interest in our ordinary shares.
Moreover, backup withholding of U.S. federal
income tax at a rate of 28%, generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an
exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt
recipient), in each case who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances, fails to comply with applicable certification requirements.
|
A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
F.
Dividends and paying agents
Not applicable.
G.
Statement by experts
Not applicable.
H.
Documents on display
You may inspect our securities filings, including
this Annual Report and the exhibits and schedules thereto, without charge at the offices of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain copies of all or any part of the Annual Report from the Public Reference Section of the SEC, 100 F Street,
NE, Washington, D.C. 20549 upon the payment of the prescribed fees. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants like us that file electronically with the SEC. You can also inspect the
Annual Report on this website.
A copy of each document
(or a translation thereof to the extent not in English) concerning our company that is referred to in this Annual Report is available
for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our offices at 641LexingtonAve.,
29th Floor, New York, NY 10022.
I.
Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Interest Rate Risk
Our exposure to interest rate risk primarily
relates to the interest expenses on borrowings and income generated by excess cash, which is mostly held in interest-bearing bank
deposits and short-term investments. We have not used derivative financial instruments in our investment portfolio and to manager
our interest rate exposure. Interest earning instruments carry a degree of interest rate risk. We have not been exposed to, nor
do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest expense
and income may fall short of expectations due to changes in market interest rates.
Credit Risk
Credit risk is one of the most significant risks
for our business. Credit risk exposure arises principally in financial guarantees that are off-balance sheet financial instruments.
Credit risk is controlled by the application
of credit approvals, limits on the amounts guaranteed and monitoring procedures. We manage credit risk through our risk control
system, which commences with the establishment of overall risk management strategies, pre-transaction due diligence and assessment,
in-transaction risk evaluation, product design, determination of risk-adjusted pricing, design of counter-guarantee requirements
and ongoing post-transaction monitoring. To minimize credit risk, we require collateral in the form of rights to cash, securities
or property and equipment. Typically, we also require our guarantee clients to provide one or more personal guarantors, referred
to as “counter-guarantors,” so that such personal guarantors are jointly and severally liable for the repayment of
the financing guaranteed with the borrower.
We identify credit risk collectively based on
industry, geography and customer type. This information is monitored regularly by management.
We hold our cash and bank deposits at
Chinese well-known financial institutions located inside the PRC with good reputations and
international financial institutions located outside the PRC with high credit ratings from internationally-recognized rating
agencies and well-acknowledged in the worldwide. We manage our credit risks by diversity of deposit banks and strict
consideration in selection of these institutions by taking into account, among others, their reputation, stability, ratings
and reported cash reserve.
Additionally, Chinese financial institutions
are subject to a series of risk control regulation and PRC laws, which protect the third-party depositors’ rights over and
interests in their depository capital. The PRC bank regulatory authorities are empowered to take over the operation and management
when any PRC bank faces a material credit crisis.
Foreign Exchange Risk
The value of
the RMB against the U.S. dollar and other currencies is affected by, among others, changes in China’s political and economic
conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars,
is based on exchange rates set by the People’s Bank of China. In July 2005, the PRC government changed its decades-old policy
of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following
three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar
remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably.
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.
To the extent
that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation
of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely,
if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, strategic
acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect
on the U.S. dollar amount available to us.
A majority of
our revenues and costs are denominated in RMB. At the Cayman Islands holding company level, we may receive dividends and other
fees paid to us by our subsidiary and consolidated affiliated entities in China. Any significant revaluation of RMB may materially
and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on,
our ordinary shares in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. Conversely,
a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings,
which in turn could adversely affect the price of our ordinary shares.
Very limited
hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into
hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to
adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a negative
effect on your investment.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 1 - ORGANIZATION AND PRINCIPAL
ACTIVITIES
The accompanying consolidated financial statements
include the financial statements of Wins Finance Holdings Inc. (“Wins Finance”) and its subsidiaries, Wins Holdings
LLC (“WHL”),Wins Finance Group Limited (“WFG”), Full Shine Capital Resources Limited (“Full Shine”),
Jinshang International Financial Leasing Co., Ltd. (“Jinshang Leasing”), Tianjin Jinshang Jiaming Financial Leasing
Co. Ltd. (“Tianjin Jiaming”), Shanxi Jinchen Agriculture Co., Ltd. (“Jinchen Agriculture) and Shanxi Dongsheng
Finance Guarantee Co., Ltd. (“Dongsheng Guarantee”). Wins Finance and its subsidiaries are collectively referred to
as the "Company".
Wins Finance was incorporated in the Cayman
Islands as an exempt company on February 15, 2015 and was then a wholly owned subsidiary of Sino Mercury Acquisition Corp.
WFG was incorporated under the laws of British
Virgin Islands on July 27, 2014 and was initially owned 100% by Mr. Wang Hong. On October 23, 2014, WFG acquired a wholly-owned
subsidiary, Full Shine, which is a shell company incorporated in the laws of the Hong Kong Special Administrative Region (the “HKSAR”
or “Hong Kong”), for $1.
On December 2, 2014, WFG, through Full Shine,
acquired 100% of the equity capital of Jinshang Leasing, a PRC Company, by means of a share exchange (the “Jinshang Leasing
Share Exchange”) pursuant to which WFG issued 30,000,000 ordinary shares to a personal holding Company owned by Mr. Wang
Hong in exchange for Mr. Wang Hong’s transferring 100% of the equity capital of Jinshang Leasing to Full Shine.
The share exchange among WFG, Full Shine and
Mr. Wang Hong is considered in substance to be a capital transaction, rather than a business combination transaction, because prior
to the share exchange WFG and Full Shine did not have any operations, had an immaterial amount of assets, and were controlled by
the same owner as Jinshang Leasing. WFG’s financial statements as of and for the year ended June 30, 2015 consolidate WFG,
Full Shine, Jinshang Leasing, and Jinshang Leasing’s direct and indirect wholly-owned PRC subsidiaries Jinchen Agriculture,
Dongsheng Guarantee and Tianjin Jiaming. Following the completion of the capital transaction, WFG conducted business operations
primarily through Jinshang Leasing and Dongsheng Guarantee.
Jinshang Leasing was incorporated on May 18,
2009 in Beijing, the People’s Republic of China (the “PRC”) under the laws of PRC and engages primarily in providing
financing lease services to small and medium-sized companies and related financing consulting services in the PRC.
Tianjin Jiaming was incorporated on April 23,
2014 as a wholly-owned subsidiary of Jinshang Leasing. Tianjin Jiaming did not conduct any business activities from its inception
through September 30, 2015.
Jinchen Agriculture was incorporated on February
29, 2012 in Jinzhong City. Shanxi Province, PRC under the laws of PRC. Jinchen Agriculture did not conduct any business activities
from its inception through September 30, 2015.
Dongsheng Guarantee was incorporated on February
22, 2006 in Jinzhong City, Shanxi Province, PRC under the laws of PRC and is mainly engaged in providing credit guarantees to small
and medium-sized companies and related consulting finance services in the PRC.
On October 26, 2015, Wins Finance consummated
the transactions contemplated by the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of April
24, 2015 and amended on May 5, 2015, by and among Wins Finance, Sino Mercury Acquisition Corp. (“Sino”), WFG and the
shareholders of WFG (the “WFG Shareholders”).
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
Upon the closing of the transactions contemplated
by the Merger Agreement (the “Closing”), (i) Sino merged with and into Wins Finance with Wins Finance surviving the
merger (the “Merger”) and (ii) the WFG Shareholders exchanged 100% of the ordinary shares of WFG for cash and ordinary
shares of Wins Finance (the “Share Exchange” together with the Merger, the “Transactions”).
WFG is an integrated financing solution provider
with operations located primarily in Jinzhong City, Shanxi Province and Beijing, China. WFG’s goal is to assist Chinese small
& medium enterprises, including microenterprises, which have limited access to financing, in improving their overall fund-raising
capability and enable them to obtain funding for business development.
As a result of the Transactions, the former
members of WFG own approximately 78.0% of the stock of Wins Finance and the former stockholders of Sino own the remaining 22.0%.
The Transactions are accounted for as a “reverse
merger” and recapitalization at the date of the consummation of the Transactions since the former members of WFG owned a
majority of common stock of the Company and WFG’s operations will be the operations of Sino following the Transactions. Accordingly,
WFG is deemed to be the accounting acquirer in the Transactions and, consequently, the Transactions are treated as a recapitalization
of WFG. As a result, the assets and liabilities and the historical operations that will be reflected in the Sino’s financial
statements after consummation of the Transactions will be those of WFG and will be recorded at the historical cost basis of WFG.
Sino’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations
of WFG upon consummation of the Transactions. As such, WFG is the continuing entity for financial reporting purpose. SEC Manual
requires that in a reverse acquisition of historical shareholder’s equity of the accounting acquirer prior to the merger
is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect
to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid-in-capital.
Therefore, the financial statements have been prepared as if WFG had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
WHL was incorporated on November 10, 2015 in
New York and was disposed on June 30, 2016 to Ms. Wenyu Li, an individual beneficially owning 8.1% of the Company’s
ordinary Shares as of June 30, 2016, for a cash consideration of $270,000 (Note 8), which was the net asset value of WHL on the
date of disposal. WHL did not conduct any business activities from its inception.
