The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTITIVIES
|
Senmiao Technology Limited (the “Company”)
is a U.S. holding company incorporated in the State of Nevada on June 8, 2017. The Company is located in Chengdu, Sichuan Province,
China, and operates its businesses in two segments: (i) online lending services through its variable interest entity (“VIE”),
Sichuan Senmiao Ronglian Technology Co., Ltd. (“Sichuan Senmiao”), in the People’s Republic of China (“PRC”
or “China”) which facilitates loan transactions between Chinese investors and individual and small-to-medium-sized
enterprise (“SME”) borrowers; and (ii) automobile transaction and related services focusing on the ride-hailing industry
in China through its majority owned subsidiary, Hunan Ruixi Financial Leasing Co., Ltd. (“Hunan Ruixi”), a PRC limited
liability company, its wholly owned subsidiary, Hunan Ruixi Automobile Leasing Co., Ltd. (“Ruixi Leasing”), and its
VIE, Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”).
On September 25, 2016, Sichuan Senmiao
acquired a peer-to-peer (“P2P”) platform (including website, internet content provider license, operating systems,
servers, and management system) from Sichuan Chenghexin Investment and Asset Management Co., Ltd. On July 28, 2017, the Company
established a wholly-owned subsidiary, Sichuan Senmiao Zecheng Business Consulting Co., Ltd. (“Senmiao Consulting”)
in China. Sichuan Senmiao was established in China in June 2014.
On September 18, 2017, the Company entered
into a series of agreements (“VIE Agreements”) with Sichuan Senmiao and its equity holders (the “Sichuan Senmiao
Shareholders”) through Senmiao Consulting to obtain control and became the primary beneficiary of Sichuan Senmiao (the “Restructuring”).
In connection with the Restructuring, as partial consideration for the Sichuan Senmiao Shareholders’ commitment to perform
their obligations under the VIE Agreements, the Company issued an aggregate of 45,000,000 shares of its common stock to the Sichuan
Senmiao Shareholders pursuant to certain subscription agreements dated September 18, 2017.
On November 21, 2018, the Company entered
into an Investment and Equity Transfer Agreement (the “Investment Agreement”) with Hunan Ruixi and all the shareholders
of Hunan Ruixi (“Hunan Ruixi Shareholders”), pursuant to which the Company acquired from the Hunan Ruixi Shareholders
an aggregate of 60% of the equity interest of Hunan Ruixi. The Company closed the acquisition on November 22, 2018 and agreed to
make a cash contribution of $6,000,000 to Hunan Ruixi, representing 60% of its registered capital, in accordance with the Investment
Agreement (Note 3). As of June 30, 2019, the Company made the full cash contributions in the aggregate amount of $6,000,000
to Hunan Ruixi.
Hunan Ruixi holds automobiles sales and
financial leasing licenses and has been engaged in automobile financial leasing services and automobile sales since January
2019. Hunan Ruixi also controls Jinkailong through its 35% equity interest and a voting agreement with Jinkailong’s other
shareholders. Jinkailong is an automobile transaction and related services company in China, which primarily targets the drivers
in the ride-hailing service sector and facilitates automobile sales and financing transactions for its clients and provides relevant
after-transaction services to them. In April 2019, Ruixi Leasing began its leasing operation.
The Company formed a wholly owned subsidiary,
Yicheng Financial Leasing Co., Ltd. ("Yicheng”), with a registered capital of $50 million in Chengdu in May 2019. Yicheng
obtained its business licenses for automobiles sale and financial leasing on May 5, 2019. Yicheng has been engaged in automobile
sales since June 2019.
The following diagram illustrates the Company’s corporate
structure, including its subsidiaries, and VIEs, as of the date of these financial statements:
VIE Agreements with Sichuan Senmiao
According to the VIE Agreements, Sichuan
Senmiao is obligated to pay Senmiao Consulting service fees equal to its net income. Sichuan Senmiao’s entire operations
are controlled by the Company.
Each of the VIE Agreements is described
in details below:
Equity Interest Pledge Agreement
Senmiao Consulting, Sichuan Senmiao and
the Sichuan Senmiao Shareholders entered into an Equity Interest Pledge Agreement, pursuant to which the Sichuan Senmiao Shareholders
pledged all of their equity interest in Sichuan Senmiao to Senmiao Consulting in order to guarantee the performance of Sichuan
Senmiao’s obligations under the Exclusive Business Cooperation Agreement as described below. During the term of the pledge,
Senmiao Consulting is entitled to receive any dividends declared on the pledged equity interest of Sichuan Senmiao. The Equity
Interest Pledge Agreement terminates when all contractual obligations under the Exclusive Business Cooperation Agreement have been
fully performed.
Exclusive Business Cooperation Agreement
Pursuant to an Exclusive Business Cooperation
Agreement entered by and among the Company, Senmiao Consulting, Sichuan Senmiao and each of Sichuan Senmiao Shareholders, Senmiao
Consulting will provide Sichuan Senmiao with complete technical support, business support and related consulting services for 10
years ended September 18, 2027. The Sichuan Senmiao Shareholders and Sichuan Senmiao will not engage any third party for the same
or similar consultation services without Senmiao Consulting’s prior consent. Further, the Sichuan Senmiao Shareholders are
entitled to receive an aggregate of 20,250,000 shares of common stock of the Company under the Exclusive Business Cooperation Agreement.
Senmiao Consulting may terminate the Exclusive Business Cooperation Agreement at any time upon prior written notice to Sichuan
Senmiao and the Sichuan Senmiao Shareholders.
Exclusive Option Agreement
Pursuant to an Exclusive Option Agreement
entered by and among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders, the Sichuan Senmiao Shareholders
have granted Senmiao Consulting an exclusive option to purchase at any time their equity interests in Sichuan Senmiao at a purchase
price equal to the capital paid by the Sichuan Senmiao Shareholders in whole or at a pro-rated price for any partial purchase.
The Exclusive Option Agreement terminates after 10 years ending September 18, 2027 but can be renewed by Senmiao Consulting at
its discretion.
Powers of Attorney
Each of the Sichuan Senmiao Shareholders
has signed a power of attorney (the “Power of Attorney”), pursuant to which, each of the Sichuan Senmiao Shareholders
has authorized Senmiao Consulting to act as his or her exclusive agent and attorney with respect to all rights of such individual
as a shareholder of Sichuan Senmiao, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all
the shareholder’s rights that shareholders are entitled to under PRC laws and the Articles of Association of Sichuan Senmiao,
including but not limited to voting, sale, transfer, pledge and disposition of the equity interests of Sichuan Senmiao; and (c)
designating and appointing the legal representative, chairperson, director, supervisor, chief executive officer and other senior
management members of Sichuan Senmiao. The Power of Attorney has the same term as the Exclusive Option Agreement.
Timely Report Agreement
The Company and Sichuan Senmiao entered
into a Timely Report Agreement, pursuant to which, Sichuan Senmiao agrees to make its officers and directors available to the Company
and promptly provide all information required by the Company so that the Company can make necessary filings to the U.S. Securities
and Exchange Commission (“SEC”) and other regulatory reports in a timely fashion.
The Company has concluded that it should
consolidate the financial statements with Sichuan Senmiao because it is Sichuan Senmiao’s primary beneficiary based on the
Power of Attorney from the Sichuan Senmiao Shareholders, who assigned their rights as shareholders of Sichuan Senmiao to Senmiao
Consulting, the Company’s wholly-owned subsidiary. These rights include, but are not limited to, attending shareholders’
meetings, voting on matters submitted for shareholder approval and appointing legal representatives, directors, supervisors and
senior management of Sichuan Senmiao. As a result, the Company, through Senmiao Consulting, is deemed to hold all of the voting
equity interests in Sichuan Senmiao. Pursuant to Exclusive Business Cooperation Agreement, Senmiao Consulting shall provide complete
technical support, business support and related consulting services for 10 years. Though not explicit in the VIE Agreements, the
Company may provide financial support to Sichuan Senmiao to meet its working capital requirements and capitalization purposes.
The terms of the VIE Agreements and the Company’s plan to provide financial support to Sichuan Senmiao were considered in
determining that the Company is the primary beneficiary of Sichuan Senmiao. Accordingly, the financial statements of Sichuan Senmiao
are consolidated in the Company’s consolidated financial statements.
The Restructuring constituted a reorganization.
As all of the above mentioned companies are under common control, this series of transactions are considered as a reorganization
of the entities under common control at carrying value and the consolidated financial statements have been prepared as if the reorganization
had occurred retroactively. The consolidated financial statements have been prepared as if the existing corporate structure had
been in existence throughout all periods and the reorganization had occurred as of the beginning of the earliest period presented
in the accompanying consolidated financial statements.
Voting Agreement with Jinkailong’s
Other Shareholders
In addition to obtaining 35% equity interests
in Jinkailong, Hunan Ruixi, Jinkailong and other Jinkailong’s shareholders holding an aggregate of 65% equity interests entered
into a voting agreement, as amended (the “Voting Agreement”), pursuant to which all other Jinkailong’s shareholders
will vote in concert with Hunan Ruixi on all fundamental corporate transactions in the event of a disagreement for a period of
20 years, ending on August 25, 2038.
The Company has concluded that it should
consolidate the financial statements with Jinkailong because it is Jinkailong’s primary beneficiary based on the Voting Agreement.
Though not explicit in the business cooperation agreement by and among Jinkailong, Hunan Ruixi, and other shareholders of Hunan
Ruixi, the Company may provide financial support to Jinkailong to meet its working capital requirements and capitalization purposes.
