YUANF Fincera Inc (CE)

ITEM 3. KEY INFORMATION

 

A. Selected financial data

 

The following selected consolidated financial data as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 have been derived from the audited consolidated financial statements of Fincera included in this Annual Report beginning on page F-1. The following summary consolidated financial data as of December 31, 2015, 2014 and 2013, and for the years ended December 31, 2014 and 2013, have been derived from the audited consolidated financial statements of Fincera. Such financial data is not included in this Annual Report. The consolidated financial data for all periods presented is retrospectively adjusted to reflect the acquisition of Eastern Eagle International Ltd. (“Eastern Eagle”) and its subsidiaries, which were under common control with us both immediately before and after the acquisition. Prior period amounts also have been adjusted to exclude discontinued operations (refer to Note 4 to the Consolidated Financial Statements). This information is only a summary and should be read together with the consolidated financial statements, the related notes, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Fincera” and other financial information included in this Annual Report.

 

The consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or “U.S. GAAP.” The results of operations of Fincera in any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” included elsewhere in this Annual Report.

 

 

 

	For the Years Ended December 31,
	2017	2017	2016	2015	2014	2013
	USD	RMB	RMB	RMB	RMB	RMB
Statement of Income Data –
Income	156,691	1,023,851	875,925	452,978	123,027	32,857
Loss from continuing operations before income taxes	(1,775 )	(11,596 )	(4,830 )	(77,771 )	(233,459 )	(176,815 )
Income tax (benefit) provision	(134 )	(878 )	8,534	(17,820 )	(44,909 )	(22,773 )
Loss from continuing operations	(1,641 )	(10,718 )	(13,364 )	(59,951 )	(188,550 )	(154,042 )
Income from discontinued operations, net of taxes	358	2,336	1,094	51,072	162,750	170,088
Net (loss) income attributable to shareholders	(1,283 )	(8,382 )	(12,270 )	(8,879 )	(25,800 )	16,046

 

 

	For the Years Ended December 31,
	2017	2017	2016	2015	2014	2013
	USD	RMB	RMB	RMB	RMB	RMB
(Loss) earnings per share –
Basic
Continuing operations	(0.03 )	(0.23 )	(0.28 )	(1.27 )	(4.00 )	(3.27 )
Discontinued operations	0.01	0.05	0.02	1.08	3.44	3.63
	(0.02 )	(0.18 )	(0.26 )	(0.19 )	(0.56 )	0.36
Diluted
Continuing operations	(0.03 )	(0.23 )	(0.28 )	(1.27 )	(4.00 )	(3.27 )
Discontinued operations	0.01	0.05	0.02	1.08	3.44	3.63
	(0.02 )	(0.18 )	(0.26 )	(0.19 )	(0.56 )	0.36

 

B. Capitalization and Indebtedness

 

Not required.

 

C. Reasons for the Offer and Use of Proceeds

 

Not required.

 

 

D. Risk Factors

 

An investment in our securities involves risk. The discussion of risks related to our business contained in this Annual Report on Form 20-F comprises material risks of which we are aware. If any of the events or developments described actually occurs, our business, financial condition or results of operations would likely suffer. The discussion of risks related to our business contained in this Annual Report on Form 20-F also includes forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

 

You should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 20-F.

 

RISKS RELATED TO OUR BUSINESS

 

We have made significant changes to our business model, and our new business model may not be successful.

 

We have undergone a strategic shift which involves growing our new internet-based businesses and ceasing our legacy commercial vehicle sales, leasing and support business. Our first two internet-based businesses, the CeraVest and CeraPay lending platforms, were launched at the end of 2014. Since then we have launched three ecommerce platforms: TruShip in October 2015; AutoChekk in March 2016 and PingPing in July 2016. We are also in the process of developing and launching additional internet-based businesses. There is no guarantee that our new businesses will be successful or profitable, or that they will provide an equal or greater return on investment as compared to the businesses we are winding down. For more description of our new business model, please see “Item 4. Information on our Company – B. Business Overview.

 

We have a limited operating history in China’s internet-based financial services industry, which is itself an emerging and evolving industry, making it difficult to evaluate our future prospects.

 

China’s internet-based financial services industry is relatively new and may not develop as expected. As a new industry, there is limited public information about comparable companies available for potential investors to review in making a decision about whether to invest in our company. In addition, borrowers may not view online peer-to-peer lending obligations facilitated on our platform as having the same consequences of default as other credit obligations arising under more traditional loans provided by banks or other commercial financial institutions. Any default on borrowers' payment obligations may adversely affect investors' confidence in the loan products on our online marketplace, which may lead to less available loan capital. If our market does not develop as we expect, if we fail to educate potential customers and funding sources about the value of our platforms and services, or if we fail to address the needs of our target customers, our reputation, business and results of operations will be materially and adversely affected.

 

We have a limited operating history in the internet-based financial services industry. It is difficult to effectively assess our future prospects. There are many risks and challenges we are subject to including, but not limited to:

 

 

If we are unsuccessful in addressing any of the above risks, our business may be materially and adversely affected.

 

 

Our new internet-based business may incur net losses in the future.

 

Our revenues of legacy commercial vehicle sales, leasing and support business have declined as a result of our strategic shift towards internet-based businesses. As we continue to grow and expand our business, our operating expenses may increase in the future. Our strategies include, among others, attracting new and potential borrowers and investors, upgrading and developing our technologies, enhancing our risk management system and launching new loan products and services on our marketplace, each or all of which may incur more expenses than we anticipate. Our revenue growth may be insufficient to offset these expenses and therefore result in net losses. We cannot assure you that our new internet-based businesses will be able to generate sufficient revenues to generate net income in the future.

 

We may not be able to maintain the growth rate we have experienced in recent years and may not be able to manage our growth effectively.

 

We may not be able to maintain the growth that we have experienced since 2014, or continue to experience growth at all, in the volume of loans facilitated on our online marketplace and the number of users, including borrowers and investors. As we have a limited operating history and our business has rapidly grown and changed in recent years, our past financial performance may not be a sound basis on which to evaluate our business prospects and future financial performance. In addition, our new businesses are still in the early stages of development, and we operate in a competitive and uncertain environment with many risks, challenges, unforeseeable expenses, difficulties, delays and complications, including, among others, the PRC regulatory landscape. If we are unsuccessful in addressing any of the following risks, uncertainties and challenges, we may be unable to rapidly scale our business and manage our growth:

 

 

If our online lending services are deemed to violate any PRC laws or regulations governing the online lending industry in China, our business, financial condition and results of operations would be materially and adversely affected.

 

Due to the relatively short history of the online lending industry in China, the PRC government has yet to establish a comprehensive regulatory framework governing our industry. Before any industry-specific regulations were introduced in mid-2015, the PRC government relied on general and basic laws and regulations for governing the online lending industry, including the PRC Contract Law and related judicial interpretations promulgated by the Supreme People's Court.

 

Since mid-2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the online lending industry, including, among others, the Guidelines on Promoting the Healthy Development of the Internet Finance Industry , or the Internet Finance Guidelines, the Interim Measures for Administration of Business Activities of Online Lending Information Intermediaries , or the Interim Measures, the Guidelines on Online Lending Funds Custodian Business , or the Custodian Guidelines, and the Guidelines on Information Disclosure of Business Activities by Online Lending Information Intermediaries , or the Disclosure Guidelines. See "Regulation—Regulations Relating to Online Lending Services."

 

 

According to the Interim Measures, the online lending information intermediaries may not engage in certain activities, including, among others, (i) fund-raising for the online lending information intermediaries themselves, (ii) holding investors' funds or setting up capital pools with investors' fund, (iii) providing security or guarantees to investors as to the principals and returns of the investment, (iv) issuing or selling any wealth management products, (v) splitting the terms of any financing project, (vi) securitization, (vii) promoting its financing project on physical premises, and (viii) equity crowd-funding. The Interim Measures also imposed certain other requirements on the online lending information intermediaries, including, among others:

 

 

 

 

 

 

 

 

 

 

To comply with existing laws, regulations, rules and governmental policies relating to the online lending industry, we have implemented and will continue to implement various policies and procedures to conduct our business and operations, including, among others:

 

 

Due to the lack of detailed rules from regulatory authorities and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry, we cannot be certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations. In particular, we cannot rule out the possibility that some of the services we provide to investors, such as portfolio investment, might be viewed as not being in full compliance. As of the date of this Annual Report, we have never been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online lending industry in China. However, to the extent that we are not able to fully comply with any existing or new regulations when they are promulgated, our business, financial condition and results of operations may be materially and adversely affected.

 

If our online lending services are considered by PRC regulatory authorities as providing direct loans to the customers, we may have to obtain the relevant approval for such lending business, and the failure to obtain such approval may have a material adverse effect on our business.

 

In December 2017, the Internet Finance Rectification Office and the Online Lending Rectification Office in the PRC jointly issued the Notice on Regulating and Rectifying "Cash Loan" Business , or the Circular 141, outlining general requirements on the "cash loan" business conducted by online microcredit companies, banking financial institutions and online lending information intermediaries. Circular 141 specifies that no organizations or individuals may conduct the lending business without obtaining approvals for the lending business.

 

Different from our CeraVest product, which is an online lending information intermediary and does not conduct the direct lending business, our CeraPay product is an online credit transaction platform and has features similar to traditional credit cards, which allows its users to make purchases at participating merchants on credit. If our CeraPay platform is considered to be a direct lending business, we may have to obtain a necessary permit for such business. Also, our subsidiaries that participate in market making loan purchases on the CeraVest platform might also be considered to be a direct lending business and would require a permit.

 

Over the course of 2017, in order to wind-down the outstanding loan balances of several large corporate borrowers to be in compliance with online lending regulations, the Company restructured these loans with new loans from the Ganglian Leasing entity. Currently, the outstanding balance of the loans issued by Ganglian is RMB788 million. Give the large outstanding loan balance, if Ganglian is considered to be directly lending to these borrowers, we may have to obtain a lending permit as well for Ganglian.

 

If we are required to obtain a “microcredit approval” and establish an online microcredit company just like many other industry peers have done for their direct online lending businesses, we may encounter substantial obstacles, as Circular 141 requires the relevant regulatory authorities to suspend the approval of the establishment of online microcredit companies and the approval of any microcredit business conducted across provincial jurisdictions. The failure to obtain such approval or permit may have a material adverse effect on our business as we believe the CeraPay is our primary profit driver. See "Regulation—Regulations Relating to Online Lending Services—Regulations on Cash Loans" and "Regulation—Regulations Relating to Online Lending Services—Regulations on Microcredit Companies."

 

 

Limited liquidity for the loans on our marketplace may adversely affect the appeal of our marketplace to investors.

 

The loan products we facilitate on our marketplace are designed specifically for our marketplace. Transactions for our loan products are only permitted on our marketplace. We operate a secondary loan market on our platform where investors can transfer the loans they hold to other investors before the loans reach maturity. To facilitate the assignment of the loans, the template loan agreement applicable to the lenders and borrowers on our platform specifically provides that a lender has the right to assign his/her rights under the loan agreement to any third parties and the borrower agrees to such assignment. However, Notice 57 only permits low-frequency debt transfers between the lender and the borrower. Though there is no clear explanation of low-frequency debt transfers, our secondary loan market may consider our secondary loan products to be non-compliant, which may cause us to modify our products, which may have a material adverse effect on our financial condition and results of operations.

 

In addition, in order to provide flexible liquidity for investors seeking to transfer their loans on the secondary market, we may use our own capital under a separate subsidiary to provide liquidity and act as a market maker when demand from other investors are unable to meet the supply of secondary loan transfers. We may not always have enough capital to provide liquidity to investors seeking to transfer. Such action as a market maker may be deemed non-compliant with online lending regulations and we may be ordered to stop these market-making activities by financial regulators.

 

If investors cannot transfer their loans or exit with as much flexibility as they desire, they may lose interest in our online marketplace and may not invest as much on our platform, or at all.

 

The transaction fees we charge borrowers and merchants may decline in the future and any material decrease in such fees could have a material adverse effect on our business, financial condition and results of operations.

 

We generate a substantial majority of our total revenues from facilitation fees we charge borrowers and the service charges we charge merchants. In the year ended December 31, 2017, transaction fees comprised 42.3% of our total revenues. Any material decrease in our transaction fees would have a substantial impact on our margin. In the event that the amount of transaction fees we charge for loan facilitation and credit transactions decrease significantly in the future and we are not able to reduce our cost of capital for funds from our marketplace investors or to adopt any cost control initiatives, our business, financial condition and results of operations will be harmed.

 

To compete effectively, the transaction fees we charge borrowers and merchants could be affected by a variety of factors, including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, our access to capital and regulatory requirements. Our transaction fees may also be affected by a change over time in the mix of the types of products we offer and a change to our borrower engagement initiatives. Our competitors may also offer more attractive fees, which may require us to reduce our fees to compete effectively. Certain financing solutions offered by traditional financial institutions may provide lower fees than our transaction fees. Although we do not believe there are many financing solutions that currently compete with our products or target the same unserved or underserved borrowers in China, such traditional financial institutions may decide to do so in the future, which may have a material adverse effect as to the financing service fees that we will be able to charge. Furthermore, as our borrowers establish their credit profile over time, they may qualify for and seek out other competing financing solutions with lower fees, including those offered by traditional financial institutions offline, and we may need to adjust our transaction fees to retain such borrowers.

 

In addition, our transaction fees are sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies. Our transaction fees, to the extent they are fully or partially deemed as interest, may also be subject to the restrictions on interest rate as specified in applicable rules on private lending. Our online lending platforms are required by applicable law to comply with the 36% limit on annualized interest rate set forth in the Private Lending Judicial Interpretations. Loans funded under arrangements involving licensed financial institutions, such as banks, the consumer finance company and the trust companies, are not private lending transactions within the meaning of the Private Lending Judicial Interpretations. Moreover, Circular 141 requires that (i) the aggregated borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations; and (ii) the online lending information intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance.

 

 

The effective annual percentage rate for our term loans currently ranges from 14.1% to 20.8%, which comprises a nominal interest rate and a loan facilitation fee we charge borrowers and also takes into account the effect of the security deposit that we deduct in advance. The interest rate component, which is stipulated in the loan agreements, does not and is not expected to exceed the mandatory limit for loan interest rates. However, to deter borrowers from submitting later payments, we do contractually charge high late fees of 10% one time and 0.1% daily, and these fees combined on delinquent accounts would far exceed the limit of 36%.   In practice, we often forgive or reduce these late fees if the borrower is cooperative in negotiating a repayment schedule.   In addition, we currently deduct the loan facilitation fee and certain deposit in advance from the principal, which is not in compliance with such requirements imposed by Circular 141. We will re-examine our fee policies and make the necessary changes as required by the local financial regulators. As transaction fees historically accounted for a substantial majority of our revenue, any material reduction in the amount of transaction fees we charge borrowers could have a material adverse effect on our business, financial condition and results of operations.

 

Our business depends on our ability to collect payment on and service the loans we facilitate.

 

Our collection process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. For example, automatic reminders through text are sent to a delinquent borrower as soon as the account becomes overdue. Our collection team will also make phone calls to borrowers or conduct in-person visits following missed payments and periodically thereafter. During fiscal years 2015, 2016 and 2017, we recovered RMB0.9 million (US$0.1 million), RMB7.4 million (US$1.1 million) and RMB7.8 million (US$1.2 million), respectively, of principal and penalty fees of loans that were more than 90 calendar days past due.