On December 13, 2016, Appelo Ltd. and Wits
Global Ltd., each an entity controlled by Mr. Wang Hong (collectively, the “Sellers”) entered into an agreement to
transfer all of the ordinary shares of Wins Finance owned by them (an aggregate of 13,440,000 ordinary shares (approximately 67%
of the Company’s outstanding ordinary shares)) to Freeman FinTech Corporation Limited (“Freeman”), a company
listed on the Hong Kong Stock Exchange. In connection with the transaction, the Seller transferred certain rights in a registration
rights agreement to Freeman.
On August 2, 2017, Spectacular Bid Limited,
a wholly owned subsidiary of Freeman, completed the acquisition of approximately 67% of the Company’s outstanding shares.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
(a)
|
Basis of presentation and principle of consolidation
|
The consolidated
financial statements of
Wins Finance
and its subsidiaries are prepared and presented in accordance
with accounting principles generally accepted in the United States (“U.S. GAAP”).
The consolidated financial statements
include the financial statements of Wins Finance, its subsidiaries, including the wholly-foreign owned enterprises ("WFOEs")
in the PRC.
A subsidiary is an entity in which
Wins Finance (i) directly or indirectly controls more than 50% of the voting power; or (ii) has the power to appoint or remove
the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or
to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders
or equity holders.
All significant inter-Company transactions
and balances have been eliminated upon consolidation.
The preparation of
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
On an ongoing basis, management reviews these estimates using information then currently available. Changes in facts and circumstances
may cause Wins Finance to revise its estimates. Material estimates that are particularly susceptible to significant change in the
near-term include the determination of the allowances for doubtful accounts receivable and for guarantee losses.
Significant accounting
estimates reflected in the financial statements include, but are not limited to: (i) the allowance for doubtful receivables; (ii)
estimates of losses on unexpired contracts and financial guarantee service contracts; (iii) accrual of estimated liabilities; (iv)
useful lives of long-lived assets; (v) impairment of long-lived assets; (vi) valuation allowance for deferred tax assets; (vii)
contingencies; and (viii) share-based compensation.
ASC 280, Segment Reporting,
requires companies to report financial and descriptive information about their reportable operating segments, including segment
profit or loss, certain specific revenue and expense items, and segment assets. All of the Company’s activities are interrelated,
and each activity is dependent and assessed based on how each of the activities of the Company supports the others.
The Company’s
chief operating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results
to make decisions about allocating resources and assessing performance for both the financing lease business and the guarantee
business. The Company’s net revenues are all generated from customers in the PRC. Hence, The Company operates and manages
its business within one reportable segment, which is to provide financial services in the PRC domestic market.
For the year ended
June 30, 2017, there were two customers that accounted for 19% and 13% of the Company’s revenue, respectively. For the year
ended June 30, 2016, there were no customers that individually accounted for 10% or more of the Company’s revenue. For the
year ended June 30, 2015, there were three customers that accounted for 18%, 14% and 11% of the Company’s revenue, respectively.
There were no other customers that each accounted for 10% or more of the Company’s revenue during the year ended June 30,
2015.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
As of June 30, 2017,
two customers accounted for 13.2% and 11% of the aggregate balances of loans guaranteed by Dongsheng Guarantee. As of June 30,
2016, one customer accounted for 10.5% of the aggregate balances of loans guaranteed by Dongsheng Guarantee.
|
(d)
|
Cash and cash equivalents
|
Cash and cash equivalents
consist of cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less that
are unrestricted as to withdrawal and use.
Restricted
cash represents cash pledged to banks by Wins Finance’s subsidiary Dongsheng Guarantee, as guarantor for guarantee business
customers. The banks providing loans to the Company’s guarantee service customers generally require Dongsheng Guarantee,
as the guarantor of the loans, to pledge a cash deposit
of a minimum of 10% to 20% of the guaranteed amount to an escrow
account that is restricted from use. The deposit is released after the guaranteed bank loan is paid off and Dongsheng Guarantee’s
guarantee obligations expire, which is usually within 12 months from the time the loan and guarantee are initiated.
|
(f)
|
Short-term investments
|
Investments in non-marketable
asset management products issued by banks and financial institutions (the issuers) with original maturities of one year to five
years that could be redeemed or are transferrable at any time are classified as short-term investments under the cost method. The
Company’s asset management products are managed by banks and financial institutions and invested in fixed-income financial
products that are permitted by the China Securities Regulatory Commission (“SRC”), such as government bonds, corporate
bonds and central bank notes. The investment portfolios of these products are not disclosed to the Company by the banks or financial
institutions. If the banks and financial institutions are required to redeem these investments, they will redeem them at a price
equal to the outstanding principal plus accrued and unpaid interest. The Company carries these cost method investments at cost
and only adjusts for other-than-temporary impairments and distributions of earnings. Management regularly evaluates the impairment
of theses cost method investments at the individual security level. If the fair value of an investment is less than its amortized
cost basis at the balance sheet date of the report period for which impairment is being assessed, management will determine whether
the decline in fair value is temporary or permanent. If the decline in fair value is other than temporary, the cost basis of the
individual security is written down to fair value as the new cost basis, and the amount of the write-down is included in current
earnings. There is no impairment noted for either of the reporting periods presented herein.
Interest income from
short-term investments is recognized when the Company’s right to receive payment is established. Accrued but unpaid interest
income is recorded as interest receivable in the accompanying consolidated balance sheets.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(g)
|
Financial guarantee service contracts
|
The Company’s
financial guarantee service contracts protect lenders by providing Dongsheng Guarantee’s agreement to pay an obligor’s
obligations to a holder of the debt if the obligor fails to pay the obligations when they become due. Dongsheng Guarantee makes
payment if the obligor fails in making payment when due. If the debtor defaults, the creditor would perform a direct claim on the
guarantor. The financial guarantee service contract is classified as direct guarantee of indebtedness
The contract amounts
reflect the extent of involvement the Company has in the guarantee transaction and also represents Dongsheng Guarantee’s
maximum exposure to credit loss. Under PRC regulations, the maximum amount Dongsheng Guarantee may provide to its financial guarantee
customers is 10 times its net assets. As of June 30, 2017 and 2016, the net assets of Dongsheng Guarantee were $205 million and
$195 million, respectively.
Dongsheng Guarantee
is a party to off-balance-sheet financial instruments in the normal course of business to meet the financing needs of its customers.
Financial instruments whose contract amounts represent credit risk are as follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Maximum guarantee issued
|
|
$
|
67,314,661
|
|
|
$
|
86,289,058
|
|
Where Dongsheng Guarantee
issues a guarantee, the fair value of the guarantee contract issued is initially recognized as unearned income from financial guarantee
services within liabilities. The fair value of guarantees issued at the time of issuance is determined by reference to commissions
charged in an arm’s length transaction for similar services, adjusted for transaction costs that are directly attributable
to the issuance of the guarantee.
The fair value of
the guarantee initially recognized as unearned income is amortized in profit or loss over the term of the guarantee as commissions
and fees on financial guarantee services. In addition, provisions are recognized in accordance with Note 2(i) if and when (i) it
becomes probable that the holder of the guarantee will call upon Dongsheng Guarantee under the guarantee, and (ii) the amount of
that claim on Dongsheng Guarantee is expected to exceed the amount currently carried in unearned income in respect of that guarantee
i.e. the amount initially recognized, less accumulated amortization.
|
(h)
|
Guarantee paid on behalf of guarantee service customers
|
As guarantor of guarantee
service customers’ loans from banks and financial institutions, Dongsheng Guarantee is obligated to repay to the banks or
financial institutions for the unpaid principal and accrued interest of the loans when customers default on their loans. Repayments
on behalf of guarantee service customers are recorded as guarantees paid on behalf of guarantee service customers in the Company’s
consolidated balance sheets. As of June 30, 2017 and 2016, uncollected guarantees paid on behalf of guarantee service customers
from guarantee service customers on whose behalf Dongsheng Guarantee had repaid the loans were $1,560,615 and $2,039,684, respectively.
Management performs an evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss
history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the
estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant
factors. As of June 30, 2017 and 2016, the Company accrued allowance on the balance in “Allowance on financial guarantee
services”.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(i)
|
Provision for guarantee losses
|
A provision for possible
losses to be absorbed by Dongsheng Guarantee for financial guarantees it provides is recorded as an accrued liability when the
guarantees are made and recorded as “Allowance on financial guarantee services” in the consolidated balance sheets.
This accrued liability represents probable losses and is increased or decreased by accruing a “Provision/(reversal of provision)
on financial guarantee services” against commission and fee income from guarantee services throughout the terms of the guarantees
as necessary when additional relevant information becomes available.
The methodology
used to estimate the liability for possible guarantee losses considers the guarantee contract amounts and a variety of factors,
which include, depending on the counterparty, the latest financial position and performance of the borrowers, actual defaults,
estimated future defaults, historical loss experience, estimated value of collateral or guarantees the customers or third parties
offered, and other economic conditions, such as economic trends in the area and the country. The estimates are based upon information
available at the time the estimates are made. It is possible that prior experience and default history of the borrowers are not
indicative of future losses on
guarantees made. Any increase or decrease in the provision would affect the Company’s
consolidated income statements in future years.