The terms of the Voting Agreement and the Company’s plan to provide financial support to Jinkailong were considered in determining
that the Company is the primary beneficiary of Jinkailong. Accordingly, management has determined that Jinkailong is a VIE and
the financial statements of Jinkailong are consolidated in the Company’s consolidated financial statements.
Total assets and total liabilities of the
Company’s VIEs included in the Company’s consolidated financial statements as of June 30, 2019 and March 31, 2019 are
as follows:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Total assets
|
|
$
|
7,975,251
|
|
|
$
|
5,214,014
|
|
Total liabilities
|
|
$
|
9,587,942
|
|
|
$
|
6,852,769
|
|
Net revenue, net
loss, operating, investing and financing cash flows of the VIEs that were included in the Company's consolidated financial statements
for the three months ended June 30, 2019 and 2018 are as follows:
|
|
For the Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net revenue
|
|
$
|
989,049
|
|
|
$
|
125,026
|
|
Income (loss) from operations
|
|
$
|
163,021
|
|
|
$
|
(399,728
|
)
|
Net loss
|
|
$
|
(15,407
|
)
|
|
$
|
(398,714
|
)
|
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
(a)
|
Basis of presentation
|
The accompanying
interim unaudited condensed consolidated financial statements of the Company has been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
The unaudited
interim financial information as of June 30, 2019 and for the three months ended June 30, 2019 and 2018 have been prepared without
audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures,
which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to
those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial
statements and the notes thereto, included in the Form 10-K for the fiscal year ended March 31, 2019, which was filed with the
SEC on July 5, 2019.
In the opinion
of management, all adjustments (including normal recurring adjustments) necessary to present a fair statement of the Company’s
unaudited financial position as of June 30, 2019, its unaudited results of operations for the three months ended June 30, 2019
and 2018, and its unaudited cash flows for the three months ended June 30, 2019 and 2018, as applicable, have been made. The unaudited
interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
|
(b)
|
Basis of consolidation
|
The unaudited
condensed consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and
expenses of the subsidiaries and VIEs. All inter-company accounts and transactions have been eliminated in consolidation.
|
(c)
|
Foreign currency translation
|
Transactions denominated
in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing on
the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are
translated into the functional currency using the applicable exchange rates on the date of the balance sheet. The resulting exchange
differences are recorded in the statement of operations.
The
reporting currency of the Company and its subsidiaries and VIEs is U.S. dollars (“US$”) and the accompanying
consolidated financial statements have been expressed in US$. However, the Company maintains the books and records in its
functional currency, Chinese Renminbi (“RMB”), being the functional currency of the economic environment in which
its operations are conducted.
In general, for
consolidation purposes, assets and liabilities of the Company and its subsidiaries whose functional currency is not the US$, are
translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing
during the period. The gains and losses resulting from translation of financial statements of the Company and its subsidiaries
and VIEs are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’
equity.
Translation of
amounts from RMB into US$ has been made at the following exchange rates for the respective periods:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
Balance sheet items, except for equity accounts
|
|
|
6.8668
|
|
|
|
6.7119
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.8237
|
|
|
|
6.3779
|
|
In presenting the unaudited condensed consolidated
financial statements in accordance with U.S. GAAP, management make estimates and assumptions that affect the amounts reported and
related disclosures. Estimates, by their nature, are based on judgement and available information. Accordingly, actual results
could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently
available information. Changes in facts and circumstances may cause the Company to revise its estimates. The Company bases its
estimates on past experience and on various other assumptions that are believed to be reasonable, the results of which form the
basis for making judgments about the carrying values of assets and liabilities. Estimates are used when accounting for items and
matters including, but not limited to, revenue recognition, residual values, lease classification and liabilities, finance lease
receivables, inventory obsolescence, right-of-use assets, determinations of the useful lives and valuation of long-lived assets,
estimates of allowances for doubtful accounts and prepayments, estimates of impairment of intangible assets, valuation of deferred
tax assets, estimated fair value used in business acquisitions, valuation of derivative liabilities and other provisions and contingencies.
|
(e)
|
Fair values of
financial instruments
|
Accounting Standards Codification (“ASC”)
Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of 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. Topic 825 excludes
certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate
fair value amounts do not represent the underlying value of the Company. The three levels of valuation hierarchy are defined as
follows:
Level 1
|
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
Level 2
|
Inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
|
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value.
|
The following table sets forth by level
within the fair value hierarchy of the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of June 30, 2019:
|
|
Carrying Value at
June 30, 2019
|
|
|
Fair Value Measurement at
June 30, 2019
|
|
|
|
(Unaudited)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability
|
|
$
|
4,156,147
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,156,147
|
|
The following is a reconciliation of the
beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the three months ended
June 30, 2019:
|
|
June 30, 2019
|
|
Beginning balance
|
|
$
|
-
|
|
Warrant liability recognized at issuance date on June 20, 2019
|
|
|
4,152,751
|
|
Change in fair value of derivative liabilities
|
|
|
3,396
|
|
Ending balance
|
|
$
|
4,156,147
|
|
On June 21, 2019, the Company closed a
registered direct public offering of an aggregate of 1,781,361 shares of common stock, and in connection therewith, issued to the
investors (i) for no additional consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock,
(ii) for nominal additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of common
stock and (iii) placement agent warrants to purchase up to 142,509 shares of common stock.
Those Warrant shares’ strike price
is denominated in US$ and the Company’s functional currency is RMB, therefore, those warrant shares are not considered indexed
to the company’s own stock which should be classified as derivative liability.
The Company’s warrants are not traded
in an active securities market; therefore, the Company estimates the fair value to those warrants using the Black-Scholes valuation
model on June 20, 2019 (the issuance date) and June 30, 2019.
|
|
June 20, 2019
|
|
|
|
Series A
Warrants
|
|
|
Series B
Warrants
|
|
|
Placement Agent
Warrants
|
|
# of shares exercisable
|
|
|
1,336,021
|
|
|
|
1,116,320
|
|
|
|
142,509
|
|
Valuation date
|
|
|
6/20/2019
|
|
|
|
6/20/2019
|
|
|
|
6/20/2019
|
|
Exercise price
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
|
$
|
3.38
|
|
Stock price
|
|
$
|
2.80
|
|
|
$
|
2.80
|
|
|
$
|
2.80
|
|
Expected term(year)
|
|
|
4.00
|
|
|
|
1.00
|
|
|
|
4.00
|
|
Risk-free interest rate
|
|
|
1.77
|
%
|
|
|
1.77
|
%
|
|
|
1.77
|
%
|
Expected volatility
|
|
|
86
|
%
|
|
|
86
|
%
|
|
|
86
|
%
|
|
|
June 30, 2019
|
|
|
|
Series A
Warrants
|
|
|
Series B
Warrants
|
|
|
Placement Agent
Warrants
|
|
# of shares exercisable
|
|
|
1,336,021
|
|
|
|
1,116,320
|
|
|
|
142,509
|
|
Valuation date
|
|
|
6/30/2019
|
|
|
|
6/30/2019
|
|
|
|
6/30/2019
|
|
Exercise price
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
|
$
|
3.38
|
|
Stock price
|
|
$
|
2.79
|
|
|
$
|
2.79
|
|
|
$
|
2.79
|
|
Expected term(year)
|
|
|
3.98
|
|
|
|
0.98
|
|
|
|
3.98
|
|
Risk-free interest rate
|
|
|
1.74
|
%
|
|
|
1.74
|
%
|
|
|
1.74
|
%
|
Expected volatility
|
|
|
87
|
%
|
|
|
87
|
%
|
|
|
87
|
%
|
As of June 30, 2019 and March 31, 2019,
financial instruments of the Company comprised primarily current assets and current liabilities including cash and cash equivalents,
accounts receivable, finance lease receivables and other assets, escrow receivables, due from related parties, borrowings from
financial institutions, other liabilities, due to stockholders and due to related parties and affiliates, which approximate their
fair values because of the short-term nature of these instruments, and noncurrent liabilities of borrowings from financial institutions,
which approximate their fair values because of the stated loan interest rate to the rate charged by similar financial institutions.
The finance lease receivables were recorded
at gross adjusted for the deferred interest income using the effective interest rate method. The Company believes that the effective
interest rates underlying the finance lease receivables approximate current market rates for such finance leasing products as of
June 30, 2019.
Other than as listed above, the Company
did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value.
(f)
|
Business combinations
and noncontrolling interests
|
The Company accounts for its business combinations
using the acquisition method of accounting in accordance with ASC 805 "Business Combinations." The cost of an acquisition
is measured as the aggregate of the acquisition date fair value of the assets transferred to the sellers and liabilities incurred
by the Company and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred.
Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date,
irrespective of the extent of any noncontrolling interests. The excess of (i) the total costs of acquisition, fair value of
the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the
fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statements.
During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the
assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to the consolidated income statements.
For the Company's non-wholly owned subsidiaries,
a noncontrolling interest is recognized to reflect portion of equity that is not attributable, directly or indirectly, to the Company.
The cumulative results of operations attributable to noncontrolling interests are also recorded as noncontrolling interests in
the Company's consolidated balance sheets and consolidated statements of operations and comprehensive loss. Cash flows related
to transactions with noncontrolling interests are presented under financing activities in the consolidated statements of cash flows.
Operating segments are reported in a manner
consistent with the internal reporting provided to the chief operating decision maker (the “CODM”), which is comprised
of certain members of the Company's management team. Historically, the Company had one single operating and reportable segment,
namely the provision of an online lending services. During the year ended March 31, 2019, the Company acquired Hunan Ruixi and
Jinkailong and evaluated how the CODM manages the businesses of the Company to maximize efficiency in allocating resources and
assessing performance. Consequently, the Company presents two operating and reportable segments as set forth in Notes 2 (p)
and 19.