 

Despite our servicing and collection efforts, we cannot assure you that we will be able to collect payments on the loans we facilitate as expected. If borrowers default on their payment obligations, investors that purchased these loans from our marketplace may suffer losses and thus result in damage to our brand and reputation. Therefore, our failure to collect payment on the loans will have a material adverse effect on our business operations and financial positions. In addition, we aim to control bad debts by utilizing and enhancing our credit assessment system rather than relying on collection efforts to maintain healthy credit performances. As such, our collection team may not possess adequate resources and manpower to collect payment on and service the loans we facilitated. As the amount of loans facilitated by us increases in the future, we may devote additional resources into our collection efforts. However, there can be no assurance that we would be able to utilize such additional resources in a cost-efficient manner.

 

Moreover, the current regulatory regime for debt collection in the PRC remains unclear. Although we aim to ensure our collection efforts comply with the relevant laws and regulations in the PRC and we have established strict internal policies that our collections personnel do not engage in overly aggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by our collection personnel or the perception that our collection practices are considered to be overly aggressive and not in compliance with the relevant laws and regulations in the PRC may result in (i) harm to our reputation and business, which could further reduce our ability to collect payments from borrowers, (ii) a decrease in the willingness of prospective borrowers to apply for and utilize our credit or (iii) fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations.

 

If we are unable to maintain or increase the volume of loan transactions facilitated on our marketplace or if we are unable to attract new borrowers or investors, or retain existing borrowers or investors, our business and results of operations will be adversely affected.

 

We have experienced considerable growth in the volume of loan transactions facilitated on our marketplace. To continue to grow our business, we must continue to increase the volume of loan transactions on our marketplace by retaining existing borrowers and attracting a large number of new borrowers who meet our qualifications, along with and new and existing investors willing to invest in these loans.

 

Furthermore, if there are insufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient investor commitments, borrowers may be unable to obtain capital through our marketplace and may turn to other sources for their borrowing needs and investors who wish to transfer their investments prior to maturity may not be able to do so in a timely manner.

 

 

Our overall transaction volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers and investors relative to market rates, the effectiveness of our risk control, the repayment rate of borrowers on our marketplace, the efficiency of our platform, the macroeconomic environment and other factors. In connection with the introduction of new products or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of loans on our platform, which may negatively affect the growth of loan volume. If any of our current user acquisition channels becomes less effective, if we are unable to continue to use any of these channels or if we are not successful in using new channels, we may not be able to attract new borrowers and investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors, and may even lose our existing borrowers and investors to our competitors. If we are unable to attract qualified borrowers and sufficient investor commitments or if borrowers and investors do not continue to participate in our marketplace at the current rates, we might be unable to increase our loan transaction volume and revenues as we expect, and our business and results of operations may be adversely affected.

 

We may not be able to completely prevent fraudulent activity on our marketplace, which may have a material adverse effect on our brand, reputation, business and results of operations.

 

Fraudulent activity on our online marketplace, including organized fraud schemes and criminals fraudulently inducing investors to lend capital, could lead to regulatory intervention, cause material damage to our brand, reputation and market share, and require us to take extra anti-fraud measures. The occurrence of fraudulent activity will cause us to incur costs and divert management attention, affecting our business and results of operations. We cannot assure you that we will not experience any fraudulent activities in the future that may cause harm to our business or reputation. We believe our risk management system has stringent controls and checks in place to minimize the incidence of fraud on our marketplace. However, we have limited resources and our technology and our risk management system may not be able to completely prevent and detect all potential fraudulent activities.

 

If we fail to promote and maintain our brand in an effective and cost-efficient way, our ability to grow our business may be impaired.

 

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and investors to our marketplace. Factors that are vital to this objective include but are not limited to our ability to:

 

 

Successful promotion of our brand and our ability to attract qualified borrowers and sufficient investors depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our marketplace. Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

 

Any harm to our brand or reputation or any damage to the reputation of the online lending industry may materially and adversely affect our business and results of operations.

 

Any malicious or innocent negative allegation made by the media or other parties about our company, including but not limited to our management, business, compliance with law, financial conditions or prospects, whether with merit or not, could severely hurt our reputation and harm our business and operating results.

 

As the market for online lending in China is new and the regulatory framework for this market is also evolving, negative publicity about this industry has and may arise from time to time. Negative publicity about China’s online lending industry in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities.

 

 

Furthermore, certain factors that may adversely affect our reputation are beyond our control, including the risk of misconduct and errors by our employees and third-party service providers. Our business depends on our employees and third-party service providers to interact with potential borrowers and investors, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and investors through our internet-based finance platforms is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.

 

We may not be able to attract sufficient loan capital from our investors to meet the demands of the borrowers on our marketplace.

 

Our online lending business involves the matching of borrowers and investors through our marketplace. The growth and success of our future operations depend on the availability of adequate lending capital to meet borrower demand for loans on our marketplace. In order to maintain the requisite level of funding for the loans facilitated on our marketplace to meet borrower demand, we may need to optimize the investor composition of our marketplace to include more investors generally and also a certain number of institutional investors, which usually invest larger amounts compared to individual investors. To the extent there is an insufficient number of investors willing to accept the risk of default posed by potential borrowers, our marketplace will be unable to fulfil all of the loan requests. If adequate funds are not available to meet borrowers' demand for loans when they arise, the volume of loans facilitated on our marketplace may be significantly impacted. To the extent that it is necessary to obtain additional lending capital from investors, such lending capital may not be available to our marketplace on acceptable terms, or at all. If our marketplace is unable to provide potential borrowers with loans or fund the loans on a timely basis due to insufficient lending capital on our marketplace, we may experience a loss of market share or slower than expected growth, which would harm our business, financial condition and results of operations.

 

Fluctuations in interest rates could negatively affect our business.

 

The profitability of our business depends on the interest rates at which our customers are willing to borrow. If we fail to respond to the fluctuations in market interest rates in a timely manner and reprice our loan products, our loan products may become less attractive to our customers. For example, in a falling interest rate environment, potential customers may seek lower priced loans from other channels if we do not lower the interest rates on our loan products. Similarly, if we fail to respond to fluctuations in market interest rates in a timely manner and reprice our investment products, our investment products may lose competitiveness. For example, in a rising interest rate environment, potential investors may seek higher return investments from other channels if we do not increase the return on our investment products. Moreover, if we are unable to reprice our loan products and investment products correspondingly, the spreads between the interest rates on our loan products and the interest rates on our investment products may be reduced, and our profitability may be adversely affected.

 

If the loan and investment products and services in our present portfolio and future pipeline are insufficiently attractive to our customers, become obsolete or they fail to satisfy the demands of borrowers or investors, our business and results of operations will be materially affected.

 

We intend to expand our product offering to borrowers to cater to their different financing needs. We also intend to expand our investor service offerings to meet the different needs of investors and offer different risk-based returns. Loan and investment products and services require significant expense and resources to develop, acquire, and market. They also may not receive sufficient market acceptance for a variety of reasons:

 

 

 

 

If the products in our present portfolio and future pipeline do not attain sufficient market acceptance, become obsolete or otherwise fail to satisfy the demands of borrowers and investors, we may be unable to compete in the intense online lending industry and our target market. Our market share may decline and negatively affect our business and results of operations.

 

Our risk management system comprising our policy framework, credit assessment and fraud detection technology and protocols may not be adequate and may adversely affect the reliability of our marketplace, and in turn damage our reputation, business and results of operations.

 

The success of our online marketplace relies heavily on our ability to detect, assess and control credit risk, and therefore to prevent fraud. We have stringent risk management protocols in place to effectively assess borrower applicants' credit risk to prevent fraud and minimize the risk of non-payment. After we receive a loan or credit line application we request for the borrower applicant's personal information supported by documentation, and we verify the information against public information and data provided by third-party suppliers. In order to prevent fraud and assess the creditworthiness of each borrower, we conduct physical interviews that are recorded and enhanced due diligence procedures, as needed, to verify the borrower applicant's information and his or her intent. Any suspicious applications would be denied for a loan and blacklisted in our databases.

 

The information and data we use may not be sufficient to allow us to adequately capture a borrower applicant's credit risk. Such information and data include, among others, demographic information, credit history with us and with other financial institutions, and employment information and blacklists maintained by other forums and organizations. We constantly update and optimize our risk management system but the system may have loopholes or defects which may prevent us from effectively identifying risks, or the data provided may be inaccurate or stale or insufficient, such that we may misjudge the risk and misalign the risk profile and loan price. The information may also not be sufficient for prediction of future non-payment. Such risks and errors may erode investor confidence in our marketplace and therefore harm our reputation and adversely affect our business and results of operations.

 

Since we sometimes act as a market maker on our lending platforms, we are therefore subject to the credit risk of our customers when we purchase loans from the secondary market. We use various methods to screen potential customers and establish appropriate credit limits, but these methods cannot eliminate all potential credit risks and may not always prevent us from approving customer applications that are not credit worthy or are fraudulently completed. Changes in our industry and customer demand may result in periodic increases to customer credit limits and spending and, as a result, could lead to increased credit losses. We may also fail to detect changes to the credit risk of customers over time. Further, during a declining economic environment, we experience increased customer defaults and preference claims by bankrupt customers. If we fail to adequately manage our credit risks, our bad debt expense could be significantly higher than historic levels and adversely affect our business, operating results and financial condition. If a significant number of customers fail to make payments when due, we may not be able to fully recover the outstanding principal of loans we make, which could significantly affect our profitability. In addition, under such a scenario, if we are unable to purchase defaulting loans from investors and investors suffer losses, he or she may lose confidence in our online marketplace. As a result, our reputation may be harmed and we may not be able to attract and retain investors to participate in our marketplace.

 

If any of the primary information provided by borrowers and data obtained from third-party external sources we use for credit and risk assessment is inaccurate or fraudulently provided, our assessment may not sufficiently capture the credit risk of the loan.

 

Borrowers supply a variety of information that is included in the listings of loans on our marketplace. We do not verify all the information we receive from borrowers, and such information may be inaccurate or incomplete. For example, we often do not verify a borrower's home ownership status or intended use of loan proceeds. Although we do take steps to ensure a borrower uses loan proceeds for specified purposes, it is possible that we are unable to detect all instances where a borrower may use loan proceeds for other purposes that may involve increased risk than as originally provided. Moreover, investors do not, and will not, have access to detailed financial information about borrowers. If investors invest in loans through our marketplace based on information supplied by borrowers that is inaccurate, misleading or incomplete, those investors may not receive their expected returns and our reputation may be harmed. Moreover, inaccurate, misleading or incomplete borrower information could also potentially subject us to liability as an intermediary under the PRC Contract Law . See "Regulation—Regulations Relating to Online Lending Services—Regulations on Private Loans."

 

 

Due to the lack of a nationwide centralized credit reporting system in China, we have had to rely on our own data collection efforts to gather as much relevant credit information about borrower applicants as possible. We collect third-party data from and cross-check information gathered against the People's Bank of China, or the PBOC credit reporting platforms, credit bureaus, data vendors, and big data analytics companies. If the data points used in our credit assessment are inaccurate, incomplete or outdated, as we do not have the means to verify the third party data we obtain, the outcome may not accurately reflect the credit risk of the borrower. This could adversely affect the effectiveness of our control over our default rates, which could in turn harm our reputation and materially and adversely affect our business, financial condition and results of operations.

 

We rely on our information technology, billing and credit control systems, and any problems with these systems could interrupt our operations, resulting in reduced cash flow.

 

Our business cannot be managed effectively without our integrated information technology system. Accordingly, we run various “real time” integrated information technology management systems for our financing business.

 

In addition, sophisticated billing and credit control systems are critical to our ability to increase revenue streams, avoid revenue loss and potential credit problems, and bill customers in a proper and timely manner. If adequate billing and credit control systems and programs are unavailable, or if upgrades are delayed or not introduced in a timely manner, or if we are unable to integrate such systems and software programs into our billing and credit systems, we may experience delayed billing, which may negatively affect our cash flow and the results of operations.

 

In case of a failure of our data storage system, we may lose critical operational or billing data or important email correspondence with our customers and suppliers. Any such data stored in the core data center may be lost if there is a lapse or failure of the disaster recovery system in backing up these data, or if the periodic offline backup is insufficient in frequency or scope, which may result in reduced cash flow and reduced revenues.

 

Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent us from processing payments or posting loans on our marketplace, reduce the attractiveness of our online products and result in a loss of users.

 

In the event of an outage affecting our internet-based businesses and physical data loss, our ability to perform our servicing obligations, process payments, process applications or make loans available to investors would be materially and adversely affected. The satisfactory performance, reliability and availability of our platforms and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to retain existing and attract new borrowers and investors. Although all of our customer-facing services are hosted on Microsoft Azure cloud servers and we periodically make backups to servers located at our offices in Beijing and Shijiazhuang, some internal systems are hosted on servers at our headquarters in Shijiazhuang, and an outage there would disrupt our operations. Our operations depend on our ability and our service provider’s ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to the Microsoft Azure cloud infrastructure or our offices in Shijiazhuang and Beijing, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

 

Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on loans, damage our brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers and investors to abandon our marketplace, any of which could adversely affect our business, financial condition and results of operations.

 

 

Our internet-based businesses and internal systems rely on software that is highly technical and requires maintenance and constant updates, and if it contains undetected errors or bugs, our business could be adversely affected.

 

Our internet-based businesses and internal systems rely on software that is highly technical and complex. For example, our lending platforms and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for our customers, delay introductions of new features or enhancements, result in errors or compromise our ability to protect customer data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of customers or liability for damages, any of which could adversely affect our business, financial condition and results of operations.

 

A security breach or malicious attack by way of hacking, cyber-attacks, infiltration of computer viruses, or physical or e-sabotage, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business or otherwise harm our results of operations.

 

We are an attractive target for cyber-attacks by criminals seeking to gain access to our confidential and valuable information collected from borrowers and investors. We and our third-party system security service providers take measures to prevent such attacks and protect our databases of confidential information, but these measures may be breached accidentally or maliciously by unauthorized access. For example, we have experienced Distributed Denial of Service (DDoS) attacks in the past that have temporarily caused us to suspend the service of our websites while we defend against attacks. If confidential information about our users and our offline cooperation partner were stolen and used for criminal purposes, we could be exposed to liability for loss of information and be subject to time-consuming and expensive litigation and negative publicity. In addition, the Administrative Measures for the Security of the International Network of Computer Information Network , effective on December 30, 1997 and amended on January 8, 2011, requires us to report any data or security breaches to the local offices of the PRC Ministry of Public Security within 24 hours of any such breach. The Cybersecurity Law requires that when we discover that our network products or services are subject to risks such as security defects or bugs, we shall take remedial measures immediately, including but not limited to, informing users of the specific risks and reporting such risks to the relevant competent departments. Technologies employed by hackers constantly evolve, so that the security measures and our third-party system security service providers may not be able to fully anticipate attacks and implement necessary prevention measures, or do so in sufficient time. Any security breach, whether actual or perceived, would harm our reputation, and could cause us to lose borrowers, investors and our offline cooperation partner and adversely affect our business and results of operations. Our relationships with our users and our offline cooperation partner may be harmed, negatively affecting our business and credibility of our marketplace.

 

We do not prohibit borrowers from incurring other debt or impose financial covenants on borrowers during the term of their loans, which could increase the risk of non-payment on these loans.

 

Subsequent to our credit assessment, a borrower applicant may (i) become delinquent in payment obligations; (ii) default on a pre-existing debt obligation; (iii) commit to further indebtedness; and/or (iv) experience events bringing about adverse financial effects.