Dongsheng Guarantee
provides “Specific Allowance” for the financial guarantee services if any specific collectability risk is identified,
and a “General Allowance”, based on total guarantee contract amount of those transactions with no specific risk identified,
to be used to cover unidentified probable loss. Dongsheng Guarantee performs periodic and systematic detailed reviews to identify
credit risks and to assess the overall collectability, and may adjust its estimates on allowance when new circumstances arise.
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Allowance on financial guarantee at the beginning of period
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
|
$
|
1,826,768
|
|
Provision (reversal) of general allowance
|
|
|
(126,211
|
)
|
|
|
(355,313
|
)
|
|
|
(576,456
|
)
|
Specific allowance (reversal)
|
|
|
(3,082,616
|
)
|
|
|
3,263,312
|
|
|
|
-
|
|
Direct write-downs against the allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
- Direct write-down for guarantees paid on behalf
|
|
|
-
|
|
|
|
(932,375
|
)
|
|
|
-
|
|
- Reversal - recoveries by cash
|
|
|
880,747
|
|
|
|
-
|
|
|
|
-
|
|
Effect of foreign currency translation
|
|
|
(78,457
|
)
|
|
|
(157,808
|
)
|
|
|
11,556
|
|
Allowance on financial guarantee at the end of year
|
|
$
|
673,147
|
|
|
$
|
3,079,684
|
|
|
$
|
1,261,868
|
|
|
(j)
|
Net investment in direct financing leases
|
Lease contracts that
Jinshang Leasing enters with financing lease customers transfer substantially all the rewards and risks of ownership of the leased
assets, other than legal title, to the customers. These financing lease contracts are accounted for as direct financing leases
in accordance with ASC 840-10-25 and ASC 840-40-25. At the inception of a transaction, the cost of the leased property is capitalized
at the present value of the minimum lease payment receivables and the unguaranteed residual value of the property at the end of
the lease. The difference between the sum of (i) the minimum lease payment receivables and the unguaranteed residual value and
(ii) the cost of the leased property is recognized as unearned income. Unearned income is recognized over the period of the lease
using the effective interest rate method.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
Net investment in
direct financing leases is recorded at net realizable value consisting of minimum lease payments to be received less allowance
for uncollectible, as needed, and less the unearned income. The allowance for lease payment receivable losses is maintained at
a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation
of the adequacy of the allowance. The allowance is based on Jinshang Leasing’s loss history, known and inherent risks in
the transactions, adverse situations that may affect the lessee’s ability to repay, the estimated value of any underlying
asset, current economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material
estimates that may be susceptible to significant revision as more information becomes available. While management uses the best
information available upon which to base estimates, future adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions used for the purposes of analysis.
Jinshang Leasing provides
“Specific Allowance” for the lease payment receivable of lease transactions if any specific collectability risk is
identified, and a “General Allowance”, based on total minimum lease payment receivable balance of those transactions
with no specific risk identified, to be used to cover unidentified probable loss. Jinshang Leasing performs periodic and systematic
detailed reviews to identify credit risks and to assess the overall collectability, and may adjust its estimates on allowance when
new circumstances arise.
The General Allowance
Jinshang Leasing provided as of June 30, 2017 and 2016 were $867,316 and $858,362, respectively; and Specific Allowance were both
nil. Jinshang Leasing made $27,332, $597,444 and $70,467 provision for General Allowance, and nil, nil and $1,011,999 were written
off against Specific Allowance, during the years ended June 30, 2017, 2016 and 2015, respectively.
Revenue is recognized
when there are probable economic benefits to the Company and when the revenue can be measured reliably, on the following:
Commission income and evaluation
income on guarantee service
Commission income on guarantee services
is recognized when guarantee contracts have been made whereby the related guarantee obligations have been accepted, the economic
benefits associated with the guarantee contracts will probably be realized, and the amount of revenue associated with the guarantee
contracts can be measured reliably. Commission income is determined based on the total fees provided for in the guarantee contracts,
is recorded in full at inception as unearned income and is recognized as commission income in the income statement over the period
of the guarantee using the straight-line method. The agreed commission is generally 2% to 6% of the guaranteed amount for 12 months,
which represents the estimated fair value of the non-contingent guarantee liability at the inception of the guarantee.
Dongsheng Guarantee charges its financial
guarantee customers a one-time fee for evaluations. Dongsheng Guarantee performs as to the likelihood that customers are qualified
to apply for loans from banks and other financial institutions. Evaluation income is recognized upon the completion of the evaluation.
Direct financing lease interest
income
Direct financing lease interest income
is recognized on an accrual basis using the effective interest method over the term of the lease by applying the rate that discounts
the estimated future minimum lease payment receivables through the period of the lease to the amount of the net investment in the
direct financing lease at inception.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The accrual of financing lease interest
income is discontinued when a customer becomes 90 days or more past due on its lease or interest payments to Jinshang Leasing,
unless Jinshang Leasing believes the interest is otherwise recoverable. Leases may be placed on non-accrual earlier if Jinshang
Leasing has significant doubt about the ability of the customer to meet its lease obligations, as evidenced by consistent delinquency,
deterioration in the customer’s financial condition or other relevant factors. Payments received while the lease is on non-accrual
are applied to reduce the amount of the recorded value. Jinshang Leasing resumes accruing the interest income when Jinshang Leasing
determines that the interest has again become recoverable, as, for example, if the customer resumes payment of the previous interest,
and shows material improvement in its operating performance, financial position, and similar indicators.
Financial advisory and agency income
Jinshang Leasing and Dongsheng Guarantee
provide financing solutions to customers and receive advisory fees as compensation. The advisory fees are recognized as income
during the service period as the related service obligations are completed.
As a licensed finance lease Company,
Jinshang Leasing acts as agent in finance lease transactions between other finance lessors and lessees, or between banks and lessees.
Jinshang Leasing neither receives the benefit of receiving the lease payments nor assumes the repayment obligations in these transactions.
The lease agency income and advisory fees received in these transactions are recognized as income on a net basis during the service
period as the related service obligations are completed.
Jinshang Leasing acts as a financing
agency between other financial leasing companies that need capital and financial institutions that are willing to provide capital.
Other financial leasing companies factor to Jinshang Leasing their right to collect capital lease receivables in order to obtain
capital from Jinshang Leasing, and Jinshang Leasing factors to other financial institutions its right to collect debts from these
financial leasing companies in order to finance entirely the capital that Jinshang Leasing provides to other financial leasing
companies. All of these factoring transactions are structured with recourse rights to the assignor of the receivable. Specifically,
the financial institutions bear the credit risk should the financial leasing companies fail to repay capital lease receivables.
Financial agency income that Jinshang Leasing earns from factoring transactions is accrued monthly as net interest income and payments
that Jinshang Leasing makes on factoring loans from financial institutions are accrued monthly as interest cost, in each case in
accordance with the terms of the factoring loan contracts. Jinshang Leasing recorded net interest income of nil in each of the
years ended June 30, 2017, 2016, and 2015 on these financing agency transactions.
|
(l)
|
Property and equipment
|
Plant and equipment are recorded at
cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets, with 3% to 5% salvage value. The average estimated useful lives of property and equipment are discussed in Note 7.
The Company eliminates the cost and
related accumulated depreciation of assets sold or otherwise retired from the corresponding accounts and includes any gain or loss
in the statements of income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major
additions and improvements of equipment are capitalized.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(m)
|
Impairment of long-lived assets
|
The Company applies the provisions
of ASC No. 360 Sub topic 10, “Impairment or Disposal of Long-Lived Assets” (ASC 360-10) issued by the Financial Accounting
Standards Board (“FASB”). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted
cash flows expected to result from the use and eventual disposition of the asset. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets,
including property and equipment and finite-lived intangible assets, for impairment at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the net carrying amount of the assets is greater than their fair value.
Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash
flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from
the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company
measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value
is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments.
The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are
considered necessary. There were no impairment losses on long-lived assets in the years ended June 30, 2017, 2016 and 2015.
|
(n)
|
Fair value measurements
|
ASC Topic 825, Financial Instruments
(“Topic 825”) requires disclosure of fair value information for financial instruments, whether or not recognized in
the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement
of the instruments. Topic 825 excludes certain financial instruments and all non-financial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
|
Level 1 -
|
inputs are based upon quoted prices (unadjusted) for
identical assets or liabilities in active markets.
|
|
Level 2 -
|
inputs are based upon quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
Level 3 -
|
inputs are generally unobservable and typically reflect
management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques.
|
As of June 30, 2017 and 2016, financial
instruments of the Company primarily consisted of cash, restricted cash, accounts receivables, other receivables, and bank loans,
loans receivable and loans payable which were carried at cost on the consolidated balance sheets, and carrying amounts approximated
their fair values because of their generally short maturities or the rate of interest of these instruments approximate the market
rate of interest.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(o)
|
Foreign currency translation
|
The Company’s functional and
reporting currency is the United States Dollar (“US dollars” or “USD”). The functional currency of the
Company’s subsidiaries in the PRC is the Chinese Yuan, or Renminbi (“RMB”).
Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at
the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional
currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized
in the statements of operations.
For financial reporting purposes,
the financial statements of the Company’s subsidiaries are prepared using RMB and translated into the Company’s functional
currency at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate in effect
at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and
stockholders' equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate
component of accumulated other comprehensive income in stockholders’ equity.
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Balance sheet items, except for equity accounts
|
|
|
6.7774
|
|
|
|
6.6312
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Items in the statements of income and comprehensive income, and statements of cash flows
|
|
|
6.8124
|
|
|
|
6.4352
|
|
|
|
6.1375
|
|
Interest expense derived from the
loans providing funds for financial leasing contracts is classified as cost of revenue in the statements of income.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(q)
|
Non-interest expenses
|
Non-interest expenses primarily consist
of salary and benefits for employees, travel cost, entertainment expense, depreciation of equipment, office rental expense, professional
service fees, office supplies, and similar items.
The Company accounts for income taxes
in accordance with FASB ASC Topic 740, “Income Taxes.” ASC 740 requires a Company to use the asset and liability method
of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of the changes.
Under ASC 740, a tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded.
Under the Corporate Income Tax Law
of the PRC and related regulations (collectively, (the “CIT Law”), small business credit guarantee institutions are
allowed to deduct from taxable income an allowance for guarantee losses as follows:
|
(i)
|
Guarantee Compensation Reserve - up to 1% of the balance of liabilities guaranteed by the Company
as of the end of each year; the Guarantee Compensation Reserve of the end of the previous year is required to be added to the current
year’s taxable income.
|
|
(ii)
|
Unexpired Liability Reserve - up to 50% of the current year’s guarantee income; the Unexpired
Liability Reserve as of the end previous year is required to be added to the current year’s taxable income.
|
|
(iii)
|
Actual guarantee compensation losses incurred by small business credit guarantee institutions are
required to be first applied as a write-off of the Guarantee Compensation Reserve, and any amount in excess of the Guarantee Compensation
Reserve deductible from the current year’s taxable income.
|
Comprehensive income includes net
income and foreign currency translation adjustments. Comprehensive income is reported in the statements of operations and comprehensive
income.
Accumulated other comprehensive income,
as presented on the balance sheets, represents cumulative foreign currency translation adjustments.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The Company leases its office premises
under lease agreements that qualify as operating leases. The Company records the rental under the lease agreements as operating
expenses on a straight-line basis over the lease periods.
|
(u)
|
Share-based compensation
|
The Company accounts for share-based
compensation awards to employees in accordance with ASC Topic 718, “Compensation – Stock Compensation”, which
requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument
issued and recognized as compensation expense net of estimated forfeitures over the requisite service period. The estimate of forfeitures
will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from
such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change
and will also impact the amount of stock compensation expense to be recognized in future periods.
If an award is cancelled for no consideration
and it is not accompanied by a concurrent grant of (or offer to grant) a replacement award, it is accounted for as a repurchase
for no consideration. Any unrecognized compensation cost is recognized on the cancellation date. Cancellation of an award, accompanied
by a concurrent grant of (or offer to grant) a replacement award, is accounted for as a modification of the cancelled award (ASC
718-20-35-8 through 35-9).
|
(v)
|
Commitments and contingencies
|
In the normal course of business,
the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among other things, government investigations and tax matters. In accordance with ASC No. 450 Sub
topic 20, “Loss Contingencies”, the Company records accruals for such loss contingencies when it is probable that a
liability has been incurred and the amount of the loss can be reasonably estimated.
|
(w)
|
Earnings per Share (EPS)
|
Basic EPS is computed by dividing
net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic
net income per share except that the denominator is increased to include the number of additional common shares that would have
been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued
and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible
shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for
the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments.
Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time
of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the
period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the
beginning of the period (or at the time of issuance, if later).
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(x)
|
Recently issued accounting pronouncements
|
In
November
2016, the Financial Accounting Standards Board (the "FASB") issued
Accounting Standards Update ("ASU")
2016-18, "
Statement of Cash
Flows (Topic 230): Restricted Cash
." ASU 2016-18 requires that a statement of cash flows explain the change during the
period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning and ending balances shown on the statement of cash flows. The guidance is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted.
ASU 2016-18 must be applied retrospectively to all periods presented. The Company is currently evaluating what impact the adoption
of this update will have on its consolidated statements of cash flows.
In
August 2016, the FASB issued ASU 2016-15, "
Classification of Certain Cash Receipts and Cash Payments (Topic 230)"
.
ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows,
reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15
is effective for interim and fiscal years beginning after December 15, 2017, with early adoption is permitted. The Company is currently
evaluating the impact adopting this guidance will have on classifications in its consolidated statements of cash flows.
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326)
for recognition of credit losses on financial instruments,
which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January
1, 2020, for calendar year entities),
with
early adoption permitted for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. The guidance introduces a new credit reserving
model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from
the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical
experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information
and will likely result in earlier recognition of credit reserves. The Company does not intend to adopt the new standard early and
is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606). This guidance supersedes current guidance on revenue recognition in Topic
605, ‘‘Revenue Recognition.” In addition, there are disclosure requirements related to the nature, amount, timing,
and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No.2015-14 to defer the effective date of ASU No. 2014-09
for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard
are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early
adoption permitted for interim and annual periods beginning after December 15, 2016. The Company will apply the new revenue
standard beginning July 1, 2018, and will not early adopt. The Company has not yet selected a transition method. The Company is
in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition,
and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to
systems and controls may be warranted.
In February 2016, the FASB issued
ASU No. 2016-02,
Leases (Topic 842)
. Under the new guidance, lessees will be required recognize the following for all leases
(with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee's obligation to make
lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents
the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting
for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no
longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning
after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company is evaluating this
ASU and has not determined the effect of this standard on its ongoing financial reporting.
WINS
FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
In March 2016, the FASB issued ASU
2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates
to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based
payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities;
and (c) classification on the statement of cash flows; (d) accounting for forfeitures of share-based payments. This standard will
be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company
does not expect this standard to have a material impact on its consolidated financial statements
There have been four new ASUs issued
amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus
Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition,
ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU
2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12,
“Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and
practical expedients to the guidance in ASU 2014-09 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. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,”
was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in
certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of
ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by
these four new ASUs.
There were various other accounting
standards and updates recently issued, none of which are expected to have a material impact on the Company's financial position,
operations, or cash flows.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 3 - RISKS
Credit risk is one of the most significant
risks for the Company’s business. Credit risk exposure arises principally in financial guarantees that are off-balance sheet
financial instruments, and in investments in direct financing leases. The total maximum financial guarantees issued (Note 2(g))
represent the maximum potential loss that would be recognized if counterparties failed completely to perform as contracted.
Credit risk is controlled by the application
of credit approvals, limits on the amounts guaranteed and monitoring procedures. The Company manages credit risk through its risk
control system based upon a “business circle” of core Small and Medium Enterprises (“SMEs”), which commences
with the establishment of overall risk management strategies, pre-transaction due diligence and assessment, in-transaction risk
evaluation, product design, determination of risk-adjusted pricing, design of counter-guarantee requirements and ongoing post-transaction
monitoring. To minimize credit risk, the Company requires collateral in the form of rights to cash, securities or property and
equipment. Typically, the Company also requires its guarantee clients to provide one or more personal guarantors, referred to as
“counter-guarantors,” so that such personal guarantors are jointly and severally liable for the repayment of the financing
guaranteed with the borrower.
The Company identifies credit risk
collectively based on industry, geography and customer type. This information is monitored regularly by management.
Further quantitative disclosures in
respect of the Company’s exposure to credit risk arising from its investments in direct financing leases are set out in Note
6.
The Company’s asset management
products are managed by banks and financial institutions and invested in fixed-income financial products that are permitted by
the China Securities Regulatory Commission (“SRC”), such as government bonds, corporate bonds and central bank notes.
Management does not foresee any significant credit risks from these assets and does not expect that these banks or financial institutions
may default and cause losses to the Company.
PRC state-owned banks, such as
Bank of China, are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are
empowered to take over the operation and management when any of those banks faces a material credit crisis. Meanwhile, China
does not have an official deposit insurance program, nor does it have an agency similar to what was the Federal Deposit
Insurance Corporation (FDIC) in the U.S. In the event of bankruptcy of one of the financial institutions in which the Company
has deposits or investments, it may be unlikely to claim its deposits or investments back in full. As of June 30, 2017 and
2016, the Company held cash and restricted cash of $41,284,490 and $75,126,811, respectively, that was not insured by any
governmental authority. To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits
only with well-known financial institutions in the PRC. There has been no recent history of
default in relation to these financial institutions.