(h)
|
Cash and cash equivalents
|
Cash and cash equivalents primarily consist
of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use.
(i)
|
Accounts receivable, net
|
Accounts receivable are recorded
at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, and are due on demand. Management
reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of
receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current
economic conditions to make adjustments in the allowance when necessary. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2019 and
March 31, 2019, allowance for doubtful accounts amounted to $16,806 and $0, respectively.
Inventories consist of automobiles
which are held for sale and for leasing purposes, and are stated at lower of cost or net realizable value, as determined using
the weighted average cost method. Management compares the cost of inventories with the net realizable value and if applicable,
an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventories
are reviewed for potential write-down for estimated obsolescence or unmarketable inventories which equals the difference between
the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When
inventories are written-down to the lower of cost or net realizable value, it is not marked up subsequently based on changes in
underlying facts and circumstances.
(k)
|
Finance lease receivables, net
|
Finance lease receivables, which
result from sales-type leases, are measured at discounted present value of (i) future minimum lease payments, (ii) any residual
value not subject to a bargain purchase option as a finance lease receivables on its balance sheet and (iii) accrued interest on
the balance of the finance lease receivables based on the interest rate inherent in the applicable lease over the term of the lease.
Management also periodically evaluates individual customer’s financial condition, credit history and the current economic
conditions to make adjustments in the allowance when necessary. Finance lease receivables is charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2019, the
Company determined no allowance for doubtful accounts was necessary for finance lease receivables.
As of June 30, 2019 and March
31, 2019, finance lease receivables consisted of the following:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Gross minimum lease payments receivable
|
|
$
|
1,145,724
|
|
|
$
|
40,023
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
1,145,724
|
|
|
|
40,023
|
|
Less Allowance for uncollectible minimum lease payments receivable
|
|
|
-
|
|
|
|
-
|
|
Net minimum lease payments receivable
|
|
|
1,145,724
|
|
|
|
40,023
|
|
Estimated residual value of leased automobiles
|
|
|
-
|
|
|
|
-
|
|
Less: Unearned interest
|
|
|
(293,588
|
)
|
|
|
(7,471
|
)
|
Financing lease receivables, net
|
|
$
|
852,136
|
|
|
$
|
32,552
|
|
Finance lease receivables, net, current portion
|
|
$
|
270,156
|
|
|
$
|
10,254
|
|
Finance lease receivables, net, long-term portion
|
|
$
|
581,980
|
|
|
$
|
22,298
|
|
Future scheduled minimum lease
payments for investments in sales-type leases as of June 30, 2019 are as follows:
|
|
Minimum future
payments receivable
|
|
Twelve months ending June 30, 2020
|
|
$
|
349,128
|
|
Twelve months ending June 30, 2021
|
|
|
348,140
|
|
Twelve months ending June 30, 2022
|
|
|
329,034
|
|
Twelve months ending June 30, 2023
|
|
|
119,422
|
|
Total
|
|
$
|
1,145,724
|
|
(l)
|
Property and equipment
|
Property and equipment primarily
consists of computer equipment, which is stated at cost less accumulated depreciation less any provision required for impairment
in value. Depreciation is computed using the straight-line method with no residual value based on the estimated useful life. The
useful life of property and equipment is summarized as follows:
Categories
|
|
Useful life
|
Leasehold improvements
|
|
Shorter of the remaining lease terms or estimated useful lives
|
Computer equipment
|
|
2 - 5 years
|
Office equipment
|
|
3 - 5 years
|
Automobiles
|
|
4 years
|
The Company reviews property
and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An asset is considered impaired if its carrying amount exceeds the future net undiscounted cash flows that the
asset is expected to generate. If such asset is considered to be impaired, the impairment recognized is the amount by which the
carrying amount of the asset, if any, exceeds its fair value determined using a discounted cash flow model. For the three months
ended June 30, 2019 and 2018, there was no impairment of property and equipment.
Costs of repairs and maintenance
are expensed as incurred and asset improvements are capitalized. The cost and related accumulated depreciation of assets disposed
of or retired are removed from the accounts, and any resulting gain or loss is reflected in the consolidated income statements.
Purchased intangible assets
are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives
continue to be amortized over their estimated useful lives using the straight-line method as follows:
Categories
|
|
Useful life
|
Platform
|
|
7 years
|
Customer relationship
|
|
10 years
|
Software
|
|
5-7 years
|
Separately identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible
assets is based on the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the three months
ended June 30, 2019 and 2018, there was no impairment of intangible assets.
Basic loss per share is computed by dividing
net loss attributable to stockholders by the weighted average number of outstanding shares of common stock, adjusted for outstanding
shares of common stock that are subject to repurchase.
For the calculation of diluted loss per
share, net loss attributable to stockholders for basic loss per share is adjusted by the effect of dilutive securities, including
share-based awards, under the treasury stock method. Potentially dilutive securities, of which the amounts are insignificant, have
been excluded from the computation of diluted net loss per share if their inclusion is anti-dilutive.
(o)
|
Derivative liabilities
|
A contract is designated as an asset or
a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s
results of operations. The Company then determines which options, warrants and embedded features require liability accounting
and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying
unaudited condensed consolidated statements of operations and comprehensive loss as “change in fair value of derivative liabilities”.
The Company adopted ASC 606, Revenue from
Contracts with Customers (“ASC 606”) on April 1, 2019 using the modified retrospective approach. ASC 606 establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict
the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive
in exchange for those goods or services recognized as performance obligations are satisfied.
The Company has assessed the impact of
the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences
that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price,
customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded
that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 606 and
therefore there was no material changes to the Company's consolidated financial statements upon adoption of ASC 606.
As of June 30, 2019, the Company had outstanding
contracts for automobile transaction and related services amounting to $1,303,206, of which $543,209 is expected to be completed
within 12 months after June 30, 2019, and $759,997 is expected to be completed after June 30, 2020.
Disaggregated information of revenues by
business lines are as follows:
|
|
For the Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Automobile Transaction and Related Services
|
|
|
|
|
|
|
|
|
- Revenues from sales of automobiles
|
|
$
|
3,980,111
|
|
|
$
|
-
|
|
- Service fees from automobile purchase services
|
|
|
656,326
|
|
|
|
-
|
|
- Facilitation fees from automobile transactions
|
|
|
101,499
|
|
|
|
-
|
|
- Service fees from management and guarantee services
|
|
|
86,815
|
|
|
|
-
|
|
- Financing revenues
|
|
|
14,143
|
|
|
|
-
|
|
- Other service fees
|
|
|
173,669
|
|
|
|
-
|
|
Online Lending Services
|
|
|
|
|
|
|
|
|
- Transaction fees from borrowers
|
|
|
56,975
|
|
|
|
115,864
|
|
- Service fees from investors
|
|
|
13,544
|
|
|
|
9,162
|
|
- Website development revenues
|
|
|
11,358
|
|
|
|
-
|
|
Total revenues
|
|
$
|
5,094,440
|
|
|
$
|
125,026
|
|
Automobile transaction and related services
Sales of automobiles – Revenue from
sales of automobiles to the customers of Jinkailong and the sales of automobiles to lessees by Hunan Ruixi under its sales-type
leases. The control over the automobile is transferred to the purchaser along with the delivery of automobile. The amount of the
revenue is based on the sale price agreed by Hunan Ruixi and the counterparties, including the leasees under sales-type leases
and Jinkailong, who acts on behalf of its customers. The Company recognizes revenues when the automobile is delivered and control
is transferred to the purchaser.
Service fees from automobile purchase services
– Services fees from automobile purchase services are paid by automobile purchasers for a series of the services provided
to them throughout the purchase process such as credit assessment, preparation of financing application materials, assistance with
closing of financing transactions, license and plate registration, payment of taxes and fees, purchase of insurance, installment
of GPS devices, ride-hailing driver qualification and other administrative procedures. The amount of these fees is based on the
sales price of the automobiles and relevant services provided. The Company recognizes revenue when all the services are completed
and the automobile is delivered to the purchaser.
Facilitation fees from automobile transactions
– Facilitation fees from automobile purchase transactions are paid by the Company’s customers including third-party
sales teams or the automobile purchasers for the facilitation of the sales and financing of automobiles. The Company attracts automobile
purchasers through third-party sales teams or its own sales department. For the sales facilitated between third-party sales teams
and automobile purchasers, the Company charges the fees to the third-party sales teams, which derived from the commission paid
by the automobile purchasers to the third-party sales teams. Relating to sales facilitated between automobile purchasers and dealers,
the Company charges the fees to the automobile purchasers. The Company recognizes revenue from facilitation fees when the titles
are transferred to the owners. The amount of fees is based on the type of automobile and negotiation with each sales team or automobile
purchaser. The fees charged to third-party sales teams or automobile purchasers are paid before the automobile purchase transactions
are consummated. These fees are non-refundable upon the delivery of automobiles.
Service fees from management and
guarantee services – Over 95% of the Company’s customers have been drivers of Didi Chuxing Technology Co., Ltd.,
the largest ride-hailing service platform in China since the acquisition of Hunan Ruixi. The drivers sign affiliation
agreements with the Company, pursuant to which the Company provides them with management and guarantee services during the
affiliation period. Service fees for management and guarantee services are paid by such automobile purchasers on a monthly
basis for the management and guarantee services provided during the affiliation period. The Company recognizes revenue
over the affiliation period when performance obligations are completed.
Financing revenues – Interest income
from the lease arising from the Company’s sales-type leases and bundled lease arrangements is recognized as financing revenues
over the lease term based on the effective rate of interest in the lease.