 

We do not prohibit our borrowers from incurring additional indebtedness, nor do we impose any financial covenants on the borrowers during the terms of their loans. Further, we have no means to independently determine whether a borrower applicant has outstanding loans on other online lending marketplaces. We are faced with the risk that borrowers borrow money from our platform to pay off loans on other lending marketplaces, creating a snowball effect of debt. Any additional indebtedness may impair the borrower's ability to observe his or her payment obligations on the loan product we facilitated, and therefore adversely affect the relevant investor's returns. If a borrower becomes insolvent or bankrupt or otherwise run into financial distress, any unsecured loan (including those obtained through our marketplace) will rank pari passu to each other, leaving delinquent borrowers to prioritize among creditors at his or her discretion, and our investors may suffer losses as a result. For secured loans, the ability of other secured investors to exercise remedies against the assets of the borrower may impair the borrower's ability to repay the loan to our investor. As a result, investors may lose their confidence in us and our reputation and business may be adversely affected.

 

 

Our borrowers acquired from referrals may take legal action against us based on representations made by our franchise stores or third parties, which may result in costly claims and disrupt our business.

 

Some borrowers and investors may be attracted to our marketplace after reviewing information provided by our franchise stores or third party partners. We do not review or approve any information provided by our franchise stores or third party partners and, while we do not believe we would have liability for such information, it is possible that an unsatisfied borrower or investor could bring claims against us based on any inaccurate information or representations made by our franchise stores or other third party partners. Such claims could be costly and time-consuming to defend and would distract management's attention and create negative publicity, which could adversely affect our reputation and business operations.

 

If we cannot continue to maintain relationships with third-party service providers, or if increases in fees are incurred by third-party service providers, our profitability could be adversely affected.

 

Our relationships with various third parties are integral to the smooth operation of our business and marketplace. Most of our agreements with third-party service providers are non-exclusive and do not prohibit third-party service providers from working with our competitors or from offering competing services. If our relationships with third-party service providers deteriorate or third-party service providers decide to terminate our respective business relationships for any reason, such as to work with our competitors on more exclusive or more favorable terms, or if any of our service providers become our competitors, our operations may be disrupted. In addition, our third-party service providers may not uphold the standard we expected under our agreements, or disagreements or disputes may arise between us and our third-party service providers. If these third-party service providers were to increase the fees that they charge us, our profitability could be adversely affected. Furthermore, we may not be able to offset any increase in expenses incurred. We could also incur additional expenses to find other suitable third-party service providers.

 

We rely on commercial banks and other third-party payment providers to manage investor funds, originate and service loans, collect service fees and ensure compliance with the relevant PRC laws and regulations that may be relevant to our business. Third-party payment agents in China are subject to oversight by the PBOC and must comply with complex rules and regulations, licensing and examination requirements, including, but not limited to: minimum registered capital, maintenance of payment business licenses, anti-money laundering regulations and management personnel requirements. Some third-party payment providers have been required by the PBOC to suspend their credit card pre-authorization and payment services in certain areas of China. If our third-party payment providers were to suspend, limit or cease their operations, or if our relationships with our third-party payment providers were to deteriorate or terminate, we would need to arrange substantially similar arrangements with other third-party payment agents. Negative publicity about our third-party payment providers or the industry in general may also adversely affect investors' or borrowers' confidence and trust in the use of third-party payment providers to carry out the payment and custodian functions in connection with the origination of loans on our marketplace. If any of these were to happen, the operation of our platform could be materially impaired and our results of operations would suffer.

 

We may be subject to liabilities imposed by relevant governmental regulations due to the personal data and other confidential information of borrowers and investors that we access or collect.

 

There are numerous laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. We receive, transmit and store a large volume of personally identifiable information and other confidential data from borrowers and investors. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. This regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. In addition, there may be limits on the cross-border transmission of user data even to the extent that such transmission is within our company. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. In November 2016, the Standing Committee of the National People’s Congress released the Cybersecurity Law of the PRC , or the Cybersecurity Law, which took effect in June 2017. The Cybersecurity Law requires network operators to perform certain functions related to internet security protection and the strengthening of network information management. For instance, under the Cybersecurity Law, network operators of key information infrastructure generally shall, during their operations in the PRC, store the personal information and important data collected and produced within the territory of the PRC. We are in the process of evaluating the potential impacts of the Cybersecurity Law on our current business practices. We plan to further strengthen our information management and privacy protection of the user data stored in our system. However, we cannot assure you that the measures we have taken or will take are adequate under the Cybersecurity Law. If further changes in our business practices are required under China's evolving regulatory framework for privacy protection, our business, financial condition and results of operations may be adversely affected. Further, we use certain data collected from external data sources to make credit assessment. In the event that the data collection and provision by any of our external data sources is considered in violation of the Cybersecurity Law, we may not be able to use relevant data for our credit assessment and our business may be materially and adversely affected.

 

 

In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business. See "Regulation—Regulations Relating to Internet-based Services—Regulations on Cybersecurity" and "Regulation—Regulations Relating to Internet-based Services—Regulations on Privacy Protection."

 

The loss of any key members of the management team may impair our ability to identify and secure new contracts with customers or otherwise manage our business effectively.

 

Our success depends on the continued services and contributions of our senior management, particularly Mr. Yong Hui Li, the Chief Executive Officer, and other executive officers named in this Annual Report. In addition, the relationships and reputation that members of our management team have established and maintained with our customers contribute to our ability to maintain good customer relations, which is important to the direct selling strategy that we adopt. Employment contracts entered into between us and our senior management cannot prevent our senior management from terminating their employment, and the death, disability or resignation of Mr. Yong Hui Li or any other member of our senior management team may impair our ability to maintain business growth and identify and develop new business opportunities or otherwise to manage our business effectively.

 

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

 

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.

 

Our operations depend on the performance and stability of the internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. We heavily rely on the internet infrastructure and telecommunications network in China for our operations and the smooth running of our online marketplace. A significant event or disaster, natural or man-made, including among others, fires, power outages, floods, strikes, terrorist attacks, coups d'etat or other catastrophic events or problems, may adversely affect our online services and our offices. Our business may be disrupted and we may lose critical data or experience interruptions, delays and compromising of our business operations and services. Our third party data suppliers and service providers, including in particular our third-party payment providers, may also be similarly affected and may not be able to provide our users and us with the support needed. In particular, if our disaster recovery plans prove to be ineffective or inadequate, the aforementioned risks will be further worsened. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

 

 

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

 

A downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition.

 

The global financial markets experienced significant disruptions between 2008 and 2009 and the United States, Europe and other economies have experienced periods of recessions as a result. The recovery from the economic downturns of 2008 and 2009 has been uneven and is facing new challenges, including the announcement of Brexit, which creates additional global economic uncertainty, and the slowdown of Chinese economic growth since 2012. It is unclear whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world's leading economies, including the United States and China. There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. Economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may reduce the demand for consumer loans and investments and have a negative impact on our business, results of operations and financial condition. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

 

The internet-based finance industry in China is becoming increasingly competitive and such increasing competition may limit our growth.

 

The internet-based finance industry in China is intensely competitive and evolving rapidly. Although we primarily focus on the transportation industry vertical, in which we have many years of operating experience, there are a large number of broader internet-based financial product offerings and e-commerce platforms that may compete with our products and may be provided by competitors that are larger and more established than us. With respect to lending competition, we primarily compete with offline boutique financing providers and in some cases internet-based financing providers. With respect to investors, we primarily compete with other investment products and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes. The competitors may also attempt to copy or replicate our business model. If we are unable to compete effectively, our business and results of operations could be harmed. In addition, if we begin lending to other industries, we will face more competition in those markets from more established lenders, and new competition may also reduce our growth prospects or level of profitability, which in turn could have an adverse effect on our business, financial condition or results of operation.

 

Uncertainties relating to the growth of the retail industry in China in general, and the online retail industry in particular, could adversely affect revenues from our cash and merchandise credit products and our business prospects.

 

We generate our revenue from the provision of both cash and merchandise credit products which we believe are mainly used for day-to-day discretionary consumption purposes. As a result, our cash and merchandise credit products businesses are affected by the development of the retail industry, and in particular the online retail industry, in China. The long-term viability and prospects of various online retail business models in China remain relatively untested. As such, demand for our credit products and our future results of operation will depend on numerous factors affecting the development of the online retail industry in China, which may be beyond our control. These factors include:

 

 

 

A decline in the popularity of online shopping in general, especially through the use of credit products, or any failure by us to adapt our marketplace and improve the online shopping experience of our users in response to trends and user requirements, may adversely affect our prospects and results of operation.

 

Uncertainties relating to the growth of the truck logistics industry in China could adversely affect revenues from our trucking-related credit products and our business prospects.

 

Currently, our target customers are small and medium-sized business and individual consumers. We primarily target customers in the trucking transportation industry because of our experience operating in that sector (for more details about our business model, please refer to “Item 4. Information on our Company – B. Business Overview – Our Business Model). The trucking transportation industry in China faces many uncertainties and regulatory headwinds and these factors may hinder any future growth. For example, tougher emission standards and road safety regulations have increased operation costs for truck owners in recent years. In addition, as recent development has increased the wealth of rural communities, fewer workers from these communities are entering the trucking profession as drivers. Thus, driver wages are also increasing and contributing to the decline in profitability of trucking businesses. With the rise of large logistics companies tailored to serve the ecommerce industry, the trucking industry also faces the pressure of consolidation from these larger firms. Our current business model is to serve SMBs within the trucking industry; therefore, any consolidation in the industry by larger firms may materially and adversely affect our prospects and results of operation.

 

Seasonality with the trucking industry and online retail industry could affect our interim results.

 

Truck sales typically experiences peak volumes from September through November and season lows from December until the Chinese New Year holiday ends in February. Seasonality in truck transportation activities vary across regions depending on the type of goods and materials commonly transported in the region. We also experience seasonality associated with the retail industry. For example, we would expect less user traffic and purchase orders during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. Furthermore, e-commerce companies in China hold special promotional campaigns on November 11 each year, which could improve our results for that quarter. Although seasonality related to our businesses may vary from year to year given industry wide and regulatory influences, our quarterly operating results could be affected by such seasonality. Therefore, our quarterly results of operations, including our operating revenue, expenses, net loss or income and other key metrics, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results for any single quarter are not necessarily an indication of future performance.

 

Stringent regulations on the trucking industry and the proliferation of electric vehicles as transportation tools may have a material adverse effect on our trucking related businesses.

 

The Ministry of Environmental Protection and the Ministry of Industry and Information Technology have jointly issued new emission standards with various classes of trucks and automobiles that must be met prior to the sale and operation of trucks. Tougher emission standards may increase the sale price of new trucks that meet the standards and restrict the operating activities and age of current trucks in operations that do not meet the standards. Operating costs to maintain emission standards may also increase. Regulators and law enforcement have also introduced rules to more tightly regulate the safety standards of truck operators such as regulations on cargo weight and trailer sizes. All of these factors would reduce the profitability of trucking business and may affect our customers in the industry. If our customers are affected by such emission regulations, we may see a decrease in our loan volumes and an increase in defaults. Furthermore, as electric vehicles become more commonplace and trucking companies begin to operate more electric trucks, our financing services for fuel purchases would be adversely affected. All of the above could adversely and materially affect our operating results. See "Regulation—Regulations Relating to the Trucking Industry."

 

Fluctuations in supply and demand for natural resources within China may have an adverse and material effect on our trucking related businesses.

 

The trucking transportation industry is sensitive to fluctuation in natural resources such as petroleum and natural gas because these resources are the most common type of fuel for trucks. Large temporary or longer term increases in diesel, LNG, or CNG prices could cause trucking businesses to be unprofitable and truck owners may choose to cease operations until fuel prices fall to a reasonable range to ensure profitability. If any of our trucking customers cease operations or cease to operate at a profit, we could see our loan volumes fall and loan defaults rise. In addition, as certain regions in China are producers and exporters of natural resources such as coal and commodities, any reductions in production or demand could adversely affect trucking operators in the region that rely on transporting these materials. In such a scenario, we may experience a fall in loan volume and a rise in default rates from customers in these regions. All of such fluctuations in supply and demand for natural resources could thus adversely and materially affect our operating results.

 

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

 

We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights.

 

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us or use any unauthorized pirated software at work, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

 

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

 

Content displayed on our ecommerce websites by merchants may be found objectionable by PRC regulatory authorities and may subject us to penalties and other administrative actions.

 

The PRC government has adopted regulations governing internet access and the distribution of information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet any content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content or other licenses, the closure of the concerned websites and reputational harm. The website operator may also be held liable for the content displayed on or linked to its website that is subject to censorship. If we are unable to control and screen out inappropriate content posted by merchants on our ecommerce sites, then our ecommerce sites may be subject to penalties and other administrative actions.

 

 

We may be held liable for information or content displayed on, retrieved from or linked to our mobile applications, which may materially and adversely affect our business and operating results.

 

In addition to our website, we also offer online lending products on our mobile applications, which are regulated by the Administrative Provisions on Mobile Internet Applications Information Services , or the APP Provisions, promulgated by the Cyberspace Administration of China, or the CAC, in June 2016 and effective in August 2016. According to the APP Provisions, the providers of mobile applications shall not create, copy, publish or distribute information and content that is prohibited by laws and regulations. We have implemented internal control procedures screening the information and content on our mobile applications to ensure their compliance with the APP Provisions. However, we cannot assure that all the information or content displayed on, retrieved from or linked to our mobile applications complies with the requirements of the APP Provisions at all times. If our mobile applications were found to be violating the APP Provisions, we may be subject to relevant penalties, including warning, service suspension or removal of our mobile applications from the relevant mobile application store, which may materially and adversely affect our business and operating results. See "Regulation—Regulations Relating to Internet-based Businesses—Regulations on Mobile Internet Applications Information Services."

 

We could be subject to allegations and lawsuits claiming that items listed on our ecommerce websites by merchants are pirated, counterfeit or illegal.

 

Goods and services made available for sale by merchants on our ecommerce platforms could be subject to allegations that they infringe third-party copyrights, trademarks, patents or other intellectual property rights. If we are unable to prevent counterfeiting and infringement of intellectual property, we could be subject to penalties, administrative actions and could face claims that we should be held liable. If any material claim occurs in the future, irrespective of the validity of such claims, we may incur significant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant merchandise. Potential liability under PRC law if we negligently participated or assisted in infringement activities associated with counterfeit goods includes injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability. Moreover, such claims or administrative penalties could result in negative publicity and our reputation could be severely damaged. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the merchandise and services offered on our marketplace.

 

Our marketplace allows consumers to buy merchandise from third-party merchandise suppliers, some of which may be defectively designed or manufactured. Operators of online marketplaces in the PRC are subject to certain provisions of consumer protection laws even where the operator is not the supplier of the product or service purchased by the consumer. As a result, sales of defective merchandise could expose us to product liability claims relating to personal injury or property damage or other actions. In addition, if we do not take appropriate remedial action against merchandise suppliers for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly liable with the merchandise suppliers for such infringement. Moreover, applicable consumer protection laws in China provide that trading platforms will be held liable for failing to meet any undertakings that the platforms make to consumers with regard to merchandise listed on their websites or mobile apps. Furthermore, we are required to report to the State Administration of Industry and Commerce, or the SAIC, or its local branches, any violation of applicable laws, regulations or SAIC rules by merchandise suppliers or service providers, such as sales of goods without proper license or authorization, and to take appropriate remedial measures, including ceasing to provide services to the relevant merchandise suppliers. We may also be held jointly liable with merchandise suppliers who do not possess the proper licenses or authorizations to sell goods or sell goods that do not meet product standards. In addition, we may face activist litigation in China by plaintiffs claiming damages based on consumer protection laws, which may result in increased costs in defending such suits and damages should we not prevail, which could materially and adversely affect our reputation and brands and our results of operations. We do not maintain product liability insurance for merchandise offered on our marketplace, and our rights of indemnity from our merchandise suppliers may not adequately cover us for any liability we may incur. Even unsuccessful claims could result in the expenditure of funds and management time and resources and could materially reduce our net income and profitability. See "Regulation—Regulations Relating to Consumer Rights Protection."