The Company is also exposed to liquidity
risk, which is the risk that it will be unable to provide sufficient capital resources and liquidity to meet its commitments and
business needs. The Company is also exposed to liquidity risk on its short-term investments, including the risks that the banks
and financial institutions that manage the Company’s short-term investments will be unable to redeem such short-term investments
at a price equal to principal and accrued and unpaid interest or, in extreme circumstances, such as significant redemptions or
a deterioration of liquidity in the financial markets, may be unable to redeem them at all. As a result, the Company may not have
access to the capital related to such short-term investments when needed. Liquidity risk is controlled by the application of financial
position analysis and monitoring procedures. When necessary, the Company may turn to other financial institutions, and historically
has occasionally take loans from its shareholders to obtain short-term funding to meet liquidity shortages.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
(c)
|
Foreign currency risk
|
A majority of the Company’s
operating activities and a significant portion of the Company’s assets and liabilities are denominated in the RMB, which
is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’
Bank of China (the “PBOC”) or other authorized financial institutions at exchange rates quoted by the PBOC. Approval
of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together
with suppliers’ invoices and signed contracts. The value of the RMB is subject to changes in central government policies
and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System
market.
|
(d)
|
Business and economic risks
|
The Company’s operations are
carried out in the PRC through its direct and indirect WFOEs. 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’s economy. The Company’s business may be influenced by changes in governmental policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
NOTE 4 - RESTRICTED CASH
Restricted cash represents cash pledged to
banks as guarantor deposits by Dongsheng Guarantee to its guarantee service customers, in the amounts to $19.9 million and $23.4
million, respectively, as of June 30, 2017 and 2016, respectively; and cash deposited with banks for Jinshang Leasing’s bank
loans for the capital lease business, in the amount of to $4.4 million and $4.5 million (Note 9) as of June 30, 2017 and 2016,
respectively. The banks providing loans to Dongsheng Guarantee’s guarantee service customers generally require Dongsheng
Guarantee as the guarantor of the loans, to pledge a minimum cash deposit usually in the range of 10% to 20% of the guaranteed
amount. The deposits are released after the guaranteed bank loans are paid off and Dongsheng Guarantee’s guarantee obligation
expires which is usually within 12 months.
NOTE 5 - SHORT-TERM INVESTMENTS
Short-term investments as of June 30, 2017
represented transactional mutual debt fund products that Dongsheng Guarantee and Jinshang Leasing purchased from financial institutions.
Short-term investments as of June 30, 2016 represented transactional mutual debt fund products that Dongsheng Guarantee, Jinshang
Leasing and Tianjin Jiaming purchased from financial institutions. The term for the investments is one year or three or five years,
and Dongsheng Guarantee, Jinshang Leasing and Tianjin Jiaming were entitled to redeem or transfer the investments at any time during
the term. Interest from the investments varies from 5% to 13% annually, with deduction of a management fee, and was receivable quarterly,
annually or upon maturity. Given that the amount of returns of the investments is determinable and the investments are redeemable
at any time during the term, the Company recorded the amount at amortized cost using the effective interest as receivable in this
account.
The balances at June 30, 2017 and 2016, by
contractual maturity, were due in one year or three or five years. Actual maturities may differ from contractual maturities because
of the subsidiaries’ rights to redeem.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The following table sets forth the contractual
maturity of the balances as of June 30, 2017 in future periods:
Maturing within:
|
|
Short- term investments
|
|
Within 1 year
|
|
$
|
30,067,091
|
|
2 years
|
|
|
47,215,579
|
|
3 years
|
|
|
110,661,514
|
|
4 years
|
|
|
-
|
|
5 years
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
187,944,184
|
|
Interest income from short-term investments
was $13,752,538, $13,958,540 and $16,657,246 for the years ended June 30, 2017, 2016 and 2015, respectively. Earned but uncollected
interest was $3,514,075 and $1,021,306 as of June 30, 2017 and 2016, respectively.
NOTE 6 - NET INVESTMENT IN DIRECT
FINANCING LEASES
Jinshang Leasing’s leasing operations
consist principally of leasing high value equipment under direct financing leases expiring in 1-5 years as of the balance sheets
dates. The leases bear effective interest rate of 5% - 10% per annum.
Future minimum lease receipts under non-cancellable
direct financing lease arrangements are as follows:
|
|
June 30, 2017
|
|
Within 1 year
|
|
$
|
43,202,345
|
|
2 years
|
|
|
27,817,612
|
|
3 years
|
|
|
8,349,451
|
|
4 years
|
|
|
5,803,700
|
|
5 years
|
|
|
1,558,517
|
|
Total minimum lease receipts
|
|
|
86,731,625
|
|
Less: amount representing interest
|
|
|
(9,140,852
|
)
|
Present value of minimum lease receivable
|
|
$
|
77,590,773
|
|
Following is a summary of the components of
the Jinshang Leasing’s net investment in direct financing leases at June 30, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Total minimum lease payments to be received
|
|
$
|
86,731,625
|
|
|
$
|
85,836,232
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
86,731,625
|
|
|
|
85,836,232
|
|
Less: Allowance for uncollectible receivables
|
|
|
(867,316
|
)
|
|
|
(858,362
|
)
|
Net minimum lease payment receivable
|
|
|
85,864,309
|
|
|
|
84,977,870
|
|
Estimated residual value of leased property
|
|
|
|
|
|
|
-
|
|
Less: unearned income
|
|
|
(9,140,852
|
)
|
|
|
(10,272,223
|
)
|
Net investment in direct financing leases
|
|
$
|
76,723,457
|
|
|
$
|
74,705,647
|
|
As of June 30, 2017 and 2016, there were no
recorded investment in direct financing leases on nonaccrual status, and no recorded investment in direct financing leases past
due 90 days or more and still accruing.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The allowance for uncollectible minimum lease
payments receivables in direct financing leases for the years ended June 30, 2017, 2016 and 2015 were as following:
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible receivables at the beginning of year
|
|
$
|
858,362
|
|
|
$
|
302,401
|
|
|
$
|
1,238,685
|
|
Provision for lease payment receivables
|
|
|
27,332
|
|
|
|
597,444
|
|
|
|
70,467
|
|
Direct write-downs charged against the allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,011,999
|
)
|
Allowance to charge off direct financing lease interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries of amounts previously charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effect of foreign currency translation
|
|
|
(18,378
|
)
|
|
|
(41,483
|
)
|
|
|
5,248
|
|
Allowance for uncollectible receivables at the end of year
|
|
$
|
867,316
|
|
|
$
|
858,362
|
|
|
$
|
302,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Collectively evaluated for impairment
|
|
|
867,316
|
|
|
|
858,362
|
|
|
|
302,401
|
|
Allowance for uncollectible receivables at the end of year
|
|
$
|
867,316
|
|
|
$
|
858,362
|
|
|
$
|
302,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Collectively evaluated for impairment
|
|
|
86,731,625
|
|
|
|
85,836,232
|
|
|
|
30,240,137
|
|
Ending balance
|
|
$
|
86,731,625
|
|
|
$
|
85,836,232
|
|
|
$
|
30,240,137
|
|
As of June 30, 2017 and 2016, there was no
impaired minimum lease payments receivable that caused the Company to evaluate individually for impairment.
The allowance for credit losses provides coverage
for probable and estimable losses in the Company’s investment in direct financing leases. The allowance recorded is based
on a quarterly review. The determination of the appropriate amount of any provision is highly dependent on management’s judgment
at that time and takes into consideration all known relevant internal and external factors, including levels of nonperforming leases,
customers’ financial condition, leased property values and collateral values as well as general economic conditions. When
a direct financing lease receivable is determined uncollectible, for example, the customer declares bankruptcy, or the Company
reaches agreement of debt restructuring with the customer, the direct financing lease would be written off from the investment
in direct financing leases.
Credit Quality of Investment in Direct Financing
Lease:
The Company performs a quarterly review on
the credit quality of its investments in direct financing leases, by evaluating a variety of factors, including dependence on the
counterparties, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical
loss experience, leased property values or collateral values, and other economic conditions such as economic trends in the area
or country. In cases where heightened risk is detected as a result of factors indicating that a customer is having difficulty repaying
the underlying financing, such as a default in making interest payments, material changes to the customer’s business, and
deterioration of financial condition and cash flow support, the Company classifies the contracts as “abnormal contracts,”
contracts without such heightened risk indicators are classified as “normal contracts”. For those contracts, the Company’s
WFOE generally initiates negotiations with the customer about possible improvement or remediation measures, such as an improvement
plan for cash flow management, third-party support, extension plans and similar measure, and implement close supervision of the
remediation measures adopted.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The risk classification of direct financing
lease receivables is as follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Normal
|
|
$
|
86,731,625
|
|
|
$
|
85,836,232
|
|
Abnormal
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
86,731,625
|
|
|
$
|
85,836,232
|
|
NOTE 7 - PROPERTY AND EQUIPMENT,
NET
Property and equipment as of June 30, 2017
and 2016 consisted of the following:
|
|
Useful life
(years)
|
|
Salvage
value
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
3-5
|
|
3%
|
|
$
|
467,564
|
|
|
$
|
393,985
|
|
Vehicles
|
|
4-5
|
|
3%-5%
|
|
|
1,112,359
|
|
|
|
1,151,482
|
|
Office equipment
|
|
3-5
|
|
3%
|
|
|
172,166
|
|
|
|
173,984
|
|
Electric equipment
|
|
3
|
|
3%
|
|
|
34,632
|
|
|
|
24,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(1,192,573
|
)
|
|
|
(889,260
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
594,148
|
|
|
$
|
854,719
|
|
Depreciation expense totaled
$320,842, $411,635 and $257,464 for the years ended June 30, 2017, 2016 and 2015, respectively.