Lease
On April 1, 2019, the Company adopted ASU
2016-02, Leases (ASC Topic 842). This update, as well as additional amendments and targeted improvements issued in 2018 and early
2019, supersedes existing lease accounting guidance found under ASC 840, Leases (“ASC 840”). The accounting
for lessors does not fundamentally change with this update except for changes to conform and align guidance to the lessee guidance,
as well as to the revenue recognition guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). Some of these
conforming changes, such as those related to the definition of lease term and minimum lease payments, resulted in certain lease
arrangements, that would have been previously accounted for as operating leases, to be classified and accounted for as sales-type
leases with a corresponding up-front recognition of automobile sales revenue when the lessee obtained control over the automobile.
The two primary accounting provisions the
Company uses to classify transactions as sales-type or operating leases are: (i) a review of the lease term to determine if it
is for the major part of the economic life of the underlying equipment (defined as greater than 75%); and (ii) a review of the
present value of the lease payments to determine if they are equal to or greater than substantially all of the fair market value
of the equipment at the inception of the lease (defined as greater than 90%). Automobile included in arrangements meeting these
conditions are accounted for as sales-type leases. Interest income from the lease is recognized in financing revenues over the
lease term. Automobile included in arrangements that do not meet these conditions are accounted for as operating leases and revenue
is recognized over the term of the lease.
The Company excludes from the measurement
of its lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing
transaction and collected from a customer.
The Company consider the economic life
of most of the automobiles to be three to four years, since this represents the most common lease term for its automobiles and
the automobile will be used for ride-hailing services. The Company believes three to four years is representative of the period
during which an automobile is expected to be economically usable, with normal service, for the purpose for which it is intended.
A portion of the Company’s direct
sales of automobile to end customers are made through bundled lease arrangements which typically include automobile, services (automobile
purchase services, facilitation services, and management and guarantee services) and financing components where the customer pays
a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. Revenues under these bundled
lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included
in the bundled arrangement and the financing components. Lease deliverables include the automobile and financing, while the non-lease
deliverables generally consist of the services and repayment of advanced fees made on behalf of its customers. The Company considers
the fixed payments for purposes of allocation to the lease elements of the contract. The fixed minimum monthly payments are multiplied
by the number of months in the contract term to arrive at the total fixed lease payments that the customer is obligated to make
over the lease term. Amounts allocated to the automobile and financing elements are then subjected to the accounting estimates
under ASC 842 to ensure the values reflect standalone selling prices. The remainder of any fixed payments are allocated to non-lease
elements (automobile purchase services, facilitation fees, and management and guarantee services), for which these revenues are
recognized in a manner consistent with the guidance for service fees from automobile purchase services, facilitation fees from
automobile transactions, and service fees from management and guarantee services as discussed above.
The Company’s lease pricing interest
rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon the local prevailing
rates in the marketplace where its customer will be able to obtain an automobile loan under similar terms from the bank. The Company
reassess its pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. As of June 30,
2019, the Company's pricing interest rate was 6.0% per annum.
Online Lending Services
Transaction fees – Transaction fees
are paid by borrowers to the Company for the work the Company performs through its platform. The amount of these fees is based
upon the loan amount, maturity and the credit grade of borrowers. The fees charged to borrowers are paid upon (i) disbursement
of the proceeds for loans which accrue interest on a monthly basis or (ii) full payment of principal and interest of loans which
accrue interest on a daily basis. These fees are non-refundable upon the issuance of loan. The Company recognizes revenue when
loan proceeds are disbursed to borrowers or borrowers pay their principal and interest on loans.
Service fees – The Company charges
investors service fees on their actual return of investment (interest income). The Company generally receives the service fees
upon the investors’ receipt of their investment returns. The Company recognizes revenue when loans are repaid and investors
receive their investment income.
Website development revenues – Revenue
allocated to website development services is recognized as the service is performed over time using the Company’s efforts
or inputs to the satisfaction of a performance obligation using an input measure method, under which the total value of revenue
is recognized on the basis of the percentage that total cost to date bears to the total expected costs. The Company considers labor
costs and related outsource labor costs for the input measurement as the best available indicator of the progress, pattern and
timing in which contract obligations are fulfilled.
Provisions for estimated losses, if any,
on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates.
In instances where substantive acceptance provisions are specified in customer contracts, revenues are deferred until all acceptance
criteria have been met. To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions
for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably
estimated.
The Company generally does not enter into
arrangements with multiple deliverables for website development services contracts. If the deliverables have standalone value at
contract inception, the Company accounts for each deliverable separately.
Deferred income tax liabilities and assets
are recognized for the expected future tax consequences of temporary differences between the income tax basis and financial reporting
basis of assets and liabilities. Provisions or benefits for income taxes consists of tax estimated from taxable income plus or
minus deferred tax expenses (benefits) if applicable.
Deferred tax is calculated using the balance
sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities
in the financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that it is probable
that taxable income will be utilized with prior net operating loss carried forwards using tax rates that are expected to apply
to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement,
except when it is related to items credited or charged directly to equity. 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
utilized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities.
An uncertain 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. Penalties and interest incurred related to underpayment of income tax are classified as
income tax expense in the period incurred. The Company did not have any significant unrecognized uncertain tax positions or any
unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of June 30, 2019 and March 31, 2018.
As of March 31, 2019, the calendar years ended December 31, 2013 through 2018 for the Company’s PRC entities remain open
for statutory examination by PRC tax authorities.
Comprehensive loss includes net loss and
foreign currency adjustments. Comprehensive loss is reported in the consolidated statements of operations and comprehensive loss.
Accumulated other comprehensive loss, as presented on the consolidated balance sheets are the cumulative foreign currency translation
adjustments.
Share-based awards granted to the Company’s
employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant
date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over
the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying
shares.
At each date of measurement, the Company
reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value
of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected
life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions
during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly,
share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
Prior to March 31, 2019, leases are classified
as either capital or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership
of assets are accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the
lease. All other leases are accounted for as operating leases expense and is included in the consolidated statements of operations
on a straight-line basis over the term of the leases. The Company had no capital lease commitments for the three months ended June
30, 2018.
On April 1, 2019, the Company adopted ASU
2016-02, Leases (ASC Topic 842). This update supersedes existing lease accounting guidance found under ASC 840, Leases (“ASC
840”) and requires the recognition of right-of-use (“ROU”) assets and lease obligations (“lease liabilities”)
by lessees for those leases currently classified as operating leases under existing lease guidance. Leases will be classified as
either finance or operating, with classification affecting the pattern of expense recognition. Short term leases with a term of
12 months or less are not required to be recognized. The Company did not have any financing lease for the three months ended June
30, 2019.
The Company adopted the practical expedient
that allows lessees to treat the lease and non-lease components of a lease a single lease component. The impact of the adoption
of the ASC 842, as of April 1, 2019, the Company recognized approximately $384,000 ROU assets and approximately $378,000 lease
liabilities, primarily related to operating leases of facilities. The adoption of this standard resulted in the recording of operating
lease assets and operating lease liabilities as of April 1, 2019, with no related impact on the Company's unaudited condensed consolidated
statement of changes in stockholders' equity or consolidated statements of operations and comprehensive loss.
Operating lease ROU assets and lease liabilities
are recognized at the adoption date of April 1, 2019 or the commencement date, whichever is earlier, based on the present value
of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the
Company use its incremental borrowing rate based on the information available at the commencement date in determining the present
value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on
a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present
value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not
have reasonable certainty at lease inception that these options will be exercised. The Company generally consider the economic
life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the
short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve
months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives.
Lease expense is recognized on a straight-line basis over the lease term.
The Company reviews the impairment of its
ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted
future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease
liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash
flows.
(u)
|
Significant risks and uncertainties
|
a.
|
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of these assets to credit risk is their carrying amount as of the balance sheet dates. On June 30, 2019 and March 31, 2019, approximately $938,000 and $1,950,000, respectively, was deposited with a bank in the United States which is insured by the U.S. government up to $250,000. On June 30, 2019 and March 31, 2019, approximately $4,445,000 and $3,070,000, respectively, were deposited in financial institutions located in mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.
|
The Company’s operations
are carried out in mainland China. 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.
In addition, the Company’s business may be influenced by changes in government policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation and other factors.
b.
|
In measuring the credit risk of accounts receivables due from the automobile purchasers (the “customers”), the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the risk exposures to the customer and its likely future development. However, as the Company commenced the automobile transaction and related services for less than one year since November 2018, there was limited historic default data and other information to make an estimate on the expected credit losses. Historically, based on our current operating result, most of the automobile purchasers would pay the Company their previously defaulted amounts within one to three months. As a result, the Company would provide full provisions on accounts receivable if the customers default on repayments for over three months. As of June 30, 2019, the Company provided $16,806 provision on accounts receivable allowance for doubtful accounts.
|
The Company is also exposed to liquidity
risk, which may limit the Company’s ability to access capital resources and have liquidity to meet its commitments and business
needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary,
the Company will turn to other financial institutions and the stockholders to obtain short-term funds to meet the liquidity requirements.
As of June 30, 2019 and March 31, 2019,
substantially all of the Company’s operating activities and major assets and liabilities, except for the cash deposit of
approximately $4,445,000 and $3,070,000, respectively, in U.S. dollars, are denominated in RMB, which are not freely convertible
into foreign currencies. All foreign exchange transactions take place through either the Peoples’ Bank of China (“PBOC”)
or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC
or other regulatory institutions requires a payment application together with invoices and signed contracts. The value of RMB is
subject to change in central government policies and international economic and political developments affecting supply and demand
in the China Foreign Exchange Trading System market. When there is a significant change in value of RMB, the gains and losses resulting
from translation of financial statements of a foreign subsidiary will be significant affected. As of the date of this report, RMB
were depreciated from 6.71 RMB into US$1.00 at March 31, 2018 to 7.03 RMB into US$1.00 at August 6, 2019.