 

 

Our interim period financial results can vary significantly due to a host of variables and may not accurately reflect the underlying performance of our business.

 

Our interim period results of operations, including operating revenue, expenses, the number of loans and other key performance indicators, may fluctuate significantly such that comparisons of our operating results period-on-period may not be meaningful. Results of any interim period cannot accurately indicate future performance. Fluctuations may be due to any number of variables, including some beyond our control, such as:

 

 

Fluctuations in our interim period results may affect the price of our stock in an adverse manner.

 

Our use of investor cash incentives may result in substantial reductions in our revenues.

 

We provide investors with certain cash incentives to encourage greater participation in the loan products we facilitate on our online marketplace. We provide cash incentives to new investors under our referral incentive program, as well as promotional cash incentives to existing investors from time to time. Upon the satisfaction of the terms and conditions under our referral incentive program or promotional incentive programs, investors can redeem their cash incentives for credit to be used on our online marketplace. We have experienced rapid growth in the number of investors, repeat investment and high transaction volume, partly attributable to our investor cash incentive program. The investor cash incentive program was intended to be a marketing tool to attract investors to commit to loan products and help us increase the number of loan product transactions so as to allow us to benefit from increased transaction and service fees. In the future, we may offer similar cash incentives to consumers on our ecommerce marketplaces. However, such cash incentives are accounted for as reduction of revenue and are paid to the investor before we are able to recoup the costs associated with the investor cash incentives. Our revenues may be reduced in periods where we have to issue an increasing amount of investor cash incentives, which may result in us incurring net losses and preventing us from achieving or maintaining profitability on a quarterly or annual basis.

 

Store closings result in unexpected costs that could result in write downs and expenses related to the closings.

 

From time to time, in the ordinary course of our business, we may close certain underperforming office branches, generally based on considerations of branch profitability, competition, strategic factors and other considerations. Closing an office branch could subject us to costs, including the write-down of leasehold improvements, equipment, furniture and fixtures. In addition, we could remain liable for future lease obligations.

 

If our internal controls over financial reporting are insufficient or ineffective, we may not be able to accurately report our financial results or prevent fraud.

 

Our internal controls and procedures, especially over financial reporting, may not be able to sufficiently identify any material weaknesses and control deficiencies that could lead to inaccuracies in our financial statements. As such, our ability to comply with applicable financial reporting requirements and regulatory filings in a timely manner may be impaired.

 

We are listed in the United States and therefore subject to the Sarbanes-Oxley Act of 2002. Section 404 of this Act requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F. If we are not able to comply with the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our ordinary shares.

 

 

The facilitation of loans through our marketplace could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising.

 

PRC laws and regulations prohibit persons and companies from raising funds through advertising to the public a promise to repay premium or interest payments over time through payments in cash or in kind except with the prior approval of the applicable government authorities. Failure to comply with these laws and regulations may result in penalties imposed by the PBOC, the Administration for Industry and Commerce, or AIC, and other governmental authorities, and can lead to civil or criminal lawsuits.

 

To date, our marketplace has not been subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. Our marketplace acts only as a service provider in the facilitation of loans between borrowers and investors, and in this capacity, we do not raise funds or promise repayment of premium or interest obligations. Nevertheless, considerable uncertainties exist with respect to the PBOC, AIC and other governmental authorities' interpretations of the fundraising-related laws and regulations in the PRC. While our agreements with investors require investors to guarantee the legality of all funds from investors, we do not verify the source of investors' funds separately, and therefore, to the extent that investors' funds are obtained through illegal fundraising, we may be negligently liable as a facilitator of illegal fundraising. In addition, while our loan agreements contain provisions that require borrowers to use the proceeds for purposes listed in their loan applications, we cannot monitor and verify all borrowers' use of funds and therefore, to the extent that borrowers use proceeds from the loans for illegal activities, we may be negligently liable as a facilitator of an illegal use. Although we have designed and implemented procedures to identify and eliminate instances of fraudulent conduct on our marketplace, as the number of borrowers and investors on our platform increases, we may not be able to identify all fraudulent conduct that may violate illegal fundraising laws and regulations. See "Regulation—Regulations Relating to Online Lending Services—Regulations on Illegal Fund-Raising."

 

The facilitation of loans through our marketplace could give rise to liabilities under PRC laws and regulations that prohibit unauthorized public offerings.

 

The PRC Securities Law stipulates that no organization or individual is permitted to issue securities for public offering without obtaining prior approval in accordance with the provisions of the law. The following offerings are deemed to be public offerings under the PRC Securities Law: (i) offering of securities to non- specific targets; (ii) offering of securities to more than 200 specific targets; and (iii) other offerings provided by the laws and administrative regulations. Additionally, private offerings of securities shall not be carried out through advertising, open solicitation and disguised publicity campaigns. If any transaction between one borrower and multiple investors on our marketplace is identified as a public offering by PRC government authorities, we may be subject to sanctions under PRC laws and our business may be adversely affected. See "Regulation—Regulations Relating to Online Lending Services—Regulations on Unauthorized Public Offerings."

 

Adverse economic conditions in Shijiazhuang, China, that negatively impact the demand for office space and hotel accommodations may result in lower occupancy and rental rates for our property lease and management business, which would adversely affect our results of operations.

 

Generally speaking, economic growth and employment levels in a local market are important factors in determining the success of a local property lease and management business. Since we only lease office space and manage hotel operations in one building that is located in Shijiazhuang, China, the economic conditions of this city are likely to be important factors in determining the occupancy levels and rental rates that our property lease and management business is able to achieve. Therefore, any deterioration in the economic conditions of Shijiazhuang may adversely affect the results of operations of our property lease and management business.

 

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may adversely affect our results of operations.

 

In addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases. Because we compete with a number of other developers, owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the extent that we are able to renew existing leases or re-let such space to new customers, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we have historically. Further, changes in space utilization by our customers due to technology, economic conditions and business culture also affect the occupancy of our properties. As a result, customers may seek to downsize by leasing less space from us upon any renewal.

 

 

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose existing and potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, reduced rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. From time to time, we may also agree to modify the terms of existing leases to incentivize customers to renew their leases. If we are unable to renew leases or re-let space in a reasonable time, or if our rental rates decline or our tenant improvement costs, leasing commissions or other costs increase, our financial condition and results of operations of the property lease and management business could be materially and adversely affected.

 

Bankruptcy or insolvency of tenants may decrease our revenue, net income and available cash.

 

The bankruptcy or insolvency of a major tenant could cause us to suffer lower revenues and operational difficulties, including leasing the remainder of the property. As a result, the bankruptcy or insolvency of a major tenant could result in decreased revenue, net income and funds available to pay our indebtedness.

 

We may not be successful in integrating or operating our recently acquired hotel business.

 

In August 2016 we entered into the hotel business with our acquisition of Eastern Eagle. The profitability of this business depends on our ability to effectively manage and integrate the acquired business into our existing operations. In addition, the performance of the hotel business may be affected by local economic conditions and competition, among other factors, which may have adverse effects on occupancy rates and on our ability to generate income from hotel operations.

 

Our profitability will be adversely affected if we are unable to successfully collect receivables from our commercial vehicle sales, leasing and support business, which have been classified as discontinued operations.

 

We have discontinued our legacy truck leasing business by exiting the leasing industry, though we continue to service the remaining leases through their expiration and collect the outstanding amounts due to us. If we are unable to effectively and efficiently collect these amounts, the profitability of this discontinued business segment will be reduced, which in turn will adversely affect our profitability.

 

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our credit products and better serve borrowers and enhance our competitive position. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction, which may result in investment losses.

 

A significant portion of our working capital is funded through loans from related parties of our Chairman and CEO, Mr. Yong Hui Li, some of which may be called by the lenders at any time, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

As of December 31, 2017, we had outstanding borrowings from related parties, including our Chairman and Chief Executive officer, Mr. Yong Hui Li, of approximately RMB62,75 million. These borrowings are interest bearing and carry various terms, and some are callable at any time by the lenders. The lenders have not indicated to us if there is a maximum amount they are willing to lend to us or that they will not call the loans for repayment. In the event such lenders determine to call these loans, we will have to repay the loans from our cash reserves or financing provided by third-party financial institutions. There can be no assurance that we will have sufficient cash reserves or that we could secure additional financing from third parties on favorable terms or at all. If cash reserves or suitable financing were not available, we would have to divert working capital from our core business to repay the loans, and we would not be able to expand our core business as quickly as expected.

 

 

We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.

 

Since inception, we have issued equity securities to support the growth of our business. As we intend to continue to make investments to support the growth of our business, we may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including developing new products and services, increasing the amount of transactions, further enhancing our risk management capabilities, increasing our marketing expenditures to improve brand awareness and diversifying our borrower engagement channels by collaborating with other leading internet companies, enhancing our operating infrastructure and acquiring complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Repayment of the debts may divert a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default and foreclosure on our assets if our operating cash flow is insufficient to repay debt obligations, which could in turn result in acceleration of obligations to repay the indebtedness and limit our sources of financing.

 

Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ordinary shares. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

We do not have any business insurance coverage for our internet-based businesses.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we carry certain insurance, such as business interruption and property insurance, for our office leasing and hotel businesses, but we do not have any business liability or disruption insurance to cover our internet-based business operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

 

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we continue to develop the infrastructure of a public company and continue to grow and change, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

 

RISKS RELATED TO OUR CORPORATE STRUCTURE

 

Contractual arrangements in respect of certain companies in the PRC may be subject to challenge by the relevant governmental authorities and may affect our investment and control over these companies and their operations.

 

Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment (2017 Revision) issued jointly by the National Development and Reform Commission and the MOFCOM, the Provisions on Administration of Foreign Invested Telecommunications Enterprises (2016 Revision) promulgated by the State Council, and other applicable laws and regulations.

 

 

We are a Cayman Islands company and our PRC subsidiaries are considered as foreign invested enterprises, which include (i) Hebei Anyong Trading Co., Ltd., or Hebei Anyong Trading, a foreign invested enterprise wholly owned by our Hong Kong subsidiary Eastern Eagle, (ii) Ganglian Finance Leasing Co., Ltd., or Ganglian Finance Leasing, a foreign invested enterprise wholly owned by our Hong Kong subsidiary Fancy Think Limited, and (iii) Chuanglian Finance Leasing Co., Ltd., or Chuanglian Finance Leasing, a foreign invested enterprise jointly owned by Ganglian Finance Leasing and Fancy Think Limited.

 

To comply with PRC laws and regulations, we conduct our internet-based businesses in China through a series of contractual arrangements entered into by and among (i) Chuanglian Finance Leasing, (ii) each of Hebei Xuhua Trading Co., Ltd. and Kaiyuan Auto Trade Co., Ltd., which are considered our variable interest entities, and (iii) the nominee shareholders of these variable interest entities. The relevant business licenses to carry out our internet-based businesses are held by the subsidiaries of these variable interest entities (for more information about our contractual arrangements, please see note 20 to the Consolidated Financial Statements). As a result of these contractual arrangements, we exert control over our variable interest entities and their subsidiaries and consolidate their operating results in our financial statements under U.S. GAAP.

 

However, there can be no assurance that the relevant governmental authority will not challenge the validity of these contractual arrangements. It is also uncertain whether any new PRC laws, rules or regulations relating to the variable interest entity structure will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or the MOFCOM, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is considered a foreign invested enterprise. Under the draft Foreign Investment Law , variable interest entities would also be deemed as foreign invested enterprises if they are ultimately "controlled" by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the variable interest entity structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See "Regulation—Regulations Relating to Foreign Investment—The Draft PRC Foreign Investment Law" and "—Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations."

 

If the ownership structure, contractual arrangements and business of our company, our PRC subsidiary Chuanglian Finance Leasing or our consolidated variable interest entities are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiary Chuanglian Finance Leasing or our consolidated variable interest entities, revoking the business licenses or operating licenses of our PRC subsidiary Chuanglian Finance Leasing or our consolidated variable interest entities, shutting down our servers or blocking our online platform, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from public offering or private placement to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our consolidated variable interest entities, and/or our failure to receive economic benefits from our consolidated variable interest entities, we may not be able to consolidate its results into our consolidated financial statements in accordance with U.S. GAAP.

 

Our contractual arrangements with our variable interest entities may not be as effective as direct ownership and operational management .

 

We rely and expect to continue to rely on contractual arrangements with our variable interest entities to operate our online lending and e-commerce platforms (for more information about our contractual arrangements, please see note 20 to the Consolidated Financial Statements). These contractual arrangements may not be as effective as direct ownership in giving us full operational management and control over our consolidated variable interest entities. We cannot prevent our variable interest entities or their nominal shareholders from breaching the contractual arrangements and failing to conduct their business operations properly, such as failing to maintain the website and online marketplace in a proper and timely manner, or misusing the domain names and trademarks or otherwise taking actions detrimental to our interests.

 

 

If we directly owned our variable interest entities, we could elect directors to the board and implement changes at the management and operational levels. Currently we only have contractual rights in relation to the performance and financial benefits of the variable interest entities’ operations. The nominal shareholders of our variable interest entities may not always act in our best interests. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated variable interest entities. Although we have the right to replace any shareholder of our consolidated variable interest entities under the contractual arrangement, if any shareholder of our consolidated variable interest entities is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our variable interest entities may not be as effective in protecting our interests as direct ownership and operational management would be.

 

Our founder, chairman and chief executive officer, Mr. Yong Hui Li, also a controlling shareholder of us, exerts strong influence over the board and Company affairs and strategy.

 

Our founder, chairman and chief executive officer, Mr. Yong Hui Li, exerts strong influence on our board of directors and management. He plays an integral role in Company decisions and formulating our corporate strategies. Mr. Yong Hui Li has considerable influence over our corporate affairs, including matters that require shareholder approval, including among others, the election of directors, approving statutory mergers, and amending our foundational documents. This concentration in control will limit shareholder ability to influence corporate matters and may discourage potential merger, takeover or other change of control transactions, which could have the effect of depriving holders of our ordinary shares of the opportunity to sell their shares at a premium over the prevailing market price.

 

The nominal shareholders of our variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

We, through our PRC subsidiary Chuanglian Finance Leasing, have contractual arrangements with our variable interest entities and their nominal shareholders. Although the nominal shareholders of our variable interest entities have given undertakings to act in our best interests, we cannot assure you that when conflicts arise, these nominal shareholders will act in our best interests or that conflicts will be resolved in our favor.