NOTE 8 - OTHER ASSETS
Other assets as of June 30, 2017 and 2016 consisted
of:
|
|
2017
|
|
|
2016
|
|
Deposits for other loans (Note 9)
|
|
$
|
590,616
|
|
|
$
|
-
|
|
Prepaid insurance
|
|
|
166,250
|
|
|
|
175,000
|
|
Advanced payment to third party companies
|
|
|
52,517
|
|
|
|
78,523
|
|
Receivable for disposal of WHL (Note 1)
|
|
|
-
|
|
|
|
270,000
|
|
Other receivables
|
|
|
6,601
|
|
|
|
85,228
|
|
|
|
$
|
815,984
|
|
|
$
|
608,751
|
|
Advanced payment to the third party companies
as of June 30, 2017 and 2016 represented an amount Jinshang Leasing and Dongsheng Guarantee prepaid for expense related car gasoline
and office rentals.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 9 - LOANS FOR CAPITAL LEASE
BUSINESS
Bank loans
Bank loans of $28,281,541 and $43,308,617 as
of June 30, 2017 and 2016, respectively, represented RMB denominated loans Jinshang Leasing obtained for Shuguang and Yancheng
projects from Huaxia Bank and CITIC Bank. The Huaxia Bank loans for Shuguang project with a total principal of RMB300 million ($44.3
million) were obtained in December 2015, May 2016 and June 2016, bear interest at the fixed rate of 5.5% per annum, have a term
of three years, pledged with the Company’s time deposit certificates of $4.4 million and $4.5 million (RMB30 million)(Note
4) as of June 30, 2017 and 2016, respectively, and guaranteed by Liaoning SG Automotive Group Co., Ltd (lessee of Shuguang project).
The CITIC Bank loan for Yancheng project with
a principal amount of RMB3.1 million ($0.5 million) was obtained in April 2015, bears interest at the fixed rate of 5.75% per annum,
has a term from April 3, 2015 to February 12, 2020, pledged with time deposit certificate from Potevio New Energy Yancheng Co.,
Ltd (lessee of Yancheng project) of $505,570 and $532,456 (RMB3,426,450) as of June 30, 2017 and 2016, respectively.
Interest expense incurred on the loans
for the years ended June 30, 2017, 2016 and 2015 were $1,684,075, $524,409 and $188,173, respectively.
Other loans
Other loans of $9,509,597 as of June 30, 2017
represented RMB denominated loans Jinshang Leasing obtained in July 2016 and April 2017 for its various direct financing lease
projects from Great Wall Guoxing Financial Leasing Co., Ltd. The loans bear interest at the fixed rate of 6% per annum and the
term of the loans is thirty months and matures in 2019, and pledged against the Company’s receivables from its certain direct
financing leases, with a carrying amount of $8,358,752 (RMB56,650,807) as of June 30, 2017. Jinshang Leasing paid deposits totaled
$590,616 (RMB4,002,855)(Note 8) to Great Wall Guoxing Financial Leasing Co., Ltd, which are non-interest bearing and repayable
upon maturity of the other loans.
Interest expense incurred on the other loans for the year ended
June 30, 2017 was $410,512.
As of June 30, 2017, the borrowings will be due according to the
following schedule:
|
|
Bank loans
(principal amounts)
|
|
|
Other loans
(principal amounts)
|
|
Within 1 year
|
|
$
|
14,905,027
|
|
|
$
|
4,846,657
|
|
Between 1 to 2 years
|
|
|
13,033,222
|
|
|
|
4,280,501
|
|
Between 2 to 3 years
|
|
|
343,292
|
|
|
|
382,439
|
|
Between 3 to 4 years
|
|
|
-
|
|
|
|
-
|
|
Between 4 to 5 years
|
|
|
-
|
|
|
|
-
|
|
Beyond 5 years
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
28,281,541
|
|
|
$
|
9,509,597
|
|
NOTE 10 - UNEARNED INCOME FROM
FINANCIAL GUARANTEE SERVICES
Unearned income from guarantee services were
$538,215 and $423,801 as of June 30, 2017 and 2016, respectively.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 11 - OTHER LIABILITIES
Other liabilities as of June 30, 2017 and 2016
consisted of:
|
|
2017
|
|
|
2016
|
|
Other tax payable
|
|
$
|
771,293
|
|
|
$
|
510,147
|
|
Payable to an equipment provider for initial investment in direct financing lease
|
|
|
-
|
|
|
|
407,679
|
|
Accrued payroll
|
|
|
45,356
|
|
|
|
42,898
|
|
Other payables
|
|
|
76,920
|
|
|
|
3,385
|
|
|
|
$
|
893,569
|
|
|
$
|
964,109
|
|
Payable to an equipment provider for initial
investment in direct financing lease as of June 30, 2017 and 2016 represented the portion of unpaid initial investment by the lessor
to the equipment provider in the direct financing lease transaction for which Jinshang Leasing acted as lease agent.
NOTE 12 - SHARE-BASED COMPENSATION
2015 Long-Term Incentive Equity Plan
On October 20, 2015, the Company adopted the
2015 Long-Term Incentive Equity Plan, or the “Plan”, under which the Company may grant options to purchase ordinary
shares of the Company to its employees, officers, directors and consultants. The total number of Ordinary Shares reserved and available
for issuance under the Plan shall be a number of Ordinary Shares equal to ten percent (10%) of the total outstanding Ordinary Shares
as of the closing date of that certain Agreement and Plan of Reorganization, dated as of April 10, 2015, by and among the Company,
WFG and the shareholders of WFG (“Merger Agreement”), after taking into account the Ordinary Shares that may be issued
pursuant to the Merger Agreement and the conversion of any shares held by the Company’s public shareholders as provided for
in the Company’s Amended and Restated Certificate of Incorporation.
The Plan shall be administered by the Board
or a Committee. If administered by a Committee, such Committee shall be composed of at least two directors, all of whom are “outside
directors” within the meaning of the regulations issued under Section 162(m) of the Code and “non-employee” directors
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Committee members shall serve for such
term as the Board may in each case determine and shall be subject to removal at any time by the Board.
The term of each Option shall be fixed by the
Committee; provided, however, that an Incentive Option may be granted only within the ten-year period commencing from the Effective
Date and may only be exercised within ten years of the date of grant (or five years in the case of an Incentive Option granted
to an optionee who, at the time of grant, owns Ordinary Shares possessing more than 10% of the total combined voting power of all
classes of voting shares of the Company (“10% Shareholder”).
The exercise price per Ordinary Share purchasable
under an Option shall be determined by the Committee at the time of grant and may not be less than 100% of the Fair Market Value
on the date of grant (or, if greater, the par value of the Ordinary Shares); provided, however, that the exercise price of an Incentive
Option granted to a 10% Shareholder will not be less than 110% of the Fair Market Value on the date of grant.
The Plan was approved and unless terminated
by the Board, it shall continue to remain effective until such time as no further awards may be granted and all awards granted
under the Plan are no longer outstanding. Notwithstanding the foregoing, grants of Incentive Options may be made only during the
ten-year period beginning on the Effective Date.
WINS
FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The following table summarizes stock award activity
and related information for all of Wins Finance’s Equity Plans for the years ended June 30, 2017 and 2016:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual
Term In Years
|
|
|
|
|
|
|
$
|
|
|
|
|
Outstanding, July 1, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,450,000
|
|
|
|
12
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(180,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, July 1, 2016
|
|
|
1,270,000
|
|
|
|
12
|
|
|
|
2.42
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,190,000
|
)
|
|
|
12
|
|
|
|
|
|
Canceled
|
|
|
(80,000
|
)
|
|
|
12
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested and expected to vest, June 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested and expected to vest, June 30, 2016
|
|
|
1,000,000
|
|
|
|
12
|
|
|
|
2.42
|
|
The aggregate intrinsic value of options vested
and expected to vest as of 2016 were both zero, respectively. Intrinsic value is calculated as the amount by which the current
market value of a share of common stock exceeds the exercise price multiplied by the number of option shares.
During the year ended June 30, 2016, the Company
granted options to purchase 1,450,000 shares of common stock to eight employees at a weighted average exercise price of $12 per
share. The options will vest and become exercisable in three (3) equal annual installments on each of the first, second and third
dates of the Grant Date and the options will expire on the fifth anniversary of the Grant Date.
During the year ended June 30, 2017, 1,190,000
options were forfeited and cancelled due to the termination of the holders’ employment prior to vesting. On February 14,
2017, Wins Finance terminated the remaining option agreements with the employees for no consideration. No options remained outstanding
following the cancellation and as of June 30, 2017.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
The Company measures compensation cost related
to share options based on the grant-date fair value of the award using the Binomial Model. The weighted-average assumptions used
in the Binomial Model calculation for option grants during the year ended June 30, 2016 were as follows:
Expected volatility
|
|
|
|
|
|
|
51.5
|
%
|
Risk-free interest rates
|
|
|
|
|
|
|
1.77
|
%
|
Expected terms
|
|
|
|
|
|
|
5.0 years
|
|
Dividend yields
|
|
|
|
|
|
|
0
|
%
|
Sub-Optimal behavior multiple
|
|
|
|
|
|
|
2.80
|
|
Fair Value per share of options granted
|
|
|
|
|
|
$
|
5.27~$5.44
|
|
The expected volatility assumption is based
on historical weekly volatility of peer companies’ share price. The Company utilized peer company data due to Wins Finance’s
limited history of publicly traded shares. During the year ended 2016, the expected term assumption represents the remaining life
of the option at the grant date. The risk-free interest rates used are based on the USD Treasury Activities (IYC25) Zero Coupon
Yield.