It is possible that the VIE Agreements
among Sichuan Senmiao, Senmiao Consulting, and the Sichuan Senmiao Shareholders would not be enforced in China if the PRC government
or courts consider those contracts contravene PRC laws and regulations or otherwise not enforceable for public policy reasons.
In the event that the Company were unable to enforce these contractual arrangements, the Company would not be able to exert effective
control over Sichuan Senmiao. Consequently, Sichuan Senmiao’s results of operations, assets and liabilities would not be
included in the Company’s consolidated financial statements. As a result, the Company’s cash flows, financial position,
and operating performance would be materially and adversely affected. The Company’s contractual arrangements with Sichuan
Senmiao, Senmiao Consulting, and the Sichuan Senmiao Shareholders are approved and in place. Management believes that such contracts
are enforceable, and considers it is less likely that PRC regulatory authorities with jurisdiction over the Company’s operations
and contractual relationships would find the contracts unenforceable.
Sichuan Senmiao has the customer relationship
the workforce for the Company’s online lending business, the costs of which are expensed as incurred. Though the Company’s
operations and businesses do not rely on the operations and businesses of Sichuan Senmiao, they may be partially adversely impacted
if Sichuan Senmiao continue to incur losses.
(v)
|
Recently issued accounting standards
|
In October 2018,
the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.
ASU 2018-17 eliminates the requirement that entities consider indirect interests held through related parties under common control
in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider
such indirect interests on a proportionate basis. The amendments are effective for fiscal years ending after December 15, 2019.
Early adoption is permitted. The Company is currently assessing the timing and impact of adopting the updated provisions to its
unaudited condensed consolidated financial statements.
In August 2018,
the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure
requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently
assessing the timing and impact of adopting the updated provisions to its unaudited condensed consolidated financial statements.
In June 2016,
the FASB issued new accounting guidance ASU 2016-13 for recognition of credit losses on financial instruments, which is effective
January 1, 2020, with early adoption permitted on January 1, 2019. 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;
however, it is expected that the new CECL model will alter the assumptions used in calculating credit losses on loans, finance
lease receivables, other receivables, prepayments, contingent liabilities from guarantee services, among other financial instruments,
and may result in material changes to the Company’s credit reserves.
CECL adoption will have broad impact on
the financial statements of financial services firms, which will affect key profitability and solvency measures. Some of the more
notable expected changes include:
-
|
Higher allowance on financial guarantee reserve and finance lease receivable levels and related deferred tax assets. While different asset types will be impacted differently, the expectation is that reserve levels will generally increase across the board for all financial firms.
|
|
|
-
|
Increased reserve levels may lead to a reduction in capital levels.
|
|
|
-
|
As a result of higher reserving levels, the expectation is that CECL will reduce cyclicality in financial firms’ results, as higher reserving in “good times” will mean that less dramatic reserve increases will be loan related income (which will continue to be recognized on a periodic basis based on the effective interest method) and the related credit losses (which will be recognized up front at origination). This will make periods of loan expansion seem less profitable due to the immediate recognition of expected credit losses. Periods of stable or declining loan levels will look comparatively profitable as the income trickles in for loans, where losses had been previously recognized.
|
The Company does
not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect
on the unaudited condensed consolidated financial position, statements of operations and cash flows of the Company.
3.
|
ACQUISITION OF HUNAN RUIXI AND ITS VIE
|
On November 21,
2018, the Company entered into the Investment Agreement with Hunan Ruixi and the Hunan Ruixi Shareholders. Pursuant to the Investment
Agreement, among other things, the Company acquired from the Hunan Ruixi Shareholders an aggregate of 60% of the outstanding equity
interest in Hunan Ruixi for no consideration. The Company closed the acquisition on November 22, 2018 and agreed to make a capital
contribution of $6,000,000 to Hunan Ruixi, representing 60% of its registered capital, in accordance with the Investment Agreement.
As of June 30, 2019, the Company made the full cash contributions totaling $6,000,000 to Hunan Ruixi. The Company is entitled to
vote and receive profits based on its equity interest ownership in Hunan Ruixi and has a right of first refusal for any issuance
of new equity of Hunan Ruixi.
The acquisition
had been accounted for as a business combination and the results of operations of Hunan Ruixi have been included in the Company's
consolidated financial statements from the acquisition date. The Company made estimates and judgments in determining the fair value
of acquired assets and liabilities, based on an independent valuation report and management's experiences with similar assets and
liabilities. The following table summarizes the fair values for major classes of assets acquired and liabilities assumed at the
date of acquisition:
|
|
Fair value
|
|
Net assets acquired (i)
|
|
$
|
63,965
|
|
Gain from acquisition of Hunan Ruixi and its subsidiary
|
|
|
-
|
|
Noncontrolling interests (ii)
|
|
|
-
|
|
Total purchase consideration
|
|
$
|
-
|
|
(i)
|
Net assets acquired primarily include cash and cash equivalents of $213,645, other current assets of $1,813,821, property and equipment of $107,865, other current liabilities of $711,303 and borrowings from related parties and affiliates of $785,231, and borrowings from financial institutions of $554,802.
|
(ii)
|
Fair value of the noncontrolling interests is estimated with reference to the purchase price per share as of the acquisition date.
|
4.
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable include a portion of
bundled lease arrangements on fixed minimum monthly payments to be paid by the automobile purchasers arising from automobile sales
and services fees, net of unearned interest income, discounted using the Company’s lease pricing interest rates.
As of June 30,
2019 and March 31, 2019, accounts receivable were comprised of the following:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Receivables of transaction fees due from borrowers
|
|
$
|
137,887
|
|
|
$
|
126,272
|
|
Receivables of automobile sales due from automobile purchasers
|
|
|
1,170,287
|
|
|
|
-
|
|
Receivables of services fees due from automobile purchasers
|
|
|
1,051,045
|
|
|
|
199,909
|
|
Less: Unearned interest
|
|
|
(103,015
|
)
|
|
|
-
|
|
Less: Allowance for doubtful accounts
|
|
|
(16,806
|
)
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
2,239,398
|
|
|
$
|
326,181
|
|
Account receivable, net, current portion
|
|
$
|
1,849,418
|
|
|
$
|
326,181
|
|
Account receivable, net, long-term portion
|
|
$
|
389,980
|
|
|
$
|
-
|
|
Movement of allowance for doubtful
accounts is as follows:
|
|
For the Three
Months Ended
June 30, 2019
|
|
|
For the Year
Ended
March 31, 2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Provision for doubtful accounts
|
|
|
16,912
|
|
|
|
-
|
|
Translation adjustment
|
|
|
(106
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
16,806
|
|
|
$
|
-
|
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Automobiles (i)
|
|
$
|
2,536,026
|
|
|
$
|
1,508,244
|
|
(i) As of
June 30, 2019, the Company owned 5 automobiles with a total value of $73,732 for leasing purposes, 218 automobiles with a total
value of $2,186,867 for sale, and 19 automobiles with a total value of $275,427 on for either leasing or selling purposes.
As of June 30, 2019 and March 31, 2019,
the management compared the cost of automobiles with their net realizable value and determined no inventory write-down was necessary
for these automobiles.
6.
|
PREPAYMENTS, RECEIVABLES AND OTHER ASSETS
|
As of June 30, 2019 and March 31, 2019,
the prepayments, receivables and other assets were comprised of the following:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Due from automobile purchasers, net (i)
|
|
$
|
2,527,020
|
|
|
$
|
2,564,834
|
|
Prepayments for automobiles (ii)
|
|
|
205,860
|
|
|
|
394,821
|
|
Deposits
|
|
|
316,984
|
|
|
|
294,986
|
|
Value added tax (“VAT”) recoverable (iii)
|
|
|
668,500
|
|
|
|
228,196
|
|
Deferred issuance costs pursuant to Registration Statement on Form S-3 (iv)
|
|
|
-
|
|
|
|
149,696
|
|
Prepaid expenses
|
|
|
302,261
|
|
|
|
112,147
|
|
Employee advances
|
|
|
113,087
|
|
|
|
-
|
|
Others
|
|
|
30,916
|
|
|
|
48,788
|
|
Total
|
|
$
|
4,164,628
|
|
|
$
|
3,793,468
|
|
(i)
|
Due from automobile purchasers
|
The balance due from automobile
purchasers represented the payment of automobiles and related insurances and taxes made on behalf of the automobile purchasers.
The balance is expected to be collected from the automobile purchasers in installments. As of June 30, 2019 and March 31, 2019,
the Company recorded allowance of $14,726 and $2,995, respectively, against doubtful receivables.
(ii)
|
Prepayments for automobiles
|
The balance represented amounts
advanced to dealers for automobiles and to other third parties for automobiles related taxes and insurances.
The balance of VAT recoverable
represented the amount to be utilized to offset the Company’s future value added taxes arising from sales of goods.
(iv)
|
Deferred issuance costs pursuant to Registration Statement on Form S-3
|
On April 15, 2019, the Company’s
Registration Statement on Form S-3 registering up to $80,000,000 in aggregate principal amount of its common stock, preferred stock,
debt securities, warrants, rights and/or units were declared effective. The deferred issuance costs pursuant to Form S-3 represented
the direct and incremental costs related to the registered direct offering closed on June 21, 2019. The deferred issuance costs
were netted against the gross proceeds of the offering on the effective date of the offering.