 

Contractual arrangements in relation to our variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we, or our variable interest entities and their subsidiaries, owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm's length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our PRC subsidiary Chuanglian Finance Leasing, our variable interest entities and their nominal shareholders were not entered into on an arm's length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust income of our variable interest entities in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our variable interest entities for PRC tax purposes, which could in turn increase their tax liabilities without reducing our PRC subsidiary Chuanglian Finance Leasing’s tax expenses. In addition, if our PRC subsidiary Chuanglian Finance Leasing requests the nominal shareholders of our variable interest entities to transfer their equity interests at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject our PRC subsidiary Chuanglian Finance Leasing to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our variable interest entities for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties

 

 

If our variable interest entities go bankrupt or become subject to dissolutions or liquidation proceedings, we may not be able to recover or claim ownership over the assets and networks of these variable interest entities.

 

Our variable interest entities and their subsidiaries hold assets material to our business operations, including the ICP License, domain names and trademarks and software licenses. Under our present contractual arrangements, our variable interest entities cannot, and their nominal shareholders shall not cause it to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without our prior consent. However if the nominal shareholders of our variable interest entities initiate liquidation proceedings in breach of our contractual arrangements, such that these variable interest entities undergo voluntary or involuntary liquidation proceedings, or if they declare bankruptcy and all or part of their assets become subject to the claims of third party creditors, liens or are otherwise disposed of without our consent, we may not be able to continue our business operations, which would materially and adversely affect our financial condition and results of operations.

 

If any of our PRC subsidiaries or variable interest entities loses its chop, or corporate seal, to the theft and use of unauthorized persons, the corporate governance of these entities may be severely and adversely compromised.

 

In the PRC, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in the PRC is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiaries and our consolidated variable interest entities are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations.

 

RISKS RELATED TO DOING BUSINESS IN CHINA

 

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of the PRC, which could have a material adverse effect on our business and result of operations.

 

We conduct substantially all of our operations and generate all our sales in the PRC. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs, or may differ, from the economies of most developed countries in many respects, including:

 

 

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.

 

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

 

In the past 20 years, the PRC has been one of the world’s fastest growing economies measured in gross domestic product. However, in conjunction with recent slowdowns in economies of the United States and the European Union, the growth rate in China has declined in recent quarters. Any further adverse change in the economic conditions or any adverse change in government policies in China could have a material adverse effect on the overall economic growth and the level of consumer and business related spending in China, which in turn could have a material adverse effect on our business, financial condition and results of operations.

 

 

The PRC legal system embodies uncertainties that could limit the legal protections available to us.

 

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

In particular, PRC laws and regulations concerning the online lending industry are developing and evolving. Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoid conducting any noncompliant activities under the applicable laws and regulations, such as illegal fund-raising, forming fund collection or providing guarantee to investors, the PRC government authority may promulgate detailed implementation regulation of the Interim Measure, or other new laws and regulations regulating the online lending industry in the future. We cannot assure you that our practice would not be deemed to violate any new PRC laws or regulations relating to the online lending industry. Moreover, developments in the online lending industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict online lending platforms, which could materially and adversely affect our business and operations.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the Ministry of Industry and Information Technology, or the MIIT, and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.

 

We have only contractual control over our website. We do not directly own the website due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet information provision services. The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

 

 

We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiary Chuanglian Finance Leasing to adjust its taxable income under the contractual arrangements it currently has in place with our variable interest entities and their subsidiaries, in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.

 

Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

In response to the persistent capital outflow and RMB's depreciation against the U.S. dollar in the fourth quarter of 2016, the People's Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the People's Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises , or the PBOC Circular 306, in November 2016, which provides that offshore RMB loans provided by a domestic enterprise to offshore enterprises that it holds equity interests in shall not exceed 30% of such equity interests. The PBOC Circular 306 may constrain our PRC subsidiaries' ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries' dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also "—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders."

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from making loans to or making additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to filing or registration with the relevant governmental authorities in China. According to the relevant PRC regulations on foreign invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE, or its local branches, and (b) each of our PRC subsidiaries may not procure loans which exceed the statutory limit. Any medium or long-term loan to be provided by us to our variable interest entities must be recorded and registered by the National Development and Reform Committee and SAFE or its local branches. We may not complete such recording or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to complete such recording or registration, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

 

In 2008, SAFE promulgated the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises , or Circular 142, which used to regulate the conversion by foreign invested enterprises of foreign currency into Renminbi by restricting the usage of converted Renminbi. In March 2015, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign Invested Enterprises , or Circular 19. Circular 19 took effect as of June 1, 2015 and superseded Circular 142 on the same date. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign invested enterprises and allows foreign invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond their business scopes. In June 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement , or Circular 16. Circular 19 and Circular 16 continue to prohibit foreign invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use.

 

In light of the substantial capital outflows of China in 2016 due to the weakening of Renminbi, the PRC government has imposed more restrictive foreign exchange policies and increased scrutiny of major outbound capital movement. More restrictions and substantial vetting processes have been put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may , at its discretion, further restrict access to foreign currencies in the future for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

Fluctuations in exchange rates could result in foreign currency exchange losses.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions and foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably, and in recent years the RMB has depreciated significantly against the U.S. dollar. Since October 1, 2016, the RMB has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from any offering or private placement into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

 

 

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, enterprises that are registered in countries or regions outside the PRC but have their " de facto management bodies" located within China may be considered as PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income.

 

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body." As most of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that Fincera Inc. or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then Fincera Inc. or such subsidiary could be subject to PRC tax at a rate of 25% on its worldwide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, dividends we distribute to non-PRC resident holders may be subject to PRC withholding tax, and gains realized on the sale or other disposition of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises, or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ordinary shares. See "Regulation—Regulations Relating to Tax—Regulations on Enterprise Income Tax."

 

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiaries.

 

We are a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to Enterprise Income Tax Law of the PRC , a withholding tax rate of 10% currently applies to dividends paid by a PRC "resident enterprise" to a foreign enterprise investor, unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income , or the Double Tax Avoidance Arrangement, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns at least 25% of a PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements , or Circular 81, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong enterprise must directly hold at least 25% share ownership in the PRC enterprise during the 12 consecutive months preceding its receipt of the dividends. However, a transaction or arrangement entered into for the primary purpose of enjoying a favorable tax treatment should not be a reason for the application of the favorable tax treatment under the Double Tax Avoidance Arrangement. If a taxpayer inappropriately is entitled to such favorable tax treatment, the competent tax authority has the power to make appropriate adjustments.

 

In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties , or Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. However, if a competent tax authority finds out that it is necessary to apply the general anti-tax avoidance rules, it may start general investigation procedures for anti-tax avoidance and adopt corresponding measures for subsequent administration. Accordingly, our Hong Kong subsidiaries may be able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries if they satisfy the conditions prescribed under Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. See "Regulation—Regulations Relating to Tax—Regulations on Withholding Tax for Dividend Distribution."

 

 

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

According to the Announcement of the SAT on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or Circular 7, promulgated by the SAT in February 2015, if a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by transfer of the equity interests of an offshore holding company (other than a purchase and sale of shares issued by a PRC resident enterprise in public securities market) without a reasonable commercial purpose, the PRC tax authorities have the power to reassess the nature of the transaction and the indirect equity transfer will be treated as a direct transfer. As a result, the gain derived from such transfer, which means the equity transfer price minus the cost of equity, will be subject to PRC withholding tax at a rate of up to 10%. Under the terms of Circular 7, a transfer meeting all of the following circumstances shall be directly deemed as having no reasonable commercial purposes: (i) over 75% of the value of the equity interests of the offshore holding company are directly or indirectly derived from PRC taxable properties; (ii) at any time during the year before the indirect transfer, over 90% of the total properties of the offshore holding company are investments within PRC territory, or in the year before the indirect transfer, over 90% of the offshore holding company's revenue is directly or indirectly derived from PRC territory; (iii) the function performed and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; or (iv) the foreign income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties. See "Regulation—Regulations Relating to Tax—Regulations on Withholding Tax for Indirect Share Transfer."

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company and our non-PRC resident investors may be subject to filing obligations or taxed or subject to withholding obligations in such transactions, under Circular 7. See "Taxation—People's Republic of China Taxation." For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 7. As a result, we may be required to expend valuable resources to comply with Circular 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

      

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Roundtrip Investment through Special Purpose Vehicles , or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles , or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

To our knowledge, none of our shareholders who directly or indirectly hold shares in our Cayman Islands holding company are deemed to be PRC residents defined under SAFE Circular 37.

 

 

However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects. See "Regulation—Regulations Relating to Foreign Exchange Controls—Regulations on Foreign Exchange Outbound."

 

Certain PRC rules and regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors , or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise "national defense and security" concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise "national security" concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. See "Regulation—Regulations Relating to Foreign Investment—Regulations on M&A by Foreign Investors."

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company , replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted options or other awards will be subject to these regulations. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries' ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See "Regulation—Regulations Relating to Employment—Regulations on Stock Incentive Plans."

 

Increases in labor costs in the PRC may adversely affect our profitability.

 

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

 

 

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We have not made adequate employee benefit payments in the past and we may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our profitability could be adversely affected. See "Regulation—Regulations Relating to Employment—Regulations on Employee Benefit Plans."

 

RISKS RELATED TO OUR ORDINARY SHARES

 

Because we may not pay regular dividends on our ordinary shares, shareholders will generally benefit from an investment in our ordinary shares only if the shares appreciate in value.

 

We declared and paid special cash dividends in the amount of $0.25 and $2.00 per ordinary share in February 2012 and June 2017, respectively, to our shareholders. We have not declared any cash dividends since June 2017 and may not declare or pay any regular cash dividends on our ordinary shares in the future. We currently intend to retain future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying regular cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of the Board of Directors and will depend on factors that the Board of Directors deems relevant, including among others, the results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities and other financing arrangements. If no dividends are paid, realization of a gain on a shareholder's investments will depend solely on the appreciation of the price of our ordinary shares. There is no guarantee that our ordinary shares will appreciate in value.

 

Our ordinary shares are quoted on the over the counter market, which may limit the liquidity and price of our ordinary shares more than if the ordinary shares were quoted or listed on a National Securities Exchange.

 

Our ordinary shares are currently quoted on the over the counter market, as opposed to being listed on a national securities exchange such as the Nasdaq Stock Market or the New York Stock Exchange. Quotation of our ordinary shares on the over the counter market limits the liquidity and price of our ordinary shares more than if the ordinary shares were quoted or listed on a national securities exchange. In addition, certain institutional investors may be prohibited from purchasing our ordinary shares because the ordinary shares are not listed on a national securities exchange.

 

The trading price of our ordinary shares may be volatile, which could result in substantial losses to investors.

 

The trading price of our ordinary shares may be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility. The trading performances of these Chinese companies' securities may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance.

 

In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for factors specific to our own operations, including the following:

 

 

 

 

Any of these factors may result in material and sudden changes in the volume and price at which our ordinary shares will trade.

 

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ordinary shares, the market price for our ordinary shares and trading volume could decline.

 

The trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our stock, the market price for our ordinary shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ordinary shares to decline.

 

We may qualify as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. investors.

 

In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (looking through certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Annual Report on Form 20-F captioned “Taxation—United States Federal Income Taxation—General”) of our ordinary shares, the U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Based on the composition (and estimated values) of the assets and the nature of the income of us and our subsidiaries for our 2017 taxable year, we do not believe that we would be a PFIC for the taxable year ended December 31, 2017 and do not anticipate becoming a PFIC in the foreseeable future. However, since we have not performed a definitive analysis with respect to our PFIC status for our 2017 taxable year, there can be no assurance with respect to our status as a PFIC for such taxable year. There also can be no assurance with respect to our PFIC status for any future taxable year. We urge U.S. Holders to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the U.S. federal income tax consequences of PFIC classification to U.S. Holders, see the section of this Annual Report on Form 20-F captioned “Taxation—United States Federal Income Taxation—Tax Consequences to U.S. Holders—Passive Foreign Investment Company Rules.”

 

Changes to U.S. tax law could materially impact us or our shareholders.

 

U.S. federal income tax laws and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. For example, the recently enacted tax reform bill in the U.S., informally known as the Tax Cuts and Jobs Act, or TCJA, made significant changes to the U.S. federal income tax laws applicable to individuals and corporations. Technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time. We cannot predict the long-term effect of the TCJA or any future changes on us or our shareholders. Current and prospective shareholders are urged to consult with their tax advisors with respect to the TCJA and any other regulatory or administrative developments and proposals and their potential effect on an investment in our securities. In addition, future U.S. tax legislation, regulations, administrative interpretations or court decisions cannot be predicted by us and could adversely affect us or our shareholders.

 

 

Mr. Yong Hui Li, our Chairman and Chief Executive Officer, is the beneficial owner of a substantial amount of our ordinary shares and Mr. Li may take actions with respect to such shares which are not consistent with the interests of the other shareholders.

 

Mr. Yong Hui Li, our Chairman and Chief Executive Officer, beneficially owns approximately 81.4% of the outstanding ordinary shares of us as of the date of this Annual Report on Form 20-F, assuming that there are no other changes to the number of ordinary shares outstanding,. Mr. Li may take actions with respect to such shares without the approval of other shareholders and which are not consistent with the interests of the other shareholders, including the election of the directors and other corporate actions such as:

 

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. We have appointed CT Corporation System located at 111 Eighth Avenue, 13/F, New York, New York 10011 as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York, and intend to abide by judgments entered by such courts in such actions.

 

However, there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments). A judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

 

Furthermore, the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our director and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

 

We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2016 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

 

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of register of members of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

 

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the OTCQB. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you if you were you investing in a U.S. domestic issuer.

 

We may be subject to changes in laws, regulations, and standards relating to corporate governance and public disclosure that could cause us to incur significantly increased costs and divert substantial additional attention of management to such matters and away from revenue-generating activities.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may also initiate legal proceedings against us and our business may be adversely affected.

 

 

We have granted, and may continue to grant, share incentive awards, which may result in increased share-based compensation expenses.

 

We first adopted our stock option plan, or the 2009 Equity Incentive Plan, in 2009 for purposes of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. The 2009 Equity Incentive Plan was later superseded by the 2015 Omnibus Equity Incentive Plan, which took effect on September 24, 2015 and was approved by shareholders at the Company’s annual meeting of shareholders held on July 12, 2016. We account for compensation costs for all share options using a fair-value based method and recognize expenses in our consolidated statements of operations in accordance with U.S. GAAP. Under the terms of the 2015 incentive plan, 5,200,000 ordinary shares are reserved for issuance in accordance with its terms (provided, however, that dividend equivalent rights are payable solely in cash and therefore do not reduce the number of shares that may be granted under the incentive plan and that stock appreciation rights only reduce the number of shares available for grant under the incentive plan by the number of shares actually received by the grantee in connection with the stock appreciation right, if any). All awards under the incentive plan are made by our Board of Directors or its Compensation Committee.

 

As of December 31, 2017, 664,871 of these stock options had been exercised, and we had recorded aggregate compensation expense of RMB139.2 million based on the estimated fair value of the stock options on their dates of grant. All of the exercised stock options utilized a net exercise method, and therefore, the Company did not receive any cash proceeds from their exercise. We believe the granting of share incentive awards is of significant importance to our ability to attract and retain employees, and we will continue to grant share incentive awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

 

 

A. History and Development of the Company

 

We were incorporated in the Cayman Islands on October 16, 2007 under the name “Spring Creek Acquisition Corp.” as a blank check company formed for the purpose of acquiring an operating business that had its principal operations in China.

 

On April 9, 2009, we acquired all of the outstanding securities of AutoChina Group, Inc. ("ACG"), an exempt company incorporated in the Cayman Islands, from Honest Best Int’l Ltd ("Honest Best"). At the time of our acquisition of ACG, Honest Best was wholly owned by Ms. Yan Wang, Mr. Li's wife. Prior to our acquisition of ACG, we had no operating business. Promptly after our acquisition of ACG, we changed our name to “AutoChina International Limited.”