The estimated fair value of share-based compensation
to employees is recognized as a charge against income on a ratable basis over the requisite service period, which is generally
the vesting period of the award.
In connection with the grant of stock
options to employees, the Company recorded share-based compensation charges of $(1,465,680), $1,889,733 and $nil,
respectively, for the years ended June 30, 2017, 2016 and 2015, respectively. The negative amount in 2017 resulted from
the reversal of share-based compensation expense for the Company’s options that were cancelled due to the termination
of the holders’ employment prior to vesting.
NOTE 13 - CAPITALIZATION
Common Stock
As of October 26, 2015, Wins Finance is authorized
to issue up to 100,000,000 ordinary shares with a par value of $0.0001, 21,526,747 shares of Common Stock were issued and outstanding.
16,800,000 and 4,726,747 ordinary shares were held by WFG's shareholders and former stockholders of Sino, respectively.
On June 28, 2016, the Company repurchased 5,100
of its ordinary shares from Bradley Reifler, a former director of the Company, for $60,180, and 1,480,000 shares from Bluesky LLC
for $17,464,000. Of the amounts payable to Bluesky, $17 million was paid. Bluesky LLC is a limited liability Company owned and
controlled by Bluesky Family Trust, a family trust benefitting the family of Jianming Hao, the Company’s former Chairman,
Co-Chief Executive Officer and President. Balance of $464,000 remained unpaid as of June 30, 2017.
On December 2, 2016, the Company repurchased
204,005 of its ordinary shares from Richard Xu, a former officer of the Company, for a consideration of $204.
As of June 30, 2017 and 2016, there were 19,837,642
and 20,041,647 shares of common stock issued and outstanding, respectively.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 14 - STATUTORY RESERVE
In accordance with the PRC regulations on enterprises
and the company’s articles of association, enterprises established in the PRC are required to provide statutory reserve before
any dividend distribution, which is appropriated from net profit as reported in the enterprise’s PRC statutory accounts for
the calendar year. Before making any dividend distribution, an enterprise is required to allocate at least 10% of its annual after-tax
profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s
PRC statutory accounts. The statutory reserve can only be used for specific purposes and is not distributable as cash dividends.
NOTE 15 - EMPLOYEE RETIREMENT
BENEFITS
The Company has made employee benefit contributions
in accordance with Chinese relevant regulations, including retirement insurance, unemployment insurance, medical insurance, housing
fund, work injury insurance and birth insurance. The Company recorded the contribution in the salary and employee charges when
incurred. The contributions made by the Company were $111,493, $107,970 and $52,374 for the years ended June 30, 2017, 2016 and
2015, respectively.
NOTE 16 - EARNINGS PER SHARE
The following table sets forth the computation
of basic and diluted earnings per share for the years ended June 30, 2016 and 2015, respectively:
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the common shareholders
|
|
$
|
20,349,791
|
|
|
$
|
12,117,397
|
|
|
$
|
26,072,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
19,926,510
|
|
|
|
20,012,356
|
|
|
|
16,800,000
|
|
Effect of dilutive securities
|
|
|
155,579
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
20,082,089
|
|
|
|
20,012,356
|
|
|
|
16,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – Basic
|
|
$
|
1.02
|
|
|
$
|
0.61
|
|
|
$
|
1.55
|
|
Earnings per share – Diluted
|
|
$
|
1.01
|
|
|
$
|
0.61
|
|
|
$
|
1.55
|
|
Basic earnings per share are computed by dividing
the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed
by adding other common stock equivalents, including non-vested common share in the weighted average number of common shares outstanding
for a period, if dilutive.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 17 - INCOME TAXES
Pursuant to the relevant rules and regulations
of the Cayman Islands and the BVI, the Company and its subsidiary incorporated therein are not subject to any income tax pursuant
to the rules and regulations of their respective countries of incorporation.
No Hong Kong Profits Tax has been made for
the years ended June 30, 2017, 2016 and 2015 as Full Shine had no assessable profits arising in Hong Kong.
The provision for PRC Enterprise Income Tax
(“EIT) is calculated at 25% of the estimated assessable profits of the subsidiaries established in the PRC during the years
ended June 30, 2017, 2016 and 2015.
Under the EIT Law, investment income from security
funds is exempted from PRC EIT.
The PRC income tax returns are generally not
subject to examination by the tax authorities for tax years before calendar (tax) year 2011. With a few exceptions, the calendar
(tax) years 2012 - 2016 remain open to examination by tax authorities in the PRC. According to the PRC Tax Administration and Collection
Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer
or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined.
In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the
case of tax evasion.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits of
the position, and measures the unrecognized benefits associated with the tax position. For the years ended June 30, 2017, 2016
and 2015, the Company had no unrecognized tax benefits.
The Company does not anticipate any significant
increase to its liabilities for unrecognized tax benefits within the next 12 months. The Company will classify interest and penalties,
if any, related to income tax matters in income tax expense.
The Company’s WFOEs are subject to income
taxes in China and are subject to routine corporate income tax audits. Management believes that the WFOEs’ tax return positions
are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. Determining the income
tax expense for these potential assessments and recording the related effects requires management judgments and estimates. The
amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in the Company’s
income tax expense and, therefore, could have a material impact on the Company’s provision for income tax, net income and
cash flows. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty and the timing of the resolution and/or closure of audits
is not certain. If any issues addressed in tax audits of the Company's WFOEs are resolved in a manner not consistent with management's
expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
Income tax payable represented enterprise income
tax at a rate of 25% of taxable income the Company accrued but not paid. Income tax payable as of June 30, 2017 and 2016 comprises:
|
|
2017
|
|
|
2016
|
|
Dongsheng Guarantee
|
|
$
|
2,517,538
|
|
|
$
|
2,083,683
|
|
Jinshang Leasing
|
|
|
255,093
|
|
|
|
427,164
|
|
|
|
$
|
2,772,631
|
|
|
$
|
2,510,847
|
|
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
$
|
1,581,470
|
|
|
$
|
1,387,373
|
|
|
$
|
3,662,488
|
|
Deferred tax expense (benefit)
|
|
|
370,019
|
|
|
|
(622,928
|
)
|
|
|
(515,495
|
)
|
Total provision for income taxes
|
|
$
|
1,951,489
|
|
|
$
|
764,445
|
|
|
$
|
3,146,993
|
|
The reconciliation between the effective income
tax rate and the PRC statutory income tax rate of 25% is as follows:
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
PRC statutory tax
|
|
|
25
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of non-deductible expenses
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Effect of non-taxable income
|
|
|
(15.4
|
)%
|
|
|
(28.5
|
)%
|
|
|
(14.3
|
)%
|
Others
|
|
|
(0.8
|
)%
|
|
|
9.7
|
%
|
|
|
0.0
|
%
|
Effective tax rate
|
|
|
8.8
|
%
|
|
|
6.2
|
%
|
|
|
10.7
|
%
|
Deferred tax arose from the difference in tax
and accounting base of the deductible allowance for guarantee loss and lease payment receivable loss and difference in direct financing
lease income recognition between PRC and U.S. GAAP.
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Provision for direct financing lease
|
|
$
|
216,829
|
|
|
$
|
208,215
|
|
Direct financing lease income
|
|
|
110,308
|
|
|
|
220,309
|
|
Allowance on guarantee
|
|
|
-
|
|
|
|
780,402
|
|
Total deferred tax assets
|
|
|
327,137
|
|
|
|
1,208,926
|
|
Less: Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Less: Net off with deferred tax liabilities for
financial reporting purposes
|
|
|
-
|
|
|
|
(780,402
|
)
|
Net
total deferred tax assets
|
|
$
|
327,137
|
|
|
$
|
428,524
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Guarantee paid on behalf of guarantee service customers loss
|
|
$
|
390,154
|
|
|
$
|
509,921
|
|
Commissions and fees on financial guarantee services
|
|
|
356,730
|
|
|
|
747,879
|
|
Total deferred tax liabilities
|
|
|
746,884
|
|
|
|
1,257,800
|
|
Less: Net off with deferred tax assets for
financial reporting purposes
|
|
|
-
|
|
|
|
(780,402
|
)
|
Net total deferred tax liabilities
|
|
$
|
746,884
|
|
|
$
|
477,398
|
|
For the purpose of presentation in the consolidated
balance sheets, certain deferred tax assets and liabilities have been offset.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
As of June 30, 2017 and 2016, the Company
had net deferred tax assets of $327,137 and $428,524, respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The management
considered all available evidence, both positive and negative, in determining the realizability of deferred tax assets at June
30, 2017 and 2016. Management considered carry back availability, the scheduled reversals of deferred tax liabilities, projected
future taxable income during the reversal periods, and tax planning strategies in making this assessment. Management also considered
recent history of taxable income, trends in the Company’s earnings and tax rate, positive financial ratios, and the impact
of the downturn in the current economic environment (including the impact of credit on allowance and provision for guarantee and
direct financing lease losses; and the impact on funding levels) on the Company. Based upon its assessment, management believes
that a valuation allowance was not necessary as of June 30, 2017 and 2016.