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consist of the following:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
183,237
|
|
|
$
|
-
|
|
Electronic devices
|
|
|
31,365
|
|
|
|
28,305
|
|
Office equipment, fixtures and furniture
|
|
|
76,174
|
|
|
|
48,157
|
|
Vehicle
|
|
|
236,368
|
|
|
|
81,523
|
|
Subtotal
|
|
|
527,144
|
|
|
|
157,985
|
|
Less:
accumulated depreciation and amortization
|
|
|
(56,736
|
)
|
|
|
(32,100
|
)
|
Total
|
|
$
|
470,408
|
|
|
$
|
125,885
|
|
Depreciation and amortization expense for
the three months ended June 30, 2019 and 2018 amounted to $25,522 and $1,882, respectively.
8.
|
INTANGIBLE ASSETS, NET
|
Intangible assets consisted of the following:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Customer relationship
|
|
$
|
383,761
|
|
|
$
|
392,618
|
|
Platform
|
|
|
1,135,103
|
|
|
|
1,161,267
|
|
Software
|
|
|
67,366
|
|
|
|
27,203
|
|
Subtotal
|
|
|
1,586,230
|
|
|
|
1,581,090
|
|
Less: Accumulated amortization
|
|
|
(1,271,100
|
)
|
|
|
(1,284,999
|
)
|
Intangible assets, net
|
|
$
|
315,130
|
|
|
$
|
296,091
|
|
Amortization expense totaled $15,152 and
$86,297 for the three months ended June 30, 2019 and 2018, respectively.
The following table sets forth the Company’s
amortization expenses for the next five year ending:
|
|
Amortization
expenses
|
|
Twelve months ending June 30, 2020
|
|
$
|
50,429
|
|
Twelve months ending June 30, 2021
|
|
|
50,429
|
|
Twelve months ending June 30, 2022
|
|
|
50,429
|
|
Twelve months ending June 30, 2023
|
|
|
50,429
|
|
Twelve months ending June 30, 2024
|
|
|
44,822
|
|
Thereafter
|
|
|
68,592
|
|
Total
|
|
$
|
315,130
|
|
9.
|
PREPAYMENTS FOR INTANGIBLE ASSETS
|
As of June 30, 2019 and March 31, 2019,
the balance of prepayments for intangible assets of $745,628 and $470,706, respectively, represented the advance payments for the
development of software to be used in the Company’s online lending platform or other related financial services of $145,628
and $190,706, respectively, and the software to be used in the automobile transaction and related services of $600,000 and $280,000,
respectively. The balance will be recognized as intangible assets and amortized over the estimated useful life upon the completion
of installation and testing of the software.
10.
|
BORROWINGS FROM FINANCIAL INSTITUTIONS, CURRENT AND NONCURRENT
|
The borrowings from certain financial
institutions represented the difference between the actual proceeds disbursed by the financial institutions to Jinkailong and
the total principal to be responsible for and repaid by the automobile purchasers. Such borrowings totaled $340,588 and
$396,946 bearing interest rates ranging between 6.2% and 8.1% per annum at June 30, 2019 and March 31, 2019, respectively, of
which $126,375 and $177,789, respectively, is to be repaid over a period of 13 to 24 months.
The interest expense for the three months
ended June 30, 2019 and 2018 was $10,238 and $0, respectively.
11.
|
BORROWINGS FROM THIRD PARTIES
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
Borrowings from third parties
|
|
$
|
145,628
|
|
|
$
|
476,765
|
|
The borrowings from third parties bear
an average interest rate of 7.24% per annum and are due in August 2019. The interest expense for the three months ended June 30,
2019 and 2018 was $13,174 and $0, respectively.
12.
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accrued payroll and welfare
|
|
$
|
666,774
|
|
|
$
|
614,765
|
|
Other payable (i)
|
|
|
203,376
|
|
|
|
247,335
|
|
Loan repayments received on behalf of financial institutions (ii)
|
|
|
323,865
|
|
|
|
169,657
|
|
Payables for expenditures on automobile transaction and related services
|
|
|
139,130
|
|
|
|
157,382
|
|
Accrued expenses
|
|
|
247,864
|
|
|
|
198,456
|
|
Customer security deposits
|
|
|
245,919
|
|
|
|
82,232
|
|
Other taxes payable
|
|
|
30,874
|
|
|
|
30,976
|
|
|
|
$
|
1,857,802
|
|
|
$
|
1,500,803
|
|
(i)
|
The balance of other payable represented amount due to suppliers and vendors for operation purposes.
|
(ii)
|
The balance of loan repayments received on behalf of financial institutions represented the loan repayments made by the automobile purchasers to financial institutions through the Company, which has not been paid to the financial institutions as of June 30, 2019.
|
13.
|
EMPLOYEE BENEFIT PLAN
|
The Company has made employee benefit contributions
in accordance with relevant PRC regulations, including retirement insurance, unemployment insurance, medical insurance, housing
fund, work injury insurance and maternity insurance. The Company has recorded the contribution in salary and employee charges when
incurred. The contributions made by the Company were $107,556 and $48,818 for the three months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019 and March 31, 2019,
the Company did not make adequate employee benefit contributions in the amount of $461,511 and $403,646. The Company accrued the
amount in accrued payroll and welfare.
Warrants
IPO Warrants
The registration statement relating to
the Company’s IPO also included the underwriters’ common stock purchase warrants to purchase 337,940 shares of common
stock (“Underwriter’s Warrants”). Each five-year warrant entitles warrant holder to purchase one share of the
Company’s common stock at the price of $4.80 per share and is not exercisable for a period of 180 days from March 16, 2018.
On March 15, 2019, the underwriters elected to exercise 300,000 shares of the Purchase Warrants on a cashless basis in exchange
for common stock. On April 5, 2019, the Company issued a total of 65,855 shares of common stock to the underwriters as a result
of the cashless exercise of 300,000 Underwriter’s Warrants. As the date of the issuance of these financial statements, there
were 37,940 Underwriter’s Warrants outstanding.
Registered Direct Offering Warrants
The Company adopted the provisions of ASC
815 on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered
indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued in
connection with the direct equity offering with exercise prices denominated in US dollars are no longer considered indexed to the
Company’s stock, as their exercise price is not in the Company’s functional currency (RMB), and therefore no longer
qualify for the scope exception and must be accounted for as a derivative. These warrants are classified as liabilities under the
caption “Derivative liabilities” in the unaudited condensed consolidated statements of balance sheets and recorded
at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. Changes in the liability from
period to period are recorded in the consolidated statements of operations and comprehensive loss under the caption “Change
in fair value of derivative liabilities.”
The Company allocated the proceeds received
between the common stock and warrants first to warrants based on the fair value on the date the proceeds were received with the
balance to common stock. The value of the warrants was determined using the Black-Scholes valuation model using the following
assumptions: volatility 86%; risk free interest rate 1.77%; dividend yield of 0% and expected term of 4 years of the Investor
Series A Warrants, 1 year of the Series B Warrants, and 4 years of the Placement Warrants. The volatility of the Company’s
common stock was estimated by management based on the historical volatility of its common stock, the risk free interest rate was
based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of
the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy and the expected
term is equal to the contractual life of the warrants. The value of the warrants was based on the Company’s common stock
closing price of $2.80 on the date the warrants were issued. Net proceeds were allocated as the follows:
Warrants
|
$
|
4,152,751
|
Common stock
|
|
989,373
|
Total net proceeds
|
$
|
5,142,124
|
Subsequent to the initial recording, the
change in the fair value of the warrants, determined under the Black-Scholes valuation model, at each reporting date will result
in either an increase or decrease the amount recorded as liability, based on the fluctuations with the Company’s stock price
with a corresponding adjustment to other income (or expense). At June 30, 2019, a loss of $3,396 was recognized in the accompanying
unaudited condensed consolidated statements of operations and comprehensive loss based on the increase in fair value of the liabilities
since issuance. At June 30, 2019, the fair value of the derivative instrument totaled $4,156,147.
The Company has outstanding warrants as
following:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Average
Exercise
|
|
|
Remaining
Contractual
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
Balance, March 31, 2018
|
|
|
337,940
|
|
|
|
337,940
|
|
|
$
|
4.80
|
|
|
|
4.96
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
$
|
4.80
|
|
|
|
-
|
|
Balance, March 31, 2019
|
|
|
37,940
|
|
|
|
37,940
|
|
|
$
|
4.80
|
|
|
|
3.96
|
|
Granted
|
|
|
2,594,850
|
|
|
|
2,594,850
|
|
|
$
|
3.70
|
|
|
|
2.71
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, June 30, 2019
|
|
|
2,632,790
|
|
|
|
2,632,790
|
|
|
$
|
3.72
|
|
|
|
2.69
|
|
Restricted Stock Units
On July 31, 2018, the board of directors
of the Company approved the issuance of 5,000 restricted stock units (“RSUs”) to each of the five directors as stock
compensation for their services for the Company’s fiscal year ending March 31, 2019. Total RSUs granted to the five directors
were 25,000 for an aggregate fair value of $117,750. Pursuant to the Restricted Stock Unit Award Agreements (“Award Agreements”)
on August 3, 2018, the RSUs vest in four equal quarterly installments on August 3, 2018, April 1, 2019, July 1, 2019 and October
1, 2019 or in full upon the occurrence of a change in control of the Company, subject to the terms and conditions set forth in
the Award Agreements, provided that the director remains in service as a director through the applicable vesting date. The RSUs
will be settled by the Company’s issuance of shares of common stock in certificated or uncertificated form upon the earlier
of (i) a change in control and (ii) the director’s cessation as a director of the Company due to a “separation of service”
within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, or the director’s death or disability.