 

On August 30, 2012, the Company’s independent directors approved, and the Company entered into, an equity transfer agreement through its wholly owned subsidiary, ACG, to purchase 100% of the equity of Heat Planet Holdings Limited (“Heat Planet”) and its subsidiaries, whose primary asset consists of 23 floors, or over 60,000 square meters, of newly constructed office space in the Kaiyuan Financial Center building (the “Kaiyuan Finance Center”). Heat Planet was controlled by Mr. Li. The total transaction value of approximately RMB 1 billion ($159.3 million) was negotiated and approved by the Company’s Audit Committee and equals the appraisal value that was determined by a third party appraisal of the Kaiyuan Finance Center. Located at 5 East Main Street in Shijiazhuang the 245-meter tall Kaiyuan Finance Center is the tallest building in Shijiazhuang and Hebei Province. The Company's headquarters are located in the Kaiyuan Finance Center, which serves as the control center for the Company’s operations throughout China. The Company does not occupy the entire office space purchased, and has been leasing out the unoccupied space, the proceeds from which are reported as rental income. Additionally, the Kaiyuan Finance Center also contains a Hilton Worldwide-operated hotel.

 

Heat Planet’s equity was purchased for approximately $56.4 million. In connection with the acquisition, the Company assumed approximately $102.9 million in debt, resulting in a total transaction value of approximately $159.3 million.

 

In November 2014, the Company launched its CeraPay product, also known as Dianfubao in Chinese, which is a proprietary transaction platform for participants in the transportation industry that allows its users to make purchases at participating merchants on credit. CeraPay has features similar to traditional credit cards, such as no fees for users if the outstanding monthly balance is paid on time. The Company charges transaction fees to merchants at a fixed rate who accept CeraPay as a form of payment.

 

 

In November 2014, the Company also launched its CeraVest product also known as Qingyidai in Chinese, which is an online lending platform that acts as an intermediary to provide short-term financing primarily to small and medium sized business in the transportation industry by connecting loan requests with investors seeking to purchase loans for a fixed return. The Company earns transaction fees for loans facilitated through CeraVest.

 

In June 2015 the Company changed its name from AutoChina International Ltd. to Fincera Inc. to better suit its new internet-based businesses.

 

In October 2015 the Company launched TruShip, also known as Yihaoche in Chinese, its first e-commerce platform, which allows trucking industry merchants, such as dealerships and leasing companies, to establish online store-fronts and conveniently conduct sales transactions through CeraPay.

 

In March 2016, the Company launched AutoChekk, also known as Chekuaikuai in Chinese, its first e-commerce platform for the passenger vehicle industry. AutoChekk provides consumers in China with online tools and information designed to make researching and purchasing passenger cars or maintenance services more convenient and affordable.

 

In July 2016, the Company launched PingPing, an e-commerce platform that allows small businesses to establish an online presence while providing an online shopping portal for their customers.

 

On October 19, 2016, the Company closed its purchase of 100% of the equity interest of Eastern Eagle and its subsidiaries, whose primary asset consists of the remaining portions of the Kaiyuan Finance Center that the company did not already own, namely 31 floors and an underground parking garage, together totaling over 119,000 square meters, which house the Shijiazhuang Hilton Hotel. Eastern Eagle was controlled by Mr. Li. The total transaction value, as adjusted to account for changes in the net asset carrying value determined for Eastern Eagle, was $409.3 million, consisting of cash of $111.5 million and assumed liabilities of $297.8 million.

 

In May 2017, the Company launched Qingyifenqi, a consumer lending product that provides zero-interest payment by installment financing for purchases of consumer goods such as mobiles phones, large appliances, furniture, home decoration materials, passenger vehicles, etc.

 

In July 2017, the Company completed a special cash dividend of $2.00 per share to all shareholders of record as of the close of business on June 23, 2017.

 

In September 2017, the Company changed its trading symbol from AUTCF to YUANF. The new ticker YUANF pays homage to the Company's Chinese name-Kaiyuan-which we believe has a degree of recognition in the Chinese trucking industry.

 

In November 2017, the Company conducted a two-for-one stock split of the Company's outstanding shares of common stock in the form of a 100% stock dividend paid to shareholders of record on November 1, 2017.

 

 

The following chart illustrates our corporate structure as of March 23, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fincera’s principal executive office is located at 27/F, Kaiyuan Finance Center, No. 5, East Main Street, Shijiazhuang, Hebei, People’s Republic of China. Our telephone number is +86 311 8382 7688. Our principal website is located at http://www.fincera.net. The information on our website is not part of this Annual Report.

 

 

B. Business Overview

 

Fincera focuses on providing innovative online lending and e-commerce services for small and medium-sized businesses (“SMBs”) and individuals in China. Our mission is to promote the success of SMBs by giving them the tools to grow their business online while providing them access to affordable credit. Through our product offerings, we aim to enable a new era of inclusive finance and Offline to Online shopping experiences in China.

 

Leveraging deep knowledge of the transportation industry gained from our extensive history as a commercial vehicle sales, leasing and support business, our product platforms include complementary tools that, beyond giving access to a source of capital, allow SMBs in the transportation and other industries to streamline their business processes and increase their sales. We encourage SMBs and their customers to use our platforms to conduct transactions or browse inventory by offering cross-platform incentives and integration capabilities. Merchants who receive financing through our CeraVest product are incentivized to conduct transactions with their customers via CeraPay, our revolving credit product, on one of our e-commerce platforms, such as TruShip. For the end consumers, we can offer financing options for the purchases they make from merchants using our e-commerce platforms. By providing financial solutions to both sides of a transaction and providing a convenient tool to facilitate the transaction, we can convert an offline business scenario to an online revenue-generating opportunity for our products.

 

We currently operate in two distinct businesses segments: 1) internet-based financial and e-commerce services and 2) property lease and management. Our internet-based services are a single reportable segment. Together, our online lending and e-commerce services have contributed immensely to our transition and growth from our discontinued leasing business. Our revenue increased by 93% from RMB452.98 million in the fiscal year ended December 31, 2015 to RMB875.93 million in the fiscal year ended December 31, 2016, and by 17% from RMB875.93 million in the fiscal year ended December 31, 2016 to RMB1,023.85 million in the fiscal year ended December 31, 2017. Our property lease and management business has two additional reportable segments: hotel and office leasing. We are in the process of winding down our commercial vehicle sales, leasing and support business and insurance agency business, which are all classified as discontinued operations.

 

Internet-Based Services: Financial Services

 

Our financial services platforms are CeraVest and CeraPay. CeraVest, known as Qingyidai in China and launched at the end of 2014, is our proprietary peer-to-peer lending platform, through which we offer SMBs short-term financing at competitive interest rates. CeraPay, known as Dianfubao in China and also launched at the end of 2014, is our proprietary revolving credit product that also processes and settles transactions between our borrowers and merchants.

 

We strive to offer competitive rates and fees on our online lending platform for borrowers and attractive investment returns for loan investors. We offer interest-free and fee-free credit-lines to borrowers that are reusable within the customer’s credit limit provided that the customer pays off the credit account in full each month. For our fixed-term loans, our effective annual percentage rate (EAPR) charged to borrowers, inclusive of fees and security deposits, falls between 14.1 to 20.8%. Investors that purchase loans on our online marketplace may receive annualized returns from 7.3% to upwards of approximately 14% if the loans are purchased on the secondary market.

 

The total amount of loans facilitated and originated through our lending platforms increased by 100.57% from the fiscal year ended December 31, 2015, to the fiscal year ended December 31, 2016, and by 9.48% from the fiscal year ended December 31, 2016, to the fiscal year ended December 31, 2017. Cumulatively since the launch of our online lending platforms, we have facilitated approximately RMB 26.76 billion in total loans as of December 31, 2017.

 

CeraPay

 

CeraPay, launched at the end of 2014, is our proprietary revolving credit product that also processes and settles transactions between our borrowers and merchants. CeraPay users are provided with a credit line that can be utilized at participating CeraPay merchants or be used to pay other CeraPay users. Having features similar to a credit card, there are no fees (other than late fees and penalties for CeraPay users who become delinquent on amounts borrowed) for using the CeraPay payments service as long as any outstanding balances are paid in full each month. We generated revenue from CeraPay primarily by charging transaction fees, which were approximately 2.4%, to merchants participating in the network. Merchants may use CeraPay funds to make payments to other CeraPay users or merchants or cash out the funds via transfer to a bank account. CeraPay users are subject to an application and credit approval process and provide guarantees and collateral before they are provided with a credit line.

 

 

Previously, we offered 30-day credit lines and 12-month installment loans via CeraPay and collected transaction service fees from merchants receiving the payment. However, since July 2017, in order to comply with financial regulation, we replaced these products with similar offerings from CeraVest where these loans are instead facilitated by our peer-to-peer lending platform. The transaction fees collected in this new format are then allocated to the investor of the loan as interest payments and to the Company as a facilitation fee.

 

CeraVest

 

Through CeraVest, we now offer three types of financing services with different terms and payment schedules for borrowers and offer three corresponding investment products for investors. Previously, we have offered 180-day loans with a different transaction process as CeraVest Fixed and also offered CeraVest Flex as a highly liquid investment option to our customers. CeraVest Fixed and CeraVest Flex were phased out and terminated by December 2017 and February 2018, respectively, and replaced with new products listed below to comply with the relevant regulations.

 

Loan Types

 

We now offer the following three loan types to our customers. 30-day lines of credit and 180 day term loans were launched with the inception of the CeraPay and CeraVest platforms, while installment loans were launched at the end of 2016.

 

30-day Lines of Credit

 

We issue interest-free revolving credit lines to SMBs to fund their short-term working capital needs. The credit lines have a 30-day billing cycle and outstanding balances after the bill due date are considered delinquent and will be subject to certain penalties. We typically reduce or waive all penalties if the borrower is cooperative in communicating a payment plan with us or submits the payment shortly after the due date.

 

Similar to credit cards, our credit lines contain no fees for borrowers to use this service as long as any outstanding balances are paid in full each month. We generate revenue primarily by charging transaction fees, which are currently approximately 2.4%. Merchants may use funds received from transactions to make payments to other users or merchants or cash out the funds via transfer to a bank account. Credit line users are subject to an application and credit approval process and are required to provide us with guarantees and collateral. For certain payments such as driver salary payments, a fee is charged instead to the borrower since the merchant in these scenarios typically will not accept paying a fee for such a transaction.

 

In partnership with SINOIOV, in October 2017, we began offering SINOIOV-Sinopec co-branded diesel fuel cards to our trucking customers. Our borrowers can use our credit lines to purchase these fuel cards, and the cards are valid for fuel purchases at all Sinopec service stations. We earn revenue from these arrangements by collecting rebates from the merchants.

 

As of December 31, 2017, we have originated and facilitated an aggregate of RMB46.3 billion in 30-day lines of credit transactions. We believe that our 30-day revolving lines of credit product will become our primary profit driver. We are catering to substantial demand from the trucking industry for short-term, low-cost credit to fund working capital needs. Not only are we able to generate high returns from transaction fees, but our 30-day credit product is also highly scalable since we can benefit from repeat transaction volumes from a one-time customer acquisition expense.

 

180-Day Term Loans

 

Currently, our 180-day term loans accrue interest at 4.25% (or 8.62% on an annualized basis). We charge a facilitation fee between 2-5% depending on the type of the loan. The fee portion is collected by the Company while the investor holding the loan at maturity receives the interest payment. In addition, the borrower remits 5-8% of the loan to the Company as a security deposit that is refunded to the borrower upon timely repayment. Payment of principal and interest is due in a lump sum at the maturity date at the end of the 180-days. Outstanding balances after the maturity date are considered delinquent, and the Company will keep the security deposit as a one-time penalty fee and may assess additional penalties. We typically reduce or waive all penalties if the borrower is cooperative with arranging a payment plan or submits the payment shortly after the maturity date.

 

As of December 31, 2017, we have originated and facilitated an aggregate of RMB13.3 billion in 180-day term loans.

 

 

Installment Loans

 

We began offering installment loans to fund purchases of trucks and consumer discretionary goods and services in December 2016. The loans require an order to be completed on one of our e-commerce websites with the borrowed purchase funds being transferred directly to the merchant via our payment network. Given the term of the loan and the type of purchase, we charge a fee between 6.9 – 8.6% to the merchant on the transaction and require some borrowers to provide us with collateral to partially secure their obligations. Terms of these installment loans may vary between 3-24 months; however, the majority of the installment loans carry a term of 12 months. As of December 31, 2017, we have originated and facilitated an aggregate RMB4.03 billion in installment loans, with 64.18% of the volume from trucking related purchases.

 

Borrowers

 

We generally source our borrowers from our nationwide physical sales network of over 280 company-owned offices, located in 30 provinces and covering 301 cities across China. Also, we have established a broad system of “associate stores,” “franchise stores,” and “individual agents” that work on a commission basis to refer borrowers, investors, and merchants to use our products. We believe that using these multiple borrower sourcing channels will allow us to grow our online business rapidly.

 

As of December 31, 2017, our borrowers consisted of 26.8% companies and 73.2% individuals, 50.68% are operating a trucking-related business and 69.1% also borrow for consumer purchases. We typically lend to SMB owners who are married and possess real property. We strictly prohibit providing services to people with criminal records or those listed on the national list of delinquent debtors.

 

As a result of industry knowledge we acquired through our legacy operations, we emphasize bringing SMBs in the trucking industry to our online lending platforms. These businesses may be individual truck owner and operators, truck leasing companies, truck dealerships, or logistic companies. Our borrowers in the trucking industry typically require financing for working capital needs or business expansions, and our online lending platform provides them with the flexibility to choose a financing option that best meets their needs. These borrowers typically reside in rural areas or lower tier cities.

 

We also offer consumer loans for retail purchases and other discretionary purchases such as home furnishing and decoration, albeit on a much smaller scale. The emerging middle class in China is a driver of growing consumption of discretionary products and services.

 

Investment Products

 

Each of the three types of our loan products are available to retail investors as fixed income investments on our Qingyidai marketplace. 180-day loans are named “Qingying” and provide annualized returns of 8.62% with principal and returned in lump-sum at maturity. 30-day loans are named “Yueying” and provide annualized returns of 8.1% with the principal and interest returned at maturity. Installment loans are named “Zhongying” and provide annualized returns of 9.02% with principal and interest returned monthly.

 

Investors are also able to exit any of the loan investments before full maturity by selling the loans to other investors on a secondary market provided by our platform. Secondary transactions are conducted based on a fixed pricing method by the Company where interest returns to the selling investor is discounted and the discounted amount passed on to boost the expected return of the purchasing investor. Investors selling 180-day loans before maturity will receive an annualized yield of 7.3% while the purchasing investor can earn an annualized return of 8.62 – 14.64% depending on the time to maturity. Investors selling 30-day loans before maturity will receive an annualized yield of 7.6% while the purchasing investor can earn an annualized return of 8.1-10.08% depending on the time to maturity. Investors selling installment loans will only receive the principal amount not yet returned and forfeit any interest accumulated during the current period.

 

In 2015 we launched the CeraVest Flex product, which gives investors flexibility concerning the term of their investment. As opposed to the fixed 180-day or 3-day term of the regular CeraVest product, CeraVest Flex allowed investors to add or withdraw funds as they please. To be compliant with China’s online lending regulations, we no longer offer the CeraVest Flex products to our customers.