As of June 30, 2017 and 2016, the Company intends
to permanently reinvest the undistributed earnings of its operating subsidiaries to fund future operations. As such, no provision
has been made for deferred tax assets related to the future repatriation of the cumulative undistributed earnings of the PRC subsidiaries
of $69,333,827 and $49,730,140 as of June 30, 2017 and 2016, respectively.
For the years ended June 30, 2017 and 2016,
the Company has not been selected for examination by the applicable tax authority and no resolution of tax audits were expected
to be material to the financial statements.
NOTE 18 - RELATED PARTY TRANSACTIONS
AND BALANCES
Related party balances
Related party balances as of June 30, 2017
and 2016 (apart from those disclosed elsewhere in these financial statements) consisted of:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
|
|
|
|
|
|
Bluesky LLC
|
|
$
|
464,000
|
|
|
$
|
464,000
|
|
|
|
$
|
464,000
|
|
|
$
|
464,000
|
|
Bluesky LLC is a limited liability Company
owned and controlled by Bluesky Family Trust, a family trust benefitting the family of Jianming Hao, the Company’s former
Chairman, Co-Chief Executive Officer and President.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
Related party transactions
Related party transactions for the years ended
June 30, 2017, 2016 and 2015 consisted of:
|
|
For the years ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Amount lent to owners
|
|
|
|
|
|
|
|
|
|
|
|
|
Dongsheng International Investment Group Co., Ltd
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,148,677
|
|
Dongsheng International Investment Ltd (HK)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,419,721
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,568,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount repaid from owners
|
|
|
|
|
|
|
|
|
|
|
|
|
Dongsheng International Investment Group Co., Ltd
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,474,032
|
|
Dongsheng International Investment Ltd (HK)
|
|
|
-
|
|
|
|
-
|
|
|
|
10,628,558
|
|
Wang Hong (Note 1)
|
|
|
-
|
|
|
|
-
|
|
|
|
6,517,312
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,619,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount repaid to owners
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang Hong (Note 1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
244,399
|
|
Tian Wenjun
|
|
|
-
|
|
|
|
-
|
|
|
|
175,917
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
420,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount borrowed from owners
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Wang Hong (Note 1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,293
|
|
Tian Wenjun
|
|
|
-
|
|
|
|
-
|
|
|
|
24,440
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluesky LLC
|
|
$
|
-
|
|
|
$
|
17,464,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluesky LLC
|
|
$
|
-
|
|
|
$
|
8,500,000
|
|
|
$
|
-
|
|
The loans from owners and to owners were all
interest free and due on demand.
On December 28, 2015, the Company issued an
$8,500,000 promissory note (the “Note”) to Bluesky LLC, an entity controlled by Jianming Hao, the Company’s former
Chairman, Co-Chief Executive Officer and President. The notes bear interest at 4% per year and mature on December 28, 2016. The
note was repaid in advance on April 28, 2016. The Notes are convertible into the Company’s ordinary shares at a price of
$12.00 per share. Martel Capital, LLC is the placement agent for the offering and received a commission equal to 1% of the gross
proceeds of the offering.
On June 30, 2016, the Company repurchased 1,480,000
ordinary shares from Bluesky LLC at a price of $11.8 per share. On June 28, 2016, the Company paid approximately $17,000,000 to
Bluesky LLC.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Commitments
Lease Commitments
The Company leased their principal offices
under lease agreements. The following table sets forth the Company’s contractual obligations as of June 30, 2017 in
future periods:
For the years ending June 30,
|
|
Rental payments
|
|
2018
|
|
$
|
186,721
|
|
2019
|
|
|
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
186,721
|
|
Guarantee Commitments
Guarantees terminate upon payment or cancellation
of the guaranteed obligation. Dongsheng Guarantee’s obligations to make payments under guarantees will be triggered upon
failure of the parties for which the guarantees are provided to fulfill their guaranteed obligations. The terms from inception
to termination of the guarantees provided generally range from 6 to 12 months.
Contingencies
In the past, Dongsheng Guarantee failed to
comply with PRC regulations that provide that the aggregate balance of liabilities guaranteed by a financing guarantee Company
for any single guaranteed party may not exceed 10% of the net assets of the guarantee Company and also failed to make required
social insurance and provident housing fund contributions for some of its employees. During the years ended June 30, 2017 and
2016, Dongsheng Guarantee did not provide guarantees for loans in excess of 10% of its net assets to any single customer and made
all required social insurance, but it failed to comply with certain housing fund requirements under PRC regulations. As of June
30, 2017 and 2016, Dongsheng Guarantee had not received any notice from any relevant government authorities regarding its prior
non-compliance with these requirements. However, it is possible that relevant regulatory authorities will impose penalties and/or
bring legal action against Dongsheng Guarantee retrospectively. Any such penalties or legal action could have an adverse effect
on the Company’s business, and management is unable to make any estimate of the amounts of any such possible penalties.
WINS FINANCE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND
2017
Litigations
The Company is involved in various legal
actions arising in the ordinary course of its business. As of June 30, 2017, the Company was involved in 3 lawsuits in China,
of which 2 of the legal actions were initiated by the Company as plaintiff in relation to the guarantee business, and in the
other of which the Company is a defendant in relation to its financing lease business (see below). The Company initiated
legal proceedings to collect delinquent balances, interest and penalties from guarantees. 2 of these cases with an aggregated
claim of $624,169 have been adjudicated by the Court in favor of the Company and these cases are in the process of being
enforced.
In October 2014, an equipment supplier filed
a lawsuit in China naming Jinshang Leasing and the respective lessee of a financing lease arrangement as defendants demanding repayment
of the equipment cost of $2.2 million (RMB14.8 million) and compensation of $0.2 million (RMB1.5 million). There has been no activity
in this lawsuit since it was transferred to the Beijing Haidian court. In June 2015, the lessee filed a notice to Jinshang Leasing
and the supplier to terminate the financing lease arrangement and the respective equipment sale and purchase agreement. Jinshang
Leasing has not collected or made any payment or recognized any income on this financing lease arrangement. The directors of the
Company have sought advice from PRC legal counsel in this respect and are of the view that the lawsuit against Jinshang Leasing
is without merit and believe that resolution of this matter will not result in any payment that, in the aggregate, would be material
to the financial position or results of operations of the Company.
The Company and certain of its executive officers
have been named as defendants in two civil securities lawsuits recently filed in two U.S. District Courts (the “Lawsuits”)
in April 2017. Both Lawsuits are putative class action lawsuits where plaintiffs’ counsels are seeking to represent the entire
class of shareholders who bought the Company’s securities between 29 October 2015 and 29 March 2017. Both Lawsuits assert
the same statutory violations under the U.S. Securities Exchange Act, alleging, in sum and substance, that the defendants made
false and misleading statements, or failed to disclose material facts, in the Company’s prospectuses, press releases, and
filings with the U.S. Securities and Exchange Commission (the “SEC”) in connection with its growth, business prospects
and the adequacy of its internal controls. The Lawsuits further alleged that the Company’s stock price fell when the alleged
misstatements or omissions became known to investors. The plaintiffs are seeking unspecified monetary damages, including interest,
costs and attorneys’ fees and other relief as the court deems just.
On June 19, 2017, the plaintiff in one
of the class actions filed a notice of voluntary discontinuance.
On June 26, 2017, the Court issued an Order
appointing lead plaintiffs and lead counsel, and on August 25, 2017 lead plaintiffs filed an Amended Class Action Complaint. The
Amended Complaint alleges a claim against the Company for securities fraud purportedly arising from alleged misrepresentations
concerning its principal executive offices (which alleged misrepresentations resulted in the Company being added to, and then
removed from, the Russell 2000 index). On October 24, 2017, the Company moved to dismiss the Amended Complaint for failure to
state a claim against it. That motion remains pending. The Amended Complaint does not specifically allege the damages purportedly
suffered by the class, and the Company is not yet able to provide a reliable estimate of any such damage claim. The directors
of the Company believe that the claims from this proceeding are without merit and they are vigorously defending this proceeding.
NOTE 20 - SUBSEQUENT EVENTS
On August 2, 2017, Spectacular Bid Limited,
a wholly owned subsidiary of Freeman, completed the acquisition of approximately 67% of the Company’s outstanding shares
(Note 1).
On October 19, 2017, the Company received a
letter from the Staff of the Listing Qualifications Department (the “Listing Qualifications Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) stating that the Listing Qualifications Staff has withdrawn its August 4, 2017 delisting determination
letter. Accordingly, the Company’s securities remain listed on Nasdaq. Notwithstanding the withdrawal of the August
4, 2017 delisting determination letter, the Company has been further advised by Nasdaq that the Company’s securities will
remain halted pending the receipt and review by Nasdaq of additional information from the Company.