As of March 31, 2019, the first installment
of RSUs has vested and the Company accounted for the vested RSUs as an addition to both expenses and additional paid-in capital.
The fair value of the vested RSUs is calculated at the grant date market price of the Company’s common stock multiplying
by the number of vested shares.
A summary of RSU activity for the year
ended March 31, 2019 and for the three months ended June 30, 2019 is as follows:
|
|
Number of
Shares
|
|
|
Weighted-Average
Grant
Date Fair
Value
|
|
Balance of RSUs outstanding at March 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Grants of RSUs
|
|
|
25,000
|
|
|
$
|
4.42
|
|
Vested RSUs
|
|
|
(6,250
|
)
|
|
$
|
4.42
|
|
Forfeited RSUs
|
|
|
(7,500
|
)
|
|
$
|
4.42
|
|
Balance of unvested RSUs at March 31, 2019
|
|
|
11,250
|
|
|
$
|
4.42
|
|
Grants of RSUs
|
|
|
-
|
|
|
|
-
|
|
Vested RSUs
|
|
|
(3,750
|
)
|
|
$
|
4.42
|
|
Forfeited RSUs
|
|
|
-
|
|
|
|
-
|
|
Balance of unvested RSUs at June 30, 2019 (Unaudited)
|
|
|
7,500
|
|
|
$
|
4.42
|
|
Total compensation expense for the three
months ended June 30, 2019 and 2018 was $16,575 and $0, respectively. Two directors ceased to serve on the board since November
8, 2018, and as a result 7,500 RSUs were forfeited during the year ended March 31, 2019. As of June 30, 2019 and March 31, 2019,
the other three directors remained on the board and the Company has an aggregate of 7,500 and 11,250 of unrecognized RSUs as of
June 30, 2019 and March 31, 2019, respectively, to be expensed over a weighted average period of six and three months, respectively.
Equity Incentive Plan
At the 2018 Annual Meeting of Stockholders
of the Company held on November 8, 2018, the Company’s stockholders approved the Company’s 2018 Equity Incentive Plan
for employees, officers, directors and consultants of the Company and its affiliates. A committee consisting of at least two
independent directors appointed by the board of directors or in the absence of such a committee, the board of directors, will be
responsible for the general administration of the Equity Incentive Plan. All awards granted under the Equity Incentive Plan will
be governed by separate award agreements between the Company and the participants. As of the date of this report, no awards have
been granted under the plan.
Registered Direct Offering
On April 15, 2019, the Securities and Exchange
Commission (“SEC”) declared effective the Company’s Registration Statement on Form S-3, pursuant to which, along
with the accompanying prospectus, the Company registered up to $80,000,000 in aggregate principal amount of its common stock, preferred
stock, debt securities, warrants, rights and/or units. On June 21, 2019, the Company closed a registered direct public offering of an aggregate of 1,781,361 shares of its common stock, and in connection therewith, issued to the
investors (i) for no additional consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock
and (iii) for nominal additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of
common stock. The Company sold the shares of common stock at a price of $3.38 per share (the “Share Purchase Price”).
The Company received gross proceeds from the offering, before deducting estimated offering expenses payable by the Company, of
approximately $6,000,000.
The Series A warrants are exercisable immediately
upon issuance at an exercise price of $3.72 per share and will expire on the fourth (4th) anniversary of the original issue date.
The Series B warrants are pre-funded
warrants and are being issued as a true-up with respect to the shares of common stock. The maximum aggregate number of shares
of common stock issuable upon exercise of the Series B warrants is 1,116,320. Initially, the Series B warrants shall not be
exercisable for any shares of common stock. In that event that on the fiftieth (50th) day after the closing date (the
“Adjustment Measuring Time”), the closing price of the common stock is less than the Share Purchase Price, then
the number of shares of common stock issuable upon exercise of the Series B warrants shall be adjusted (upward or downward,
as applicable) to the greater of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to fifty percent
(50%) of the difference of (A) the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined in
Purchase Agreement) as of the Adjustment Measuring Time, less (B) the aggregate number of shares of common stock issued to
the investors at the closing (as adjusted for share splits, share dividends, share combinations, recapitalizations and
similar events). On August 13, 2019, the Company issued an aggregate of 500,470 shares of common stock to certain investors in
the June 2019 offering upon exercise of the pre-funded Series B warrants for a total consideration of $50.
The United States of America
The Company is incorporated in the State
of Nevada in the U.S., and is subject to U.S. federal corporate income taxes. The State of Nevada does not impose any state corporate
income tax.
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 (the “Tax Act”) was signed into law, which has made significant changes to the Internal Revenue Code.
Those changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning
after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and
a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. As the Company has
a March 31 fiscal year end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of
approximately 31.5% for its fiscal year ended March 31, 2018, and 21% for subsequent fiscal years. Accordingly, the Company reevaluated
its deferred tax assets on net operating loss carryforward in the U.S and concluded there was no effect on the Company’s
income tax expenses as the Company has no deferred tax assets generated since inception.
Additionally, the Tax Act imposes a one-time
transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to
U.S. taxation. The change in rate has caused the Company to reevaluate all U.S. deferred income tax assets and liabilities for
cumulative temporary differences and net operating loss carryforwards and recorded one time income tax payable to be paid in 8
years. However, this one-time transition tax has no effect on the Company’s income tax expenses as the Company has no undistributed
foreign earnings prior to March 31, 2019, because the Company has cumulative foreign losses as of March 31, 2019.
The Company’s net operating loss
for the three months ended June 30, 2019 amounted to approximately $319,000. As of June 30, 2019, the Company’s net operating
loss carryforward for U.S. income taxes was approximately $1.6 million. The net operating loss carryforward is available to reduce
future years’ taxable income through year 2039. Management believes that the utilization of the benefit from this loss appears
uncertain due to the Company’s operating history. Accordingly, the Company has recorded a 100% valuation allowance on the
deferred tax asset to reduce the deferred tax assets to zero on the consolidated balance sheets. As of June 30, 2019 and March
31, 2019, valuation allowances for deferred tax assets were approximately $0.34 million and $0.27 million, respectively. Management
reviews the valuation allowance periodically and makes changes accordingly.
PRC
Senmiao Consulting, Sichuan Senmiao, Hunan
Ruixi, Ruixi Leasing, Jinkailong, and Yicheng are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income
in accordance with the relevant PRC income tax laws. The EIT rate for companies operating in the PRC is 25%.
Income taxes in the PRC are consist of:
|
|
For the Three Months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Current income tax expenses
|
|
$
|
101,141
|
|
|
$
|
-
|
|
Deferred income tax expenses
|
|
|
|
|
|
|
-
|
|
|
|
$
|
101,141
|
|
|
$
|
-
|
|
As of June 30, 2019 and March 31, 2019,
the Company’s PRC entities had net operating loss carryforwards of approximately $3.9 million and $4.8 million, respectively,
which will expire in 2024. The Company reviews deferred tax assets for a valuation allowance based upon whether it is more likely
than not that the deferred tax asset will be fully realized. At June 30, 2019 and March 31, 2019, full valuation allowance is provided
against the deferred tax assets based upon management’s assessment as to their realization on the Company’s PRC entities
that are operating at losses.
The tax effects of temporary differences
from continuing operations that give rise to the Company’s deferred tax assets are as follows:
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Net operating loss carryforwards in the PRC
|
|
$
|
983,287
|
|
|
$
|
886,176
|
|
Net operating loss carryforwards in the U.S.
|
|
|
339,286
|
|
|
|
272,258
|
|
Allowance for doubtful accounts
|
|
|
4,202
|
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(1,326,775
|
)
|
|
|
(1,158,434
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
16.
|
RELATED PARTY TRANSACTIONS
AND BALANCES
|
1.
|
Related Party Balances
|
1)
|
Due from related parties
|
All balances due from related parties represent
operation costs of these related parties paid by the Company on behalf of them, amounts received by the Company on behalf of a
related party for refund of insurance claims, and amounts collected by these related parties on behalf of the Company from the
automobile purchasers, including certain installment payments and facilitation fees. The balances due from related parties were
all non-interest bearing and due on demand.
This is comprised of amounts payable to
two stockholders and are unsecured, interest free and due on demand.
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Jun Wang
|
|
$
|
104,814
|
|
|
$
|
107,233
|
|
Xiang Hu
|
|
|
926,345
|
|
|
|
972,814
|
|
Total
|
|
$
|
1,031,159
|
|
|
$
|
1,080,047
|
|
3)
|
Due to related parties and affiliates
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Loan payable to related parties (i)
|
|
$
|
480,573
|
|
|
$
|
95,781
|
|
Other payables due to related parties (ii)
|
|
|
-
|
|
|
|
297,978
|
|
Others
|
|
|
71,389
|
|
|
|
22,172
|
|
|
|
$
|
551,962
|
|
|
$
|
415,931
|
|
(i)
|
As of June 30, 2019 and March 31, 2019, the balances
represented borrowings from three and two related parties, respectively. $43,688 of the balances as of June 30, 2019 is
unsecured, interest free and due in the fiscal year of 2020 while $436,885 of the balance bears an interest rate of 8% per
annum and is due in August 2019. The balance as of March 31, 2019 bore an interest rate of 10% per annum and is
due in the fiscal year of 2020.
|
(ii)
|
As of March 31, 2019, the balance represented borrowings from
two related parties, who obtained borrowings from the online P2P lending platform of Sichuan Senmiao and then loaned the
money to Jinkailong. The balance bore an interest rate of 8.22% per annum and was fully repaid in April 2019.
|
|
|
Interest expense for the three months ended
June 30, 2019 and 2018 were $13,627 and $0, respectively.