 

 

At times the Company voluntarily purchases defaulted loans at maturity so that investors can retain their principal and the expected interest income. The Company also willingly purchases notes from investors on the secondary market if no other investors can buy the notes within a specified period; after which the Company immediately relists these loans for sale to other investors on the secondary market. All of the Company’s loan purchases are intended to provide the desired level of liquidity to investors; these actions are part of the Company’s commitment to providing the best investment experience to our customers.

 

We serve all investors domiciled in China and offer them investment opportunities in loans available on our marketplace. Currently, we focus our efforts on attracting individual investors and SMBs with idle cash on hand. We plan to expand and diversify our investor base to include institutional investors, such as banks, trust funds, and fixed income funds, as well as additional high-net-worth individuals who may invest more substantial amounts of funds. Due to our reliance on our offline sales network across China, we attract mostly investors located in lower tier cities since our offices operate in these regions, and there is less competition of investors as opposed to the 1 st tier cities.

 

As of December 31, 2017, our investors profile consisted of 56% male and 44% female. In terms of age distribution, 25.3% of our investors were in their 20's, 37.9% in their 30's, 22.9% in their 40's, and 13.3% were in their 50's or older. The majority of our investors are located in the Hebei region as shown on the map below:

 

 

Sales & Marketing

 

We primarily utilize a highly targeted, multi-tiered approach to selling and marketing our products. We employ a direct sales force, partner with SMBs, use commission-only sales agents and rely on word of mouth advertising to market our products. For branding and promotional purposes, we invest a small portion of our budget on ads on various traditional and digital media sources such as news outlets, social media, app stores, and other third-party web or mobile app platforms. While we currently rely heavily on our sales network for customer acquisition, we expect digital and multimedia marketing to be our main channels going forward as we build capabilities in this area. As of December 31, 2017, 90.1% of borrowers were introduced to us by our franchise stores and associate stores while 45% of investors were referred to our peer-to-peer lending platform by our offline sales network.

 

 

Our sales network comprises a hierarchy of company-owned stores, associate stores, franchise stores, and individual agents. While historically our company-owned truck leasing sales centers have been located in rural areas, our new company-owned stores are located in 2 nd – 4 th tier cities and their chief sales and marketing related function are to acquire and manage associate stores and franchise stores. As of December 31, 2017, we have 287 company-owned stores in operation.

 

Associate stores are small businesses that have an extensive network of business and customer relationships within their region that have a keen interest in promoting our products. To become an associate store, the owner of the small business signs an employment agreement with the Company while his or her firm remains independent. By becoming an employee of the Company, the business owner of the associate store has a more significant legal responsibility to us, and we have more recourse options in cases of dispute or fraud. Associate stores are mandated to leverage their regional relationships to onboard more small businesses as our franchise stores as well as acquire borrowers and investors for our financial products in exchange for a commission on transaction volume adjusted for any delinquencies. We typically allow small businesses that have a long and successful working relationship with the Company to become our associate stores. As of December 31, 2017, we have established 135 associate stores that are actively operating.

 

Franchise stores are small businesses that have borrowing needs and a customer base that need our financial products. To become a franchise store, the business owner or manager has to complete a full credit assessment and execute a franchise agreement with the Company. The comprehensive credit assessment is necessary because the majority of our franchise stores are also our borrowers and because they will refer and acquire individual borrowers for us from their customer base. Thus we need to ensure that our franchise stores are creditworthy and have sound management to prevent unnecessary concentration of risk in these franchise stores. If authorized by us to do so, franchise stores can refer borrowers to us and collect application information from the borrowers on our behalf for a commission based on loan transaction volume adjusted for delinquencies. Not all franchise stores are authorized to refer borrowers to us, but all franchise stores are permitted to refer investors to our peer-to-peer lending platform in exchange for a commission on the average monthly invested balance. As of December 31, 2017, we had 35,837 franchise stores that are actively operating.

 

Individual agent is a concept introduced in the fourth quarter of 2017, and we are currently testing the method nationwide. Individual agents could be referred to the Company by any of our employees, associate stores, or franchise stores. To become an individual agent, the individual must demonstrate the possession of a broad personal network that he or she could leverage to promote our various products. Individual agents can refer franchise stores, borrowers, and investors to the Company in exchange for a commission based on transaction volume or average monthly invested balance. As of December 31, 2017, we had contracted 920 individual agents.

 

In conjunction with our sales and customer acquisition efforts, we also offer ongoing promotions that provide cash incentives to first-time investors on our platform. Existing customers that refer new investors to our platform can also receive a cash reward. From time to time, we will also conduct promotional campaigns targeted at specific segments of our existing customer base to retain or increase a customer’s invested balance. For investors in the Shijiazhuang region, we also offer room and dining vouchers for our hotel during seasonal promotional events.

 

Risk Management

 

We have extensive experience underwriting credit and managing risk concerning SMBs in the transportation industry. To manage the credit risk from the loans extended to customers, we have leveraged this experience in our current risk management practices. Our risk management efforts mainly focus on: i) thorough verification of personal and asset information; ii) building robust evidence for cases to collect through litigation; iii) maintaining and promoting a “never-call-it-quits” culture when it comes to collections; iv) developing our data-driven anti-fraud and credit assessment and decision systems.

 

Screening and Verification

 

As outlined in our transaction process, our verification of the information provided in each credit application is a core process of our risk management procedures. Each application begins with an in-person meeting to collect information and record photo and video evidence of the entire process. After our regional service representatives submit the application information to our headquarters for review, we verify the information provided against third-party sources such as state authorized personal identity databases, commerce bureau registration information, vehicle registration data providers, telecom data providers, and more. We also manually scrutinized the identification and documents provided to spot any false documentation. Finally, we also conduct an interview over the phone with the applicant to verify specific information and that they have indeed submitted a credit application for the purposes stated in the application materials. Most importantly, since the majority of loans are trucking related, we ensure that we verify the truck assets and ownership information since trucks are income generating assets and this allows us to determine whether the borrower can repay the loan.

 

 

Evidence and Case Building for Litigation

 

We have developed a streamlined set of procedures to efficiently file lawsuits against delinquent borrowers in local courts as well as establish criminal cases against fraudulent borrowers with the local police. In both scenarios, we must provide a robust record of evidence that documents the loan agreement’s validity, the borrower’s participation, and the borrower’s intent to commit fraud (if applicable). Thus as part of our application process, we emphasize that documents must be physically signed, fingerprinted or stamped with the borrower's company chop, witnessed by our service representative, and also require the process to be documented by photo and video. Physical signatures and multimedia records are strong evidence that we could use in court against an uncooperative delinquent borrower. Similarly, across all of our platforms and information systems, we keep complete logs of all user account activity that could be provided as evidence of the borrower committing fraud. In certain processes, we may use facial recognition service provided by a third party to verify the user conducting a transaction is, in fact, the authorized and registered user named on the account.

 

Developing Data Driven Risk Management Systems

 

We are in the process of implementing credit risk models that utilize both internal and external data sources to rate borrowers’ creditworthiness and calculate default risk for future use in our screening process. Since China has an underdeveloped credit rating system, we must rely on our proprietary models and alternative data to rate and underwrite prospective borrowers. Aside from internal data sources such as transaction history and user activity on our platform websites, we also purchase external data such as an applicant’s cell phone activity, bank card activity, traffic violations record, and highway toll data. Using a wide array of data that we collect over time, we can optimize our risk models to calculate default risk better.

 

Data-driven risk management is an area in which we are striving for improvement. Since our target customers have limited data that could be collected and verified by reliable third parties, we are continually experimenting with data sources that could help us improve our data-driven anti-fraud and credit evaluation processes.

 

Transaction Overview

 

Our loan facilitation process is designed to ensure that our customers can access the funds they need within a reasonable time while not sacrificing the quality of our risk management measures. Typically, our initial credit application process takes 1 business week, while subsequent credit line drawdowns or loan funding requests are processed instantaneously. The diagram below illustrates our general transaction process.

 

 

 

Step 1 Application Submission

 

In most of our loan facilitation scenarios, a borrower completes an initial application with one of our service representatives in person. At this stage, we ask the borrower to submit detailed documentation regarding the borrower’s identity and creditworthiness. The initial application and related agreements are signed in person and witnessed by our service representative. A video is recorded of the borrower signing agreements and citing that he or she acknowledges the terms and that the information submitted is accurate and complete. We also take photographs of assets such as the borrower’s truck with the borrower appearing in the same frame of the vehicle. All of the applicant information is submitted electronically via our backend management systems to our application review department for evaluation. Regional service centers mail hard copies of signed agreements to our headquarters for processing and record keeping.

 

Step 2: Screening and Verification

 

After our regional service representatives send the borrower’s credit application to our review department,

We conduct a series of anti-fraud checks on each credit application to ensure the information provided is true and complete. We use third-party data sources to check information such as the applicant’s cell phone activity, bank card activity, business registration, and vehicle registration. We also call the applicant to confirm specific details over the phone as well as contact the family members listed to ensure the contact information is valid. If any application information is deemed to be false or incorrect, we may contact the service representative who processed the application to make a correction or additional in-person validation. If we believe that an applicant purposely submitted false information or documentation, we will terminate the application and take additional measures to prevent the applicant from making use of our platform.

 

Step 3: Credit Assessment and Approval

 

Applications that clear our rigorous screening procedures move on to our credit assessment process for final credit approval. Our loan officers follow established credit limit policies and approve credit limits based on the verified information and collateral pledged by the borrower. Because all of our credit products are either interest-free or offered at a single fixed rate, we do not conduct risk-based pricing. For lines of credit and term loans, once we approve a credit limit, the borrower may request a drawdown of any amount within the credit limit either online or by conducting a transaction on our CeraPay platform. For our installment loans, each loan is approved based on a purchase order on our e-commerce platform and requires the borrower to complete the purchase at the point of sale, in person, at the merchant’s place of business.

 

Step 4: Loan Listing and Funding

 

When a borrower requests a loan online or conducts a credit transaction on our network, a loan request will list on our Qingyidai peer-to-peer lending platform for funding by retail investors. Investors will subscribe to a loan request, and once investors fully subscribe to a loan, we will transfer the funds after deducting fees and the deposit to the borrower’s platform account, from which the borrower can withdraw to his bank account for use. If a loan is not fully subscribed before the end of the day, the Company will use a subsidiary that is not Qingyi Technology to purchase the unfunded portion to ensure that we can fund the borrower’s loan request on the same day without delay.

 

Step 5: Servicing and Collections

 

We conduct collections for scheduled loan payments through an automated online process. Borrowers just have to deposit funds into their platform custody account before the scheduled time on the day of repayment. The borrower’s account is delinquent if he or she does not remit payment at the expected time and penalties would apply. We employ a variety of sequenced collection procedures, including working with delinquent borrowers to structure feasible payment plans, to ensure that we, and our investors, are repaid.

 

For borrowers across all of our loan products that have difficulty repaying delinquent balances within a reasonable time, we also offer our 180-day term loans as a way for these borrowers to restructure their delinquent loans. We may negotiate with delinquent borrowers to create a payment plan to repay a portion of the delinquent balance. Facilitation fees charged for these restructuring loans are typically higher at 3-5%.

 

 

Beginning in the fourth quarter of 2017, we began to sell certain delinquent loans to third-party collection companies. Prices for the loan sales are negotiated on a case by case basis. Alternatively, we may sell loans that have been delinquent for an extended period and have a low chance of being recovered at a significant discount to recover as much as possible. As of December 31, 2017, we have sold RMB 75.0 million of delinquent loans to third parties and incurred RMB 3.7 million loss from it. The average age of the delinquent loans sold as of December 31, 2017, is 314 days.

 

Internet-Based Services: E-Commerce

 

We have several e-commerce products targeting different vertical markets spanning the trucking, passenger vehicle, and retail industries. We offer our e-commerce services in conjunction with our lending services in an effort to establish an online presence for the merchants in our network and to help them grow their online business. Currently, our three primary e-commerce products are TruShip, AutoChekk, and PingPing.

 

TruShip

 

TruShip, launched in October 2015, is our online e-commerce platform whereby trucking industry merchants, such as dealerships and leasing companies, can establish an online store-front and conveniently conduct sales transactions through CeraPay. In December 2015, we launched the TruShip Logistics shipping marketplace on the platform. It allows participants in China’s fragmented long-haul trucking industry to publish, browse, and connect with shipping jobs across the country at no cost. CeraPay can process payment transactions resulting from connections made on TruShip Logistics. The primary strategic objective of TruShip is to provide our customers with a useful transaction platform that facilitates the increased use of CeraPay.

 

AutoChekk

 

AutoChekk, launched in March 2016, is our e-commerce platform for the passenger vehicle industry. AutoChekk provides consumers in China with a powerful and intuitive tool that makes researching and purchasing passenger cars or maintenance services convenient and affordable. The platform provides information regarding passenger cars that are available for sale and facilitates purchases. AutoChekk also provides consumers with search tools and a procurement platform for maintenance services.

 

PingPing

 

PingPing, launched in July 2016, is our e-commerce platform for small businesses. PingPing provides businesses with an easy-to-use online platform to establish an online presence while providing an intuitive, full-service online shopping experience for their customers. PingPing plans to offer B2B, B2C, and real estate e-commerce services, which are all complemented by Fincera's core financial service offerings. As with Fincera's TruShip and AutoChekk platforms, payment transactions are processed using CeraPay and other third-party payment platforms, and the resulting data will be used as underwriting metrics for CeraVest loans to small businesses.

 

Since our installment loans primarily drive transaction volume on our e-commerce websites, we are planning to consolidate our AutoChekk and PingPing websites under our consumer lending brand: Qingyifenqi by the end of the second quarter of 2018. This consolidation would align all of our consumer and investor-related businesses under the Qingyidai brand family, allowing for better recognition by our customers.

 

Merchants

 

Merchants in our payment and e-commerce network are primarily SMBs within the trucking industry, while some are small retailers that have customers that require our purchase financing services. Our financing services support the sales efforts of our merchants by attracting more customers that need purchase financing. In addition to increasing merchant sales, we also help improve their cash flow by reducing the number of customer receivables resulting from merchants providing goods or services to their customers on credit, a common practice in the trucking industry. For most of our financing services, the merchant pays us a percentage of the purchase amount as a transaction fee. The fee charged varies by merchant type and the type of the financing service and terms. Merchants can also invest their idle cash on our peer-to-peer lending platform to earn additional interest income. In addition to our financial services, merchants can also establish and manage online stores on any of our e-commerce websites to market their goods online.

 

 

As of December 31, 2017, we had 27,001 merchants registered across all of our platforms, 79.2% of which are trucking related and 20.8% of which are non-trucking related retailers. The majority of our merchants are located in mid-east China as shown on the map below.

 

 

Property Lease and Management Business

 

We own the Kaiyuan Finance Center, which is a 53-floor large-scale commercial building with hotel, office and ancillary facilities, erected on a land parcel with a site area of approximately 10,601 square meters in the central business district of Shijiazhuang, China. The office space in the building comprises a total gross floor area of roughly 62,701 square meters. Our corporate headquarters is located in the building, and we lease out the space that we do not occupy (about 54,696 square meters). As of December 31, 2017, we have leased out 88% of the area available for rent pursuant to leases that expire on various dates through 2022.

 

The Kaiyuan Finance Center also houses the Shijiazhuang Hilton Hotel. This full-service hotel property totals over 119,000 square meters and includes guest rooms, restaurants, conference facilities, a fitness center, spa and an underground parking garage. The Company has entered into a management and franchise agreement with Hilton Worldwide Holdings Inc. to manage and operate the hotel.

 

We believe that the Kaiyuan Finance Center is one of the premier commercial properties in Shijiazhuang, making it highly attractive to both office tenants and hotel guests. It is currently the tallest building in Hebei province and sits in a central location next to a large luxury shopping mall, the Hebei Provincial Museum and the Hebei Provincial Library. Its convenient location places it steps away from one of Shijiazhuang’s main thoroughfares, Zhongshan Road, where the city completed its first subway line in 2017.

 

Our Chairman has significant experience developing, owning and operating real estate assets. We aim to continually improve the operating results of our existing property through concentrated leasing, asset management, cost control and customer service efforts. We focus on meeting our customers’ needs and providing them with cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. Our property competes against similar properties located in our market primarily by location, rent, services provided and the design, quality, amenities, and condition of the facilities.

 

 

Customers

 

Our office leasing business mainly serves corporate clients with operations in Shijiazhuang with a need for premier office space in the city center. We attract many financial services companies as our tenants as well as regional divisions of large enterprises.

 

Our hotel business mainly serves individual guests, corporate guests, ballroom event or conference attendees, third-party travel agencies, and hotel restaurant customers. The majority of our hotel guests are Chinese nationals; however, approximately 6% of our past guests have been foreign nationals.

 

Sales & Marketing

 

As one of the premier office locations in Shijiazhuang, we require little advertisement or marketing to attract tenants for our vacant office space at Kaiyuan Finance Center. We maintain a staff of 7 team members to manage tenant relationships, collect lease payments, receive inbound inquiries from prospective tenants, negotiate lease contracts, and coordinate tenant requests. When space is available for lease, our sales sometimes may also proactively make sales calls to reputable local enterprises currently leasing other comparable high-end office spaces in the area. As of December 31, 2017, approximately 88% of the office space had been leased out.

 

Our hotel business follows sales and marketing guidelines set forth by Hilton. Our Hilton sales and marketing department consists of 14 team members responsible for executing marketing strategy and managing sales and promotions of all hotel products including space rentals for conferences and other corporate functions. The marketing team routinely advertises in traditional media such as magazines, local radio, and outdoor ads at central locations to target local customers. We also promote through social media and partner with banks to reach customers using their channels. The hotel will also conduct seasonal promotions to increase food and dining revenue as well as annual charitable events to promote the Shijiazhuang Hilton brand.

 

Competition & Competitive Strengths

 

We face direct competition for borrowers from a multitude of financial institutions and lending platforms in China. In the trucking industry, our installment loans for truck purchases competes against other leasing companies’ services as well as financing services provided the manufacturer. Our 180-day term loans compete against regional banks and private lenders that may lend to small businesses within the trucking industry. Moreover, our installment loans for consumer purchases of non-discretionary goods compete directly against consumer loans offered consumer lending platforms, consumer finance companies, micro-finance companies, and commercial banks.

 

We also face considerable competition for individual investors. We compete with a multitude of different investment products in various asset classes. These include but are not limited to equities, bonds, peer-to-peer loans, investment trust products, bank savings accounts, and real estate and alternative asset classes.

 

Our e-commerce businesses face competition from many nascent and established internet companies. Our trucking platform TruShip faces competition from well-funded logistics platforms such as Huochebang and Loji. Our consumer e-commerce platforms Pingping and AutoChekk directly compete against various consumer and new vehicle e-commerce startups or subsidiaries of established e-commerce companies such as JD.com and Alibaba.

 

Our office leasing and hotel business face competition from other premier office space for lease as well as internationally branded hotel chains located in the city of Shijiazhuang.

 

Nevertheless, we believe the following strengths make us competitive in this environment:

 

Our experience developing proprietary credit controls and information systems minimizes risk and potential losses.

 

We have several years of experience developing standardized underwriting and credit control procedures. We believe that this knowledge and expertise allows us to profitably service underserved market segments with a minimum amount of risk. Our screening and approval process helps to ensure that we only accept customers whom we believe will be able to fulfill the terms of the loans facilitated through our platform.

 

 

With the rapid growth of our high-volume online lending platforms, we are developing data-driven risk assessment systems in conjunction with third-party consultants. Because we possess proprietary and exclusive transaction data on borrowers that transact through our e-commerce websites, we believe we have strong potential to develop value-added risk models that will further improve our underwriting and credit control procedures and better position us to compete in the lending and payment processing markets.

 

We offer competitive rates and fees to our borrowers.

 

Our 30-day credit lines and 12-month purchase financing are interest-free if borrowers are not late on their payments and our 180-day term loans currently carry an effective annual percentage rate of 14 - 21%. We believe borrowers find that our rates and fees can significantly lower their cost of capital for their business financing needs. We believe our financing products offers unique opportunities for businesses and consumers to access affordable credit at rates and with fees that that few competitors can match.

Our nationwide sales network provides us greater borrower access.

 

We believe that our vast sales network differentiates us from our competitors. Our bricks-and-mortar locations span a broad geographic footprint that facilitates our sales, marketing and service efforts with our target customers, who are located mostly in smaller cities and rural areas that are not readily reached through online advertising or our other media channels.

 

Our management team has significant experience operating in our industries of focus.

 

Our founder started one of the earliest commercial vehicle leasing companies in 1994 and, by the time we began winding down our legacy commercial vehicle business in 2015, we considered ourselves the leading provider of commercial vehicle leases to owners and owner-operators. Key members of the founding team remain in senior sales and risk management positions with Fincera. Over time we have accumulated significant experience in the trucking industry and knowledge about its participants. We also have developed a strong reputation and many business relationships through our commercial vehicle sales, leasing and support business. Because the trucking industry is the primary focus of our initial strategy, we believe our over two-decade long experience in this sector as well as working with SMBs will be crucial to making our new Internet-based businesses successful in this industry and others.

 

Additionally,   our founder has significant experience in developing, owning, and operating real estate assets. Through Hebei Kaiyuan Real Estate Development Co., Ltd. he has become one of the preeminent developers of real estate in Shijiazhuang by developing several landmark commercial and residential projects in the city center. He leverages this expertise in owning and operating the Kaiyuan Finance Center.

 

We offer flexible investment products that provide greater liquidity for investors

 

Investors that purchase any of our products are allowed to sell their investments to other investors on a secondary market that we operate. We determine the pricing of loans sold on the secondary market and control certain aspects of the transactions to encourage investors to purchase secondary market investments for increased returns.

 

Corporate Strategy

 

Leveraging our strengths and our risk management experience, we plan to implement the following key strategies to continue to grow our business volume and gain market share within our target industries.

 

Broaden our selection of financing and e-commerce services and increase our market share in the trucking industry

 

We are leveraging our experience in the trucking industry to expand our product lines within the industry. In the past two years, we have launched new products to provide financing for truck purchases, fuel card purchases, employee payments, and highway toll fees. We plan to expand our product offerings to serve even more trucking related businesses such as shipping agencies and repair shops. We hope that by connecting even more trucking SMBs with financing through our online lending platform, we can gain additional customers and increase our market share in the industry. With the increased traffic to our online lending platforms, we can then monetize these expanded services by charging transaction fees or by using the transaction data in our risk models to further decrease default risk and related expenses.

 

 

Expand our financial services to retail and other industries.

 

As we grow our product offerings and business volume in the trucking industry, we plan to expand our financial services to other consumer-facing sectors and further diversify our lending activities. Developments such as government policies on environmental protection and the proliferation of electric vehicles may affect the Chinese trucking industry. We seek to diversify into other sectors to maintain our prospects for growth in the future. We believe that our financial products are highly adaptable for use in retail and other industries.

 

Expand and diversify our investor base and offer more investment products

 

The investors currently on our platform are geographically concentrated around the Hebei province and surrounding regions in mid-east China. Our investor base consists mainly of individuals or small businesses, and their average investment tends to be higher than the industry standard as the average age of our investors is 37. We plan to expand and diversify our investor base by increasing sales and marketing efforts in regions where we lack investors, and we seek to attract younger investors that may increase their investment profile with us over time. We are also seeking relationships with institutional investors that have lower return expectations and can help reduce the cost of capital to our borrowers.

 

Continue to improve our risk management processes and risk modeling capabilities

 

We plan to continue to monitor and refine our risk management processes to reduce the incidence of frauds and defaults. In addition to gathering more data from our internal process to drive improvements in our operations, we seek to interface with more data providers that can supply us with various forms of credit data or other personal information of borrowers to support our anti-fraud and risk modeling mechanisms. We plan to strengthen our data analytics and machine-learning development team to develop and refine additional risk models as we produce different types of loan products targeted at customers in various industries.

 

Invest in our technology platforms to increase the efficiency of our operations

 

We plan to continue to invest in our development teams and technology platforms to provide more process automation and increase the stability of our online services. In the past year, we have adopted DevOps, a software engineering culture and practice that aims at unifying software development (Dev) and software operation (Ops). The main characteristic of the DevOps movement is to strongly advocate automation and monitoring at all steps of software construction, from integration, testing, releasing to deployment and infrastructure management. DevOps aims at shorter development cycles, increased deployment frequency, more dependable releases, in close alignment with business objectives. We have spent a considerable effort to automate our virtual environment creation, code integration, testing, code deployment, and feature release processes. We will continue to implement DevOps best practices to increase our speed of feature releases and responses to service interruptions. By doing so, we may improve the security and stability of our online services, which will enhance our brand reputation in the market.

 

Furthermore, because our businesses require significant interaction between our physical sales network across China and our information systems, we plan to develop more convenient mobile-enabled applications to support our sales efforts. We also intend to invest in and use technologies to further enhance operational efficiencies in our human resources, finance and accounting, and marketing teams.

 

Maintain our status and market share as the premier office and luxury hotel property in Shijiazhuang

 

We believe that our Kaiyuan Finance Center is currently one of the premier commercial properties in Shijiazhuang. It is the tallest building in the Hebei province and is located in the city’s financial and political center immediately next to the provincial government’s offices. Office space in the Kaiyuan Finance Center is in demand, and we have an occupancy rate of 88% as of December 31, 2017. Our five-star, Hilton operated hotel is one of the best five-star hotels in Hebei and was awarded Hilton’s Connie Award in 2014 for Asia. We plan to maintain Kaiyuan Finance Center’s status in the area by continuing to provide excellent service to our customers. We also plan to leverage the brand value of the Kaiyuan Finance Center to increase the brand recognition of our online services in the region.

 

 

Increase public recognition of our brand through multi-channel marketing

 

As we continue to launch more consumer-facing online services, we plan to increase our brand marketing through a multi-channel approach to extend our reach beyond the trucking industry and the Hebei region where we are based. We intend to invest prudently in online advertising and to optimize our channel selection based on cost efficiency. We also intend to invest in social media advertising. We also seek to participate in more cross-platform and cross-industry collaborations with well-branded companies that can help elevate our brand recognition. Finally, we seek to gain brand exposure through our offline merchant partners who may choose to display our brand signage and promotional materials at their store locations.

 

Seasonality

 

We experience seasonality in both our internet and our hotel businesses, reflecting effects from market seasonality and our promotional activities. For our financial services, we typically see seasonally low lending and borrowing activity around the calendar year end and around the time of Chinese New Year when business activity usually slows down. Consequently, we often experience a season-high immediately after the Chinese New Year as business activity rebounds in the spring. Also, for our trucking-related financial and e-commerce services, we often experience a season-high in the months of September and October, a period regarded as high season for truck sales.

 

Our hotel business typically sees decreased activity immediately before and after the Chinese New Year when corporate clients are not as active. Seasonal highs occur in the fourth quarter of each year as corporate activity picks up close to year end. Food and beverage sales also experience increases during summer and winter school holidays from increased family activity and spending during this period.

 

Capital Expenditures

 

Our capital expenditure primarily includes leasehold improvements of the Kaiyuan Finance Center that we acquired in September 2012. For fiscal 2015 we incurred RMB7.5 million in leasehold improvement for the Kaiyuan Finance Center. For fiscal 2016 we incurred RMB4.0 million in leasehold improvement for the Kaiyuan Finance Center. For fiscal 2017 we incurred RMB5.1 million in leasehold improvement for the Kaiyuan Finance Center.

 

Discontinued Operations

 

In late 2015 we began winding down the operations of our commercial vehicle sales, leasing and support business because we felt that our Internet-based business presented both a better opportunity and a more efficient way to operate. Our commercial vehicle sales, leasing and support business provided commercial vehicle leasing solutions for small and medium-sized businesses in China’s transportation industry. We offered sales-type leases that include after-sales service and support for Class 8 heavy trucks (gross vehicle weight rating “GVWR” of over 33,000 lbs). Our insurance agency business, in which we established an insurance agency company, Shijie Kaiyuan Insurance Agency Co., Ltd (“Kaiyuan Insurance”), to act as a direct insurance agent in China, is part of this segment. Due to this strategic shift, we present our commercial vehicle sales, leasing and support business as a discontinued operation in our financial statements.

 

In 2017, we accelerated the wind-down of the tail-end portfolio by selling our registered logistics subsidiaries to third parties along with the leasing portfolio held by these subsidiaries. As of December 31, 2017, our remaining leasing portfolio consists of RMB47.6 million in receivables.

 

Our Technology Systems

 

We have established a comprehensive suite of information technology systems to operate our various business lines. We host most of these technology systems on Microsoft Azure’s cloud computing platforms. We believe using Microsoft’s cloud solution would allow us to scale capacity quickly when needed and also reduces the operational risks and costs from maintaining a cloud infrastructure by ourselves. Microsoft’s services offer many layers of security and redundancy to ensure the reliability and safety of our systems. We also maintain our own set of Docker-based platform infrastructure used to run our internal tools and testing environments as well as for periodic data backup. We have plans to establish a set of self-maintained platform infrastructure to serve as a backup service for our customers in case of interruptions in Microsoft’s cloud service.

 

 

Our product development and IT teams comprise of 218 employees as of December 31, 2017, and they focus primarily on developing our front-end and backend systems and maintaining high-performance operations of all of our technology systems and infrastructure. Our technology systems consist of mainly the following:

 

 

 

 

We believe that improving performance, stability, and user experience is the primary focus of our product development efforts for our front-end systems. For our back-end systems, we hope to improve the integration between sub-systems to create a more seamless and efficient interface and also develop machine learning algorithms to increase the usage of our automated and data-driven credit assessment processes. Also, we hope to discover and purchase additional third party software that could help us save development and maintenance costs on generic back-end systems that require little customization.

 

 

As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including, among other things, housing, pension, medical insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount determined by the local government from time to time.

 

 

Insurance

 

We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We have property insurance covering our equipment on all floors of the Kaiyuan Finance Center and also various property insurance policies insuring the different floors of the office space and hotel. We have also purchased terrorism insurance and business interruption insurance for our hotel operations. We do not maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.

 

Facilities

 

Our headquarters is based in Shijiazhuang, the capital of Hebei Province. We own the Kaiyuan Finance Center where our headquarters occupy approximately 8,005 square meters of office space. We also lease office space with an area of roughly 2,560 square meters in Beijing for our product development and IT teams. We also rent approximately 22,350 square meters of office space in cities across China for our regional headquarters and company-owned stores.

 

Trademarks and Intellectual Property

 

Fincera, CeraPay, and CeraVest are registered trademarks of the Company in the United States. We have also been granted software copyrights in China for four of our mobile applications. We have successfully registered over 44 trademarks of different variations of our current and potential product logos and names and have several other trademark applications in China that are pending approval.