2.
|
Related Party Transactions
|
In December 2017, the Company entered into
loan agreements with two stockholders, who agreed to grant lines of credit of approximating $955,000 and $159,000, respectively,
to the Company for five years. The lines of credit are non-interest bearing, effective from January 2017. As of June 30, 2019,
the outstanding balances were $926,345 and $104,814, respectively.
The Company entered into two office lease
agreements which expire on January 1, 2020. On April 1, 2018, the two office leases were modified with the leasing term from April
1, 2018 to March 31, 2021. For the three months ended June 30, 2019 and 2018, the Company paid $27,971 and $29,926 in rent, respectively,
to the stockholder.
In November 2018, Hunan Ruixi entered into
an office lease agreement with Hunan Dingchentai Investment Co., Ltd. ("Dingchentai"), a company where one of our independent
directors serves as legal representative and general manager. The term of the lease agreement is from November 1, 2018 to October
31, 2023 and the rent is approximately $44,250 per year, payable on a quarterly basis. This lease agreement was terminated on July
1, 2019. For the three months ended June 30, 2019 and 2018, the Company paid $10,604 and $0 in rent, respectively, to Dingchentai.
Before the acquisition of Hunan Ruixi,
five related parties of Jinkailong borrowed funds of $747,647 through the online P2P lending platform of Sichuan Senmiao and then
loaned the money to Jinkailong. As of March 31, 2019, the outstanding balance was $297,978. During the three months ended June
30, 2019, Jinkailong repaid all of them. Those loans bore interest rates ranging from 7.68% to 8.22% per annum and the interest
expense for the three months ended June 30, 2019 and 2018 was $12,353 and $0, respectively.
Effective January 1, 2019, the Company
adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require the
Company to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired
or existing leases and (3) initial direct costs for any expired or existing leases. The impact of the adoption of the ASC 842,
as of April 1, 2019, the Company recognized approximately $384,000 ROU assets and approximately $378,000 lease liabilities, primarily
related to leases of facilities. The ROU and lease liabilities are determined based on the present value of the future minimum
rental payments of the lease as of the adoption date, using an effective interest rate of 6.0%, which is determined using an incremental
borrowing rate with similar term in the PRC. The average remaining lease term of its existing leases is 2.31 years. The adoption
of this standard resulted in the recording of operating lease assets and operating lease liabilities as of April 1, 2019, with
no related impact on the Company's unaudited condensed consolidated statement of changes in stockholders' equity or consolidated
statements of operations and comprehensive loss
The
Company occupies various offices under operating lease agreements with a term shorter than 12 months which it elected not to recognize
lease assets and lease liabilities under ASC 842. Instead, the Company recognized the lease payments in profit or loss on a straight-line
basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
The Company’s lease agreements do
not contain any material residual value guarantees or material restrictive covenants.
Rental expenses totaled $82,738 and $40,634
for the three months ended June 30, 2019 and 2018, respectively.
The following table sets forth the Company’s
lease obligations as of June 30, 2019 in future periods:
|
|
Lease payments
|
|
Twelve months ending June 30, 2020
|
|
$
|
209,493
|
|
Twelve months ending June 30, 2021
|
|
|
116,755
|
|
Twelve months ending June 30, 2022
|
|
|
6,011
|
|
Twelve months ending June 30, 2023
|
|
|
6,312
|
|
Total lease payments
|
|
|
338,571
|
|
Less: discount
|
|
|
(17,999
|
)
|
Present value of lease liabilities
|
|
$
|
320,572
|
|
|
18.
|
COMMITMENTS AND CONTINGENCIES
|
Purchase Commitments
As of June 30, 2019, the Company had multiple
outstanding purchase contracts with various automobile dealers for the purchase of a total 433 automobiles in the aggregate purchase
price of approximately $4.9 million.
From July 1, 2019 through the date of issuance
of these financial statements, the Company entered into one contract with an automobile dealer for the purchase of a total 40 automobiles
in the aggregate purchase price of approximately $0.4 million. These transactions are expected to be completed in 2019.
Contingencies
In measuring the credit risk of guarantee
services to automobile purchasers, the Company primarily reflects the “probability of default” by the automobile purchasers
on its contractual obligations and considers the current financial position of the automobile purchasers and its likely future
development.
The Company manages the credit risk of
automobile purchasers by performing preliminary credit checks of each automobile purchaser and ongoing monitoring every month.
By using the current credit loss model, management is of the opinion that the Company is bearing the credit risk to repay the principal
and interests to the financial institutions if automobile purchasers default on their payments for more than three months. Management
also periodically re-evaluates probability of default of automobile purchasers to make adjustments in the allowance when necessary.
However, as the Company commenced the automobile
transaction and related services for less than one year, there was no sufficient historic default data and other information to
make an estimate on the expected credit losses. Historically, most of the automobile purchasers would pay the Company their previous
defaulted amounts within one to three months. For the three months ended June 30, 2019, the Company did not provide provisions
for the guarantee services. As of June 30, 2019, the maximum contingent liabilities the Company exposed to would be approximately
$14,489,000 if all the automobile purchasers defaulted, among which approximately $748,000 would be due to investors of online
lending platform operated by Sichuan Senmiao. Automobiles are used as collateral to secure the payment obligations of the automobile
purchasers under the financing agreements. The Company estimated the fair market value of the collateral to be approximately $12,366,000
as of June 30, 2019, based on the market price and the useful life of such collateral, which represents about 85.3% of the contingent
liabilities
The Company presents segment information
after elimination of inter-company transactions. In general, revenue, cost of revenue and operating expenses are directly attributable,
or are allocated, to each segment. The Company allocates costs and expenses that are not directly attributable to a specific segment,
such as those that support infrastructure across different segments, to different segments mainly on the basis of usage, revenue
or headcount, depending on the nature of the relevant costs and expenses. The Company does not allocate assets to its segments
as the CODM does not evaluate the performance of segments using asset information.
The following tables present the summary
of each segment's revenue, loss from operations, loss before income taxes and net loss which is considered as a segment operating
performance measure, for the three months ended June 30, 2019:
|
|
For the Three Months Ended June 30, 2019
|
|
|
|
Online Lending
Services
|
|
|
Automobile
Transaction and
Related Services
|
|
|
Unallocated
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
81,877
|
|
|
$
|
5,012,563
|
|
|
$
|
-
|
|
|
$
|
5,094,440
|
|
Income / (loss) from operations
|
|
$
|
(472,345
|
)
|
|
$
|
415,602
|
|
|
$
|
(339,355
|
)
|
|
$
|
(396,098
|
)
|
Income / (loss) before income taxes
|
|
$
|
(453,270
|
)
|
|
$
|
391,492
|
|
|
$
|
(342,513
|
)
|
|
$
|
(404,291
|
)
|
Net loss
|
|
$
|
(453,270
|
)
|
|
$
|
290,351
|
|
|
$
|
(342,513
|
)
|
|
$
|
(505,432
|
)
|
Details of the Company's revenue by segment
are set out in Note 2(p).
As of June 30, 2019 and March 31, 2019,
the Company’s total assets were $1,344,736 and $1,695,391, respectively, for online lending services, $14,248,408 and $7,580,070,
respectively, for automobile transaction and related services, and $2,261,479 and $3,038,674, respectively, unallocated.
As substantially all of the Company's long-lived
assets are located in the PRC and substantially all of the Company's revenue is derived from within the PRC, no geographical information
is presented.
On July 5, 2019, Yicheng entered into an
Investment and Equity Transfer Agreement (“Investment Agreement”) with Chengdu Mashangchuxing Automobile Leasing Co.,
Ltd. (“Mashang Chuxing”), Chengdu Yunche Chixun Business Consulting Co., Ltd. (“Yunche Chixun”), Mr. Zhiqiu
Xia and all the shareholders of Mashang Chuxing (“Mashang Chuxing Shareholders”), pursuant to which, Yicheng, Yunche
Chixun, Mr. Zhiqiu Xia will acquire from the Mashang Chuxing Shareholders 49%, 5% and 46% of the equity interests of Mashang Chuxing
for no consideration, respectively. Yicheng planned to close the acquisition before September 2019 and would make a cash contribution
of RMB4,900,000 (approximately $731,000) to Mashang Chuxing, representing 49% of its registered capital, in accordance with the
Investment Agreement. Mashang Chuxing is wholly owned by one of the shareholders of Jinkailong and his spouse. As the date of this
report, Mashang Chuxing has not commenced operation.
2)
|
Closing of performance
review period of Jinkailong
|
Pursuant to a business cooperation agreement
and valuation adjustment mechanism and indemnification agreement, dated August 26, 2018, and its amendment dated October 16, 2018
(the “Business Cooperation Agreement”), by and among Jinkailong, Hunan Ruixi, and the original shareholders of Jinkailong,
Xiaoliang Chen, Xi Yang, Yiqiang He and Xiaohui Luo (the “Original Jinkailong Shareholders”), Hunan Ruixi acquired
from the Original Shareholders 35% of the equity interest of Jinkailong for no consideration. Pursuant to the Business Cooperation
Agreement, Hunan Ruixi would make payments to the Original Jinkailong Shareholders equal to 35% of the audited net profit at the
end of the 9 month period after October 16, 2018 (the “performance review period”), if Jinkailong met the performance
targets during the performance review period. The performance review period ended on July 15, 2019 and it was concluded Jinkailong
did not meet the performance targets. Therefore, no additional payment is required from Hunan Ruixi to the Original Jinkailong
Shareholders.